ECON100A_14

# ECON100A_14 - Review For Midterm 2 1 UtilityMaximization...

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1/4/2008 1 Review For Midterm 2

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1/4/2008 2 Utility Maximization max U(x 1 , x 2 ) s.t. p 1 x 1 + p 2 x 2 = I F.O.C.s MU 1 /MU 2 = p 1 /p 2 p 1 x 1 + p 2 x 2 = I X 1 X 2
1/4/2008 3 Properties of Goods Income Properties Normal Inferior Price Properties Substitutes Complements Giffen

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1/4/2008 4 Comparative Statics – Income and Substitution  Effects A to B is sub effect. Always toward good that has become relatively cheaper B to C is income effect Normal and inferior: These tell whether C is: Left or right of B, for good 1 Below or above B, for good 2 Substitutes, complements, or Giffen. These tell whether C is Left or right of A, for good 1 Below or above A, for good 2 p 1 X 1 X 2 B A C 1 C 2 C 3 C 4
1/4/2008 5 Labor - Leisure max U(L e , I) Le, I s.t. wLe + I = I 0 + 168w Tangency Condition: At Le*, I* slope of indif curve = slope of budget line MRS Le, I = w Budget Condition Must be on budget line wL e * + I * = I 0 + 168w L a I 168 L e I 0 I 0 + 168w L e * I *

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1/4/2008 6 I 0 sub Wage change: Income and Sub  Effects Suppose w↑ Sub effect: Leisure has become more
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ECON100A_14 - Review For Midterm 2 1 UtilityMaximization...

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