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lecture9full - Recap Milkshake Problem Compensating and...

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Recap Milkshake Problem Compensating and Equivalent Variation Inverse demand curves Income and substitution effects Taxes and deadweight loss
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When is there no deadweight loss?
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Deadweight loss and the elasticity of substitution
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The Map
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Utility maximization 1 Monotonic transformations yield the same answers for demand 2 For ‘normal’ cases use the Lagrangian 1 Take FOC’s for each of the goods, plus a FOC with respect to λ , and solve out 2 Double check that you have a maximum 3 When the utility function is the sum of functions, check returns to scale to see if you need to go to a corner 4 When there is a min, set what is inside the min to be equal
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Example: Perfect Compliments u ( x 1 , x 2 ) = ( min { 4 x 1 , 2 x 2 } ) 2
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Demand x 1 ( p 1 , p 2 , I ) 1 Increasing in income, normal good. Decreasing in income, inferior 2 Increasing in own price, Giffen good. Decreasing in own price, ordinary 3 HD0 in prices and income (inflation doesn’t matter) 4 Elasticity of substitution greater than 1 implies x 1 /∂ p 2 > 0
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