Coursenotes_ECON301

Uy marginal utility of good y rearrange 1 and 2 to

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Unformatted text preview: rginal Utility of good Y. Rearrange (1) and (2) to isolate on the LHS... = UX / PX = UY / PY Equate (3) and (4) to get, UX = UY PX PY MUX = MUY PY PX which is the consumer's equilibrium condition that we arrived at above using our ECON 201 logic and intuition. This condition is central to microeconomics and this course. We will often use variations of the equilibrium condition above, for example, MUX = PX MUY PY which says that the ratio of the marginal utilities of two goods is proportional to the ratio of the prices of the two goods. Also, this says that the MRSXY is equal to the relative prices of X and Y (the price ratio). from (1) from (2) (3) (4) or simply, 2 Some popular utility functions used in economics are of the forms: U(x,y) = aXY Cobb-Douglas Preferences U(x,y) = aX + bY Perfect Substitutes Utility U(x,y) = min{aX , bY) Liontief Preferences Perfect Compliments U(x,y) = X + aY1/2 Quasi-linear Preferences Quasi-linear preferences are useful in economic applications because they allow us to ignore wealth effects. These have a similar shape to CobbDouglas preferences. Expectations for Diagrams, Graphs and Charts in this Course We will continue to rely quite heavily on the intuition provided by diagrams in this course. It is important to take the production of these diagrams very seriously and to put sufficient care into drawing them since they can provide an excellent basis to guide our economic intuition. You should attempt to produce good diagrams and graphs that are large, properly (and completely) labeled, with curves that curve and straight lines that are straight. You should also take brief yet detailed notes concerning the key features of the diagram since at test time this will refresh your memory about the point that the graph is intended to illustrate when you study. The intended result of a good diagram is that it be self-contained and selfexplanatory (without long paragraphs of explanatory text). Partial vs. General Equilibrium Analysis In ECON 201, we restricted our analysis to one individual object at a time whether it was a market, a consumer, or a producer while we assumed away the rest of the world. As an example, wh...
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