Lecture 8 - Economics 101A (Lecture 8) Stefano DellaVigna...

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Unformatted text preview: Economics 101A (Lecture 8) Stefano DellaVigna September 19, 2009 Outline 1. Price Changes 2. Expenditure Minimization 3. Slutsky Equation 1 Price changes Price of good i decreases from p i to to p i > p i For example, decrease in price of good 2, p 2 < p 2 Budget line tilts: x 2 = M p 2 x 1 p 1 p 2 New optimum? Demand curve: x i ( p i ) : demand for good i as func- tion of own price holding f xed p j and M Odd convention of economists: plot price p i on ver- tical axis and quantity x i on horizontal axis. Better get used to it! Does x i decrease with p i ? Yes. Most cases No. Good i is Gi f en Ex.: Potatoes in Ireland Do not confuse with Veblen e f ect for luxury goods or informational asimmetries: these e f ects are real, but not included in current model 2 Expenditure minimization Nicholson, Ch. 4, pp. 127-132 (109113, 9th) Solve problem EMIN (minimize expenditure): min p 1 x 1 + p 2 x 2 s.t. u ( x 1 , x 2 ) u Choose bundle that attains utility u with minimal expenditure Ex.: You are choosing combination CDs/restaurant to make a friend happy...
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Lecture 8 - Economics 101A (Lecture 8) Stefano DellaVigna...

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