lecture_5_for_students_ - Lecture 5 Demand Click to edit...

Info icon This preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Click to edit Master subtitle style 1/1/11 Demand Lecture 5
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
1/1/11 We learned how to maximize the utility of a consumer considering the budget constraint. Assuming the strictly convex indifference curves, the optimal point is at the tangency point of the budget and indifference curves, and the consumer uses the positive amounts of both goods (MRS=MRT). Now the question is finding out how the consumer’s consumption changes when the price of for example one of the goods changes
Image of page 2
1/1/11 Assume a consumer is consuming q1 and q2. Her utility function is U=U(q1, q2)= and her budget constraint is 12q1+35q2=419. Find the optimal point or where utility is maximized. 24 . 0 2 76 . 0 1 q q Deriving Demand Curve for q1 ) 24 . 0 and 76 . 0 ( 76 . 0 2 76 . 0 1 2 24 . 0 2 24 . 0 1 1 - - = = q q MU q q MU q q 12) (P 7 . 26 1 8 . 2 2 : e Point 2 35 2 ) 11 . 9 ( 12 2 35 1 12 419 11 . 9 35 12 24 . 0 76 . 0 : 1 1 2 1 1 2 2 1 = = + = + = = = - = = - = - = q and q q q q q q q MRT q q MU MU MRS Answer q q
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
1/1/11 Assume P1↓ (from 12 to 6) => budget rotates (L1 to L2) =>find the new equilibrium from MRS=MRTnew => e2: q1*=44.5, q2*=4.3 (p1=6) Assume P1↓ further (from 6 to 4) => budget rotates => L2 to L3 =>e3: q1*=58.9 , q2*=5.2 (p1=4) Using the amount of q1 and P1 in equilibrium points Deriving Demand Curve for q1
Image of page 4
1/1/11 Deriving Demand Curve 2) P1↓ ($6) => e2 ( p1=6 , q1=44.5 ) 3) P1↓ ($4) => e3 ( p1=4 , q1=58.9 ) 4) Price consumption curve and total effect 1) At original equi or e1 ( p1=12 , q1=26.7 ) q 1 q 2 q1 P 1 Demand For q1
Image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
1/1/11 Assume a consumer is consuming q1 and q2. Her utility function is U=U(q1, q2)= and her budget constraint is 12q1+35q2=419. Find the optimal point or where utility is maximized. 24 . 0 2 76 . 0 1 q q ) 24 . 0 and 76 . 0 ( 76 . 0 2 76 . 0 1 2 24 . 0 2 24 . 0 1 1 - - = = q q MU q q MU q q 419) ( 7 . 26 1 8 . 2 2 : e Point 2 35 2 ) 11 . 9 ( 12 2 35 1 12 419 11 . 9 35 12 24 . 0 76 . 0 : 1 2 1 1 2 2 1 = = + = + = = = - = = - = - = I q and q q q q q q q MRT q q MU MU MRS Answer q q Income Increase and Engle Curve
Image of page 6
1/1/11 Income Increase and Engle Curve L1 :12q1+35q2= 419 => e1 is the optimal point (q1=26.7 and I=419) Income ↑ to 628$ ( e2 and L2) => (q1=38.2 and I=628) Income ↑ to 837$ ( e3 and L3)=> (q1=49.1 and I=837) q 1 q 2 q1 I q 1 p 1 Change of income is IC C
Image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
1/1/11 Example L 1 I 1 L 2 I 2 e1 e2 Pepsi Canada Dry q1 q2 Peps i Income Engle Curve for Pepsi I 1 I 2 q1 q2 Canada Dry (q2) and Pepsi (q1) are perfect substitutes for Mimi. Her utility function is U(q1,q2)=q1+q2. If P of Pepsi is less than Canada Dry, plot Mimi’s Engle curve for Pepsi.
Image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern