Lecture%2011%20February%2028

Lecture%2011%20February%2028 - Todays agenda The consumers...

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Today’s agenda The consumer’s optimum bundle Effect of income changes on the optimum bundle Deriving demand curves from budget lines and indifference curves Income and substitution effects of price changes on Q D Applying consumer theory: Do taxes reduce labor supply?
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B M p p p A B A B =− M p B M p A Budget line
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The slope of the budget line p A /p B is the opportunity cost of A in terms of B. Budget line slope measures opportunity cost
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For more, see Interactive Exercise 5.1
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Diminishing marginal utility u
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Choose an affordable consumption bundle with the property that “Equal bang for the buck” Fundamental rule of utility maximization B B A A P MU P MU =
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A consumer’s indifference curves B A
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Shape of indifference curves negative slope More is better complete ranking An indifference curve passes through every point convexity slope as marginal rate of substitution diminishing marginal rate of substitution
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- Slope is marginal rate of substitution between A and B, denoted MRS AB (x) B A x 1 2 y
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Notational convention: - Slope at x = MRS AB (x) B A x 1 2 y
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At optimum, MRS AB = p A /p B B A M/p B M/p A
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At the consumer’s optimal consumption bundle, A. The rate at which the consumer is willing to give up one good in exchange for additional units of the other good exceeds the rate at which she must give up the first good for more of the second while keeping spending constant. B. The opportunity cost of additional units of one good in terms of forgone units of the other good exceeds the rate at which she is willing to give up the first good in exchange for additional units of the second good. C. The rate at which the consumer is willing to give up units
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This note was uploaded on 03/08/2011 for the course ECON 220 taught by Professor Cai during the Spring '08 term at Rutgers.

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Lecture%2011%20February%2028 - Todays agenda The consumers...

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