This preview shows pages 1–4. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: ECON 300B Lei Intermediate Microeconomics Winter 2011 1 Chapter 5 Chapter 5 Chapter 5 Chapter 5  Applying Consumer Theory Applying Consumer Theory Applying Consumer Theory Applying Consumer Theory Price Price Price Priceconsumption curve and demand curve consumption curve and demand curve consumption curve and demand curve consumption curve and demand curve Consider two goods, x and y. Recall from chapter 4 that when price of good x decreases, the budget line shifts outward. Suppose g G, < g G, < g G, , then: The optimal consumption bundle is different at each budget line. They are labeled as , and respectively in the graph below. If we connect the points , and , we obtain the ____________________________________________________ . The optimal bundles contain the optimal quantities of good x  , and respectively. In a separate graph of x against p x , we can plot the points ( , g G, ), ( , g G, ) and ( , g G, ). Joining the points traces out the ______________________________ of good x because it tells the relationship between the price of good x and the optimal quantity demanded of good x. When the price of good x decreases, holding constant the price of good y, good x becomes relatively cheaper. The consumer substitutes good x for good y so quantity demanded of good x increases. Thus, the law of demand holds and the demand curve must be ________________________________________________________ . 1 The two graphs can be stacked up because the horizontal axes both measure level of x. This way, the connection between the priceconsumption curve and the demand curve can be seen clearly. 1 A good that does not obey the law of demand (a good that has upwardsloping demand curve) is called a Giffen good. /g G, /g G, /g G, g ECON 300B Lei Intermediate Microeconomics Winter 2011 2 Example Example Example Example In the example of apples and oranges in chapter 4, if g G , g and are not given as constants but kept as exogenous variables: G, , = u s.t. g G + g = = u + g G g NFOCs: G = 1 2 . g G = 0 1 2g G . = 1 = 1 2 . g = 0 1 2g . = 2 = g G g = 0 g G + g = 3 g x x x g g , x x x g , g , g g ECON 300B Lei Intermediate Microeconomics Winter 2011 3 Substitute (2) into (1): 1 2g G . = 1 2g . = g G g 4 Substitute (4) into (3): g G + g g G g = = 2g G is the demand function for apples because it expresses the quantity demanded of...
View
Full
Document
 Spring '07
 JUZWIAK,WILLIAM
 Microeconomics

Click to edit the document details