chp5 - ECON 300B Lei Intermediate Microeconomics Winter...

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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 Price-consumption 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 price-consumption curve and the demand curve can be seen clearly. 1 A good that does not obey the law of demand (a good that has upward-sloping 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...
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chp5 - ECON 300B Lei Intermediate Microeconomics Winter...

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