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ECO200 Topics - Revised Sept 2010

ECO200 Topics - Revised Sept 2010 - points of understanding...

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points of understanding: a guide to the topics preferences and indifference curves 1. preferences 1.1. four axioms defining preferences 1.2. utility functions provide an ordinal ranking of bundles 1.3. differentiate between marginal utility and total utility 1.4. indifference curves are level contours 1.5. the marginal rate of substitution is your personal rate of exchange 1.6. the ratio of marginal utilities is the slope of an indifference curve 1.7. key features of the cobb-douglas utility function 2. properties of indifference curves 2.1. indifference curves can’t cross 2.2. indifference curves can’t slope upwards 3. utility functions and indifference curves for other cases 3.1. perfect substitutes 3.2. perfect complements 3.3. concave indifference curves 3.4. economic bads 3.5. more than two goods utility maximization 1. affordability: the budget constraint 1.1. interpret the vertical intercept, horizontal intercept and slope 1.2. shifts and rotations 1.3. joining a club 2. utility maximization 2.1. the graphical approach 2.2. interpret the first order conditions: tangency and affordability 2.3. lagrangean multipliers _____________________________________________________________________________________________________________________ ECO200 Lee Bailey University of Toronto, Department of Economics
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3. utility maximization for the other cases 3.1. perfect substitutes 3.2. perfect complements 3.3. concave indifference curves 3.4. economic bads 3.5. more than two goods 4. expenditure minimization 4.1. the graphical approach 5. demand curves 5.1. graphical derivation of Cobb-Douglas demand curve 5.2. mathematical equation for the C-D demand curve 5.3. demand curves for perfect complements and perfect substitutes 6. elasticities of demand 6.1. interpretation 6.2. calculation for cobb douglas 6.3. calculation for perfect complements 6.4. using logarithms 7. changes in income 7.1. budget line shifts 7.2. three possible locations for bundle C based on normal vs inferior distinction 7.3. the income consumption curve 7.4. the demand curve shifts 8. changes in cross price 8.1. budget line rotates 8.2. three possible locations for bundle C based on substitute vs complement distinction 8.3. the cross-price consumption path 8.4. the demand curve shifts 9. changes in own price 9.1. budget line rotates 9.2. substitution effects reflect changes in opportunity cost 9.3. income effects reflect changes in perceived wealth 9.4. three possible locations for bundle C depend on SE and IE 9.5. drawing the compensated budget line 9.6. demand curve does not shift 10. perfect complements 10.1. changes in income 10.2. changes in cross price page 2 _____________________________________________________________________________________________________________________ ECO200 Lee Bailey University of Toronto, Department of Economics
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10.3. income and substitution effects 11. perfect substitutes 11.1. changes in income 11.2. changes in cross price 11.3. income and substitution effects measuring the impact of a price change: consumer surplus, compensating variations and equivalent variations 1. consumer surplus 1.1. approximate change in consumer surplus 1.2. the compensated demand curve measures the exact change in consumer surplus 1.3. approximate gains/losses are over or understated depends on normal/inferior 1.4. derive the compensated demand curve 1.5. integrating the area under the HHx curve 2.
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