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Unformatted text preview: Econ 251 Fall 2009 11/3/09 Cristea Review for Midterm Exam #2 CHAPTER 7 UTILITY AND DEMAND Budget line (B.L.): What does it show? Graphical representation:- identify affordable and non-affordable consumption choices Derive the equation of the B.L.- What does the slope tell me? How about the intercepts? Relative price and real income Changes in the B.L. due to:- Price change- Income change Total Utility Understand the meaning of utility / total utility Find consumer equilibrium given information on total utility Marginal Utility (MU) Understand what marginal utility is (be able to define it) Calculate MU given information on total utility What is the Diminishing MU Principle? Consumer Equilibrium What does it represent? Know the concept Find consumer equilibrium given information on marginal utility: Spend all income and equalize MU per dollar Changes in consumer equilibrium as a result of:- Changes in goods prices- Changes in income Paradox of value:- understand what it refers to- explain it using the concepts of marginal utility and total utility CHAPTER 8 POSSIBILITIES, PREFERENCES AND CHOICE Indifference Curve (IC): What does it show? How do we represent an IC? 1 Econ 251 Fall 2009 11/3/09 Cristea What are the characteristics of indifference curves? 1. Negatively sloped 2. Slope becomes flatter as we consume more of the X-axis good 3. Better IC are to the northeast Remember : IC cannot cross each other! 4. Tightness of the bend of an IC indicates the willingness to substitute across goods- Need to know the shapes of IC for perfect substitutes, perfect complements and ordinary goods How to rank consumption bundles using their position on different ICs ? Marginal Rate of Substitution (MRS): What does it represent? (concept) What is the relation between MRS and the slope of the indifference curve? Diminishing MRS along the indifference curve (as we consume more of good x) Consumer Equilibrium (again; new information relative to what we know from Chapter 7) Graphically represent the consumer equilibrium using indifference curves and budget line Understand how consumption choices change at different points along the budget line Properties of the consumer equilibrium: 1. total utility is maximized 2. MU x /P x = MU y /P y 3. slope of IC is equal to the slope of the budget line (tangency point) 4. MRS xy =MU x /MU y = P x /P y Income effect: Graphical representation:- Normal goods- Inferior goods Price effect: Graphical representation (total effect) Need to know how to decompose the total effect into income and substitution effect:...
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This note was uploaded on 10/04/2011 for the course ECONOMICS 251 taught by Professor Kelly during the Spring '11 term at Purdue University-West Lafayette.
- Spring '11