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12_IncomeSubstitutionEffects_ToPost

# 12_IncomeSubstitutionEffects_ToPost - These new taxes will...

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“These new taxes will stifle economic growth, destroy jobs, reduce revenues, and increase the deficit. Economists across the ideological spectrum are convinced that the Clinton tax increases will lead to widespread job loss..” – Rep. Phil Crane (R-IL) ECON 410 Income and Substitution Effects

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2 Class 12 - Income & Substitution Effects Grade #of Students A (94+) 34 A- (90-93.9) 74 B+ (85-89.9) 43 B (80-84.9) 66 B- (75-79.99) 50 C+ (70-74.99) 53 C (65-69.9) 46 C- (60-64.9) 32 D+ (50-59.9) 44
3 Class 12 - Income & Substitution Effects Grade #of Students A (94+) 34 A- (90-93.9) 74 B+ (85-89.9) 43 B (80-84.9) 66 B- (75-79.99) 50 C+ (70-74.99) 53 C (65-69.9) 46 C- (60-64.9) 32 D+ (50-59.9) 44 Current Class Grade = (.65)*Midterm Grade + (.10)*Clicker Grade + (.25)*(Average of Top 2 HW’s)

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4 Class 12 - Income & Substitution Effects Consider an individual who likes more chocolate cake up to a point. In particular, if he has had less than 3 pieces of cake, he would always prefer another piece. However, once he has had his third piece of cake, he is indifferent to any additional pieces of cake since he will not eat them anyway. Which of the following is an accurate statement concerning his preferences over chocolate cake? a) An increasing utility function exists that represents his preferences. b) A non-increasing utility function exists that represents his preferences. c) No utility function exists that represents his preferences due to a violation of completeness. d) No utility function exists that represents his preferences due to a violation of transitivity.
5 Class 12 - Income & Substitution Effects

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6 Class 12 - Income & Substitution Effects
7 Class 12 - Income & Substitution Effects

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8 Class 12 - Income & Substitution Effects
9 Class 12 - Income & Substitution Effects Steps to Analytically Solve for an Individual’s Demand Curve 1. Create the Lagrange equation with the specified utility, but leave I, p1, and p2 as parameters. 2. Take the FOC’s and solve for x1 and x2. Your results will be as a function of I, p1, and p2 (or some combination of the three). x1 and x2 will be your Demand Functions. 3. To plot your Demand Curves , solve your optimal x1 solution for p1. Plug in points for x1 and plot the corresponding values of p1. Solve your optimal x2 solution for p2. Plug in points for x2 and plot the corresponding values of p2.

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10 Class 12 - Income & Substitution Effects ElasticityA,B 1. A,B 2. “Elasticity of A with respect to B” 3. “B Elasticity of A” The percent change in A that results from a percent change in B. % % A B = V V A B B A = V V A B B A =
Self-Clicker Question (P): Do you agree with this statement: “A 5% increase in the income tax rate would be very bad for job growth.” 1. Strongly Agree 2. Agree 3. Neutral 4. Disagree 5. Strongly Disagree

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Self-Clicker Question (P): Assume I said “I am going to make Midterm 2 5% harder”. Would you study more or less? 1. A lot more 2. A little more 3. The same 4.
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