Econ Mid-term #2

# Econ Mid-term #2 - Econ Mid-Term#2 Consumer's Decision and...

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Econ Mid-Term #2 Consumer’s Decision and constructing demand for Output Define: Consumer – preferences over possible consumption bundles Consumer’s Goal – to maximize utility over possible consumption bundles Consumer’s Problem – given price preference, price of alternatives, income, consumers choose quantity demanded to maximize utility Preferences and Indifference curves Be able to Graph Know which shapes are ok and which are not Marginal Rate of substitution (MRS) Amount of one good that the consumer is willing to give up in order to get one more unit of some other good and be indifferent between two bundles The negative slope of the indifference curve MRS xy =MU y (vertical axis of good) / MU x (horizontal axis of good) Budgets Definition – resources are privately owned and income is value of resources sold Math formula o Points on budget constraint -I/P Graph – always linear and increasing is parallel Indicate affordable, unaffordable, just affordable o Affordable is under the budget constraint line o Just affordable is on the line o Unaffordable is outside of the budget line Marginal Utility MU x = ΔU/ΔM x Additional utility from consumers gaining one more good Know how income and price changes affects budgets, Draw these Income change – parallel shift of BC Price change o BC pivots around price of product that doesn’t change o If price changes, slope changes

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Price Ratio Amount of one good the consumer gives up in order to get one for of some other good, and still be on the budget constraint Price ratio is the slope of the BC PR=P x /P y Consumers optimal bundle: in words, graphically, formula, be able to prove the rule The consumers optimal bundle is the consumption bundle that maximizes a consumer’s
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