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

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern