Chap005.4 - Slide 22 Translating Wants into Demand Assume z...

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4 Chapter 5: Demand: The Benefit Side of the Market Slide 19 Translating Wants into Demand ± How is the rational spending rule related to the cost-benefit principle? Chapter 5: Demand: The Benefit Side of the Market Slide 20 Translating Wants into Demand ± Income and Substitution Effects Revisited z How should Sarah respond to a reduction in the price of chocolate ice cream? Chapter 5: Demand: The Benefit Side of the Market Slide 21 Marginal Utility Curves for Two Flavors of Ice Cream (III) Pints/yr Marginal utility of vanilla ice cream (utils/ pint) Marginal utility of chocolate ice cream Pints/yr 10 250 20 75 1 10 Vanilla Price Vanilla = MU 2 20 Chocolate Price Chocolate = MU Chapter 5: Demand: The Benefit Side of the Market
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Unformatted text preview: Slide 22 Translating Wants into Demand Assume z Budget = $400 z P C = $2 & P V = $1 z Q C = 75 & Q V = 250 1 10 P MU 2 20 P MU V V C C = = = Chapter 5: Demand: The Benefit Side of the Market Slide 23 Translating Wants into Demand Assume price of chocolate falls to $1 z Sarah should buy more chocolate and less vanilla. 1 10 P MU 1 20 P MU V V C C = > = Chapter 5: Demand: The Benefit Side of the Market Slide 24 Applying the Rational Spending Rule Economic Naturalist z Why did people turn to four-cylinder cars in the 1970s only to shift back to six- and eight-cylinder cars in the 1990s?...
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