ECO 8-27-07

ECO 8-27-07 - Econ 8/27/07 1. Implications of substitution...

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Econ 8/27/07 1. Implications of substitution a. The willingness to substitution is the only observable measure of value b. Value shows a willingness to sacrifice c. Marginal Value : the maximum amount of one good an individual is willing to sacrifice to obtain one more unit of another good. d. Ex: A B C Skippy Apples 9 10 11 Hot Dogs 13 8 4 Myrtle Apples 5 6 7 Hot Dogs 17 15 14 2. Exchange a. Two misconceptions of trade i. One person has “Too Much” of something (surplus) 1. people are greedy, you can never have too much ii. Trade involves the exchange of items of equal value 1. In fact: trade only occurs when the marginal values are different 2. When they are different, both traders can be made better off through exchange b. Ex Part 2: i. Suppose both chose bundle B 1. Skippy is willing to “pay” up to 4 hotdogs for 1 more apple 2. Myrtle is willing to give up 1 apple for 2 hotdogs 3. Assume they’ll split the difference and arrive at a price of 1 apple for three hotdogs 4. 5.
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ECO 8-27-07 - Econ 8/27/07 1. Implications of substitution...

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