two years the law requires the 4You may recognize that this equation is an
approximation of the change in utility that results from changing x and y by x and
y, respectively. The approximation becomes more accurate when x and y are small
because the margi
marginal utility is positive. Second, you can look at the marginal utility of the good
to see if it is a positive number. When the marginal utility is a positive number, the
total utility will increase when more of the good is consumed. Some utility
funct
explain how. If you cannot infer a ranking, explain why not. b) On the graph, shade
in (and clearly label) the areas that are revealed to be less preferred to basket B,
and explain why you indicated these areas. c) On the graph, shade in (and clearly
labe
through land reform (wealth redistribution) designed to more or less equalize
landholdings, and/or through export restrictions. To sum up, the discussions in this
section clearly suggest that the failure of poverty alleviation programs in
developing count
traditional theory of consumer choice from microeconomics, so that its
implications are consistent with the empirical findings from the literature on
psychological well-being? Bridging psychology and economic theory is the central
purpose of an important
at the date of repayment). The fact that money has a time value complicates the
comparison of different amounts of money received at different points in time. For
example, if the prizes in the raffle had been $100 in cash immediately or $120 in
cash one y
Roughly speaking, a hedonic price is a measure of the marginal utility of a
particular attribute. Given this, the ratio of hedonic prices for two different
automobile attributes, such as horsepower and gas mileage, represents the
marginal rate of substitu
follows: A particular type of an annuity is a perpetuity. This is an annuity that lasts
forever. Examples of a perpetuity are the Consol Bonds issued by the British
government in 1752, which promised to pay a fixed amount of money to the
holder of the bon
(218) 14. x 18(212) 1 MU MUy 1x(21y). x 1y(21x) U 1xy, MUy U y 2 x is held
constant MUx U x 2 y is held constant U 1(2)(8) 4 3 Learning-By-Doing Exercise
A.7 in the Mathematical Appendix shows how to derive the equations of MUx and
MUy in this case. Lets
subsidy to consumers led to increased vehicle sales, at least temporarily aiding an
industry in financial difficulty. Starting in late 2008, some European countries also
offered similar cash incentives to induce consumers to trade in their old cars for
ne
of utility U1 and U2) that cross. The basket represented by point S on U1 is
preferred to the basket represented by point T on U2, as shown by the fact that S
lies to the northeast of T; thus, U1 U2. Similarly, the basket represented by point R
on U2 is p
of gas mileage for horsepower could reflect changes in consumer tastes, or it
could also reflect simultaneous changes in automobile prices, gasoline prices, and
consumer incomes. As we will see in the next chapter, when changes in prices and
income occur,
total utility curve is zero. (The segment MN, which is tangent to the utility curve at
point B, has a slope of zero.) If Sarah were to buy more than seven hamburgers,
her total satisfaction U( y), total utility of hamburgers y, weekly consumption of
hambu
behavior is consistent with utility maximization? What baskets might he purchase
if Plan B is better for him? 4.26. Figure 4.17 illustrates the case in which a
consumer is better off with a quantity discount. Can you draw an indifference map
for a consume
CT (1 r) T 1,000 0.20 5,000 C r 1 (1 r) T c04consumerchoice.qxd 6/18/10 5:31 PM
Page 147 148 CHAPTER 4 CONSUMER CHOICE PRESENT VALUE, FUTURE VALUE,
AND THE OPTIMAL CONSUMPTION CHOICE PROBLEM The concepts of present
value and future value play a role in th
tax (i.e., the student pays a tax of $10.00 per month, regardless of how much root
beer is consumed). If the new proposal is adopted, how will the students
consumption pattern (in particular, the amount of root beer consumed) and
welfare be affected? (Ass
is a Lagrange multiplier. The first-order necessary conditions for an interior
optimum (with x 0 and y 0) are (A4.2) (A4.3) (A4.4) 0 0l 0 1 I Px x Py y 0 0 0y 0
1 0U(x, y) 0y lPy 0 0x 0 1 0U(x, y) 0x lPx () (x, y, l) U(x, y) l(I Px x Py y), max (x,
y) U(x
x MRSx,y Consider what happens when a utility function has an increasing
marginal rate of substitution. Problem Suppose a consumers preferences between
two goods (x and y) can be represented by the utility function U Ax2 By2 , where A
and B are positive c
A. She would prefer basket A to B or J because she receives the same amount of
food in these three baskets, but more clothing at A. She will also prefer A to G or D
because she receives more food and more clothing at A than at either of the other
two bask
such that the marginal rate of substitution of one good for the other is constant;
therefore, the indifference curves are straight lines. If you listen to advertisements
on television, you might believe that most goods are highly differentiated products
a
another while maintaining the same level of satisfaction is called the marginal
rate of substitution. For example, a consumers marginal rate of substitution of
hamburgers for lemonade is the rate at which the consumer would be willing to
give up glasses o
country; the dashed line is the time path in the other country). Based on the
information provided, which is the time path for each country? Price of
pomegranates Time c02demandandsupplyanalysis.qxd 7/14/10 11:16 AM Page
71 72 CHAPTER 2 DEMAND AND SUPPLY
Should the government simply give the families a cash supplement and let them
spend the money in any way they wish? Or should the aid be in the form of
certificates, such as food stamps, that can only be used to buy food? One might
also ask if a Cash-for-
choose to borrow in the first period if at basket A and will choose to lend if at
basket A If the MRS lies between these two values, then he will neither borrow nor
lend. (You can try to prove this if you like. Keep in mind that diminishing MRS plays
an i
BL3. Assume her indifference map is unchanged over the three months. Use the
theory of revealed preference to show whether her choices are consistent with
utilitymaximizing behavior. If so, show how she ranks the three baskets. If it is not
possible to in
UTILITY FUNCTIONS 77 3.2 UTILITY FUNCTIONS The three assumptions
preferences are complete, they are transitive, and more is betterallow us to
represent preferences with a utility function. A utility function measures the level
of satisfaction that a consu
A, B, and C). A B C U3 U2 U1 x x1 y education classes, and was named after the
Hawaiian dance involving similar movements. Although children have long played
with wooden or metal hoops by rolling, tossing, or spinning them, Wham-O found
the durable, light
might always want exactly 1 ounce of peanut butter for each ounce of jelly on his
sandwiches and be unwilling to consume peanut butter and jelly in any other
proportions. To cover cases such as these and others, there are several special
utility functions
satisfaction to the consumer. c03consumerpreferencesandtheconceptofutility.qxd
6/14/10 2:54 PM Page 83 84 CHAPTER 3 CONSUMER PREFERENCES AND THE
CONCEPT OF UTILITY equally satisfied with (or indifferent in choosing among) all
baskets on that curve. For ex