Effects of a Price Change
happens when a commoditys
Substitution effect: the commodity
is relatively cheaper, so
consumers substitute it for now
relatively more expen
When preferences are well-behaved:
To find the optimal bundle, consumer
solves the following optimization
Maxx1 , x2U x1 , x2
p1 x1 p2 x2 m
most preferred affordable
bundle, X*, is called the consumer
Decision maker (consumer) chooses its most
preferred alternative from those available to it.
Ch 2: The available choices constitute the
Ch 3 & 4: Preferences determine how bundles
are compared by the co
There can be more than one utility
function that represent the same
Let for any bundle X= (x1,x2) , utility of that
bundle be given by
U(x1,x2) = x1x2
For example, if X= (2,3), then
If Y= (2,2), then U(Y)=2.2=4
Effects of a Price
What happens when a commoditys
Substitution effect: the commodity is
relatively cheaper, so consumers
substitute it for now relatively more
expensive other commodities.
How is math review going?
Topics we need:
Fraction simplifications, arithmetic
Rules of ln / log functions (simplifying,
Recorded videos in the worked exercises
Web resources in
Demand function: x1(p1, p2, m)= 22 +
When p2 rises, the quantity of x will decrease because -4 is less than zero. Therefore,
it is good 1 is gross complement for good 2.
(b) The initial values of variables are:
Sprgsml til Choice
1. At a boundary optimum, a consumers indifference curve must be tangent to her budget line.
2. Max Gross has the utility function U(x, y) = maxcfw_x, y. If the price of x is the same as the price of y,
Max will bu
PS: CH 6
1. A consumer has the utility function U(x, y) = mincfw_x, 2y. If the price of good x is zero
and the price of good y is p, then the consumer's demand function for good y is m/2p.
True or false? False
2. When other variables are
Week 5 Tutorial Exercise
Intermediate Microeconomics II/IID
A consumer consumes only two commodities, commodity 1 and commodity 2, with the
quantities of each consumed denoted by and , respectively. The price of is $3/unit
and the price of is
monopolized market has a single
The monopolists demand curve is
the (downward sloping) market
So the monopolist can alter the
market price by adjusting its o
technology is a process by which
inputs are converted to an output.
E.g. labor, a computer, a projector,
electricity, and software are being
combined to produce this lecture.
monopoly is an industry consisting
a single firm.
A duopoly is an industry consisting of
An oligopoly is an industry consisting
of a few firms. Particularly, each
a reference bundle x. The set
of all bundles equally preferred to x
is the indifference curve containing
x; the set of all bundles y ~ x.
Since an indifference curve is
firm is a cost-minimizer if it
produces any given output level y 0
at smallest possible total cost.
c(y) denotes the firms smallest
possible total cost for producing y
Properties of Demand Functions
statics analysis of
ordinary demand functions - the
study of how ordinary demands
x1*(p1,p2,y) and x2*(p1,p2,y) change as
prices p1, p2 and income y change.
Preferences - A Reminder
y: x is preferred strictly to y.
x ~ y: x and y are equally preferred.
x f y: x is preferred at least as
much as is y.
Preferences - A Reminder
Consumption Choice Sets
consumption choice set is the
collection of all consumption choices
available to the consumer.
What constrains consumption
principal behavioral postulate is
that a decisionmaker chooses its
most preferred alternative from those
available to it.
The available choices constitute the
Week 7 Tutorial Exercise
Intermediate Microeconomics A II/IID
A consumer consumes only two goods, good 1 and good 2, with the quantities of each
consumed denoted by and , respectively. The price of is $ /unit and the price of
is $ /unit. The
ECON 2056: Intermediate Microeconomics II
Semester 1, 2017
This assignment is a compulsory assessable worth 10% of your course grade. This component
of assessment is NOT redeemable. The assignment will be graded out of 100 marks. You