Economics 001 Principles of Microeconomics
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1 Eonomis 001 riniples of Miroeonomis Leture 9 household hoie budgets indifferene urves MRS demand again rofessor Arik Levinson Moving from point B to point A, right and down the (straight line) demand urve shown on the right, the prie elastiity of demand... a) inreases. b) dereases. ) remains onstant. d) annot be diserned from the information given. B A Q D Wage subsidy Moving from point B to point A, right and down the (urved) demand urve shown on the right, the prie elastiity of demand... a) inreases. b) dereases. ) remains onstant. d) annot be diserned from the information given. B A D Q Wage W +subsidy w 1 w CS CS S S ΔCS+ ΔS D L S L subsidy Subsidy ost DWL L 1 L Labor song Household budget onstraint $0 per week to spend on and lothing osts $5 per meal lothing osts $ per artile lothing affordable unaffordable slope lothes 0 1
2 Consumption ossibilities C Q C + F Q F = Y Divide both sides of this equation by C, to give: Q C + ( F / C )Q F = Y/ C Then subtrat ( F / C )Q F from both sides of the equation to give: Q C = Y/ C ( F / C )Q F The term Y/ C is the left interept: real inome in terms of lothes, the maximum that an be spent entirely on lothes. The term F / C is the relative prie of a in terms of lothes, the slope of the budget line. 3 hanges: 1) rie inflation ) Inome inreases 3) Relative prie hanges 1) rie inflation In = $150 =$7.50 lothes =$15 ) Inome grows 50% 15 In = $150 =$5 lothes =$ lothing Nothing hanges! lothing ) prie doubles In = $0 =$ lothes =$ Suppose you have a $500 budget to host a dinner. The prie of is $ per item, and drinks ost $ eah. What is the slope of the budget line depited at right? (In absolute value.) Drinks lothing a) 50 b) 1.0 ) 0.0 d) 5 e) annot be diserned from the information given. 0
3 Most opular Sports 1. NFL football. Women's figure skating 3. (tie) Women's gymnastis. Major League baseball 5. airs figure skating. Men's figure skating 7. airs Ie daning. Men's gymnastis 9. NBA Basketball. NCAA/CFA ollege football referenes Assumption #1: More is better. DN: Indifferene urve = set of points (ombinations of goods) among whih a onsumer is indifferent. National Sports Study II, 1,79 responses. An indifferene urve Isotherms Clothing referred Not referred g 0 Isobars Topographi Maps 3
4 A set of indifferene urves Assumption #: Indifferene urves never ross Clothes j g I 0 I 0 Assumption #3: Indifferene urves not bowed outwards from origin Marginal Rate of Substitution DN: Marginal rate of substitution (MRS) = rate at whih onsumer willing to trade goods = slope of indifferene urve = how muh Y (lothes) for 1 unit X () Marginal Rate of Substitution Marginal Rate of Substitution Clothes MRS = MRS = 1/ Notie: As the onsumption of inreases, the MRS dereases. This is referred to as the diminishing marginal rate of substitution. g 0
5 Substitutes and omplements (again) The shape of the indifferene urves reveals the degree of substitutability between two goods. Marker pens at the loal supermarket Degree of Substitutability erfet substitutes 0 Marker pens at the ampus bookstore Degree of Substitutability Left running shoes 5 erfet omplements Right running shoes C Budget Defined by: C, F, inome Slope = F / C F C referenes F Assumptions: more better no X-ing bowed in Slope = MRS 0 ut the two together.... Soda (six-paks per month) 1 f i h d 3 Best affordable point: MRS= movies / soda I I 0 Movies (per month) In=$3 movie =$ soda =$3 5
6 Inome effets Soda (six-paks per month) 1 0 Inome $ Inome $3 j I 3 Movies (per month) In falls to $ movie =$ soda =$3 rie effets Soda (six-paks per month) Best affordable point: movies $ 9 j 1 Movies (per month) In=$3 movie falls to $3 soda =$3 Best affordable point: movies $3 I Good Y Good Y Good X Demand Curve x Good X Good X
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