midtermi review slides
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8/12/2019 MidtermI Review Slides
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Econ 100A
Microeconomic Analysis
Midterm I Review
1
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Announcement
PS 2 is due now
Exam policies:
No outside material and no calculators
No powdering your nose
No hoodies or hats while taking the exam
No grade if you keep working past allocated time No make-up exams
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Announcements
You can go to any GSI office hours
No sections on Tuesday or Wednesday
Office hours:
Study session:
597 Evans, Friday 2/21, 10-12
639 Evans, Monday 2/24, 8-10
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Reading for exam
Chapter 1
Chapter 3.1-3.4
Chapter 4.1 – 4.4 (excluding Slutsky equation)
Chapter 5.5 – up to shape of labor supply curve
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What have we done so far?
We made assumptions on behavior in order to
allow ourselves to use math and graphs to solve
for optimal consumption
We can represent preferences with a utility
function if the consumer is rational
We can use nice graphs that allow for quickanalysis if more is better
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Assumptions
Rationality:1. Completeness
2. Transitivity
3. More is better
Budget constraint:
1. We spend all of our income
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Constrained Maximization
Given these assumptions we can use
constrained maximization tools to find what
would be the optimal consumption bundle,
given income and prices
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How to…
Find uncompensated (Marshalian) demand for agood by solving the utility maximization or
expenditure minimization problem
Find compensated (Hicksian) demand by deriving
the expenditure function
Find whether the good is normal or inferior
Find the share of consumption for a specific good
Find whether there are corner solutions
(i.e. when the demand for one good is 0) Find whether goods are substitutes or complements
Find income and substitution effect
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Question #14
For a given increase in INCOME, only one good
can be inferior.
A. True
B. False
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Question #15
Let the price of good X decrease. If the
consumption of good X increases, it must be a
normal good.
A. True
B. False
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Example
James consumes pizza and sushi, which he
regards as imperfect substitutes. One day he
wakes up to the terrible news that the price of
pizza doubled and that the price of sushi
tripled.
Draw an initial consumption bundle for James,
and a budget constraint after the price
changes. You may choose the axis.
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Example continued
James parents hear about his hardships and
decide to increase his stipend so he can
purchase the same bundle he purchased
before. Add this budget constraint to your
graph.
Given the new prices and his additional
stipend, will James consume more or less
pizza/sushi than his initial bundle?
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Utility Maximization
Consider preferences over good X and good Y
represented by the utility function,
U = X(Y-k)(1-)
Where 0 < < 1 & k > 0
Use Lagrangian method to find the demand for
X & Y
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Solution
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Example continued
Let I = 1000, k = 100, = 0.5 and Py = 2
Find the demand for good X
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Example
Is good X normal or inferior?
Is good X a substitute or complement for good
Y?
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Example
Now let I = 100 and the rest of theparameters are the same.
What is the demand for good X?
What is the demand for good Y?
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Example
What is the economic interpretation of k?
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What is the economic interpretation of
k?
When income is lower than a certain threshold(Py·k), the consumer buys only good Y.
But when income is high enough to afford k
units of good Y (that is, when I PY· k) both
good X and good Y are purchased. k represents the baseline level of good k that is
required before consuming anything else.
If good Y was food, and good X was
entertainment, then k would be the survivallevel of food that a consumer requires before
being willing to spend any money on
entertainment.
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Quasi-linear preferences
Quasi-linear preferences have 2 interesting
properties:
You can have a corner solution, where only one
good is being consumed
The level of consumption of one good is
independent of income
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Example
Let U = X
0.5
+ Y
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Question #16
An increase in income will shift the Engel curve
to the right.
A. True
B. False