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ECON100 Tutorial 4. Rob Pryce. Accessing My Slides. For those who didn’t get the email: I will put my slides up after Friday tutorials Plus any other stuff ( eg . Excel worksheets) You still must attend tutorials! www.robpryce.co.uk/teaching. Question 1. Coffee. Muffins.

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Econ100 tutorial 4

ECON100 Tutorial 4

Rob Pryce


Accessing my slides
Accessing My Slides

For those who didn’t get the email:

I will put my slides up after Friday tutorials

Plus any other stuff (eg. Excel worksheets)

You still must attend tutorials!

www.robpryce.co.uk/teaching


Question 1
Question 1

Coffee

Muffins


Question 2
Question 2

Coffee

The slope of the budget constraint is the relative price of the two goods

D is optimal

C is impossible

At point D, the indifference curve is “tangential” to the budget constraint

B is possible, but not optimal

A is possible, but not optimal

Doesn’t use all available resources

Lies outside of budge constraint, so not affordable

Lies on the highest indifference curve

The slope of the indifference curve is the marginal rate of substitution

The slope is equal to the slope of the budget constraint

But within the budget constraint

A

C

D

B

i3

i2

i1

Ui1 < Ui2 < Ui3

BC

Muffins


Question 3
Question 3

Marginal Utility

Utility

Diminishing marginal utility

Increasing marginal utility

Amount of good


Marginal Rate of Substitution

  • Is the increase in one good needed to offset the decrease of the other

    • Like coffee and muffins

  • Is the ratio of marginal utilities between the two goods

    • MRS = MUx/ MUy


  • Question 4 perfect substitutes
    Question 4 – Perfect Substitutes

    5p

    coins

    20

    Income = £1

    Any point is optimal

    10

    10p coins


    Price of 10p coins falls to 5p
    “Price” of 10p coins falls to 5p

    5p

    coins

    20

    Income = £1

    i4 > i3 > i2 > i1

    Optimal point at A

    Called a ‘corner solution’

    i2

    i1

    i4

    i3

    A

    10

    20

    10p coins


    Inter temporal food choice if perfect substitutes
    Inter-temporal Food Choiceif perfect substitutes

    Food this year

    10

    Income = £1

    i4 > i3 > i2 > i1

    Optimal point at A

    We don’t eat this year

    Unrealistic – we need to eat

    i2

    i1

    i4

    i3

    A

    10

    20

    Food next year


    Question 5
    Question 5

    This is in the lecture notes (lectures 7 & 8)

    If you are having trouble:

    Re-read the notes

    Read the book

    Ask me!

    But for now…


    Question 5a normal goods
    Question 5a – Normal Goods

    (coffee)

    Intuition of substitution effect:

    Consumer sees decrease in relative price

    So even with the same indifference curve, would shift towards more x

    So more x, less y (A to B)

    Intuition of income effect:

    Consumer is richer, he can buy more

    He buys more of x and more of y

    Moves from B to C

    y

    A

    C

    B

    i2

    BC2

    i1

    BC1

    x

    sub

    inc

    (muffins)


    Question 5b muffins are inferior
    Question 5b – Muffins are inferior

    (coffee)

    Intuition for substitution effect:

    Relative price has fallen for x

    So want more x, less y on same indifference curve

    Move from A to B

    y

    Intuition for income effect:

    Income has risen, but x is inferior good

    So demand less, move from B to C

    Total effect:

    Amount of x has increased

    But by less than when it was a normal good

    B

    C

    A

    i2

    BC2

    i1

    BC1

    x

    sub

    (muffins)

    inc (negative)


    Question 5c muffins are giffen
    Question 5c – Muffins are Giffen

    (coffee)

    Intuition for substitution effect:

    Relative price has fallen for x

    So want more x, less y on same indifference curve

    Move from A to B

    Total effect:

    Amount of x has decreased after a fall in the price of x

    Demand curve upward sloping

    y

    Intuition for income effect:

    Income has risen, but x is giffen good

    So demand less, move from B to C

    B

    C

    A

    i2

    i1

    BC1

    BC2

    x

    sub

    (muffins)

    inc (negative)


    For more on this
    For more on this

    See this link



    Question 6c
    Question 6c

    A

    The slope of the budget constraint is -2

    This is equal to –Phamburgers/ Phot dogs

    It is also the slope of the indifference curve at the optimum (point A). It is the marginal rate of substitution at point A.

    At the optimum, MRS = -Px/Py

    Economically, the trade-off between the goods that the individual is willing to undertake (MRS) is the same as the trade-off that the market requires (slope of budget constraint).


    Question 7
    Question 7

    a) Pm = £2, Pb = £10, Inc = £100

    Optimum is point

    Z

    b) Pm = £2, Pb = £5, Inc= £100

    Substitution effect is

    Z - X

    X - Y

    c) Income effect is

    Z - Y

    c) Total effect is


    Question 71
    Question 7

    QUANTITIES

    books magazines

    a) 5 (£50) 25 (£50)

    b) 8 10

    c) 6 (£30) 35 (£70)




    Any questions
    Any Questions?

    Office hour: Wednesday, 12:30

    Email


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