1 / 7

80 likes | 225 Views

Economics 202: Intermediate Microeconomic Theory. 1. Student Information Sheets 2. Any questions? 3. For next time, finish reading Chapter 5 4. HW #2 due Thursday in class (it’s on the website). Budget Constraints. Shifts in the Budget Line Change in Income Change in Prices

Download Presentation
## Economics 202: Intermediate Microeconomic Theory

**An Image/Link below is provided (as is) to download presentation**
Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.
Content is provided to you AS IS for your information and personal use only.
Download presentation by click this link.
While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.
During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

**Economics 202: Intermediate Microeconomic Theory**1. Student Information Sheets 2. Any questions? 3. For next time, finish reading Chapter 5 4. HW #2 due Thursday in class (it’s on the website)**Budget Constraints**• Shifts in the Budget Line • Change in Income • Change in Prices • Double I, Triple PX & PY? Yo-yos I/PY 2I/3PY • NB: slope measures the real price, the purchasing power of one good in terms of the other • so if both prices rise by the same % (or fall by same %), their ratio is the same the slope of budget line stays same! • Composite consumption good x2: p1x1 + 1x2 = m • What if the price changes with quantity purchased? 2I/3PX I/PX Xylophones**Budget Constraints**• Change in Income • lump-sum tax or subsidy (grant) • “earmarked” grant • Change in Prices • Per-unit tax or subsidy (quantity tax or subsidy) • Ad valorem tax or subsidy (value/proportional tax or subsidy)**Optimal Consumption**• Two criteria: (1) slope of IC = slope of budget line (2) we have to be on the budget line • This will give us 2 equations in 2 unknowns, and we can solve for optimal values • General Lagrangian & MRS = PX/PY is only a necessary condition for utility maximization. Assumption of dim. MRS (strict convexity) gives sufficiency for utility maximization. • U = GT Income = $100 Ptennis racquet = $10 Pgatorade = $5 • What is Roger’s optimal consumption bundle of Gatorade and tennis racquets? • Three approaches**Optimal Consumption**• Approach #1 • Write down & solve the MRS condition and budget constraint • Approach #2 • Create unconstrained utility maximization problem • Approach #3 • Constrained utility maximization problem (use the Lagrangian) • has an economic interpretation • Check • Let I = $101 and calculate the resulting increase in utility … • We had U = GT, I = $100, PG = $5 per bottle, PT = $10 per racquet • This gave us G* = 10 bottles, T* = 5 tennis racuets for U* = 50 “utils”**Pretzels**a U2 U1 U0 Final four tickets Exception: Corner Solution • At point “a”, MRS < slope of the budget line • But that is our final point since we can’t consume less than 0 Final Four tickets • NB: the optimality condition (MRS = slope of budget line) only holds for cases in which we consume positive amounts of BOTH goods. • FOC’s must be modified with a sign, rather than = sign. • When, e.g., U/X - PX < 0, then X* = 0. • PX > MUX / which says ?**Optimal Consumption**• Derive the demand functions for the quasi-linear function U(X,Y) = ln X + Y X* = dX(PX, PY, I; tastes) Y* = dY(PX, PY, I; tastes) • Green is a foreshadowing to emphasize now that this is Marshallian demand (uncompensated demand) which holds income fixed. Numerical example: U = ln X + Y Income = $10 PX = PY = $1 • Are these homothetic preferences? • What is optimal consumption bundle (X*,Y*)? • What is utility at the optimum? • What is the marginal utility of income at the optimum?

More Related