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ECO 211 Cartels and Consumer Theory

by: May Thu

ECO 211 Cartels and Consumer Theory ECON 221

Marketplace > University of Miami > Economcs > ECON 221 > ECO 211 Cartels and Consumer Theory
May Thu
GPA 3.8

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These notes cover cartels with graphs, budget constraint examples, and how to find the consumer's optimum. There are also detailed explanations and example questions on indifference curves, substit...
Economic Principles and Problems 211
David Spigelman
Class Notes
Microeconomics, Cartels, ConsumerTheory
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This 5 page Class Notes was uploaded by May Thu on Saturday April 16, 2016. The Class Notes belongs to ECON 221 at University of Miami taught by David Spigelman in Spring 2016. Since its upload, it has received 41 views. For similar materials see Economic Principles and Problems 211 in Economcs at University of Miami.


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Date Created: 04/16/16
Friday, April 8, 2016 ECO 211 Cartels, Consumer Theory - 2 Cartels (only need to know one) • Economic Cartels: businesses that get together to act like a cartel - Cartels are illegal in the US (illegal to collude, firms can’t get together to set price and output) - 2 Characteristics for cartels to form 1. When you have a small number of firms (few players in the market) 2. homogeneous product (example: ebooks: only about 3 big companies for this product - If a cartel is successful, businesses will restrict output, raise the price, and there will be a welfare's along with homogenous products with no innovation. •Point A: successful cartel (not operating at the Point of Beauty (POB) •At point A, quantity of output (Q2) is lower and price is higher (P2) •welfare loss, efficiency loss - How does the market equilibrate itself in a monopolistic competition? • if Average Cost curve is too low, firms will enter the market (demand goes down) 1 Friday, April 8, 2016 • if Average Cost curve is too high, firms will drop out (demand goes up) - Consumer Theory • 3 Assumptions - More is better - People can rank their preferences - Preferences are transitive or consistent (A >B, B >C, then A >C) - Budget Constraint Example -Y intercept: 5 (if you spend all your money on burritos) (Budget/Price of burrito) -X intercept: 4 (if you spend all your money on hamburgers) (Budget/Price of hamburger) -Find the slope of the Budget constraint (BC)/ Marginal Rate of transformation (MRT) •(-Px/Py)=Slope of BC or MRT •-Price of Hamburger/Price of Burrito: (-5/4) - Indifference Curve: all combinations of two goods which give consumer the same level of utility (utility is held constant) - convex to the origin - customer tries to be as far to the north-east but with subject to budget constraint * If there’s a unique point of tangency between the consumer budget constraint and the indifference, then the consumer’s optimum and condition that holds at that optimum is MRS=MRT* 2 Friday, April 8, 2016 Example Test Questions -Can the indifference curve be upward sloping? -No - D is at the north-east of C, which means it’s preferred -D can’t be indifferent to C if it is preferred - Can the indifference curve be thick? - No - D is in the north east of C, which means it’s preferred - D can’t be indifferent to C if it is preferred - Consumer’s Optimum - customer tries to be as far to the north-east but with subject to budget constraint - How do you find the consumer’s optimum if the indifference curve is a straight line? - Find where the utility is highest at the origin through the two corners (dotted lines), the one at/ closer to the north-east is the optimum 3 Friday, April 8, 2016 - Income Substitution Effect - Rules: - 1) always on the initial indifference curve - 2) always go towards the thing that’s getting cheaper Example Problem - What happens when price of cheese goes down - Price of cheese decreases = budget constraint goes up (Y to0 Y ) 1 - Substitution effect: goes to the thing that’s getting cheaper (cheese is cheeper) (Point A to Point B) -Income effect: can afford more cheese so parallel shift of indifference curve (Point A to Point C) - What happens when price of cheese goes up? - Price of cheese increases= budget constraint comes in (Y t0 Y )1 - Substitution effect: moving towards beet because it’s cheaper (A to B) - Income effect: can’t afford more cheese so parallel shift inwards of indifference curve (A to C) 4 Friday, April 8, 2016 - Different Kinds of Indifferent curves - C: Normal good (parallel shift of indifference curve) - C’: Inferior good (shift upwards between A and B) - C’’: Giffen good (way on top or way on bottom at the Y curve) 1 5


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