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# micro notes (2/24 - 3/4) end of week 6 & all of week 7 Econ 2020

Marketplace > Auburn University > Business > Econ 2020 > micro notes 2 24 3 4 end of week 6 all of week 7
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micro notes (2/24, 2/29, 3/1, 3/4, ) end of week 6 and all of week 7
COURSE
Principles of Economics: Microeconomics
PROF.
William M. Finck
TYPE
Class Notes
PAGES
7
WORDS
CONCEPTS
Micro Econ
KARMA
25 ?

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This 7 page Class Notes was uploaded by kmb0095 on Tuesday March 1, 2016. The Class Notes belongs to Econ 2020 at Auburn University taught by William M. Finck in Spring 2016. Since its upload, it has received 80 views. For similar materials see Principles of Economics: Microeconomics in Business at Auburn University.

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Date Created: 03/01/16
o Factors that change the budget line  Income – a change in income causes a shift of the budget line  Price of y – a change in price causes a rotation of the budget line Week 7 2/29/16  Price of x – a change in price causes a rotation of the budget line o What do we buy first?  The good that gives us the most:  Marginal utility per dollar = MU / P  Vacation vs. Cheeseburger o MU of vacation = 50,000 utils o MU of cheeseburger = 20 utils o P of vacation = \$5,000 o P of cheeseburger = \$1 o MU / v = v0,000 / 5,000 = 10 o MU / P = 20 / 1 = 20 c c  Utility-Maximization Rule (aka Consumer Equilibrium) o For utility maximization, the consumer must get the same amount of utility from the last dollar spent on each good o Basically, TU is maximized when:  All income is spent  MUx / Px = MUy / Py  Utility-Maximizing (Optimal) Consumption o Optimal Consumption Bundle – the bundle that maximizes total utility o Ex) Find the optimal consumption bundle using:  Consumer income = \$24  Px = \$3  Py = \$2 Qx TUx MUx MUx / Px Qy TUy MUy MUy / Py 1 39 39 13 = 39 / 31 30 30 15 = 30 / 2 2 75 36 = 75­39 12 = 36 / 32 58 28 = 58 ­ 30 14 = 28 / 2 3 108 33 = 108­75 11 = 33 / 33 84 26 13 4 135 27 9 4 108 24 12 5 159 24 8 5 128 20 10 6 180 21 7 6 146 18 9 7 198 18 6 7 162 16 8 13, 12, 9, 8 satisfies all conditions of optimal bundle (use for condition # 1, not in formula) BUT have to make sure you’re spending \$24 to say it’s the optimal bundle Unit of x gives 13 units per util, y gives 15 units per util o Possible Optimal Bundles  Use the income formula on possible optimal bundles to determine if all \$ was spent (Income = (Qx * Px) + (Qy * Py)  1x and 3y = (1 * 3) + (3 * 2) = \$9  1 unit of x for \$3, 3 units of y for \$2 = \$9  2x and 4y = (2 * 3) + (4 * 2) = \$14  4x and 6y = (4 * 3) + (6 * 2) = \$24  Optimal = 4 units of x and 6 units of y  TU of bundle = 135 + 146 = 281 utils o Graphing Optimal Consumption  What happens if prices change?  Rewrite the entire graph OR  Use a graph  Indifference curve – a line that shows the consumption bundles that yield the same amount of total utility  Properties of (most) IC’s: o downward sloping o farther from the origin represents a greater level of TU o never cross o bowed inward 3/2/16  Calculating the slope of IC’s o Slope = Qy / Qx o Along an IC: Tux + TUy = 0 Can also be written as  Mux *  Qx + MUy * Qy = 0 OR  Mux * Qx = -MUy * Qy o Dividing both sides by Qx and by -MUy: Qy / Qx = - Mux / MUy  Marginal Rate of Substitution o Ratio of the marginal utility of one good to the marginal utility of another o MRS = Mux / MUy o Big MUx / tiny MUy = big MRS o Tiny MUx / big MUy = tiny MRS  Principle of Diminishing MRS o The more of a good X a person consumes in proportion to good Y, the less Y the consumer is willing to substitute for X; MRS decreases as Qx increases o The MRS changes along an IC because of diminishing marginal utility o At 1, the consumer would be willing to give up lots of Y to get another X o At 2, y is scarce, so the consumer will only give up very little to get another X Graphing optimal consumption (graph) add the budget line to the IC graph which is the optimal bundle? At bundle 2, slope of the IC = slope of the BL  Relative Price o The ratio of the price of one good to the price of the other o RP = Px / Py o Slope (of the budget line) = -Px / Py o So, we can find the optimal budget by setting MRS = RP (MUx / MUy = Px / Py) o Rules:  At the optimal consumption bundle, MRS = RP Bundle Qx MUx Qy MUy MRS A 2 2500 60 100 25 B 3 2000 40 200 10 C 5 1000 24 500 2 D 6 750 20 750 1  If Px = \$50 and Py = \$5, what is the optimal bundle?  Solution: MRS = RP MRS = MUx / MUy RP = Px / Py = 50 / 5 = 10 Optimal bundle = B 3/4/16  Special Indifference Curves o Perfect substitutes – goods for which the marginal rate f substitution is constant, no matter how much of each is consumed  Ex) a consumer has \$55 to spend on bundles containing Exxon and Chevron gasoline  Px = \$2.75  Pc = \$2.50  Optimal bundle = Income / low P  0 units of X and 22 units of C o Perfect complements – goods that a consumer will consume in the same ratio regardless of their relative price  ex) a consumer has \$24 to spend on bundles containing ham and bread  Ph = \$6  Pb = \$2  Optimal bundle = Income / (Px + Py)  3 units of H and 3 units of B ch. 9  Costs and Profits o Profit ()   = Total Revenue – Total Cost (TR = P * Q)  TC can be defined in multiple ways:  Accounting  = TR – Explicit Cost  Economic  = TR – Economic Cost  Economic cost includes implicit cost, which for a producer is the forgone income from employing resources in their next-best use  Ex) Find Accounting and Economic Profits  TR = \$15,000  Explicit cost = \$11,000  Implicit cost = \$4,000 Solution:  Accounting  = 15000 – 11000 = \$4,000  Economic  = 15000 – (11000 + 4000) = \$0  Normal profit  The first is doing just as well as it could in another industry  Accounting profit = Implicit Cost  Economic profit = \$0

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