Microeconomics, consumer choices
Microeconomics, consumer choices Econ 22060-002
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This page Class Notes was uploaded by Jacquelyn McGee on Monday March 14, 2016. The Class Notes belongs to Econ 22060-002 at Kent State University taught by Jeremiah Harris in Spring 2016. Since its upload, it has received 33 views. For similar materials see Microeconomics in Economcs at Kent State University.
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Date Created: 03/14/16
Consumer Choices 3716 Review from Externalities Freerider someone who enjoys the bene t of a good positive externality without paying for it Freerider problem the market would supply an inef ciently low quantity of a public good Ef cient Quantity of a public good Example below 0 Public good Demand City Park 0 At P40 Lisa demands 3 parks and max demands 2 so if sold to Lisa Max would become a Freerider because Max cannot be prevented from using the park 0 Lisa39s Marginal Bene t is Private 0 Max39s Marginal bene t is an externality Add vertically when using a graph to nd the MSB but horizontally when using a table Tragedy of the commons o The absence of incentives to prevent the overuse and depletion of a commonly owned resource Example is whale over shing around Australia Deforestation in the Amazon Basin When the MB is large and the MC is small for one person but the MC for others is large 0 Example is stealing and not getting caught because the cost to others when you steal is large but by not getting caught your cost is small but also have a large bene t When the MSB is lower than the Marginal private bene t the society gets hurt by the actions causing this 0 Common resources and Public goods are often Overused 0 Solutions Assign property rights Production Quotas Individual Transferable Quotas Consumer Choices Consumption Possibilities 0 Budget Constraints Consumption Choices with a Budget Constraint 0 Maximize your utility the bene t or satisfaction from consuming the good or service How do I maximize my utility subject to my income 0 Budget constraint 2 goods donuts and hot chocolate 120income QHquantity of hot chocolate QDquantity of donuts PH2price of hot chocolate PD1price of a donut Budget Line lncome 2 hot chocolate expenditure donut expenditure 2 PHQH l PDQD expenditure expenditure on hot chocolate on donuts g The budget line describes the limits of consumption possibilities given income level and prices Budget line 2022QH1QD 2 PHQH PDQD P I D QH PH Q PH Slope vi nterce pt 3 Solve for OH 0 Put QD on the x axis 0 20ZQHQD 0 Qh12 QD 10 1515 10 010 Budget Line slope 1l 2 2 relative price of x donuts 200 ng AQD Slope of Budget line I Pg Inside the lineunder the line is affordable Outside above the line is unaffordable On the line means all money is spent Slope of the budget line very important to remember 0 PxPy or Budget Line changes 0 Pivot results from the change in one price holding everything else constant Very Important equation Oh PdPhQD lPh in these examples the subscript letters d and h still follow the Hot chocolate and donut information from earlier in the notes 0 PD rises from 1 to 2 No longer available Old Budget Slope 1j2 10 20 OD New Budget Slope 1 o A parallel Shift From a change in income holding everything else constant 0 Shifts in the budget line The price of the xaxis good changes Pivot Change The price of the yaxis good changes Pivot Change The income of that person or yourself changes Parallel shift 0 Income rises from 20 to 30 1H Slope 1392 r 20 30 DP Slope 1l2 Utility 0 Preference a description of a person39s likes and dislikes and the intensity of those feelings Utility The bene t or satisfaction from consuming the good or service measured in utils Total Utility the total bene t that a person gets from the consumption of all the different goods and services generally more consumption results in higher total utility Marginal Utility Marginal utility o Is the change in total utility that results from a one unit increase in the quantity of a good consumed Diminishing Marginal Utility Principle of o The tendency of the marginal utility to decrease as the consumption of a good increases 0 Example Movies Quantity Tolal Marginal Ilpui ll39lwl39llhl utility Utility 0 C39 50 or 50 d0 l 2 32 3 l922a 4 l50EV 26 5 mu l P 20022 r 22239 quot 120 a 242 0 25939quot 0 275quot l lo a The Utility Maximizing Choice Algorithm 0 Spend all available income Any leftover money can be used to purchase additional utility thus none will be saved o Equalize the marginal utility per dollar for all goods Marginal utility is de ned as additional utility from one more good by normalizing by the price we are getting additional utility per dollar spent How we get to the Algorithm 39Maximizing Utility Proof 0 MU 5 Am If PS i Pp al39norease QH 1 Lirth slit Ilf 1 PD gtIncrease CID Maximize utility where MUH EMUD PH Y When QHincreases MUHwill go down If QD decreases MUDwill increase 0 When QDincreases MUDwill go down If QH decreases MUHwill increase Preference Consumer Equilibrium equal marginal utilities per dollar spent 0 Spend all income on shoes and shirts 0 Shoes are worth 2 times as much as a shirt but cost 5 times as much Mills hoes 100 Pshoes50 MlUshi39rt5250 Psihirtsi10 Given the previous information how will the quantity of shirts and shoes ML MES Liraquot2117 2 lt 5 E5509 Brian IM39Ushom 1 JED shirts Primes Efforts change Consumer Equilibrium 0 Consumers maximize subject to the budget constraint 0 Income 2 PxQx PyQy 0 Budget ine Qy PxPy Qx Py Now the budget lines can be compared with the consumers indifference curves to nd optimal bunde