PRIN MICROECONOMICS ECON 2000
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This 17 page Class Notes was uploaded by Bethany Conn on Tuesday October 13, 2015. The Class Notes belongs to ECON 2000 at Louisiana State University taught by R. Gittings in Fall. Since its upload, it has received 13 views. For similar materials see /class/223024/econ-2000-louisiana-state-university in Economcs at Louisiana State University.
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Date Created: 10/13/15
Chapter 6 Appendix 392 Indifference Curves Figure 6A1 Hugh s Indifference Curve 390 Alternative Bundles Giving Hugh Equal Utility Bundle Clothing Food 4 a 30 5 b 18 10 c 13 15 g a39 10 20 e x 25 7 J I 7 30 5 5 At every point on the indifference curve the utility level is the same Literally the individual is indifferent between any 0 1 bundle on that line 20 30 Quantity of Food per Week The slope of the tangent line T tells you the marginal rate of substitution M RS between the goods The MRS is the tradeoff at that particular point MRS is different along that curved line above Copyright 2008 Pearson AddisonWesley All rights reserved Table 6A1 Hugh s Marginal Rate of Substitution between Clothing and Food In 1 2 3 Nlarginal Rate Movement Change in Clothing Change in Food of Substitution From a to b 12 5 24 From b to c 5 5 l 0 From 6 to d 3 5 06 From d to e 2 5 04 From 6 ref 1 5 02 So pick two points on the line and calculate the change Divide the tradeoff of clothing for food and this gives you the rate of change talking about the slope again Note that as you consume more food the MRS goes to zero meaning I m not willing to give up any more clothing for food I ve had enough food Interesting points on the previous graph are a and f Point f For me to give up any more food you ll need to give me a truckload of clothing Copyright 2008 Pearson AddisonWesley All rights reserved Figure 6A2 Hugh s l Indifference Map Io Each indifference cune lC represents a different level of utility I2 is higher utility than l1 etc Higher utility levels move outward to the rightquot lfthe IC is very flat this represents a preference for clothing lfthe IC is very steep this represents a preference for food Quantity of Clothing per Week The shape of the indifference curve determines where it 0 touches the budget line and therefore what bundle is best Quantity of Food per Week Copyright 2008 Pearson AddisonWesley All rights reserved Line 390 m 0 Every point on that budget line represents a different combination of Food and Clothing that can be consumed by the same amount of money your budget 4 0 Budget line For example if your budget was 100 that budget ine tells you that you can afford 4O clothes and 10 food OR for the same amount of money you can get 20 clothes and 20 food N O Quantity of Clothing per Week C Higher budgets are represented by I ines further out to the right 40 Quantity of Food per week p The bundle X2 is unaffordable Copyright 2008 Pearson AddisonWesley All rights reserved Figure 6A4 Hugh s Utility I Maximizing Choice Io Bring the IC and the budget line together Clearly one wants to obtain the best bundle they can given their budget Want to be on the highest lC possible Can t spend too much Don t want to leave money on the table The sweet spot is where the IC curve is tangent perfectly touches the budget line Quantity of Clothing per Week This is l4 Don t have enough 0 5 10 15 20 25 3o 35 money for l5 the other points on the Quantity of Food per Week budget line aren t as good as Copyright 2008 Pearson AddisonWesley All rights reserved Figure 6A3 Hugh s Budget Line 390 G O lC1 preference for clothing is clearly flatter than lC2 preference for food C1 You have to visualize moving these Budget line indifference curves around on the graph until you find a spot where it just touches the budget line 4 O For lC1 to go any lower consume less clothing and more food it would cross the budget line Ix O Quantity of Clothing per Week C Similarly for IC2 The shape of I these curves naturally find their 40 spot Quantity of Food per Week F Copyright 2008 Pearson AddisonWesley All rights reserved Figure 6A5 Hugh s Income 1 Consumption Line no Changes in income are Income clonsumption represented by the green lines me A B C are the best bundles for each ofthose different incomes We can trace that C path outwith the red line B Note that the red line is non linear increasing at a 3 decreasing rate its is getting I atter What does that mean Quantity of Clothing per Week 1 As this person gets richer they spend the extra money more on food than clothing Quantity of Food per Week Copyright 2008 Pearson AddisonWesley All rights reserved Figure 6A6 Hugh s Price 1 Consumption Line no Previously we adjusted income and mapped out a path Here we adjust the price of food consider price decreases in food Price consumption line Food is most expensive for green line cheaper at c and cheapest at d Note that we assume the price of clothing stays the same Quantity of Clothing per Week The red line maps out our best bundles at these different prices Quantity of Food per Week What does this path tell 7 Copyright 2008 Pearson AddisonWesley All rights reserved US 39 Figure 6A Derivation of a I Consumer s Demand Curve Io 3 4000 g E Price consurnprion E g line 3 a 35 Putting the pieces together i you might have guessed that this exercise is what generates o 300 l I 1333 2000 4000 the demand curve we ve been 600 LIOO Gasoline gallons per month ii Priceconsumption line H With a little more detail we can i f put numbers on the graphs Sc 3 10 a Y Ebemndcmc and trace out the demand g m b 39 curve for any price 10 5 c 0 300 l l 600 1100 Gasoline gallons per month U H ii Demand curve H 0 Figure 6A8 The Income and Substitution Effects of a Price Change I0 Now we have the tools to take a closer look at our substitution and income effects of a price change This graph represents a price decrease of gasoline The budget line goes from ab to the new budget line aj This causes us to OVERALL go from consumption bundle A0 to A2 With the price change and more real income we go from 1 IC 1 to l2 Note that the graph 0 Qquot Qquot b 92 11 I in the book has themlabeled differently This labeling here is easier to follow All Otbcr Goods dollars per month Substi tution l effect I Quantity of Gasoline gallons per month Copyright 2008 Pearson AddisonWesley All rights reserved All Other Goods dollars per month Figure 6A8 The Income and Substitution Effects of a Price Change I0 Substi tution l effect I 0 90 Q I Q jl Quantity of Gasoline gallons per month Copyright 2008 Pearson AddisonWesley All rights reserved However we can break up the move from A0 to A2 into our substitution and income effects The substitution effect takes us to A1 The income effect takes us to A2 Note that Gasoline here is a normal good A1 is on the same indifference curve as A0 itsjust the price change that takes us here without considering the increase in our real income caused by the price change All Other Goods dollars per month Figure 6A8 The Income and Substitution Effects of a Price Change I0 Substi tution l effect I 0 90 Q I 5 Q 1 Quantity of Gasoline gallons per month Copyright 2008 Pearson AddisonWesley All rights reserved To find A1 however we need to think about how much change in real income did we get with the price change that got us to A2 This can be found by considering a parallel shift inward from budget line aj until we find a new tangency point on the original indifference cune l1 This shift says Given the price reduction what amount of real income needs to be taken awa to get back to the original utility level Practice Problems 1 If a binding price ceiling is in place and if the demand for the product shifts outward one 1 consequence would be A the quantity exchanged would increase B an increase in the amount of excess supply C the quantity exchanged would remain constant D the quantity exchanged would decrease E a decrease in the amount of excess demand 2 Suppose the demand for eggs is inelastic and that the market clearingprice is 150 per dozen 2 Now suppose the government imposes a minimum price of 200 per dozen Why might the government implement such a policy A to decrease tax revenues from egg farmers B to increase the incomes of egg farmers C to make consumers better off D to reduce excess supply in the egg market E to increase excess demand in the egg market Toffee bars Cashews bags Units Marginal Total Marginal Total Utilitv Utilitv Utilitv Utilitv 1 10 10 12 12 2 8 18 10 22 3 5 23 7 29 4 3 26 5 34 5 1 27 2 36 6 0 27 1 37 7 0 27 0 37 TABLE 6 1 3 Refer to Table 6 1 If the prices of toffee bars and bags of cashews are both 1 and this consumer 3 has 7 per week to spend on these two snacks how many of each will heshe purchase to maximize utility A 1 toffee bars and 2 bags of cashews B 2 toffee bars and 5 bags of cashews C 5 toffee bars and 6 bag of cashews D 3 toffee bars and 4 bags of cashews E 5 toffee bars and 2 bags of cashews 4 If money income is reduced by half and the prices of all goods consumed by the household are 4 reduced by half the household39s budget line will A shift outward become steeper not change become flatter mUOm shift inward 5 Consider a basket producing firm with fixed capital If the firm can produce 36 baskets per day 5 with 3 workers and 44 baskets per day with 4 workers then we know that which of the following is true A The marginal product of the fourth worker is 8 The firm has passed the point of diminishing marginal productivity The firm has passed the point of diminishing average productivity The marginal product is below the average product E all of the above 000 The table below shows output marginal cost and average variable costfor the production ofpairs ofshoes All costs are in dollars Average Cu at Marginal Cost Variable Cost 50 60 70 45 115 90 35 95 110 30 80 130 35 65 150 60 60 170 105 65 190 180 75 210 230 90 230 290 110 TABLE 7 5 6 Refer to Table 7 5 Suppose there are no fixed costs The firm reaches it s capacity level of output 6 when its output is equal to units A 1 B 50 C 210 D 110 E 150 Thefollowing table shows the marginal products q cupitul K and labor Lfor various methodsforFirm ABC to produce 1000 toys per day Production Method MPK MPL A 50 4 B 45 8 C 40 12 D 35 16 E 30 20 F 25 24 G 20 28 TABLE 8 2 7 Refer to Table 8 2 If capital costs 6 per unit and labor costs 4 per unit which production method 7 minimizes the cost of producing 1000 toys per day A method B B method C C method D D method E E method F Gk Q I 2000 Q 1000 soccer Ine Q1 FIGURE 8 4 8 Refer to Figure 8 4 The firm is initially minimizing the cost of producing 1000 units of output 8 Suppose the factor prices then change such that the price of capital K rises and the price of labor L falls If the firm decides to keep its output unchanged it will move toward the point A A B B C C D D E unknown as there is insufficient information to know Assume thefollowing total cost schedulefor a perfectly competitive rm Output per period TVC TEC 0 0 100 1 40 100 2 70 100 3 120 100 4 180 100 5 250 100 6 330 100 TABLE 9 1 9 Refer to Table 9 1 The profit maximizing firm would shut down in the short run if the market 9 price of its output dropped below A 35 B 40 C 70 D 90 E 100 10 Refer to Table 9 1 If the market price were 71 the competitive firm wishing to maximize its 10 profits would A produce 6 units of output B not produce because P lt minimum of A TC C produce 2 units of output D not produce because P lt TFC E produce 5 units of output 11 Suppose that a single price monopolist calculates that at its present output marginal revenue is 2 11 and marginal cost is 1 If the price of the product is 3 the monopolist could maximize its profits by A raising price and leaving output unchanged doing nothing 001 lowering price and leaving output unchanged lowering price and raising output shutting down m0 12 A monopolist is currently producing an output level where price equals marginal cost and profits 12 are positive In order to maximize profits this monopolist should A not change his output level because he is currently earning profits 001 shut down reduce price and let production adjust to the new price D increase production and reduce price E decrease production and increase price
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