Microeconomic Analysis for Business Decisions
Microeconomic Analysis for Business Decisions UGBA 101A
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This 3 page Class Notes was uploaded by Melba Champlin on Thursday October 22, 2015. The Class Notes belongs to UGBA 101A at University of California - Berkeley taught by Staff in Fall. Since its upload, it has received 60 views. For similar materials see /class/226756/ugba-101a-university-of-california-berkeley in Business Administration at University of California - Berkeley.
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Date Created: 10/22/15
Some review for the rst UGBA 101A exam Charlie Gibbons University of California Berkeley September 28 2007 E i u D dzD 1 Own price demand 6 7 1px 733 S dzs 1 Own price supply 6 7 1px m7 7 diLy Cross price em 7 d m 7 a lncome 77m 7 d1 i i d 7 MRTS i L LK Substitution 039 7 idMRTSLVK Equilibrium conditions Interior solution my gt 0 MRS pi Corner solution x gt 07 y 0 MRS gt M 10ygt0 MRS lt Directions of income and substitution effects of price changes on x Substitution effect lncome effect Total effect Normal good Inferior good Normal good Inferior good If pm T m l x l x T x T 7 If pm T l m T x T x T l x T 7 cgibbons econiberkeley edu Consumer and producer analogues Consumers Producers Utility function Uy U Production function FL7 K Q Marginal utility MUm7 MUy Marginal product MPL7 MPK Indifference curves Uxy U lsoquants L7K FL7 K Marginal rate of MRS Marginal rate of MRTSLK 1313 substitution technical substitution Solving for an equilibrium 1 Set Q5 QD and solve for the equilibrium price 2 Plug the equilibrium price into either Q5 or QD and solve for the equilibrium quantity Finding a demand curve for x H Solve MRS 4 for y in terms of x E0 Substitute the expression for y into the budget constraint and solve for z in terms of Pm See if there are any values of pr such that the demand for z is 0 or negative In these 9 instances7 only y will be consumed important step for quasi linear utility This procedure works if there is an interior solution to the problem If utility is linear7 this will not be the case lnstead7 use the corner solution equilibrium conditions listed above to determine whether only z or only y will be consumed For quasi linear utility7 there will be an interior solution for some values of pm pg and I and this procedure will permit you to identify these values Finding an optimal consumption bundle 1 Follow the instructions above to nd the demand curve for x 2 Plug in the appropriate values of the exogenous parameters to solve for x 3 Plug this value of z into the equilibrium condition for the problem to nd y Algebraically identifying income and substitution effects on x 1 Find the optimal bundle under the original prices and income7 mayo Also7 calculate the utility of this bundle7 Uz0y0 U0 2 F 9 7 U 03 Find the optimal bundle under the new prices and income7 xhyl Also7 note the equilibrium condition expressed as y in terms of 1 Substitute the new equilibrium condition for y into the utility function and set the utility level equal to U0 Solve to nd xD Substitute this value of z into the new equi librium condition and calculate 1113 These values comprise the decomposition bundle The substitution effect is 13 7 0 The income effect is 1 7 zD The total effect is 1 7 07 which is also lE SE
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