Академический Документы
Профессиональный Документы
Культура Документы
Microeconomic
Analysis
Consumer Demand Analysis
P(Bananas) = $4/lb.
Q(Bananas) = 10lbs
P(Apples) = $2/Lb.
Q(Apples) = 20lbs
P(Bananas) = $3/lb.
Q(Bananas) = 15lbs
P(Apples) = $3/Lb.
Q(Apples) = 15lbs
Choice A
Choice B
Choice B
Is strictly
preferred to
Choice A
P(Bananas) = $4/lb.
P(Apples) = $2/Lb.
P(Bananas) = $3/lb.
Q(Bananas) = 10lbs
Q(Bananas) = 15lbs
Q(Apples) = 20lbs
Q(Apples) = 15lbs
Cost = $80
Cost = $90
Cost = $90
Cost = $90
P(Apples) = $3/Lb.
Q(Bananas) = 25lbs
P(Apples) = $4/Lb.
Q(Apples) = 10lbs
Q(Bananas) = 15lbs
Choice B
Cost = $90
Cost = $90
Q(Apples) = 15lbs
Q(Bananas) = 10lbs
Choice A
Choice C
Cost = $100
Q(Apples) = 20lbs
Is strictly
preferred to
Choice B
Is choice C
preferred to choice
A?
Choice B
Choice C
Is strictly
preferred to
Choice A
Is strictly
preferred to
Choice B
C>B>A
Choice C
Is strictly
preferred to
Choice A
U :A B
A
Set of possible
choices
B
Utility Value
Choice A
Q(Bananas) = 10lbs
Q(Apples) = 20lbs
Choice B
Q(Bananas) = 15lbs
Q(Apples) = 15lbs
Choice C
Q(Bananas) = 25lbs
Q(Apples) = 10lbs
For choices X, Y, and Z, if U(X) > U(Y), and U(Y) > U(Z), then
U(X) > U(Z) (i.e., the is a definitive ranking of choices)
U U ( x, y )
U = 20
U ( A) U ( B ) 20
U (C ) U ( A) U (C ) U ( B )
U ( x, y ) 25
B
U ( x, y ) 20
U (C ) U ( A)
C
A
U ( x, y ) 20
x
U (C ) U ( A)
A
C
U ( x, y ) 20
x
U ( x * x, y * ) U ( x * , y * )
*
*
*
+ U ( x, y y ) U ( x , y )
y
x
y*
U ( x, y ) k
x*
=0
U ( x* x, y * ) U ( x * , y * )
U ( x, y * y ) U ( x* , y * )
y = 0
x +
x
y
y
x
y*
y
U ( x, y ) k
x*
U x ( x* , y * )dx U y ( x* , y * )dy 0
y
y
Marginal Utility of X
Marginal Utility of Y
dy
U x ( x* , y * )
MRS
dx
U y ( x* , y * )
U ( x, y ) k
x*
y*
y'
U ( x, y ) k
x'
An Example
U ( x, y ) x y
U x ( x, y ) x 1 y
U y ( x, y ) x y
U x ( x* , y * ) x 1 y y
1
*
*
U y ( x , y ) x y
x
y
x
y
%
x
%MRS
'
y
d
MRS x
y d MRS
x
y
x
x
An Example
U x ( x, y ) x
U ( x, y ) x y
1
U y ( x, y ) x y 1
x
d MRS
d
U x ( x * , y * ) x 1 y y
1
*
*
U y ( x , y ) x y
x
y
x
1
y
x
max U ( x, y )
x0, y 0
subject to
px x p y y I
( x, y, ) U ( x, y ) ( I p x x p y y )
( x, y, ) U ( x, y ) ( I p x x p y y )
First Order Necessary Conditions
x ( x, y , ) U x ( x, y ) p x 0
y ( x, y, ) Uy ( x, y ) p y 0
U x ( x, y ) Px
U y ( x, y ) Py
( x, y, ) I p x x p y y 0
px x p y y I
U y ( x, y )
py
U x ( x, y )
px
max U ( x, y )
x0, y 0
subject to
px x p y y I
y
x* x( p x , p y , I )
I
py
y * x( p x , p y , I )
*
I
px
.5
max x y
.5
x0, y 0
subject to
px x p y y I
( x, y, ) x y ( I p x x p y y )
.5
.5
U x ( x, y ) .5 x .5 y .5 Px
.5 .5
U y ( x, y ) .5 x y
Py
Px
x
y
P
y
px x p y y I
.5
max x y
.5
x0, y 0
subject to
px x p y y I
px x p y y I
Px
xI
p x x Py
P
y
I
x
2 px
I
y
2 py
y
I
py
y*
I
px
y
U x ( x, y ) Px
U y ( x, y ) Py
I
py
Substitution effect
y*
I
px
y
I
py
px x p y y I
Income effect
y*
I
px
px
p' x
px
x'
x*
x'
x*
px
y
%
x
%MRS
%x
x
% p x
px
x*
px
is small
x is small
x
px
y
is large
x is large
px
x 0
(Almost)
x
px
.5
max x y
.5
x0, y 0
subject to
px
px x p y y I
%x
dx p x
x
%p x dp x x
dx
I
2
dp x
2 px
px
x*
I
x
2 px
px
I
x 2
1
2 px I
2 px
U y ( x, y ) Py
px x p y y I
I
py
I
px
px
%x
dx p y
y
%p y dp y x
px
%x
x*
.5
max x y
.5
x0, y 0
subject to
I
x
2 px
I
y
2 py
px x p y y I
%x
dx p y
y
0
%p y dp y x
Income and Substitution effects
cancel each other out!!
U y ( x, y ) Py
Substitution effect = 0
px x p y y I
I
py
y*
x x'
*
I
px
Income Elasticity
%x dx I
I
%I dI x
px
px
%x
x*
.5
max x y
.5
x0, y 0
subject to
I
x
2 px
I
y
2 py
px x p y y I
%x dx I
I
%I
dI x
1
2 px
I
1
I
2 px
Willingness to pay
Q 200 2 P
$100
$50
D
100
Willingness to pay
Q 200 2 P
$100
$75
$50
D
50
100
Consumer Surplus
Q 200 2 P
$100
$75
$50
D
50
100
Consumer Surplus
Q 200 2 P
$100
$50
Total Willingness to Pay ($7500)
- Actual Amount Paid ($5000)
$5000
D
100
A useful tool
In economics, we are often interested in elasticity as a measure
of responsiveness (price, income, etc.)
%x
x
% p x
dx
%x
d ln x
x
dp x
%p x
d ln p x
px
d (ln x)
x
d (ln p x )
xd a0 a1 p x a2 I a3 p y
%x
dx p x
px
x
a1
%p x dp x x
x
xd a0 a1 p x a2 I a3 p y
%x
dx p x
px
x
a1
%p x dp x x
x
px
High Elasticity
Low Elasticity
xd a0 a1 ln p x a2 ln I a3 ln p y
%x
dx 1 a1
x
%p x d ln p x x x
ln xd a0 a1 p x a2 I a3 p y
%x d ln x
x
p x a1 p x
%p x
dp x
ln xd a0 a1 ln p x a2 ln I a3 ln p y
%x
d ln x
x
a1
%p x d ln p x
Log linear demand curves are not straight lines, but have
constant elasticities!
.5
max x y
.5
x0, y 0
subject to
px x p y y I
ln xd a0 a1 ln p x a2 ln I a3 ln p y
H 0 : a1 1
a2 1
a3 0
px
xd a0 a1 p x a2 I d
px
S
px
D
xd x s
px
px
S
S
D
D
D
D
An example
Demand
Supply
Equilibrium
xd a0 a1 p x a2 I d
xs b0 b1 p x s
x s xd
x s xd
a0 a1 p x a2 I d b0 b1 p x s
d s
a2
I
p x
b1 a1
b1 a1
b1 d a1 s
a2
I
x b2
b1 a1
b1 a1
p x 1I 1
x 2 I 2
The original parameters are related as follows:
a2
1
b1 a1
a2
2 b2
b1 a1
2
b2
1
We can solve for the
supply parameter, but
not demand. Why?
xd a0 a1 p x a2 I d
xs b0 b1 p x s
px
D
D
D