ECO204Y5 Lecture Notes - Lecture 5: Engel Curve, Giffen Good, Normal Good

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18 Oct 2017

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Evaluate engel curves: relationship between income and quantity demanded. If positive: normal good: positively sloped engel curve. If negative: inferior or giffen good, negatively sloped engel curve. Behind- the-scenes force that causes individuals to switch from one utility maximizing bundle to another. Consider a (decrease) in the price of fish while others remain constant (i, pc) (add bar: substitution effect: response to the relative price change. Observe: sub away from the relatively more expensive good to buy more of the relatively cheaper good. Key: reallocation of goods (combination), while keeping utility constant: income effect: for normal good, a response to the change in real purchasing power. In reality, its what you do with remaining unspent income. Final utility max max bundle (c) 1st condition (bc): 4x + 1y = 72 y = 72-4x. 2nd condition (tangency): mux/muy = px/py = y/x = 4/1 -> y= 4x then sub into the original equation.

Related Questions

1. Assume that beer is an inferior good for Wei. If the price of beer goes up, then the total effect results in Wei buying _______ beer and the substitution effect results in Wei buying ______ beer.

	a.	more, more
	b.	more, less
	c.	less, more
	d.	less, less
	e.	not enough information to determine

2. A consumer has preferences that are complete, transitive and satisfy the "more is better" property. Which of the following statements are necessarily true?

	a.	Indifference curves are negatively sloped.
	b.	Indifference curves do not cross.
	c.	Indifference curves exhibit diminishing marginal rates of substitution.
	d.	Both a) and b) are true.
	e.	a), b), and c) are true.

3. Suppose an individual has preferences over two goods - good X and good Y. In response to changes in the price of good X, the individual has a positively sloped price consumption curve, where good X is drawn on the horizontal axis. Which of the following statements is true?

	a.	Good Y is a normal good.
	b.	Good Y is a Giffen good.
	c.	Good Y is a complement for good X.
	d.	Good Y is an inferior good.
	e.	Good Y is a substitute for good X.

True or False. If False explain why it's false.

1. If all prices are doubled an money income is the left the same, the budget set does not change because the relative prices do not change.

2. A decrease in income pivots the budget line around the bundle initially consumed.

3. If preferences are well-behaved, then for any commodity bundle (x1,x2), the set of commodity bundles that are worse than (x1,x2) is a convex set.

4. The marginal rate of substitution measures the distance betwee one indifference curve and the next one.

5. If someone has the utility function U= 2min(x, y), then x and y are perfect complements for that person.

6. At the boundary optimum, a consumers indifference curve must be tangent to her budget line.

7. If two goods are substitutes, then an increase in the price of one of them will increase the demand for the other.

8. An Engel curve is a demand curve with the vertical and horizontal axes reversed.

9. An inferior good is less durable than a normal good.

10. When other variables are held fixed, the demand for a Giffen good rises when income increase.

budget line

marginal utility

complete property of preferences

market demand

consumption bundle

substitution effect

Giffen good

total effect

income effect

transitive property of preferences

indifference curves

utility

the marginal rate of substitution

utility function

1.	_____	The satisfaction or benefit that consumers receive from consuming goods or services.
2.	________________ _	A particular combination of specific quantities of goods or services
3.	________________ _	Consumers can rank all conceivable bundles of goods or services
4.	_____	If A is preferred to B, and B is preferred to C, then A is always preferred to C.
5.	_____	Equation showing a consumerâs perception of the total utility forthcoming from consuming each bundle of goods and services.
6.	_____	A set of consumption bundles each and every one of which provides a consumer with exactly the same level of total utility.
7.	_____	The number of units of Y that must be given up for total utility to remain the same when one more unit of X is consumed.
8.	_____	The addition to total utility attributable to consuming one more unit of a good, holding the consumption of all other goods constant.
9.	_____	The line showing all bundles of goods that can be purchased at given prices if the entire income is spent.
10.	_____	The change in the consumption of a good that would result if the consumer remained on the original indifference curve after the price of the good changes.
11.	_____	The change in consumption of goods results strictly from the change in purchasing power after the price of a good changes.
12.	________________ _	The sum of the substitution and income effects.
13.	_____	A good for which quantity demanded varies directly with price, causing an upward sloping demand curve.
14.	_____	A list of prices and the corresponding quantity consumers are willing and able to purchase at each price.

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ECO204Y5 Lecture Notes - Lecture 5: Engel Curve, Giffen Good, Normal Good

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