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ECON 310 Lecture 3: l310x3

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taupeserval94
10 May 2017
School
CSULB
Department
Economics
Course
ECON 310
Professor
E Funkhouser

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Document Summary

Lecture 3 more consumer choice: deriving the demand curve. Demand curve for each price how much is demanded. To see this, vary the price of one good and map out what happens to the demand for that good. As price of food goes up (budget constraint becomes steeper), demand for food decreases. We have shown that when the price of a good changes, the quantity demanded also changes. For example, when the price of food rose, the quantity of food consumed declined. We have shown how the budget constraint shifts when income changes holding prices fixed the budget constraint shifts out or in, maintaining the same slope (because the relative price of the goods has not changed). Key idea income effect is the change in the quantity demanded resulting from a change in income while holding prices fixed. We usually think that as income increases, consumption also increases.

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Related Questions

This question explores the quasi-linear utility function. Consider Thomas who has preferences over food, QF, and clothing, QC. His preferences are represented by

U (QF,QC) = [alpha]QF^(1/3) + QC

where [alpha] > 0. Let pF, pC, and I represent the prices of food, clothing, and Thomas's budget for food and clothing.

i. Using the Lagrangian method, solve mathematically for the demand function for each good. Make sure to show each step of your work.

ii. Determine whether food and clothing are normal or inferior goods for Thomas. Prove your answer mathematically.

iii. Are food and clothing substitutes or complements for Thomas? Prove your answer mathematically.

iv. Now assume that [alpha] = 3, and I = $1,224.

1. If pf = $3, and pc = $12 what is Thomas's demand for food and clothing?

2. If the price of food goes down to pf = $4/3, what happens to Thomas's demand for food and clothing?

3. If Thomas’ income falls to $996, what happens to quantity consumed of each good?

4. Graph Thomas's inverse demand curve (i.e price on y-axis, quantity on x-axis) for food when his income is I = $996 and the price of clothing is pc = $12. Be as precise as possible, labeling the exact value of any important points on the graph.

From lecture on Using Demand Functions

The linear demand function, the log-log demand function and two alternative forms of the semi-log demand function are simple formulas for demand functions where the quantity of a good demanded is represented as a function of its price and the consumer’s income. Write down these formulas. They imply different patterns of choice behavior. How do they differ with regard the level of price that drives a consumer to stop consumption of a good? One functional form implies that the price and income elasticities of demand are constant (i.e. don’t vary with income or the amount consumed): which form is that? In terms of the implied qualitative choice behavior, how does the demand function from a Stone-Geary utility function differ from these demand functions?

1.
The demand curve for a good is very unlikely to be perfectly vertical because
A) scarcity and limited income restrict the ability of consumers to afford goods as they become very expensive.
B) as the price of a good rises to high enough levels, the incentive for other suppliers to invent new substitutes for the good increases.
C) consumers generally do not care about the price of the goods they consume.
D) both a and b are true.
2.
As the period for firms to expand output is lengthened, the elasticity of the market supply curve will
A) approach zero.
B) increase.
C) decrease.
D) remain the same since time does not affect the elasticity of market supply.
3.
The price elasticity of demand for automobiles measures the responsiveness of
A) consumer purchases to a change in the price of automobiles.
B) consumer purchases to a change in the quality of automobiles.
C) supplier production levels to a change in the price of automobiles.
D) consumer purchases of automobiles to a change in their income.
4.
Which of the following is true regarding the price elasticity of demand?
A) Demand is generally more elastic in the long run than in the short run.
B) Along a single demand curve, demand elasticity decreases as you move down the curve (to lower prices).
C) a flatter demand curve (has a less steep slope) is relatively more elastic than a demand curve that has a steeper slope.
D) All of the above are true.
5. (Answer ONE of the Following Question)
  • Economists maintain that the price of a product does not affect demand. How can this be true?
  • National defence is considered a public good because there appear to be no limits to the nonrivalry-in-consumption characteristic, and exclusion of nonpayers is impossible. Are there any other goods that so perfectly meet both public goods criteria?
  • Congressman Local stuff always votes for a balanced budget amendment to the U.S. Constitution. He also always votes for spending bills supported by the leadership of his political party. Is this rational?