ECON 2310 Chapter Notes - Chapter 6: Giffen Good, Budget Constraint, Demand Curve

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22 Feb 2016

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Good becomes more expensive related to other goods. (consumers tend to shift purchases away from more expensive good to other goods. ) Consumers" purchasing power declines! (dollar doesn"t buy as much as it once did. )(consumers can"t afford the consumption bundles they would have chosen; must adjust their purchases) Uncompensated price change: price change with no change in income (shift from l1 to l2)(rotates budget line) Compensated price change: price change and income change which together leave consumer"s well being unaffected (shift from l1 to l3)(shifts the budget line) Substitution effect of a price change: effect on consumption of a compensated price change (part 1) Reminds us that a change in relative prices causes the consumer to substitute one. Always involves a movement along an indifference curve to a point where the slope of the indifference curve is the same as the slope of the new budget line good for another: gray arrows.

Related Questions

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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2. Plot the initial budget line Blo, the new budget line BL1 and the compensated budget line BLC after the price of X, increases. Then, plot the substitution effect SE, the income effect IE, and the total effect TE for each of the two consumers according to their indifference curves. Please note that the focus of this question is not on finding the exact quantities of each good that these consumers would be purchasing before and after the price change. (30 marks) 2. (a) Adam lives in Australia and his income is 300. Initially, the price of X, is 6 and the price of X2 is 10. Then, the price of xı increases to 12 while the price of X2 and his income remain unchanged. Use your findings on SE, IE, TE, and lecture discussion to help you explain whether (i) X1 is a normal good and (ii) the demand curve for Xi is downward-sloping (13 marks) 40 0 5 10 15 20 25 30 35 40 45 50 x1 2. (b) Beatrice lives in Barbados and her income is 700. Initially, the price of Xi is 7 and the price of xz is 10. Then, the price of Xı increases to 14 while the price of x2 and her income remain unchanged. Use your findings on SE, IE, TE, and lecture discussion to help you explain whether (i) x1 is a normal good and (ii) the demand curve for Xi is downward- sloping. (14 marks) -U3 02 10 o 20 30 40 50 60 70 80 90 100 x;* 2. (c) Is Xi a Giffen good to Adam or Beatrice? What are the conditions for a good to become a Giffen good? (3 marks)

The following table shows the demand curve and cost information for a firm that is monopoly

Price	Quantity	TC
$10	0	$500
$9	200	$1,000
$8	400	$1,600
$7	600	$2,500
$6	800	$4,000

What quantity should they produce to maximize their profits?

200 units

400 units

800 units

600 units

Mary competes in a monopolistically competitive market. Suddenly, 5 new firms enter the market causing her perceived demand curve to shift. The following tables show her original and new demand curves and her cost information.

Assume that Mary can only choose from the quantities of output given in the table. By how will the quantity that she produces change after the new firms enter the market?

Original Demand Curve

Price	quantity	TC
30	0	$130
25	10	$140
20	20	$260
15	30	$450
10	40	$660

New Demand Curve

25	0	$130
20	10	$140
15	20	$260
10	30	$450
5	40	$660

Decrease by 5

Decrease by 10

Increase by 10

Increase by 5

Monopolistic competitor has the following information about cost and demand

Quantity	Price($)	Total Revenue ($)	Marginal Revenue ($)	Total Cost ($)	Marginal Cost ($)	Average Cost ($)
0	25	0	25	30	----	----
2	24	48	23	35	2.5	17.5
4	23	92	21	45	5	11.25
6	22	132	19	60	7.5	10
8	21	168	17	77	8.5	9.63
10	20	200	15	100	11.5	10
12	19	228	13	126	13	10.5
14	18	252	11	165	19.5	11.79
16	17	272	9	210	22.5	13.13
18	16	288	7	260	25	14.44
20	15	300	5	320	30	16

If this industry was perfectly competitive, what price would the good sell for?

$19

$23

$21

$15

Monopolistic competitor has the following information about cost and demand

Quantity	Price($)	Total Revenue ($)	Marginal Revenue ($)	Total Cost ($)	Marginal Cost ($)	Average Cost ($)
0	25	0	25	30	----	----
2	24	48	23	35	2.5	17.5
4	23	92	21	45	5	11.25
6	22	132	19	60	7.5	10
8	21	168	17	77	8.5	9.63
10	20	200	15	100	11.5	10
12	19	228	13	126	13	10.5
14	18	252	11	165	19.5	11.79
16	17	272	9	210	22.5	13.13
18	16	288	7	260	25	14.44
20	15	300	5	320	30	16

What will the firm

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ECON 2310 Chapter Notes - Chapter 6: Giffen Good, Budget Constraint, Demand Curve

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