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Economics 1021A/B Chapter Notes - Chapter 9: Indifference Curve, Normal Good, Demand Curve

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School
Western University
Department
Economics
Course
Economics 1021A/B
Professor
Bruce Hammond

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ECON 1021A/B Full Course Notes
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ECON 1021A/B Full Course Notes
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Document Summary

Its position depends on lisa"s income and on the prices she faces. Quantity of pop = qp: the budget: qp + qm = : the budget line: Qp + (pm/ pp) qm = y/ pp. Subtract (pm/ pp) qm from both sides of equation. Qp = y/ pp - (pm/ pp) qm: the budget line with numbers: Divide both sides of the equation by pp() When income increases, the budget line shifts outward. An indifference curve is a line that shows combinations of goods among which a consumer is indifferent. The top figure shows one of lisa"s indifference curves. Lisa is just as happy to consume at point c as she is to consume at point g. Lisa also prefers all the combinations above the indifference curve to those on the indifference curve. And she prefers any combination on the indifference curve to any combination in the grey area below the indifference curve.

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Related Questions

The following table provides quarterly sales data of frozen pie by Edward’s Pie Company for the period 2002-2013

Unit Sales (Q)

Price ($)

Advertising Expenditures ($)

Competitors' Price ($)

Income ($)

Population

Period

Q

P

A

PX

M

Pop

1

2002

193,334

6.39

15,827

6.92

33,337

4,116,250

2

170,041

7.21

20,819

4.84

33,390

4,140,338

3

247,709

5.75

14,062

5.28

33,599

4,218,965

4

183,259

6.75

16,973

6.17

33,797

4,226,070

5

2003

282,118

6.36

18,815

6.36

33,879

4,278,912

6

203,396

5.98

14,176

4.88

34,186

4,359,442

7

167,447

6.64

17,030

5.22

35,691

4,363,494

8

361,677

5.30

14,456

5.80

35,950

4,380,084

9

2004

401,805

6.08

27,183

4.99

34,983

9,184,926

10

412,312

6.13

27,572

6.13

35,804

9,237,683

11

321,972

7.24

34,367

5.82

35,898

9,254,182

12

445,236

6.08

26,895

6.05

36,113

9,272,758

13

2005

479,713

6.40

30,539

5.37

36,252

9,300,401

14

459,379

6.00

26,679

4.86

36,449

9,322,168

15

444,040

5.96

26,607

5.29

37,327

9,323,331

16

376,046

7.21

32,760

4.89

37,841

9,348,725

17

2006

255,203

6.55

19,880

6.97

34,870

5,294,645

18

270,881

6.11

19,151

6.25

35,464

5,335,816

19

330,271

5.62

15,743

6.03

35,972

5,386,134

20

313,485

6.06

17,512

5.08

36,843

5,409,350

21

2007

311,500

5.83

16,984

5.29

37,573

5,409,358

22

370,780

5.38

15,698

6.19

37,781

5,425,001

23

152,338

7.41

22,057

6.94

37,854

5,429,300

24

320,804

6.19

17,460

6.38

39,231

5,442,595

25

2008

738,760

5.75

42,925

5.54

28,579

16,381,600

26

707,015

6.61

50,299

6.73

28,593

16,544,289

27

699,051

5.03

37,364

5.04

28,633

16,547,258

28

628,838

6.76

50,602

4.61

28,833

16,553,958

29

2009

631,934

7.04

53,562

5.85

29,242

16,587,432

30

651,162

6.70

48,911

5.63

29,876

16,680,782

31

765,124

6.54

49,422

6.94

30,327

16,716,936

32

741,364

5.73

44,061

6.37

30,411

16,717,938

33

2010

291,773

5.35

13,896

5.78

29,778

2,972,443

34

153,018

6.33

27,429

4.73

30,079

2,974,275

35

574,486

5.94

31,631

6.70

30,598

2,989,720

36

75,396

7.00

39,176

4.58

30,718

3,020,244

37

2011

590,190

5.19

33,538

5.17

30,922

3,021,618

38

288,112

7.02

53,643

5.15

31,199

3,025,298

39

276,619

7.02

60,284

5.46

31,354

3,042,834

40

522,446

5.23

53,595

6.06

31,422

3,063,011

41

2012

395,314

5.80

22,626

6.56

38,892

7,611,304

42

436,103

5.32

22,697

6.38

39,080

7,615,783

43

336,338

6.35

25,475

4.53

39,510

7,666,220

44

451,321

5.95

25,734

6.31

39,552

7,710,368

45

2013

352,181

6.01

23,777

6.24

39,776

7,713,007

46

317,322

7.02

27,544

4.86

41,068

7,752,393

47

422,455

5.71

23,852

4.86

41,471

7,754,204

48

290,963

7.36

30,487

5.32

41,989

7,782,654

Where Q = the quantity of pies sold during a quarter, P = retail price in dollars, A = advertising expenditure in dollars, Px = price charged by a competing pie company in dollars, M = disposable income per capita in the area, in dollars, Pop = population of the market area.

Estimate the model Q = a0 + a1 P + a2 A + a3 Px + a4 M + a5 Pop relating quantity sold as a function of price charged by Edward’s Pie, advertising, price charged by the competitors, and area population. Write the estimated model in equation form.

Carefully interpret the estimated coefficients in the model

Are the estimated coefficients statistically significant? Use the reported p values to carry out the tests.

Discuss the explanatory power of the model. What percentage of variations in sales is explained by the estimated regression equation?

Use the estimated regression model to forecast sales for the first quarter of 2014, for following values of the independent variables:

P = $8.50, A = $40,000, Px = 7.50, M = $43,000, and Pop = 8,500,000

1. (12 points) Suppose a typical used car buyer is willing to pay $6000 dollars for a low-quality used car (Lemon), and $14,000 for a high-quality car (Plum). Also, suppose the market supply of Plums is given by QP = -60 +.01P and the market supply of Lemons is given by QL = -20 +.01 P. Let the typical buyer’s belief that a car of unknown quality is a Plum = z, so (1-z) is the probability that a car of unknown quality is a Lemon.

Assume that buyers are risk-neutral so that the price a buyer will offer for a car of unknown quality is given by:

P = z($14,000) + (1-z)($6000). Therefore P = $6000 + $8000z.


a) (8 points) State the equilibrium condition in this market.

z = QP/(QP + QL)















b) (4 points) Determine the two values of z that lead to a market equilibrium. .

z = 0

z = .252. (16 pointsSuppose a manufacturer is a monopoly. This manufacturer produces a good at MC = 8 and sells it to a retailer. The retailer is also a monopoly, and it sells the good bought from the manufacturer to consumers. The retailer has no additional costs other than the price they pay to the manufacturer. The retailer faces a demand curve P = 200 –4Q, where Q is the number of units sold.

a) What price will the manufacturer charge to the retailer?

PM = 104






b) What price will the retailer charge to the consumers?

PR = 152







c) If the two firms merged, what would be the price charged?

P = 104







d) If the two firms merged into a single firm, how much profit would the firm make?

Î = 2304







e) How much profit would the two firms make if they do not merge?

Î M = 1152

Î R = 576

Total Î = 1728





3. (8 points) Consider the case of a manufacturer (upstream firm) who sells a product to a retailer (downstream firm). For each of the following four possible situations carefully explain under which circumstances there is an incentive for the firms to vertically integrate. (You may assume the cost of vertical integration is zero).

Both firms are perfectly competitive

NO






Both firms are monopolies

YES






The manufacturer is perfectly competitive and the retailer is a monopoly

NO







The manufacturer is a monopoly and the retailer is perfectly competitive.

YES If the Retailer has a variable proportions production function. Otherwise, NO.



Q1. The following table shows the relationship between outside temperature (T) and number of hot drinks sold (Q).

Outside temperature (T)

Number of hot drinks sold(Q)

0 0F

1000 cups

20

900

40

800

60

700

80

600

a. Graph and briefly explain the relationship. Put the number of hot drinks sold (Q) on the vertical axis and outside temperature (T) on the horizontal axis.

b. Compute the slope of the line? Y-intercept? Show your work.

c. Construct the equation that represents this line. Predict the number of hot drinks sold (Q) at 26 0F. Show your work.

Q2. Discuss the opportunity costs of the following cases, respectively.

a .Go to the movie theater and watch a movie instead of studying for a midterm exam.

b .Suppose that an economy’s PPF is a straight line, rather than a concave curve. What would this say about the nature of marginal opportunity cost as production is shifted from one good to the other?

Q3. Dreamland’s production possibilities schedule is as follows:

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

POINT

Capital Goods

Consumption Goods

A

0

30

B

2

27

C

4

21

D

6

12

E

8

0

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

a. Draw the production possibilities frontier. Put Capital Goods on the horizontal axis and Consumption Goods on the vertical axis.

b. If this economy is at point C, what is the opportunity cost of one more capital good (i.e., marginal opportunity cost)?

c. Can Dreamland produce 6 capital goods and 21 consumption goods? Explain.

d. Suppose that Dreamland has two possible choices in the future: it devotes only 5% of its resources to producing capital goods over each of the next 10 years, whereas it devotes 20%. In which case is Dreamland likely to experience more rapid economic growth in the future? Explain your reasoning.