ECON 1010 Chapter Notes - Chapter 9: Indifference Curve, Substitute Good, Relative Price

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coffeemarten199

19 Mar 2016

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The budget (line) equation: in this equation expenditure (expenses) = income because the income an individual makes is all spent on expenses and these would be point on the budget line. The formula is y = pxqx + pyqy + pzqz The formula can be rearranged to find quantity or price of one product. The budget line shows the limits to household consumption, considering the income and price of goods and services. Real income: is income expressed as a quantity of goods that the household can afford to buy. Formula would be y/px, x being any good. Relative price: this is the price of one good divided by the price of another good. Price of x in term of y, therefore this formula expresses the opportunity cost of the goods, how many y goods must be given up for x goods. (4/2=2, for every good of px 2 py are given up).

Related Questions

Consider an individual making choices over two goods, x and y with prices px and py, and who has income:

Suppose that, as a result of changes in the individual's economic circumstances, the budget line rotates outward, with the vertical (good y) intercept remaining unchanged but the horizontal (good x) intercept shifting to the right. Explain how this could have happened if the price of good x did not change?

If the individual's utility function is u(x; y) = x 2 + 4y 2 , are these preferences convex? Are they monotonic? Explain.

coffeegnu443

A firm's demand function for product X has the following question:
Qx = 1420 -20Px- 10Py + 0.02M + 0.04A
where Qx is the quantity purchased, Px is the price of X, Py is the price charged for a related good, M is per capita income, and A is the dollar spent on advertising.

Suppose the firm spends $1200 per week on advertising, that Py=$40and that income is $8,000 per capita.

a.) Write the equation of the demand curve for product X.
b.) Briefly explain how product X is related to product Y. (Is Y a substitute or a compliment, and how can you tell?)
c.) Given the stated values of the other independent variables, calculate the point price elasticity of demand for X at Px =$50.
d.) Given the stated values of M, A, and Py at what price and quantity demanded will total revenue maximized? What will the maximum revenue be?

greypig263

1. Economists use indifference curves to characterize the preferences of a rational consumer. There are some plausible assumptions that lead to a set of âwell-behavedâ (i.e., downward-sloping and strictly convex) indifference curves. Which one of the following is NOT among the assumptions?

a. All goods must be economic âgoods.â

b. Preferences are complete.

c. Preferences are transitive.

d. All goods are normal goods

2. Given the prices of good X and Y, the (negative of the) slope of the budget constraint (i.e., - PX/PY) measures

a. the amount of good Y the consumer is willing to forgo in order to consume one more unit of good X.

b. the ratio of the consumer's income to the price of the X good.

c. the quantity of the Y good that must be forgone in order to purchase one more unit of the X good.

d. the quantity of the X good that must be forgone in order to purchase one more unit of the Y good.

3. Which of the following statements is incorrect for an inferior good?

a. An inferior good may have an upward-sloping demand curve.

b. The income elasticity of demand for an inferior good is negative.

c. An inferior good is an economic âbad.â

d. All of the above.

ECON 1010 Chapter Notes - Chapter 9: Indifference Curve, Substitute Good, Relative Price

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