Consumer choice Flashcards
Comparative statics
Comparing to predictions ction of an economic model before and after a change in an underlying exogenous parameter
Exogenous and endogenous variables in Consumer choice
Exogenous variables include prices and income
Endogenous: x1 x2
Giffen goods
Demand goes up when it’s price goes up
Inferior
Take up a large Proportion of the income
Has no close substitutes
Cobb Douglas demand function
xp = share of m
What is xed for Cobb Douglas
0
What is C-D’s YED
1
What is C-D’s PED
-1
If quasi-linear in y, what happens to x if income changes
X does not change. Only substitution but no income effect
Can Cobb Douglas be giffen
No. Price and then quantity must move in oppo direction
Why is DWL generates
Q restricted and p raised.
Measures by how much the society is worse off facing the mono p
Perfect price discrimination
Each unit of the good is sold to the individual who values it most highly At the maximum price that this individual is willing to pay
Requires info about each indi’s D curve
How do you demonstrate the relationship between LRand SR AC
LR all factors of production are variable, KL. Solve cost minimalisation problem, sub in optimal L* and K* to get the cost curve in terns of y. Cost min is for given 1 y and do this for all y.
SR suppose K fixed. Vary L only. Do this for all y. Only equals LRAC when K bar also optimal = K* at some y
Second degree price discrimination
Non linear: p of each unit varies
Arises coz unlike 1st degree, don’t know each D curve
Directly revealed preferred
If a consumer chooses bundle X when bundle Y is affordable then we say X is directly repre to Y
Week axiom of revealed preference
If X is directly revealed preferred to Y and X =\ Y then Y cannot be repre to X
