Demand Redux Class Notes Flashcards
MRS=MRT
Only if it’s interior solution, which it will be for all cobb-douglas.
Marginal Utility
is the additional utility that a consumer get from increasing their consumption by one more good.
MRS (for just cobb-douglas?) =
(MU1/MU2) = (ax1)/(bx2)
Perfect Complements
1.) ax1 = bx2
2.) p1Y1 + p2Y2 = Y
so…
x2 = Y/(p1 + p2)
What do we use consumer theory to derive?
Demand Curves
For perfect substitutes, how do we relate the MRS and MRT to determine the optimal bundle?
1.) MRS > MRT
then => optimal solution (x1,x2) = (Y/p2, 0)
2.) MRS less than MRT (x1,x2) = (Y/p1, 0)
vs
2.) MRS = MRT then anywhere works
What does corner solution mean?
Just means that one of your constraints is bind you solution. So the solution is on one of the axes.
Why is the overall movement ambigous when the wage is increase?
- ) When the wage goes up then the price of leisure has gone up and so you’d substitute away.
- ) When the price of leisure increases due to the income effect then that will pull leisure up.
C = wh + R
This is true at the optimum and so by plugging in the results we get than we can double check our work.
Hours
are T - R
useful to know but doesn’t need to be shown on the graph
What is the total effect of a Giffen good?
By definition the total effect of a Giffen good is positive.
Income effect is
how much richer you feel if the wage goes up vs. how much poorer you feel if the wage goes down
Income effect is bigger…
the more you’re in the market.
ex(For 40’s married couple the income effect would be much larger for the man than the woman.)
What does the amount of money the government raises depend directly on?
The elasticity of the good. Without knowledge of the elasticity of the good to be taxed the government cannot estimate the tax revenue.
Is it true that if elasticities are very large than a tax cut can raise money?
Not really.
