week 1-5

Question 1

Calculate MRS

Answer 1

change in X2 / change in X1 = MU1/MU2 = P1/P2

Question 2

Calculate elasticity of substitution

Answer 2

(% change in X2/X1) / % change in MRS

Question 3

What does less curvature IC mean?

Answer 3

less curvature means greater %change in X2/X1 is required for MRS to change 1%, so higher elasticity

Question 4

Define homothetic tastes

Answer 4

• a situation where consumer’s preference depend solely on the ratio of good 1 to good 2
• incomes rises, demand rises by the same proportion

Question 5

Define quasilinear taste

Answer 5

• tastes are linear in 1 good, but may not in the other good
  u(X1, X2) = vX1 + X2
• IC are vertical translation of each other
• constant MRS along any vertical line of x-axis

e.g. salt

Question 6

Calculate PED

Answer 6

(diff X/PX)*(PX/X)

for demand function Qx = a-bPx

Question 7

What is Hicksian demand?

Answer 7

• utility is the same after price changes
• ignore income effect
• how much demand changed solely based on price change

Question 8

What is Slutsky demand?

Answer 8

• purchasing power is the same after price changes
• ignore income effect
• compensate consumer so still consume original bundle
• compensated BL passes through original bundle

Question 9

Differences between Marshall, Hicksian and Slutsky demand

Answer 9

Marshall: consider both income and substitution effect (so giffen good has upward sloping demand curve)
H&S only has downward sloping demand curve, because only consider substitution effect

Question 10

How to do the Lagrange method when optimising? （The Primal)

Answer 10

1. set up the Lagrange
2. find FOCs
3. use FOCs to find MRS and set = price ratio
4. Find an equation for the expansion path
5. use BC and EP to find optimal bundle of goods.

Question 11

How to do the Lagrange method when optimising? （The Dual problem)

Answer 11

1. find initial bundle at original p ratio
   - u max: consume on highest IC subject to BC
2. find change in D due to sub. effect
   - expenditure min: less costly way
3. find the new bundle at new p ratio
   - u max.