Econ 410 Unit 1

MUx > 0

x is a “good” good, more of x increases utility holding y constant

MUx < 0

x is a “bad” good, more of x decreases utility holding y constant

if MUx < 0 and dMUx/dX > 0

x is a “bad” good that gets less bad the more you consume

MUx and MUy have the same sign

IC slopes down, more x less y

MUx and MUy have different signs

IC slopes up, more x more y

MUy=0

Y is neutral and IC slopes vertical

MUx=0

X is neutral and IC slopes horizontal

if dMRS/dx and dMRS/dy are both =0

IC is linear and slope is determined from MRS

dMRS/dy or dMRS/dx

MRS is kind of like the derivative, the slope at a point tangent to the curve, ex- if dMRS/dx is negative for down slope IC, then from points left to right, MRS decreases | to \ to _

price elasticity of demand

(dX/dPx)*(Px/X)

cross price elasticity of demand

(dX/dPy)*(Py/X)

if cross price elasticity is…

>0 x and y are substitutes, <0 x and y are complements, =0 x and y are unrelated

law of demand

(dX/dPx)<0

if income elasticity of demand is…

>0 x is normal, <0 x is inferior, =0 x is income neutral

lagrange

L = U(x,y) + (lambda)(I-PxX-PyY)

dX/dPy and dY/dPx are both <0

x and y are complements

dX/dPy and dY/dPx are both >0

x and y are substitutes

dMRS/dx <0

diminishing marginal utility, the consumer is willing to give up smaller and smaller amounts of y for one more x

this function never has a corner solution

cobb douglas

perfect complements has a solution at

the kink point of IC curve, the corner of the IC curve (NOT corner solution)

this function will most likely have a corner solution but not always

perfect substitutes, if MRS=MRT, then every point is utility maximizing

interpreting statements like “consumer is willing to give up increasing amounts of y for each additional x”

increasing amounts indicates that MRS increases, and x is increasing, and y is always opposite of x so it is decreasing; x and y are opposite because you have to decrease one to offset the increase of another and keep utility constant

convex

concave up

concave

concave down

ICC

x and y axes, with graphed budget lines (income) and ICC going through those budget lines to show how change in income impacts demand

PCC

x and y axes, with budget lines (change in price) and PCC going through those budget lines to show how change in price impacts demand

demand curve

axes x and price on y axis, has only the demand curve which represents the different optimal bundles for different prices of x

how to get demand function

MRS=MRT, write x or y in terms of the other and Px and Py; plug into I=Px+Py and solve

engel curve

axes x and income on y, has only the engel curve to represent the different optimal bundles of x for different incomes