03/11: ECON 310 - Midterm Review and Lecture 7 on Income and Substitution Effects
Summary of Midterm Review and Lecture 7 Notes
Midterm Review
Topical Coverage:
Review midterm questions and tackle each question one by one.
Post-grading details for midterm results.
Mean and median scores approximately 80%, indicating strong performance from students.
Midterm Weighting:
Midterm contributes 40% of final grade.
Better score from either Midterm 1 (30%) or Midterm 2 (10%) used for final calculation.
Exam Copies:
Students can review or discuss specific questions and grades during office hours or via email.
Important Dates:
Next midterm scheduled for Wednesday, April 8.
Question Review
Budget Line and Price Calculation:
Graph of budget line for consumer with $400 income.
If all income is spent on food, 80 units of food can be purchased.
Calculation demonstrates:
Price of food per unit is:
Opportunity Cost of Food:
Opportunity cost of one unit of food measured in clothing terms (slope of budget line).
Computation using two points (b and d):
Change in clothing = 30 - 20 = 10;
Change in food = 20 - 40 = -20.
Marginal rate of transformation (MRT):
Marginal Rate of Transformation (MRT):
Given prices of goods x and y, computations yield:
Cost of x in terms of y:
Cost of y in terms of x:
Answers include both c and d as valid interpretations.
Consumer Behavior with Pizza and Coke:
Marginal utilities for Pizza ($5) and Coke ($2) are evaluated under budget of $21.
Optimal solution satisfying:
The condition of marginal utility per dollar:
Final consumption yields three slices of pizza.
Optimal Choices for Two Products:
Analyzed conditions where consumer fails budget constraint.
Assess Optimal Consumption:
Bill buys two Pepsis and six hamburgers, checking if consumption is optimal using marginal utilities:
Calculation of marginal utility per dollar for Pepsi and hamburgers shows that he should adjust to buy more Pepsi and fewer hamburgers.
The Indifference Curve Concept:
Marginal Rate of Substitution (MRS) varies along the curve.
Identification of true or false statements about indifference curves shows that:
Total utility remains constant along IC curves.
Slope provides measure for trade-off between two goods.
Quasi-Linear Utility Function:
Utility function evaluated under constraints to determine corner solutions based on price behavior.
Indifference Curve Properties:
Learning about downward slope of curves, non-crossing property, and convexity implications.
Lecture 7: Income and Substitution Effects
Introduction to how income and price changes affect consumer choices.
Overview of the definition:
Income change shifts budget line outward, leading to increased purchasing capability.
Price change impacts slope of the budget line, changing relative prices between goods.
Decomposition of Effects:
Substitution Effect:
How quantity demanded changes with new relative prices, keeping utility constant.
Income Effect:
Changes in quantity demanded due to changes in purchasing power while holding relative prices static.
Graphical Representation:
Utilized various graphs to illustrate how changes affect purchasing choices.
Hypothetical budgets created to better visualize substitution effects.
Income effects segmented showing relationship between maximum purchasing capacity and costs.
Key Takeaway -- Total Effect:
Aggregate refinements in purchasing decisions based on changes attributed to both income and substitution effects.
Real-World Implications:
Changes in income and prices elucidate consumer behavior shifts in real markets.
Conclusion
Emphasis on differentiating normal and inferior goods related to income effects.
Reinforcement on how to navigate through changes in utility curves to maximize consumer satisfaction.