Intermediate Microeconomics with Calculus: A Modern Approach 1st Edition

Chapter 1 1 Chapter 1 The Market This chapter was written so I would have something to talk about on the first day of class. I wanted to give students an idea of what economics was all about, and what my lectures would be like, and yet not have anything that was really critical for

Chapter 1 NAME The Market Introduction. The problems in this chapter examine some variations on the apartment market described in the text. In most of the problems we work with the true demand curve constructed from the reservation prices of the consumers rather than the smoothed demand curve that we used in the text. Remember

26 Chapter Highlights Chapter 10 Intertemporal Choice This is one of my favorite topics, since it uses consumer theory in such fundamental ways, and yet has many important and practical consequences. The intertemporal budget constraint is pretty straightforward. I sometimes draw the kinked shape that results from different borrowing and lending rates, just to drive the

Chapter 10 NAME Intertemporal Choice Introduction. The theory of consumer saving uses techniques that you have already learned. In order to focus attention on consumption over time, we will usually consider examples where there is only one consumer good, but this good can be consumed in either of two time periods. We will be

NAME 139 025 75 100 25 50 75 Ambrosia this period Ambrosia next period 100 50 (b) If Jane planned to spend no red income in the next period and to borrow as much red currency as it can pay back with interest with next periods red income, how much red currency could it borrow? 80. (c) The (exact) real

Chapter 11 29 Chapter 11 Asset Markets This chapter fits in very nicely with the present value calculations in the last chapter. The idea that all riskless assets should earn the same rate of return in equilibrium is a very powerful idea, and generally receives inadequate treatment in intermediate micro texts. I especially like the arbitrage

Chapter 11 NAME Asset Markets Introduction. The fundamental equilibrium condition for asset markets is that in equilibrium the rate of return on all assets must be the same. Thus if you know the rate of interest and the cash ow generated by an asset, you can predict what its market equilibrium price will

154 ASSET MARKETS (Ch. 11) (e) What is the most that Ashley would be willing to pay today for a case of Wine C? (Hint: What is the present value of his investment if he sells it to a drinker at the optimal time?) Express your answer in exponential notation without

Chapter 12 31 Chapter 12 Uncertainty This chapter begins with the idea of contingent consumption and an insurance market example. Make sure that you define contingent since a lot of students dont know the term. (The definition is given in the book.) The emphasis in this first section is on the idea that exactly the

Chapter 12 NAME Uncertainty Introduction. In Chapter 11, you learned some tricks that allow you to use techniques you already know for studying intertemporal choice. Here you will learn some similar tricks, so that you can use the same methods to study risk taking, insurance, and gambling. One of these new tricks is similar

168 UNCERTAINTY (Ch. 12) 0 50 100 150 200 50 100 150 Money in Event 1 Money in Event 2 200 Blue curve Red curves (d) On the same graph, let us draw Hjalmers son-in-law Earls indif- ference curves between contingent commodities where the probabilities are different. Suppose that a card is drawn from a fair deck of cards. Let

Chapter 13 33 Chapter 13 Risky Assets The first part of this chapter is just notation and review of the concepts of mean and standard deviation. If your students have had some statistics, these ideas should be pretty standard. If they havent had any statistics, then be sure to get the basics down before proceeding. The

Chapter 13 NAME Risky Assets Introduction. Here you will solve the problems of consumers who wish to divide their wealth optimally between a risky asset and a safe asset. The expected rate of return on a portfolio is just a weighted average of the rate of return on the safe asset and the

Chapter 14 35 Chapter 14 Consumers Surplus This chapter derives consumers surplus using the demand theory for discrete goods that was developed earlier in Chapters 5 and 6. I review this material in Section 14.1 just to be safe. Given that derivation, it is easy to work backwards to get utility. Later in the chapter I

Chapter 14 NAME Consumers Surplus Introduction. In this chapter you will study ways to measure a con- sumers valuation of a good given the consumers demand curve for it. The basic logic is as follows: The height of the demand curve measures how much the consumer is willing to pay for the last

Chapter 15 37 Chapter 15 Market Demand It would be logical to proceed directly to discussing the theory of the firm, but I wanted to take a break from pure optimization analysis, and discuss instead some ideas from equilibrium analysis. I think that this switch of gears helps students to see where they are going

Chapter 15 NAME Market Demand Introduction. Some problems in this chapter will ask you to construct the market demand curve from individual demand curves. The market demand at any given price is simply the sum of the individual demands at that price. The key thing to remember in going from individual demands to the

Chapter 16 39 Chapter 16 Equilibrium Some people have suggested that it would make more sense to save this chapter until after deriving supply curves, but I still feel that it is in a better position here. After all, the students have seen labor supply curves and net supply curves earlier in the course, and

Chapter 16 NAME Equilibrium Introduction. Supply and demand problems are bread and butter for economists. In the problems below, you will typically want to solve for equilibrium prices and quantities by writing an equation that sets supply equal to demand. Where the price received by suppliers is the same as the price paid by

210 EQUILIBRIUM (Ch. 16) (e) What would be the effect on total revenue of cotton farmers in the South? Since the demand has elasticity of 1, the revenue would stay the same. South? Since the demand has elasticity of 1, the revenue would stay the same. South? Since the demand

42 Chapter Highlights Chapter 17 Measurement The purpose of this chapter is to bridge the gap between the undergraduate theory and econometric classes. It can be covered in a lecture or two and can fit in almost anywhere in the course once you have covered the basics. I describe the 5 basic things you do

Chapter 17 NAME Measurement Introduction. There are currently no exercises for this chapter

44 Chapter Highlights Chapter 18 Auctions This is a fun chapter, since it brings in some real-life examples and non- obvious points about a widely-used form of market. The classification is straightforward, but it would be good to ask the students for examples of common-value and private-value auctions. (If there is a resale market, the distinction

Chapter 18 NAME Auctions Introduction. An auction is described by a set of rules. The rules specify bidding procedures for participants and the way in which the array of bids made determines who gets the object being sold and how much each bidder pays. Those who are trying to sell an object by

230 AUCTIONS (Ch. 18) (e) Assuming that Al always bids his expected value for a car, given the result of his taste test, how much will Al bid for a car that tastes sweet? 3/51,000 + 2/5100 = $640.How much will he bid for a car that tastes sour? $100. 3/51,000

46 Chapter Highlights Chapter 19 Technology Here we start our discussion of firm behavior. This chapter discusses the concepts that economists use to describe technologies. Almost all of the material here is quite straightforward, especially given all of the exposure that the students have had to indifference curves, utility functions, etc. Since students are by now

Chapter 19 NAME Technology Introduction. In this chapter you work with production functions, re- lating output of a firm to the inputs it uses. This theory will look familiar to you, because it closely parallels the theory of utility functions. In utility theory, an indifference curve is a locus of commodity bundles, all

NAME 245 (b) The marginal product of x1(increases, decreases, remains constant) decreases for small increases in x1, holding x2fixed. decreases for small increases in x1, holding x2fixed. decreases for small increases in x1, holding x2fixed. (c) The marginal product of factor 2 is 3/2x1/2 1x1/2 2, and it (in- creases,

4Chapter Highlights Chapter 2 Budget Constraint Most of the material here is pretty straightforward. Drive home the formula for the slope of the budget line, emphasizing the derivation on page 23. Try some different notation to make sure that they see the idea of the budget line, and dont just memorize the formulas. In

Chapter 2 NAME Budget Constraint Introduction. These workouts are designed to build your skills in de- scribing economic situations with graphs and algebra. Budget sets are a good place to start, because both the algebra and the graphing are very easy. Where there are just two goods, a consumer who consumes x1units of

12 BUDGET CONSTRAINT (Ch. 2) (a) Write down a budget equation stating those combinations of the three commodities, Good X, hours of speeches by politicians (P), and hours of speeches by university administrators (A) that Emmett could afford to consume per week. 15X1P2A=50. consume per week. 15X1P2A=50. consume per week.

48 Chapter Highlights Chapter 20 Profit Maximization I start out the chapter with a careful definition of profits: you must value each output and input at its market price, whether or not the good is actually sold on a market. This is because the market price measures the price at which you could sell the

Chapter 20 NAME Profit Maximization Introduction. A firm in a competitive industry cannot charge more than the market price for its output. If it also must compete for its inputs, then it has to pay the market price for inputs as well. Suppose that a profit- maximizing competitive firm can vary the amount

NAME 259 (a) If the price of the input does not change, then a decrease in the price of the output will imply that the firm will produce the same amount or less output. Yes. If price of input doesnt change, w=0, so WAPM says py0. less output. Yes. If price

50 Chapter Highlights Chapter 21 Cost Minimization The treatment in this chapter is pretty standard, except for the material on revealed cost minimization. However, by now the students have seen this kind of material three times, so they shouldnt have much difficulty with it. It is worthwhile emphasizing the difference between the unconditional factor demand functions

Chapter 21 NAME Cost Minimization Introduction. In the chapter on consumer choice, you studied a con- sumer who tries to maximize his utility subject to the constraint that he has a fixed amount of money to spend. In this chapter you study the behavior of a firm that is trying to produce a

NAME 273 (a) If Flo uses no fertilizer, how many hours of talk must she devote if she wants one happy plant? 1 hour. If she doesnt talk to her plants at all, how many bags of fertilizer will she need for one happy plant? 1/2bag. 1/2bag. 1/2bag. (b) If wt<w

52 Chapter Highlights Chapter 22 Cost Curves Now we get to the standard meat and potatoes of undergraduate microeco- nomics. The first section lays out the rationale behind U-shaped average cost curves. To me the most natural rationale is constant fixed costs and increasing average variable costs. The link between marginal costs and variable costs is

Chapter 22 NAME Cost Curves Introduction. Here you continue to work on cost functions. Total cost can be divided into fixed cost, the part that doesnt change as output changes, and variable cost. To get the average (total) cost, average fixed cost, and average variable cost, just divide the appropriate cost function by y,

54 Chapter Highlights Chapter 23 Firm Supply After all that material on technology and optimization problems, it is fun to get back to the behavior of real economic units. I devote a fair amount of time to laying out the idea of a purely competitive market. It is important to distinguish between the definition of

Chapter 23 NAME Firm Supply Introduction. The short-run supply curve of a competitive firm is the portion of its short-run marginal cost curve that is upward sloping and lies above its average variable cost curve. The long-run supply curve of a competitive firm is the portion of its short-run marginal cost curve that is

56 Chapter Highlights Chapter 24 Industry Supply The treatment of industry supply in the case of free entry given in this chapter is more satisfactory than that one usually sees. I simply draw the supply curves for different numbers of firms and look for the lowest intersection that allows for nonnegative profits. After drawing a

Chapter 24 NAME Industry Supply Introduction. To find the industry supply of output, just add up the supply of output coming from each individual firm. Remember to add quantities, not prices. The industry supply curve will have a kink in it where the market price becomes low enough that some firm reduces its quantity

NAME 303 (b) In 1990 the city council of Ham Harbor created a taxicab licensing board and issued a license to each of the existing cabs. The board stated that it would continue to adjust the taxicab fares so that the demand for rides equals the supply of rides, but no new

Chapter 25 59 Chapter 25 Monopoly This chapter discusses the theory of monopoly and compares it with that of competition. The big idea here is the inefficiency of monopoly. The first way to drive it home is to use the fundamental definition of Pareto improvement: whenever price exceeds marginal cost, there must be a whole

Chapter 25 NAME Monopoly Introduction. The profit-maximizing output of a monopolist is found by solving for the output at which marginal revenue is equal to marginal cost. Having solved for this output, you find the monopolists price by plugging the profit-maximizing output into the demand function. In general, the marginal revenue function can be

Chapter 26 61 Chapter 26 Monopoly Behavior This chapter is concerned with price discrimination, product differentiation, monopolistic competition, and the like. Price discrimination is a great topic for discussion. It is good to bring up examples of price discrimination from the students lives. A local movie theater here offers discounts on Tuesday nights. Local bars have

Chapter 26 NAME Monopoly Behavior Introduction. Problems in this chapter explore the possibilities of price discrimination by monopolists. There are also problems related to spatial markets, where transportation costs are accounted for and we show that lessons learned about spatial models give us a useful way of thinking about competition under product differentiation in

324 MONOPOLY BEHAVIOR (Ch. 26) (d) What is the the maximum price that the Journal can charge for 100 articles per year if it wants executives to prefer this deal to buying 80 articles a year at the highest price the undergraduates are willing to pay for 80 articles? Solve 50 p=4832

Chapter 27 63 Chapter 27 Factor Markets I added this chapter in order to discuss some of the problems with imperfect competition in factor markets. There are three topics: a monopolists demand for a factor, monopsony, and vertically integrated monopolies. The monopolists demand is a snap if the students know a little calculus. If they dont,

Chapter 27 NAME Factor Markets Introduction. In this chapter you will examine the factor demand de- cision of a monopolist. If a firm is a monopolist in some industry, it will produce less output than if the industry were competitively orga- nized. Therefore it will in general want to use less inputs than

Chapter 28 65 Chapter 28 Oligopoly This chapter is a serious attempt to convey some of the standard models of strategic interaction to intermediate microeconomics students. This is an ambitious goal, but with some motivation it can be done. I have pursued a middle ground in this chapter between the traditional approach to oligopoly and the

Chapter 28 NAME Oligopoly Introduction. In this chapter you will solve problems for firm and indus- try outcomes when the firms engage in Cournot competition, Stackelberg competition, and other sorts of oligopoly behavior. In Cournot competi- tion, each firm chooses its own output to maximize its profits given the output that it expects the

NAME 343 (b) Calculate the profit-maximizing price and quantity and total daily profits for Albatross Airlines. p=45 ,q=70 ,= $450 per day. $450 per day. $450 per day. (c) If the interest rate is 10% per year, how much would someone be will- ing to pay to own Albatross Airliness monopoly on the

68 Chapter Highlights Chapter 29 Game Theory This is a fun chapter. Students like it a lot, and faculty usually enjoy teaching it. Game theory is hot stuff in economics these days, and this chapter tries to convey some of the reasons why. The first two equilibrium concepts, that of a dominant strategy equilibrium and that

Chapter 29 NAME Game Theory Introduction. In this introduction we offer two examples of two-person games. The first game has a dominant strategy equilibrium. The second game is a zero-sum game that has a Nash equilibrium in pure strategies that is not a dominant strategy equilibrium. Example: Albert and Victoria are roommates. Each of

358 GAME THEORY (Ch. 29) (c) Do any of the pure Nash equilibria that you found seem more rea- sonable than others? Why or why not? Although (Stay, Stay) is a Nash equilibrium, it seems a silly one. If either player believesthat there is any chance that the otherwill go to

Chapter 3 7 Chapter 3 Preferences This chapter is more abstract and therefore needs somewhat more motivation than the previous chapters. It might be a good idea to talk about relations in general before introducing the particular idea of preference relations. Try the relations of taller, and heavier, and taller and heavier. Point out that taller

Chapter 3 NAME PreferencesIntroduction. In the previous section you learned how to use graphs to show the set of commodity bundles that a consumer can afford. In thissection, you learn to put information about the consumers preferences onthe same kind of graph. Most of the problems ask you to draw

26 PREFERENCES (Ch. 3) 3.8 (0) Professor Goodheart always gives two midterms in his commu- nications class. He only uses the higher of the two scores that a student gets on the midterms when he calculates the course grade. (a) Nancy Lerner wants to maximize her grade in this course. Let x1be

Chapter 30 71 Chapter 30 Game Applications This is a chapter for those who want more game theory. Basically it is a set of examples of game theory in action. Most of the examples are self-contained so you can pick and choose what you want. There are 4 major themes: cooperation (games of coordination), competition (zero-sum

Chapter 30 NAME Game Applications Introduction. As we have seen, some games do not have a Nash equi- librium in pure strategies. But if we allow for the possibility of Nash equilibrium in mixed strategies, virtually every game of the sort we are interested in will have a Nash equilibrium. The key to solving

NAME 373 (d) If the kicker kicks left with probability K, then if the goalie jumps left, the probability that the kicker will not score is K. (e) If the kicker kicks left with probability K, then if the goalie jumps right, the probability that the kicker will not score

Chapter 31 75 Chapter 31 Behavioral Economics This is a new chapter on one of the hottest fields in economics, behavioral economics. Ive tried to provide a survey of some of the most interesting results, but there is lots of new and interesting material available on the web, so be sure to look there as

Chapter 31 NAME Behavioral Economics Introduction. In this section we present some problems designed to help you think about the nature of rational and not-so-rational choice. You will meet a hyperbolic procrastinator and an exponential procrastinator. Do these people remind you of anyone you know? You will meet Jake, who is aware that he

78 Chapter Highlights Chapter 32ExchangeThis chapter starts out with a relatively standard treatment of trade in anEdgeworth box. This leads naturally to the idea of Pareto efficient allocationsas the outcome of a voluntary trading process. Given the many possibilitiesthat can result from unstructured voluntary trade, I then turn to examining

Chapter 32 NAME Exchange Introduction. The Edgeworth box is a thing of beauty. An amazing amount of information is displayed with a few lines, points and curves. In fact one can use an Edgeworth box to show just about everything there is to say about the case of two traders dealing in two

NAME 399 equilibrium prices. In equilibrium Kens income will be the value of hisendowment at competitive prices. Knowing his income and the prices,(g) On the Edgeworth box for Ken and Barbie, draw in the competitive 32.5 (0) Linus Straights utility function is U(a, b)=a+2b,wherea is his consumption of apples and

Chapter 33 81 Chapter 33ProductionIn this chapter I describe a general equilibrium model of production, theclassical Robinson Crusoe economy. I usually start my lecture by apologizing forthe two-good, one-person nature of this example, since this is a context where atwo-good treatment seems quite unnatural. On the other hand, there isnt

Chapter 33 NAME Production Introduction. In this section we explore economywide production pos- sibility sets. We pay special attention to the principle of comparative advantage. The principle is simply that efficiency suggests that people should specialize according to their relative abilities in different activities rather than absolute abilities. Example: For simplicity, let us imagine

Chapter 34 83 Chapter 34 Chapter 34 83 Chapter 34 Chapter 34 83 Chapter 34 Welfare I like to describe the aggregation of preference issues in terms of manipulation. Majority voting is bad because the outcome can depend on the order in which the vote is taken and this can lead to agenda manipulation. Rank-order voting is

Chapter 34 NAME Welfare Chapter 34 NAME Welfare Chapter 34 NAME Welfare Introduction. Here you will look at various ways of determining social preferences. You will check to see which of the Arrow axioms for ag- gregating individual preferences are satisfied by these welfare relations. You will also try to find optimal allocations for some

Chapter 35 85 Chapter 35ExternalitiesI really like the smokers and nonsmokers example in the Edgeworth box.I think that it gets the main points about externalities across very simply.Students sometimes get confused about the vertical axis. Emphasize that this isthe total amount of smoke in the apartment, not how much each

Chapter 35 NAME Externalities Introduction. When there are externalities, the outcome from indepen- dently chosen actions is typically not Pareto efficient. In these exercises, you explore the consequences of alternative mechanisms and institutional arrangements for dealing with externalities. Example: A large factory pumps its waste into a nearby lake. The lake is also used

NAME 433 Suppose that each consumer owns 1 unit of the consumption good and consumes it. (a) Calculate his utility level. 0. (a) Calculate his utility level. 0. (a) Calculate his utility level. 0. (b) Suppose that each consumer consumes only 3/4 of a unit. Will all individuals be better off or

88 Chapter Highlights Chapter 36Information TechnologyTheres so much discussion these days about the Internet, the informationeconomy, and the information society that I thought it would be fun to try toget some of these ideas into the classroom. Whats remarkable is how poorlyinformed most of the commentators are about basic economicsnot

Chapter 36 NAME Information Technology Introduction. We all recognize that information technology has revolu- tionized the way we produce and consume. Some think that it is necessary to have a new economics to understand this New Economy. We think not. The economic tools that you have learned in this course can offer very powerful

NAME 447 (c) Calculate the prices p1and p2that maximize the difference between (d) If East Frisian Press chooses its profit-maximizing p1and p2, compare (c) Calculate the prices p1and p2that maximize the difference between (d) If East Frisian Press chooses its profit-maximizing p1and p2, compare (c) Calculate the prices p1and p2that

92 Chapter Highlights Chapter 37Public GoodsI start by introducing the basic idea of a public gooda good that lacksexclusion in consumption. The standard textbook treatment leaps right intothe Samuelson conditions, but I think that it makes much more sense to lookat the public provision of a discrete good. I derive

Chapter 37 NAME Public Goods Introduction. In previous chapters we studied selfish consumers con- suming private goods. A unit of private goods consumed by one person cannot be simultaneously consumed by another. If you eat a ham sand- wich, I cannot eat the same ham sandwich. (Of course we can both eat ham sandwiches,

462 PUBLIC GOODS (Ch. 37) There are 3,000,000 people in all. If eachgets Alessons and lessons cost 2 fondas, total cost is 6,000,000A. There are 3,000,000 people in all. If eachgets Alessons and lessons cost 2 fondas, total cost is 6,000,000A. There are 3,000,000 people in all. If each gets Alessons

Chapter 38 95 Chapter 38 Information The students really like this material on information economics, but you have to work at it to really get the ideas across. The first topic is the famous lemons market. I found it easy to get the idea across, but the logic needs emphasizing. Thats why I go through

Chapter 38 NAME Asymmetric Information Introduction. The economics of information and incentives is a rela- tively new branch of microeconomics, in which much intriguing work is going on. This chapter shows you a sample of these problems and the way that economists think about them. 38.1 (0) There are two types of electric pencil-sharpener

10 Chapter Highlights Chapter 4 Utility In this chapter, the level of abstraction kicks up another notch. Students often have trouble with the idea of utility. It is sometimes hard for trained economists to sympathize with them suciently, since it seems like such an obvious notion to us. Here is a way to approach the subject.

Chapter 4 NAME Utility Introduction. In the previous chapter, you learned about preferences and indifference curves. Here we study another way of describing prefer- ences, the utility function. A utility function that represents a persons preferences is a function that assigns a utility number to each commodity bundle. The numbers are assigned in

40 UTILITY (Ch. 4) 4.5 (0) As you may recall, Nancy Lerner is taking Professor Sterns economics course. She will take two examinations in the course, and her score for the course is the minimum of the scores that she gets on the two exams. Nancy wants to get the highest possible

Chapter 5 13 Chapter 5 Choice This is the chapter where we bring it all together. Make sure that students understand the method of maximization and dont just memorize the various special cases. The problems in the workbook are designed to show the futility of memorizing special cases, but often students try it anyway. The

Chapter 5 NAME Choice Introduction. You have studied budgets, and you have studied prefer- ences. Now is the time to put these two ideas together and do something with them. In this chapter you study the commodity bundle chosen by a utility-maximizing consumer from a given budget. Given prices and income, you know how

58 CHOICE (Ch. 5) 04812 16 4 8 12 Y 16 X (3,3) Blue curve Black curve Red line (b) On the same graph, use red ink to draw Linuss budget line if the price of xis 1 and the price of yis 2 and his income is 8. What bundle does Linus choose in this situation? (0,4). does Linus choose in this situation?

16 Chapter Highlights Chapter 6 Demand This is a very important chapter, since it unifies all the material in the previous chapter. It is also the chapter that separates the sheep from the goats. If the student has been paying attention for the previous 5 chapters and has been religiously doing the homework, then it

Chapter 6 NAME Demand Introduction. In the previous chapter, you found the commodity bundle that a consumer with a given utility function would choose in a specific price-income situation. In this chapter, we take this idea a step further. We find demand functions, which tell us for any prices and income you might

NAME 75 tables below report total current consumption expenditures and expendi- tures on certain major categories of goods for 5 different income groups in the United States in 1961. People within each of these groups all had similar incomes. Group Ais the lowest income group and Group Eis the highest. Table 6.1 Expenditures by Category

18 Chapter Highlights Chapter 7 Revealed Preference This is a big change of pace, and usually a welcome one. The basic idea of revealed preference, as described in Section 7.1, is a very intuitive one. All I want to do in this chapter is give the students the tools to express that intuition algebraically. I think

Chapter 7 NAME Revealed Preference Introduction. In the last section, you were given a consumers pref- erences and then you solved for his or her demand behavior. In this chapter we turn this process around: you are given information about a consumers demand behavior and you must deduce something about the consumers preferences. The

NAME 89 since. Lord Peter has learned that Sir Cedric left England and is living under an assumed name somewhere in the Empire. There are three sus- pects, R. Preston McAfee of Brass Monkey, Ontario, Canada, Richard Manning of North Shag, New Zealand, and Richard Stevenson of Gooey Shoes, Falkland Islands. Lord Peter has

Chapter 8 21 Chapter 8 Slutsky Equation Most books talk about income and substitution effects, but then they dont do anything with the ideas. My view is that you have to give the student enough of an understanding of an idea to be able to compute with it; otherwise, why bother? The Slutsky decomposition is an

Chapter 8 NAME Slutsky Equation Introduction. It is useful to think of a price change as having two dis- tinct effects, a substitution effect and an income effect. The substitution effect of a price change is the change that would have happened if in- come changed at the same time in

104 SLUTSKY EQUATION (Ch. 8) (b) The substitution effect is a change in demand from 80 to 92. The income effect of the price change is a change in demand from 92 to 100. (b) The substitution effect is a change in demand from 80 to 92. The income effect of

Chapter 9 23 Chapter 9 Buying and Selling The idea of an endowment is an important one, and I wanted to devote a whole chapter to it rather than give it the cursory treatment it gets in most books. It is somewhat unnatural in a two-good context, so it is worth pointing out to students

Chapter 9 NAME Buying and Selling Introduction. In previous chapters, we studied the behavior of con- sumers who start out without owning any goods, but who had some money with which to buy goods. In this chapter, the consumer has an initial en- dowment, which is the bundle of goods the consumer

NAME 121 030405060 50 100 150 200 250 300 10 Leisure Consumption Black budget line Blue indifference curve (3000) 20 Blue indifference curve (4500) Blue indifference curve (7500) 9.9 (0) George Johnson earns $5 per hour in his job as a true snif- fer. After allowing time for all of the activities necessary for bodily up- keep, George has 80 hours per week to allocate between leisure and labor. Sketch the budget