1
Price changes II
• Price of good decreases from to to 0
• For example, decrease in price of good 2, 02 2
• Budget line tilts:
= − 1
2 0 10 22
• New optimum?
• Demand curve: ∗ (): demand for good as func- tion of
own price holding fixed and
• Odd convention of economists: plot price on ver- tical
axis and quantity on horizontal axis. Better get used to
it!
• Does ∗ decrease with ? — Yes. Most cases
— No. Good is Giffen
— Ex.: Potatoes in Ireland
— DonotconfusewithVebleneffectforluxurygoods
or informational asimmetries: these effects are real,
but not included in current model
2
• •
• • •
• •
Expenditure minimization
Nicholson, Ch. 4, pp. 131-135; Ch. 5, pp. 155-157
Solve problem EMIN (minimize expenditure):
