Intermediate Microeconomics - PowerPoint PPT Presentation

Loading...

PPT – Intermediate Microeconomics PowerPoint presentation | free to download - id: 72da82-N2QzY



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

Intermediate Microeconomics

Description:

Intermediate Microeconomics Choice * – PowerPoint PPT presentation

Number of Views:81
Avg rating:3.0/5.0
Slides: 20
Provided by: Informat2158
Learn more at: http://www.cmc.edu
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Intermediate Microeconomics


1
Intermediate Microeconomics
  • Choice

2
Optimal Choice
  • We can now put together our theory of preferences
    with our budget constraint apparatus and talk
    about optimal choice.
  • Unlike psychology, which often attempts to
    understand why particular individuals make
    particular choices, economic theory is trying to
    develop a model of what individuals as a whole
    generally do.
  • Therefore, at its most basic, economic theory
    simply assumes individuals choose their most
    preferred bundle, or equivalently the bundle that
    gives them the most utility, that is in their
    budget set.

3
Optimal Choice
  • Consider an individual with a 1000 and spends it
    on lbs. of food and sq. ft. of housing, where pf
    5/lb and ph 10/sq. ft.
  • Budget Constraint depicted to the right. What are
    intercepts? What is slope?
  • If his preferences are captured by the
    indifference curves depicted here, what will be
    his optimal bundle? Why?

Lbs food
A
C
E
D
sq. ft.
B
4
Optimal Choice
  • Why is A not optimal?
  • Why is B not optimal?
  • Why is C not optimal?
  • Why is D not optimal?
  • So what all is true at E?
  • What happens if price of food falls?

food
A
C
E
D
sq. ft.
B
5
Optimal Choice
  • Does tangency condition always have to hold for
    optimum bundle?
  • Consider goods that are perfect substitutes.
  • e.g. Suppose you are working for Doctors without
    Borders.
  • You have 20 beds, malaria patients take a week to
    treat, TB patients take two weeks. What does your
    monthly budget constraint look like?
  • Your preferences are such that you want to treat
    as many patients as you can. What do your
    indifference curves look like?
  • So how would you optimally allocate your bed
    slots per month?
  • What if each Tuberculosis treatment cost took
    only one week?

6
Optimal Choice
  • Now consider two goods that are perfect
    complements (i.e. must be consumed in fixed
    proportions).
  • E.g. I only like coffee if it is 1/2 coffee 1/2
    milk.
  • What will my indifference curves look like?
  • Suppose I had 6, coffee costs 0.50/oz and cream
    costs 1.00/oz.
  • What will my budget constraint look like?
  • What will be my optimal choice?
  • What if prices were 1/oz for each?

7
Demand Function
  • Demand Function for a given consumer for each
    good i - the amount consumer chooses to consume
    of that good given any set of prices and her
    endowment
  • qi(p1, p2, m)
  • In general, demand function will tell how a
    consumer reacts to changes in prices and
    endowment.
  • How would we derive a demand function
    graphically?

8
Optimal Choice Analytically
  • While graphs are informative, they can be
    cumbersome, so we often want to solve things
    analytically.
  • For a two-good analysis, for each good i, we will
    want to find a function qi(p1, p2, m) that maps
    prices and endowment into an amount of that good.
  • How do we find one of these? Where should we
    start?

9
Optimal Choice Analytically
  • Consider again an individual who finds q1 and q2
    perfect substitutes, or
  • U(q1,q2) q1 q2.
  • So if he has 20 and p1 7 and p2 5, how much
    q1 will he buy? (hint think about graph)
  • If he has 20 and p1 6 and p2 5, how much q1
    will he buy?
  • If he has 20 and p1 4 and p2 5, how much q1
    will he buy?
  • If he has 20 and p1 2 and p2 5, how much q1
    will he buy?
  • How would things change if he had 40?
  • So what is general form of demand function for q1
    and q2 given linear utility function?

10
Optimal Choice Analytically
  • Demand functions for Quasi-linear utility
  • U(q1,q2) aq10.5 q2,
  • endowment m, prices p1 and p2
  • Finding demand function is more complicated, but
    still helps to think about graphically.
  • What two conditions must be true at optimum
    bundle given Quasi-linear utility?
  • How can we use these conditions to find demand
    functions?

11
Optimal Choice Analytically
  • Demand functions for quasi-linear utility are
    given by
  • Do these demand functions make intuitive sense?
  • What happens when p1 rises? Falls? How about a?
  • What do these demand functions reveal about why
    quasi-linear utility functions are not always
    appropriate for modeling preferences?

12
Optimal Choice Analytically
  • Now consider again an individual who has
    Cobb-Douglas utility U(q1,q2) q1cq2d, who has
    m, and faces prices p1 and p2.
  • What two conditions must be true at optimum
    bundle given Cobb-Douglas utility?
  • How can we use these conditions to find demand
    functions?

13
Optimal Choice Analytically
  • So with Cobb-Douglas preferences, demand
    functions will be given by
  • Do these demand functions make intuitive sense?
  • What happens when p1 rises? Falls?
  • What happens when m rises?
  • Why is it convenient to choose a specification
    such that c d 1?

14
Optimal Choice Analytically
  • Example
  • Consider an individual whose preferences are
    captured by U(q1,q2) q10.4q20.6
  • p1 2, p2 4, m 20
  • What is optimal bundle?
  • How would we sketch this graphically?
  • If p1 changed to 1, how would optimal bundle
    change? How would graph change?

15
Application Government Funding of Religious
Institutions
  • Suppose government is considering giving grants
    to religious institutions with the restriction
    that these funds are used for non-religious
    purposes only.
  • Why might advocates for separation of church and
    state still find this proposal troubling?

16
Application Government Funding of Religious
Institutions
  • Assume
  • Govt grant equals 4,000/yr
  • A religious institution has an annual budget of
    20,000.
  • Institutions preferences are captured by
    U(qr,qn) qr0.75qn0.25
  • What will be institutions spending on religious
    and non-religious activity without grant?
  • How will grant change budget constraint?
  • What will be institutions spending on religious
    and non-religious activity with grant?

17
Application Government Funding of Religious
Institutions
  • What will this problem look like graphically?

18
Application Social Security Indexing for
Inflation
  • This framework can help us think about issues
    involved in indexing payments such as social
    security.
  • Adjustments in Social Security are currently
    determined by changes in Consumer Price Index
    (CPI). CPI is essentially determined by
    calculating the price of a basket of goods.
  • Some argue that this makes SS increasingly
    generous over time and therefore should be
    reformed. Why would they say this?

food
A
housing
19
Application Social Security Indexing for
Inflation
  • Chained CPI recognizes consumers will change
    optimal bundle as relative prices change.
  • Idea is to keep utility the same.

food
A
housing
About PowerShow.com