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Econ 100A Microeconomic Analysis: Midterm I Review

This document provides a review for an economics midterm exam. It outlines exam policies, assigned reading materials, and sample review questions. Key points covered include assumptions of rational consumer behavior, utility maximization using constrained optimization, deriving demand curves, and interpreting properties like normal/inferior goods and substitutes/complements. Examples are provided to demonstrate utility maximization techniques and interpreting quasi-linear preferences.

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Beccky
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41 views

Econ 100A Microeconomic Analysis: Midterm I Review

This document provides a review for an economics midterm exam. It outlines exam policies, assigned reading materials, and sample review questions. Key points covered include assumptions of rational consumer behavior, utility maximization using constrained optimization, deriving demand curves, and interpreting properties like normal/inferior goods and substitutes/complements. Examples are provided to demonstrate utility maximization techniques and interpreting quasi-linear preferences.

Uploaded by

Beccky
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Econ 100A Microeconomic Analysis

Midterm I Review

Announcement

PS 2 is due now Exam policies:


No outside material and no calculators No powdering your nose No hoodies or hats while taking the exam No grade if you keep working past allocated time

No make-up exams

Announcements

You can go to any GSI office hours No sections on Tuesday or Wednesday Office hours: Study session:

597 Evans, Friday 2/21, 10-12 639 Evans, Monday 2/24, 8-10

Reading for exam


Chapter 1 Chapter 3.1-3.4 Chapter 4.1 4.4 (excluding Slutsky equation) Chapter 5.5 up to shape of labor supply curve

What have we done so far?

We made assumptions on behavior in order to allow ourselves to use math and graphs to solve for optimal consumption

We can represent preferences with a utility function if the consumer is rational

We can use nice graphs that allow for quick

analysis if more is better

Assumptions
Rationality: 1. Completeness 2. Transitivity 3. More is better

Budget constraint: 1. We spend all of our income

Constrained Maximization

Given these assumptions we can use constrained maximization tools to find what would be the optimal consumption bundle, given income and prices

How to

Find uncompensated (Marshalian) demand for a good by solving the utility maximization or expenditure minimization problem Find compensated (Hicksian) demand by deriving the expenditure function Find whether the good is normal or inferior Find the share of consumption for a specific good Find whether there are corner solutions (i.e. when the demand for one good is 0) Find whether goods are substitutes or complements Find income and substitution effect

Question #14

For a given increase in INCOME, only one good can be inferior.

A. B.

True False

Question #15

Let the price of good X decrease. If the consumption of good X increases, it must be a normal good.

A. B.

True False

Example

James consumes pizza and sushi, which he regards as imperfect substitutes. One day he wakes up to the terrible news that the price of pizza doubled and that the price of sushi tripled.

Draw an initial consumption bundle for James,

and a budget constraint after the price


changes. You may choose the axis.

Example continued

James parents hear about his hardships and decide to increase his stipend so he can purchase the same bundle he purchased before. Add this budget constraint to your graph.

Given the new prices and his additional

stipend, will James consume more or less


pizza/sushi than his initial bundle?

Utility Maximization

Consider preferences over good X and good Y represented by the utility function,

U = X(Y-k)(1-) Where 0 < < 1 & k > 0 Use Lagrangian method to find the demand for X&Y

FOCS

Solution

Example continued

Let I = 1000, k = 100, = 0.5 and Py = 2 Find the demand for good X

Example

Is good X normal or inferior?

Is good X a substitute or complement for good Y?

Example

Now let I = 100 and the rest of the parameters are the same.

What is the demand for good X?

What is the demand for good Y?

Example

What is the economic interpretation of k?

What is the economic interpretation of k?

When income is lower than a certain threshold (Pyk), the consumer buys only good Y. But when income is high enough to afford k units of good Y (that is, when I PY k) both good X and good Y are purchased. k represents the baseline level of good k that is required before consuming anything else. If good Y was food, and good X was entertainment, then k would be the survival level of food that a consumer requires before being willing to spend any money on entertainment.

Quasi-linear preferences

Quasi-linear preferences have 2 interesting properties:

You can have a corner solution, where only one good is being consumed

The level of consumption of one good is independent of income

Example

Let U = X0.5 + Y

Question #16

An increase in income will shift the Engel curve to the right.

A. B.

True False

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