ECON 220

Giffen Good

Demand increases as price increases, demand decreases when price decreases Has to be inferior good

Corner solution

Only selecting one product has more utility than taking some of each.

How does a price change effect the budget line?

Pivot

Production function:

Q = f(X1, X2, X3,....Xn)

Diminishing Marginal Rate of Substitution

When, to hold utility constant, diminishing quantities of one good must be sacrificed to obtain successive equal increases in the quantity of the other good.

Perfect Complements

Graph is not curved, L-shape.

Composite-Good Convention

Graphing/Comparing one good against a group of goods

Perfect Substitutes

All depends on price. Pepsi vs Coke example

Are all inferior goods giffen goods?

All giffen goods are inferior goods, but not all inferior goods are giffen goods

Inferior Good

As income increases, quantity demanded for inferior good goes down. Income consumption curve is negative

Normal Good

As income rises, more is purchased. As income decreases, less is purchased.

Substitution effect

As prices rise, consumers will replace more expensive items with less costly alternatives

True or False: The average product of labor is decreasing when MPL is decreasing

False

Curve that connects optimal consumption points on indifference curves

Income-consumption curve

Inversely related to income

Inferior goods

What does price ratio measure?

Marginal Cost

Optimal Market Basket

Maxing utility according to budget (MUa)/Pa)=(MUb)/Pb)

Marginal Rate of Substitution

Measures willingness by an individual to substitute one good for another and be equally as good off

Goal of firm

max profit

The slope of any budget line, regardless of income level, equals:

the price ratio