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