Intermediate Microeconomics Econ 301RoadmapRationality in EconomicsL01Consumers: Commodity spaceCommodity Space: Geometry, 2 goodsBudget Set =all affordable bundlesBudget Set and Real IncomeSlope (Real Price)Budget Constraints: 3 goodsBudget SetIncome goes downOranges more expensiveInflation and Budget setAd Valorem TaxThe Food Stamp ProgramBudget Set withIntermediate MicroeconomicsEcon 301 Instructor: Marek WeretkaCourse DescriptionTextbook GradingAttitude (no pain no gain, interactive)Rules Please contact me after classMc Burney studentsNot registered studentsRoadmapConsumers, Producers, Market Failures1) Consumers- Budget set- Preferences and Utility - Optimal Choice and Equilibrium- Applications (Labor Market, Finance, )2) Producers- Technology- Optimal Choice (Profit Maximization)3) Market Failures- Monopoly and Oligopoly- Other (Externalities, Public Goods)Rationality in EconomicsBehavioral Postulate:A decisionmaker chooses its most preferred alternative from the set of affordable alternatives.Budget set = affordable alternativesTo model choice we must have decisionmaker’s preferences.L01Budget SetConsumers: Commodity spaceCommodity (apples, oranges, cars etc)A Consumption BundlesMath: Consumption bundle is a vectorCommodity Space - the set of all consumptions bundlesBudget set - set of all consumption bundles that are affordable given prices and incomeCommodity Space: Geometry, 2 goods (Apples) x2 (Oranges)x1Budget Set =all affordable bundlesAffordable Bundle?(1,1),(2,2),(3,3)Budget constraintBudget set: all affordable bundlesp1=$2 p2=$1 m=$6Budget Set and Real Incomex1p1=2 p2=1m=6x2EI: Real income = income in terms ofSlope (Real Price)x1p1=2 p2=1m=6x2EI: Real price is a price of an apple in terms ofBudget Constraints: 3 goodsIf n = 3 what do the budget constraint and the budget set look like?Budget SetBudget set depends on prices and incomeWhat happens to the budget set if–income changes?–one of the prices changes?Effects of Inflation, taxesIncome goes downx1p1=2 p2=1x2What happens:m=6m=4Oranges more expensivex1p1=2 M=6x2What happens:p2=1p2=2Inflation and Budget setInflation 100%x1x2p1=2 p2=1m=6Ad Valorem TaxTax rate t=100%x1x2p1=2 p2=1m=6Effective pricesThe Food Stamp ProgramFood stamps are coupons that can be legally exchanged only for food.x1x2p1=2 p2=1m=600F=2 applesBlack MarketBudget Set withMinimal PurchaseMaximal Purchase (Rationing)Quantity
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