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UW-Madison ECON 301 - Intermediate Microeconomics

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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 WeretkaCourse DescriptionTextbook GradingAttitude (no pain no gain, interactive)Rules Please contact me after classMc Burney studentsNot 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 EconomicsBehavioral Postulate:A decisionmaker chooses its most preferred alternative from the set of affordable alternatives.Budget set = affordable alternativesTo model choice we must have decisionmaker’s preferences.L01Budget SetConsumers: Commodity spaceCommodity (apples, oranges, cars etc)A Consumption BundlesMath: Consumption bundle is a vectorCommodity Space - the set of all consumptions bundlesBudget set - set of all consumption bundles that are affordable given prices and incomeCommodity Space: Geometry, 2 goods (Apples) x2 (Oranges)x1Budget Set =all affordable bundlesAffordable Bundle?(1,1),(2,2),(3,3)Budget constraintBudget 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 goodsIf n = 3 what do the budget constraint and the budget set look like?Budget SetBudget set depends on prices and incomeWhat 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 setInflation 100%x1x2p1=2 p2=1m=6Ad Valorem TaxTax rate t=100%x1x2p1=2 p2=1m=6Effective pricesThe Food Stamp ProgramFood stamps are coupons that can be legally exchanged only for food.x1x2p1=2 p2=1m=600F=2 applesBlack MarketBudget Set withMinimal PurchaseMaximal Purchase (Rationing)Quantity


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UW-Madison ECON 301 - Intermediate Microeconomics

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