ECON 1100 1nd Edition Lecture 15 Outline of Last Lecture I. Budget LineII. Maximal UtilityOutline of Current Lecture I.ExamII.Income & Substitution Effects III.Wage EffectCurrent LectureI. ExamTop Ten Lists: 3b, 4, 5, 625 MC & 2 SAQ&A sessions @ C106 PBBII. Income & Substitution EffectsSlope = -Ps/PpUtility maximizing rule: final Qs* & Qp* so that MUs/Ps=MUp/PpIncome substitute effects = how change in Price affects change in QuantityPs decreased so the budget line changed, Qs increased but Qp is the same because Ps is the sameIncome hasn’t changed but you have more $ to spend on one, other, or both items because price of one droppedBuying power increased – what person can getYou’re richer because you can afford/will buy more than before – income effectThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Income effect of Price decrease – buy more all normal goods (less inferior goods)Ps decreased = buy more sandwichesPrice fell = $ worth is moreBuy less that gives low utility ($’s worth) and more of what gives more per $ to equalizeSubstitution effect of P decrease = buy more of good whose P decreased and less of other good; substitution cheaper good for more expensiveIII. Wage EffectPerson works by hour @ $10/hrSlope = -wage/1 => -wageX is utility max rule MUleisure/w=MUstuff/1Best point always depends on the individualWage increases = how does labor supply changeBudget constraint changes & leisure sameWage increase -> income increase -> buy more normal, less inferior goods, work lessIncome effect = buy more of both goods, buy more leisureWage increase -> leisure becomes more expensiveSubstitute effect = buy less leisure, work
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