1. An individual's budget
Suppose Alex has a weekly budget of $48 to spend on juice and yogurt. Juice is priced at $4 per gallon, and yogurt is priced at $6 per container.
2. Shifts in a budget constraint
Sean brings $15 to a baseball game to spend on sodas and pizza. The following diagram shows his budget constraint:
3. Indifference curves and preferences
Eleanor likes both chocolate and milk. Assume that the “more is better” principle applies to Eleanor; that is, she would always prefer to consume more of either good, holding the consumption of the other good constant.
4. Calculating the marginal rate of substitution (MRS)
Bob enjoys eating muffins and cookies. The following graph displays one of Bob's indifference curves ( L1 ), which shows his preference for muffins and cookies each month.
5. Complements and substitutes TWO CASE
Yvette enjoys eating peanut butter sandwiches and drinking milk. She is particular about proportions, though: For every peanut butter sandwich she eats, she must drink exactly one glass of milk, and vice
Perfect Substitutes Case
Perfect Complements Case
6. Indifference curves and utility maximization
Megan is in a band and likes to advertise upcoming shows using flyers she posts around the city. Making one black-and-white flyer costs $0.05, and making a flyer in color costs $0.20. Megan budgets $40.00 for making flyers each month.
7. MRS and utility maximization
Darnell lives in Houston and loves to eat desserts. He spends his entire weekly allowance on pudding and pie. A bowl of pudding is priced at $1.50, and a piece of apple pie is priced at $4.50. At his current consumption point, Darnell's marginal rate of substitution (MRS) of pudding for pie is 1.
MORE - (Second # / First #) > Third #
LESS - (Second # / First #) < Third #
MAX - (Second # / First #) = Third #
EXAMPLE:
8. Normal and inferior goods
Tim enjoys going to the theater to see plays, and he also enjoys going to rock concerts. The following diagram shows two of Tim's indifference curves for going to plays and concerts. With Tim's initial
9. Income and substitution effects
Van and Amy Alberti live in San Francisco and enjoy going out to fancy restaurants for dinner and to diners for breakfast. On the following diagram, the purple curves
10. Deriving demand from an indifference map
Janet lives in Miami and enjoys drinking lattes and eating scones. The price of a latte is held constant at $3 throughout this problem. On the following diagram, the purple curves represent two of
11. The backward-bending labor supply curve
Megan has 80 hours per week to devote to working or to leisure. She is paid an hourly wage and can work at her job as many hours a week as she likes.
12. Savings decisions
Musashi is an assistant professor who teaches genetics at a university where he is paid a yearly salary of $80,000. He plans to take the next year off to write a book, so he won't earn any money next year. He is currently trying to figure out how much of this year's salary he should save
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