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Your income is “I”. The market prices you face for these two goods are PX and PY.
Draw an initial equilibrium point for your consumption of these two goods.
(Restate the formula for the relation between your marginal rate of substitution and the market values of “X” and “Y” at the point of equilibrium.)
Now, you suddenly crave good “X” much more relative to “Y” than previously. What does this do to your indifference curve and equilibrium position? Why?
After you crave more “X” relative to “Y”, the price of “X” rises dramatically. Draw on your graph what does this do you your equilibrium position?
Now, your income doubles. Graph your new equilibrium position.
By doing this exercise, you get a sense of how your real income and purchasing power, and consumption changes, as your tastes, income and market conditions change. Remember there are three components here:
Your psychological makeup – your indifference curve
Your income – the result of all your hard work and application of skills
The prices you face, determined by the market.
In the “real world” this is a situation that will always hold true for you as you interact with the world of goods and services.
Think of a commercial establishment (department store, coffee shop, gas station, store from which you make common purchases – that is spending your hard-earned money) and think through the questions in the previous exercise (4) as they would apply yourself and to the goods offered by this establishment. That is, take any two goods or groups of goods from the store you have chosen and re-do the questions in (4) as they would really apply to you and your tastes. Now you are thinking economics and thinking creatively as well!
You are willing to accept risk for rewards. For example, you are willing to take real tough courses at UCD because if you do well, it will look like you are a hard worker on your transcript (and that is a good thing). Okay, the reward is what could be on your transcript but the risk is that you MAY pull down your GPA (the risk). Draw an indifference curve for your two “goods”, risk and reward for your decision to take or not take the hard courses. Put the good, reward, on the X axis. What do micro-economists call these two goods with respect to the indifference map?
The price of good X is $2. The price of good Y is $6. You have income of $30. In the case where you prefer to consume X, what will your indifference map look like? Give a numeric example of how much of the two goods you will consume in equilibrium. What will be the ratio of the marginal utilities of these two goods? What exactly will be the level of your utility at equilibrium?
Automobile bodies and automobile wheels are perfect complements. Normally, four wheels are consumed for each body purchased. Draw the typical consumer’s indifference map for these two goods, auto bodies, and auto wheels. What can you say about the point of equilibrium for the typical consumer of these two items? Indicate the point of equilibrium on the diagram for lower and higher levels of personal income.
With respect to three goods – ice cream, green tea, and digital cameras, what does it means when your preference for, and satisfaction gained from, these three goods are consistent with the assumptions of completeness, transitivity, and (what I call) the “pig theory” of demand.
What does it mean when we say that the MRS is A NEGTIVE VALUE on the indifference curve?
If your equilibrium point between two goods X and Y is a CORNER SOLUTION, and you are on the X axis, what does that indicate about the relation between your personal MRS between X and Y and the market determined price ratio Px/Py? Why is this a corner solution?
If your equilibrium point between two goods X and Y is a CORNER SOLUTION, and you are on the Y axis, what does that indicate about the relation between your personal MRS between X and Y and the market determined price ratio Px/Py? Why is this a corner solution?
How might an indifference curve map indicate your personal preferences if you believe in the following:
Coke is just as good as Pepsi
I hate rainy days and just love sunny days.
Compared to everything else I could possible buy, I absolutely, positively want an Audi tt sports car.
Baskin-Robbins Jamoca Almond Fudge® ice cream is the only ice cream I will ever eat.
I like ice cream, but under a very few circumstances will I eat yoghurt.
Draw an indifference map where at your point of consumption your MRS between X and Y is 3 and the price of X is $1.00 and the price of Y is $1.00. Is there anything you can do to raise your level of satisfaction? If so, what is it? If increasing your utility is possible, where do you want to end up on the diagram and why?
Draw an indifference map where at your point of consumption your MRS between X and Y is 1 and the price of X is $3.00 and the price of Y is $1.00. Is there anything you can do to raise your level of satisfaction? If so, what is it? If increasing your utility is possible, where do you want to end up on the diagram and why?
The Addictive Foods Corporation wants you do purchase and eat as much of its possible as is humanly possible. So Addictive Foods designs a pricing strategy to encourage this result. Given your own utility preferences for products of the type marketed and sold by Addictive, what is the likely shape of your budget constraint? Where might you end up on this constraint? If the pricing campaign is totally successful, where might most people end up on the constraint?
The Greenie Energy Corporation wants you to conserve your household energy use – electricity and gas. So Greenie designs a pricing strategy to encourage this result. Given your own utility preferences for the energy marketed and sold by Greenie, what is the likely shape of your
budget constraint? Where might you end up on this constraint? If the pricing campaign is totally successful, where might most people end up on the constraint?
What to I mean when I say when “at the point of consumer equilibrium” on an indifference map with prices for X and Y, that:
The consumer’s psychological relative valuation between X and Y is exactly the same as the market’s relative valuation?