微观经济学Ch04

CHAPTER 4 INDIVIDUAL AND MARKET DEMAND

QUESTIONS FOR REVIEW

1. Explain the differenee between each of the following terms:

a. a price eon sumpti on curve and a dema nd curve;

A price con sumpti on curve ide ntifies the utility maximiz ing comb in ati ons of two goods as

the price of one of the goods changes. When the price of one of the goods declines, the budget line will pivot

outwards, and a new utility maximizing bundle will be chosen. The

price con sumpti on curve conn ects all such bun dles. A dema nd curve is a graphical

relati on ship betwee n the price of a good and the (utility maximiz ing) qua ntity dema nded of a good, all else the same. Price is plotted on the vertical axis and quantity demanded on the horiz on tal axis.

b. an in dividual dema nd curve and a market dema nd curve;

An in dividual dema nd curve ide ntifies the (utility maximiz ing) qua ntity dema nded by one

pers on at any give n price of the good. A market dema nd curve is the sum of the in dividual dema nd curves for any give n product. At any give n price, the market dema nd curve identifies the quantity demanded by all

individuals, all else the same.

c. an En gel curve and a dema nd curve;

A dema nd curve ide ntifies the qua ntity dema nded of a good for any give n price, holdi ng in come and all else

the same. An En gel curve ide ntifies the qua ntity dema nded of a good for any give n in come, hold ing prices and all else the same.

d. an in come effect and a substituti on effect;

The substitution effect measures the effect of a change in the price of a good on the consumption of the good, utility held constant. This change in price changes the slope of the budget line and causes the consumer to

rotate along the current indifferenee curve. The in come effect measures the effect of a cha nge in purchas ing power (caused by a cha nge in the price of a good) on the consumption of the good, relative prices held

constant. For

example, an in crease in the price of good 1 (on the horiz on tal axis) will rotate the budget line down along the indifference curve as the slope of the budget line (the relative price ratio)

cha nges. This is the substituti on effect. This new budget line will the n shift in wards to reflect the decli ne in

purchas ing power caused by the in crease in the price of the good. This is the in come effect.

3. Explai n whether the followi ng stateme nts are true or false.

a. The marginal rate of substituti on dimini shes as an in dividual moves dow nward along the dema nd curve.

This is true. The con sumer will maximize his utility by choos ing the bun dle on his budget line where the price ratio is equal to the MRS. Suppose the consumer chooses the quantity of

P i

goods 1 and 2 such that MRS. As the price of good 1 falls, the price ratio becomes a

P

2

smaller n umber and hence the MRS becomes a smaller n umber. This mea ns that as the price of good 1 falls, the consumer is willing to give up fewer units of good 2 in exchange for ano ther un it of good 1.

b. The level of utility in creases as an in dividual moves dow nward along the dema nd

curve.

This is true. As the price of a good falls, the budget line pivots outwards and the con sumer is able to move to a higher in differe nce curve.

c. En gel curves always slope upwards.

This is false. The En gel curve ide ntifies the relati on ship betwee n the qua ntity dema nded of a good and in come, all else the same. If the good is in ferior, the n as in come in creases, qua ntity dema nded will decrease, and the En gel curve will slope dow nwards.