Download Study Guide for Utility | Intermediate Microeconomic Theory | ECO 240.00 and more Study notes Microeconomics in PDF only on Docsity! Prof. Carlson Study Guide ECO 240 Chapter 4 I. MAJOR TOPICS: Listed below are the major topics in this chapter. You should have a complete understanding of each of these topics and be able to conduct analyses that utilize the corresponding concepts, principles, etc. 1. Use indifference curves analysis to derive, graphically and verbally, the consumer’s demand curve for a good. As part of your discussion, explain the concept of the price-consumption curve. 2. Explain what happens to a consumer’s welfare, her consumption of other goods, her optimality condition, and her marginal benefits as she moves along her demand curve for a particular good. 3. Distinguish between the income and substitution effects of a price change. Be able to isolate each of these effects graphically and explain what each effect is reflecting. 4. Explain the similarities and differences between the income and substitution effects for normal goods and inferior goods. 5. Be able to explain the combined effect an excise tax and a rebate equal to the amount of tax paid would have a consumer’s well being, as well as the reasons for the effects you have described. In addition, be able to explain what the possible effects would be if the rebate is greater or less than the amount of tax paid by the consumer. 6. Distinguish between inferior goods and Giffen goods. How likely is the Giffen good case? Why? (As part of your answer, discuss the likely relative magnitudes of the income and substitution effects resulting from a change in the price of most goods.) 7. Explain how the market demand curve for a normal good is determined. 8. Explain the concept of consumer surplus. How is it measured? As part of your answer, include the concepts of marginal and total willingness to pay and marginal and total benefits, and net benefits. In addition, be able to illustrate how consumer surplus would be calculated using indifference curves analysis. 9. Explain how we can infer the relative price elasticity of demand for a good from the consumer’s price-consumption curve for the good. Does the price-consumption curve tell us anything about the market price elasticity of demand for the good? Why or why not? II. PROBLEMS 1. Assume your roommate, who is also taking ECO 240, is convinced that when the price-consumption curve is downward sloping it means that the good being measured on the vertical axis is an inferior good. Explain why he/she/it is wrong. (Hint: Think about how we define an inferior good.) 2. Explain why, in the case of a normal good, the substitution and income effects of a decrease in the price of the good are positive. 3. What would be expected to happen to the amount of consumer surplus derived from consuming good as the supply of the good in question increases? Explain your reasoning.
