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7 Cards in this Set
- Front
- Back
Interior Solution: With a concave utility funciton and a linear budget line, there will be a unique interior solution
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1) Geomatrically, this is the tangency between the budget line and an indiffernce curve
2) Algebraically, use MUx/MUy=PxX+PyYI to solve for X and Y |
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Coner Solutions: Cases where the best bundle does not satisfy the tangency condition.
Def → |
The budget line reaches the highest achievable indiffernce curve along an axis (so only one of the two goods is consumed) or at a kink.
Although the corner bundle is the best affordable bundle, the tangency condition will not hold. |
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Normal Goods; Def →
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Goods that experienc increases in quantity consumed in response to increases in the consumer's real income. In Math Terms, it is;
εx,I = ∆Q/Q ∆I/I For a normal good, n1 >0 X, Y, are both normal goods and Px, Py are the prices |
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Finer gradations of normal goods
Necessity → |
n1<1
good is a declining share of total expenditure as income increases |
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Finer gradations of normal goods
Luxury → |
n1>1
A good is an increasing share of total expenditure as income increases |
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Inferior Goods; Def →
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Goods for which quantity consumed decrweases in response to increases in the consumer's real income. That is, goods with n1<0
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Inferior Good; Def →
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Goods for which quantity consumed decreases in response to increases in the consumer's real income. That is, goods with n1<0
Graph (see notes - Lecture 7) |