微观经济学Ch04.docx

微观经济学Ch04.docx

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微观经济学Ch04

CHAPTER4INDIVIDUALANDMARKETDEMAND

QUESTIONSFORREVIEW

1.Explainthedifferencebetweeneachofthefollowingterms:

a.apriceconsumptioncurveandademandcurve;

Apriceconsumptioncurveidentifiestheutilitymaximizingcombinationsoftwogoodsasthepriceofoneofthegoodschanges.Whenthepriceofoneofthegoodsdeclines,thebudgetlinewillpivotoutwards,andanewutilitymaximizingbundlewillbechosen.Thepriceconsumptioncurveconnectsallsuchbundles.Ademandcurveisagraphicalrelationshipbetweenthepriceofagoodandthe（utilitymaximizing）quantitydemandedofagood,allelsethesame.Priceisplottedontheverticalaxisandquantitydemandedonthehorizontalaxis.

b.anindividualdemandcurveandamarketdemandcurve;

Anindividualdemandcurveidentifiesthe（utilitymaximizing）quantitydemandedbyonepersonatanygivenpriceofthegood.Amarketdemandcurveisthesumoftheindividualdemandcurvesforanygivenproduct.Atanygivenprice,themarketdemandcurveidentifiesthequantitydemandedbyallindividuals,allelsethesame.

c.anEngelcurveandademandcurve;

Ademandcurveidentifiesthequantitydemandedofagoodforanygivenprice,holdingincomeandallelsethesame.AnEngelcurveidentifiesthequantitydemandedofagoodforanygivenincome,holdingpricesandallelsethesame.

d.anincomeeffectandasubstitutioneffect;

Thesubstitutioneffectmeasurestheeffectofachangeinthepriceofagoodontheconsumptionofthegood,utilityheldconstant.Thischangeinpricechangestheslopeofthebudgetlineandcausestheconsumertorotatealongthecurrentindifferencecurve.Theincomeeffectmeasurestheeffectofachangeinpurchasingpower（causedbyachangeinthepriceofagood）ontheconsumptionofthegood,relativepricesheldconstant.Forexample,anincreaseinthepriceofgood1（onthehorizontalaxis）willrotatethebudgetlinedownalongtheindifferencecurveastheslopeofthebudgetline（therelativepriceratio）changes.Thisisthesubstitutioneffect.Thisnewbudgetlinewillthenshiftinwardstoreflectthedeclineinpurchasingpowercausedbytheincreaseinthepriceofthegood.Thisistheincomeeffect.

3.Explainwhetherthefollowingstatementsaretrueorfalse.

a.Themarginalrateofsubstitutiondiminishesasanindividualmovesdownwardalongthedemandcurve.

Thisistrue.TheconsumerwillmaximizehisutilitybychoosingthebundleonhisbudgetlinewherethepriceratioisequaltotheMRS.Supposetheconsumerchoosesthequantityofgoods1and2suchthat

Asthepriceofgood1falls,thepriceratiobecomesasmallernumberandhencetheMRSbecomesasmallernumber.Thismeansthatasthepriceofgood1falls,theconsumeriswillingtogiveupfewerunitsofgood2inexchangeforanotherunitofgood1.

b.Thelevelofutilityincreasesasanindividualmovesdownwardalongthedemandcurve.

Thisistrue.Asthepriceofagoodfalls,thebudgetlinepivotsoutwardsandtheconsumerisabletomovetoahigherindifferencecurve.

c.Engelcurvesalwaysslopeupwards.

Thisisfalse.TheEngelcurveidentifiestherelationshipbetweenthequantitydemandedofagoodandincome,allelsethesame.Ifthegoodisinferior,thenasincomeincreases,quantitydemandedwilldecrease,andtheEngelcurvewillslopedownwards.

5.Whichofthefollowingcombinationsofgoodsarecomplementsandwhicharesubstitutes?

Couldtheybeeitherindifferentcircumstances?

Discuss.

a.amathematicsclassandaneconomicsclass

Ifthemathclassandtheeconomicsclassdonotconflictinscheduling,thentheclassescouldbeeithercomplementsorsubstitutes.Themathclassmayilluminateeconomics,andtheeconomicsclasscanmotivatemathematics.Iftheclassesconflict,theyaresubstitutes.

b.tennisballsandatennisracket

Tennisballsandatennisracketarebothneededtoplayagameoftennis,thustheyarecomplements.

c.steakandlobster

Foodscanbothcomplementandsubstituteforeachother.Steakandlobstercancompete,i.e.,besubstitutes,whentheyarelistedasseparateitemsonamenu.However,theycanalsofunctionascomplementsbecausetheyareoftenservedtogether.

d.aplanetripandatraintriptothesamedestination

Twomodesoftransportationbetweenthesametwopointsaresubstitutesforoneanother.

e.baconandeggs

Baconandeggsareofteneatentogetherandare,therefore,complementarygoods.Byconsideringtheminrelationtosomethingelse,suchaspancakes,baconandeggscanfunctionassubstitutes.

7.WhichofthefollowingeventswouldcauseamovementalongthedemandcurveforU.S.-producedclothing,andwhichwouldcauseashiftinthedemandcurve?

a.theremovalofquotasontheimportationofforeignclothes

Theremovalofquotaswillshiftthedemandcurveinwardfordomestically-producedclothes,becauseforeign-producedgoodsaresubstitutesfordomestically-producedgoods.Boththeequilibriumpriceandquantitywillfallasforeignclothesaretradedinafreemarketenvironment.

b.anincreaseintheincomeofU.S.citizens

Whenincomerises,expendituresonnormalgoodssuchasclothingincrease,causingthedemandcurvetoshiftout.Theequilibriumquantityandpricewillincrease.

c.acutintheindustry’scostsofproducingdomesticclothesthatispassedontothemarketintheformoflowerclothingprices

Acutinanindustry’scostswillshiftthesupplycurveout.Theequilibriumpricewillfallandquantitywillincrease.Thereisamovementalongthedemandcurve.

9.Supposethattheaveragehouseholdinastateconsumes800gallonsofgasolineperyear.A20-centgasolinetaxisintroduced,coupledwitha$160annualtaxrebateperhousehold.Willthehouseholdbebetterorworseoffunderthenewprogram?

Ifthehouseholddoesnotchangeitsconsumptionofgasoline,itwillbeunaffectedbythetax-rebateprogram,becauseinthiscasethehouseholdpays0.20*800=$160intaxesandreceives$160asanannualtaxrebate.Thetwoeffectswouldcanceleachotherout.Totheextentthatthehouseholdreducesitsgasconsumptionthroughsubstitution,itmustbebetteroff.Thenewbudgetline（pricechangeplusrebate）willpassthroughtheoldconsumptionpointof800gallonsofgasoline,andanynowaffordablebundlethatcontainslessgasolinemustbeonahigherindifferencecurve.Thehouseholdwillnotchooseanybundlewithmoregasolinebecausethesebundlesareallinsidetheoldbudgetline,andhenceareinferiortothebundlewith800gallonsofgas.

11.Explainwhichofthefollowingitemsineachpairismorepriceelastic.

a.Thedemandforaspecificbrandoftoothpasteandthedemandfortoothpasteingeneral.

Thedemandforaspecificbrandismoreelasticsincetheconsumercaneasilyswitchtoanotherbrandifthepricegoesup.

b.Thedemandforgasolineintheshortrunandthedemandforgasolineinthelongrun.

Demandinthelongrunismoreelasticsinceconsumershavehadmoretimetoadjusttothechangeinprice.

EXERCISES

1.Anindividualsetsasideacertainamountofhisincomepermonthtospendonhistwohobbies,collectingwineandcollectingbooks.Giventheinformationbelow,illustrateboththepriceconsumptioncurveassociatedwithchangesinthepriceofwine,andthedemandcurveforwine.

Price

Wine

Price

Book

Quantity

Wine

Quantity

Book

Budget

$10

$10

7

8

$150

$12

$10

5

9

$150

$15

$10

4

9

$150

$20

$10

2

11

$150

Thepriceconsumptioncurveconnectseachofthefouroptimalbundlesgiveninthetableabove.Asthepriceofwineincreases,thebudgetlinewillpivotinwardsandtheoptimalbundlewillchange.

4.a.Orangejuiceandapplejuiceareknowntobeperfectsubstitutes.Drawtheappropriateprice-consumption（foravariablepriceoforangejuice）andincome-consumptioncurves.

Weknowthattheindifferencecurvesforperfectsubstituteswillbestraightlines.Inthiscase,theconsumerwillalwayspurchasethecheaperofthetwogoods.Ifthepriceoforangejuiceislessthanthatofapplejuice,theconsumerwillpurchaseonlyorangejuiceandthepriceconsumptioncurvewillbeonthe“orangejuiceaxis”ofthegraph（pointF）.Ifapplejuiceischeaper,theconsumerwillpurchaseonlyapplejuiceandthepriceconsumptioncurvewillbeonthe“applejuiceaxis”（pointE）.Ifthetwogoodshavethesameprice,theconsumerwillbeindifferentbetweenthetwo;thepriceconsumptioncurvewillcoincidewiththeindifferencecurve（betweenEandF）.Seethefigurebelow.

Assumingthatthepriceoforangejuiceislessthanthepriceofapplejuice,theconsumerwillmaximizeherutilitybyconsumingonlyorangejuice.Asthelevelofincomevaries,onlytheamountoforangejuicevaries.Thus,theincomeconsumptioncurvewillbethe“orangejuiceaxis”inthefigurebelow.

4.b.Leftshoesandrightshoesareperfectcomplements.Drawtheappropriateprice-consumptionandincome-consumptioncurves.

Forgoodsthatareperfectcomplements,suchasrightshoesandleftshoes,weknowthattheindifferencecurvesareL-shaped.Thepointofutilitymaximizationoccurswhenthebudgetconstraints,L1andL2touchthekinkofU1andU2.Seethefollowingfigure.

Inthecaseofperfectcomplements,theincomeconsumptioncurveisalsoalinethroughthecornersoftheL-shapedindifferencecurves.Seethefigurebelow.

6.Twoindividuals,SamandBarb,deriveutilityfromthehoursofleisure（L）theyconsumeandfromtheamountofgoods（G）theyconsume.Inordertomaximizeutilitytheyneedtoallocatethe24hoursinthedaybetweenleisurehoursandworkhours.Assumethatallhoursnotspentworkingareleisurehours.Thepriceofagoodisequ