Giffen Behaviour and Asymmetric Substitutability*
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ECON501- Short Questions
Graduate Microeconomics Short Study Questions Areas: 1. Consumer Demand Theory 2. Theory of the firm and Production 3. Competitive Markets Lecturer: Glenn P. Jenkins Indicate whether the following statements are true, false or uncertain and briefly explain why. Your grade will depend on your explanation. 1. If two goods are gross substitutes then the absolute value of the uncompensated cross price elasticity of demand must always be less than the absolute value of compensated cross price elasticity between these two goods. 2. The shares of income that individuals spend on every good will always be changing as the person’s income grows, unless the person’s income elasticity of demand for each goods is equal to one. 3. A fall in the price of automobiles will decrease the consumer surplus of the workers in the factory that produces the automobiles. 4. The cross-price elasticity of demand for automobiles with respect to the price of gasoline is equal to the cross- price elasticity of demand for gasoline with respect to the price of automobiles. 5. The sum of the uncompensated own and cross price elasticities of demand for any one good must be equal to the negative of the income elasticity of demand for the good. 6. An inferior good will always be inferior throughout the full range of incomes experienced by consumers. 7. If the MRSxy < Px/Py then the consumer would maximize utility if she would consume less of good X. 8. A consumer’s utility function containing two goods X and Y yields a set of indifference curves that are straight lines. -
Preview Guide
ContentsNOT FOR SALE Preface xiii CHAPTER 3 The Behavior of Consumers 45 3.1 Tastes 45 CHAPTER 1 Indifference Curves 45 Supply, Demand, Marginal Values 48 and Equilibrium 1 More on Indifference Curves 53 1.1 Demand 1 3.2 The Budget Line and the Demand versus Quantity Consumer’s Choice 53 Demanded 1 The Budget Line 54 Demand Curves 2 The Consumer’s Choice 56 Changes in Demand 3 Market Demand 7 3.3 Applications of Indifference The Shape of the Demand Curve 7 Curves 59 The Wide Scope of Economics 10 Standards of Living 59 The Least Bad Tax 64 1.2 Supply 10 Summary 69 Supply versus Quantity Supplied 10 Author Commentary 69 1.3 Equilibrium 13 Review Questions 70 The Equilibrium Point 13 Numerical Exercises 70 Changes in the Equilibrium Point 15 Problem Set 71 Summary 23 Appendix to Chapter 3 77 Author Commentary 24 Cardinal Utility 77 Review Questions 25 The Consumer’s Optimum 79 Numerical Exercises 25 Problem Set 26 CHAPTER 4 Consumers in the Marketplace 81 CHAPTER 2 4.1 Changes in Income 81 Prices, Costs, and the Gains Changes in Income and Changes in the from Trade 31 Budget Line 81 Changes in Income and Changes in the 2.1 Prices 31 Optimum Point 82 Absolute versus Relative Prices 32 The Engel Curve 84 Some Applications 34 4.2 Changes in Price 85 2.2 Costs, Efficiency, and Gains from Changes in Price and Changes in the Trade 35 Budget Line 85 Costs and Efficiency 35 Changes in Price and Changes in the Optimum Point 86 Specialization and the Gains from Trade 37 The Demand Curve 88 Why People Trade 39 4.3 Income and Substitution Summary 41 -
Quantifying Worldwide Demand Elasticities As a Policy Tool
Quantifying Worldwide Demand Elasticities as a Policy Tool Tarek Atalla, Simona Bigerna and Carlo Andrea Bollino August 2016 KS-1644-DP038A Quantifying Worldwide Demand Elasticities as a Policy Tool 1 About KAPSARC The King Abdullah Petroleum Studies and Research Center (KAPSARC) is a non-profit global institution dedicated to independent research into energy economics, policy, technology, and the environment across all types of energy. KAPSARC’s mandate is to advance the understanding of energy challenges and opportunities facing the world today and tomorrow, through unbiased, independent, and high-caliber research for the benefit of society. KAPSARC is located in Riyadh, Saudi Arabia. Legal Notice © Copyright 2016 King Abdullah Petroleum Studies and Research Center (KAPSARC). No portion of this document may be reproduced or utilized without the proper attribution to KAPSARC. Quantifying Worldwide Demand Elasticities as a Policy Tool 2 Key Points his paper provides a comprehensive worldwide database of estimated elasticities for electricity and natural gas for households as a function of income, price, capital stocks and weather conditions. TEmerging economies show lower price elasticities than advanced economies as a result of limited physical capital availability and lock in effect pertaining to energy consumption. Hot weather has a higher impact on energy demand in emerging economies than in advanced ones, as a result of higher efficiency and diversified technologically-advanced equipment. We find that the energy demand elasticity to capital stock is positive implying that the rebound effect prevails over the substitution effect when it comes to the deployment of capital stock technologies. For most countries, including former Soviet Union economies, natural gas is considered as an essential good while electricity is perceived, economically, as a luxury where its income elasticity is above unity. -
Decisions and Games
DECISIONS AND GAMES. PART I 1. Preference and choice 2. Demand theory 3. Uncertainty 4. Intertemporal decision making 5. Behavioral decision theory DECISIONS AND GAMES. PART II 6. Static Games of complete information 7. Dynamic games of complete information 8. Static games of incomplete information 9. Dynamic games of incomplete information 10. Behavioral game theory References Gibbons, R. 1992. Game theory for applied economists. Princeton University Press. Princeton, New Jersey. Varian, H.1992. Microeconomic analysis. Norton & Company. New York. Chapters 7, 8, 9, 10, 11, 19. Camerer, C. , Loewenstein, G. , and Rabin, M. 2004. Advances in Behavioral Economics. Princeton University Press. Mas-Colell, A., Whinston, M., and Green, J. 1995. Microeconomic theory. Oxford University Press. Chapters 1, 2, 3, 4, 6. 1 Two approaches to analyze behavior of decision makers. 1. From an abstract construction generate choices that satisfy rationality restrictions. 2. Directly from choice, ask for some structure to these choices and derive properties. Relation between the two approaches. 2 1. Preference and choice Consider a set of alternatives (mutually exclusives) X and we consider a preference relation on X. Preferences The preference relation “at least as good as” is a binary relation − over the set of alternatives X. Preferences express the ordering between alternatives resulting from the objectives of the decision maker. Properties: Rational Preference Relation (or Weak order, or Complete preorder) if -Completeness, Transitivity (and Reflexivity) A relation is complete if ∀∈x,,yXxy or yx. A relation is transitive if and only if ∀∈x,yz, X, if x≺≺y and y z, then x≺z. 3 Transitiveness is more delicate than completeness. -
Benchmark Two-Good Utility Functions
Tjalling C. Koopmans Research Institute Tjalling C. Koopmans Research Institute Utrecht School of Economics Utrecht University Janskerkhof 12 3512 BL Utrecht The Netherlands telephone +31 30 253 9800 fax +31 30 253 7373 website www.koopmansinstitute.uu.nl The Tjalling C. Koopmans Institute is the research institute and research school of Utrecht School of Economics. It was founded in 2003, and named after Professor Tjalling C. Koopmans, Dutch-born Nobel Prize laureate in economics of 1975. In the discussion papers series the Koopmans Institute publishes results of ongoing research for early dissemination of research results, and to enhance discussion with colleagues. Please send any comments and suggestions on the Koopmans institute, or this series to [email protected] ontwerp voorblad: WRIK Utrecht How to reach the authors Please direct all correspondence to the first author. Kris de Jaegher Utrecht University Utrecht School of Economics Janskerkhof 12 3512 BL Utrecht The Netherlands E-mail: [email protected] This paper can be downloaded at: http://www.koopmansinstitute.uu.nl Utrecht School of Economics Tjalling C. Koopmans Research Institute Discussion Paper Series 07-09 Benchmark Two-Good Utility Functions Kris de Jaeghera a Utrecht School of Economics Utrecht University February 2007 Abstract Benchmark two-good utility functions involving a good with zero income elasticity and unit income elasticity are well known. This paper derives utility functions for the additional benchmark cases where one good has zero cross-price elasticity, unit own-price elasticity, and zero own price elasticity. It is shown how each of these utility functions arises from a simple graphical construction based on a single given indifference curve. -
Illustrating the Difference Between Emissions Fees and Abatement Subsidies Using Isoquant and Isocost Geometry
Illustrating the Difference between Emissions Fees and Abatement Subsidies Using Isoquant and Isocost Geometry Emissions fees (taxes) and abatement subsidies are common policy solutions when negative externalities, such as pollution generated from production, impact market transactions. Textbook treatment of these two policies vary in exposition and detail and are generally more descriptive than analytical. This can leave students with limited insights regarding behavioral differences that arise with these policies. In illustrating unintended policy consequences, this graphical analysis illustrates that a subsidy policy is, paradoxically, more likely to generate more pollution than a fee policy, a result consistent with Metcalf’s (2009) empirical work and a result often not well articulated in textbooks. Christopher S Decker† †University of Nebraska at Omaha © 2020 Journal of Economics Teaching. All rights reserved. Decker / Journal of Economics Teaching (2020) 1. Introduction Since its inception, researchers in the field of environmental economics have developed a menu of policies for addressing the negative externality resulting when pollution results from production. Emissions fees (taxes) and abatement subsidies are some of the most common policy solutions discussed in most environmental economics courses. Textbook treatment of these two policies, however, vary in exposition and detail (e.g. Callan and Thomas, 2010; Field and Field, 2009; Kalstad, 2011; Perman, Ma, McGilvray, and Common, 2011; Tietenberg, 2003). However, it is fair to say that this approach, at least at the undergraduate level, is descriptive.1 Textbooks tend to offer examples of each policy as well as an overview of those states or countries that have implemented each. They correctly point out that emission fees tend to be more common in Europe than the United States. -
A PUBLIC GOODS APPROACH to AGRICULTURAL POLICY POST- BREXIT Dr Adam P Hejnowicz and Prof Sue E Hartley
NEW DIRECTIONS: A PUBLIC GOODS APPROACH TO AGRICULTURAL POLICY POST- BREXIT Dr Adam P Hejnowicz and Prof Sue E Hartley CONTENTS Summary .............................................................................................................................................................................................................................. 2 About The Authors .......................................................................................................................................................................................................... 3 1. All is for the Best in the Best of All Possible Worlds ........................................................................................................................................ 4 2. The Economic Public Goods Paradigm ................................................................................................................................................................ 8 2.1 Show Me the Goods! ........................................................................................................................................................................................... 8 3. An Environmental Turn: The Social-Ecological Public Goods Paradigm ............................................................................................... 10 3.1 Environmental Concerns Promote a Public Goods Agenda .................................................................................................................. 10 3.2 Public Goods and -
The Market A. Example of an Economic Model
The Market 1 The Market A. Example of an economic model — the market for apartments 1. models are simplifications of reality 2. for example, assume all apartments are identical 3. some are close to the university, others are far away 4. price of outer-ring apartments is exogenous — determined outside the model 5. price of inner-ring apartments is endogenous — determined within the model B. Two principles of economics 1. optimization principle — people choose actions that are in their interest 2. equilibrium principle — people’s actions must eventually be consistent with each other C. Constructing the demand curve 1. line up the people by willingness-to-pay. See Figure 1.1. RESERVATION PRICE 500 ...... 490 ...... 480 ... ...... ...... Demand curve ...... ...... 1 2 3 ... NUMBER OF APARTMENTS Figure 1.1 2. for large numbers of people, this is essentially a smooth curve as in Figure 1.2. The Market 2 RESERVATION PRICE Demand curve NUMBER OF APARTMENTS Figure 1.2 D. Supply curve 1. depends on time frame 2. but we’ll look at the short run — when supply of apartments is fixed. E. Equilibrium 1. when demand equals supply 2. price that clears the market F. Comparative statics 1. how does equilibrium adjust when economic conditions change? 2. “comparative” — compare two equilibria 3. “statics” — only look at equilibria, not at adjustment 4. example — increase in supply lowers price; see Figure 1.5. 5. example — create condos which are purchased by renters; no effect on price; see Figure 1.6. G. Other ways to allocate apartments 1. discriminating monopolist 2. ordinary monopolist 3. -
By Marcus Berliant, Shin-Kun Peng, and Ping Wang
WELFARE ANALYSIS OF THE NUMBER AND LOCATIONS OF LOCAL PUBLIC FACILITIES by Marcus Berliant, Shin-kun Peng, and Ping Wang Working Paper No. 00-W35 August 2000 DEPARTMENT OF ECONOMICS VANDERBILT UNIVERSITY NASHVILLE, TN 37235 www.vanderbilt.edu/econ Welfare Analysis of the Number and Locations of Local Public Facilities Marcus Berliant Washington University, St. Louis, MO, USA Shin-kun Peng Academia Sinica, Taipei, Taiwan, ROC Ping Wang Vanderbilt University, Nashville, TN, USA This Version: August 2000 Abstract We develop a discrete or finite household model with congestable local public goods where the level of provision, the number of facilities and their locations are all endogenously determined in a purely normative context. We prove the existence of an equal-treatment identical-provision second best optimum, where all households are required to reach the same utility level, the provision of local public good is required to be the same at all facilities, and all facilities must serve the same number of consumers. Such an optimal public facility configuration need not be geographically centralized even if there is only a single public facility site. Moreover, the optimal public facility configuration could be either concentrated (single site) or dispersed (multiple sites), depending crucially on the degree of congestability and the household valuation of local public goods as well as the unit transportation cost. JEL Classification Numbers: D61, H41, R13 Keywords: Congestable Local Public Goods, Optimal Public Facility Configurations Acknowledgments: We are grateful for valuable comments and suggestions from Hideo Konishi, Tomoya Mori, David Wildasin, and participants at the North American Meetings of the Regional Science Association International in Montreal. -
Title: Rice Consumption: Giffen Behavior in Rural Bangladesh
Lekhe, Islam, Islam and Akter, International Journal of Applied Economics, 11(1), 48-59 48 Giffen Behavior for Rice Consumption in Rural Bangladesh Fatima S. Lekhe1, Lamya B. Islam1, Silvia Z. Islam2 and Aysha Akter2 Eastern University1 and RMIT University2 Abstract: Rice is the staple food in Bangladesh. Thus, the price of rice is an important economic factor in Bangladesh especially for poor people. In Bangladesh, during the price hike of 2008-09, rice price increased by 40% on an average across the country. Interestingly, the consumption of rice in some rural parts of Bangladesh also increased during that period. Thus, the focus of this paper is to examine the practical evidence of this positive relationship between the consumption of rice and increasing price which is addressed as Giffen behavior (inverse of normal behavior) for rice consumption in Bangladesh. By analyzing secondary data obtained from some specific rural parts namely Patharghata (Barguna), Chaddagham (Comilla), Sadar (Jamalpur), Kaligang (Jhenaidaha), Sreemangal (Moulvibazar) and Sadar (Naogaon) of Bangladesh, we have found a new insight in this context. We find that the price elasticity of staple food for the poor people depends significantly and nonlinearly on the severity of their poverty. In order to have an effective design of welfare for the poor people, we need to understand this heterogeneity of their consumption behavior. Keywords: Rice, Price, Bangladesh, Giffen behavior, Elasticity JEL Classification: D01, D12, I30, O12 1. Introduction Alfred Marshall first established the concept of Giffen good in the 1895 edition of his Principles of Economics. He pointed out that a poor consumer facing a price rise in a staple food, has to cut back the consumption of the protein or fancy food to increase the consumption of the staple item. -
The Giffen Paradox Revisited
The Giffen Paradox Revisited Trieu Nguyen Economics Student, Hillsdale College Hillsdale, MI 49242, USA [email protected] ORCID ID: 0000-0002-8579-4879 Abstract This paper aims at defending Austrian causal-realist demand theory which refutes the existence of upward-sloping demand curve or the Giffen good. The analysis traces back to the fundamental difference between Austrian and neo-classical microeconomics, especially in utility theory. Additionally, this paper also briefly examines and proposes a rejoinder to the criticism of Hudik (2011a). Keywords: price theory, utility theory, demand theory, Giffen goods. JEL Classification: B53, D01 Acknowledgement: The idea of this paper emerged from a short conversation between the present author and Dr. Joseph Salerno at Mises University 2019 in which the present author was an attendee. He indebts the Economics Department of Hillsdale College including Dr. Michael Clark and Dr. Charles Steele, as well as Dr. Marek Hudik from University of Economics in Prague and Ohad Osterreicher of University of Bayreuth, Germany for their critical comments and constructive suggestion on earlier drafts of this paper. The standard disclaimer applies. 1. Introduction The comparison between neo-classical and Austrian economics has been a great constructive discussion in the economics profession. Unfortunately, for the most part, the scope of the discussion is indeed macroscopic and from a methodological ground. As Klein (2008) pointed out, what make the Austrian school distinct from the neo-classical framework, i. e. the heart of the Austrian analysis, are “price theory, capital theory, monetary theory, business-cycle theory, and the theory of interventionism.” Among these topics, though there exists similarity, the dehomogenization between Austrian and neo-classical price theory deserves much more attention than what it is having now within the profession. -
Network Externalities and Public Goods in Payment Systems
NETWORK EXTERNALITIES AND PUBLIC GOODS IN PAYMENT SYSTEMS John A, Weinberg Research Department, Federal Reserve Bank of Richmond P.O. Box 27622, Richmond VA 23261, 804-697-8205 November 1996 ABSTRACT: As a network, a payment system is likely to exhibit network externalities and perhaps some public good characteristics. Such properties may be more pronounced in an electronic payment system, because of its greater reliance on communication infrastructures with high fixed and low variable costs, for instance. This paper presents the basic economics of network externalities and reviews some basic principles regarding public goods. It then asks what these phenomena imply about the role of the Federal Reserve in emerging payment systems. The general conclusion is that there is reason to be skeptical that network externalities and public goods will be significant sources of market failure in electronic payment systems. These phenomena, by themselves, give rise to no particular, essential central bank role in these markets. The views expressed herein are the authors and do not represent the views of the Federal Reserve Bank of Richmond or the Federal Reserve System. In a large modern economy, there is a vast and constant movement of funds in the conduct of commerce and finance. In dollar value, the bulk of this movement is not in cash but in the form of instructions for the crediting and debiting of accounts held with public or private financial institutions. In using a non-cash payment instrument, a business or consumer relies on the process through which the payment is ultimately made final. That is, parties to a transaction rely on the network that connects the point of the transaction (in space and time) to the parties' accounts with financial institutions.