San Francisco State University Econ 101 Matthew Keen Fall 20

San Francisco State Universityecon 101matthew Keenfall 2016homework

San Francisco State University ECON 101 Matthew Keen Fall 2016 Homework 3 Please make sure all graphs are clearly labeled. Each of these questions should be answered with complete sentences. Due at the start of class Sept 27th; no late homework is accepted. All questions are taken from the textbook, Principles of Microeconomics, chapter 6.

Paper For Above instruction

This essay explores fundamental microeconomic concepts including consumer choice, budget constraints, utility maximization, income effects, marginal utility, and price elasticity. By analyzing specific scenarios such as Jeremy's decision-making process, the impact of changes in income on a budget constraint, and the behavior of demand relative to price shifts, this paper aims to elucidate how individuals allocate their limited resources among various goods and services to maximize their satisfaction. The discussion integrates theoretical principles with illustrative examples to provide a comprehensive understanding of consumer behavior in microeconomics.

Consumer Choice and Budget Constraints

Jeremy faces a decision between spending his limited weekly budget on phone calls or personal visits to Jasmine. His total weekly budget amounts to $10. The cost per minute for a phone call is five cents, and the round-trip cost for a personal visit is $2. These choices can be represented graphically with a budget constraint that shows all feasible combinations of phone minutes and visits Jeremy can afford.

To determine his utility-maximizing choice, we consider the marginal utility derived from each activity, measured through a "utilimometer." By calculating the marginal utility per dollar spent on each good, Jeremy can identify the optimal combination where the marginal utility per dollar is equal across both options. For instance, if the utility per minute of a call exceeds the utility per trip, Jeremy should favor phone calls until the marginal utilities align, or vice versa.

Graphically, the budget constraint would be drawn with the maximum number of minutes and visits possible within the $10 limit, with the slope determined by the relative prices of phone calls and visits. The utility-maximizing point lies where an indifference curve is tangent to this constraint, indicating the best combination of means to maximize Jeremy's total utility.

Impact of a Lost Allowance on Budget and Preferences

As a college student working part-time, receiving an allowance from parents forms a significant part of the monthly income. If one month the allowance is missing, your overall income decreases, shifting your budget constraint inward, meaning you can afford fewer goods. This reduction affects the quantity and types of goods you purchase, especially if they are normal goods—goods for which demand increases with income.

Graphically, the budget line shifts leftward, reflecting less available income, resulting in lower consumption of normal goods. The consumer's optimal bundle moves to a new point on the lower indifference curve, decreasing overall utility. The extent of the decrease depends on the elasticity of demand for the specific goods; highly elastic goods see a more significant drop in consumption, whereas inelastic goods are less affected.

This scenario highlights how income variations directly influence consumer choices, reinforcing the importance of income elasticity in understanding demand behavior.

Utility Perception and Consumption Behavior

The question of who determines the utility an individual receives from consuming a good centers on the consumer themselves. Utility is a subjective measure, dependent on individual preferences, tastes, and circumstances. While producers and marketers influence perceived value through advertising, it is ultimately the consumer who assigns the level of satisfaction or utility to a good or service based on personal evaluation.

When considering whether total utility rises or falls with additional consumption, theoretical expectations suggest that total utility increases with each unit consumed but at a decreasing rate. This phenomenon is known as the Law of Diminishing Marginal Utility, which states that each additional unit yields less additional satisfaction than the previous one. Consequently, total utility rises but at a decreasing pace as consumption increases.

Similarly, marginal utility—the extra satisfaction gained from consuming one more unit—tends to decline with additional units, reflecting diminishing returns. This decline occurs because consumers typically derive less extra satisfaction from each additional unit as they consume more.

Income Changes and Budget Effect

A shift in income causes a parallel shift in the budget constraint because the consumer's purchasing power either expands or contracts proportionally across all goods and services. An increase in income shifts the budget line outward, enabling greater consumption possibilities, while a decrease shifts it inward, reducing available choices. This parallel movement occurs because the ratio of prices remains unchanged, maintaining the same slope but altering the intercepts.

Such income variations influence consumer buying habits for normal and inferior goods. For normal goods, demand tends to increase with higher income, leading to greater consumption. Conversely, for inferior goods—goods with negative income elasticity—demand decreases as income rises. For example, if a consumer's income increases, they may buy less inexpensive brands or cheap substitutes, opting for higher-quality alternatives.

Income Elasticity and Demand Behavior

Income elasticity of demand measures how the quantity demanded of a good responds to changes in income. For inferior goods, underscored by a negative income elasticity, demand decreases as income increases. In contrast, the other good's income elasticity must be positive, indicating it is a normal good—demand for which rises with income. The relationship between these elasticities depends on the consumer's preferences and substitution effects, often described through the framework of demand theory.

Particularly, if one good is inferior with negative elasticity, the other good is likely a normal good with positive income elasticity, maintaining the overall balance in consumer preferences and income effects during income variability.

Price Changes and Demand Response

When the price of a product decreases by 10%, resulting in an 8% increase in quantity demanded, the price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price, which in this case is 0.8 (or 0.8 elasticity coefficient). If the price decreases again by another 10%, the demand response will typically follow the same elasticity coefficient, meaning demand would increase by an additional 8%. However, such linearity assumes constant elasticity, which may not hold perfectly in real markets. Demand elasticity can vary at different price levels, often decreasing as prices fall or rise further.

Thus, another 10% decrease in price generally results in a similar percentage increase in demand, provided the demand elasticity remains constant, a common assumption in basic demand analysis.

References

• Mankiw, N. G. (2021). Principles of Microeconomics (9th ed.). Cengage Learning.
• Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics (9th ed.). Pearson.
• Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach (9th ed.). W.W. Norton & Company.
• Perloff, J. M. (2017). Microeconomics (8th ed.). Pearson.
• Frank, R. H., & Bernanke, B. S. (2020). Principles of Microeconomics (7th ed.). McGraw-Hill Education.
• Case, K. E., Fair, R. C., & Oster, S. M. (2017). Principles of Microeconomics (12th ed.). Pearson.
• Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th ed.). McGraw-Hill Education.
• Hubbard, R. G., & O'Brien, A. P. (2018). Microeconomics (7th ed.). Pearson.
• Hicks, J. R. (1939). Value and Capital. Oxford University Press.
• Lvoffe, H., & Baily, M. N. (2022). The Economics of Microeconomics (2nd ed.). Routledge.