Using carefully-labeled graphs, explain how an individual demand curve is derived from the utility-maximizing behavior of a consumer.
What will be an ideal response?
Refer to Figure 5.8. The left panel of Figure 5.8 represents the utility-maximizing behavior of a consumer. When income is M, the price of good Y is Py1 and the price of good X is Px1, the consumer's budget constraint is represented by the budget line labeled L1. The consumer maximizes their utility by choosing the bundle labeled a, where indifference curve U1 is tangent to budget line L1. Therefore, at a price of Px1, the consumer chooses to consumer X1 units of good X. This price and quantity combination is represented by point a in the right-hand panel of Figure 5.8. Now suppose the price of good X falls to Px2, causing the budget line to rotate out to L2. The consumer now maximizes their utility at point b, where indifference curve U2 is tangent to the new budget line L2. At point b, the consumer chooses to consume X2 units of good X. The price and quantity combination Px2 and X2 is represented by point b in the right-hand panel of Figure 5.8. Connecting the price and quantity combinations a and b in the right-hand graph gives the individual demand curve for good X.
You might also like to view...
In the Keynesian model, an increase in saving serves to decrease consumption spending, causing a multiple contraction in national income
Indicate whether the statement is true or false
Many immigrants and many American high school dropouts possess very few skills. What impact will these low-skill immigrants likely have on the labor market opportunities of American high school dropouts?
A. Immigration of low-skilled workers does not affect wages paid to American high school dropouts. B. Immigration of low-skilled workers is associated with lower wages paid to American high school dropouts. C. Immigration of low-skilled workers is associated with greater employment among American high school dropouts. D. Immigration of low-skilled workers is associated with higher wages paid to American high school dropouts. E. None of the statements is correct.
At the short-run break-even price, the firm
A) is earning positive economic profits. B) is earning negative economic profits. C) is making a normal rate of return on its capital investment. D) may be earning a positive or negative economic profit depending upon costs.
Say a pill existed that made people selfless. After taking it they were only interested in others, not themselves. Under the coordination definition of economics:
A. there would be a political problem but not an economic problem. B. no economic problem would exist. C. there still would be an economic problem. D. there would be a social problem but not an economic problem.