MGT 621 – Microeconomics
2. Demand Theory
Lecture Notes (Overheads Used In Class)
· Pindyck/Rubinfeld, Ch. 4
· Provide an example of a good where one might consume less of with more wealth.
· Provide an example of a good that cannot be bought on a market, i.e., for which there is no set price.
· Formulate a utility maximization problem, given a price vector p>>0 and a budget constraint p.x ≤ y for an agent with utility function u(x) and income y>0. What is the agent’s indirect utility function v(p,y)?
· Given an agent’s indirect utility function v(p,y), how could one determine the maximum amount he or she would be willing to pay for a unit quantity of a consumption good that cannot be bought on a market? (this is called the “compensating variation”)
· Based on the last question, if the agent already has the nonmarket good, how could one determine the minimum amount he or she would be willing to accept so as to give up the item? (this is called the “equivalent variation”)
Background Reading (for future reference only)
· Debreu, G. (1959) Theory of Value: An Axiomatic Analysis of Economic Equilibrium, Yale University Press, New Haven, CT; Chs. 2 & 4.
· Kahneman, D. (2011) Thinking, Fast and Slow, Farrar, Straus and Giroux, New York, NY.