Market economy and pubic policy

Today
Homework from last week
- Monica’s indifference curve and price
From utility function to demand curve in math.
Introduction of Market Intervention by government

Homework 2
Translate to Ukrainian language
Price Elasticity of Demand
(Demand Elasticity)
Price Elasticity of Supply
(Supply Elasticity)
Marginal rate of substitution

Homework *
A consumer must pay $10 per unit of good X for the first 5 units, but only $5 per unit for each unit in excess of 5 units. How does the budget line look like?

Homework
Monica spends her entire monthly income of $600 on cosmetics and accessories.
The price of cosmetic is $30, and the price of accessory is $10.
If she consumes 12 cosmetics and 24 accessories, her MRS is 1A/1C. Is she in equilibrium at this point on her budget line?
Show the result in a picture.

Marginal rate of substitution (MRS)
MRS: Other goods/Steak

Condition for the Maximum Utility

Cobb-Douglas 2 dimensional case

Price setting by government

How to respond to shortage?
Divide?
Non price rationing
First come, first serve
Waiting line = cost to consumer
Quality deterioration
Show the product less attractive
Open fewer hours per day or fewer days per week
Self-service pumping
Eliminate special services, such as wiping windows
Black market
With Q2, consumer could pay $1.50
Penalties
In a long run…

Governmental purchase
apple case

The supply and demand for apples
Demand
Supply
What is the market equilibrium price and quantity?

Questions
The government agrees to purchase as many pounds of apples as growers will sell to it at a price of $0.80.
How much will the government purchase,
how much will consumers purchase, and
how much will be produced?

Governmental purchase = 140 000 – 110 000 = 30 000
Consumer purchase = 110 000
Produced apples = 140 000

Intervention by government
Tax

Government purchase

Emission trade ?

Intervention by government (1)
Tax

Price Ceiling

Government purchase

Emission trade ?

How is price made?
Why it is changed?
In competitive market

Effect of food stamp program on consumption

Excise subsidy vs. Lump-sum subsidy

Fixed-quantity subsidy: Education

Tax and Rebate Program

Investment in education and borrowing

Investment risk

Homework 1
Suppose the government policy of purchasing apples remains in effect, but consumer demand increases by 10 percent (consumers will purchases 10 percent more at each price than they did before).
What will be the effects on
total apple output,
purchases by consumers,
purchases by government, and
the price of apples?

Homework 2
Find the demand curves for each of 3 variables.