FreeEconHelp.com, Learning Economics... Solved!: budget
Showing posts with label budget. Show all posts
Showing posts with label budget. Show all posts

## How to calculate marginal utility per dollar spent

13:13
In economics you are often required to calculate the marginal utility per dollar spent during the consumer theory or the utility theory portion of the class. The calculation is easy, as you only need to divide the marginal utility of a good or service by the price of that good or service. If you do not have the marginal utility of the good or service, then you need to figure it out by looking at the difference between total utility amounts at different levels of consumption (see this link for help on calculating marginal values—and also see the example below). The idea behind calculating marginal utility per dollar spent is to find out how effective you are while allocating your budget. For example, if a marginal utility per dollar spent is higher for one good than it is for another good then it means that you are not allocating your budget efficiently.  In order to allocate your budget efficiently, you need to have the marginal utility per dollar spent for every good and service be equal to each other.

## How to choose a discount rate--and justify it

11:12

In general there are three possible justifications for choosing a discount rate for your cost benefit analysis. The three justifications are used to explain how people perceive costs and benefits affecting them in different time periods. Because there are a lot of mechanisms within an economy that account for valuing money in different time periods (the most obvious is the interest rate on loans, but inflation and other factors can play a role) they tend to be the predominate choice when choosing a discount rate. The three most common justifications for discount rates are:

1) Cost of borrowing funds. The first and most appropriate justification for choosing a discount rate would be the cost of borrowing the money or capital to run a project. This justification makes the most sense if you are actually going to borrow funds to complete your project. In this scenario you would want your benefits to grow at a rate faster than the interest rate on the loan you made to make the project possible.

## Strictly convex vs. convex and well-behaved preferences in economics

11:42
This post is going to be a bit more technical than average and will probably be aimed towards the upper division microeconomics or perhaps even the graduate level students. When we go a letter more in depth studying consumer theory we learned about well-behaved preferences and the associated shapes that the indifference curves take on. Below you can see a graph with three different indifference curves where 2 are straight lines and one is bowed in. The curve that is bowed in is strictly convex, and all three of them are convex.

Lines A, B, and C all represent indifference curves, while points D and E represent points where the indifference curves touch or intersect (for discussions sake, point D is the point of tangency between lines C and A).

## Budget constraints, utility functions and maximized utility

01:10
This post goes over a question regarding the economics of utility functions and budget constraints:

Matt has the utility function U = √XY (where Y represents pears and X represents hamburgers), income of \$20, and is deciding how to allocate that income between pears and hamburgers. Both hamburgers and pears cost \$1.00 each.

(i) Write the equation for Matt’s budget line in slope, intercept form (y = mx + c).

## Budget constraint and welfare/tax breaks

01:33

Figuring out how government policy affects the budget constraint is very easy if you know how to relate the particular policy to either changes in income, or changes in prices.  For a review on how income and price changes affect the budget constraint read this past post.

## Figuring out budgets and or income levels from prices

14:52

This post will focus more on algebra, but it will use algebra to answer an economics question.  This type of question asks you to find out an individual’s income, if they give you two different scenarios and a price for one of the goods.  The trick to answering problems like this is to set up the problem correctly.  Once you have set up the problem, answering is a simple exercise with algebra.

If Hellen spends all her income on Lemons & Oranges Hellen can just afford 30 Lemons & 8 Oranges per day.   She could also use her entire budget to buy 6 Lemon & 14 Oranges per day. The price of Lemon is \$6.How much is Hellen's income per day?

## Budget constraint with an endowment (a free amount of one good)

20:56
This economics entry goes over a budget constraint example where the individual in question receives a free amount of the good to begin with.  The way these types of problems are modeled is slightly different from our typical budget constraint problem.  Another common application for this type of problem is the introduction of food stamps or low income housing.  Any microeconomics problem where the individual is given a free amount of the good will have a similar solution to the one shown below.  See the graphs and explanations below for more information, and here is the question:

## Utility, Indifference curves, and budget constraints, an example

14:10

Today we will go over the problem:  When the price of X is 10 and the price of Y is 30, a consumer purchases 100 units of X and 50 Units of Y. Because 100 Units of X and 50 Units of Y are purchased, the consumer must be willing to substitute 2 units of X for 1 unit of Y to remain indifferent. Given the prices, 3﻿ units of X can be substituted for each unit of Y along the budget constraint. Therefore, the consumer is not maximizing utility. Explain why you agree or disagree with this statement.

Ok, so the relevant information is:
The Price of X is 10
The price of Y is 30
The consumer purchases 100 units of X therefore she spends 1,000 on X.
The consumer purchases 50 units of Y, therefore she spends 1,500 on Y.
This means that the total budget is 2,500 which means:
Up to 250 units of X can be purchased, and up to 83.33 units of Y can be purchased.

## Solving a budget constraint problem in economics

21:11
This post goes over how to solve a variety of questions focusing on budget constraints and how to manipulate them.

Answer the following questions based on the table. A consumer is able to consume the following bundles of rice and beans when the price of rice is \$2 and the price of beans is \$3.

 Rice Beans 12 0 6 4 0 8

a.
How much is this consumer's income?
b.
Draw a budget constraint given this information. Label it B.
c.
Construct a new budget constraint showing the change if the price of rice falls \$1. Label this C.
d.
Given the original prices for rice (\$2) and beans (\$3), construct a new budget constraint if this consumer's income increased to \$48. Label this D.

## Understanding marginal utility and maximized consumption.

19:51
This post goes through an example of how to figure out if someone is maximizing their utility buy looking at their consumption and figuring out their marginal utility per dollar spent.  In particular it answers the following question:

Roy spends her income of \$150 per week on two goods; movies (which cost \$5 each) and books (which cost \$10 each). At his level of consumption, the marginal utility from the last movie consumed is 20 and the marginal utility from the last book consumed is 30. Is Roy maximizing her utility?Why or why not? If not, what should Roy do to achieve a higher level of utility?

There are two rules to see if someone is maximizing their utility.  First, the marginal utilities per dollar have to be equal.  Second, the entire budget has to be exhausted (used up).

Lets check the second rule first, is the entire budget being used?