Term
| What 2 things does the relative demand curve depend on? |
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Definition
1) Relative prices
2) Income / Endowment |
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Term
| When does the relative demand curve not depend on endowment / income? |
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Definition
| When preferences are homothetic (consumers consume same ratio of goods across all income levels). |
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Term
| When preferences are homothetic the MRS is ___ along the ___ that passes through the origin. |
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Definition
| When preferences are homothetic the MRS is constant along the ray that passes through the origin. |
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Term
| If all consumers have the same homothetic preferences, then aggregate demand is independent of what? |
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Definition
The distribution of income:
Dc/Df = RD (Pc, Pf) |
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Term
| Aggregate demand is the same as demand of a consumer who has income equal to ____ ____. |
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Definition
| Aggregate demand is the same as demand of a consumer who has income equal to aggregate income. |
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Term
| If consumers have identical homothetic preferences and face identical relative prices, do they have same MRS? |
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Definition
Yes.
MRS = MUc/MUf = Pc/Pf |
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Term
| If MRS is the same for all consumers what does this imply about their relative demand / relative consumption? |
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Definition
Relative demand / relative consumption must be identical.
Dc/Df = Dc*/Df* |
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Term
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Definition
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Term
| What is the formula for aggregate relative demand and why is it independent of income? |
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Definition
Dc/Df = RD(Pc/Pf)
Independent of income because homothetic preferences give everyone the same relative consumption, so no income is needed. |
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Term
| If utility for aggregate consumer goes up/down does it mean it moves in the same direction for all consumers? |
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Definition
| No, their utility depends on the level of income, which depends on the distribution of income. |
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Term
| Name three types of models with homothetic preferences. |
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Definition
1) Cobb Douglas
2) Perfect Substitutes
3) Perfect Complements |
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Term
| What is a model without homothetic preferences? |
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Definition
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Term
| What is MRS in a country with an endowment under autarky? |
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Definition
| MRS(Ec,Ef) = MRS(Dc,Df)= PCA/PFA |
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Term
| In an autarky that opens itself up to trade, what price / MRS conditions result in trade taking place? |
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Definition
| Whenever world relative price is different from autarky relative price, trade will take place. If they are the same, trade will not take place. |
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