End of Consumer Theory Lecture 15 Dr. Jennifer P. Wissink ©2018 John M. Abowd and Jennifer P. Wissink, all rights reserved. March 19, 2018

Announcements: micro Spring 2018 Please make sure you see the Bb message all about prelim 1. Reminder: last day to change grade option or to drop is March 21. Any requests for grading re-considerations must be given to me NO LATER than this Friday March 23, please use the form:   https://courses.cit.cornell.edu/econ1110jpw/regrade.pdf Wissink added office hour for rest of semester: Wednesday 12-1pm MEL issue from the weekend was fixed Friday night. Please see Bb post. And remember to submit any attempts on Quiz#06 by tonight at 11pm! Interesting labor market story in the news this morning… John McEnroe paid more than Martina Navratilova by BBC http://www.bbc.com/news/av/world-europe-43435117/john-mcenroe-paid-more-than-martina-navratilova-by-bbc CES EVENT. GO!!

Seeing Total, Substitution & Income Effects on the Graph (The Hicks Way) Total Effect: Substitution Effect: Income Effect: B

Challenge Question to Try: TRUST ME What would it look like if Beans were Giffen? Break it down into the Total Effect, the Substitution Effect and the Income Effect! Suppose O is the original optimal bundle. Suppose PB increases. If Beans are Giffen, where would the new bundle (N) have to be on the new green budget line? O BLO BLN B

IC/BL Application #1: From Individual to Market Demand DemandMC DemandK BMC BK BTot Maryclaire Katie Aggregate Market

Market Demand Blast From the Past How does our scratch demand compare to the one we bought off the shelf? Recall the demand function for X (mini speakers): QXD = f(PX, Ps, Pc, I, T&P, Pop) Where: PX = price of the mini speakers Ps = the price of substitutes for mini speakers Pc = the price of complements used with mini speakers I=income T&P=tastes and preferences Pop=population in market or market size

IC/BL Application #2: Effect of a Gas Tax with Rebate From The NYT (via Cornell) February 16, 2006, Economic Scene A Way to Cut Fuel Consumption That Everyone Likes, Except the Politicians By ROBERT H. FRANK, Cornell University http://www.nytimes.com/2006/02/16/business/16scene.html?_r=1&pagewanted=print

IC/BL Application #2: Effect of a Gas Tax w/Rebate $aog or $mlo Slutsky’s TE/SE/IE Method: Use a bundle as the anchor– let us say, the original bundle. gallons of gas

IC/BL Application #3: “In Kind” vs. Cash – The Biggs $mlo BLcash BLfs BLo food

IC/BL Application #3: “In Kind” vs. Cash – The Littles $mlo BLfs BLo BLcash food

IC/BL Application #4: Two-Part Tariffs (Sam’s Club Example) Consider Sam (who owns Sam’s Club and sells only X) and Abe (a shopper) and suppose: IAbe = $2,000 PX = $10 and PY = $10 Initially for Abe: Xo* =100 and Yo* =100 Perfectly competitive firms sell Y Sam’s Club has a monopoly on X Sam’s total cost to make X is total cost = $5X Sam’s idea: Offer Abe the following deal Abe pays $200 to join Sam’s Club and then... Sam lowers price of X to PX = $8 Note: PY is still $10 and IAbe is still $2,000 Question: Is this a good idea? If so, for whom?

O N IAbe = $2000 Entry Fee to Sam’s = $200; PX = $8 and PY = $10 Note: By taking the deal Abe could still afford the original bundle Original bundle: Xo*=100 and Yo*= 100 Budget: $200 (to join) + $800 (spent on X) + $1,000 (spent on Y) = 2,000 IAbe = $2,000 PX = $10 and PY = $10 Initially for Abe: Xo* =100 and Yo* =100 Sam’s total cost: tc=5X Sam’s profit is $500 = $10∙10 – $5∙10 Y 200 IC0 ICnew 180 O N BLN BL0 225 Xold Xnew 200 X