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Stanford Econ165 Lecture1 Fall2009 - Part II
Homothetic Preferences, Autarky, Relative Demand
15
Economics
Undergraduate 3
09/23/2009

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Term
What 2 things does the relative demand curve depend on?
Definition

1) Relative prices

2) Income / Endowment

Term
When does the relative demand curve not depend on endowment / income?
Definition
When preferences are homothetic (consumers consume same ratio of goods across all income levels).
Term
When preferences are homothetic the MRS is ___ along the ___ that passes through the origin.
Definition
When preferences are homothetic the MRS is constant along the ray that passes through the origin.
Term
If all consumers have the same homothetic preferences, then aggregate demand is independent of what?
Definition

The distribution of income:

 

Dc/Df = RD (Pc, Pf)

Term
Aggregate demand is the same as demand of a consumer who has income equal to ____ ____.
Definition
Aggregate demand is the same as demand of a consumer who has income equal to aggregate income.
Term
If consumers have identical homothetic preferences and face identical relative prices, do they have same MRS?
Definition

Yes.

 

MRS = MUc/MUf = Pc/Pf

Term
If MRS is the same for all consumers what does this imply about their relative demand / relative consumption?
Definition

Relative demand / relative consumption must be identical.

 

Dc/Df = Dc*/Df* 

Term
What is relative demand?
Definition
Dc/Df
Term
What is the formula for aggregate relative demand and why is it independent of income?
Definition

Dc/Df = RD(Pc/Pf)

 

Independent of income because homothetic preferences give everyone the same relative consumption, so no income is needed.

Term
If utility for aggregate consumer goes up/down does it mean it moves in the same direction for all consumers?
Definition
No, their utility depends on the level of income, which depends on the distribution of income.
Term
Name three types of models with homothetic preferences.
Definition

1) Cobb Douglas

2) Perfect Substitutes

3) Perfect Complements

Term
What is a model without homothetic preferences?
Definition
Quasilinear preferences
Term
What is MRS in a country with an endowment under autarky?
Definition
MRS(Ec,Ef) = MRS(Dc,Df)= PCA/PFA
Term
In an autarky that opens itself up to trade, what price / MRS conditions result in trade taking place?
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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