# Shared Flashcard Set

## Details

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

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.
Supporting users have an ad free experience!