Micro Midterm

Front 1

factors of production

Back 1

land, labor, and capital

Front 2

microeconomics

Back 2

the science of choice under scarcity (scarcity is a fact of life b/c resources are limited)

Front 3

non satiation assumption

Back 3

a human is never fulfilled --> always wants more

Front 4

cost benefit analysis

Back 4

determine if the benefit is greater than the cost

Front 5

ignoring the opportunity cost: mistake in cost benefit analysis

Back 5

-don't ignore the implicit costs during cost benefit analysis

-take into account the value of the next best alternative

-ex: opportunity cost of not going to college is the income you would have made from 18-22 minus the extra income past 22

Front 6

failing to ignore the sunk cost: mistake in cost benefit analysis

Back 6

-a sunk cost is a cost from the past that has no impact on the future --> ignore it

-example: don't look at the scoreboard during the game because it is a sunk cost

-example: if a 3 year relationship sucks then dump her --> the time is a sunk cost

Front 7

failing to calculate in absolute terms: mistake in cost benefit analysis

Back 7

-always calculate value in absolute terms

-a 50% off coupon on a $100 purchase has less value than a 10% off coupon on a $1000 purchase in absolute terms

Front 8

failing to understand average / marginal distinction: mistake in cost benefit analysis

Back 8

-average cost: the average cost of undertaking n units of an activity

-average benefit: the average benefit of undertaking n units of an activity

-marginal cost: the increase in total cost that results fro carrying out one additional unit of an activity

-marginal benefit: the increase in total benefit that results from carrying out one additional unit of an activity

-example: if you have an exam on Thursday but your friend wants to get dinner, on average you would say yes, but on the margin you say no

-example: we got into Yale b/c we did something a little more on the margin

Front 9

rational economic agents...

Back 9

-never ignore an opportunity cost

-never fail to ignore a sunk cost

-calculate everything in absolute terms

-understand and do a marginal analysis

Front 10

what do buyers want to do?

Back 10

maximize their utility

Front 11

axis on graphs of supply and demand

Back 11

x axis: quantity (dependent)

y axis: price (independent)

change in price alters the quantity

Front 12

law of demand:

Back 12

the inverse relationship between price and quantity of demand ---> as price goes down, demand goes up, and as price goes up, quantity demanded goes down

Front 13

movement along the demand curve

Back 13

-only way to go from one point to another on a demand curve is by changing the price

-the demand curve doesn't change but the quantity demanded does

-as price goes up, quantity demanded goes down

Front 14

increase in demand

Back 14

curve shifts up and to the right (quantity demanded gets bigger at the same price)

Front 15

decrease in demand

Back 15

curve shifts down and to the left (quantity demanded gets smaller at the same price)

Front 16

factors the shift the demand curve: change in..

Back 16

a) population (more people, more demand)

b) income (more income, more demand)

c) preferences (context)

d) price of substitutes (price of coke increases, demand for pepsi increases)

e) price of complimentary goods (price of tennis rackets goes up, demand for balls goes down)

f) expected price (expected price of oil tomorrow goes up, demand for oil now goes up)

Front 17

sellers want to

Back 17

maximize their profit

Front 18

law of supply:

Back 18

positive relationship between price and quantity supplied

Front 19

if price increases

Back 19

quantity supplied increases

Front 20

if price decreases

Back 20

quantity supplied decreases

Front 21

increase in supply means

Back 21

at each price, producers are willing to supply more (shift right and down)

Front 22

decrease in supply

Back 22

at each price, producers are willing to supply less (shift left and up)

Front 23

factors that shift the supply curve

Back 23

1) # of suppliers (if # goes up, supply goes up)

2) technological advances (technology improves, supply goes up)

3) change in price of inputs aka LLC (if price of labor goes up, then the supply goes down)

4) change in oil price (if oil prices increase, supply decreases)

5) change in price of related goods (if the price of ice cream goes up, supply of cheese goes down)

6) change in weather (if weather is good then the supply will go up)

Front 24

two types of economic variables

Back 24

-endogenous: commodity from within the economic system (land, labor, and capitol)

-exogenous: commodity from outside the economic system (weather)

Front 25

weirdly shaped supply and demand curves

Back 25

-supply curve would be vertical if price kept going up forever (dead persons paintings --> quantity is fixed, but price skyrockets)

-demand could be linearly increasing (price of vaccines in Africa)

Front 26

invisible hand theorum:

Back 26

the pursuit of self interest results in greater social good (baker gives you bread to make $$)

Front 27

equilibrium price

Back 27

the agreed upon price and quantity between buyers and sellers

Front 28

price ceiling:

Back 28

-quantity demanded will exceed quantity supplied because the price is so low

-there could be a black market with higher prices, indifferent suppliers (bad super), andunderinvestment

Front 29

price floor:

Back 29

-quantity supplied will exceed quantity demanded because the price is so high

-there will be an excess supply/surplus and the government will pay the difference --> could lead to a disposal problem and over investment on the part of the producers

Front 30

demand equation:

supply equation:

Back 30

P = A - BQ(d)

P = C + DQ(s)

Front 31

equation to solve for Q:

Back 31

Q = (A-C) / (B+D)

Front 32

equation for P*:

Back 32

P* = (AD + BC) / (B+D)

Front 33

tax on the consumer:

Back 33

D1: P = A - BQ

D2: P = (A-T) - BQ

Front 34

tax on the producer:

Back 34

S1: P = C + DQ

S2: P = (C+T) + DQ

Front 35

subsidy on the consumer (consumer gets it)

Back 35

D1: P = A - BQ

D2: P = (A+S) - BQ

Front 36

subsidy on the producer (producer gets it)

Back 36

S1: P = C + DQ

S2: P = (C-S) + DQ

Front 37

two conditions for a consumer trying to maximize his or her utility:

Back 37

1) he cannot spend more than he has

2) he has no control over prices

Front 38

a bundle is a

Back 38

particular collection of commodities (A,B)

U(A,B) is the utility of a bundle

Front 39

a commodity is good if

Back 39

the consumer prefers more of it

Front 40

a commodity is bad if

Back 40

the consumer prefers less of it

Front 41

three axioms of the subjective utility theory

Back 41

1) axiom of completeness (consumer knows all about his choices --> a+b+c are car companies)

2) axiom of comparison (the consumer can rank his choices --> a>b>c)

3) axiom of transitivity (the consumer is consistent in comparing all of his choices --> a>b and b>c, so a is always > c)

Front 42

axis of a utility function (indifference curve)

Back 42

good x and good y

Front 43

indifference curve:

Back 43

locus of equally preferred bundles

Front 44

if it says to find the "marginal" of an equation at x = something then

Back 44

find the slope at x by taking the derivative

Front 45

indifference curves never

Back 45

intersect

Front 46

if x and y are both good, an IC has a

Back 46

negative slope

Front 47

utility increases toward the

Back 47

NE direction

Front 48

to the origin, IC's are generally

Back 48

convex b/c of the principal of diversity in consumption

Front 49

if perfect substitutes,

Back 49

indifference curves are linear w/ a negative slope

Front 50

if perfect complements,

Back 50

indifference curves are like Ls because U(1,1) = U(2,1) = U(1,2)

Front 51

indifference curve is opposite of convex if

Back 51

combining goods decreases utility

Front 52

if both goods are bad

Back 52

better indifference curves are closer to the origin

Front 53

if one good is bad and one is neutral

Back 53

indifference curves are straight lines (either horizontal or vertical)

Front 54

total expenditure

Back 54

(Px)(x) + (Py)(y)

Front 55

budget constraint

Back 55

(Px)(x) + (Py)(y) < or = to I

Front 56

budget constraint

x max:

y max:

Back 56

I/Px

I/Py

Front 57

slope of budget constraint

Back 57

(-I/Py) / (I/Px) = (-Px / Py) = marginal rate of substitution when it intersects IC = MRS

Front 58

when creating a budget constraint, the normal equation can be turned into

Back 58

y = (I/Py) - (Px/Py)x

Front 59

an interior solution

Back 59

a consumer diversifies his/her consumption

Front 60

a corner solution

Back 60

consumer spends all of his/her income on one good

Front 61

corner solutions

Back 61

-if combining goods decreases utility

-if one is good and one is neutral

-if perfect substitutes but one more expensive than the other

Front 62

marginal utility of x =

Back 62

partial derivative of utility function treating x as the variable and the other as a constant

Front 63

(Mux)/(Muy) =

Back 63

Px/Py

Front 64

marginal utility of x graph

Back 64

-shows happiness from the very last unit

-decreasing, positive slope

-x v u(x,y) but y is constant

Front 65

MRS definition:

MRS in a budget constraint=

Back 65

the slope of an indifference curve at a point ---> the amount of y a consumer must be given to compensate for a loss of one unit of x

Px/Py = Mux/Muy

Front 66

when solving for an optimum bundle, use these two equations:

Back 66

1. Px/Py = Mux/Muy

2. (Px)(x) + (Py)(y) = to I

Front 67

demand for commodity x is based on

Back 67

Px, Py, and Income

Front 68

if Px and Py are constant, then

Back 68

an increase in income causes the BC to get larger and a decrease in income causes the bC to get smaller, but every BC is parallel

Front 69

income consumption curve:

Back 69

locus of all the optima as income varies

(axis are still x v y)

Front 70

when income goes up, will you buy more or less of x?

-normal good

-inferior good

-necessity good

-luxury good

Back 70

x goes down as income increases

x goes up as income increases

if the fraction of income spent on a good falls as income increases

if the fraction of income spent on a good rises as income increases

Front 71

PxX/E =

Back 71

PxX/I = (PxX) / (PxX + PyY) = 1 / 1 + (PyY)/(PxX)

---> if y/x goes up, then PxX/E goes down and the optima is more toward the left

---> if y/x goes down, then PxX/E goes up and the optima is more toward the right

Front 72

engel curves definition

Back 72

show the changing characteristics of a good with income

Front 73

engel curves axis

Back 73

x axis is income, y axis is good x

Front 74

engel curves:

1) normal + necessity

2) normal + luxury

3) inferior + necessity

Back 74

1) positive slope concave down

2) positive slope concave up

3) negative slope

Front 75

if I and Py are fixed, Px changes --> how? if...

Back 75

Px increases, resulting in a shorter BC

Px decreases, resulting in a longer BC

Front 76

PCC

Back 76

locus of all the optima as Px changes

Front 77

as Px decreases,

Back 77

indifference curve optima points include more of x and less of y than they did when Px was higher (same thing applies for Py)

Front 78

if I and Px are fixed, Py changes --> how? if...

Back 78

Py increases, resulting in a shorter BC

Py decreases, resulting in a longer BC

Front 79

Elasticity is

Back 79

a measure of responsiveness

Front 80

three times of elasticity

Back 80

1) income elasticity of demand

2) price elasticity of demand

3) cross price elasticity of demand

Front 81

income elasticity

Back 81

the responsiveness of x to a 1% change in income

Front 82

Exi=

Back 82

Δ%x/Δ%I = (Δx/x) / (ΔI/I) = (Δx/ΔI) * (I/x)

Front 83

when using I and x with two sets of data

Back 83

take the averages

Front 84

when the absolute value of Exi is

-less than 1, x is

-equal to one, x is

-greater than one, x is

Back 84

inelastic

unit elastic

elastic

Front 85

Exi for electricity = .2, so

Back 85

a 10% increases in income means a 2% increase in electricity usage

Front 86

if Exi is,

negative:

positive:

between 0 and 1:

high (3+):

Back 86

inferior

normal

necessity

luxury

Front 87

price elasticity of demand

Back 87

the responsiveness of x to a 1% change in the price of x

Front 88

Exp=

Back 88

Δ%x/Δ%Px = (Δx/x) / (ΔPx/Px) = (Δx/ΔPx) * (Px/x)

Front 89

point elasticity =

axis being:

Back 89

x2-x1/x1 / p2-p1/p1

x on the x axis and p on the y axis

Front 90

If x is...

price elastic:

unit elastic:

price inelastic:

Back 90

1. !Exp! > 1 , so a price cut leads to an increase in expenditure --> large change in Qd

2. !Exp! = 1, so a price cut leads to no change in expenditure --> medium change in Qd

3. !Exp! < 1, so a price cut leads to a decrease in expenditure --> small change in Qd

Front 91

price elasticity is always

graph of price elasticity axis

Back 91

negative (slope of curve)

(price on the y axis and good x on the x axis --> as x increases, price decreases, and vice versa)

Front 92

cross price elasticity

Back 92

the responsiveness of x to a 1% change in the price of y

Front 93

Exy

Back 93

Δ%x/Δ%Py = (Δx/x) / (ΔPy/Py) = (Δx/ΔPy) * (Py/x)

Front 94

if Exy <0

if Exy >0

Back 94

x and y are complements

x and y are substitutes

Front 95

(Δx/ΔPx) =

Back 95

1/slope, with slope being the slope of a price elasticity graph in which the x axis is x and the y axis is price of x

Front 96

when solving for price elasticity, use:

Back 96

Exp = (Δx/ΔPx) * (Px/x) , --> (Δx/ΔPx) is 1/slope

Front 97

what happens to Exp as

x goes to 0

px goes to 0

Back 97

negative infinite

0

Front 98

___ will maximize total revenue

Back 98

unit elasticity

Front 99

to find the market demand....

axis are:

add them by:

Back 99

x on the x and p(x) on the y

adding the x axis together

Front 100

substitution effect:

Back 100

component of the total effect of a price change that results from a change in the relative attractiveness of other goods

-if the price of a good rises, a substitute becomes more attractive (buy more of that)

Front 101

income effect:

Back 101

component of total effect of a price change that results from a change in purchasing power

-if the price of a normal good rises, amount purchased decreases b/c less purchasing power

-if the price of an inferior good rises, amount purchased increases b/c less purchasing power (buy more of inferior goods with less income)

Front 102

analyze income and substitution effects

-if Px decreases...

Back 102

1) draw BC2 and IC2

2) draw a parallel BC3 that intersects IC1 (intersect point will be to the right of the original intersect between BC1 and IC1)

3) space between the BC1/IC1 and BC3/ICI is the substitution effect

4) space between BC3/IC1 and BC2/IC2 is income effect

Front 103

analyze income and substitution effects

-if Px increases...

Back 103

1) draw BC2 and IC2

2) draw a parallel BC3 that intersects IC1 (intersect point will be to the left of the original intersect between BC1 and IC1)

3) space between the BC1/IC1 and BC3/ICI is the substitution effect

4) space between BC3/IC1 and BC2/IC2 is income effect

Front 104

consumer surplus

Back 104

on a demand curve if a price is charged, solve for the quantity, and the resultant triangle is the consumer surplus --> can charge the consumer that price in addition to the hourly rate

Front 105

unlimited ____

Back 105

fds

Front 106

axis of inter-temporal budget constraints:

marginal rate of time preference:

positive/negative/neutral time preference:

Back 106

current consumption and future consumption

the number of units of consumption in the future a consumer would exchange for one unit of consumption in the present --> the slope of the intertemporal indifference curve

positive if change in c2 / change in c1 > 1

negative if change in c2 / change in c1 < 1

neutral if change in c2 / change in c1 = 1

Front 107

if you have 100 dollars now and 100 in the future and the interest rate is 10%....

Back 107

r = .1

intercepts = 210 and 100 + 100/1.1

slope = -1.1

m1 and m2 = 100 --> indifference curve there

Front 108

inter-temporal variables

Back 108

r = interest rate

intercepts = (1+r)(m1) + m2 and m1 + m2/1+r

slope = -(1+r)

Front 109

giffen good

Back 109

quantity demanded increases as price increases

Front 110

Information is a

Back 110

scarce good --> scarcity = economics

Front 111

signaling

Back 111

any communication that conveys information

Front 112

credible signals: believe in signals for 2 reasons:

Back 112

1) The costly to fake principle

2) The full disclosure principle

Front 113

costly to fake principal definition and applications

Back 113

definition: it is too costly to lie, so signal is credible

applications

1) product quality assurance (maintain rep)

2) choosing a hardworking employee (you pretend to be hardworking, are found out and fired, and now no one will hire you)

3) choosing a trustworthy employee (you pretend to be trustworthy, are found out and fired, now no one will hire you)

4) CV (costly to fake because if they find a mistake you're done)

Front 114

full disclosure principal definition and applications

Back 114

definition: revealing favorable information (one party) forces others (other parties) to reveal unfavorable information

applications

1) product warranty (if apple gives a warranty, other companies have to or the worst is assumed, but they can't offer as good a warranty as apple, so they look bad)

2) job interviews (best fit person discloses marital information, so everyone who is not the worst does as well or else assumed worst)

3) new comer stigma (new comers gave unfavorable info to avoid being the worst)

4) lemon principle (peach cars saying no forces lemon cars to reveal themselves)

Front 115

choice under uncertainty

Back 115

any decision about the future involved uncertainty, which brings risk

Front 116

expected value definition

expected value definition

expected value of a coin toss in which you win 100 on heads or lose 90 if tails

Back 116

Pg*G + Pl*G

the sum of all possibilities weighted by probability of occurrence

EV = (100)(1/2) - (90)(1/2)

Front 117

people choose the option with the highest

Back 117

expected utility

Front 118

expected utility formula:

expected utility of coin game (u=m^1/2):

Back 118

Pg*U(m0 + gain) + (1 - Pg) * u(m0-loss)

(1/2)(200)^1/2 + (1/2)(10)^1/2

Front 119

accept a gamble if and only if

Back 119

expected utility > u(m0)

Front 120

a gamble whose Ev = 0 is a

Back 120

fair gamble

Front 121

risk averse person:

risk neutral person:

risk seeking person:

Back 121

u = m^1/2 ---> concave down --> decreasing marginal utility

u = m ---> linear --> constant marginal utility

u = m^2 ---> concave up --> increasing marginal utility

Front 122

reservation price r

Back 122

the price at which the consumer is indifferent between buying and not buying insurance

Front 123

to find r

Back 123

1) calculate EU without insurance

2) calculate EU with insurance

3) set them equal to each other

4) solve for R

Front 124

in an insurance graph,

axis are:

expected utility can be found:

r is:

loss * probability of loss (expected value)

Back 124

wealth in the x and utility of wealth in the y

middle number on y axis that intersects both the insurance and utility curves

the difference between maximum wealth and the x intercept drawn from the utility curve

x intercept drawn from the insurance curve

Front 125

insurance companies charge a higher premium than R because of

Back 125

1) administrative costs

2) moral hazard

3) adverse selection

Front 126

moral hazard

Back 126

tendency of people to protect insured goods less

Front 127

adverse selection

Back 127

process by which undesirable members of a population voluntarily exchange or engage in exchange

example: Tolga saying he gives all As would adversely select bad students

example: an insurance company giving a one price fits all would adversely select bad drivers

Front 128

cognitive limitations -->

Back 128

rather than assume rational economic agent, ask what happens if people aren't rational

Front 129

bounded rationality

Back 129

people satisfize rather than maximize --> people are okay with a good bundle rather than the optimum one

Front 130

asymmetric value function (loss v gain)

Back 130

rational choice says v(100) = !v(-100)!, but really !v(-100)! > v(100)

Front 131

framing definition:

framing 2 applications:

Back 131

the presentation of an issue affects its outcome

in asymmetric value functions

1) segregate gains: multiple small gains have a higher value than one big gain

2) combine losses: multiple small losses are worse than one big loss

Front 132

heuristics:

Back 132

mental short cuts, or "rules of thumb," can lead to mistakes

Front 133

heuristic application: availability

Back 133

frequency of information exposure matters

-# of suicide is actually higher than homicide

Front 134

heuristic application: representativeness

Back 134

a certain characteristic of a population may lead to a bias in rational decision making

-foreigners in California are served better b/c they "tip" better

-you pick nerdy people to help you

Front 135

heuristic application: adjustment and anchoring effect

Back 135

people first choose a preliminary estimate (an anchor) then adjust it in accordance with available information

-8! is estimated to be greater if you start with 8 and not with 1

-$9.99 --> anchor to 9 and ignore its actually 10

Front 136

heuristic application: adding an alternative

Back 136

people evenly split two options, but they want the middle option given three choices

-If you give people 3 options for donations to a politician they choose the middle one

Front 137

regress to mean effect

Back 137

first statistic or experience tends to be an exception

-person you're dating "you used to be fun"

-an amazing meal