consumers

Question 1

Composite Goods

(basket of goods)

Answer 1

the dollars you spend on all other goods

Question 2

Budget Line

(basket of goods)

Answer 2

the whole series of bundles that you could afford to buy when you spend all of your money

Question 3

budget equation

Answer 3

(x1 * p1) + (x2 * p2) = income

Question 4

what happnes to the budget line when x increases

Answer 4

outward shift of budget line

Question 5

what happnes to the budget line when P1 increases

Answer 5

steeper slope, lower x-icpt, same y-icpt

Question 6

what happnes to the budget line when P2 increases

Answer 6

shallower slope, lower y-icpt, same x-icpt

Question 7

Define

complete tastes

Answer 7

for any A,B, A>B or B>A or A~B

Question 8

transitive tastes

Answer 8

if A>B and B>C, then A>C

Question 9

we can say your tastes are rational if they are both xxx and xxx

Answer 9

complete and transitive

Question 10

monotonicity assumption

tastes

Answer 10

• if A has more of everything compared to be, then A>B
• if A has more of some goods and no less of others, A>~B

(more is better)

Question 11

convexity assumption

tastes

Answer 11

if A~B, then any weighed average is at least as good (usually better)

(averages are better than extremes)

Question 12

continuity assumption

tastes

Answer 12

if you’re given more stuff in tiny increments, you’re not going to suddenly have a huge jump in how you feel about it – tiny changes in quantity = tiny changes in how you feel

(no sudden jumps)

Question 13

The indifference curve that contains A is the set of bundles that are:
a) better than a
b) worse than a
c) just as good as A

Answer 13

c) just as good as A

Question 14

what does the slope of indifference curve tell you

Answer 14

the rate at which i’m willing to trade x2 for x1

Question 15

what is MRS (marginal rate of substitution)

Answer 15

how much of x2 you are wiling to give up for 1 more of x1

Question 16

why is the slope of an indefference curve steeper at the beginning

Answer 16

because we have a taste for variety and are more willing to give up more of what we have the most (x2 at the start, then x1) –> diminishing MRS along indifference curve which arises from the assumption of convexity

Question 17

formula for MRS

Answer 17

dx2/dx1

= neg. partial dervative of u with respect to x1 divided by the partial dervative of u with respect to x2

Question 18

to find the optimal level of consumption of x1, we need to find where du/dx1=

Answer 18

0

Question 19

Lagrange equation

Answer 19

(what we’re trying to maximize) + λ(constraint – with all the terms on one side)

Question 20

define income effect

Answer 20

change in consumption from a change in income

Question 21

what do income effects arise from

Answer 21

parallel shifts in budget (bc changes in I cause parallel shifts in budgets)

Question 22

define

inferior goods

Answer 22

consumption of x and income move in opposite directions

↑I –> ↓x1
↓I –> ↑x1

Question 23

define

quailinear goods

Answer 23

MRS doesn’t change along a vertical ray (i.e.△I –> no change in x1)

Question 24

define

normal goods

Answer 24

consumpton of x1 moves in the same direction as income

↑I –> ↑x1
↓I –> ↓x1

Question 25

# define homothetic goods

Answer 25

you increase consumption of x1 and x2 by the same percentage (same % as the change in I) | (they are a type of normal good)

Question 26

# define necessity

Answer 26

% increase in I results in a lesser than that % increase in consmption of x1

Question 27

# define luxury goods

Answer 27

% increase in I results in a greater than that % increase in consmption of x1

Question 28

define substitution effect

Answer 28

change in consumption due solely to a change in opportunity costs

Question 29

size of sub. effect depends on ...

Answer 29

teh degree of substitutability

Question 30

how do price changes affect which bundle we choose

Answer 30

1. increase in price makes the budget line steeper (same y-icpt, smaller x-icpt) 2. we shift this new budget line until it becomes parallel w the indiff. curve (this new budget is called the compensated budget) 3. the new budet lies at the point of intersectiom btwn the new budget and the indiff. curve

Question 31

# define giffen goods

Answer 31

a giffen good is a good so inferior that the income effect doesn't just point in the opposite direction as the sub. effect – **it dominates it** this means that as we take income away from you you consume more of the good

Question 32

# define lump sum tax

Answer 32

tax that does not distort relative prices –– doesn't change the slopes of budget constraints, just results in parallel shifts

Question 33

# define distortionary tax

Answer 33

tax that does distort relative prices –– changes the slopes of budget contraints

Question 34

DWL formula | (w respect to taxes in budget lines)

Answer 34

DWL = L - T where: * T = tax revenue raised from consumers with a distortionary tax * L = tax revenue we could've raised without making anyone worse off than they are under the distortionary tax

Question 35

a distortionary tax is inefficient if

Answer 35

if we could've raised more money than we actually did and made no one worse off, then the distortionary tax is inefficient – we could've been better off using a tax that doesn't distort prices

Question 36

DWL from distortionary taxes in the consumer side emerges solely because of: a) sub. effects b) income effects

Answer 36

a) sub. effects

Question 37

steps for calculating DWL from a consumer-side tax

Answer 37

1. figure out where the original bundle lies using a utility maximization 2. calculate tax payment (T) by multiplying x1 * t 3. figure out what label the utlity func. is giving to this indifference curve (i.e. plug in x1 and x2 into utlity func) 4. calculate x1 and x2 when the consumer faces this indiff. curve at original prices 5. calculate L by subtracting spending [p1(new x1) + p2(new x2)] from original budget 6. find DWL (L–T)

Question 38

the demand curve and demand function are xxx of eachother a) mirrors b) inverses

Answer 38

b) inverses

Question 39

what does a demand function tell us

Answer 39

how much of a good the consumer will consume if she optimizes at any economic environment (P1, P2, I)

Question 40

How do we find the demand functions for x1 and x2

Answer 40

maximize utlity function s.t. budget equation and solve for x1 and x2 the eqs. you get fro x1 and x2 are their demand funcs

Question 41

why is PED larger higher up along the demand curve

Answer 41

bc when we start w a high quantity a change in x is relatively smaller (%-wise) than when we start w a smaller quantity

Question 42

PED formula

Answer 42

(%△x)/(%△P) = dx/dp[p(x(p)]

Question 43

what is compensated demand

Answer 43

how much of x1 i'm going to consume as the price changes assuming i get compensated for the price change --> as we get compensated we always end up on the same indiff. curve

Question 44

for what type of good is comp. demand = uncomp. demand?

Answer 44

quasilinear

Question 45

MWTP curve = a) comp demand curve b) uncomp. demand curve

Answer 45

a) comp demand curve

Question 46

why does measuring CS on regular demand curves give us an incorrect estiamte

Answer 46

bc if the good is not quasilinear the uncomp. D curve will be shallower or steeper than the comp.

Question 47

why do perfect complements not have DWL

Answer 47

bc the difference btwn L and T (i.e. the DWL) emerges purely frum a sub. effect