Exam 1

Question 1

• What is microeconomics?

Answer 1

The study of economic behavior of individual economic decision makers

Concerned with the positive analysis of social questions

Question 2

How is micro different than macro

Answer 2

Micro is focused on an individual or business, while macro is focused on the state of the economy or on a much larger scale.

Question 3

Constrained optimization

Answer 3

Behavior can be modeled as the optimization of an objective function subject to various constraints

Question 4

Objective function

Answer 4

Specifies what a person cares about/wants (utility or profits)

Question 5

Constraints

Answer 5

The limits that are placed on the resources available (budget, time, technology, etc.)

Question 6

Exogenous variables

Answer 6

Variables that are outside the system. These values are taken as given within the analysis (price and budget)

Question 7

Endogenous variables

Answer 7

Variables that are within the system. These values are determined as a result of our analysis (quantity)

Question 8

Equilibrium

Answer 8

State of a system that will continue indefinitely as long as the exo variables remain unchanged (supply and demand)

Question 9

Comparative statics analysis

Answer 9

Compares the equilibrium state of a system before and after a change in an exo variable

Ex. Minimum wage decreases

Question 10

Demand

Answer 10

How much one is willing and able to buy at various price points

Question 11

Law of demand

Answer 11

As the price increases, the quantity demanded will fall

Question 12

Shifters of demand

Answer 12

Tastes and preferences, individual’s income, change in the prices of related goods, expectations, or the change in the number of buyers

Question 13

Supply

Answer 13

The maximum quantity that a seller is willing and able to sell

Question 14

Law of supply

Answer 14

As prices go up, the quantity supplied will rise

Question 15

Supply shifters

Answer 15

Technology changes, change in the price of inputs, change in the number of sellers, government intervention, change in price expectations, change in the prices of related goods, and natural disasters

Question 16

Market equilibrium

Answer 16

A price such that at this price, the quantity demanded and supplied are exactly the same

Question 17

Own price elasticity of demand

Answer 17

Measures the responsiveness of consumer demand to a change in price

Question 18

Demand is elastic if…

Answer 18

Ed is greater than 1

Question 19

Demand is inelastic if…

Answer 19

Ed is between 0 and -1

Question 20

Demand is unit elastic if…

Answer 20

Ed = -1

Question 21

Cross price elasticity of demand

Answer 21

Measures the degree of shift in the demand curve of good (i) induced by a change in the price of another product (j)

Question 22

A good is a substitute if the cross price elasticity is…

Answer 22

Greater than 0 because as the price of the other good goes up, the quantity demanded of your good goes up

Question 23

A good is a complement if the cross price of elasticity is…

Answer 23

Less than 0 because as the price of the other good goes down, the quantity demanded of your good goes down

Question 24

Income elasticity of demand

Answer 24

Measures the degree of shift in demand due to a change in come (responsiveness to a change in income)

Question 25

A good is a normal good if...

Answer 25

The income elasticity is greater than 0 because as your income increases, you have a higher quantity demand

Question 26

A good is an inferior good if...

Answer 26

The income elasticity is less than 0 because as your income decreases, you have a lower quantity demanded

Question 27

Consumer preferences

Answer 27

Tell us how a consumer would rank any two combinations of goods, assuming these allotments were available to the consumer at no cost

Question 28

Properties of consumer preferences

Answer 28

Completeness, transitivity, monotonicity

Question 29

Completeness

Answer 29

Given two baskets of goods (a,b), it must be the cases that a>b, b>a, or a=b

Question 30

Transitivity

Answer 30

If a.b and b>c, then a>c

Question 31

Monotonicity

Answer 31

More is better (2 cars is better than 3 cars)

Question 32

Utility function

Answer 32

A function that measures the satisfaction a consumer gets from a basket of goods

Question 33

Marginal utility

Answer 33

The change in total utility from a one unit change in the quantity of a consumed good

Question 34

Indifference curve

Answer 34

The set of all baskets which give the consumer exactly the same utility. All of the baskets the consumer is indifferent between

Question 35

Marginal rate of substitution

Answer 35

The more of good x you have, means the more you are willing to give up in order to get a little more y

Question 36

Budget constraint

Answer 36

The set of baskets that are affordable to the consumer

Question 37

Budget line

Answer 37

The set of all baskets that are obtained if the consumer spends all of their income

Question 38

Budget set

Answer 38

all possible consumption bundles that someone can afford given the prices of goods and the person's income level

Question 39

What happens to the budget line if the price of a good changes

Answer 39

The line will either rotate inwards (x) or outwards (y)

Question 40

What happens to the budget line if the level of income changes

Answer 40

The line will shift out (income increase) or out (income decrease)

Question 41

Interior optimum

Answer 41

Optimal basket (x,y) is such that the person buys the same of both goods

Question 42

Corner case

Answer 42

One good is NOT consumed at all