I) Introduction to Microeconomics

Question 1

What is “economy”?

Answer 1

A (large) group of people making decisions.

Question 2

What is “methodological individualism”?

Answer 2

Individuals behavior => group behavior (economy) Parts => totality

Question 3

What is “holism”?

Answer 3

Totality => parts Used in sociology

Question 4

What does mean “formal rigor” in economy?

Answer 4

It means that the models of behaviors are defined mathematically.

Question 5

What is the function of economy?

Answer 5

f: input → decision/choice

Question 6

What is the major hypothesis to define “f” (fonction of economy)?

Answer 6

Rationality. Agents are assumed rational.

Question 7

What does a rational agent?

Answer 7

He always acts in his “best-interest” / according to his preferences.

Question 8

What is “best-interest”?

Answer 8

Each agent has some well defined preferences (tastes, needs, whims, desires…)

Question 9

What is “preference”? as a definition

Answer 9

Measure of attractiveness of goods, situations… It is individual tastes and as given.

Question 10

What is “preference”? mathematically

Answer 10

Ranking all the options in the set of options S.

Question 11

How do you model a preference?

Answer 11

It is a relation: x≻y. R={(x,y)⎪xRy} (R =relation) This agent prefers x to y. So, he will choose x.

Question 12

What are the 3 assumptions on preference?

Answer 12

1) x⊁x
2) x≻y => y⊁x
3) transitivity: x≻y, y≻z => x≻z

Question 13

When is the “choice function” well defined?

Answer 13

If the 3 assumptions are true (preferences are consistent) and if people is rational. The choice function is well defined.

Question 14

How do you write the “choice function”?

Answer 14

c:S →2ˢ = {set of all subsets of S} X⟼c(X) = {x∈X⎥∄y≻x}

Question 15

How do you write a “weak preference”?

Answer 15

x≿y x is preferred or equivalent to y.

Question 16

How do you write an “indifference”?

Answer 16

x∼y

Question 17

What are the conditions for indifference?

Answer 17

x∼y if and only if: 1) a≿b 2) b≿a Indifference is different from an indecision.

Question 18

What is “completeness”?

Answer 18

∀ (x,y)∈S, x≿y ∨ y≿x The hard choice doesn’t really exists. It is the fact that the agent didn’t make up his mind.

Question 19

How do you write a “bundle”?

Answer 19

{qx, qy…} q: quantity I want to buy.

Question 20

How do you describe a bettering graph?

Answer 20

{(q’x, q’y)⎪(q’x, q’y) ≻ (1,1)}

Question 21

What is monotonicity?

Answer 21

if: qx>q’x ∧ qy ≥ q’y => (qx, qy) ≻ (q’x, q’y) More is better.

Question 22

What is convexity of preferences?

Answer 22

If (x,y)∈X, any point in the middle belongs to X.

Question 23

How is written the “graph of preferences”?

Answer 23

{(qx, qy)⎪(qx, qy)≻(1, 1)}

Question 24

How are written the “dominated bundles”?

Answer 24

{(qx, qy)⎪(1, 1) ≻ (qx, qy)}

Question 25

How is written the indifference curve?

Answer 25

{(qx, qy)⎪(qx, qy) ∼ (1, 1)}

Question 26

What is the "utility function"?

Answer 26

For any preference over S, you can find some function "u" such that ∀(x,y) ∈S, x\>y \< = \> u(x) \> u(y)

Question 27

Why do people prefer bundles?

Answer 27

People prefer mixed bundles because they prefer diversity.

Question 28

How is represented the bettering graph?

Answer 28

Question 29

What is a "partial equilibrium"?

Answer 29

My consumption on a simple market.

Question 30

What are the 3 characteristics to define a good or a commodity?

Answer 30

Physical characteristics Location Time

Question 31

What is a "bundle of goods"?

Answer 31

List of everything I wanna buy with the quantities.

Question 32

What is a "bundle of goods" mathematically?

Answer 32

It is a vector (q₁, q₂...q_n)

Question 33

What are the 3 axioms for épreferences"?

Answer 33

Preference relation is completed, a consiummer can always order 2 bundles Transitivity Monotonicity: I prefer when I have more.

Question 34

Why is an indifference curve always decreasing?

Answer 34

Because of monotonicity.

Question 35

What kind of bundles do you prefer?

Answer 35

Mixed bundles are prefered.

Question 36

Can an indifference curve be crossed? Why?

Answer 36

NO! It violates monotonicity and transitivity.

Question 37

Why are the curve always bent in the same shape?

Answer 37

Because of convexity.

Question 38

What is the decreasing marginal utility line?

Answer 38

Line on which the choice is equivalent for the consummer.

Question 39

What are the 2 extreme indifference curves?

Answer 39

Straight lines: 2 groups are exact substitutes, the only matter is quantity. "L": perfect complements: both goods need to be consumed exactely in the same quantity.

Question 40

What does tell us an increasing curve?

Answer 40

It tells us that a good is, in fact, a bad (you don't want to buy it).

Question 41

What is the equivalent of the "utility function"?

Answer 41

It is an alternative representation of a consumer preferences.

Question 42

What does represent the "utility function"?

Answer 42

It reprensents the degree of satisfaction of an agent.

Question 43

What is the interest of the values of this function?

Answer 43

You can compare values but they have no meaning by themselves.

Question 44

What are the properties of the "utility function"?

Answer 44

Preferences are monotonic Concavitiy Quasi-concavity:

Question 45

What does measure the "marginal utility"?

Answer 45

It measures how much the degree of satisfaction will increase / decrease when one more good is given.

Question 46

What is the marginal rate of substitution? And what is its formula?

Answer 46

It tells us the amount of good 2 a consumer is ready to give up in order to get one more good 1. If it is low, I care a lot of good 2. If it is high, I care a lot of good 1. MRS₁₂(q) = (MU₁(q))/(MU₂(q)) MRS₁₂(q) = q₂/q₁ MRS₁₂(q) = p₁/p₂

Question 47

What is the equation for the linear budget constrain?

Answer 47

ⁿΣ_i=1(p_iq_i) ≤ x I maximize the utility staying under the line given by this inequality.

Question 48

What is the consumer optimization?

Answer 48

Studying together: budget sets and preferences

Question 49

What is the best optimization of the budget set?

Answer 49

The point that crosses budget line and utility function: q'. The slope of the busget set is the slope of the utility function.

Question 50

At the tangent point, what is the slope value?

Answer 50

slope = p₁/p₂ = MRS

Question 51

What is MRS ≠ p₁/p₂? MRS \> p₁/p₂ MRS \< p₁/p₂

Answer 51

I go to the market to exchange. \> : I exchange good 2 for good 1 \< : I exchange good 1 for good 2.

Question 52

What are the 2 equations to find the "Marshallian demand function"?

Answer 52

MU₁/MU₂= p₁/p₂ p₁q₁+p₂q₂ = x

Question 53

What is the Lagrangian function of utility?

Answer 53

L = u(q) + λ(x-pq) λ: marginal utility of the income or wealth

Question 54

Do we really observe preferences directly?

Answer 54

No, we observe choices.

Question 55

Which parameters do give the choice?

Answer 55

Different levels of prices p₁, p₂. Different income level x.

Question 56

WHat is a revealed preference relation?

Answer 56

If at some budget set B, two bundles are affordable and the consumer chooses q over q', q is said to be revealed preferred to q'.

Question 57

How do you write a "revealed preference relation"?

Answer 57

qRPq'

Question 58

What are the 2 axioms for the revealed preference?

Answer 58

Strong: the relation is asymmetric: qRPq' so q'RPq is not possible. q is chosen under B and q' is chosen under B'. Weak: the relation is acyclic: q₁RPq₂, ... q_n-1RPq_n, q_nRPq₁ is impossible.

Question 59

What does mean that a a consumer chooses a bundle which maximzes his utility under his budget set?

Answer 59

At this bundle, the MRS between 2 good is equal to the price ratio.

Question 60

WHen are choices rational?

Answer 60

When they satisfy the strong (or weak) axiom of revealted preferences.