Microeconomics Revision

Question 1

What is the objective of consumer choice?

Answer 1

Maximise Utility between two goods, X and Y given the budget constraint M (= Px.x + Py.y)

Question 2

What are the assumptions of the indifference curve?

Answer 2

1. Non-satiation: more is better than less
2. Transitivity: ranking of goods (if x > y and y > z, then x > z)
3. MRS between X and Y declines

Question 3

Slope of Indifference Curve

Answer 3

MUx/MUy = dy/dx = MRS of XY

Question 4

If indifference curve cuts another, it violates

Answer 4

Transitivity assumption

Question 5

Budget Line formula (M)

Answer 5

M = Px . x + Py . y

Question 6

When is utility maximisation conditon reached?

Answer 6

When indifference curve is tangent to budget line at X0 and Y0 units
Basically when MUx/Px = MUy/Py

Question 7

What are the types of goods?

Answer 7

1. Perfect complements (can’t consume one good without the other, they rely on each other and must be consumed in FIXED PROPORTION)
2. Perfect substitutes (either good brings same utility)

Question 8

Indifference curve of perfect complements

Answer 8

L-shaped IC

Question 9

Indifference curve of perfect substitutes

Answer 9

Either steeper (consume more X), flatter (more Y), or same slope as budget line (placed precisely on budget line)

Question 10

Nature of goods

Answer 10

1. Normal Good
2. Inferior Good
3. Giffen Good

Question 11

Difference with inferior good and giffen good

Answer 11

Yes both are inferior and yes income effect is negative (< 0), but inferior good has |SE| > |IE| and giffen good has |IE| > |SE|

Question 12

Shape of demand curve for types of goods

Answer 12

1. Normal good: downward sloping
2. Inferior good: downward sloping (but steeper than normal good)
3. Giffen good: upward sloping

Question 13

Substitution effect

Answer 13

Measures effect of change in price on income (feel relatively richer/poorer than before) and change in quantities bought
e.g. if Px falls, feel richer bc same income can buy more X, hence will buy more X

Question 14

Income effect

Answer 14

Measures effect when we give back additional income to consumer

Question 15

Income effect sign in different types of goods

Answer 15

1. Normal Good: positive (> 0)
2. Inferior Good: negative (< 0)
3. Giffen Good: negative (< 0)

Question 16

Substitution effect sign in different types of goods

Answer 16

1. Normal Good: negative (< 0)
2. Inferior Good:
3. Giffen Good:

Question 17

What type of good has no substitution effect?

Answer 17

Perfect complements (only has income effect)
bc must consume both goods in FIXED PROPOTION, therefore CAN’T SUBSTITUTE X for Y even if Px changes => budget line shifts PARALLEL to former budget line, which is tangent to original indifference curve, and overall BL has the SAME TANGENCY with previous IC

Question 18

Labour Supply objective

Answer 18

Maximise Utility of Consumption (amount of goods we can buy) and Leisure (24 - Hours worked) -> graphically represented by indifference curve
subject to budget constraint = w x H + V (where w: wage and V: non-labor income)

Question 19

Assumption of leisure in labour supply

Answer 19

Nature of leisure is normal good

Question 20

Labour supply slope given values of income effect and substitution effect

Answer 20

Upward sloping: when income effect > substitution effect
Backward bending: when substitution effect > income effect

Question 21

Hours worked formula

Answer 21

H = 24 - leisure time

Question 22

Why can’t two goods be inferior?

Answer 22

Violates non-satiation
Relation: if income rises and P, X and Y are unchanged -> will consume less of both goods (bc both inferior la) -> can’t really increase X and Y consumption bc nature of goods are inferior -> excess budget (contradicts with the assumption that more is always better)

Question 23

Inverse function

Answer 23

Price = function of(Quantity)
P = f(Q)

Question 24

Quantity Demanded formula

Answer 24

a - b x P

Question 25

Quantity Supplied formula

Answer 25

c + d x P

Question 26

Market equilibrium

Answer 26

QD = QS
a - bP = c + dP
a - c = (b+d)P
P* = a - c / b + d
Substitute P* into QD or QS
Q* = a - b[a-c/b+d]
Q* = (a x d + b x c) / b + d

Question 27

Who reaps the burden of tax when demand is perfectly inelastic? What shape is the demand curve?

Answer 27

Fully on consumers
Vertically shaped ( | )

Question 28

Who reaps the burden of tax when demand is perfectly elastic? What shape is the demand curve?

Answer 28

Fully on sellers
Horizontally shaped (——–)

Question 29

What are the shapes of perfectly elastic and inelastic demand curves? Why are they like that?

Answer 29

1. Perfectly elastic: horizontal because buyers are not willing to pay for any price above P bar
2. Perfectly inelastic: vertical because buyers are willing to pay for any price on the P-axis (Y-axis)

Question 30

Market equilibrium when tax is imposed

Answer 30

Price of supply = Price of demand - tax
QD = a - b x Pd
QS = c + d(Pd - t)
a - bPd = c + d x (Pd - t)
Equilibrium price of demand (Pd)
= (a-c/b+d) + (d x t/b+d)
= (P+dt) / (b+d)
Equilibrium quantity of demand (Q*d)
= ((ad+bc)/(b+d)) - (b.d.t/b+d)
Price of Supply
= Pd - t
= (a-c/b+d) - (b.t/b+d)

Question 31

What market equilibriums graphically represent

Answer 31

Equilibrium price of demand: gap between supply curves shows TAX
Equilibrium quantity of demand: idk
Price of supply: burden of sellers