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Microeconomics 2 > Mid-Semester Exam > Flashcards

Mid-Semester Exam Flashcards

(72 cards)

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1
Q

What is the Budget Constraint?

A

captures the fact that consumers face limited resources and are constrained by their Budgets

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2
Q

What is the Equation of the Budget Line?

A

Y I/py - px/py*x

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3
Q

What is the slope of the Budget Line

A

Px / Py

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4
Q

What happens when income increases?

A

When Income increases (decreases), the Budget line shifts out (in) and consumers purchase more (less) of both goods, assuming normal goods

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5
Q

What happens to the Budget Line when relative price changes?

A

The line pivots around the fixed price

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6
Q

What are the 3 assumptions we make about preferences?

A

1) complete
2) transitive
3) monotonicity

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7
Q

What does completeness mean?

A

consumers know the relative preferences between any two products and the extend to which one is preferred

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8
Q

What does transitivity mean?

A

if A is preferred to B and B is preferred to C, then A is also preferred to C

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9
Q

What does monotonicity mean?

A

more is preferred to less

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10
Q

Are utility functions unique?

A

No

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11
Q

What is an indifference curve?

A

.Indifference Curves show combination of goods and services which provide the same level of utility

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12
Q

Where is the optimal consumption point?

A

Consumer where Indifference Curve and the Budget Line are tangent.
Marginal Rate of Substitution = Relative Prices (x / y)

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13
Q

Where do you move with the substitution effect

A

Along same indifference curve towards relatively cheaper good

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14
Q

Where do you move with the income effect

A

Move line out with the same slope as the new curve. Move to higher (lower) indifference curve

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15
Q

For what type of good do the income and substitution effects move in the same direction>

A

normal

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16
Q

For what type of good do the income and substitution effects move in opposite directions>

A

inferior, giifen

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17
Q

For what type of goods does the substitution effect dominate?

A

normal, inferior

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18
Q

For what type of goods does the income effect dominate?

A

Giiffen

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19
Q

If the demand function is in the form min(), what type is it?

A

Perfect complements

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20
Q

If the demand function is in the form ax + by what type is it?

A

Perfect substitutes

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21
Q

If the demand function is in the form X^a Y^b, what type is it?

A

Middle case

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22
Q

What is consumer surplus?

A

max the consumer is willing to pay – amount paid

Corresponds to the are between the Demand Curve and Price

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23
Q

Where does consumer surplus come from>

A

Under the assumption of a single constant price, consumers cheese marginal value = price on the last unit consumed. However, since the price is constant and they value the preceding units more than the last unit. The cost of these is less than the value of the consumer, resulting in a consumer surplus

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24
Q

What is elasticity?

A

Elasticity is a unit-free way of measuring the responsiveness of demand to price

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25
What is the formula for elasticity
Elasticity=Elasticity= (%∆ outcome)/(%∆ cause) =((Q_(new / Q_(old ) ) ) - 1 )/((P_(new /P_(old ) ) ) - 1 =change q/ change p x p/q
26
What does an elasticity of
elastic
27
What does an elasticity of =-1 (1) mean?
Unit elastic
28
What does an elasticity of >-1 (<1) mean?
inelastic
29
Which part of the curve is more elastic
left | A straight-line demand curve is elastic in its upper portion and inelastic in its lower portion.
30
What is uncertainty?
Difference between objective probability (relative frequency of events) and perceived probability
31
What is risk aversion?
Tendency of people to refuse fair gambles (where the expected value = 0).
32
Why does risk aversion occur?
Related to diminishing marginal utility of income. That is, the utility from the same amount of addition income falls as the base income increases.
33
What does a risk averse curve look like
flattens out (square root or log)
34
What does a risk loving curve look like
gets steeper (x^2 or exponential curve)
35
What does a risk neutral curve look like
linear
36
What is the marginal rate of substitution?
The rate at which an individual is willing to reduce consumption of one good when he or she gets one more unit of another good. The negative of the slope of an indifference curve.
37
What is an indifference curve map?
A contour map that shows the utility an individual | obtains from all possible consumption options.
38
What is a normal good?
A good that is bought in greater quantities as | income increases
39
What is an inferior good?
Consumption decreases as income rises
40
What is a giffen good?
Consumption increases with price
41
What is the substitution effect?
The part of the change in quantity demanded that is | caused by substitution of one good for another. A movement along an indifference curve.
42
What is the income effect?
The part of the change in quantity demanded that is caused by a change in real income. A movement to a new indifference curve
43
What is the elasticity of a hyperbolic demand curve?
-1
44
What is probability?
The relative frequency with which an event | occurs.
45
What is a firm?
Any organisation that turns inputs into outputs.
46
What is the production function?
The mathematical relationship between | inputs and outputs.
47
What is the marginal product?
The additional output that can be produced by adding one more unit of a particular input while holding all other inputs constant. slope of the total product curve
48
What is an isoquant?
A curve that shows the various combinations of inputs that will produce the same amount of output. Drawn with each output as the x and y axis
49
What does the slop of an isoquant show?
rate at which X can be substituted for Y while keeping output constant The negative of this slope is called the (marginal) rate of technical substitution (RTS).
50
What is the rate of substitution
The amount by which one input can be reduced when one more unit of another input is added while holding output constant. The negative of the slope of an isoquant = change in y / change in x or MPx / MPk
51
What is returns to scale?
The rate at which output increases in response to | proportional increases in all inputs.
52
What is a fixed proportions production function
A production function in which the inputs must be | used in a fixed ratio to one another. Firm version of perfect complements
53
What is technical progress?
A shift in the production function that allows a given output level to be produced using fewer inputs
54
What is the opportunity cost?
Cost of the best alternative forgone
55
What is a firm's expansion path?
The set of cost-minimising input combinations a firm will choose to produce various levels of output (when the prices of inputs are held constant). Shown on graph with capital and labour on axis and isocost curves
56
What shape is the TC curve with constant returns to scale (quantity against cost on axis)
linear
57
What shape is the TC curve with decreasing returns to scale (quantity against cost on axis)
Slopes up at end (shallow half u)
58
What shape is the TC curve with increasing returns to scale (quantity against cost on axis)
Flattens out
59
What shape is the TC curve with optimal scale (quantity against cost on axis)
Kind of s shaped starts increasing then decreasing
60
What is the average cost
TC / q
61
What shape are the AC and MC curve with constant returns to scale (quantity against cost on axis)
horizontal line
62
What shape are the AC and MC curve with decreasing returns to scale (quantity against cost on axis)
Increase over time, MC above AC
63
What shape are the AC and MC curve with increasing returns to scale (quantity against cost on axis)
Slope downwards, AC above MC
64
What shape are the AC and MC curve with optimal returns to scale (quantity against cost on axis)
U shaped, MC left of AC and goes deeper, cross at optimal point
65
What is the short run?
The period of time in which a firm must consider some inputs to be fixed in making its decisions.
66
What is the long run
All inputs variable
67
What are fixed costs?
Costs associated with inputs that are fixed in | the short run. Have to pay regardless of output
68
Why do short run cost increase rapidly
Short-run costs increase rapidly as output expands because the inputs that can be increased experience diminishing marginal productivities (one input is fixed)
69
What is profit maximised?
MR = MC
70
How is MR related to elasticity?
MR = P (1 + 1 / elasticity of q, p)
71
What is the Marginal Revenue Curve?
A curve showing the relation between the quantity a firm sells and the revenue yielded by the last unit sold. Derived from the demand curve (demand curve is average revenue curve)
72
Where does the MR curve sit?
Below the Demand Curve, if the demand curve is linear, it is twice as steep as demand

Microeconomics 2 (2 decks)

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