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Flashcards in Midterm Review Deck (107)
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1

What does it mean if a consumer weakly prefers a bundle?

She either prefers the bundle or is indifferent to it. 

2

What does it mean if a consumer is indifferent between two bundles?

The consumer would be just as satisfied, according to her own preferenecs, consuming the bundle (x1, x2) as the bundle (y1, y2)

3

What does it mean that a consumer strictly prefers a bundle?

He definitely wants the x-bundle rather than the y-bundle. 

4

What is the symbol for strictly preferred bundles?

This is the symbol for these bundles.

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5

What is the symbol for weakly preferred bundles?

This is the symbol for these bundles.

6

What does it mean that consumer preference is complete?

We assume that any two bundles can be compared.  Either one is weakly preferred to the other, or vice versa.

7

What does it mean that consumer preference is reflexive?

We assume that any bundle is at least as good as itself; that is, an x-bundle is weakly preferred to itself. 

8

What does it mean that consumer preference is transitive?

If an x-bundle is preferred to y-bundle, and the y-bundle is preferred to a z-bundle, then the x-bundle is preferred to the z-bundle also.

9

What does monotonicity imply?

This assumption implies that more is better. It also implies the slope is negative.

10

What preferences does a convex set imply?

This type of set implies that averages are preferred to extremes.

11

What does strict convexity mean?

This means that the weighted average of two indifferent bundles is strictly preferred to the two extreme bundles. That is, the indifference curves are rounded: there are no flat spots. 

12

What is the slope of the indifference curve?

This slope is the marginal rate of substitution (MRS). 

13

What two properties do well-behaved preferences have?

  • monotonic
  • convex

14

What can the MRS be interpreted as? The consumer is willing to: 

It measures how much the consumer is willing to give up of good 2 to acquire more of good 1.

15

What is a monotonic transformation?

This is a way of transforming one set of numbers into another set of numbers in a way that preserves the order of the numbers.

16

What are some examples of monotonic transformations?

  • multiplication by a positive number
  • adding any number
  • raising u to an odd power

17

What is the utility function for perfect substitutes?

u(x1, x2) = ax1 + bx2, where a and b are positive numbers that measure the "value" of goods to the consumer.

18

What is the utility function for perfect complements?

u(x1,x2) = min{ax1,bx2} , where a and b are positive numbers that indicate the proportions in which the goods are consumed.

19

What is the utility function for quasilinear preferences? Why called quasilinear?

u(x1,x2) = k = v(x1) + x2.  

It is quasilinear because it is linear for x2 (good 2), and possibly non-linear for good 1. 

20

What is the utility function for Cobb-Douglas?

u(x1,x2) = (x1)^c(x2)^d , where c and d are positive numbers that describe the preferences of the consumer. 

21

What is a boundary optimum?

An optimal bundle that does not have a tangent because it is on an axis.

22

Is tangency a necessary or sufficient condition for optimality?

Only necessary.  Imagine wavy-line indifference curves: you can have two curves with tangents to the same budget line – and one is clearly less optimal. 

23

True or False: The Cobb-Douglas consumer always spends a fixed fraction of his income on each good.

True. The size of the fraction is determined by the exponent in the Cobb-Douglas fraction.

24

What is the optimal demand for good 1 for a Cobb-Douglas consumer?

x1 = c/(c+d) * (m/p1), or, in the HW terminology, a(m/p1).

25

What is the optimal demand for good 2 for a Cobb-Douglas consumer?

x2 = d/(c+d)*(m/p2) , or (1-a)(m/p2) in other terminology.

26

What is a quantity tax?

This is a tax on the amount consumed of a good; for example, a gasoline tax of 15¢.  

27

What is an income tax?

Just a tax on income. 

28

What is comparative statics?

  • Comparative = before and after the change in the economic environment
  • Statics = not dynamic; we are not concerned with any adjustment process. 

29

What is a normal good?

The quantity demanded always changes the same way income changes.  That is ∆x1/∆m > 0.

30

What is the income offer curve?

This curve illustrates the bundles of goods that are demanded at the different levels of income. That is, it goes through the optimal bundle at each budget constraint: the axes are still x1, x2.