PART A

Question 1

Completeness

Answer 1

A consumer either prefers one of the bundles to the other, or is indifferent between the two bundles

Question 2

Transitivity

Answer 2

If consumer prefers bundle A to B, and prefers B to C, then consumer should prefer bundle A to C. Similarly if indifferent

Question 3

Monotonicity

Answer 3

Any marginal increase in the quantity of a good generates an increase in a consumer’s utility.
More is better!

Question 4

Indifference Curve

Answer 4

Represents different levels of utility a consumer derives from consuming different combinations of goods.

Question 5

Budget Constraint

Answer 5

Possible combinations of two goods that can be purchased given a specific budget

Question 6

MRS

Answer 6

Gradient of IC. Maximum amount of one good the consumer would be willing to sacrifice in order to obtain one more unit of another good.

MRS = -MUx/MUy

Question 7

MRT

Answer 7

Gradient of BC. The amount of one good that must be forgone to produce an additional unit of another good while keeping the overall level of production constant.

MRT = -Px/Py

Question 8

MRTP

Answer 8

Rate at which individuals value present consumption compared to future consumption. It represents the trade-off between consuming resources now versus saving or investing them for future consumption.

Gradient of IC between C1 and C2 as axis

Question 9

MRTS

Answer 9

rate at which one input can be substituted for another in the production process while keeping the level of output constant. MPL/MPK

Gradient of Isoquant with Labour (Y axis) and Capital on axis

Question 10

Interior Solution

Answer 10

Interior solutions exhibit optimal quantities that are positive for both goods,

At such a point, notice the following condition holds because the slope of the IC equals the slope of the BC.

Question 11

Corner Solution

Answer 11

Sometimes, an interior solution may not exist because there is no possible point where MRS=MRT

Highest IC the consumer can reach where the optimal quantity of one of the goods is zero. This will occur when the MRS is greater or less than the MRT.

Question 12

Utility possibilities frontier

Answer 12

Shows combinations of consumer A and B utility that correspond to contract curve. For a certain level of persons A utility what is the max utility B can have

Question 13

Normal good

Answer 13

∂𝑞Y/∂M > 0

Question 14

Inferior good

Answer 14

∂𝑞Y/∂M < 0

Question 15

Substitutes

Answer 15

𝜕𝑞X /𝜕𝑝𝑌 > 0

Question 16

Complements

Answer 16

𝜕𝑞𝑋 /𝜕𝑝𝑌< 0

Question 17

Independent goods

Answer 17

𝜕𝑞𝑋 /𝜕𝑝𝑌= 0

Question 18

Ordinary good

Answer 18

𝜕𝑞𝑌 /𝜕𝑝𝑌< 0

Question 19

Giffen good

Answer 19

𝜕𝑞𝑌 /𝜕𝑝𝑌> 0

Question 20

Income elasticity

Answer 20

% change in qy/ % change in M

Question 21

Cross price elasticity

Answer 21

% change in qx / % change in px

Question 22

Substitution effect

Answer 22

The change in demand, holding the other price and utility constant. Purely the impact of a change in relative prices.

Question 23

Income effect

Answer 23

The change in demand resulting from the change in real income or purchasing power.

Question 24

Slutsky equation

Answer 24

ε = ε*-ηθ

Total Price Elasticity = Substitution price elasticity -income elasticity x budget share of good

Question 25

Compensating variation

Answer 25

Change in income that the consumer would need to restore his original utility.

Question 26

Equivalent variation

Answer 26

Change in income that would provide an equivalent change to the consumer’s utility.

Question 27

Choice overload

Answer 27

Individuals are presented with too many options, making it difficult for them to make a decision. People may feel overwhelmed, experience decision fatigue, and struggle to make a confident and satisfying decision.

Question 28

Loss averse

Answer 28

People strongly prefer avoiding losses over acquiring equivalent gains

Question 29

Risk averse (diagram)

Answer 29

Choose expected value over taking the gamble

Question 30

Laffer curve

Answer 30

There is an optimal tax rate that maximizes government revenue, beyond which further increases in tax rates can actually lead to a decrease in revenue.

Question 31

Isoquants

Answer 31

Possible combinations of factors (labour and capital) that, when used efficiently, generate a given level of output. Returns to labour and capital diminishing (convex). How much extra labour required to give up 1 unit of capital. This increases the more labour/less capital you have

Question 32

Isocost

Answer 32

Possible combinations of inputs that constitute a given total cost, C . For a wage rate, w, and capital rental rate, r, an isocost line, can be described by C = wL + rK.

Question 33

Shutdown rules (diagram)

Answer 33

Shutdown Rule (in the LR) In the LR, firms do not need to incur any fixed capital costs. Shutdown if profits are negative, if revenues are less than total costs: pq < C(q) .... or if we divide by q: p < AC(q) Shutdown Rules (in the SR) In the SR however, the firm has to pay its fixed capital costs, F, regardless of its output choice. Shut down if pq < VC(q) or if we divide by q: p < AVC(q)

Question 34

Price floor

Answer 34

Government-imposed minimum price set above the equilibrium price in a market. It is a form of price control that aims to ensure that the price of a good or service does not fall below a certain level. The intention behind implementing a price floor is typically to protect producers or workers in industries where the market price may be considered too low to sustain their livelihoods or operations.

Question 35

Price ceiling

Answer 35

Government-imposed maximum price set below the equilibrium price in a market. It is a form of price control that aims to limit the price that can be charged for a particular good or service. The intention behind implementing a price ceiling is typically to protect consumers from high prices or to ensure affordability in essential goods or services.

Question 36

Lerner index

Answer 36

The Lerner Index is an index of firm market power. It is also another way to examine how elasticity affects a monopoly’s price relative to its MC. * Competitive firms have a Lerner Index of 0. * The Lerner Index gets closer to 1as a firm has more market power (p-MC)/p = -1/e

Question 37

Ad valorem tax

Answer 37

% of the item's value.

Question 38

Specific tax

Answer 38

fixed value based on quantity

Question 39

Tax incidence

Answer 39

Distribution of the burden of a tax between buyers and sellers in a market. It examines who bears the actual economic burden of a tax, whether it is the consumers (buyers), producers (sellers), or both.

Question 40

Natural Monopoly (diagram)

Answer 40

A single firm can produce and supply a good or service more efficiently and at a lower cost than multiple competing firms. It arises when economies of scale are so significant that they create a high barrier to entry, making it economically impractical for other firms to enter the market and compete effectively.

Question 41

Perfect PD

Answer 41

Under perfect price discrimination, the firm charges each consumer a price that is exactly equal to the maximum he/she is willing to pay. 0 CS

Question 42

Multimarket PD

Answer 42

Firms divide potential customers into two or more groups (based on some easily observable characteristic, demand elasticity matters) and set a different price for each group.

Question 43

Quantity PD

Answer 43

Price varies with quantity purchased, but each customer faces the same nonlinear pricing schedule.

Question 44

Block pricing

Answer 44

Pricing strategy used by companies to offer different price levels or tiers based on the quantity or volume of a product or service purchased. Under block pricing, the price per unit varies depending on the quantity or block of units purchased.

Question 45

2 part tariff

Answer 45

The firm charges a consumer a lump-sum fee for the right to purchase (first tariff) and a per unit fee for each unit actually purchased (second tariff).

Question 46

Nash Equilibrium

Question 47

Endowment point

Answer 47

Point where resources are initially allocated. From here they trade to a Pareto efficient point

Question 48

Risk Neutral

Answer 48

An individual or entity is indifferent or neutral towards risk. In other words, a risk-neutral individual assigns no additional value or cost to the uncertainty or variability associated with different outcomes. They make decisions solely based on the expected values of outcomes, without considering the level of risk involved.

Question 49

Market for Lemons (diagram)

Answer 49

The Market for 'Lemons' - refers to a situation in which the presence of information asymmetry between buyers and sellers leads to adverse selection and a deterioration of the quality of goods or services being traded in a market.

Question 50

Signalling

Answer 50

Refers to the strategic actions taken by one party to convey information to another party in order to influence their behavior or beliefs. It is a way for individuals or firms to communicate private information to others and overcome information asymmetry.

Question 51

Screening

Answer 51

A strategy used by one party to gather information about another party's characteristics or attributes that are not directly observable. It is a way to address information asymmetry by inducing the other party to reveal their private information.

Question 52

Pooling Equilibrium

Answer 52

When everything is sold together at same price

Question 53

Separating Equilibrium

Answer 53

Different goods sold at different prices

Question 54

Sunken Costs

Answer 54

Costs that have already been incurred and cannot be recovered

Question 55

Negative Externality

Answer 55

A negative externality is a concept in economics that refers to a cost or impact imposed on a third party who is not directly involved in a transaction or activity. It occurs when the production or consumption of a good or service causes spillover effects that result in harm or costs to individuals or society at large.

Question 56

Property rights

Answer 56

Legal and enforceable rights individuals or entities have over resources, assets, or properties. They define the ownership, control, and use of tangible and intangible assets and provide individuals with the ability to exclude others from using or benefiting from those assets without their permission.

Question 57

Public good

Answer 57

Good or service that is non-excludable and non-rivalrous in consumption, meaning that it is available to all individuals in a society and one person's consumption of the good does not diminish its availability for others. Typically provided by the government because they may not be adequately supplied by the market