Term-1 Flashcards Preview

Microeconomcs > Term-1 > Flashcards

Flashcards in Term-1 Deck (61):
1

What are the Axioms of Preference?

Completeness
Transitivity
Continuity
Monoticity
Convexity

2

Define Tranitivity

If A>B and B>C, A>C

3

Define Completeness

Can rank all bundles in order of preference

4

Define Monoticity

More is always preferred to less
Weak: B>C, B~C
Strong: B>C

5

Define Convexity

An average is preferred to extremities
Strong: Any point on line is preferred to points on curve
Weak: Can be indifferent also

6

Describe MRS for Normal IC and Perfect Compliments

Normal: Constantly declining
Perfect Comp: Vertical = Infinity, Horizontal=0

7

How would you prove MRS is decreasing?

Calculate MRS and differentiate

8

What happens if increasing income yields parallel budget lines?

If parallel, bundles have the same MRS
If not, due to X2 being inferior

9

What should XPED, PED and YED sum to?

0

10

What is the optimum point of consumption for perfect substitutes?

If P1/P2<=a/b:
X1=M/P1

If P1/P2>a/b:
X2=M/P2

11

Discuss Homoginity

The degree to which doubling inputs raises outputs:
If Degree 0, doubling incomes and prices will not change utility

12

How do you find homogeneity?

Add the powers, sum the elasticises

13

How do you calculate indirect utility?

Sum optimum values back into utility function

14

What is the income effect, substitution effect, and price effect

A-C is the Substitution Effect
A-B is the Price Effect
B-C is the income effect

15

What are the properties of Hicksian demand Functions?

Law of demand applies
The Goods are Net Substitutes
Homogeneous degree 0

16

What is the formula for income effect?

-dx1/dM*x1*

17

What is the formula for substitution effect?
What is it the slope of?

dx1h/dP1
Slope of hicksian demand function

18

What is the formula for the price effect?

Sub Effect + Income Effect

19

What is the Slutsky equation?

dx1*/dP1= dx1h/dP1 -
dx1/dM*x1*

20

When calculating income effect, how is X1 obtained?

An average of the values of X1 at A and C

21

Discuss the slutsky equation for normal goods

Negative price effect
Income effect positive ( but negative sign)
Negative Sub effect

22

Discuss the slutsky equation for inferiord goods

Price effect is Negative
Income is negative
Sub is negative
Sub > Income

23

Discuss the slutsky equitation for giffen goods

Price effect is positive
Income is Negative
Sub is Negative
Sub < Income

24

How will rising income be distributed?

BSX1*YED1 + BSX2*YED2 = 1

25

Discuss a subsidy

(P1−S)x1+P2x2=M If x1≤K
P1x+P2x2=M+sK If X1>K

If XK Slope = P1/P2

26

Discuss Free Provision

P2 x2=M If X1≤K
P1x1+P2x2=M+P1 K If X>K

If X

27

Discuss Bulk Discounts

(P1+c)X1+P2x2=M IF X1≤K
P1 x1+P2x2=M−cK if X>K

If X

28

Discuss BOFOF

Graph looks like staircase as every other good is free

29

Discuss labour leisure Choice?

Leisure: L
Work = 24-L
Income = (24-L)W

30

What does a labour supply curve look like for a normal good

If wage increases
Income Effect: More Leisure less work
Sub Effect: Less leisure, more work

If Income > Sub: Backwards Bending
If Sub>Income: Tends to Vertical

31

What does a labour supply curve look like for a inferior good

If Wages Increase:
Both Income and Sub say have less leisure and more work

Therefore always backwards bending

32

Discuss Consumption Savings

What you save today is tomorrows consumption:

M=C1 + C2/1+R

33

Discuss Weak Axiom of Revealed Preference

If Cons Chooses A in P1, we know A>B

Therefore, must always choose A if A and B affordable

34

What is the difference between exogenous and endogenous uncertainty

Exogenous: Not sensitive to your behaviour
Endogenous: You can influence the probabilities

35

What is a fair bet?

Where the expected return EY=0

36

How can you make an unfair bet fair?

Pay the loosing party money to play

37

Discuss the ST Petersburg Paradox?

Flipping a Coin,
EY=100, therefore opponent needs 100 to play
Need to reach round 7 to Profit

38

What are the measures of risk aversion?

Absolute: -U''(Y)/U'(Y)
Relative: -U''(Y)/U'(Y)*Y

39

What can you do when facing risk?

Nothing : U=EU
Avoid: EY = CE
Mitigate: Insurance

40

Provide an Overview of Insurance

Good Outcome =W
Bad Outcome = L
Insurance Cover = D
Premium Amount = γD

41

How do you work out the optimal insurance cover (D)?

MAXE=PB * U(YB) +PG * U(YG)
U(YB)=W-L-γD+D
U(YG)=W-γD
Diff and Set = 0
Solve to
U'YB/U'YG=(1-PB/PB)*(γ/1-γ)

42

What is the value of γ

As PC Eπ=γD−PBD=0
Therefore PB=γ

43

Discuss constant utility across all states?

Same amount of utiltiy regardless of good or bad

44

Create the Job Search Model

Salary distributed over a line
Old Wage W*

45

What is the probability of finding a w>W*

b-W*/B-a

46

What is the net expected W from a job search?

NETEW=(b−w*)/(b−a) X (b−w*)/2) + (1−(b−w*)/(b−a)w*−c

47

What should W* be to stop searching?

Set NETEW = W*, Solve for W*:

W*=b-ROOT(2(b-a)c

48

Discuss the lemon problem

As buyers cannot tell quality of car, will only pay low price, therefore only lemons come to market

49

Discuss the optional insurance problem

You only buy insurance if:
U(W−P)≥π(U+ (1−π)U(W)

Therefore: π=(U(W)−U(W−P))/((U(W)−U(W−L)) )

Only people with a risk higher than the critical probability will buy insurance, therefore average increases and market breaks down

50

What is screening?

Getting the informed party to reveal there information through varipus means

51

Why is first degree price discrimination not possible if markets are not separated?

High price will purchase at low price, thus gaining a discount

52

How would you price discriminate if markets are not separate?

Design different bundles, allow consumers to self select

53

Discuss the high bundle

A+B+C=200-DX
P=200-DX

54

Discuss the Low Bundle

Integrate: P-Z
Px-X^2/2

55

What is total profit?

14x−x^2/2+200−6x
To optimise, diff for X and solve

56

What other methods are available for discovering hidden information

Auction
Signalling: Adopting costly means to communicate information

57

Discuss moral hazard in the loan market

Initially high as banks will not reposes for small loans
Then falls as they repossess
Then rises, as even if banks do repossess, cannot find buyer for large assets

58

What are the two types of valuation?

Private Valuation - Each WTP is independent

Common Valuation - Also known as correlated, is linked in some way

59

What are the four types of private auctions?

Open Bid English - Open and accending
Open Bid Dutch - Open and decending
First price sealed - Pay highest
Second Price Sealed - Pay second highest

60

What are the similarities between auction types?

English and Second price are identical
Dutch and First are identical
Dutch is better for seller and efficency

61

What is the winners curse?

The winner of a auction often has to overestimate to win