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