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Unit 3 Doing the best you can: Scarcity, wellbeing, and working hours Flashcards

(10 cards)

1
Q

Budget constraint

A

Px . x + Py . y = income

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2
Q

Price ratio

A

Px : Py
- number of good y you have to give up to get 1 more good x

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3
Q

MRS

A

amount of good Y consumer willing to give up to get 1 more of good x

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4
Q

Properties of consumer preferences (ICs)

A
  1. preferences are complete - otherwise couldn’t sketch the ICs
  2. Preferences are transitive - prefer A to B and B to C, then A preferred to C - why ICs can’t cross
  3. preferences are continuous - if x is preferred to y, then bundles close to x are preferred to bundles close to y - allows ICs to be smooth continuous functions
  4. Preferences are monotonic (more the better) - if B contains more of one good than A, w/o less of the other, B is preferred to A
  5. Preferences are convex (to origin) - MRS is high initially and falls as consumers earn more of good x
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5
Q

Difference between MRS and MRT

A
  • MRS is the tradeoff one is willing to make
  • MRT is the tradeoff someone is constrained to make
  • when MRS < MRT, more of x could be transformed into y
    when MRS > MRT, less of x could be transformed into y
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6
Q

Hicksian decomposition

A
  • separating the income and substitution effects due to a price change
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7
Q

Indifference curve for a useless good

A
  • horizontal line
  • moves upwards
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8
Q

IC for garbage goods

A
  • if we want the consumer to take more kitty litter, need to compensate her
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9
Q

IC for perfect substitutes

A
  • linear equations
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10
Q

IC for perfect complements

A
  • L shaped to reflect how consuming more of one good w/o the other doesn’t increase utility
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