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AAAA 20/20 2nd Year Micro > Up to Lecture 13 profit max > Flashcards

Up to Lecture 13 profit max Flashcards

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1
Q

What are the three axioms of consistent choice

A

Completeness
Reflexivity
Transitivity

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2
Q

Characteristics of well-behaved IC

A

Monotonicity
Convexity

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3
Q

What’s the slope of the IC also called

A

MRS

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4
Q

Formula and DEF of perfect substitutes

A

The consumer only cares about the total consumption
U=ax1 + bx2

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5
Q

Formula and DEF of perfect complements

A

Goods that are always consumed together
U = min(x1,x2)

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6
Q

What’s special about Quasi Linear Utility functions?

A

MRS doesn’t change as consumption of x2 increases

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7
Q

Cobb Douglas Utility function

A

U=(x1^a) (x2^b)

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8
Q

What’s the math. DEF of Marginal Utilities

A

MU1 = dU / dx1

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9
Q

What’s the connection of MRS to Marginal Utilities

A

MRS = -MU1 / MU2

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10
Q

What’s the tangency condition for optimal choice?

A

-p1 / p2 = MRS

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11
Q

How do you find the optimal choice of a Cobb Douglas Function?

A

-Find the MRS (Marginal Utilities)
-Set equal to the slope of the BC (-p1/p2) and solve for x2
-Put into the BC formula

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12
Q

What’s the Engel Curve

A

Plots m against x1, holding prices constant

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13
Q

What’s the formula for the Engel Curve

A

x1 = (c / c+d) (m / p1)

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14
Q

What are homothetic preferences

A

as income doubles - demand doubles

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15
Q

Do quasi-linear functions show homothetic preferences?

A

No - as income increases only one good increases

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16
Q

What can we test for with homothetic equations?

A

Normal or Inferior goods

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17
Q

What’s the mathematical definition of a normal good

A

dx1/dm > 0 as m increases, the demand x1 increases

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18
Q

What’s the mathematical definition of an inferior good

A

dx1/dm < 0 as m increases, the demand x1 decreases

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19
Q

If prices are changed and income is held constant, what can we test for

A

Ordinary, Giffen and Luxurious goods

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20
Q

What’s the mathematical definition of an ordinary good?

A

dx1/dp1 < 0 (Law of demand, as prices rises the demand falls)

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21
Q

What’s the mathematical definition of a Giffen good?

A

dx1/dp1 < 0 as the price increases, the demand increases

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22
Q

What can you tell me about Cross Price Effect?

A

We can test if goods are either substitutes or complements

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23
Q

What’s the mathematical definition of a substitute - using cross price effects

A

dx1/dp2 > 0

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24
Q

What’s the mathematical definition of a complement - using cross price effects

A

dx1/dp2 < 0

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25
What if the cross price effect is dx1/dx2 = 0
The goods are unrelated to eachother
26
What does the Slutsky equation do?
It separates the total change in x1 into a substitution effect and into the income effect
27
Define the substitution effect
Change in X1, holding PP constant
28
Define income effect
Change in X1, following an increase in PP
29
What's the adjusted income equation?
m' = m + (change in)p1x1
30
Walk through the steps of finding the income and substitution effect
1) Find the optimal consumption bundle pre price change 2)Find the new consumption bundle post price change 3)The difference is the total change in x1 4)Now find the adjusted income level 5)Using this aIncome and the new price find the pivoted consumption B 6) Difference between the pivoted bundle and initial bundle = SE 7) Total change - SE= IE
31
Which effect is always the opposite direction of the price change with nromal goods?
The substitution effect, (increase in price less demand)
32
For what kind of good is the income effect always postive?
For normal goods
33
For what kind of good is the income effect always negative?
For inferior goods
34
What's the relation between Se and IE in normal goods
they reinforce eachother
35
What's the relation between Se and IE in inferior goods
They oppose eachother
36
For which kind of good is there no SE?
For perfect complements
37
For which kind of good is there no IE?
For perfect substitutes
38
What's the FV budget line?
c2 = (1+r)m1 + m2 - (1+r)C1
39
What's the PV budget line?
c1 + c2/(1+r) = m1 + m2/(1+r)
40
What's the slope of the budget line in intertemporal choice?
-(1+r)
41
Condition for optimal choice in intertemporal choice problems
MU1/MU2 = MRS = -(1+r)
42
Math. DEF of a borrower
c1 > m1
43
Math. DEF of a lender
c1 < m1
44
DEF of the real interest rate
r - e.i (expected inflation)
45
What does directly revealed preferred mean?
X is chosen when Y was affordable and available. X is DRP to Y
46
What does Indirectly Revealed Preferred mean?
Transitivity If X > Y and Y > Z then X > Z
47
What's WARP
Weak axiom of revealed preferences If X > Y then Y > X WARP is necessary for consistent choices
48
What's SARP
Strong axiom of revealed preferences When transitivity is violated necessary and sufficient for consistent choices
49
What's the formula for profit?
π = pY - w1x1 - w2x2
50
What's special about the profit function in the SHORT RUN?
x2 is fixed
51
What's special about the profit function in a competitive market?
the firm only gets to choose x1
52
Breakdown of the profit function
Total Revenue - VC - FC
53
what's the FOC in the Short run
dY/ dX1 = pMP1 - w1 = 0
54
What's the optimal choice in the short run for profit max?
pMP1 = w1
55
What are w1 and w2 in profit maximisation?
Input prices
56
What's the long run optimal choice for profit max.?
pMP1 = w1 pMP2 = w2 since there's no fixed costs in the long run
57
Formula of the production function?
Y = f(x) Y = f(L,K)
58
What's an isoquant?
Different combinations of two inputs (x1,x2) or (L,K) that give the same output (Y).
59
What kinds of isoquants are there
Cobb Douglas Fixed Proportions Perfect Substitutes
60
What's the slope of the production called and what's the mathematical DEF
The rate of change of output as inputs change. Marginal Product, MPi = dY/dXi
61
Law of diminishing marginal product
dMPi/dXi
62
What's the math. DEF and name of the slope of the isoquants
Technical rate of substitution TRS = - MP1 / MP2
63
What are the different returns to scale
IRS - double input, more than double output CRS - double input, double output DRS - double input, less than double output
64

AAAA 20/20 2nd Year Micro (3 decks)

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