Intermediate Microeconomics Ch 3-4

Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 90%. What must the jackpot be for this to be a fair bet?

$10

What determines the price elasticity of demand?

1) Number of close substitutes. 2) The more time people have to respond to a change in price, the more elastic demand will be. In the long term demand tends to be more elastic than in the short term.

Substitution Effect

A effect on consumption due to a change in price, holding that real income or utility are constant.

What is a Giffen Good?

A good that is in greater demand as its price increases. For example, if the price of an essential food staple, such as rice, rises it may mean that consumers have less money to buy more expensive foods, so they will actually be forced to buy more rice.

An increase in quantity demanded is represented by

A movement along the demand curve in a southeasterly direction in response to a decline in the good's price

A decrease in demand is represented by

A shift INWARD of the entire demand curve

Two goods, X and Y are called Substitutes if... A) An increase in PX causes more Y to be purchased B) An increase in PX causes less Y to be bought C) an increase in PY causes less X to be bought D) an increase in income causes more of both X and Y to be bought

A) An increase in PX causes more Y to be purchased

Income Effect

An effect on consumption due to a change in real income caused by a change in price

Suppose two goods coffee and creamer provided the consumer with utility but only if they are consumed in fixed proportions. An increase in the price of coffee will yield......(think income and substitution effects)

An income effect but no substitution effect

Suppose the "poor" and "rich" have identical demand functions for good X but only differ in income (I): Qx = 1000+ I - 50Px - 20Py At a given price of X, the price elasticity of their individual demand curves is such that: A) the rich person's demand is more elastic than the poor person's B) The poor person's demand is more elastic than the rich person's C) the poor person's demand is as elastic as the rich person's

B) The poor person's demand is more elastic than the rich person's

____________ is a measure of how responsive quantity demanded is to a change in the price of a related good: complements vs. substitutes.

Cross-Price Elasticity

The relationship between changes in income and purchase of a good indicates A) Whether the good is a luxury or necessity B) Whether the good is normal or inferior C) Whether the good is a compliment or substitute D) Both A and B

D) Both A and B

A change in factors other than price changes

DEMAND

Risk Aversion is best explained by

Decreasing Marginal Utility of Income

The price elasticity of demand for a linear demand curve follows the pattern (moving from high prices to low prices)

Elastic, Unit Elastic, Inelastic

the average outcome from an uncertain gamble.

Expected Value

_______ is a gamble with an expected value of zero.

Fair Gamble

If demand is elastic, a decrease in quantity will cause the total spending to

Fall

Suppose a person's utility is only a function of their consumptions of diet soda and they do not care which brand, Diet Coke (DC), Diet Pepsi (DP) they consume. Suppose further that if P of DC rises but it remains less than the P of DP then the consumption of DC

Falls from a positive to another positive amount

___________ is a measure of how responsive quantity demanded is to a change in income: normal vs. inferior.

Income Elasticity

With only two goods, if the income effect is in the opposite direction as the substitution effect but the substitution effect dominates then the good is...

Inferior but not Giffen

An Inferior Good

Is a good that you purchase at smaller quantities as income increases

Suppose there are two goods (X and Y). On a traditional graph of a budget line a tripling of all prices and income will

Leave the budget line unaltered

For a Complementary Good, if the price of Y increases the Demand Curve moves to the _______

Left

With moral hazard, fair insurance contracts are not viable because

Probabilities of loss are increased over what is expected

The relative frequency with which an event occurs.

Probability

A change in Price changes _________________

Quantity Demanded

For a Substitute Good, if the price of Y increases the Demand Curve moves to the _______

Right

People who choose not to participate in fair gambles are called

Risk Averse

Expected Value is defined as

The outcome that will occur on average for a given experiment

Elastic at prices above midpoint price: e is ___

e < -1

Unit Elastic at prices at midpoint price: e is ______

e = -1

Inelastic at prices below midpoint price: e is _____

e > -1

the degree to which a demand or supply is sensitive to changes in price or income

elasticity

A Normal Good

is a good that is purchased in greater quantities as income increases

If the price of all goods increase by the same proportion as income, the quantity demanded of Good X will

remain unchanged

If a good is Giffen and its price increases

the income effect will be positive and the substitution effect will be negative

If a good is inferior and its price increases

the income effect will be positive and the substitution effect will be negative