Intermediate Microeconomics Midterm 1

Corner solution

In a choice between two goods, consumer will consume only 1 good and give up other good to maximize satisfaction --> ALWAYS happens with perfect substitutes (they're substitutes!) --> Basically, consumer chooses good that has more MU per $ --> When MUx/Px > MUy/Px, get more marginal utility per $ from x than y! So choose x INSTEAD of y = CORNER SOLUTION, wow --> When MRS is not = Px/Py (when the goods are substitutes) -->Predictions about how much product consumers purchase in changing economy depends on slope of consumer's budget line, how much consumer prefers a certain product, etc.

Theory of the "Market Price" in a perfectly competitive vs. noncompetitive market

In a perfectly competitive market- no single buyer or firm can control prices, so market price will usually prevail due to invisible capitalist forces (ugh) In a market that's NOT perfectly competitive- firms CAN control prices, so they charge different prices for same product --> market price is average of all different prices

Cyclical industries (not on exam)

Industries in which sales magnify cyclical changes in GDP and national income (strongly affected by changing macroeconomic conditions) Basically industries in which sales = microcosm of macroeconomy ie- General Motors, General Electric

Market baskets/bundles

Just a point (food, clothing ) = (x,y) List with specific quantities of 1+ goods; assume consumer likes everything; question of what they PREFER ie- 3 boxes of shoes vs. 10 cans of beans; various food items in grocery cart; quantities of food/clothing/housing consumer buys each month ie- (9,2,5) --> 9 chocolates, 2 mints, 5 coffees) (9,2,5) vs. (9,2,7) = (9,2,7) wins but (9,2,5) vs. (9,2,7) vs. (8,6,7)--> depends on preference; (8,6,7) = tradeoff

Chapter 2 HW 4) Qd = 400 - 10P + 2i; Price = $20; Income (i) = $100 a) Calculate price elasticity of demand. b) Calculate income elasticity of demand. c) Use these elasticities to predict what would happen to Qd if price increased by 25%. d) Verify your answer in (c) by calculating Qd at the higher price. e) Use these elasticities to predict what would happen to Qd if income increased by 10%. f) Verify your answer in (e) by calculating Qd at the higher income level.

Just do this problem like the last problem, but hold i or p constant whenever trying to solve for the other variable! a) PED--> Qd1 = 400; P1 = 20; i = constant = 100 To find Qd2, set P2 = 0 (just another point on the curve)--> Qd2 = 600; P2 = 0 PED = [(600 - 400)/400]/[(0 - 20)/20]--> ***-0.5; inelastic; for every 1% increase in price, demand decreases by 0.5%*** b) IED--> i1 = 100; Qd1 = 400; P = constant = 20 To find i2, set Qd2 = 600 (just another point on the curve)--> i2 = 200; Qd2 = 600 IED = [(600-400)/400]/[(200-100)/100]--> ***0.5, inelastic; for every 1% increase in income, demand increases by 0.5%*** c) If price increases by 25%, what happens to Qd?--> 25% x PED--> 25% x -0.5% = ***Qd decreases by 12.5%*** d) P1 = $20; P after 25% increase = $25 i = constant = 100--> plug P = $25; i = 100--> Qd = 400 - 10(25) + 2(100) = ***350*** Qd1 = 400; -12.5% x 400 = 50--> 400 - 50 = 350! Verified bich! e) If income increases by 10%, what happens to Qd?--> 10% x IED--> 10% x 0.5% = ***Qd increases by 5%*** f) i1 = $100; i after 10% increase = $110 P = constant = 20--> plug P = 20; i = 110--> Qd = 400 - 10(20) + 2(110) = ***420*** Qd1 = 400; 5% x 400 = 20--> 400 + 20 = 420! Verified bich!!

What happens to MRS as we move down indifference curve? What is this called?

MRS falls as we move down indifference curve --> as more of good A consumed, expect consumer to give up fewer units of good B in pursuit of additional units of good A (they're getting tired of good A) Indifference curve = convex if MRS diminishes along curve Diminishing marginal rate of substitution- indifference curves usually convex (bowed inwards) --> Slope of curve becomes less negative as we move down curve

Perfectly competitive market vs. noncompetitive markets

Perfectly competitive market- many buyers/sellers, no single buyer/seller has significant impact on price ie- agricultural market Noncompetitive market- small number of producers that control large parts of a market, have power to impact price ie- US airline industry, world oil market (even though it has a lot of producers, it is noncompetitive because many powerful producers of oil act collectively as the OPEC cartel to drive oil prices up), social media

What is the slope of the budget line? Where does line go if price of a good increases vs. decreases? Where does the line go if income increases?

Pf/Pc = slope of budget line! (this is the external value) If person consumes good that has price change: -Price increase = person's purchasing power decreases = line swivels inwards -Price decrease = person's purchasing power increases = line swivels outwards --> If person doesn't consume the good with price change, line not changed If income increases, line shifts outward due to increased spending power!

Positive Analysis vs. Normative Analysis

Positive Analysis- describes relationships of cause and effect; based in fact; objective Normative Analysis- examining questions of what ought to be; based in opinion; subjective

Price ceiling vs. Price floor

Price ceiling- when prices = too high, gov't sets maximum price BELOW equilibrium; results in shortage (Qd > Qs) Price floor- when prices too low, gov't sets minimum price ABOVE equilibrium; results in surplus (Qd < Qs)

Equilibrium/market clearing price

Price where supply and demand curves intersect! Qd = Qs

What are capacity constraints?

Production constraints that companies face in the short run; can't keep up with Qd --> shortage Typically arise from lack of efficiency in manufacturing facilities and workers

PES = 1.3; price increases by 8%. What happens to Qs as a result?

Qs after change in price = PES x % change in price--> 1.3*8 = ***10.4% increase in Qs***

Supply curve

Relationship between quantity of a good that producers are willing to sell, and price of the good (higher the price, more firms are able/willing to produce and sell) Affected by production costs like: cost of labor, inputs, interest, future expectations, technology, etc. Expressed as Qs = Qs(P) Positive slope- as P increases, so does Qs

Demand curve

Relationship between the quantity of good that consumers are willing to buy and price of the good (we buy more if it's cheaper!) --> Negative slope- as price decreases, Qd decreases SHIFTED by: income; preferences; # buyers; future expectations; prices of related goods Expressed as Qd = Qd(P)

If the price elasticity of demand is -2 and the price increases by 3%, what happens to the Qd?

Since PED = % changes in Qd when price increases by 1%, if price increases by 3% = PED x 3% = -2 x 3% = -6%......OR The Qd DECREASES by 6%.

The price elasticity of demand for natural gas is negative −1.2​, and the price elasticity of supply for natural gas is 0.5. If the government imposes a ceiling price for natural gas that is 10% below the equilibrium​ price, what would happen to Qs and Qd? This would result in a ____________ , which is equal to ______% of the equilibrium quantity.

So the stats are: PED = -1.2 PES = 0.5 % change in price = -10 So Qd after change in price = PED x % change in price--> -1.2*-10 = ***12*** Qs after change in price = PES x % change in price--> 0.5*-10 = ***-5*** Qd > Qs--> shortage, find difference between the two--> Qd - Qs = 12 - (-5)--> ***so there would be a shortage = 17%***

Steep indifference curve vs. flatter indifference curve

Steep indifference curve = willing up give up a lot of y in exchange for a unit of x (slope = -large sacrifice of y/increase of x) Flatter indifference curve = unwilling to give up a lot of y in exchange for a unit of x (slope = -small unwilling sacrifice of y/increase of x)

Substitutes vs. complements

Substitutes- goods that are considered similar enough to be substitute one another --> Increase in PRICE of good A = increase in DEMAND of good B ie- increase in coffee price = increase in demand for tea; copper/aluminum; chicken/beef Complements- goods that are used together --> Increase in PRICE of good A = decrease in DEMAND of good B ie- decrease in gas price = increase in demand for cars; computer/software

Surplus vs. shortage

Surplus- quantity supplied > quantity demanded ie-supplier set price above equilibrium, lower demand, too many goods, to sell surplus supplier would decrease price, alas equilibrium Shortage- quantity supplied < quantity demanded ie- supplier set price below equilibrium, high demand, not enough goods, upward pressure on price as consumers outbid each other and producers increased price, alas equilibrium Basically, no matter what, price will eventually reach equilibrium

What is the theory of consumer behavior? What are its 3 factors?

Theory of consumer behavior- theory that we can model how consumers use their income for goods/services to maximize their well being through three factors: consumer choices, consumer preferences, and budget constraints 1) *Consumer Choices*- demand stems from consumer's preferences and income, result of rational decisions --> Assumptions: consumer choices results of educated decisions and preferences; leaves out impulse shopping, short sight, bad planning, ads, peer pressure, etc. --> This is why behavioral economics exists! 2) *Consumer Preferences*- aims to understand WHY consumers prefer certain goods > another, through graphs/math --> Assume preferences are fixed, hold all else constant to simplify 3) *Budget Constraints*- consumers have limited income; restricts how much they can buy; how do they maximize satisfaction within constraints of income?

Market mechanism theory

Theory that without government in a free markets, supply and demand will come into equilibrium to determine both market price of a good and total quantity produced .......sounds like late stage capitalism and blatant delusion to me.....but ok

Equal marginal principle

Utility is maximized when MU/$ is constant across ALL goods (MUx/Px = MUy/Py = MUz/Pz, etc.)

Completely INelastic demand

Vertical line, y = 0 Principle that consumers will buy fixed quantity of good, regardless of price; **completely irresponsive to price** Completely inelastic....it's self explanatory

Market Definition

What buyers, sellers and range of products are included in a particular market

When is satisfaction maximized?

When MRS = Pf/Pc, OR --> When the marginal rate of substitution (of food(x) for clothing(y)) = ratio of the prices (of food(x) for clothing(y)) --> Maximum satisfaction = adjust consumption of food and clothing so MRS = price ratio--> internal value = external value! --> Maximized when marginal benefit = marginal cost

Chapter 1 HW 2) Sketch the lines f(x) = 2x+4 and g(x) = 6x-1. a) Where do the 2 lines intersect? Label this point on your graph. b) Verify that the intersection point satisfies both formulas. c) Go to desmos.com and graph the lines. Verify that the lines cross at the intersection. Print/take a screen shot of your graph.

a) (5/4, 13/2), or (1.25,6.5) b) Simply plug x into both equations to verify the veracity of y! :----)

Chapter 3 HW: 6) Suppose prices and income are Pf = 8; Pc = 5; and i = 40. a) Write the formula for the budget line. b) Sketch the budget line. c) Label at least 4 market baskets on the budget line. d) What is the slope of the budget line?

a) 5C + 8F = 40 Find intercepts of F & C --> F = 5; C = 8--> (5,0); (0,8) c) Plug and chug, baby! --> (0,8); (5,0); (3.75,2); (2.5,4) d) Plug into m = (y2-y1)/(x2-x1) --> (0-8)/(5-0) = -8/5--> m = -1.6

What do the market baskets in class stand for? (oversimplified)

(food, clothing) food = x clothing = y

For elasticity, when they ask for a the PED or PES for (x,y), does (x,y) represent (old Q, old P) or (new Q, new P)?

(x,y) would = (old Q, old P) --> Given point always represents original value(s)! (given Qd = old Qd, etc.)

Which of the following would NOT cause demand for Coca Cola to shift? a) Price of Pepsi increases b) New study finds that drinking Coca Cola causes stomach cancer c) Cost of producing Coca Cola increases d) Coca Cola increases its advertising expenditures by 20%

c) Cost of producing Coca Cola increases --> Cost of producing Coca Cola affects SUPPLY curve (would shift SUPPLY curve left); does NOT affect demand. -->Increase of advertising expenditures WOULD shift demand because it affects consumers' opinions of Coca Cola--> ads they see

Which of the following is not a perfectly competitive market? a) The U.S. wheat market. b) The U.S. stock market. c) The world gold market. d) The world diamond market.

d) The world diamond market.

What is a partial derivative? What are the partial derivatives for xy^2? What are the partial derivatives for F and C, in the function U = 5FC?

A derivative of a function with 2+ variables; find derivative of 1 variable by holding other constant! ie- xy^2 --> MU/partial derivative of x = hold y constant; partial derivative of (x) = 1--> MUx = y^2 --> MU/partial derivative of y = hold x constant; partial derivative of (y^2) = 2y--> MUy = 2xy Partial derivative is the same as MU--> U = 5FC MUf = hold C constant; derivative of (F) = 1--> MUf = 5C MUc = hold F constant; derivative of (C) = 1--> MUc = 5F

It is often said that a good theory is one that can be refuted by an empirical, data-oriented study. Explain why a theory that cannot be evaluated empirically is not a good theory.

A theory that cannot be evaluated empirically is unreliable because of the human condition's innate bias, which affects all of our actions, whether conscious or unconscious. It is impossible to verify the veracity of a theory if it cannot be evaluated empirically; therefore, it is not even a theory but simply an opinion that cannot be systemically applied.

Steel and aluminum are substitutes. If price of steel increases, all else remaining constant, what would happen to price and quantity of aluminum?

Aluminum: P = increase Q = increase *This is due to demand shifting right as buyers purchase aluminum instead of the now more expensive steel- remember that only demand shifts, all else is constant!

Market

Any arrangement that allows buyers and sellers to exchange things

What is the assumption about level of competition when using the supply and demand model?

Assume that market is at least roughly competitive; meaning both sellers and buyers should have little market power to impact the price --> Must assume this to make theory of invisible hand viable when using these shoddy models

Pf goes down as quantity of food goes up: U = 3F + C MUf = 3 MUc = 1 i = 100 Pf = ? Pc = 1 Find the price of food.

BL--> xF + C = 100 MRS = MUf/MUc MRS = 3/1 Set MRS = to price ratio to find MU per $! 3/1 = Pf/1--> 3/Pf = 1/1

Extent of a market

Boundaries of a market- In both geography & product range [sold in market]

Arbitrage

Buying at low price in one location and selling at higher price in another **Possibility of arbitrage prevents prices from differing significantly in different locations- everyone buys in one location and sells for higher price at another location, all the prices eventually get driven up = KANT'S CATEGORICAL IMPERATIVE wow

Indifference curve

Curve representing all combos of market baskets that give consumer SAME level of satisfaction -->Always downward sloping Market baskets represented by points on curve --> If combo of market baskets A + B + C = same level of satisfaction as market baskets C + D + E, consumer is INDIFFERENT to both because they would provide same level of satisfaction

Macroeconomics

Economics dealing with aggregate economic variables, such as level and growth rate of national output, interest rates, unemployment, inflation

Microeconomics

Economics dealing with individual units-consumers, firms, workers, investors-and markets these units comprise

Behavioral economics

Economics dealing with models of consumer behavior that incorporate realistic assumptions about rationality, decision making--> draws heavily from psychology+ Most models we use are highly simplified; behavioral economics takes into account that people are stupid

What is elasticity?

Elasticity- % change in Variable 1, in response to 1% increase in Variable 2. Otw known as how sensitive x is to percent changes of y, expressed in %

Goods vs. bads (i'm serious lmao)

Goods- consumers want more of this (equality and tolerance; common sense gun control; movies with majority people of color lead actors; more books by tanehisi coates; free pdf textbooks; opportunities to grow intellectually...) Bads- consumers want less of this (police brutality; delusion of american dream; mass shootings as a result of complacency in the republican politicians bought and owned by the NRA; pollution and dissolution of environmental structures that keep earth habitable for the horrible/undeserving species that are humans...)

Indifference map

Graph containing set of indifference curves, shows market baskets that consumer is indifferent towards -->Because they provide SAME level of satisfaction Graphical representation of a consumer's tastes. Each curve reflects a different level of utility.

Infinitely elastic demand

Horizontal line; x = 0; y = specific price --> Qd drops to zero at a higher price but increases exponentially at lower price --> *Perfectly competitive firm (unable to influence price) faces this demand* Any higher price will cause the Qd (or x) = 0 Any lower price = Qd increases exponentially

Chapter 3 HW: 7) Jane's utility function is U = 4FC. The prices and Jane's income are: Pf = 5; Pc = 10; i = 50. The marginal utilities are MUf = 4C and MUc = 4F. a) Find Jane's utility maximizing market basket. b) How much utility does Jane get? c) Sketch Jane's budget line and her utility maximizing indifference curve and market basket.

*Find utility maximizing basket using the following steps:* i. Write down equation for budget line. ii. Write down equation for MRS. iii. Set MRS = price ratio and solve for C. (remember MU is just partial derivative of utility fxn- coefficent + other variable) iv. Plug into budget line to solve for F; now plug number back into equation for C to find number value for C. v. Write down the utility maximizing market basket. a) Utility maximizing bundle = when MRS = slope or budget line, or Pf/Pc--> MRS = MUf/MUc = 4C/4F; Pf/Pc = 5/10 4C/4F = 5/10--> 4C = 2F--> C = 1/2F To solve for F, plug C =1/2F into budget equation!--> 50 = 5F + 10C--> 50 = 5F + 10(1/2)(F) --> 50 = 5F + 5F--> F = 5! Now plug F = 5 into C = 1/2F--> C = 1/2(5)--> C = 2.5 --> (5, 2.5) is the utility maximizing bundle! b) To find utility, simply plug utility maximizing bundle into U = 4FC --> U = 4(5)(2.5)--> U = 50 c) Since U = 50--> 50 = 4FC; plug and chug to find other market bundles to make graph! --> (5, 2.5); (2.5, 5); (2, 6.25); (6.25, 2)

1) What is cross price elasticity of demand? 2) How do you calculate it? 3) How do you determine if demand is cross price elastic or not? 4) What happens to cross price elasticity of demand as we move up/down the demand curve?

1) % change in Qd of tea when price of coffee increases by 1% (they're substitutes!) 2) [(New Qd of tea-Old Qd of tea)/Old Qd of tea]/[(New price of coffee-Old price of coffee)/Old price of coffee] 3) (Dealing with magnitudes, so absolute value) Ecp > 1 = elastic, sensitive to price change in other good goods are *substitutes* (increase in price of coffee increases demand of tea); elastic Ecp < 1 = inelastic; insensitive to price change in other good If elasticity is negative, goods are *complements* (increase in price of tea decreases demand of honey) If elasticity is positive, goods are *substitutes* (increase in price of tea increases demand of honey)

1) What is income elasticity of demand? 2) How do you calculate it? 3) How do you determine if demand is income elastic or not?

1) % change of Qd when income increases by 1% 2) [(New Qd-Old Qd)/Old Qd]/[(New Income-Old Income)/Old Income] 3) Ei > 1 = income elastic, demand sensitive to changes in income Ei < 1 = income inelastic, demand INsensitive to changes in income

4 basic assumptions about consumer preference?

1) *Completeness*- preferences for market baskets assumed to be complete/absolute; no in between --> A > B or B > A or A = B...no in between! 2) *Transitivity*- if consumer prefers A to B, and prefers B to C, we can assume that consumer prefers A to C! (necessary for consumer consistency) 3) *More is better than less*- goods assumed to be desirable; consumers always prefer more of any good to less; consumers are never satiated -->Simplifies graphical analysis; ignore negatives like pollution to simplify and bc late stage capitalism/greed 4) *Typical MRS has diminishing returns*- MRS is diminishing where indifference curves are convex

3 main themes of Microeconomics- explain them!

1) *Markets*- collections of buyers/sellers that determines free market prices of goods (invisible hand and a healthy dash of delusion) 2) *Prices/Wages*- this is what all tradeoffs by consumers, firms, workers are based on! 1) *Tradeoffs*- sacrifices made for most satisfying choice, based on prices and scarcity --> Consumers- limited incomes; goods/services vs. saving --> Workers- 3 tradeoffs i) Enter work force or nah? (education vs. work, etc.) ii) Choice of work (small fish in corporation vs. big fish in small company?) iii) How many hours to work per week? (labor vs. leisure) --> Firms- limits in kinds of products they can produce, and resources available to produce such products.

Julio receives utility from consuming food and clothing as given by utility fxn U(F,C) = FC. In addition, price of food is $3 per unit; price of clothing is $9 per unit; Julio's weekly income is $50. 1) What is Julio's MRS of food for clothing when utility is maximized? 2) Suppose Julio is consuming bundle with more food and less clothing than his utility maximizing bundle. Would this MRS of food for clothing be more or less than your MRS from (1)? Why?

1) MRS when utility is maximized will = Pf/Pc--> MRS = 3/9 = 1/3 = 0.33 2) MRS = less than utility maximizing MRS of 0.33. --> More food = more x; less clothing = less y; IC = flatter --> This is bc new market bundle = to the right of the satisfaction maximizing bundle (more x = to the right)

1) Marginal rate of substitution (MRS)? 2) How do you calculate it? 3) When is utility maximized, in relation to MRS? 4) How do you find the MU per dollar? Why is this relevant?

1) Maximum amount of good consumer is willing to give up in order to obtain 1 additional unit of ANOTHER good (how much you value good in terms of another good) 2) MRS of x for y = how much y I'm willing to give up for x = -(change in y)/(change in x) = rise/run (- change in y = how much I give up of y) --> basically just the slope, MRS = 1/2 means that slope = -1/2; willing to give up 1 of y for 2 of x 3) When MUx/Px = MUy/Py or Px/Py = MUx/MUy = MRS (when internal value = market value) 4) MUx/Px = MUy/Py! Lets us know which good/service yields more satisfaction for $1 and therefore more worth it.

What are the requirements for indifference curve intersecting BL = utility maximizing bundle?

1) Must intersect at the vertex of the indifference curve 2) MUST be the only point where indifference curve and BL meet 3) The points have the same slope! (indifference curve is tangent to BL) --> Thus, Pf/Pc = MUf/MUc--> market value of good = internal valuation of good

1) What is price elasticity of demand? 2) How do you calculate it? 3) How do you determine if demand is price elastic or not? 4) What happens to price elasticity of demand as we move up/down the demand curve?

1) Price Elasticity of Demand- % change of quantity demanded when price of good increase by 1% Typically negative Magnitude = absolute value of Ep (magnitude of -2 = 2) 2) Epd = [(New QD-Old QD)/Old QD] / [(New Price-Old Price)/Old Price] 3) If magnitude of Epd > 1 = price elastic (close substitutes, customers CAN decide not to buy based on price) If magnitude of Epd < 1 = price inelastic (no close substitutes, customers can't decide not to buy based on price) 4) Epd decreases as we move down the demand curve! More elasticity at top because of higher prices (price changes in, say, a car are more impactful than compared to a coffee) and larger magnitude; smaller as we move down the curve.

1) What is price elasticity of supply? 2) How do you calculate it? 3) How do you determine if supply is price elastic or not? 4) What happens to price elasticity of supply as we move up/down the supply curve?

1) Price Elasticity of Supply- % change of quantity demanded when price of good increase by 1% Positive; higher price = more incentive for producers to increase output 2) PES or Eps = [(New Qs-Old Qs)/Old Qs] / [(New Price-Old Price)/Old Price] 3) If magnitude of... Eps > 1 = price elastic (Qs depends heavily on price) Eps < 1 = price inelastic (Qs doesn't really depend on price) 4) Eps increases as we move up the supply curve! --> Producers more responsive to changes in large prices vs. small prices ($1 to $2 vs. $100 to $200; both are 100% increases but which one is more impactful?); will produce more for price changes in large prices vs. small prices!

1) What two factors does the supply curve relate? 2) What is the law of supply?

1) Relates prices to quantities sold by sellers 2) When prices go up, quantity supplied by producers increases! (they are simply points on the line, does NOT shift the curve)

1) What is difference between short run and long run? 2) What is the demand for most goods in the short run vs. long run? 3) What is the demand for durable goods in the short run vs. long run? 4) What is the supply for most goods in the short run vs. long run? 5) What is the supply for durable goods in the short run vs. long run?

1) Short run- 1 year or less Long run- 1 year or more; enough time for consumers to adjust to price changes 2) *Demand for most goods* = less elastic in short run; more elastic in long run (takes more time for subs to come into mkt) 3) *Demand for durable goods* = more elastic in short run; less elastic in long run (going to need durable goods eventually) 4) *Supply for most goods* = completely inelastic in short run; more elastic in long run --> Completely inelastic due to capacity constraints 5) *Supply for durable/recyclable goods* = more elastic in short run; less elastic in long run --> ie- scrap metal, etc.

1) Graph the changes of a budget line when you get extra money that is only to be spent on food. (Clothing = y; food = x) 2) What happens to the slope? How do you calculate it? 3) What happens to the budget line for income increases/decreases?

1) Since you have extra food money, food or x-intercept will shift out; clothing or y-intercept will shift to the right --> PARALLEL MOVE TO THE RIGHT --> Same amt of clothing, but more food while affording same amount of clothing!! 2) Slope stays the same; Pf/Pc 3) When income increases- parallel shift to the right/outwards When income decreases- parallel shift to the left/inwards

For linear demand curve... 1) How does the slope behave? 2) How does the elasticity behave?

1) Slope stays constant on a LINEAR demand curve 2) Elasticity changes (Qd and Price are simply points on the curve; change at different points of the line--> more elastic @ higher prices)

1) How do you graph a satisfaction maximizing bundle that is outside the consumer's preferred quantity of a good, in relation to the budget line and IC? (this is not a trick question) 2) Suppose Jaya allocates her budget between 2 goods, x and y. Suppose y is taxed, causing price to increase by 20%. Now Jaya has to ration good y at a quantity less than her desired quantity. How would this affect her new budget line, compared to her original one? 3) Where do you graph the equilibrium consumption bundle in relation to the budget line, illustrating the consumer's maximum total satisfaction?

1) The point would be on the budget line, but ***outside the indifference curve*** (all points of indifference curve = satisfaction maximizing with preferred quantities 2) Her budget line would have a smaller y intercept (smaller quantity); x intercept would stay the same (line would swivel downward) 3) Where the indifference curve and budget line intersect and are tangent (have the same slope, aka MRS = Px/Py)- in budget, and also maximizing satisfaction/utility bc it's on the indifference curve! :D = maximum total satisfaction/utility

What are the 2 conditions the utility maximizing market basket must satisfy?

2 Conditions: 1) Must be located on the budget line- same concept as the PPF; cannot leave income unallocated for bc spending income would increase consumer's satisfaction --> *Assume that choice of whether or not to spend is NOW, and not for future* --> Where IC and BL meet- the ONLY point where they meet 2) Must give consumer MOST preferred combo of goods/services

Janet spends her entertainment budget on movies and basketball games. Movie tickets cost ​$9 each and basketball game tickets cost ​$15 each. If Janet saw one more movie​ (holding the number of basketball games​ constant), her total utility would increase by 28. On the other​ hand, if she attended one more basketball game​ (holding the number of movies​ constant), her utility would increase by 50. Should Janet consume more basketball games or movies to maximize her utility? Or is it already maximized?

MRS is maximized for utility when MUm/Pm = MUb/Pb = MUm = 28; MUb = 50; Pm = 9; Pb = 15 28/9 = 50/15 --> 3.11 < 3.33; basketball games yield more utility per $1, and is thus more valuable than movies--> Janet should attend more basketball games and see fewer movies. (not as he suan!)

Linda consumes only DVDs and books. At her current consumption bundle, her marginal utility from DVDs is 19; from books is 6. Each DVD costs $8; each book costs $2. Is she maximizing her utility? Explain. (MRS would be of books for DVDs) How should Linda increase her utility while keeping total expenditure constant?

MRS of books for DVDs = how many DVDs given up for books = how many DVDs given up for books Find MU per $ --> MUd/Pd vs. MUb/Pb --> 19/8 vs. 6/2--> 2.375 < 3--> books bring Linda more MU/$ than DVDs Linda should increase her utility while keeping total expenditure constant by increasing book consumption--> she gets more marginal utility/$ from consuming books!

Consumers in Cali pay twice as much for peaches as they do for avocados. However, peaches and avocados are same price in SC. If consumers in both states maximize utility, will the MRS of avocados for peaches be the same for consumers in both states?a If not, which will be higher?

MRS of x for y = -(change in y)/(change in x) --> MRS of avocados for peaches = -(change in peaches)/change in avocados --> SC willing to give up more peaches than Cali = higher MRS! Thus, MRS will be higher for SC than Cali. --> Cali = less willing to give up peaches for avocados, since peaches = twice as expensive --> SC = more willing to give up peaches for avocados, since the two fruits = same price

For U = 3F + C: What is the MUf? What is the MUc? What is MRS? What is the slope of the indifference curve? What can we tell from the utility function about the relationship between the goods?

MUf = 3+C MUc = 3F MRS = slope = 3, as one can tell from the equation Slope = -3; MRS is downward sloping (willing to give up 3 units for 1 unit of another good!) We can tell that the 2 goods = complements; there will be a corner solution!

Marginal benefit vs. marginal cost?

Marginal benefit- benefit from consumption of 1 more unit of good Marginal cost- cost of 1 more unit of good

Marginal utility vs. diminishing marginal utility How does it relate to MRS?

Marginal utility- additional satisfaction from consuming 1 additional unit of good Diminishing marginal utility- basically economic talk for TOLERANCE; as more is consumed, less satisfaction from each additional unit consumption (law of diminishing returns) --> MRS = -(change in clothing(y))/(change in food(x)) = MUf/MUc = price of food/price of clothing

Utility? Utility function?

Number representing level of satisfaction consumer gets from a market basket ie- (food, clothing) Like animal crossing.....LMAO Utility function = formula/equation giving utility, where you can find all the market baskets that give the same utility -->Level of satisfaction for market basket; would just plug in coordinates of market basket A to get utility of market basket A, etc. ie- U = 2FC; find utility for market basket (10,9) --> Plug! U = 2(10)(9)--> 180 = utility of market basket (10,9)!

Ordinal utility vs. cardinal utility (not on exam) Which will we focus on? Why?

Ordinal- orders utilities from most to least preferred -->Doesn't show HOW MUCH one is preferred over another, simplified, if Juan gives textbook utility = 5 and Maria gives textbook utility = 10, cannot say whether or not Maria = MORE happy than Juan for a textbook Cardinal- DESCRIBES how MUCH one market basket is preferred to another -->Does what ordinal utility does not Will be focusing on ordinal utility bc there is no way of actually knowing how much one market basket is preferred to another; using cardinal utility in economic theory is unfeasible

What is a perfect substitute? What is a perfect complement? What do the graphs for both look like? What are the slopes for both?

Perfect substitutes- 2 goods that are perfectly substitutable; MRS of one for other is constant --> Indifference curves = negative LINEAR --> Very willing to give up 1 good for another to achieve maximum utility! Always results in a *corner solution* Perfect complements- 2 goods that are always consumed together (PACKAGE DEAL!); MRS of horizontal = 0 (0/run); MRS of vertical = undefined (rise/0) --> Indifference curves = right angles facing the right --> Unwilling to give up 1 good for the other; they HAVE to be consumed together!

Chapter 3 HW: 2) Antonio buys five new college textbooks during his first year at school at a cost of $80 each. Used books cost only $50 each. When the bookstore announces that there will be a 10 percent increase in the price of new books and a 5 percent increase in the price of used books, Antonio's father offers him $40 extra. a) What happens to Antonio's budget line? Illustrate the change with new books on the vertical axis. b) Is Antonio worse or better off after the price change? Explain.

a) A's original budget = $80 x 5 textbooks = $400 --> Construct equation using $400 and original prices to find out how many textbooks they can buy of each with budget of $400 --> 80N + 50U = 400 --> Find x & y intercepts--> N = 5; U = 8 --> Plot intercepts with N = y; U = x A's new budget = 400 + 40 = 440 --> Construct equation using $440 and new prices to find out how many textbooks they can buy of each with budget of $440 --> 88N + 52.5U = 440 --> Find x & y intercepts--> N = 5; U = 8.38 --> Plot intercepts with N = y; U = x b) Equally well off with new books (can afford same amount of new books); slightly better off with used books (can afford 0.38 textbooks more...lmao)

Short run world oil demand: Qd = 33.6 - 0.02P Short run total oil supply: Qs = 31.05 + 0.012P Initial equilibrium price: P0 = $79.69 Initial equilibrium quantity: Q0 = 32.01 bb/yr Saudi Arabia is one of the world's largest oil producers, accounting for roughly 3 bb/year, which is nearly 10% of total world oil production. a) What would happen to PRICE of oil if, due to war/political upheaval, Saudi Arabia reduced oil production by 3 bb/year? b) What would happen to QUANTITY of oil due to this decrease? Now, we're moving on to long run: Long run world oil demand: Qd = 41.6 - 0.12P Long run total oil supply: Qs = 26.3 + 0.071P Long run equilibrium price: P0 = $80.10 Long run equilibrium quantity: Q0 = 31.99 bb/yr c) What would happen to PRICE of oil if, due to war/political upheaval, Saudi Arabia reduced oil production by 3 bb/year? d) What would happen to QUANTITY of oil due to this decrease?

a) After 3 bb/year decrease in supply, new supply equation = (31.05-3)+0.012P Set new Qs = Qd--> 28.05 + 0.012P = 33.6 - 0.02P--> ***new short run P = $173.4375*** --> Price of oil would increase by $93.75 b) To find new corresponding quantity, simply plug $173.4375 into either Qs or Qd--> 28.05 + 0.012(173.4375)--> ***new short run Q = 30.13125*** --> Quantity of oil would decrease by 1.88 bb/year c) After 3 bb/year decrease in supply, new supply equation = (26.3-3)+0.071P Set new Qs = Qd--> 23.3 + 0.071P = 41.6 - 0.12P--> ***new long run P = $95.81*** --> Price of oil would increase by $15.71 d) To find new corresponding quantity, simply plug $95.81 into either Qs or Qd--> 23.3 + 0.071(95.81)--> ***new long run Q = 30.10*** -->Quantity of oil would decrease by 1.89 bb/year

Decide whether each of the following statements is true or false and explain why: a) Fast-food chains like McDonald's, Burger King, and Wendy's operate all over the United States. Therefore, the market for fast food is a national market. b) People generally buy clothing in the city in which they live. Therefore, there is a clothing market in, say, Atlanta that is distinct from the clothing market in Los Angeles. c) Some consumers strongly prefer Pepsi and some strongly prefer Coke. Therefore, there is no single market for colas.

a) False- people don't travel long distances just to purchase cheaper fast food. Also, who is to say that the market isn't international? Fast food is not limited to US. b) False- clothing suppliers can easily move clothing from one part of country to another c) False- different brands of cola are similar enough to constitute 1 market!

Paper towels are nondurable and TVs are durable. a) PED of paper towels should be larger in the....because.... b) PED of TVS should be larger in the....because....

a) PED of paper towels/common goods: --> Less elastic in short run --> More elastic in long run- it takes time for new substitutes to enter the market (more substitutes = more sensitivity to price) b) PED of TVs/durable goods: --> Less elastic in long run- will need TV in long run! --> More elastic in short run- less willing to buy TV now vs. later on, when you will need it = less sensitive to price when you need it!

Chapter 3 HW: 5) Consider the utility function U = 4FC^2. The marginal utility functions (the partial derivatives) are given by MUf = 4C^2 and MUc = 8FC. a) Verify that the 3 market baskets: (1,1) and (4, 1/2) and (1/9, 3) are all on the same indifference curve. Sketch the indifference curve. b) What is the formula for MRS of food for clothing? What is the MRS at the market basket (1,1)? Briefly explain what this MRS implies about the indifference curve in (a).

a) Plug and chug! (1,1)--> 4 x 1 x 1^2 = 4 (4, 1/2)--> 4 x 4 x (1/2)^2 = 4 (1/9, 3)--> 4 x (1/9) x 3^2 = 4 Yes, they are on the same indifference curve. b) MRS = MUf/MUc = (4C^2)/(8FC) Plug in (1,1)--> (4(1)^2)/(8(1)(1)) = 4/8--> 1/2 = MRS For every additional unit of food, consumer is willing to give up a maximum of 1/2 a unit of clothing--> very unwilling to give up clothing.

Chapter 2 HW 2) Refer to Ex. 2.10 on p. 59 which analyzes the effects of price controls on natural gas. a) Using data from example, these are the supply/demand curves: (o=oil; g=natural gas) -Supply: Q = 15.90 + 0.72Pg + 0.05Po -Demand: Q = 0.02 - 1.8Pg + 0.69Po Verify that if price of oil is $50, these curves imply free market price of $6.40 for natural gas. b) Suppose regulated price of gas were $4.50 per thousand cubit feet instead of $3. Po = $50, as stipulated in previous question. How much excess Qd or Qs would there have been for $4.50? What about for $3? c) Suppose the market for natural gas remained unregulated. If price of oil had increased from $50 to $100, what would have happened to free market price of natural gas?

a) Set supply = demand and plug $50 in for Poil--> 15.90 + 0.72Pg +0.05(50) = 0.02 - 1.8Pg + 0.69(50)-->Pg = 6.396 = ~$6.40. b) Remember that Po = $50, from part (a)! Just plug Pg = $4.50; Po = $50 into Qs and Qd: Qs = 15.90 + 0.72(4.5) + 0.05(50) = 21.64 Qd = 0.02 - 1.8(4.5) + 0.69(50) = 26.42 Excess demand = 26.42 - 21.64 = *4.78 in excess demand for Pg = $4.50!* -->For $3- follow same steps above but with Pg = 3 -->Qs = 20.56; Qd = 29.12 --> Excess demand = *8.56 in excess demand for Pg = $3* c) Just plug in 100 instead of 50 for Po and set supply = demand--> 15.90 + 0.72(4.5) + 0.05(100) = 21.64 = 0.02 - 1.8(4.5) + 0.69(100)--> ***$19.10 = new price of natural gas***

Chapter 3 HW: 1) Suppose that Bridget and Erin spend their incomes on two goods, food (F) and clothing (C). Bridget's preferences are represented by the utility function U(F,C) = 10FC, while Erin's preferences are represented by the utility function U(F,C) = (0.2F^2)(C^2) a) With food on the horizontal axis and clothing on the vertical axis, identify on a graph the set of points that give Bridget the same level of utility as the bundle (10, 5). Do the same for Erin on a separate graph. b) On the same two graphs, identify the set of bundles that give Bridget and Erin the same level of utility as the bundle (15, 8). c) Do you think Bridget and Erin have the same preferences or different preferences? Explain.

a) This is a pretty simple case of plug and chug. To find the utility that (10,5) gives + set of points that give same utility for B: -->Plug the bundle into B's utility function: U(10,5) = 10(10)(5) = 500 --> So 500 = 10FC--> 50 = FC --> Find combos of F & C that multiply = 50 --> (10,5); (5,10); (25, 2); (2, 25) To find the utility that (10,5) gives + set of points that give same utility for E: -->Plug the bundle into E's utility function: U(10,5) = (0.2(10^2))(5^2) = 500 --> So 500 = (0.2F^2)(C^2)--> divide by 0.2, then sq. root --> 50 = FC --> Find combos of F & C that multiply = 50 --> (10,5); (5,10); (25, 2); (2, 25) b) To find the utility that (15,8) gives + set of points that give same utility for B: -->Plug the bundle into B's utility function: U(15,8) = 10(15)(8) = 1200 --> So 1200 = 10FC--> 120 = FC --> Find combos of F & C that multiply = 120 --> (15,8); (8,15); (12,10); (10,12) To find the utility that (15,8) gives + set of points that give same utility for E: -->Plug the bundle into E's utility function: U(15,8) = (0.2(15^2))(8^2) = 2880 --> So 2880 = (0.2F^2)(C^2)--> divide by 0.2, then sq. root --> 120 = FC --> Find combos of F & C that multiply = 120 --> (15,8); (8,15); (12,10); (10,12) c) Yes, Bridget and Erin have the same preferences—this is clear from their identical indifference curves and utilities.

Chapter 3 HW: 4) Consider the utility function U = 3F + 5C. a) Carefully sketch the indifference curve for 30. Label 4 market baskets on the indifference curve. b) Carefully sketch the indifference curve for 45. Label 4 market baskets on the indifference curve. c) Which market basket gives highest utility: (0,10) or (5,5) or (2,8)? Rank the market baskets.

a) U = 30; 30 = 3F + 5C--> find F and C combos that = 30 in equation! --> (10,0); (0,6); (5,3); (5/3, 5) --> Since this is a linear line equation, this is a linear curve = perfect substitutes! b) U = 45; 45 = 3F + 5C--> find F and C combos that = 45 in equation! --> (5,6); (0,9); (10,3); (15,0) c) Plug and chug bich!!! (0,10)--> 0 + 50 = 50 (5,5)--> 15 + 25 = 40 (2,8)--> 6 + 40 = 46 --> (0,10); (2,8); (5,5)

Chapter 3 HW: 3) Consider utility function U = 2FC a) Carefully sketch indifference curve for utility of 48. Label 4 market baskets on indifference curve. b) Carefully sketch indifference curve for utility of 64. Label 4 market baskets on indifference curve. c) Which market basket gives highest utility: (0,10) or (5,5) or (2,8)? Rank the market baskets, and identify them on your graph.

a) U = 48-->48 = 2FC--> 24 = FC --> Find numbers that multiply = 24--> (6,4); (4,6); (2,12); (12,2) b) U = 64-->64 = 2FC--> 32 = FC --> Find numbers that multiply = 32--> (16,2); (2,16); (4,8); (8,4) c) Plug and chug baby!!! 2(0)(10) = 0; 2(5)(5) = 50; 2(2)(8) = 32 In order from greatest U-least U = (5,5); (2,8); (0,10)

Chapter 2 HW 1) Much of the demand for US agricultural output has come from other countries. In 1998, total demand for wheat was Q = 3244 - 283P. Of this, total domestic demand was Qd = 1700 - 107P, and domestic supply for Qs = 1944 + 207P. Suppose the export demand for wheat falls by 40%. --> $ in millions; bushels in millions <-- a) US farmers are concerned about this drop in export demand. What happens to the free market price of wheat in the US? Do farmers have much reason to worry? b) Now suppose the US Gov't wants to buy enough wheat to raise the price fo $3.50/bushel. With the drop in export demand, how much wheat would the gov't have to buy? How much would this cost the gov't?

a) i. Find OG equilibrium price by setting demand = supply--> Qt = Qs--> (3244-283P)=(1944+207P)--> 1300-490P = 0--> equilibrium price = ***$2.65*** Remember that domestic Qs = total Qs because we're talking exclusively about US --> two Qds because there are 2 types of demand for all the wheat produced by US! geddit :-D ii. Find OG Qe --> Qt - Qd = (3244-283P)-(1700-107P)--> Qe = ***1544-176P*** iii. Find Q'e, after 40% drop = (1-0.4)(Qe) = (0.6)(1544-176P)--> Q'e = ***926.4-105.6P*** iv. Find total Q't --> Qd + Q'e = (1700-107P) + (926.4-105.6P)--> Q't = ***2626.4 - 212.6P*** v. Find NEW equilibrium price by setting demand = supply--> Q't = Qs--> (2626.4 - 212.6P) = (1944 + 207P)--> new equilibrium price = ***$1.63*** So, this shows a significant drop in the price of wheat, from $2.65 to $1.63. The farmers have a lot to worry about. b) Since $3.50 > $1.63, raising the price to $3.50 would cause a surplus. Plug $3.50 into Qdemand and Qsupply equations to find surplus: Qdemand = Q' = 2626.4 - 212.6(3.5) = 1882.3 Qsupply = Qs = 1944 + 207(3.5) = 2668.5 Amount of surplus = Qs - Q'--> 2668.5 - 1882.3 = ***786.2 million bushels that gov't would have to buy to raise price to $3.50.*** Total $ gov't would have to spend = Qsurplus x price--> 786.2 x $3.50 = ***$2751.7 million***

Chapter 1 HW 1) Carefully graph the line f(x) = 2x+1. Label 4 points on the line. a) What is the slope of the line? b) What is the x intercept of the line? c) What is the y intercept of the line? d) What is f(3)?

a) m = 2 b) x intercept = -1/2 c) y intercept = 1 d) f(3) = 7

Chapter 2 HW 3) Qs = 100P - 100; Qd = 800 - 200P. a) Sketch supply and demand curves. Remember that quantity = x-axis and price = y-axis! b) Calculate the market clearing price and quantity. c) Calculate elasticity of demand at market clearing price. d) Calculate elasticity of supply at market clearing price. e) Suppose gov't wishes to impose price floor 10% above market clearing price. Use elasticities to estimate surplus that would result from this higher price. f) Verify your estimate in (e) by calculating Qs and Qd at price floor. g) Suppose demand increases by 10%. Claculate new market clearing price and quantity.

b) Market clearing p/q = equilibrium--> set Qs = Qd--> 100P - 100 = 800 - 200P--> equilibrium P = $3; Q = 200 c) Elasticity of demand = [(New Qd - Old or Equilibrium Qd)/Equilibrium Qd]/[(New P - Old or Equilibrium P)/Equilibrium P]--> set new Qd = 0, find new Pd--> Qd = 0; Pd = 4--> [(0-200)/200]/[(4-3)/3] = ***-3 PED, very elastic*** d) Elasticity of supply = [(New Qs - Old or Equilibrium Qs)/Equilibrium Qd]/[(New P - Old or Equilibrium P)/Equilibrium P]--> set new Qs = 0, find new Ps--> Qs = 0; Pd = 1--> [(0-200)/200]/[(1-3)/3] = ***1.5 PES, elastic*** e) For every 1% increase in price, PED and PES change by their calculated amounts--> -For PED--> 10% increase in price = (10% x -3) = -30% = 30% decrease in demand -For PES--> 10% increase in price = (10% x 1.5) = 15% increase in supply f) 10% increase in price--> 1.1 x equilibrium price of 3 = ***$3.30 = P'*** Now plug $3.30 into Qd and Qs! -New Qd = 800 - 200(3.3) = 140 -New Qs = 100(3.3) - 100 = 230 Equilibrium Q = 200 Equilibrium P = 3 -New Qd = 140 = 30% decrease from 200 (60 is -30% of 200) -New Qs = 230 = 15% increase from 200 (30 is 15% of 200) g) Demand as a WHOLE increases by 10%--> (1.1)(800 - 200P) = ***880 - 220P = Q'd*** New equilibrium--> Q'd = Qs--> 880 - 220P = 100P - 100--> ***New equilibrium: P' = 3.06; Q' = 206***

Chapter 1 HW 3) Consider the line 4x+2y = 16. a) Neatly sketch the line. Label at least 3 points on he line. b) What is the slope of the line? c) What is the x intercept of the line? The y intercept of the line?

b) m = -2 c) x intercept = 4; y intercept = 8

Farmers complain that they cannot make a living selling sugar at the current market-clearing price. They successfully lobby the government to initiate price controls on the sale of sugar. The government sets a price floor substantially about the equilibrium price, and no one is allowed to sell sugar for a price less than the price floor. As a result, a) The supply curve for sugar will shift to the right because of the higher price. b) The demand curve for sugar will shift to the left because of the higher price. c) There will be a surplus of sugar. d) All of the above are correct.

c) There will be a surplus of sugar. Not any of the other answers because CHANGE IN PRICE only = CHANGE IN QUANTITY DEMANDED/SUPPLIED; does NOT shift entire curve. (unless there is a change in price of a substitute/complement). So for this price floor, there will be more Qs than Qd; not any shift in the curves.

Farmers complain that they cannot make a living selling sugar at the current market-clearing price. They successfully lobby the government to initiate price controls on the sale of sugar. The government sets a price floor substantially about the equilibrium price, and no one is allowed to sell sugar for a price less than the price floor. As a result... a) The supply curve for sugar will shift to the right because of the higher price. b) The demand curve for sugar will shift to the left because of the higher price. c) There will be a surplus of sugar. d) All of the above are correct.

c) There will be a surplus of sugar. The rest are wrong BECAUSE a price floor only = *points on the graphs*; doesn't actually shift demand or supply. REMEMBER that price only = point on the graph, so Quantity SUPPLIED/DEMANDED would change. Not the curve as a whole. Be careful! You got this.