ACE 474 EXAM 1 CONCEPTS
own price elasticity
one good
endowment point
point where if you were to spend your income in each given period
hedonic pricing
price consumers will pay for a characteristic -real estate -housing prices -consumer durables -CPI
backward bending labor supply curve
represents a rise in real wages, decline in work hours; income effect dominates substation effect
saver vs. borrower
saver is patient (higher utility); borrower is impatient
friedman's permanent income hypothesis (bonus/lottery)
takes into account negative and positive shocks (transitory income vs permanent income)
fisher's intemporal choice model (two sisters)
tells us how rational consumers distribute consumption over time based on income (future and current - determined by interest rates)
keynes' model
the more money you have, the more you save (current income) (rich are expected to save more than poor)
the american time use survey (ATUS) uses
the recall method (stated in Jan 2003)
neoclassical theory
u=f(x); x represents the good
marginal rate of time preference (MRTP)
|1+r|
non-cooperative
household members act strategically; household members react to what the other household member is doing
cooperative
household members work together to maximize the household's total utility W=[u(Ch) -Th)][u(Cw)-Tw)]
role of interest rates (in saving/borrowing)
if interest rates increase, the saver is better off because utility becomes higher
threat points
individual utility obtaining outside he relationship; increase bargaining power; determined by who makes more money/age/education/law
non market work measurement methods
input -opportunity cost method (wage rate) -global substitute method -specialist substitute method (hiring chef...) output -market value approach (general wage rate)
consumer price index (CPI)
measures changes in "cost of living" , amount consumer must spend to maintain a given standard of living (fails to take in substitutions/improvements)
divisia index
"perfect"; holds consumer utility constant over time; allows substitution
midpoint method formula
(Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P2+P1)/2]
consumers allocate their time
-across activities -working in the market vs. leisure
modigliani's life-cycle hypothesis limitations
-bequests -precautionary savings -consumers have other motives for savings besides retirement
CPI measures
-changes in cost of living -consumers well-being -calculates inflation rates -calculates economic growth
unitary model limitations
-common preferences assumed -"benevolent dictator -misleading because people always agree
bargaining model branches
-cooperative -non-cooperative
collecting time use data methods
-diary method (record and turn in) -recall method (asking people to think back) -observation method (record and watch)
hedonic pricing limitations
-difficulty identifying appropriate set of characteristics -how many characteristics should be considered -what form (composite or individual)
friedman's permanent income hypothesis limitations
-does not take into account interest rates
income elasticities
-inferior (<1) -normal (as income increases you buy more, =0) -necessity (between 0 and 1) -luxury (>1)
keynes' model limitations
-not supported post WW2 -thinks interest rates do not matter -the ratio of consumption stays the same even when income is increased
intrahousehold allocation and bargaining models
-unitary model -bargaining model
price elasticity formula
Exy = %ΔQ/%ΔP
policy implications/welfare programs
Finland recently gave people $600 a month. Showed positive effects on health and stress, but no improvement in work status.
the labor supply model
M=24W-HW -slope is the wage rate -optimal point is where the marginal value of an extra hour of leisure = the opportunity cost of acquiring it -leisure is on the x axis
maximization point
MRS=slope of the budget constraint= -P1/P2
unitary model
assumes household behaves as if there is one decision maker
bargaining model
assumes household decisions are the outcomes of a bargaining process; who brings the income into the household matters.
modigliani's life-cycle hypothesis (retirement)
assumes systematic variation in income over time (incomes falls after retirement)
time allocation matters
because it shows how consumers allocate their time over both market work and non market work
pasche index
bundle of goods in current period; no substitution (understates)
lasperez index
bundle of goods in the base period; no substitution (overstates)
the american time use survey (ATUS) is measured by
bureau of labor statistics
CPI who measures it
bureau of labor statistics -still use 1982-1984 as the base period
cross price elasticity
compliments (negative) and substitutes (positive)
characteristics theory (lancaster approach)
consumers don't get utility from the good itself, but from the characteristics of the good (used to predict demand of products) u=f(c); c represents the characteristic useful to determine house price on the market
CPI is better off when
cost of living < income
CPI formula
current (reference) basket / base basket
intemporal budget constraint formulas
current consumption (C1): C1 + (C2)/(1+r) future consumption (C2): C2 + (C1)(1+r)