ECON201 Midterm

giffen goods

demand curve slopes upwards, income effect dominates the substitution effect, inferior goods for which an increase in the price raises the quantity demanded

availability

depends on intensity not about frequency

derivation of the demand curve

derived from the optimal decision a consumer makes based upon; 1. budget constraint 2. indifference curve 3. response to different prices.

for pairs of goods that have indifference curves with the standard bowed in shape, the marginal rate of substitution is

diminishing

Taxation and welfare policies: you receive $100 pay check but have an $80 parking fine when you get home. has it been a good day or a bad day

does losing money impact you more than gaining money, total satisfaction of our economy.

income is equal to ______ at optimisation

expenditure

Daniel Kahneman shared the 2002 Nobel prize in Economic science with Vernon Smith. in what are was the contribution that earned smith the prize

experimental economics

behavioural/ psychological models

explains peoples irrational or inconsistent behaviour - how people behave, not how they should behave

when marginal utility is decreasing but positive, total utility is

increasing at a decreasing rate.

if tripling the inputs causes output to quadruple, then the production process exhibits

increasing returns to scale

heuristics

mental shortcuts that ease the cognitive load of making a decision. this allows people to solve problems and make judgements quickly and efficiently.

suppose the a firm is currently producing 100 units of output. At its current input choices, the marginal product of labour is MPl = 8 and the marginal product of capital is MPk = 12. input prices for labour and capital are given by w = 5 and r = 10 in the long run, to minimise the cost of producing its current output the firm should use

more capital and less labour

heuristic shortcuts

need to add up all the information to get an accurate outcome

does a monopoly have a supply curve

no, instead it has a single combination of output and price

if a consumer buys more of a good when their income rises, this is a

normal good

if both goods change in the same direction for income and substitution effects, those goods are

normal goods

reference dependence

our perception of value is dependent on the relative change and not on the resulting value

an increase in income shifts the budget constraint

outwards

loss aversion

people dislike losses relative to the reference point more than they like the same-sized gains - more sensitive to losses than gains of some magnitude.

amygdala

studies on individuals with amygdala lesions show a dramatic reduction in loss aversion.

the slope of a consumers budget line depends on

the relative amounts of each good consumed and the relative prices of each good consumed

the slope of a firms isoquant line depends on

the relative prices of each input used

diminishing sensitivity for losses and gains

the value function is concave for gains but convex for losses.

asymmetric value function

the way you feel about gaining $100 is a lot less than how you feel about losing $80. most of us feel losses more intensely than we feel gains.

consumer choice theory

this analysis assumes that households 1. have preferences over what they like 2. have budget contstraint that limits their choices 3. maximise welfare and utility by allocating resources 4. are rational

along an indifference curve, if the marginal rate of substitution is 3, then the consumer is willing

to give up 3 units of the good measure along the y axis for 1 unit of the good measured along the x axis

consumer equilibrium

utility is maximised subject to the budget constraint at the optimal commodity bundle

Pizza Hut offers a deal where you pay $12 for all your an eat. one day half of the customers are given a $12 refund when they sit down and are allowed to eat for free. Which half will eat more pizza?

utility to ride. people who paid will eat more pizza to get their moneys worth.

the phenomenon whereby a person makes more effort to obtain a $20 discount on something priced at $50 rather than the same $20 discount on something else prices at $500.

weber-fechner law

optimisation

what the consumer can afford to buy. This shows all combinations of goods the consumer can afford for a given income and prices are shown

in response to a decrease in the hourly wage rate, the substitution effect will cause a person to

work fewer hours

perfect compliments

x amounts of products are consumed l shape on graph left and right shoes

good indifference curve

slopes upwards from left hand bottom corner

biases to decision making

- availability - representativeness - anchoring and adjustment

separate gains

- give employees multiple smaller bonuses or raises over time - order packages to arrive on different days - share good news over multiple conversations - split up pleasurable experiences.

combine losses

- pay all your bills on the same day - aggregate financial losses into one quarter - share multiple instances of bad news at one time - group unpleasant activities into a single episode.

examples of heuristics

- using rule of thumb - an educated guess - an intuitive judgement - a guesstimate - profiling - common sense

4 properties of indifference curves

1. higher indifference curves are favoured 2. indifference curves are downward sloping 3. indifference curves do not cross 4. indifference curves are bowed inwards due to diminishing marginal utility

self interest and altruism

1. only care about what makes YOU better off 2. often better with cash

suppose there are 600 yellow-eyed penguins on the Otago peninsula and that 5% are sadistic killers. there are also 120 ferrets, all of whom are sadistic killers. what is the probability that if you meet a sadistic kille, that its a yellow eyed penguin.

20%

which famous economist first put forward the theory of invisible hand

Adam Smith

Asymmetric Value Function - diminishing marginal utility

Diminishing marginal utility. Easy for a fat person to lose weight but as they get skinnier and skinnier it is harder to lose more weight than at the beginning

K = 1 --> 4 l = 1 --> 4 Q = 100 --> 200

L and K are perfect complements and returns to scale are increasing

loss aversion defintion

a behavioural preference for avoidance of risks with losses even when they might earn a substantially larger gain.

anchoring and adjustment

a common way for people to estimate something they don't know is to start with some 'anchor' and then adjust it by using other information they have that they think might be relevant.

consider a household that is currently borrowing to fund present consumption. if there is a rise in the interest rate, then for current consumption there is

a negative income effect and a negative substitution effect

consider a household that is currently saving to fund future consumption. if there is a fall in the interest rate, then for current consumption there is

a negative income effect and a positive substitution effect

how do interest rates effect household savings

an increase in the interest rates can result in lower consumption when younger, therefore higher saving.

some people try to estimate things they do not know by starting with a particular value and then revising their estimate by using any other information they thin may be relevant. what is the name of this particular judgemental heuristic

anchoring and adjustment

substitution effect

change in consumption that results when a price change moves the consumer along an indifference curve to a pint with a new MRS

income effect

change in consumption that results when a price change moves the consumer to a different indifference curve

isoquants represent

combinations of inputs for which total cost is constant

in general, a demand curve will have a positive slope (given good) when

for a price fall, the positive substitution effect is less than the negative income effect

a demand curve will have a positive slope (given good) when

for a price increase, the negative substitution effect is less than the positive income effect

Daniel Kahneman and Vernon L. Smith

for having integrated insights from psychological science, especially concerning human judgement and decision making for having established laboratory experiments as a tool in empirical analysis, especially in the study of alternative market mechanisms.

with respect to hedonic framing, which of the following statements is false

for the recipient, it is better to separate losses than combine them

cash vs. in-kind transfers

government gives cash to someone and the budget constraint moves outwards as this person can spend the cash however they please. government gives a person an in-kind transfer of food, that persons new budget constraint has again shifted out. $1000 in food does not affect the recipient differently than $1000 cash, but cash allows them to spend the money on what they would like not solely food.

regression to the mean

hard to replicate success

according to the economist article "rethinking thinking" cognitive dissonance is

holding a belief plainly at odds with the evidence, usually because the belief has been help and cherished for a long time.

rational choice model

homo economicus - rationality - optimisation - ignore sunk costs - wealth is fungible/ interchangeable

segregate gains

how is something framed.. glass half full or half empty. want the consumer to be as happy as possible so try give best outcome possible

hedonic framing

how people try to maximise psychological pleasure and minimise pain when faced with decision relating to gains and losses.

labour leisure

if the substitution effect is greater for the worker, they work more. if the income effect is greater than the substitution effect, the worker should work less and the labour supply curve slopes downwards.

what is not a property of 'standard' indifference curves for goods that are desireable

indifference curves show how utility depends on household income

if a consumer buys less of a good when their income rises, this is a

inferior good

if the income and substitution effects change in opposite ways, the goods are

inferior goods

if the isoquants are straight lines then

inputs are substitutable in production and the marginal rate of technical substitution is constant

when indifferent curves cross they are

irrational and inconsistent

bounded rationality

is a concept proposed by Herbert Simon that challenges the notion of human rationality as implied by the concept of homo economcius the idea that when individuals make decisions, their rationality is limited by - tractability if the decision problem - the cognitive limitations of their minds - the time available to make the decision

when a market is in equilibrium

it is always possible to identify unexploited opportunities

rationing

leads to price distortions and inefficiencies. Effective rationing can lead to the information of black markets

subjects with damage to the amygdala exhibit

less loss aversion than other subjects

what is not a characteristic of a competitive market

limits on entry and exit

the kahneman-tversky asymmetric value function is characterised by

losses hurting more than gains value being defined over changes in wealth the separate evaluation of losses and gains, rather than their combination

representative bias

people guess the likelihood of some instance or item belonging to a general class on the basis of how representative it is of that class need to know the relative frequencies to make an accurate outcome. shortcut methods don't always lead to accurate outcomes.

prospect theory

people maximise their preferences and their preferences are independent of whats happening in the world.

ba indifference curve

pollution, slopes upwards from right hand bottom corner

an assumption of standard economic theory challenged by behavioural economics is that

preferences are independent of an individuals endowment of wealth

Marginal rate of substitution (MRS)

rate at which the consumer is willing to trade 1 good for another. Changes SHIFT ALONG the curve this is the rate you have to substitute to remain indifferent

you have prepaid tickets to the theatre. The evening of the play the surf is pumping, and you love to surf. do you go to the theatre or do you go surfing

rational: price of ticket is a sunk cost. Doesn't matter if you go surfing or not. Ignore the sunk cost and go surfing because you will get more enjoyment out of it.

praise often appears less effective at encouraging people to continue their performance when it is above average than condemnation is at encouraging them to improve their below-average performance. this phenomenon arises from the

regression to the mean effect

as the price for a good falls there is a shift down along the demand curve

the consumer is moving to a higher indifference cruve so the utility is increase, while the area under the demand curve representing total value is increasing

Indifference curves

the consumption bundles that give the consumer the same level of satisfaction. eg first lolly is always better than the second

according to the law of diminishing returns

the marginal product of an input will eventually decline

perfect substitutes

the marginal rate of consumption is constant with a constant gradient. diagonal lines

why are economists interested in the model of perfectly-competitive firms?

the model represents a theoretical ideal, especially with respect to efficiency, against which other market forms such a a monopoly can be compared