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)