SUPA Economics Chapter 2 Objectives

Describe intertemporal choice. Give an example.

It means across time. You have decide now what will give you more utility in the future. $100 now or $300 next year.

Define natural resources and labor. Give examples of each.

natural resources are things that are found on earth, such as oil, trees, and coal. Labor is human work, such as a lumberjack or a carpenter.

Explain the purpose of starting out with such an unrealistic decision rule. Describe how the process will unfold from that point.

the strong asuumptions give us a place to start and to build off of. as we relax assumptions, the rule will be more realistic

Define process of production.

transforming the inputs into an good, or service

Explain why we assume perfect divisibility of units.

we assume perfect divisibility because it allows us to model on marginal decision making

Descibe how the utility maximizing decision rule changes as we relax the no scarcity assumption. Explain why this new rule is, given our assumptions, the only way one can maximize utility.

when scarcity is involved, one thing may have to be cut short, even if more utility could be gained, due to scarce time. thus, we must optimize our activities to obtain maximum utility. you can't achieve MU=0 for all, but you try to make them equal.

Desribe how a changing discount rate can affect one's choices. Give an example.

A bomb is coming within the next few hours, you completely discount the future.

Define technique and technology. Describe the relationship between these concepts.

A technique is a way of combining inputs. Technology is the set of techniques. tress are to techniques as the forest is to technology.

Describe the challenge of intertemporal choice.

All choices have concequences across time. You have to decide now, not knowing how it will turn out in the future. You have to take the future and bring it to the present so you can compare the benefits and costs.

Define capital. Distinguish between physical and human capital. Give an example of each. Distinguish between production and financial capital.

Capital is a produced means of production. Physical capital -tools, machines Human capital - inside yourself, allows you to be more productive - education

Define discount rate. Describe what the discount rate measures. Comment on the following assertion: The "right" discount rate is 10%.

DIscount rate is the waiting premium you require to wait. $100 now or $150 later, discount rate is 50%. There is no 'right' discount rate. It varies from person to person.

Explain why our theory is often referred to as marginal analysis.

Decisions to produce another thing or consume another thing are made at the margin

Describe society's endowment. Explain the relationship between society's endowment and scarcity.

Endowment- all the natural and human resources from which all goods and services are produces. Endowment may not be fixed, but it is finite, so scarcity is an issue

Compare labor intensive and capital intensive techniques. Explain how a choice is made among techniques when technology offers an array of more labor or more capital intensive techniques.

Labor intensive means that a lot of labor (work) is needed, such as ditch digging. Capital intensive means a lot of capital (usually money or machines) is needed. The cheapest way is usually choosen.

Define marginal product. State the assumption of diminishing marginal product. Explain this assumption using an example.

Marginal Product is the additional output that comes from an additional unit of input. The assumption of diminishing marginal product is that the productivity will decrease in marginal productivity. Ex: Adding workers to a factory means you will produce more, but after you add so many people, each person that you add helps less than their predecessors.

Define marginal utility. State the assumption of diminishing marginal utility. Explain this assumption using an example.

Marginal utility is how much satifaction something brings at a particular time. utility from consuming a good ussually diminishes as more of the good is consumed. for example, the first gulp of water after a long walk yields many utils. the next gulp is less and so on until no utils are gained by drinking the water.

Specify the arrangement of these terms as they are used in our model: factors, allocated, process of production, techniques, technology, goods and services.

Once you allocate factors they are combined in a process of production. The way that goods and services are produced in these services depends on the technique. The techniques are all the possible ways of produsing goods and services and technology is a set of all the techniques

Identify the decision rule that takes into account that choices across alternative allocations generate flows of future utilities, but does not reflect risk or uncertainty.

PV1=PV2=PV3=PVn

Given the set of the V schedules. Identify the optimal allocation for a given resource constraint. Identify how the allocation will change if the constraint changes.

Pick the highest option given how many hours you have to spend.

Define preference ordering. Specify the assumption our model makes about an individual's preference ordering.

Prefernce ordering is how a person ranks choices according to how much utiity they will get. we assume that an indvidiual will make choices that will give them the most utility

Define saving and investing. Identify, ceteris paribus, who you would expect to do more saving and investing: Someone with a high discount rate or someone with a low discount rate.

Saving- to put money in a static location for later use, to forgo using the resources Investing- to use saved resources in order to increase future productivity in hopes of increasing future utility. Ceteris paribus, someone with a low discount rate will save and invest as they are willing to wait

Illustrate the following assertion: a society's endowment is finite, but it is not fixed.

Society is only alloted with a certain amount of crude oil. however, no one is certain exactly how much.

Identify the general rule for factor allocation given scarcity and assuming a one period time horizon and no risk. Demonstrate that given our assumptions this is the only way to optimize.

The general rule for factor allocation given scarcity and assuming a one period time horizon and no risk is V1=V2=V3+Vn=X>/= 0. It tells us how someone maximizes thier utility given a finite initial endowment in the current state of the world, and allows us to perdict how she will respond to changes in her set of constraints and productivity.

Define present value. Explain how we use this concept in our choice process.

The present value of the future utilities that are telescoped back into a single value now. Which means it is the present value that future utilities have. We compare the present value with the intertemporal choices and then make a rational choice.

Explain the concept of discounting the future. Give an example. Identify economists' assumption about our attitude toward satisfaction that will be realized in the future.

To diminish the value of the future. Now is all that matters. $100 now is better than $300 in the future. Economists assume people discount the future.

Define utility, rational economic behavior, consume, and goods and services. Specify the arrangement of these terms as they are used in the model.

Utility-the satisfaction one gets from a good or service Rational behavior- A person will always choose the action that will derive maximum utility Consume- to derive utility Good- tanigble, can be stored, like cereal Service- Intangible, like a haircut A rational person will consume goods/services in order to derive maximum utility

Define value from the marginal product - V. Describe the information that is combined in the concept.

Value is the utility derived from the marginal product of a particular allocation. (The satisfaction you get from something) The first few rabbist caught while hunting give more utils than the last few rabbits. The worth (in utils) of the last hour of work spent. Combines MU and MP.

Identify and explain what pratical applications there are for a model of the decision rule people follow.

You can underdstand public and private policies and the logic behind them. It also helps you implement them.

Identify the motive that we assume drives the choices of all individuals all the time.

all individuals are driven to choose the thing that gives maximum utility

Explain the concept: allocation of a factor.

allocation of a factor refers to deciding what to do with somthing. a rocket scientist could dig ditches by hand. however, his human capital would be put to better use building rockets.

If there is not scarcity and there are "n" differnt things to consume where "n" is some large number, identify the decision rule an individual will follow in consuming all "n" things. Explain the rule.

an individual will consume until MU1=0 for the first good, MU2=0, MU3=0...MUn=0 for all goods and services.

Explain the concept of a constrained optimization problem. Identify the constrained optimization problem we all face.

constrained optimization refers to how people maximize utility in the face of scarcity. we are all faced with scarce time and resources. for example, we must choose between studying and playing due to scarce time.

If I say "You're nuts to want to jump out of an airplane - even with a prachute." Does that make you nuts? Explain in terms of our model.

no. i may gain many utils by jumping out of the plain while you may not. even though it is the same activity, i may get much more satisfaction than you.

Define optimize. Explain the concept: optimal allocation.

optimize is to do somthing to gain the most utility. optimal allocation refers to doing somthing more or less and substituting that time with another activitey in order to get the most utility.

Identify the ultimate determinant of how closely our decision rule reflects reality.

our decision rule is only as close to reality as our assumptions are

Identify the assumptions of the Robinson Crusoe case, that are ultimately relaxed. Explain what each one does for the model.

relaxing Scarcity will force rob to make choices about what to do and keep in mind opportunity cost and decide what will give him the most utils. relaxing the no production necessary assumption will mean that rob will have to get the most utils out of the materials avaible. Relaxing the no future assumption will force rob to think ahead and plan out the utility of future activities. relaxing the no risk or uncertainty assumtion will mean that rob may think that he will catch fish in a predicatable mannner but may have completley different results. Relaxing the no interdepndence assumption will force rob to work with others to get more utility.

Define risk. Explain the impact of risk on decision (choice) making.

risk is anything that will affect an event or a decision because you know the likelihood of a negative outcome.

Describe a bliss point.

the bliss point is when an individual has gained the maximum utility from a good or service. consuming more will resukt in negative utility. MU=0 for all

Define margin. Give an axample of a margin.

the last in a series, the edge. ex: a person will gain the last amount of utility out of their final gulp of water.

Descrine the process of assigning a probability to a risk. Comment on the following statement: Risk assessment is the same for everyone.

you must decide on the probability that the event will work out as planned. Risk assessment is not the same for everyone, when asked, everyone will give a different probability of contracting AIDS from unsafe sex. The risk is about the same for every person who performs the action, but the perceived risk of each person can vary widely. another example is driving. Nate may think: i'll never get into trouble drifting my car on ice. while Doogs may say: I would probably wreck my car if i tried to drift around an icy turn. The same action with a similar probability of disaster, different perceived risk. We rarely know the actual probability of an event occurring.