Microeconomics - STUDY GUIDE EXAM 1
Microeconomics - STUDY GUIDE EXAM 1
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Date Created: 04/29/14
Econ 200 429 Govt behavior Tax Subsidy Review Exam 1 Q MV 1 13 2 12 3 11 4 10 5 9 6 8 7 7 MP10 PMV Q4 Q MV New MV Sub 1 13 14 2 12 13 3 11 12 4 10 11 5 9 10 6 8 9 7 7 8 1 Subsidy Consumer pays 1 less producer gets 1 more per unit MP P 1 P1MV MP10 PMV Q5 Consumers buy MORE with govt subsidy Cost of subsidy to govt MP10 1 X Q5 5 New MV Schedule gt Review Cost MV CS Resources are scarce so people compete and make choices Opportunity cost value of next best altemative forgone In uences decisions 1 Constraints 2 Tastes and preferences not quanti able Postulates of behavior 1 People have preferences 2 More preferred to less 3 Substitution 4 Marginal value decreases as Q increases MV Schedule for Jack Q 1 2 3 4 5 6 MV 12 1 1 10 9 8 7 MP8 or 5 How much would Jack bribe to pay 8 instead of 10 Difference in CS at both prices CSTVTE Law of Demand Market Demand DW Paradox Consumption smoothing Relative price Height of Demand re ects MV A Purple L lllll1lL39l39 I demand Red consumer 2 demand ireen market demand sum ofl Consumers TV cs TE Pl 013 Q Market demand horizontal sum of quantities bought by each person in market at each point Over time MV decreases and TV increases Diamond Water paradox Do we value diamonds more than water because cost more No only re ects MV but should be charged by TV MV can be low if lots of good available but TV is huge because Q very high TV and CS for water very high TV and CS for diamonds very low Would bribe more for water high CS Pw Pd CSw gt QW Qd Consumption smoothing borrowing and lending MV of consumption today becomes lower than MV of consuming tomorrow EX earn 30k year one and 10k year two Person A smooths Person B doesn t 1 A Consumes Consumes 2A2b B A 2Abc 3 C gt J Relative price prices of several goods change Law of Demand relates to relative price of good Ex salad increases from 2934 while pizza increases from S125 8 Salad increased 2x while pizza increased l5 limes Therefore pizza is relatively even though price increased so consume more pizja KC HEAPER Elasticity Mutual gains Price elasticity of Demand Elastic Change in P high change in Q Inelastic Change in P low change in Q EQ2Q1 Q1132P 1P1 If price rises in inelastic demand TR increases because Q decreases by less percentage than price increase If price rises in elastic demand TR decreases because Q decreases by greater percentage than price increase Elasticity higher for brand name can substitute than entire clothing category can t substitute Drug crimes rise in response to law enforcement to eradicate drugs inelastic demand so lower quantity creates huge increase in price and TE goes up so need more money to get drugs so commit crime Mutual gain difference btwn MV of good by different people A has no shirts B has 11 shirts MV A MV B 12 20 10 1 8 8 16 14 12 10 8 6 4 10 2 1 1 O 0 Trade until gains exhausted derive supply behavior from demand schedule MP C demanded lied 3911 20 1 8 16 14 12 10 8 oolOU1lgtL gtlgt O oo1OU1lgtL gtlgt 10 l l MP4 Q supplied2 TR8 TC 6 1 9 8 7 6 5 4 3 2 1 O Marginal costs gt Q Offer quantity for sale when PMC Seller s Rent SR at MP4 TRTC2 P I MS After E buyer TS willing to forgo less than seller SR willing to gain ALL GAINS FRM TRADE MD EXHAUSTEI Zjjj E market equilibrium Most gains at this point Want to eliminate transaction costs Subsidy moves demand schedule up buy MORE Subsidy moves supply schedule down supply MORE Tax moves demand schedule down buy LESS Tax PMC 1 Tax moves supply schedule up supply LESS A Subsidytax S W tax
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