Econ 201 Midterm 2 Study Guide
Econ 201 Midterm 2 Study Guide Econ 201
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This 10 page Study Guide was uploaded by Cheyenne Thorpe on Friday February 19, 2016. The Study Guide belongs to Econ 201 at University of Oregon taught by Waddell in Winter 2016. Since its upload, it has received 640 views. For similar materials see Introduction to Microeconomics in Economcs at University of Oregon.
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Date Created: 02/19/16
Econ 201 Microeconomics Glen Waddell Midterm 2 Study Guide *Bring Green Scantron! *Student or Gov Issued ID *#2 pencils Definitions: Normal good: is a good for which demand increases as income increases Income elasticity: % change in quantity of x/ % change in income Cross Price Elasticity: % change in quantity of x/ % change in y Price floor: a government imposed limit on how low a dollar price can be charged Imposed above (below) the equilibrium price is effective… surplus (ineffective... it doesn’t change anything) Agriculture price supports Dairy price supports Federal minimum wage (higher minimum wage, higher unemployment) Price Ceiling: a government imposed limit on how high a dollar price can be charged Imposed below (above) the equilibrium price is effective (ineffective) Insurance and utility rates Gas Food Prescription drugs Rent controlled apartments Tuition) Productions Possibilities Frontier: The combinations of various goods that can be produced given available resources and technology Absolute Advantage: if that individual can produce more than others in the same time or the same amount as others in less time Comparative Advantage: if the individual can produce the good at lower cost than others Specialization Would we both be better off through specialization? If your roommate is good at math do you ask him to help you with your math homework or your English homework? If you’re good at English and he’s not, do you switch homework? You’d both be better off focusing on what you can produce better Through specialization you both end up with more stuff What will happen over time as specialization occurs? o You’re going to get better at producing your product o Your production possibilities frontier is going to decrease because you’re focusing on one item The Principle of increasing Opportunity cost: As the production of one good increases, the opportunity cost of producing another unity (marginal cost) of producing that good generally increases Consumer Surplus: the amount producers receive upon selling the units above the costs of producing unit Efficiency: the absence of waste. Obtained where Marginal cost of production equals the Marginal Values of consumption Welfare: the sum of consumer and producer surplus. Defined this way, it’s maximized in perfectly competitive markets The “Law” of demand: as the price of an item rises, the quantity demanded of the item generally falls Qd(p)=abp, where a>; 0, b>0 Since, b>0, inversely related o Qd(p)=102p At p=2 quantity demanded in the market is 102(2)=6units Supply: Qs(p)=2+2p Quantity supplied rises two units for every dollar increase in price Equilibrium Suppose that Qd(p)=50p and Qs(p)=20+2p o Qd(p)=Qs(p) o 50p=20+2p o p=$10 Qd(10)=Qs(10)=40 Suppose Qd(p)=40010p and Qs(p)=100+2p. Is a price ceiling of p=$10 effective? o 40010p=100+2p o p=25 o $10 price ceiling is effective because 10<25 o Shortage (Qd(p)=40010(10)=300, Qs(p)=100+2(10)=120 Inverse demand: p(Qd)=60Qd Inverse supply: p(Qs)=0.5Qs Inputs, or factors of production: Anything that in any way contributes to production Production function: The relationship between inputs and outputs Total Product: the amount of output obtained in total from a given quantity of input Marginal Product: The change in the total product that results from a 1 unit increase in an input, holding the amounts of all other inputs constant The “Law” of Diminishing Marginal Product: As more of one factor of production is used with a fixed quantity of other factors, the marginal product of expanding factors ultimately decreases Average Product: The total product divided by quantity Marginal Revenue Product: the increasing total revenue that results from a 1 unit increase in an input, holding the amounts of all other inputs constant o If we know the MP of an input and the price of the output P, then we can calculate the MRP by, o MRP=MPxP The Coase Theorem: in the absence of transition coasts, resource allocation is independent of the assignment of liability (or distribution of property rights) Table example (definition equations put to use) Inputs TP MP MRP wL Hire? TR TC Profit 1 3 3 30 $40 Yes 30 40 10 2 8 5 50 $40 Yes 80 80 0 3 15 7 70 $40 Yes 150 120 30 4 21 6 60 $40 Yes 210 160 50 5 26 5 50 $40 Yes 260 200 60 6 30 4 40 $40 Yes 300 240 60 7 22 3 30 $40 No 330 280 50 8 35 2 20 $40 No 350 320 30 9 36 1 10 $40 No 360 260 0 Questions: Farmers can plant either corn or soybeans in their fields. Suppose that the st first decade of the 21 century, a new technology for converting corn into liquid furl increases the demand for corn. What will happen? o The supply of soybeans will decrease In May of 1996 a Value Jet airliner crashed in Florida. Allegations were made that cost cutting by Value Jet had led to reduce safety measures. On the day following the crash, airline stock rallied. UAL gained 6 to 214, AMR gained 2.5 to 92 and Delta air rose 3.375 to 85.657 o Anticipated behavior changed so stock prices rose because everyone wanted a piece of the other airlines (demand for airline stock increase-prices adjust upward) Suppose that over time, technological innovations act to lower the cost of music piracy. What would you expect to happen in the retail market for recorded music? o Demand in the retail sector falls and prices adjust downward… fewer units are exchanged o Long run predictions: if the market is segmented and those with a higher willingness to pay- retail prices should increase The wall street journal reports that crude oil prices soared after the U.N. froze the Iraqi oil pact that was to permit Iraq to resume sales of oil on the world market. Why should oil prices rise when Iraq was not selling oil at the time? o Expectations –demand adjusts o Prices adjust upward o Quantity increases Surplus: Tutor: $10 an hour Time Benefit Price/ Hour Price Net Benefit 1 30 10 10 20 2 45 10 20 25 3 60 10 30 30 4 70 10 40 30 5 75 10 50 25 With 3 hours of Tutoring you get the same Net Benefit as 4 hours of tutoring Total Surplus= Consumer Surplus + Producer Surplus Consumer Surplus: Producer Surplus: Suppose the government builds a dam on a river in order to generate electricity. The dam also creates a lake that enhances recreational use of the land. As a result rents on the land increase and campers and hikers are charged a higher fee for use of land o These increase in use-frees are a measure of benefits created by the dam o The lake is worth that use-fee If property rights aren’t well-defined, transaction costs are positive and resource allocation is different insofar as they are spent attempting to better-define these rights o When the right to a seat at Autzen stadium are not well- defined, resources are reallocated toward keeping the peace o Where workers are prone to shirk, resources are reallocated toward monitoring workers Self Review Checklist: Preliminaries What is economics What is our role The economic problem The organization of an economy Prices and markets Theory Policy analysis Scarcity and competition Cost- value of the next best alternative Demand and supply Consumer Theory Individual preferences and behavioral postulates Valuation- total versus marginal The optimal purchase rule and demand theory The diamond water paradox Sale prices Inflation Individual responsiveness Demand determinants Shipping the good apples out Exchange and Supply Voluntary exchange- you can't be forced into it The supply side of the market Organized markets Demand and Supply Demand determinants and changes in demand Supply determinants and changes in supply Interactions between markets Price controls Black markets Cost and production Productive advantages Societys production choice Marginal cost and supply Market efficiency Production, Profit and Property Rights Production technology Factor demand First Midterm Review: Definitions: Price: Ratio of exchange Ex: Raise price of DUI raises the number of hit and runs Theory Value: Testability How well it predicts behavior Scientist cant prove anything. At best we fail to refute Ex: one cannot prove gods existence or lack there of Regulation: designed to alter the behavior of individuals by using some appropriate set of incentives (sanctions and rewards) to induce us to incur the costs of a behavior change We put costs in front of the unethical forms of competition to push people into the right paths Ex: Punishments for immoral actions like jail, fines, tickets, etc. Incentive: must serve to raise the gains or lower the costs (positive incentive) or opposite (negative) Scarcity: not having enough of the items we find desirable to satisfy our wants Ex: Mineral, water, clean air, wildlife, land / Labor hours by labor force / torque of a given turbine engine Pollution isn’t a scarcity but clean air is Opportunity Cost: of any decision is the value of the next best alternative foregone Ex: How does one determine the financial rate of return to a 4year college degree, most expensive part=time Consumer theory: characterizes consumers’ choices in a systematic way Producer theory: characterizes producers’/sellers’ choices in a systematic way Demand curve shows the amount of a good consumers wish to purchase at specified prices (negative slope) Supply curve shows the amount if a good producers are willing and able to sell at specified prices (positive slope) Equilibrium where the demand curve and supply curve intersect Surplus: an excess of quantity supplied over quantity demanded Shortage: an excess of quantity demanded over quantity supplied Behavior Postulates: People have preference, more is preferred to less, people are willing to substitute, marginal values are decreasing We can’t accurately describe the preferences of a group, It would be problematic if we based theory on groups: ex. 3 people have 3 different Republicanprimary candidate preferences Valuation: we measure value by what one is willing to give up in order to obtain something Ex: one gives up $40,000 worth of other goods to buy a car reveals that the car has a value of at least $40,000 Intrinsic Value: we will maintain that an object cant have value beyond what people are willing to pay for right to control the object Value of human life: US government says $78 million to a human life Total Value: the max amount of money a consumer is willing to pay in order to acquire the good, the minimum amount of money a consumer is willing to accept in order to give up the good Marginal Value: the max amount a consumer is willing to pay to acquire one more unit of the good The law of diminishing marginal value: for all individuals and good the marginal value of goods decreases as more of that good is consumer, holding other things constant After running a marathon, how might you value the first glass of water? What about the first relative to the second? The first glass of water is a lot more valued than the second The optimal purchase rule: a consumer is always better off by purchasing an additional unit of a good if the marginal value of that next unit exceeds the price he would be required to pay for that unit That is, the consumer should continue to purchase additional goods as long as Marginal Values>Price The law of demand: as the price of an item rises, the quantity demanded of the item generally falls The Diamondwater paradox: Why are diamonds more expensive than water, which is essential to all life? the market prices of goods reflects consumers marginal values of these goods and not their total value One more glass of water is worth less than one more diamond Inflation: prices rise If there are currently 20 million packs of cigarettes sold in a week, how much revenue will a new $.25 per pack tax generate for the government? Will they still sell 20 million after the tax is imposed Probably less than $5 million (20x.25) Priceelasticity of demand: measures the responsiveness in quantity demanded to change in price (%change in quantity of x) / (%change in price of x) What determines the responsiveness of an individual’s choice of quantity demanded to a change in price? The availability of close substitutes, ex: cigarettes, prescription drugs steep slope The fraction of income spent on the good The unit of time: with the passage of time, the response to a given change in price becomes greater (2 law of demand) Normal Good: A good for which demand increases as income increases Inferior Good: response to income increases Substitutes: two goods for which the demand of one good increases as the price of the other good increases MacBook pro Dell Latitude Econ major Business major Beer Spirits? Complements: two goods for which the demand of one good increases as the price of the other good decreases CDs CD players IPod ITunes Coffee Cream Voluntary Exchange: o What is the basis of trade (why does it exist?) Voluntary exchange is based on mutual benefits Everything depends on free choice Are you willing? Forced? The only way you can back out value is if the situation was forced/coerced, the rules change
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