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Study Guide

by: Ahmed Notetaker

Study Guide Econ-600

Ahmed Notetaker
GPA 3.35

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This covers Chapters 2-6, and chapter 16 in the Microeconomics textbook and what will be on the exam.
Nathan Larson
Study Guide
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This 3 page Study Guide was uploaded by Ahmed Notetaker on Sunday February 28, 2016. The Study Guide belongs to Econ-600 at American University taught by Nathan Larson in Winter 2016. Since its upload, it has received 40 views. For similar materials see Microeconomics in Economcs at American University.


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Date Created: 02/28/16
Microeconomics Study Guide: Chapter 2: Supply and Demand Creating the Demand and Supply Function. Deriving Market equilibrium Deriving Equilibrium with a tax. Chapter 3: Properties of Consumer preferences: properties of indifference curves The marginal rate of substitution and the slope of the budget line 1) Higher the indifference curve, the better off oe is 2) Indiff curves can’t cross 3) There are no flat curves, which violates monotonicity (more is better) 4) MRS implies that adding one additional unit of good 1 holding good 2 constant adds less and less to one’s utility. Study different types of budget sets Utility Maximization problems. Equate (MU/P) across goods. You will be asked how much extra money would you like to spend with what you can afford to buy. You should spend your last $ on what gives you the most bang for your buck. 4 types of indifference curves 1) Linear (perfect substitutes: U=ax1+bx2): Usually involves a corner solution. 2) Quasilinear preferences: U=ln(x1) + bx2 3) Prefect compliments U=min(1/2(x1)/ 2/3 (x2) a. Equate the two to get how much of each good you need to satisfy your utility. In this example 3/4x1=x2 4) Cobb Douglas Production function x1x2. This normally provides you with the same faction of net income in terms of a good s.t. Y=2p1 etc. or Y/p1q1 always provides you with the same preferences and same ratio for good 1 given an income, Y. Chapter 4: Marshallian uncompensated demand x1(p1,p2,Y) vs. Hicksian demand compensated demand h1(p1,p2,u). Solve for Hicksian demand, the demand that must be compensated for with Y by holding U constant and inputting changing prices, by solving for x1 in terms of (p1, p2, Y) and putting this into U. Then solving again for the variable of x1 that remains. Duality: U E(p, v(p,y))=y V (p,e(p,u))=u where e(p,u)=y, the min expenditure needed to satisfy utility given new prices. Indirect Utility: Plugging x in terms of (p, y) s.t. x(p,y)=v(p,y)=u and solving for u. Expenditure Minimization problems: min: p1x1+p2x2 s.t. U(x1,x2) greater than U(fixd) Exp. Fxn: e(p1,p2,U)= p1h1+p2h2 = p1h1(p1,p2,U). Income-substitution effects: Find total effect either through using price elasticity of substitution and subtracting x at given utility and prices to find income effect or use the slutsky equation. If normal good, income and sub effect move in tandem, if inferior, they move against each other. Giffen good, both must be negative. Slutsky Equation: dx/dp = dh/dp – x(dx/dy) Chapter 5: Welfare Use integral or geometry of triangle to find change in consumer surplus Compensating Variation Process is generally as follows: (e(new prices, original u)-e(old prices, original u))- (e(new prices, new u)-(old prices, new u)) Keep in mind you want to figure out how much money to keep the same old utility. Steps to find this are 1) Find demand funcitons 2) Plug demand functions into utility function 3) Solve for utility level achieved at the old income and old prices 4) Set the value found in step 3 equal to the utility function using new prices and unknown new income, and solve for new income 5) Subtract old income from income found in step 4-that’s cv Equivalent variation: (e(new prices, new u))-e(old prices, new u)) keep in mind you want to figure out much Y to give to prevent new price changes while changes already occurred. 1) Find demand functions 2) Plug demand functions into utility function 3) Solve for utility level achieved at old income and new prices 4) Set the value found in step 3 equal to the utility function using old prices and unknown new income and solve for new income 5) Subtract income found in step 4 from old income- that’s EV. Labor-Leisure problems Chapter 16: Insurance Policy Consider Ew, EU(w) = u function containing Ew as inputs. Fair value for insurance company = pI-qI=0 therefore p=q Ew = E [q(w1) + (1-q)w2] EUw= qu(w1) + (1-q) To find out if someone take a bet see if the utility of their bet is better or worse than the utility of not taking the bet. CE is the inverse of EU(w). The certainty equivalent is the amount that a person would take rather than taking a risky bet. Chapters 6-9 Topics to study returns to scale Elasticity of substitution: dMRS/d(L/K) * (L/K)(MRS) where MRS can reduce to L/K. Elasticity of substitution should reduce to a constant. Cost minimization: SR C(Q): min(L) wL+rK s.t. f((fixed K, L) >=q C(Q) LR: min(L) wL+rK s.t. f((K, L) >=q Profit maximization: SR: fixed(K) maxpf(K,L) –wL-rK : LR: max pf(K,L) – wL-rK Shephard’s Lemma Perfect Competition, find the market supply curves Producer Surplus and Welfare Producer and Consumer surplus with market distortions.


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