Bocconi Micro

Question 1

What are substitutes?

Answer 1

Products that are interchangeable; a price increase in one causes a demand increase in another (ex: corn & potatoes).

Question 2

What are complements?

Answer 2

Products that are codependent; a price increase in one causes a demand decrease in another (ex: corn & fuel)

Question 3

What is elasticity?

Answer 3

A measure of the % change in Y caused by a % change in X.

Question 4

What is the price elasticity of demand?

Answer 4

It measures how responsive the quantity demanded is to any changes in price.

Question 5

What happens with the Substitution Effect

Answer 5

The good becomes more expensive relative to all goods, and so people find cheaper alternatives to that good

Question 6

What happens with the Income Effect?

Answer 6

The purchasing power of the consumer falls, and they must adjust their purchases accordingly.

Question 7

What happens when supply increases and demand stays the same?

Answer 7

Price goes down, quantity goes up

Question 8

What happens when supply decreases and demand stays the same?

Answer 8

Price goes up, quantity goes down.

Question 9

What happens when demand rises and supply stays the same?

Answer 9

Price goes up, quantity goes up.

Question 10

What happens when demand falls and supply stays the same?

Answer 10

Price goes down, quantity goes down.

Question 11

What happens when supply goes up and demand goes up (by a proportional amount)?

Answer 11

No changes.

Question 12

What happens when supply goes up and demand goes down?

Answer 12

Price goes down, quantity is ambiguous.

Question 13

What happens when supply goes down and demand goes up?

Answer 13

Price goes up, quantity is ambiguous.

Question 14

When can we observe a maximized expenditure?

Answer 14

When the elasticity of demand is -1.

Question 15

What is a normal good?

Answer 15

A good that is purchased more when the income of a consumer rises.

It has positive income elasticity of demand, i.e. %change in income = %change in demand

Question 16

What is an inferior good?

Answer 16

A good that is purchased less when the income of the consumer falls.

It has negative income elasticity of demand, i.e. %change in income = - %change in demand

Question 17

What is the cross-price elasticity of demand?

Answer 17

It measures how responsive the demand of one product is relative to a price changes in another product. The formula is (ΔQ/Q)/(ΔPo/Po)

If it is > 0 they are perfect substitutes.
If it is < 0 they are perfect complements.

Question 18

What is the formula (and its equivalents) for Marginal Rate of Substitution (MRS)?

Answer 18

= -(ΔX/ΔY)
= Px/Py
= MUx/MUy

Question 19

What is the formula for marginal utility?

Answer 19

MUx = -(ΔUx/ΔX)

Question 20

What is the formula for compound interest rate?

Answer 20

Balance = Starting Amount(1+Rate)^Time

Question 21

What is the formula for present discounted value?

Answer 21

PDV = Future Value/(1+Rate)^Time

Question 22

What is the budget constraint formula?

Answer 22

M ≥ XPx + YPy

Question 23

What is an interior choice?

Answer 23

A bundle that is not objectively better, i.e. there are other bundles on the same budget constraint that contain a little bit more or a little bit less of each good.

When a solution is not interior it lies on one of the intercepts.

Question 23

What are Engel curves?

Answer 23

They show the relationship between the consumption of a good and the income of the consumer.

Question 24

What are Giffen Goods?

Answer 24

They are inferior goods that experience an increase in demand when price rises. This is because the income effect opposes and surpasses the substitution effect.

Question 25

What is consumer surplus?

Answer 25

The net benefit a consumer receives for participating in a market.

Question 26

Is leisure a normal or inferior good? Explain why using a scenario where wage increases.

Answer 26

Leisure is a normal good.

If the wage rises, then consumers will substitute away from leisure because it is more expensive. However, since wages increase the consumer’s purchasing power, and leisure is a normal good, they will consume it more.

Question 27

What is defaulting?

Answer 27

Failing to pay back borrowed money.

Question 28

What is principal?

Answer 28

The amount initially lent/borrowed.

Question 29

What is the slope of a budget line considering future values?

Answer 29

-((1+R)(P0))/P1

The price of P0 is multiplied by (1+R) because consuming in the present becomes more expensive, precisely by the opportunity cost of lending the money.