Chapter 1 + 2

Question 0

What is an Exogenous Variable?

Answer 0

Relating to or dependent on external factors

Question 1

What is a model?

Answer 1

A simplified representation of reality

Question 2

What is an Endogenous Variable?

Answer 2

Related to or dependent on internal factors

Question 3

What is the “Optimization Principle”?

Answer 3

People try to choose the best patterns of consumption that they can afford.

Question 4

What is the “Equilibrium Principle”?

Answer 4

Prices adjust until the amount that people demand of something is equal to the amount that is supplied.

Question 5

Reservation Price

Answer 5

The highest price that a given person will accept and still purchase the good

Question 6

Demand Curve

Answer 6

A curve that relates the quantity demanded to price.

Question 7

What is a Competitive Market?

Answer 7

A market in which large numbers of producers compete with each other to satisfy the wants and needs of a large number of consumers.

Question 8

Comparative Statics

Answer 8

Involves comparing two “static” equilibria without worrying about how the market moves from one equilibrium to another.

Question 9

Monopoly

Answer 9

A situation where a market is dominated by a single seller of a product

Question 10

Discriminating Monopolist

Answer 10

A single seller who makes different people pay different prices for the same good.

Question 11

What are four possible ways of allocating a good?

Answer 11

The competitive market.
A discriminating monopolist.
An ordinary monopolist.
Rent control.

Question 12

What is a Pareto improvement?

Answer 12

A situation where we can find a way to make some people better off without making anybody else worse off.

Question 13

What makes an allocation Pareto inefficient?

Answer 13

If an allocation allows for a Pareto improvement.

Question 14

What makes an allocation Pareto efficient?

Answer 14

If an allocation is such that no Pareto improvements are possible.

Question 15

Budget Constraint

Answer 15

Represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income

Question 16

Consumption Bundle

Answer 16

This is simply a list of two numbers that tells us how much the consumer is choosing to consume of good 1 and good 2

Question 17

Budget Set

Answer 17

The set of affordable consumption bundles at prices (p1 , p2 ) and income m

Question 18

Composite Good

Answer 18

Stands for everything else that the consumer might want to consume other than good 1.

Question 19

Budget Line

Answer 19

The set of bundles that cost exactly m

Question 20

Opportunity Cost

Answer 20

The value of the best alternative forgone

Question 21

Numeraire Price

Answer 21

A good who’s price has been set to 1 and all other goods prices are measured relative to that.

Question 22

Quantity Tax

Answer 22

The consumer has to pay a certain amount to the government for each unit of the good he purchases.

Question 23

Ad Valorem Tax

Answer 23

A tax on the value—the price—of a good, rather than the quantity purchased of a good.

Also called a Value Tax

Question 24

Subsidy

Answer 24

The opposite of a tax

Question 25

Lump Sum Tax

Answer 25

The government takes away some fixed amount of money, regardless of the individual’s behavior.

Question 26

Rationing Constraints

Answer 26

This means that the level of consumption of some good is fixed to be no larger than some amount