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Macroeconomics > Consumer and Firm Behavior: The Work-Leisure Decision and Profit Maximization > Flashcards

Consumer and Firm Behavior: The Work-Leisure Decision and Profit Maximization Flashcards

1
Q

A dynamic decision is one that

A

involves planning over more than one time period

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2
Q

A static decision is one that

A

involves planning over one time period

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3
Q

The principle that consumers and firms optimize

A

is helpful because it allows us to analyze how economic agents respond to changes in their environment.

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4
Q

It is useful to assume that there is a single representative consumer because

A

this is a useful abstraction if we are interested in problems where distribution effects are not important.

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5
Q

The utility function captures

A

how an individual consumer ranks consumption bundles.

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6
Q

The indifference map

A

captures the same information as the utility function

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7
Q

The consumer’s work-leisure choice problem focuses on how a consumer’s work-leisure

A

preferences and constraints.

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8
Q

Leisure does not include

A

market work

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9
Q

The consumer wants to work because he/she

A

wants the income

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10
Q

In macroeconomic analysis, what is the representative consumer’s role

A

plays the role of a stand-in for all consumers in the economy

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11
Q

We consider the preferences of the consumer because

A

we want to understand the consumer’s reaction to changing circumstances.

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12
Q

A consumption bundle

A

is a particular combination of consumption and leisure

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13
Q

A utility function

A

needs to measure relative amounts of happiness for a single individual

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14
Q

We use indifference curves because

A

they help represent preferences

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15
Q

The preferences of the representative consumer over consumption and leisure are represented by use of a

A

utility function

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16
Q

We assume that the representative consumer’s preferences exhibit the properties that

A

more is preferred to less and that the consumer prefers diversity.

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17
Q

In the one-period model, what do we assume about household preferences

A

Households prefer more to less.

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18
Q

when is a consumer said to be indifferent between two consumption bundles

A

when the two bundles provide equal amounts of utility.

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19
Q

We assume that the representative consumer’s preferences exhibit the properties that

A

consumption and leisure are both normal goods and that the consumer likes diversity in his or her consumption bundle

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20
Q

In the (consumption,leisure) space, what shape are indifference curves

A

downward sloping and bowed towards the origin.

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21
Q

In the (consumption,leisure) space, indifference curves as we have assumed them have the property of presenting the highest levels of satisfaction in what corner

A

in the north-east corner.

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22
Q

A good is normal for a consumer if

A

its consumption rises when income rises

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23
Q

We assume leisure is a normal good. This implies that

A

an increase in taxes decreases the demand for leisure.

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24
Q

A good is inferior for a consumer if

A

its consumption falls when income rises.

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25
Q

what is a consumption bundle

A

a particular combination of consumption and leisure.

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26
Q

what is an indifference curve

A

connects a set of consumption bundles among which the consumer is indifferent.

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27
Q

Two key properties of indifference curves are that an indifference curve slopes

A

downward and is bowed in toward the origin

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28
Q

what is the significance that indifference curves are downward sloping

A

it follows from the fact that more is preferred to less

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29
Q

The fact that indifference curves are bowed in toward the origin

A

follows from the property that the consumer likes diversity in his or her consumption bundle

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30
Q

what is the marginal rate of substitution

A

is minus the slope of the indifference curve.

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31
Q

The property of diminishing marginal rate of substitution follows from the property that the indifference curve is

A

bowed in toward the origin.

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32
Q

The marginal rate of substitution measures

A

the rate at which a consumer is willing to exchange one good for another

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33
Q

The representative consumer acts competitively

A

when he or she is a price-taker.

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34
Q

When consumers act as price-takers, we say that they behave

A

competitively.

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35
Q

what is a barter economy

A

an economy without monetary exchange

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36
Q

An economy without monetary exchange is called

A

a barter economy.

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37
Q

A numeraire is

A

a good used as a unit of account

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38
Q

Which of the following is false?

A

lump-sum taxes are realistic.

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39
Q

The time constraint for the consumer is

A

expressed as leisure time + time spent working = total time available.

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40
Q

The real wage denotes

A

the number of units of consumption goods that can be exchanged for one unit of labor time.

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41
Q

A lump-sum tax is a tax that

A

does not depend on the actions of the economic agent being taxed

42
Q

In a one-period economy

A

consumption equals disposable income.

43
Q

A consumer’s real disposable income equals

A

wage income plus profit income minus taxes.

44
Q

In a one-period economy, real consumption is equal to…

A

exactly equal to disposable income.

45
Q

In a one-period economy, all of the following are equivalent expressions of the budget constraint except

A

C = w(NS + l) + π - T.

46
Q

With consumption on the vertical axis and leisure on the horizontal axis, the slope of the budget line is equal to

A

-w.

47
Q

The vertical intercept of the consumer’s budget line is equal to

A

wh + π - T.

48
Q

An increase in taxes has the following impact on the budget constraint

A

a parallel move down.

49
Q

If dividend income increases, the following does not happen

A

the substitution effect exceeds the income effect.

50
Q

The household budget constraint may have a kink because

A

leisure is limited by the number of available hours.

51
Q

The optimal consumption bundle is the point representing a consumption-leisure pair that is on the

A

highest possible indifference curve and is on or inside the consumer’s budget constraint.

52
Q

At the optimal consumption bundle, the marginal rate of substitution of leisure for consumption is equal to

A

the real wage and the budget line is tangent to an indifference curve.

53
Q

Saying the consumer is rational means

A

the consumer makes the best choices.

54
Q

A defense for the assumption that consumers maximize is that

A

consumers do not consistently make the same mistakes.

55
Q

An increase in real dividend income minus taxes represents

A

a pure income effect

56
Q

A positive, pure income effect can be obtained by

A

increasing the dividend.

57
Q

A pure positive income shock leads to

A

an increase in leisure and consumption.

58
Q

When consumption and leisure are both normal goods, after an increase in real dividend income minus taxation, the rational consumer

A

increases consumption and increases leisure.

59
Q

When consumption and leisure are both normal goods, after an increase in real dividend income minus taxation, the rational consumer

A

increases consumption and reduces labor supply.

60
Q

An increase in the real wage

A

represents a combination of income and substitution effects.

61
Q

An increase in the real wage

A

increases consumption and has an ambiguous effect on labor supply

62
Q

When the wage increases, the substitution effect in the household’s choices leads to

A

an increase in consumption and a decrease in leisure

63
Q

When the wage increases, the income effect on the household’s choices leads to

A

an increase in consumption and leisure.

64
Q

Theoretically, an increase in the real wage

A

has an ambiguous effect on leisure.

65
Q

The substitution effect measures

A

the responses of quantities to changes in the relative prices of goods

66
Q

Labor supply

A

increases if the substitution effect exceeds the income effect.

67
Q

If labor supply is increasing in the real wage, then

A

the substitution effect is larger than the income effect.

68
Q

A production function describes the

A

technological possibilities for converting factor inputs into outputs.

69
Q

In the production function, Y = zF(K, Nd), total factor productivity is

A

z

70
Q

Capital, K, includes

A

machinery

71
Q

The marginal product of a factor of production

A

is equal to the amount of additional output that can be produced with one additional unit of that factor input, holding constant the quantities of the other factor inputs.

72
Q

Constant returns to scale means that, given any constant x > 0

A

xzF(xK, xNd)= zF(xK, xNd).

73
Q

The construct of a representative firm is most helpful in describing the behavior of all of the firms in the economy when

A

there are constant returns to scale.

74
Q

We are assuming that returns to scale are

A

Constant

75
Q

As the quantity of labor increases, the marginal product of labor

A

decreases.

76
Q

As the quantity of labor increases, the marginal product of capital

A

increases

77
Q

As the quantity of capital increases, the marginal product of capital

A

decreases

78
Q

The assumption that the marginal product of labor decreases as the labor input increases implies that

A

the production function is concave

79
Q

The production function is concave in labor because

A

the contribution to production of each additional unit of labor decreases

80
Q

The production function is concave in capital because

A

the contribution to production of each additional unit of capital decreases

81
Q

An increase in total factor productivity shifts the production function

A

upward and increases the marginal product of labor.

82
Q

Of the following, which is the least likely example of an increase in total factor productivity?

A

an increase in immigration

83
Q

An increase in total factor productivity could be the result of

A

the introduction of new manufacturing methods.

84
Q

Look at the production schedule of the Widget Company below:
Number of workers 0 1 2 3 4 5
Number of widgets 0 12 22 30 36 40

A

10

85
Q

Look at the production schedule of the Widget Company below:
Number of workers 0 1 2 3 4 5
Number of widgets 0 12 22 30 36 40

A

3

86
Q

Look at the production schedule below:
Workers 0 1 2 3 4 5
Output 0 45 80 100 130 165

A

decreasing marginal product of labor

87
Q

Look at the production schedule below:
Workers 0 1 2 3 4 5
Output 0 45 80 100 130 165

A

4

88
Q

Which is a good example of an increase in total factor productivity?

A

good weather

89
Q

If the firm hires more labor, everything else held constant, then

A

the marginal product of labor falls.

90
Q

Total factor productivity encompasses

A

know-how

91
Q

The goal of the representative firm is to

A

maximise profits

92
Q

An increase in total factor productivity

A

changes both the slope and the position of the production function.

93
Q

The Solow residual is a measure of

A

total factor productivity.

94
Q

A Cobb-Douglas production function is

A

a particular production function that fits the data well.

95
Q

The profit-maximizing quantity of labor equates the marginal product of labor with

A

the real wage

96
Q

When the representative firm maximizes profits,

A

the wage equals marginal labor productivity

97
Q

When the representative firm maximizes profits

A

the marginal product of labor equals the wage.

98
Q

Suppose the representative firm suddenly has less capital at its disposal. What happens to labor demand?

A

It decreases.

99
Q

If the real wage is equal to 7 widgets, and only an integer number of workers can be hired, the Widget company should hire

A

3 workers.

100
Q

Labor demand is decreasing in the wage because

A

the production function is concave.

Macroeconomics (1 decks)

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