Consumer and Firm Behavior: The Work-Leisure Decision and Profit Maximization Flashcards
A dynamic decision is one that
involves planning over more than one time period
A static decision is one that
involves planning over one time period
The principle that consumers and firms optimize
is helpful because it allows us to analyze how economic agents respond to changes in their environment.
It is useful to assume that there is a single representative consumer because
this is a useful abstraction if we are interested in problems where distribution effects are not important.
The utility function captures
how an individual consumer ranks consumption bundles.
The indifference map
captures the same information as the utility function
The consumer’s work-leisure choice problem focuses on how a consumer’s work-leisure
preferences and constraints.
Leisure does not include
market work
The consumer wants to work because he/she
wants the income
In macroeconomic analysis, what is the representative consumer’s role
plays the role of a stand-in for all consumers in the economy
We consider the preferences of the consumer because
we want to understand the consumer’s reaction to changing circumstances.
A consumption bundle
is a particular combination of consumption and leisure
A utility function
needs to measure relative amounts of happiness for a single individual
We use indifference curves because
they help represent preferences
The preferences of the representative consumer over consumption and leisure are represented by use of a
utility function
We assume that the representative consumer’s preferences exhibit the properties that
more is preferred to less and that the consumer prefers diversity.
In the one-period model, what do we assume about household preferences
Households prefer more to less.
when is a consumer said to be indifferent between two consumption bundles
when the two bundles provide equal amounts of utility.
We assume that the representative consumer’s preferences exhibit the properties that
consumption and leisure are both normal goods and that the consumer likes diversity in his or her consumption bundle
In the (consumption,leisure) space, what shape are indifference curves
downward sloping and bowed towards the origin.
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
in the north-east corner.
A good is normal for a consumer if
its consumption rises when income rises
We assume leisure is a normal good. This implies that
an increase in taxes decreases the demand for leisure.
A good is inferior for a consumer if
its consumption falls when income rises.
what is a consumption bundle
a particular combination of consumption and leisure.
what is an indifference curve
connects a set of consumption bundles among which the consumer is indifferent.
Two key properties of indifference curves are that an indifference curve slopes
downward and is bowed in toward the origin
what is the significance that indifference curves are downward sloping
it follows from the fact that more is preferred to less
The fact that indifference curves are bowed in toward the origin
follows from the property that the consumer likes diversity in his or her consumption bundle
what is the marginal rate of substitution
is minus the slope of the indifference curve.
The property of diminishing marginal rate of substitution follows from the property that the indifference curve is
bowed in toward the origin.
The marginal rate of substitution measures
the rate at which a consumer is willing to exchange one good for another
The representative consumer acts competitively
when he or she is a price-taker.
When consumers act as price-takers, we say that they behave
competitively.
what is a barter economy
an economy without monetary exchange
An economy without monetary exchange is called
a barter economy.
A numeraire is
a good used as a unit of account
Which of the following is false?
lump-sum taxes are realistic.
The time constraint for the consumer is
expressed as leisure time + time spent working = total time available.
The real wage denotes
the number of units of consumption goods that can be exchanged for one unit of labor time.
A lump-sum tax is a tax that
does not depend on the actions of the economic agent being taxed
In a one-period economy
consumption equals disposable income.
A consumer’s real disposable income equals
wage income plus profit income minus taxes.
In a one-period economy, real consumption is equal to…
exactly equal to disposable income.
In a one-period economy, all of the following are equivalent expressions of the budget constraint except
C = w(NS + l) + π - T.
With consumption on the vertical axis and leisure on the horizontal axis, the slope of the budget line is equal to
-w.
The vertical intercept of the consumer’s budget line is equal to
wh + π - T.
An increase in taxes has the following impact on the budget constraint
a parallel move down.
If dividend income increases, the following does not happen
the substitution effect exceeds the income effect.
The household budget constraint may have a kink because
leisure is limited by the number of available hours.
The optimal consumption bundle is the point representing a consumption-leisure pair that is on the
highest possible indifference curve and is on or inside the consumer’s budget constraint.
At the optimal consumption bundle, the marginal rate of substitution of leisure for consumption is equal to
the real wage and the budget line is tangent to an indifference curve.
Saying the consumer is rational means
the consumer makes the best choices.
A defense for the assumption that consumers maximize is that
consumers do not consistently make the same mistakes.
An increase in real dividend income minus taxes represents
a pure income effect
A positive, pure income effect can be obtained by
increasing the dividend.
A pure positive income shock leads to
an increase in leisure and consumption.
When consumption and leisure are both normal goods, after an increase in real dividend income minus taxation, the rational consumer
increases consumption and increases leisure.
When consumption and leisure are both normal goods, after an increase in real dividend income minus taxation, the rational consumer
increases consumption and reduces labor supply.
An increase in the real wage
represents a combination of income and substitution effects.
An increase in the real wage
increases consumption and has an ambiguous effect on labor supply
When the wage increases, the substitution effect in the household’s choices leads to
an increase in consumption and a decrease in leisure
When the wage increases, the income effect on the household’s choices leads to
an increase in consumption and leisure.
Theoretically, an increase in the real wage
has an ambiguous effect on leisure.
The substitution effect measures
the responses of quantities to changes in the relative prices of goods
Labor supply
increases if the substitution effect exceeds the income effect.
If labor supply is increasing in the real wage, then
the substitution effect is larger than the income effect.
A production function describes the
technological possibilities for converting factor inputs into outputs.
In the production function, Y = zF(K, Nd), total factor productivity is
z
Capital, K, includes
machinery
The marginal product of a factor of production
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.
Constant returns to scale means that, given any constant x > 0
xzF(xK, xNd)= zF(xK, xNd).
The construct of a representative firm is most helpful in describing the behavior of all of the firms in the economy when
there are constant returns to scale.
We are assuming that returns to scale are
Constant
As the quantity of labor increases, the marginal product of labor
decreases.
As the quantity of labor increases, the marginal product of capital
increases
As the quantity of capital increases, the marginal product of capital
decreases
The assumption that the marginal product of labor decreases as the labor input increases implies that
the production function is concave
The production function is concave in labor because
the contribution to production of each additional unit of labor decreases
The production function is concave in capital because
the contribution to production of each additional unit of capital decreases
An increase in total factor productivity shifts the production function
upward and increases the marginal product of labor.
Of the following, which is the least likely example of an increase in total factor productivity?
an increase in immigration
An increase in total factor productivity could be the result of
the introduction of new manufacturing methods.
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
10
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
3
Look at the production schedule below:
Workers 0 1 2 3 4 5
Output 0 45 80 100 130 165
decreasing marginal product of labor
Look at the production schedule below:
Workers 0 1 2 3 4 5
Output 0 45 80 100 130 165
4
Which is a good example of an increase in total factor productivity?
good weather
If the firm hires more labor, everything else held constant, then
the marginal product of labor falls.
Total factor productivity encompasses
know-how
The goal of the representative firm is to
maximise profits
An increase in total factor productivity
changes both the slope and the position of the production function.
The Solow residual is a measure of
total factor productivity.
A Cobb-Douglas production function is
a particular production function that fits the data well.
The profit-maximizing quantity of labor equates the marginal product of labor with
the real wage
When the representative firm maximizes profits,
the wage equals marginal labor productivity
When the representative firm maximizes profits
the marginal product of labor equals the wage.
Suppose the representative firm suddenly has less capital at its disposal. What happens to labor demand?
It decreases.
If the real wage is equal to 7 widgets, and only an integer number of workers can be hired, the Widget company should hire
3 workers.
Labor demand is decreasing in the wage because
the production function is concave.
