Consumer & Producer Theory

Question 1

Complete

Answer 1

If any two bundles (x1,x2) satisfy (x1,x2) >= (y1,y2) OR (x1,x2) <= (y1,y2) OR BOTH

Question 2

Transitive

Answer 2

If consumer prefers x to y and y to z then prefers x to z

Question 3

Rational preferences

Answer 3

Complete + transitive

Question 4

Well-behaved preferences

Answer 4

Monotonic (strictly prefers more to less), convex (weighted average more preferred), (continuous), monotone, strictly convex - if so, there exists a most preferred bundle in budget set

Question 5

3 conditions for a Giffen good

Answer 5

1. Inferior good - as income decreases, consumer demands more of the good (rise in price essentially makes consumer ‘poorer’)
2. Large income effect - takes up a large fraction income
3. Small substitution effect - no close substitutes

Question 6

Income an substitution effects for various types of good

Answer 6

Perfect complements - income effect = TOTAL effect
Perfect substitutes - substitution effect = TOTAL effect

Question 7

Examples of fixed CoP

Answer 7

1. One-off costs necessary for the firm to operate at all (searching for an appropriate location, legal costs etc.)
2. Factors which are not permanently fixed but might have to be fixed for a certain while
   i) e.g. for any production to begin, some machinery might have to be in place, which means capital spending has to be above some fixed level before the firm can produce anything
   ii) or some factors cannot be adjusted quickly, and ‘in the SR’, the firm might have to hold them constant, whilst adjusting other factors in response to changes in the economic environment

Question 8

LRMC vs SRMC

Answer 8

Not true that LRMC is strictly lower than SRMC, nor that LRMC “touches” SRMCs.
However, it is true that for any q = q-bar you can find a
corresponding optimal long-run level of capital K-bar = K*(q-bar), and the LRAC curve would meet the SRAC curve that
corresponds to the fixed value K = K-bar, at q = q-bar

MC(q) = dc(q)/dq = d(AC(q).q)/dq = AC(q) + qAC’(q).