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MICRO - ECON Y2 > Consumer Welfare + Intertemporal Choices > Flashcards

Consumer Welfare + Intertemporal Choices Flashcards

1
Q

What is Consumer Surplus?

A

Measure of benefits obtained from Consuming certain units of a good

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2
Q

Where on a diagram is Consumer Surplus represented?

A

Area under Demand Curve

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3
Q

What does Consumer Surplus say for each unit of a good?

A

Consumer is willing to pay a reservation Price

But only Pays Market Price

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4
Q

What is the Total Loss to a Consumer due to a Price Increase on a Diagram?

A

A + B
A = x’ (p’ - p)
B = 0.5 (x - x’) (p’ - p)

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5
Q

In terms of Loss to Consumer, what is A = x’ (p’ - p)?

A

A = Additional Amount Consumer pays for units they continue to Consume

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6
Q

In terms of Loss to Consumer, what is B = 0.5 (x - x’) (p’ - p)?

A

B = Reduction in amount of Consumption

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7
Q

What is Compensating Variation (CV)?

A

Measures how much Extra Income Consumer must Receive to be compensated for Price change
- Amount of extra income needed to be just as well off as before Price Change

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8
Q

What is Equivalent Variation (EV)?

A

Measures Max. Amount of Income Consumer is Willing to pay to avoid the Price Change
- Amount of Income Taken away before Price Change to be as well off as After Price Change

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9
Q

For an Increase in Price of Good 1, what happens to the graph for CV?

A

New I.C is Lower
- B.C parallel to B.C2 but Tangent to I.C1
=> Gives New Income at Initial Prices (Initial Consump. Bundle) with Same Price Ratio as New Bundle

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10
Q

For an Increase in Price of Good 1, what happens to the graph for EV?

A

New I.C is Lower
- B.C parallel to B.C1 but Tangent to I.C2
=> Gives New Income at New Prices with Same Price Ratio as Initial Bundle

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11
Q

Given Utility Function, Initial Prices + Income & Price Change
=> How do you find CV + EV?

A
  1. Compute Demand Function of x1 + x2: p1x1 + p2x2 = m
    + Calculate MRS
  2. Compute Consumption Choices at Initial + New Prices using Utility Func.
  3. Calculate CV - Utility Bundle w/ Income = m’ + New Prices
  4. Calculate EV - Utility Bundle w/ Income m’ + Initial Prices
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12
Q

When does CV = EV = dCS ALWAYS apply?

A

Quasilinear Functions

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13
Q

What happens to EV, CV and dCS if Utility Function is NOT Quasilinear?

A

EV < dCS < CV

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14
Q

What does Intertemporal Choice do?

A

Accounts for Saving, Lending + Borrowing

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15
Q

What is Intertemporal Choice made up of?

A

2 Time Periods - t1 + t2
Consumption in each Period - c1 + c2 (Suppose Price of Consump. = 1)
Income Available in each Period - m1 + m2

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16
Q

What 3 Choices does Consumer have for Intertemporal Choice?

A

Must make Choice Today
c1 = m1 & c2 = m2
c1 < m1 - Save for t2
c1 > m1 - Borrow Money + Pay back in t2

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17
Q

If Consumer Saves in t1 - what is c2 + the B.C?

A

Saving in t1 - c1 < m1
t2 : c2 = m2 + (m1 - c1) + r(m1 - c1) – i.e. c2 = m2 + money saved + interest on saved money
=> B.C = c2 = m2 (1 + r) (m1 - c1)

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18
Q

If Consumer Borrows in t1 - what is c2 + the B.C?

A

Borrows in t1 - c1 > m1
t2: c2 = m2 - (c1 - m1) - r(c1 - m1) – i.e. c2 = m2 - borrowed money - interest on borrowed money
=> B.C = c2 = m2 (1 + r) (m1 - c1)

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19
Q

What is the B.C in terms of Future Value?

A

(1 + r) c1 + c2 = (1 + r)m1 + m2

- Price of Future Consumption = 1

20
Q

What is the B.C in terms of Present Value?

A

c1 + (c2 / 1 + r) = m1 + (m2 / 1 + r)

  • Price of Present Consumption = 1
  • -> Measures Future Price relative to Present Price
21
Q

What is the Slope of the B.C?

A

Slope = - (1 + r)

22
Q

Where is the Endowment Point?

A

Middle of B.C- m1 = m2

23
Q

What does it mean if the Individual is to the Left of the Endowment Point?

A

They are a LENDER

24
Q

What does it mean if the Individual is to the Right of the Endowment Point?

A

They are a BORROWER

25
Q

What is the Present Value of Endowment?

A

m1 + (m2 / 1 + r)

26
Q

What is the Future Value of Endowment?

A

(1 + r) m1 + m2

27
Q

What does I.C indicate for Intertemporal Choice?

A

Consumer’s Tastes for Consumption at Different Times

28
Q

What does it mean if Slope of I.C is a Constant Slope = 1?

A
  • Consumer does NOT care if they Consume Today or Tomorrow
    • I.Cs are Straight Lines
  • MRS between Today + Tomorrow = -1
29
Q

What does it mean if I.C is L-Shaped?

A

Perfect Complements - Equal Consumption Today + Tomorrow

- Unwilling to Sub. Consumption between Periods

30
Q

What does it mean for Well-Behaved Preferences for Intertemporal Choice?

A

Consumer is Willing to Sub. some Consumption for Future Consumption

31
Q

What does it mean for Convexity of Preferences for Intertemporal Choice?

A

Consumer would like ‘Average’ Consumption in each Period rather than A lot in One Period + None in Next Period

32
Q

What does the Effect of a Change in I.R depend on?

A

Depends on whether Consumer is Initially a LENDER or BORROWER

33
Q

What is the effect of Increased I.R if Consumer is Initially a LENDER?

A 
c1 < m1
Increased I.R --> STEEPER B.C
- For given Reduction in c1 --> Consumer gets More Consumption in t2
=> New Optimal Consumption = c'1 < m1
- Consumer REMAINS a LENDER
Moves Up Budget Line
34
Q

What is the effect of Decreased I.R if Consumer is Initially a BORROWER?

A 
c1 > m1
Decreased I.R --> FLATTER B.C
- For given Reduction in c1 --> Consumer gets Less Consumption in t2
=> New Optimal Consumption = c'1 > m1
- Consumer REMAINS a BORROWER
Moves Down Budget Line
35
Q

What is the effect of Decreased I.R if Consumer is Initially a LENDER?

A

Lender –> Decreased I.R –> May switch to being a BORROWER

36
Q

What is the effect of Increased I.R if Consumer is Initially a BORROWER?

A

Borrower –> Increased I.R –> May switch to being a LENDER

37
Q

What does the Slutsky Equation do?

A

Decomposes Change in Demand (due to Change in I.R) into Income + Sub. Effects

38
Q

What is Effect on Consumption in each Period from Increased I.R?

A

Use Future Value B.C

- Increased I.R - means Today is Relatively More Expensive compared to Future Consumption

39
Q

What is the Slutsky Equation?

A

dc1 / dp1 = (dc1s / dp1) + (m1 - c1) (dc1m / dm)

40
Q

What is the SE?

A

SE is Negative: (dc1s / dp1) < 0

41
Q

What is IE if Consumption in t1 is Normal?

A

IE is Positive: (dc1m / dm) > 0

42
Q

What does the sign of TE depend on?

A

TE: dc1 / dp1 - depends on Sign of (m1 - c1)

43
Q

What is the Slutsky Effect if Consumer is a Borrower?

A

c1 > m1 –> dc1 / dp1 < 0
Increased I.R - Consumer Subs. away from Current Consump.
- It becomes relatively more expensive

44
Q

What is the Slutsky Effect if Consumer is a Lender?

A

c1 < m1 –> Effect is Ambiguous

Increased I.R - May give Consumer enough Extra Income to want to Consume even more in t1

45
Q

What is the Effect of Imperfect Capital Markets?

A

When Borrowing- I.R Higher than when Saving

46
Q

How do Imperfect Capital Markets affect the B.C?

A

Slope of B.C- Greater to Right of Endowment Point + Smaller to Left of Endowment Point
- Kink in B.C at Initial Endowment Point
Both c2 + c1 are Lower than Perfect Capital Markets

MICRO - ECON Y2 (7 decks)

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