Econ

Question 1

Key elements of economic analysis?

Answer 1

Axiom, Assumption, deductions, results, compare against data

Question 2

Characteristics of a good economic model?

Answer 2

Transparent & infallible reasoning. Reasonable predictive power, and simplicity

Question 3

Normal good

Answer 3

you consume more of it with higher income

ex. designer clothing, ski vacations

Question 4

Inferior good

Answer 4

demand for good rises when income falls (bus rides

Question 5

Complements

Answer 5

using more of one good requires more use of another good (printer and ink cartridge)

Question 6

Substitutes

Answer 6

using more of one good, reduces the demand for another (Pepsi and Cola)

Question 7

Market in perfect competition

Answer 7

no buyer/seller can affect price and every buyer/seller is a price taker

Question 8

Market in imperfect competition

Answer 8

some buyer/sellers can affect price and some buyers/sellers are price setter (not parietal optimal)

Question 9

If some buyer in a market is a price taker, which schedule is not defined?

Answer 9

Demand schedule

Question 10

If some seller in a market is not a price taker, which schedule is not defined?

Answer 10

Supply schedule

Question 11

Why is elasticity a more useful measure of curvature of demand and supply curves than slope?

Answer 11

Slope you cannot compare across goods and markets, elasticity is unites and you can compare across goods and markets

Question 12

Price elasticity of demand

Answer 12

[Q(B) - Q(A)] / .5 [Q(A) +Q(B)]
________________________

[P(B) - Q(A)] / .5 [P(A) +P(B)]

Question 13

Price elasticity of supply

Answer 13

[Q(2) - Q(1)] / .5 [Q(1) +Q(2)]
________________________

[P(2) - Q(1)] / .5 [P(1) +P(2)]

Question 14

Demand for cotton is INELASTIC. If the price of cotton falls, what happens to the consumer spending on cotton?

Answer 14

Consumer spending goes down

Question 15

Demand for beef is ELASTIC, if the price of beef increases, what happens to the consumer spending on beef?

Answer 15

It will stay the same

Question 16

Equilibrium

Answer 16

State from which there is no tendency to change, you cannot trade out of equilibrium = INVISIBLE HAND

Question 17

Market equilibrium

Answer 17

supply in the market is equal to demand

Question 18

Price Adjustment rule of Walrasian Auctioneer

Answer 18

Excess demand - shut down market and raise the price and try again, keep going till equilibrium is reached

Question 19

What is sold and what is bought as the price moves towards its new equilibrium?

Answer 19

Nothing, until equilibrium is reached

Question 20

Excise tax - what do we assume about the tax revenue? What does this assumption imply?

Answer 20

If there is a tax revenue, it is not going back to the people who have given it. Assumption implies that the demand curve does not change

Question 21

In which 2 cases do buyers bear the burden from an excise tax?

Answer 21

When demand is perfectly inelastic or supply is elastic

Question 22

In which 2 cases do sellers bear the burden from an excise tax?

Answer 22

When demand is perfectly elastic or supply is inelastic

Question 23

Price floor

Answer 23

always above the equilibrium - excess supply - surplus

Question 24

Price ceiling

Answer 24

always below the equilibrium - market shortage - rent control

Question 25

Pareto Improvement

Answer 25

if someone is better off and no one is hurt

Question 26

Pareto Optimal

Answer 26

a situation in which and other situation would make someone worse off

Question 27

1st welfare theorem

Answer 27

free trade for a competitive economy leads to a Pareto Optimal allocation

Question 28

2nd welfare theorem

Answer 28

any pareto optimal situation can be achieved with an appropriate redistribution of income and free trade

Question 29

2nd welfare theorem - how would a transfer/gift of goods be a better way to redistribute income (better than manipulate the market place)?

Answer 29

Manipulation in the market place will always lead to dead weight loss

Question 30

positive externality

Answer 30

make others better off

Question 31

negative externality

Answer 31

make others worse off

Question 32

Coase's theorem

Answer 32

an equilibrium with externalities will be pareto optimal regardless of who gets the property rights IF: 1. Property rights are specified 2. Free trade is permitted 3. There is no transaction/bargaining cost

Question 33

public good

Answer 33

all consumers who get utility from a good consume the same units

Question 34

local public good

Answer 34

some consumers can be excluded

Question 35

What is a normative issue in the world with a public good? Positive issue?

Answer 35

How mush of the good CAN we provide (economic) vs. How much of the good SHOULD we supply (political)

Question 36

In an equilibrium, P & Q are...

Answer 36

the same!

Question 37

When situation is pareto optimal, social benefits = social cost. What is the criterion for the optimal provision of a good?

Answer 37

SB=SC - pareto optimal SB>SC - build more SB

Question 38

possible changes that could achieve optimality in the market failure problem for a steel plant...

Answer 38

1. Tax them -> waste 2. Force them to clean the water (gov regulation) 3. Internalization - firms merge 4. Define property rights and allow free trade - who has the right to pollute/not be polluted on

Question 39

Market failure

Answer 39

a situation that leads to an equilibrium that is not pareto optimal

Question 40

Tax incident

Answer 40

sellers hurt to the extent Ps falls, buyers hurt to the extent Pd rises – cost to interfering in the market!

Question 41

Taxes who had the burden?

Answer 41

burden depends on price elasticity of supply and demand more elastic = less burden less elastic = more burden

Question 42

Rational person

Answer 42

a person is rational if he/she has some idea of his/her likes/dislikes and will act accordingly

Question 43

Unemployment

Answer 43

willing and able to work, but cannot get work

Question 44

price elasticity of a horizontal demand curve vs price elasticity of a vertical demand curve

Answer 44

infinity | 0

Question 45

normal vs inferior goods in a market

Answer 45

A good x is said to be normal if higher income causes higher demand for good x. A good y is said to be inferior if higher income causes lower demand for good y.

Question 46

exogenous variable

Answer 46

sufficiently important, but not determined int he model, value is constant, if value changes --- there is a shock

Question 47

endogenous variable

Answer 47

is one whose value is determined | within the model