Econ Exam 1

Question 1

Normative Economics

Answer 1

Prescriptive, “should”

Question 2

Positive Economics

Answer 2

Descriptive, “what is”

Question 3

Law of Demand

Answer 3

As price increases, quantity demanded decreases (incentivizes consumers to substitute or they are unable to pay)

Question 4

Law of Supply

Answer 4

As price increases, quantity supplied increases (incentivizes suppliers to move into market)

Question 5

Things that shift a Demand Curve in/out

Answer 5

New information that changes preference, price of substitute or complement, technology, change in # of buyers, expectations about the future

Question 6

Normal Good

Answer 6

As income increases, quantity demanded increases

Question 7

Inferior Good

Answer 7

As income increases, quantity demanded decreases

Question 8

Luxury

Answer 8

As income increases, percent of income spent on good increases

Question 9

Necessity

Answer 9

As income increases, percent of income spent on good decreases

Question 10

Things that shift a Supply Curve in/out

Answer 10

Changes in input prices, technology, expectation about future, price of related goods, weather, # of sellers

Question 11

4 Assumptions of Consumption

Answer 11

1. Consumer assumer to have preferences 2. Consumer is non satiable 3. Convex preferences 4. Consumer makes resource allocation according to preferences

Question 12

MRS (x,y)

Answer 12

Negative slope of indifference curve (- change in Y/ change in x), how much X would you give up for some Y, dy/dx

Question 13

What does MRS equal at Max utility

Answer 13

MRS(x,y)  = price X/Price Y 
MRS = price ratio (MRT)
MRS = budget constraint

Question 14

Surplus

Answer 14

Quantity Demanded < Quantity Supplied

Question 15

Shortage

Answer 15

Quantity Demanded > Quantity Supplied

Question 16

Price Ceiling

Answer 16

legal maximum on price, goal: to protect consumers from high price e.g. rent control

Question 17

Price Floor

Answer 17

Legal minimum of price e.g. minimum wage

Question 18

Completeness in Preference

Answer 18

Can’t say IDK

Question 19

Transitivity in Preference

Answer 19

If you like A more than B and B more than C, then you like A more than C

Question 20

Nonsatiation in preference

Answer 20

More is Better

Question 21

Convex Preferences

Answer 21

consumers prefer diversity, they would like to balance their budget

Question 22

Consumer Surplus

Answer 22

Excess of what I’m willing to pay after I paid for what I wanted (we see this in the event of a price ceiling for those who could have afforded higher rent but were able to get the capped price, that excess is lost to the market)

Question 23

5 Properties of Indifference Curves

Answer 23

1. NE preferable to SW 2. Every bundle is on a curve 3. Never cross 4. Slope downward 5. Never thick

Question 24

Ordinal

Answer 24

relative ranking

Question 25

Cardinal

Answer 25

whole number value

Question 26

MRS (burritos, pizza)

Answer 26

(-) dPizza/dBurritos

Question 27

Slope of indifference curve for Perfect Substitutes

Answer 27

Linear

Question 28

Slope of indifference curve for compliments

Answer 28

right angle graphs

Question 29

Marginal Rate of Transformation (MRT)

Answer 29

ration of prices, not about preferences but about market values and tradeoffs, MRT= dy/dx, -(p1/p2)

Question 30

Constrained Optimization

Answer 30

MRS = MRT = - marginal utility x/ marginal utility Y = - price x/ price Y

Question 31

Cobb Douglass Lagrange Heuristic

Answer 31

U = X ^a Y ^ b X = a/ (a+b) * (Income/price x) Y = b/ (a+b) * (Income/price Y) Only if a + b = 1

Question 32

Theoretical Intermediate

Answer 32

e* represents the substitution effect, in a model where we change the price of one good but move the new MRS under new price ratio out to meet the old utility effect

Question 33

Engel Curve

Answer 33

As income increases, the share of your income you spend on a good increases

Question 34

Substitution effect

Answer 34

the change in Q demanded when prices increase holding other price constant and UTILITY CONSTANT E1-E*

Question 35

Income effect

Answer 35

the change in Q demanded when income changes (perhaps spending more on necessity with changed price and not substituting) holding other prices constant E*-e2

Question 36

Sign of substitution effect for an own price increase

Answer 36

Negative

Question 37

Sign of substitution effect for a cross price increase

Answer 37

Positive

Question 38

Elasticities

Answer 38

How responsive one variable is to a change in another variable, usually demand for a good sensitive to a price change

Question 39

Elasticity > 1

Answer 39

Elastic

Question 40

Elasticity < 1

Answer 40

Inelastic

Question 41

Elasticity = 1

Answer 41

Unit elastic

Question 42

Income Elasticity of demand

Answer 42

%change Q demanded/ % change Income

Question 43

Price elastic of demand

Answer 43

%change Q demanded/ % change price

Question 44

cross-price elastic of demand

Answer 44

% change in Q1/ % change in P 2 = dq1/dp2 (p2/p1)

Question 45

Uncompensated demand

Answer 45

Total effect (sub + income)

Question 46

Compensated Demand

Answer 46

only substitution effect

Question 47

Slutsky Equation

Answer 47

total effect = sub effect + income effect

Question 48

Consumer Price Index

Answer 48

Typical basket of gods priced in a specific year