Exam 1

Question 1

Key assumptions of supply and demand model

Answer 1

1. S and D are in a single market
2. all goods are identical
3. all goods sells for the same price and everyone has the same info
4. many producers and consumers in the market

Question 2

Demand choke P

Answer 2

Where D curve intercepts Y-axis

-P @ which no consumer is willing to pay– Qd=0

Question 3

inverse demand curve

Answer 3

• price as a function of Qd

- solve for P

Question 4

Factors that influence supply

Answer 4

1. price
2. cost of production
3. # of sellers
4. sellers’ outside options (substitutes)

Question 5

supply choke price

Answer 5

no firm is willing to produce a good
Qs=0
Supply curve y-intercept

Question 6

inverse supply curve

Answer 6

price as a function of quantity supplied

solve for P

Question 7

to find choke prices of both S and D

Answer 7

set each equation equal to 0

Question 8

market equilibrium

Answer 8

Qd=Qs

Question 9

to find equilibrium P

Answer 9

set S and D equations equal to each other and solve for P

Question 10

to find equilibrium Q

Answer 10

take equilibrium P and plug it into either the S or D curve equation

Question 11

curve equations

Answer 11

y=a+bx
b=slope
a=y intercept

Question 12

Qs>Qd

Answer 12

surplus

price floors cause

Question 13

Qd>Qs

Answer 13

shortage

price ceiling cause

Question 14

price floor

Answer 14

sets lowest P that can be paid legally for a good or service
binding above Pe
nonbinding below Pe

Question 15

price ceiling

Answer 15

sets highest P that can be paid legally for a good or service
binding below Pe
nonbinding above Pe

Question 16

elasticity of demand (Ed)

Answer 16

Ed= %ΔQd/%ΔP

no more absolute value

Question 17

Perfectly inelastic

Answer 17

Ed=0

Question 18

inelastic

Answer 18

-1<0 or between 0 and 1

Question 19

unit elastic

Answer 19

=(-1) or 1

Question 20

perfectly elastic

Answer 20

Ed= (-∞) or ∞

Question 21

to calculate Ed at a point

Answer 21

(1/slope)*(P/Q)

Question 22

horizontal demand curve

Answer 22

perfectly elastic

Question 23

vertical demand curve

Answer 23

perfectly inelastic

Question 24

the steeper the D curve & the bigger the slope

Answer 24

the more inelastic the D

Question 25

the flatter the D curve & the smaller the slope

Answer 25

the more elastic the D

Question 26

as move SE down a D curve

Answer 26

D becomes more inelastic

Question 27

TR=

Answer 27

P*Q

Question 28

if elastic and P goes down

Answer 28

TR goes up

Question 29

if elastic and P goes up

Answer 29

TR goes down

Question 30

if inelastic and P goes down

Answer 30

TR goes down

Question 31

if inelastic and P goes up

Answer 31

TR goes up

Question 32

Es=

Answer 32

%ΔQs/%ΔP

Question 33

Ey= Income elasticity of demand

Answer 33

%ΔQd/%ΔY either pos or neg pos=normal good neg=inferior good

Question 34

Cross price elasticity

Answer 34

Exy= %ΔQdy/%ΔPx if pos then they are substitutes if neg then they are complements

Question 35

consumer surplus

Answer 35

willingness to pay-what actually pay | =1/2(quantity sold)*(demand choke price-market price)

Question 36

producer surplus

Answer 36

price-cost of production | =1/2(quantity sold)*(market price-supply choke price)

Question 37

to calculate CS and PS graphically

Answer 37

A=1/2bh

Question 38

economic incidence

Answer 38

whose purchasing power is reduced by the tax? | not always the same as the legal incidence

Question 39

DWL

Answer 39

inefficiency created by the tax--reduces the incentive to produce

Question 40

DWL< with ________demand

Answer 40

inelastic

Question 41

DWL > with __________demand

Answer 41

elastic

Question 42

demand inelastic the more incidence on the

Answer 42

consumers, less DWL

Question 43

demand elastic the more incidence on the

Answer 43

producers, more DWL

Question 44

When tax size increases

Answer 44

DWL goes up exponentially

Question 45

Laffer curve with taxes

Answer 45

as tax size increases, TR will go up but it will peak and then TR will go down if the tax size keeps getting bigger

Question 46

consumption bundle

Answer 46

the goods and services that you consume | goes into the Utility Function to compute the amt of utility

Question 47

marginal utility

Answer 47

the amt of utility you get from consuming one more unit of something

Question 48

law of diminishing marginal utility

Answer 48

as consume more, smaller additions of utility then dont get any utility or it becomes neg.

Question 49

assumptions about consumer preferences

Answer 49

1. completeness and rankability 2. more is better than less 3. transitivity A>B B>C then A>C 4. the more a consumer has of a good the less she is willing to give up of something else to get even more of that good

Question 50

completeness and rankability

Answer 50

ordinal ranking not cardinal

Question 51

Indifference curve

Answer 51

shows the bundles @ which a consumer won't care which is bought the higher the curve the more utility

Question 52

properties of an indifference curve

Answer 52

1. ubiquitous( everywhere) 2. can figure out which indifference curves have higher utility and why they are downward sloping (substitutes) 3. curves never cross 4. convex to the origin

Question 53

marginal rate of substitution definition

Answer 53

how many units of Y you are willing to give up to get one more unit of X

Question 54

marginal rate of substitution (MRS)

Answer 54

|ΔY/ΔX|

Question 55

MRS=

Answer 55

MUx/MUy= Px/Px

Question 56

budget constraint

Answer 56

Income= (Px*X)+(Py*Y)

Question 57

Px/Py=

Answer 57

slope of budget constraint

Question 58

solve for _____ to get budget constraint equation

Answer 58

Y (the good relative to what is on the Y axis)

Question 59

MRS vs price ratio definition

Answer 59

How many units of y WILLING to give up vs how many units of Y you HAVE to give up

Question 60

if MUx/MUy=Px/Py then...

Answer 60

utility is maximized

Question 61

If MRS>price ratio then

Answer 61

not maximizing, buying too much y and too little x

Question 62

If MRS

Answer 62

not maximizing, buying too much x and too little y

Question 63

consumers optimal choice

Answer 63

when MRSxy=Px/Py | tangent of constraint and indifference curve