Microeconomics

Question 1

Comparative Advantage

Answer 1

A country has a comparative advantage if it can produce a good with a lower opportunity cost –> foreign trade is beneficial for countries (the closer the price is to opportunity costs, the less beneficial)

Question 2

Consumer Preferences

Answer 2

• Transitivity: A > B, B > C –> A > C
• Completeness: compare and rank possible baskets
• More is better than less

Question 3

Indifference curve

Answer 3

all basket combinations offering the same level of satisfaction/utility

• Goal: reach indifference curve as far from origin as possible
• Curves can’t intersects
• Curves can’t bend backwards
• Slope: MRS –> max. amount that consumer is willing to give up to get one more unit of other good (MRS is decreasing)

Question 4

Budget Line

Answer 4

All combinations of goods that can be purchased considering prices and total income

• Slope: -p1/p2 –> relative price
• income changes: parallel line left or right
• prices change: slope changes

Question 5

Consumer choices

Answer 5

Optimum choice: max. utility considering budget constraints –> max. utility: MRS = p1/p2

Marginal utility: additional satisfaction from consuming one more unit of a good
–> is decreasing: the more consumed in terms of one good, the lower additional utility for one more unit

MRS = MU1/MU2 –> the higher MU2, the more needed of x1 to compensate for less x2

Question 6

Substitution and income effect

Answer 6

Substitution: demand changes due to change in relative price (negative relationship)
Income: demand changes due to change in purchasing power (unclear relationship)

Question 7

Normal vs. inferior good

Answer 7

–> depends on income effect

Normal: income increases, demand increases
Inferior: income increases, demand decreases

Question 8

Elasticity

Answer 8

–> change of dependent / change of independent variable

Price elasticity: change in Q/change in P

Income elasticity: change in Q/change in I

• above 0: normal good
• below 0: inferior good

Cross-price: change in Qa/change in Pb

• above 0: substitutes
• below 0: complements

Question 9

Consumer and Producer surplus

Answer 9

Consumer: how much better of consumer is because of the fact they are consuming –> the price is lower than what they are willing to pay

Producer: how much more money the producer gets compared to VC –> price is higher than what they are willing to sell it for

Producer + Consumer = Welfare