Microeconomics- Autumn Term Flashcards
What does it mean when we say utility is ordinal?
It provides a rank or preference ordering of consumption bundles
What is utility?
The happiness derived from a good
What is cardinal utility?
When a value is placed on utility
Axioms of utility modelling?
- Completeness (all ranked)
- Transitivity (Consistency)
- Continuous (cannot cross curves)
Properties of indifference curve maps?
-Every consumption bundle lies on some indifference curve
(completeness)
-Indifference curves cannot intersect (transitivity axiom)
2 extra axioms you can add to indifference models?
- Non-satiation: Always want more!
- Diminishing Marginal Rate of Substitution
What is the a diminishing marginal rate of substitution?
As you move down an indifference curve the consumer is willing to swap less between the goods (Consumers favour diversity)
What is Monotonicity?
The preference ranking must remain even if a monotonic transformation occurs
How is the price vector shown on a graph?
Slope of the budget constraint
What does the lagrange multiplier represent?
The shadow price of the budget constraint
expresses quantity of utils from the next pound of consumption
What is indirect utility?
The max attainable utility
What is the carte blanche theory?
Consumers can maximise themselves given they are rational
What is a deadweight loss?
The loss of efficiency when the equilibrium bundle is not achieved
What is an expenditure function?
Calculate the minimum expenditure needed to attain a certain level of utility (allows us to monetize trade offs)
What is the relationship between expenditure and indirect utility functions?
They are the inverse of each other
What does a Marshallian demand function show?
The level of demand at given prices, holding income constant
What does a Hicksian demand function show?
The level of demand at given prices, holding utility constant
How did in kind benefits affect the budget curve?
- Shift the constraint outwards
- Place a kink in the curve
Advantages of in kind benefits?
- Correct targeting of the objective
- Paternalism
- Political necessity for the policy
Disadvantages of in kind benefits?
- Restricts/distorts choice
- Admin/enforcement cost
- Is enforcement Pareto efficient
- Creates underground market
What is Pareto efficiency?
The point where you cannot reallocate resources without making one person worse off
What effect does a change in the consumer’s budget have on the price ratio and MRS?
No effect on either
How does a price rise for Good 1 affect the budget curve?
Shifts budget inwards for X1 (income effect- poorer). Changes slope of the price ratio (substitution effect)
What is a normal good?
Demand increases as income increases
slope (x1/i) >0
What is an inferior good?
Demand falls as income rises.
Slope (x1/i) < 0
What happens to consumption of x1 if p1/p2 rises but utility remains constant?
Diminishing MRS, substitution effect negative/ Have to give up more of X2 to buy X1
What is a Giffen good?
Income effect (+) dominates the substitution effect, as the price rises consumers buy more. Total effect is positive
What is the Slutsky Equation?
The total change in demand from a price change, holding income constant
Total change in demand = Substitution effect + Income effect
Which symbols will the Slutsky equation have for normal goods?
Normal Good
∆x1 = ∆(s)x1 + ∆(i)x1
- - -
Which symbols will the Slutsky equation have for inferior goods?
Inferior Good
∆x1 = ∆(s)x1 + ∆(i)x1
? - +
Which symbols will the Slutsky equation have for Giffen goods?
Giffen Good
∆x1 = ∆(s)x1 + ∆(i)x1
+ - +
What is a perfect compliment good?
Goods always consumed together in fixed proportions
Income effect = total effect
What are perfect substitutes?
Goods that can be exactly swapped. Consumer spends all the money on one good
Income and total effect for inferior good?
Income effect (+) Total effect (?)
Income and total effect for normal good?
Income effect (-) Total effect (?)
What does revealed preferred mean?
It means the bundle of goods was chosen along that budget set (so is prefered to the other options)
What is the WARP principle? (Weak Axiom of Revealed Preference)
If A and B are feasible but A is chosen, then at any prices and
income where A and B are feasible, the consumer will chose A
over B.
How do you check WARP?
Create tables of bundles and prices to see if the other bundles were feasible at those prices
Why are indifference curves always bowed to the origin?
As compensated demand is
always downward sloping (diminishing
MRS)
What is SARP? (Strong axiom of revealed preferences)
WARP with added transitivity
If bundle 0 is RP to 1 and 1 is RP to 2 etc (etc) and bundle k-1 is RP to bundle k then bundle k cannot be revealed preferred to bundle 0.
When was the minimum wage introduced into the UK?
1999 (£3.60)
What has happened to union membership over the last 25 years?
Declined for all industries except teaching
How to calculate the elasticity of employment?
%change in employment/
%change in wages
When is demand inelastic?
Less than 1
When is demand elastic?
More than or equal to 1
Features of a perfectly competitive market?
- Many firms, identical products.
- No barriers to entry
- Price set by the market
- Sellers set the quantity of supply
Who are the price takers in a Perfectly competitive market?
The Firms
-No market power, the prices are set by the market
In a textbook model, how does pricing affect labour supply in a perfectly competitive market?
W- equilibrium wage
Less than W- 0 workers
More han W*- infinite
What is an endogenous variable?
Internally determined. An outcome as opposed to a cause
What is an Exogenous variable?
Externally determined. A causing or forcing
variable.
What happens if a minimum wage is imposed on the equilibrium in a perfectly competitive market? (Textbook)
If the wage is less than the equilibrium wage there will be no effect.
If it is higher then employment will drop
Why might a minimum wage be introduced even if employment falls?
wminQmin <> wQ
Total worker earnings may increase even if employment falls.
Under what conditions will total worker earnings increase if min wage is higher than the equilibrium? (PC market)
-If the proportional increase in wages is larger than the
proportional decline in employment. (η < 1)
What is the primary assumption that predicts than min wages reduce employment?
Price-taking behaviour assumption (in labour and product markets). Perfect elasticity
-Firms don’t set prices for goods. Wages don’t increase to employ extra workers
What is the marginal revenue product of labour?
What the marginal worker produces
Why is MRPL assumed to be decreasing?
Decreasing returns in the production function- All else equal, the next hire produces marginally less than the prior hire
What direction does the labour supply curve face?
Upwards: Market level
Flat: Perceived by single firm
How is revenue calculated?
Price per good multiplied by the number of goods produced
How are costs calculated?
: cost per unit of input (ie the wage) multiplied by
the number of units of input (the number of workers)
How is profit calculated?
Revenue- costs
Equation for firms MRPL?
Equilibrium wage + change in labour costs from hiring an extra worker
What is inframarginal workers?
Each additional worker hired could potentially raise the cost of all of the previous workers hired
In a perfectly competitive market, what affect does hiring extra workers have on the market wage?
None- as no firm is large enough to influence the market wage
In equilibrium the wage in a PC market equals?
MRPL
If a firm is NOT a price taker then what wage will it pay?
Strictly less than the MRPL
What is a monopsony?
One buyer, many sellers
What does the labour supply curve look like for a monopsonist market?
Upward sloping (raise wage to higher more)
How do marginal labour costs increase for monopsonistic firms?
More upward sloping curve than supply curve (As you cannot pay workers different amounts)
The effect of introducing a minimum wage on a monopsonist is?
Ambiguous- depends on the level of the minimum wage
Places we would expect to find monopsonies?
- Mining towns
- Specific skilled jobs
- Captive labour markets
What is the Card and Krueger study about? (1994)
The effect of changes in the minimum wage in fast food restaurants in the USA- original study hswed a 13.5% increase in employment as the wage increased
How many were impacted by in introduction of the minimum wage in the UK?
4-5% of workers affected (around 1.5million were earning less before its introduction)
Macro effects of the minimum wage in the UK?
-No clear negative effects (employment roughly the same)
Micro effects of the minimum wage in the UK?
Steward 2004; no employment effects, but wages did rise (more for those who were earning less before the minimum wage was introduced)
What did Machin, Manning, Rahman
(2003) study?
The effect of NMW on the labour market for care assistants. This is a vulnerable sector (low skill/wage) yet hard to find much evidence of job losses
What is game theory a study of?
Strategic interactions
What are simultaneous games?
Games in which the participants choose their actions simultaneously without knowing their opponents’ strategies
What are repeated games?
Successful collusion (e.g., functioning cartels) is made possible by the repeated nature of output decisions
What are sequential games?
Games in which players take turns making decisions
What is a dominant strategy?
A winning strategy regardless of the other players move. Always chosen!
What is a dominated strategy?
A losing strategy regardless of the other players move. NEVER chosen!
If a dominant strategy is there what is true?
All others are dominated strategies
What is a payoff matrix?
A table that lists the players, strategies, and payoffs of an economic game
What is the prisoner’s dilemma?
Two partners in crime interviewed. Choice to confess and implicate the other, or deny the crime.
1 confesses: Go free, other gets long sentences
Neither: Both get a small sentence
Both: Medium sentence
What is a nash equilibrium?
The best action a player can do given the action of the opponent (no cooperation)
What is a pure strategy?
A strategy that results in an equilibrium after a single action
What happens if there are multiple equilibria?
Randomness enters the model (mixed strategies)
What is a Maxim strategy?
strategy is one in which a player minimizes their exposure to loss
What is backward induction used for?
To analyze finitely repeated games
Why are future payments seen as less preferable to current payments?
Impatience and positive interest rates
What is a grim trigger strategy?
A strategy in which cooperative play ends when one player cheats
What is a tit-for-tat strategy?
A strategy in which the player mimics her opponent’s prior-period action in each round
What is the expected value in game theory showing?
The expected value for each choice is just a mean of the payoffs, weighted by the probability that the opponent chooses each strategy.
In an infinite game when is cooperate sustained?
When the present value of lifetime income exceeds the value of defecting
How will the discount rate (d) affect the chances of cheating?
Closer the value is to 0 the more likely they are to cheat, as today’s extra money is more valuable
How do we model sequential games?
Using decision trees
What is a side payment strategy?
A bribe to influence the outcome of the game
What is a non-credible threat?
An empty threat/promise made by one player in a sequential game
What is a credible commitment?
One that is irreversible and observable
What does the Rubenstein bargaining model observe?
Examines bargaining-
Looks at the sequence of choices and then solves for the subgame perfect equilibrium.
