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2nd Year > Microeconomics- Autumn Term > Flashcards

Microeconomics- Autumn Term Flashcards

1
Q

What does it mean when we say utility is ordinal?

A

It provides a rank or preference ordering of consumption bundles

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2
Q

What is utility?

A

The happiness derived from a good

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3
Q

What is cardinal utility?

A

When a value is placed on utility

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4
Q

Axioms of utility modelling?

A
  • Completeness (all ranked)
  • Transitivity (Consistency)
  • Continuous (cannot cross curves)
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5
Q

Properties of indifference curve maps?

A

-Every consumption bundle lies on some indifference curve
(completeness)
-Indifference curves cannot intersect (transitivity axiom)

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6
Q

2 extra axioms you can add to indifference models?

A
  • Non-satiation: Always want more!

- Diminishing Marginal Rate of Substitution

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7
Q

What is the a diminishing marginal rate of substitution?

A

As you move down an indifference curve the consumer is willing to swap less between the goods (Consumers favour diversity)

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8
Q

What is Monotonicity?

A

The preference ranking must remain even if a monotonic transformation occurs

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9
Q

How is the price vector shown on a graph?

A

Slope of the budget constraint

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10
Q

What does the lagrange multiplier represent?

A

The shadow price of the budget constraint

expresses quantity of utils from the next pound of consumption

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11
Q

What is indirect utility?

A

The max attainable utility

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12
Q

What is the carte blanche theory?

A

Consumers can maximise themselves given they are rational

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13
Q

What is a deadweight loss?

A

The loss of efficiency when the equilibrium bundle is not achieved

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14
Q

What is an expenditure function?

A

Calculate the minimum expenditure needed to attain a certain level of utility (allows us to monetize trade offs)

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15
Q

What is the relationship between expenditure and indirect utility functions?

A

They are the inverse of each other

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16
Q

What does a Marshallian demand function show?

A

The level of demand at given prices, holding income constant

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17
Q

What does a Hicksian demand function show?

A

The level of demand at given prices, holding utility constant

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18
Q

How did in kind benefits affect the budget curve?

A
  • Shift the constraint outwards

- Place a kink in the curve

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19
Q

Advantages of in kind benefits?

A
  • Correct targeting of the objective
  • Paternalism
  • Political necessity for the policy
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20
Q

Disadvantages of in kind benefits?

A
  • Restricts/distorts choice
  • Admin/enforcement cost
  • Is enforcement Pareto efficient
  • Creates underground market
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21
Q

What is Pareto efficiency?

A

The point where you cannot reallocate resources without making one person worse off

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22
Q

What effect does a change in the consumer’s budget have on the price ratio and MRS?

A

No effect on either

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23
Q

How does a price rise for Good 1 affect the budget curve?

A

Shifts budget inwards for X1 (income effect- poorer). Changes slope of the price ratio (substitution effect)

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24
Q

What is a normal good?

A

Demand increases as income increases

slope (x1/i) >0

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25
Q

What is an inferior good?

A

Demand falls as income rises.

Slope (x1/i) < 0

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26
Q

What happens to consumption of x1 if p1/p2 rises but utility remains constant?

A

Diminishing MRS, substitution effect negative/ Have to give up more of X2 to buy X1

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27
Q

What is a Giffen good?

A

Income effect (+) dominates the substitution effect, as the price rises consumers buy more. Total effect is positive

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28
Q

What is the Slutsky Equation?

A

The total change in demand from a price change, holding income constant

Total change in demand = Substitution effect + Income effect

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29
Q

Which symbols will the Slutsky equation have for normal goods?

A

Normal Good
∆x1 = ∆(s)x1 + ∆(i)x1
- - -

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30
Q

Which symbols will the Slutsky equation have for inferior goods?

A

Inferior Good
∆x1 = ∆(s)x1 + ∆(i)x1
? - +

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31
Q

Which symbols will the Slutsky equation have for Giffen goods?

A

Giffen Good
∆x1 = ∆(s)x1 + ∆(i)x1
+ - +

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32
Q

What is a perfect compliment good?

A

Goods always consumed together in fixed proportions

Income effect = total effect

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33
Q

What are perfect substitutes?

A

Goods that can be exactly swapped. Consumer spends all the money on one good

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34
Q

Income and total effect for inferior good?

A 
Income effect (+)
Total effect (?)
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35
Q

Income and total effect for normal good?

A 
Income effect (-)
Total effect (?)
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36
Q

What does revealed preferred mean?

A

It means the bundle of goods was chosen along that budget set (so is prefered to the other options)

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37
Q

What is the WARP principle? (Weak Axiom of Revealed Preference)

A

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.

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38
Q

How do you check WARP?

A

Create tables of bundles and prices to see if the other bundles were feasible at those prices

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39
Q

Why are indifference curves always bowed to the origin?

A

As compensated demand is
always downward sloping (diminishing
MRS)

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40
Q

What is SARP? (Strong axiom of revealed preferences)

A

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.

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41
Q

When was the minimum wage introduced into the UK?

A

1999 (£3.60)

42
Q

What has happened to union membership over the last 25 years?

A

Declined for all industries except teaching

43
Q

How to calculate the elasticity of employment?

A

%change in employment/

%change in wages

44
Q

When is demand inelastic?

A

Less than 1

45
Q

When is demand elastic?

A

More than or equal to 1

46
Q

Features of a perfectly competitive market?

A
  • Many firms, identical products.
  • No barriers to entry
  • Price set by the market
  • Sellers set the quantity of supply
47
Q

Who are the price takers in a Perfectly competitive market?

A

The Firms

-No market power, the prices are set by the market

48
Q

In a textbook model, how does pricing affect labour supply in a perfectly competitive market?

A

W- equilibrium wage
Less than W- 0 workers
More han W*- infinite

49
Q

What is an endogenous variable?

A

Internally determined. An outcome as opposed to a cause

50
Q

What is an Exogenous variable?

A

Externally determined. A causing or forcing

variable.

51
Q

What happens if a minimum wage is imposed on the equilibrium in a perfectly competitive market? (Textbook)

A

If the wage is less than the equilibrium wage there will be no effect.

If it is higher then employment will drop

52
Q

Why might a minimum wage be introduced even if employment falls?

A

wminQmin <> wQ

Total worker earnings may increase even if employment falls.

53
Q

Under what conditions will total worker earnings increase if min wage is higher than the equilibrium? (PC market)

A

-If the proportional increase in wages is larger than the

proportional decline in employment. (η < 1)

54
Q

What is the primary assumption that predicts than min wages reduce employment?

A

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

55
Q

What is the marginal revenue product of labour?

A

What the marginal worker produces

56
Q

Why is MRPL assumed to be decreasing?

A

Decreasing returns in the production function- All else equal, the next hire produces marginally less than the prior hire

57
Q

What direction does the labour supply curve face?

A

Upwards: Market level
Flat: Perceived by single firm

58
Q

How is revenue calculated?

A

Price per good multiplied by the number of goods produced

59
Q

How are costs calculated?

A

: cost per unit of input (ie the wage) multiplied by

the number of units of input (the number of workers)

60
Q

How is profit calculated?

A

Revenue- costs

61
Q

Equation for firms MRPL?

A

Equilibrium wage + change in labour costs from hiring an extra worker

62
Q

What is inframarginal workers?

A

Each additional worker hired could potentially raise the cost of all of the previous workers hired

63
Q

In a perfectly competitive market, what affect does hiring extra workers have on the market wage?

A

None- as no firm is large enough to influence the market wage

64
Q

In equilibrium the wage in a PC market equals?

A

MRPL

65
Q

If a firm is NOT a price taker then what wage will it pay?

A

Strictly less than the MRPL

66
Q

What is a monopsony?

A

One buyer, many sellers

67
Q

What does the labour supply curve look like for a monopsonist market?

A

Upward sloping (raise wage to higher more)

68
Q

How do marginal labour costs increase for monopsonistic firms?

A

More upward sloping curve than supply curve (As you cannot pay workers different amounts)

69
Q

The effect of introducing a minimum wage on a monopsonist is?

A

Ambiguous- depends on the level of the minimum wage

70
Q

Places we would expect to find monopsonies?

A
  • Mining towns
  • Specific skilled jobs
  • Captive labour markets
71
Q

What is the Card and Krueger study about? (1994)

A

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

72
Q

How many were impacted by in introduction of the minimum wage in the UK?

A

4-5% of workers affected (around 1.5million were earning less before its introduction)

73
Q

Macro effects of the minimum wage in the UK?

A

-No clear negative effects (employment roughly the same)

74
Q

Micro effects of the minimum wage in the UK?

A

Steward 2004; no employment effects, but wages did rise (more for those who were earning less before the minimum wage was introduced)

75
Q

What did Machin, Manning, Rahman

(2003) study?

A

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

76
Q

What is game theory a study of?

A

Strategic interactions

77
Q

What are simultaneous games?

A

Games in which the participants choose their actions simultaneously without knowing their opponents’ strategies

78
Q

What are repeated games?

A

Successful collusion (e.g., functioning cartels) is made possible by the repeated nature of output decisions

79
Q

What are sequential games?

A

Games in which players take turns making decisions

80
Q

What is a dominant strategy?

A

A winning strategy regardless of the other players move. Always chosen!

81
Q

What is a dominated strategy?

A

A losing strategy regardless of the other players move. NEVER chosen!

82
Q

If a dominant strategy is there what is true?

A

All others are dominated strategies

83
Q

What is a payoff matrix?

A

A table that lists the players, strategies, and payoffs of an economic game

84
Q

What is the prisoner’s dilemma?

A

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

85
Q

What is a nash equilibrium?

A

The best action a player can do given the action of the opponent (no cooperation)

86
Q

What is a pure strategy?

A

A strategy that results in an equilibrium after a single action

87
Q

What happens if there are multiple equilibria?

A

Randomness enters the model (mixed strategies)

88
Q

What is a Maxim strategy?

A

strategy is one in which a player minimizes their exposure to loss

89
Q

What is backward induction used for?

A

To analyze finitely repeated games

90
Q

Why are future payments seen as less preferable to current payments?

A

Impatience and positive interest rates

91
Q

What is a grim trigger strategy?

A

A strategy in which cooperative play ends when one player cheats

92
Q

What is a tit-for-tat strategy?

A

A strategy in which the player mimics her opponent’s prior-period action in each round

93
Q

What is the expected value in game theory showing?

A

The expected value for each choice is just a mean of the payoffs, weighted by the probability that the opponent chooses each strategy.

94
Q

In an infinite game when is cooperate sustained?

A

When the present value of lifetime income exceeds the value of defecting

95
Q

How will the discount rate (d) affect the chances of cheating?

A

Closer the value is to 0 the more likely they are to cheat, as today’s extra money is more valuable

96
Q

How do we model sequential games?

A

Using decision trees

97
Q

What is a side payment strategy?

A

A bribe to influence the outcome of the game

98
Q

What is a non-credible threat?

A

An empty threat/promise made by one player in a sequential game

99
Q

What is a credible commitment?

A

One that is irreversible and observable

100
Q

What does the Rubenstein bargaining model observe?

A

Examines bargaining-

Looks at the sequence of choices and then solves for the subgame perfect equilibrium.

2nd Year (8 decks)

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