modeling

Question 1

what makes a good model? (4)

Answer 1

1. clearness
2. identifies important relationships
3. predicts accurately
4. improves communication

Question 2

ceteris paribus

Answer 2

holding everything else constant

Question 3

incentives

Answer 3

rewards / punishments that affect the costs or benefits of taking one action as opposed to another.

Question 4

3 ideas of economic modeling

Answer 4

1. ceteris paribus
2. incentives
3. relative prices

Question 5

relative prices

Answer 5

we often focus on ratios of things to compare different actions and explain individual choice.

Question 6

trade off’s

Answer 6

we have constraints

Question 7

production function

Answer 7

shows how inputs (work hours) translate into outputs (GPA), holding other factors constant (environment)

Question 8

marginal product

Answer 8

if we change the input 1 unit, what happens to output. (at 4 hours of study)

Question 9

diminishing marginal product

Answer 9

studying becomes less productive the more you study

Question 10

opportunity costs

Answer 10

cost of engaging in one activity and not your next best alternative.

Question 11

economic costs

Answer 11

monetary costs + subjective costs

Question 12

economic rent

Answer 12

if the benefit from an action exceeds the economic costs you receive an economic rent.

Question 13

feasible frontier

Answer 13

what is possible- shows the maximum output that can be received with a given amount of input

Question 14

marginal rate of transformation (opportunity cost)

Answer 14

the trade offs an individual faces

what is the cost of transforming something to another thing’s one unit.

Question 15

being under the frontier means…

Answer 15

not optimal or efficient- means having more of something without giving up another thing.

Question 16

marginal rate of transformation in our case:

Answer 16

at point E, country buys 1 gun and 280 butters, and at point D country buys 2 guns and 240 butters. => MRT= 280 - 240 = 40 units of butter.

Question 17

marginal rate of substitution

Answer 17

your preferences! the slope of the indifference curve.

Question 18

expected utility

Answer 18

utility you gain if an actor chooses a particular outcome or takes a particular path

Question 19

indifference curves

Answer 19

along that line, everything is indifferent (you don’t care if you get a 70 or a 80) the one in the top is preferred to the one in the bottom in a graph. - joint points that cannot be ordered.

Question 20

what do indifference curves show?

Answer 20

they show all combinations that give the same utility

Question 21

what does MRS represent?

Answer 21

MRS represents the trade offs an individual PREFERS to make - what trade off’s your cool with.

Question 22

properties of indifference curves

Answer 22

1. they slope downwards
2. higher indifference curve correspond to higher utility levels. (between lines)
3. they are smooth (there aren’t large fluctuations in preferences)
4. indifference curve’s don’t cross (because all points on the lines that cross would be equivalent.)
5. diminishing MRS: as you move to the right along an indifference curve, it becomes flatter (because we assume we don’t want to have all of one good) (if there was perfect substitutability it would be a flat line)

Question 23

optimal choice

Answer 23

the utility maximizing choice is where the amount of one good the individual is WILLING to trade equals the ACTUAL trade off between two goods.

Question 24

tangency

Answer 24

where MRT= MRS (the highest attainable indifference curve touches the frontier but don’t cross it)

Question 25

what may increase the frontier?

Answer 25

technological progress - the new technology increases the marginal product of labor (1 hour used to give 3 things, now it gives 6 things )

Question 26

Tversky and Khanneman

Answer 26

a) you lose 10 dollars at restaurant
b) you lose the ticket which costed you 10 dollars.
people spent the second 20 dollars in a. (humans not acting like economists)

Question 27

sunk cost

Answer 27

staying in the movie when you hate it.

humans not acting like economists

Question 28

“thinking at the margins”

Answer 28

focus on your future utility - consider opportunity costs (what is my other option, and does that one have more benefits)