October 2, 219

Question 1

What are the agents of a macroeconomic model and their differences (3)?

Answer 1

1. Comsumers: consumers make decisions on how much to work. They consume by maximizing their utility subject to their budget constraints.
2. Firms: make decisions on how many workers to hire in order to maximize profit subject to their technological constraints (production functions).
3. Government: tax and spend.

Question 2

What are the differences between a static and dynamic model?

Answer 2

A static model uses one period in its analysis while a dynamic uses greater than 2 periods in its analysis.

** recheck**
For static models, this implies all income is used towards consumption and no savings.

Question 3

What’s a representative consumer?

Answer 3

For models purposes, they represent average consumers who have preferences over two bundles of goods: consumption (C) and leisure (L)

(C) represents an aggregation of consumption goods (physical goods) and L represents time spent not working. e.g entertainment, sleep, etc.

Question 4

What does a utility function represent and what’s it used for?

Answer 4

U(C,L) represents satisfaction.

It is used to represent preference over bundles.

Question 5

What are the properties of preferences(4)?

Answer 5

1. More is preferred to less. The consumer is happier the higher the consumption of one good for a given amount of the other good. In other words keeping and for ex keeping C or L constant while increasing the non constant variable. This is also known as the MONOTONICITY assumption.
2. Consumers like diversity in their consumption bundles and don’t like extremes of either C or L. They prefer to consume positive amounts of both goods than maximum of one and none of the other. (3,L)>(0,L).
3. C,L are both normal goods. e.g with increasing income, you want to consume more of that good). Conversely, for an inferior good, when income rises you want to consume less of it.
4. Assumes preferences are transitive. So if the consumer prefers B over A and D over B, he must prefer D over A.
   In other words, this means indifference curves can’t cross.