Remaining Terms Flashcards
Example of Utility (Perfect Substitutes)
U(x,y) = ax + by
Examples of Utility (Perfect complements)
U(x,y) = min{ax,by}
Examples of Utility (Cobb-Douglas Function)
U(x,y) = A(x^y)(y^c)
Examples of Utility Function (One good is bad)
U(x,y) = -ax + by
For utility functions MRS is…
the slope of the indifference curve.
If the utility function is
u(x,y) = x(y^2)
x(y^2) = C y = Square Root(c/x)
What is the budget constraint generally?
Px * x + Py * y
Whats the slope of the budget line?
Marginal Rate of Transformation
Px/Py
Why do budget lines shift?
Because of shifts in income
Why do budget lines rotate?
Because of a change in the price of one good.
Perfectly Elastic
Infiniti
elastic
Ed > 1
Inelastic
Ed
Unit Elastic
Ed = 1
Price Elasticity of Supply
Income/Cross Price Elasticity = tell about sensitivity of curve behavior in response to changes in income and other input factors
Sales Tax
Ad Valorem Tax (Tax is fraction of good’s total price)
Specific/Unit Tax
Gas tax (added per unit of the good sold)
What is the major tradeoff in economics?
Efficiency vs. Equity
What are the key differences between a perfectly inelastic demand curve and a perfectly elastic demand curve?
- ) Perfectly inelastic demand is characteristic of a good with no substitutes.
a. ) Insulin - ) Perfectly elastic demand is characteristic of a good with perfect substitutes.
a. ) Cola wars
What does elasticity represent about consumers’ responses?
Their response to a change in price.
If the elasticity is between 0 and -1 then firms can…
raise revenues by raising the price (since consumers will still buy the good in significant quantities
If the elasticity is less than -1 then…
raising the price results in a decline in firm revenue.
What are the three imposed assumptions about consumer preferences?
- ) Preferences are complete.
- ) Preferences are transitive
- ) Preferences cannot be satiated.
What are the four assumptions made about indifference curves stemming from the three imposed assumptions about indifference curve.
- ) Consumers prefer higher indifference curves.
- ) Indifference are downward sloping
- ) Indifference curves never cross
- ) there is one indifference curve through every consumption bundle.