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Econ 114 > Unit 3 > Flashcards

Unit 3 Flashcards

1
Q

What is utility?

A

This is the numerical indicator of the value that one places on an outcome

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2
Q

When is an individual indifferent?

A

When they get the same level of utility from 2 situations

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3
Q

Whats preference?

A

Description of the benefit or cost that we associate with a possible outcome

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4
Q

Why do indifference curves slope downwards?

A

Because of the tradeoffs between two choices, more of one good means less of another

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5
Q

What is the MRS

A

This is the tradeoff that an individual is willing to make between two goods, amount of one good that they are willing to give up in exchange for another.

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6
Q

What is the slope of the indifference curve?

A

The MRS

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7
Q

What does a steeper curve mean?

A

They are more willing to give up the one good

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8
Q

What causes the shape of the indifference curve?

A

People are more willing to give up a good when they have more of it

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9
Q

What is diminishing MRS?

A

An individual is willing to give up less of one good for another good as you go down the IC

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10
Q

What does the budget constraint show?

A

The different combinations of goods that consumers can buy given their income

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11
Q

What does a change in the price of a product do?

A

Changes the slope and it pivots

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12
Q

What does a change in income do?

A

Shifts the whole constraint

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13
Q

What two effects can the impact of a change in price of one good be divided into?

A
  1. Income effect

2. Substitution effect

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14
Q

What is the feasible frontier?

A

This shows the maximum feasible quantity of one good for a given quantity of another good. The highest amount that can be produced with a given input

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15
Q

What is MRT?

A

This the quantity of a good that must be sacrificed to acquire a quantity of another. It is a trade off. It’s the slope of the feasible frontier

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16
Q

What would an individuals trade off be?

A

As free time increases, MRS decreases

MRT increases

17
Q

What does the feasible frontier represent?

A

It represents a constrain on choice

18
Q

What is the utility maximising choice?

A

This is a point on the highest indifference curve that is tangent to the feasible frontier
Its where the amount of one good that the individual is willing to trade off for another good is equal to the actual trade off between them

19
Q

What is the constrained choice problem and what is the solution?

A

It is the problem about how we can do the best for ourselves given our preferences and constraints and when what value is scarce. The solution to it is the optimal choice

20
Q

What did John Maynard Keynes state?

A

He stated that due to technological improvement, we would not face the so called economic problem and that we wouldn’t have to work more than 15 hours a week

21
Q

When ff expands, what happens?

A

Its possible to increase both options, but it depends on preferences and the willingness to substitute one good for the other

22
Q

What are budget constraints?

A

These are the ff for working hours
c= w(24-t)
It shows what you can afford to buy

23
Q

What is the slope of a budget constraint?

A

It is the wage

24
Q

What happens when you get extra income

A

-The budget constraint slope stays the same
-The constraint shifts up parallel
income effect
-Working hours decrease

25
Q

What happens when your wage increases?

A
  • Your budget constraint swivels upwards, MRT increases
  • The feasible set expands
  • Working hours increases
26
Q

What happens in the income effect of increased income?

A

Your MRS increases

Your willingness increases

27
Q

What happens with the Substitution effect?

A

The MRT increases

You have an incentive to work more

28
Q

What happened in the US and in Britain?

A

The income effect began to dominate and so working hours decreased

29
Q

How can differences in working hours in different countries be explained?

A
  1. Difference in culture
  2. Politics
  3. Social Preferences
30
Q

To what extent is the model a good one?

A
  • It’s unrealistic
  • A good approximation as people learn what’s best for them over time
  • It helps to understand a real world phenomena

Econ 114 (8 decks)

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