Week 4

Question 1

What is an institution?

Answer 1

The laws and customers governing the way people interact in society
the rules of the game - North, 1990

something that constrains and empowers - individuals with the same ideas and values coming together to project power

Question 2

What is bargaining power?

Answer 2

the extent a person’s advantage in securing a larger share of the economic rents made possible by an interaction

Question 3

what is an economic rent?

Answer 3

any payment to an owner of a resource in excess of the costs needed to keep it in its current use

Question 4

What are production functions?

Answer 4

show how inputs translate into outputs eg. g/s holding other factors constant like production environment or machines used

Question 5

what is the shape of a curve for a production function?

Answer 5

doesnt have to intercept at 0

tends to be a curve that reflects the idea of diminishing marginal returns

it doesn’t describe your desires or preferences. but can help make a decision based on preferences - e.g. how much you study and your grade

Question 6

What is an indifference curve?

Answer 6

Shows the combination of goods that give the same utility

like a bindle of allocations - set of consumption bundles

Question 7

What is the marginal rate of substitution?

Answer 7

the trade-off a person is willing to make between two goods

the slope of the indifference curve and represents the tradeoffs that an individual faces

reflects the idea that more is not always better

what the person is willing to trade off

Question 8

What is the feasibility frontier ?

Answer 8

what economically and realistically possible - imposes a constraint on the preferences

Question 9

What is the marginal rate of transformation?

Answer 9

a measure of the trade-offs a person faces in what is feasible

given a feasible frontier this is the amount of a good that must be sacrificed to acquire one additional unit of another good - it is the slope of the feasible frontier

the actual trade-off

Question 10

What is the relationship between MRS and MRT in optimal decision making

Answer 10

MRS= MRT

Question 11

What is a reservation option

Answer 11

A person’s next best alternative among all options in a particular transaction

Question 12

how can democracy and bargaining power result in different allocations

Answer 12

Government policies can increase the fairness of how joint surplus is shares

Question 12

what is a joint surplus?

Answer 12

he sum of the economic rents of all involved in an interaction.

Question 13

What is power

Answer 13

the ability to do and get things one wants in opposition to the intentions

Question 14

What are the four main factors that impact an allocation?

Answer 14

Institutions - bargaining power and reservation options - economically feasible allocation

Biology - technically feasible allocations

Technology - technically feasible allocations

Preferences

IPBT

Question 15

What is the Gini co-efficient?

Answer 15

half the average differences of income/average income

looks at the average differences between different individuals including the middle not just the extreme eg. not just rich and poor but middle too

1= v unequal 0= v equal

Question 16

What is the Lorenz curve?

Answer 16

Focus more on distribution - looks more at the disparity in income or other measure

horizontal axis - population ranked poorest to richest - the height of the curve at any point is the fraction of the total (income) they receive

equity= 1

Question 17

What is the relationship between the Lorenz curve and the gini co-efficient?

Answer 17

Graph with a 45o angle slope of perfect equality line

line below of the market income

Gini co-efficient is the ratio of area between PEL and MI (a) to the area of (a) and (b) which is below the perfect equity line

LC can show the inequality differences even if the GCE is the same in different countries