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[ECO100Y1] - Midterm Exam Guide - Ultimate 28 pages long Study Guide!Premium

28 pages404 viewsFall 2016

Department
Economics
Course Code
ECO100Y1
Professor
Robert Gazzale
Study Guide
Midterm

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UTSG
ECO100Y1
MIDTERM EXAM
STUDY GUIDE
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1. Eco 100 Lecture 2
*From power point slide “A Silly Question”
Way #1: Give up Giant Steps value = $14
Way #2: Explicit Cost + Implicit Cost
$ you pay + (net value of foregone opportunity)
10+(14-10)
10+4
=$14
*Because you use $16 to go to the movies, you have to give up $16 worth of other things. If
you chose to go to the movies, what did you have to give up?
-You gave up +$16
-Enjoyment of 8 coffees +$20
-Having to pay for 8 coffees: -$16 (i.e. benefit)
-Gave up 3 hours of friends: +$45
-Total Opportunity Cost: $65
-Note that the $16 will cancel out
-Explicit costs = $16 (& 3 hours of time)
-Implicit costs = ($20-16) + 45
*Analysis for tradeoffs
-Normative analysis is prescriptive (value judgement, welfare economics)
-e.g. New York city “ought” to increase the minimum wage to $13
-Positive analysis is verifiable through data or theory (either true or false)
-e.g. New York city’s minimum wage is $9, SF minimum wage is $13
-Parallel to the “ought” vs “is” in philosophy
-e.g. the number of low paying jobs would decrease by 8% if NYC increased minimum
wage to $13
*Economic models are used to simplify complex issues
-We need to leave out important details, and test the model. If the model does not work, we need
to revisit the model
-Therefore, we need to make assumptions
-Leave out irrelevant details in the model
-If predictions are good, that means the model is good
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*When making assumptions about people, economists assume that we are perfectly rational
-However, some people may not be rational and will do stupid things
-Also assume that people are utility maximizers and firms are profit maximizers
-People are “self-interested” (they only care about their own happiness)
-When economists introduce irrationality, the problem is that there are an infinite number of
ways to be irrational
-Therefore, the model will not work
-When people are irrational, they are irrational in systematic ways
-We can predict what they are going to do (irrational but still predictable)
-This is known as behavioral economics
*People will spend their money on something when the benefit >= opportunity cost
Item value >= explicit cost (price you pay) + implicit cost
Item value – Implicit Cost >= the price
Willingness to pay (item value-implicit cost) >= the price
*Under what condition do you rationally purchase Miles Davis’ Birth of the Cool?
Willingness to pay >= $10
Item Value – Implicit Cost >= $10
-People are going to come to different decisions depending on how well off they are, and what
they could have used the 10$ for in the next best alternative use
-Note that both people could have liked the CD equally
*Thinking at the Margin example: Both Bob and Barbara are willing to pay $5 for two
cups of coffee. In fact, they both can purchase as many cups of coffee as they want for
$2/cup. The question is, how much cups will each person buy?
Bob Barbara
Marginal Benefit of the first cup $2.55 $4.75
Marginal Benefit of the second cup $2.45 $0.25
Total Benefit $5 $5
Cups Purchased 2+ 1
-From the table above, we can see that Bob will purchase at least two cups of coffee because he
values both cups of coffee to be greater than $2. However, Barbara will only purchase one cup of
coffee because the marginal benefit of the second cup is less than $2. Even though both Bob and
Barbara can purchase as much coffee as they want for $2, they will buy according to their
marginal benefit.
*Thinking at the margin is the consideration of the benefits/costs of doing marginally more (e.g.
one more) or marginally less (e.g. one less) of an activity
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