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Micro Economics Midterm

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Western University
Psychology 1000
Mark Holden

Chapter 6▯ ▯ 1) In an unregulated housing market higher rents create incentives to use current buildings more intensively, increasing the short-run quantity of housing supplied.▯ 2) At equilibrium price, all those who can afford housing will achieve it.▯ 3) A rent ceiling above equilibrium price will not result in black markets.▯ 4) In an unregulated labour market, a decrease in the demand for labour causes the wage rate to rise.▯ 5) An increase in the minimum wage will reduce the number of workers employed.▯ 6) Minimum wage laws, when above market equilibrium increase the amount of time people spend ▯ 7) Perfectly inelastic demand -buyers pay. They will pay whatever the price for that product.▯ Perfectly elastic demand -sellers pay. Buyers can dip for substitute anytime.▯ 8) A sales tax creates a deadweight loss as long as it is not inelastic or elastic.▯ 9) The deadweight loss does not equal the tax revenue for the government.▯ 10) A production quota creates inefficiency through under production. A quota limits the production.▯ 11) Subsidy makes the price fall, shifts the equilibrium rightward along the demand, increasing it because the price drop.▯ ▯ Multiple Choice▯ 1) The short run supply curve for rental housing is positively sloped because the current stock of building will be used more intensively as rents rise.▯ 2) rent ceilings imposed by governments keep rental prices below the unregulated market price.▯ 3) Black market prices below the rent ceiling prices not a likely outcome.▯ 4) The minimum wage set below equilibrium would not create unemployment.▯ 5) If the minimum wage is set at 6$ and hour, there would be 50 unemployment hours.▯ 6) “ade” is dead weight loss.▯ 7) sales tax is vertical distance between tax + demand and regular demand curves.▯ 8) Buyers pay 60 cents, sellers pay 40 cents.▯ 9) For each frisbee the buyers share of tax is 40 cents.▯ 10)Government revenue = $1 frisbee X $4000 (market equilibrium supply) = $4000 revenue.▯ 11)We can deduce that between 4,000 and 5,000 units , the demand for frisbees is elastic.▯ 12)The deadweight loss is the area of the demand and supply loss. It is $500.▯ 13)A tax on buyers has the same effect on price and quantity as a tax on sellers▯ 14)If the price of a good is not effected by a sales tax, demand is elastic. If the prices rises people will switch to a substitute. ▯ 15)All of the above are true.▯ 16)All of the above are true.▯ 17)If the board sets a quota of 50 million bushels, the market-clearing price of a bushel of wheat bran is $5.▯ 18)With the quota of 50 million bushels, farmers have an incentive to increaser output because the market-clearing price is above cost of production.▯ 19)70 million bushels. When their is a subsidiary (a payment made by the government to a producer the supply curve shits rightward along the demand curve the absolute distance from the equilibrium price and the actual subsidiary cost.▯ 20)The amount of taxpayers money that the marketing board pays to farmers in question 20 is 5X70 million= $350 million.▯ 21)Floor prices above market prices create excess supply.▯ 22)An agricultural subsidy does all of the above.▯ ▯ Chapter 8▯ Consumption possibilities: all of the things that you can afford to buy.▯ Budget line: limit to the consumption possibilities. Much like a PPF -all possibilities within the budget line are possible.▯ income fluctuations shift budget line.▯ ▯ Preferences: a description of ones likes and dislikes.▯ Goal: determine what decides marginal benefit▯ Utility: The benefit or satisfaction that a person gets from the consumption of goods and services. ▯ Total utility: The benefit that a person gets from consumption of all different goods and services. -more consumption=more total utility.▯ a good consumed.▯ the change in total utility that results from a one-unit increase in the quantity of ▯ The principle of diminishing marginal utility: the tendency for marginal utility to decrease as the consumption of a good increases.▯ ▯ In terms of consumer utility they want to maximize.▯ to determine utility we find..▯ Just affordable utility: the combinations of movies and pop that exhaust her $40 income.▯ add the total utilities of pop and movies for each combination to achieve the total costumer utility. ▯ ▯ income in a way that maximizes his or her total utility, given the prices of goods and services. ▯ ▯ Lisa’s equilibrium is at 2 movies 6 pops. Added utilities her to create the total utility is highest with this combination.▯ ▯ Marginal utility per dollar: the marginal utility from a good that results from spending one more dollar on it. -how to interpret the best possible choice. (ex. the increased utility from spending another dollar at the gas pump is the marginal utility per dollar).▯ ▯ One unit from the marginal utility = the marginal unit per dollar. To determine marginal utility per dollar you divide the marginal utility by the cost of the product.▯ ▯ equalizing the marginal utility per dollar for all goods.▯the available income, and -as long as the utility per dollar exceeds the other (between good A and B) there is not a maximized utility (equilibrium) money must be moved from each so that the values are the same. ▯ If the marginal utility per dollar from movies exceeds the marginal utility per dollar for pop, see less movies and drink more pop.▯ ▯ MUp= utility price of pop▯ MUm= utility price of pizza▯ Pp= pop price▯ Pm= pizza price▯ maximized if - MUp/Pp = MUm/Pm▯ Multiply both sides by the price of pop to obtain▯ MUp=MUm X (Pp/Pm) ▯ ▯ -(Pp/Pm) is the ratio of the price of pop to the price of a movie. how much she is foregoing for the other ▯ ▯ For lisa when Pm=$8 and Pp=$4 we observe that in a month she goes to the movies twice and buys 6 cases of pop. So we know that her MUp from 6 cases equals her Mum from 2 movies multiplied by $4/$8. That is, for Lisa the marginal utility from 6 cases of pop equals on half of the marginal utility from 2 movies. ▯ ▯ Paradox of Value: How can valuable water be so cheap, while a relatively useless diamond is so expensive?▯ ▯ The paradox is resolved by distinguishing through total utility and marginal utility. We use so ▯uch water that the benefit from it diminishes to a small value.▯ Water has a low price, low marginal utility, diamonds have a high price, high marginal utility. ▯ When the high marginal utility from diamonds is divided by high price of a diamond, the result is a number that equals the low marginal utility from water divided by the low price of water.▯ ▯ Questions▯ ▯ 1) All points within a consumers budget line are affordable, not maximized however.▯ 2) The principle of diminishing marginal utility means that as consumption of a good increases, total utility increases but at a decreasing rate.▯ 3) A household is maximizing utility if the marginal utility per dollar spent is equal for all goods and all its income is spent. ▯ 4) If the marginal utility per dollar is not equal consumer cannot be at equilibrium. Marginal utility ratios will not be consistent however if the prices are different. ▯ 5) If marginal utility per dollar spent on good X exceeds the marginal utility per dollar spent on good Y, total utility will increase by increasing consumption of good X (to decrease marginal dollar value), and decreasing consumption of Y (to increase marginal dollar value). If marginal gain from an action exceeds marginal loss you take the action.▯ ▯ 1) A households consumption choices are determined by prices of goods and services, income, and preferences.▯ 2) Total utility equals the sum of the marginal utilities of each unit consumed.▯ 3) Total utility is always increasing when marginal utility is positive. Positive Marginal Utility: All things that people enjoy and want more of have a positive marginal utility. ▯ 4) According to the principle of diminishing marginal utility, as consumption of a good increases, total utility decreases at an increasing rate.▯ 5) If a consumer is in equilibrium, total utility is maximized given the consumer’s income and the prices of goods.▯ 6) Miniskirts: MU/P= 16/4= 4, Law Books= MU/P= 8/2= 4. Marginal Price per dollar is equal at 4, therefore the equilibrium amount of miniskirts is 1.▯ 7) If potato chips were free, individuals would consume them until the quantity of chips at which marginal utility from chips falls to 0.▯ 8) In consumer equilibrium, the consumer equates the the marginal utility per dollar spent on each good. Or the highest total utility combination. ▯ 9) Equilibrium = MUp/P=MUa/P ▯ 10/.5=5/P▯ 10/.5=20 (market price per dollar)▯ must be equal▯ 5/P must = 5/20 = .25▯ The banana has half the total utility as the apple, this means the banana must be half the price as well. ▯ ▯ 10) If marginal cost per dollar of squid is 10 at equilibrium, and no octopus were purchased, then the marginal utility of squid must be at least less then 20 so that the dollars cannot match up. If it was 20 exactly then it would be worth purchasing a squid.▯ ▯ 11) If Soula is maximizing her utility and two goods have the same marginal utility she will be willing to pay the same price for both.▯ 13) TU= 8+6+16+12= 42.▯y of the las purchased beer is greater then the last purchased bubblegum▯ ▯ Chapter 9▯ ▯ A households budget line describes the limits to its consumption choices.▯ Divisible goods can be bought in any quantity desired.▯ ▯ Budget lines are described by Budget Equations.▯ Expenditure = income▯ Expenditure is equal of the sum of the price of each good multiplied by the quantity bought.▯ Ex. Expenditure= (price of pop X quantity of pop) + (price of movie X quantity of movies)= $40▯ ▯ A households real income is its income expressed as a quantity of goods that the household can afford to buy.▯ ▯ Relative Price is the price of one good divided by the price of another. ▯ The relative price essentially equals the slope of the budget line.▯ ▯ When the relative price of something changes on the budget line it rotates.▯ When income increases the line shifts left, decreases shifts right.▯ ▯ Preference Map: people can sort all the possible combinations of goods into three groups: preferred, not preferred, indifferent.▯ An indifference curve is a line that shows combinations of goods among which a consumer is indifferent. ▯ -any combination within the indifference curve is not preferred and outside it is preferred. ▯ A preference map is a series of indifference curves that allow us to understand somebody's preferences.▯ Marginal rate of substitution: the rate at which a person will give up good Y (measured on the Y axis), to get and additional unit of good X (measured on the X axis).▯ steep difference curve=high substitution.▯ flat=low substitution▯ Diminishing marginal rate of substitution: a general tendency for a person to be willing to give up less of good Y to get one more unit of good X, while at the same time remaining indifferent as the quantity of X increases. ▯ -when two goods are perfect substitutes there indifference curves are straight lines that slope downward. For perfect substitutes the slope is 1.▯ Compliments produce an L shaped indifference curve. You cannot have one without the other. ex. you want 1 left and right running shoe.▯ ▯ The best point that intersects with the budget line and indifference curve is the best affordable point.▯ ▯ demand curve is basically a budget line.▯ ▯ Income effect: the effect of a change in income on buying plans. ▯ budget line shifts when income changes, produces different intersections on the indifference curve.▯ ▯ Price effect: The effect of a change in the price of a good on the quantity of the good consumed.▯ For a normal good a fall in its price always increases the quantity bought.▯ The substitution effect is the effect of a change in price on the quantity bought when the consumer remains indifferent between the original situation and the new one. ▯ ▯ When the relative price of a good falls the consumer substitutes more of that good for the oth
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