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Reservation price def
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Econ 401 Exam 2

TermDefinition
Reservation price def most a single consumer would pay for a unit of good
Reservation price solve set x = 0, find U when all y is bought, then set x = 1 and y = m - r and same utility
Consumer surplus def area under curve above price to quantity purchased
Quasilinear consumer surplus no income effects on nonlinear good, consumer surplus is measure of change in utility form purchasing good
Compensation variation def what is least extra income that at new prices, just restores original utility level
Compensation variation = original income - compensating income
Equivalent variation def money loss a consumer would consider to be equivalent to a price increase (take away income + old prices)
Equivalent variation = original income - equivalent income
Quasilinear changes CV = EV = change in consumer surplus
ration coupon area on graph where tax revenue normally is
Gross surplus def total WTP up to amount, area under curve up to amount
Net surplus def area under curve above price
Cobb Douglas x & y equilibriums x = am/ (a+b)p1 & y = bm / (a+b)p2
perfect compliments equilibriums x = m/(p1+p2)
derivative of lnx = 1/x
demand curve cobb douglas = p1 = am/x
Producer surplus def difference between minimum amount willing to sell and what they actually sell x units for
effective price def price that would induce consumers to demand certain quantity
market demand def horizontal sum of quantities demanded by each consumer at every price
Elasticity def measures sensitivity of one variable with respect to another
Own price elasticity = percent change x / percent change y
Arc own price elasticity = p' / ((x upper - x lower)/2) * ((x upper - x lower)/2h, where h is the difference between price bounds and center price
Point own price elasticity = p'/x' * dx/dp
Own - Price elasticity for p = a - bx E = p/((a-p)/b) * (-1/b)
if -1<E<0 then inelastic
if -infinity<E<-1 elastic
if E = -1 unit elastic
if x = kp^a then own price elasticity is E = -a everywhere (constant)
Revenue = p * q
inelastic demand causes sellers rev to ___ as price rises increase
elastic demand causes sellers rev to ___ as price rises decrease
Marginal Revenue = p(q) * (1+1/E own price)
if unit elastic own price elasticity then MR 0
if elastic own price elasticity then MR greater than zero
if inelastic own price elasticity then MR less than zero
If Demand < Supply excess supply, downward pressure
If Demand > Supply excess demand, upward pressure
When D(p) = a - bp and S(p) = c + dp then p & q are p = a - c/b+d & q = ad + bc/ b + d
excise tax def tax levied on sellers
sales tax def tax levied on buyers
t = pb - ps
With tax D(p) = a - bp and S(p) = c + dp then p&q are ps = a - c - bt / b + d & q = ad + bc - bdt / b + d
tax incidence = pb - p' / p' - ps
Price elasticity of demand (changes) = (change q / q') / (pb - p'/p')
Price elasticity of supply (changes) = (change q / q') / (ps - p'/p')
tax incidence (elasticity) = Es / Ed
fraction of tax to buyers increases when supply more elastic or demand more inelastic
fraction of tax to suppliers increases when supply more inelastic or demand more elastic
Elasticity is slope of the demand function
Price elasticity of demand for q = a - bp E = -bp/a-bp
Normal good has what income elasticity positive
inferior good has what income elasticity negative
perfectly elastic horizontal supply curve
perfectly inelastic vertical supply curve
Pareto efficiency no way to make anyone better without making anyone worse off
partial equilibrium equilibrium in particular market
general equilibrium interact in several markets
feasible allocation = xA + xB = WA + WB
edgeworth box dimensions width is total amount of x and height is total amount of y
net demand = xA - WA
Walrasian equilibrium set of prices that each consumer is choosing their most preferred affordable bundle
Walras law def value of aggregate excess demand is identically zero
First Theorem of Welfare Economics guarantees a competitive market will exhaust all gains from trade and will be pareto efficient
Second Theorem of Welfare Economics when preferences are convex, a pareto efficient allocation is an equilibrium for some set of prices
Assumption of First Theorem consumption externality (competitive)
Total cost curve = cv(y) + F
Average total cost = c(y)/y + F/y
Marginal cost = dc(y)/dy
MC intersects AVC at minimum point
area under MC is total cost of y units
SR ATC intersects SR MC at ATC minimum
LR total cost curve consists of lower envelope of SR total cost curves
Pure competition market price independent, everyone price taker
profit = py - c(y) - F
choose level of output at p = MC(y)
shutdown if AVC > P
producer surplus = py - cv(y)
find the min average cost for firm find average cost, find derivative, set = to 0, find critical points, plug back in
Monopoly one seller that determines supply and sets market clearing price
Oligopoly few firms producing same product, decisions of each influence profits and payoffs
Dominant firm many firms, but 1 large firm that affects decisions of small firms
Monopolistic competition many firms each slightly different products, each firm's output is small relative to total
Perfect competition (4) many firms, same product, no influence on market price, price takers
find max profit level take derivative of profit function, critical points, second derivative should be negative
produce in short run if p > min AVC
produce in long run if p > min AC
short run supply curve find p = MC(y) then solve for y
Long Run producer surplus profit
market supply curve def sum of individual supply curves
long run market supply curve is flat at p = min AC, profits driven to zero
tax burden in long run all of burden is on consumers
find industry supply at given price level find MC for each, find supply curve for each, add together, input given price level
saw - toothed LR supply curve is relevant SR supply curves above min AC (y) and increasingly flat
steps to find n and p for long run (5) 1. find inverse supply functions for one firm 2. solve for supply function 3. lowest possible p = min AC 4. set S(market) = D at p to find n 5. if n is fraction round down and solve for p
Price elasticity (formula) E = p/q * dq/dp
Income elasticity (formula) E = I/Q * dq/di
If q = Ap^a then PED does not depend on price
In SR if MC is decreasing as output increases then total cost is increasing
a profit maximizing firm may ___ money in the SR lose
a small firm in perfectly competitive market, the marginal revenue is ___ over the output range it operates horizontal
Revenue equation is R(p) = D(p) * p
To find maximum revenue then derivative of R(p) then find critical points
Expected revenue = P(survive)*P(not confiscated)*Price
Expected cost = P(confiscated)*fine + cost
Created by: wayisaac
 

 



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