Econ 401 Exam 2
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| Reservation price def | most a single consumer would pay for a unit of good
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| Reservation price solve | set x = 0, find U when all y is bought, then set x = 1 and y = m - r and same utility
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| Consumer surplus def | area under curve above price to quantity purchased
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| Quasilinear consumer surplus | no income effects on nonlinear good, consumer surplus is measure of change in utility form purchasing good
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| Compensation variation def | what is least extra income that at new prices, just restores original utility level
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| Compensation variation = | original income - compensating income
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| Equivalent variation def | money loss a consumer would consider to be equivalent to a price increase (take away income + old prices)
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| Equivalent variation = | original income - equivalent income
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| Quasilinear changes | CV = EV = change in consumer surplus
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| ration coupon area on graph | where tax revenue normally is
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| Gross surplus def | total WTP up to amount, area under curve up to amount
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| Net surplus def | area under curve above price
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| Cobb Douglas x & y equilibriums | x = am/ (a+b)p1 & y = bm / (a+b)p2
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| perfect compliments equilibriums | x = m/(p1+p2)
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| derivative of lnx = | 1/x
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| demand curve cobb douglas = | p1 = am/x
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| Producer surplus def | difference between minimum amount willing to sell and what they actually sell x units for
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| effective price def | price that would induce consumers to demand certain quantity
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| market demand def | horizontal sum of quantities demanded by each consumer at every price
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| Elasticity def | measures sensitivity of one variable with respect to another
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| Own price elasticity = | percent change x / percent change y
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| 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
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| Point own price elasticity = | p'/x' * dx/dp
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| Own - Price elasticity for p = a - bx | E = p/((a-p)/b) * (-1/b)
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| if -1<E<0 then | inelastic
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| if -infinity<E<-1 | elastic
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| if E = -1 | unit elastic
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| if x = kp^a then own price elasticity is | E = -a everywhere (constant)
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| Revenue = | p * q
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| inelastic demand causes sellers rev to ___ as price rises | increase
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| elastic demand causes sellers rev to ___ as price rises | decrease
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| Marginal Revenue = | p(q) * (1+1/E own price)
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| if unit elastic own price elasticity then MR | 0
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| if elastic own price elasticity then MR | greater than zero
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| if inelastic own price elasticity then MR | less than zero
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| If Demand < Supply | excess supply, downward pressure
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| If Demand > Supply | excess demand, upward pressure
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| When D(p) = a - bp and S(p) = c + dp then p & q are | p = a - c/b+d & q = ad + bc/ b + d
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| excise tax def | tax levied on sellers
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| sales tax def | tax levied on buyers
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| t = | pb - ps
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| 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
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| tax incidence = | pb - p' / p' - ps
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| Price elasticity of demand (changes) = | (change q / q') / (pb - p'/p')
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| Price elasticity of supply (changes) = | (change q / q') / (ps - p'/p')
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| tax incidence (elasticity) = | Es / Ed
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| fraction of tax to buyers increases when | supply more elastic or demand more inelastic
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| fraction of tax to suppliers increases when | supply more inelastic or demand more elastic
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| Elasticity is | slope of the demand function
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| Price elasticity of demand for q = a - bp | E = -bp/a-bp
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| Normal good has what income elasticity | positive
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| inferior good has what income elasticity | negative
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| perfectly elastic | horizontal supply curve
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| perfectly inelastic | vertical supply curve
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| Pareto efficiency | no way to make anyone better without making anyone worse off
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| partial equilibrium | equilibrium in particular market
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| general equilibrium | interact in several markets
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| feasible allocation = | xA + xB = WA + WB
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| edgeworth box dimensions | width is total amount of x and height is total amount of y
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| net demand = | xA - WA
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| Walrasian equilibrium | set of prices that each consumer is choosing their most preferred affordable bundle
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| Walras law def | value of aggregate excess demand is identically zero
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| First Theorem of Welfare Economics | guarantees a competitive market will exhaust all gains from trade and will be pareto efficient
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| Second Theorem of Welfare Economics | when preferences are convex, a pareto efficient allocation is an equilibrium for some set of prices
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| Assumption of First Theorem | consumption externality (competitive)
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| Total cost curve = | cv(y) + F
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| Average total cost = | c(y)/y + F/y
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| Marginal cost = | dc(y)/dy
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| MC intersects AVC at | minimum point
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| area under MC is | total cost of y units
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| SR ATC intersects SR MC at | ATC minimum
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| LR total cost curve consists of | lower envelope of SR total cost curves
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| Pure competition | market price independent, everyone price taker
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| profit = | py - c(y) - F
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| choose level of output at | p = MC(y)
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| shutdown if | AVC > P
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| producer surplus = | py - cv(y)
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| find the min average cost for firm | find average cost, find derivative, set = to 0, find critical points, plug back in
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| Monopoly | one seller that determines supply and sets market clearing price
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| Oligopoly | few firms producing same product, decisions of each influence profits and payoffs
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| Dominant firm | many firms, but 1 large firm that affects decisions of small firms
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| Monopolistic competition | many firms each slightly different products, each firm's output is small relative to total
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| Perfect competition (4) | many firms, same product, no influence on market price, price takers
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| find max profit level | take derivative of profit function, critical points, second derivative should be negative
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| produce in short run if | p > min AVC
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| produce in long run if | p > min AC
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| short run supply curve find | p = MC(y) then solve for y
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| Long Run producer surplus | profit
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| market supply curve def | sum of individual supply curves
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| long run market supply curve is | flat at p = min AC, profits driven to zero
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| tax burden in long run | all of burden is on consumers
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| find industry supply at given price level | find MC for each, find supply curve for each, add together, input given price level
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| saw - toothed LR supply curve is | relevant SR supply curves above min AC (y) and increasingly flat
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| 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
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| Price elasticity (formula) | E = p/q * dq/dp
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| Income elasticity (formula) | E = I/Q * dq/di
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| If q = Ap^a then PED does not depend on | price
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| In SR if MC is decreasing as output increases then | total cost is increasing
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| a profit maximizing firm may ___ money in the SR | lose
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| a small firm in perfectly competitive market, the marginal revenue is ___ over the output range it operates | horizontal
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| Revenue equation is | R(p) = D(p) * p
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| To find maximum revenue then | derivative of R(p) then find critical points
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| Expected revenue = | P(survive)*P(not confiscated)*Price
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| Expected cost = | P(confiscated)*fine + cost
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