econ principles final review

SMC < PMC
EMC < 0

Positive production externality

EMB < 0
SMB < PMB

negative consumption externality

SMB > PMB
EMB > 0

positive consumption externality

EMC > 0
SMC > PMC

negative production externality

SMC =

PMC + EMC

slope of budget constraint

price of x / price of y = MRS

slope of indifference curve

maringal rate of subsitution

to decide trade prices?

divide good x / good y = price of production
find a price in between both firms’ prices of production

how do you decie to specialize

lower opportunity costs

tax incidence falls more onto the good with

more inelasticity / steeper slope

DWL

(P* - P’) * (Q* - Q’)/ 2

price ceiling is when price is…

decreased from P*

price floor is when price is

increased from P*

consequences of price floors

1. P ↑

2. Q↓

3. CS↓

4. PS?

   1. Some do better (sell higher price)

   2. Some do worse (excluded from market)

*quantity supplied - quantity demanded = excess supply

consequences of price ceilings

1. P↓

2. Q↓

3. PS↓

4. CS? 

   1. Some happier bc goods are cheaper

   2. Some sadder because they cant get the good

Quantity demanded - quantity supplied = shortage

tax incidence for consumers

Pc - P* * Q

tax incidence for sellers

P* - Ps * Q

taxing consumers leads to ___er total surplus for society than market equilibrium

higher

how to fix positive externalities?

subsidize

how to fix negative externalities

piguovian tax

what happens to an indifference curve if income increases

buy more of x > buy more of y > shift right

substitution effect

preference of one good over another is a price decreases for one good; inconclusive if it lists only an increase of a price

income effect

the change in income in relation to purchasing power of goods

to find price paid by each side of a tax

1. take tax amount, shift the supply line by that much, find out new intersection

2. new equilibrium P - p with which the old supply is at right under that new p = producer price

taxing consumers leads to ____ total surplus for society than market equilibrium

higher

when a price changes, consumption of that good moves in one direction for certain/uncertain, while the other good’s direction is certain/uncertain

1. certain

2. uncertain

find AFC from ATC and AVC

AFC = ATC - AVC

find FC from AFC and Q

FC = AFC * Q

find ATC from AVC and AFC

ATC = AVC + AFC

find fixed cost from shutdown price

shutdown price: min(AVC)

1. draw a line from min(AVC) until it touches demand, and then draw from that up to ATC. == Functioning Quantity

2. then, find ATC - min(AVC) == AFC

3. AFC / Functioning Quantity = FC

perfect competition

many firms producing identical products

perf comp price

= MR = D = AR

for ALL markets, profit is maximized at the Q where

MC=MR

at p > min(ATC), profit… and firms will…

profit > 0, more firms will enter

at p = min(ATC)

profit = 0, firms make 0 profit

in the long run perfect competition makes ___ profit

0

in the long run monopolistic competition makes ___ profit

0

in the long run oligopolies can make ___ profit

positive

in the long run monopolies can make ___ profits

positive

in perf comp, when min(AVC) < p < min(ATC)…

short run: stay operational to recover fixed costs
long run: exit market once fixed costs are adjusted

breaking even profit

in perf comp, when p < min(AVC)

negative profit, firms will shut down in the short run and exit in the long run

monopoly is

one firm making a unique product

monopoly maximizes profit by restricting ___ to keep price high, causing ___

1. quantity

2. dwl

1st degree price discrimination

exact WTP

1st degree price discrimination effects

NO CS, NO DWL

2nd degree price discrimination

bulk pricing, discounting

2nd degree price discrimination effects

LESS CS, LESS DWL

3rd degree price discrimination

visible characteristics

3rd degree price discrimination effects

MORE CS, LESS DWL

monopolistic competition

many small firms selling similar but differentiated products

order of markets in terms of demand steepness

perf comp (perfectly elastic) < monop comp (some) < monopoly (entire demand)

excess capacity

(MC = ATC) - (D=Q*)

oligopoly

few firms (2-5), identical products, share ONE demand line

quantity of firms in an oligopoly

q* / 2 bc of collusions
2q* if not

in monop comp, P = ___ , so demand line is usually tangent to ___, not intersecting any point

1. atc

2. atc

to find benefit from collusion

1. collusion profit: do math as if already colluding; find q*, divide it by 2, and then multiply that by (p-mc) {this is how u find revenue}

2. then do this calculation assuming you are your own firm, but the other firm is still producing at collusion quantity

   1. plug their quantity into demand but leave your own Q to solve for (this is the MR equation) and set equal to MC ==> should be higher than collusion profit

3. both deviating profit: demand = K - q1 - q2

   1. D = MR, and then set = MC

      1. solve in both sides where K - 2q1 - q2 and [K - q1] - 2q1

      2. q1=q2

      3. K = 3qeach

      4. Qeach = K/3

      5. Qeach * 2 = total Q

public goods

neither rival (one’s usage prevents others’) nor excludable (preventable from use) {babies, streetlights} ==> free rider

common resources

non-excludable, but rivalrous (hunting) ==> tragedy of the commons

expected value equation

E[V] = P(A)*V(A) + P(B)*V(B)….

utility function

E[U] = P(A)*U(A) + P(B)*U(B)…

risk AVERSE utility function

x^1/2

risk SEEKING utility

x²

risk neutral

x

certainty equivalence

U(CE) = E[U]; such that

take a situation, find the E[U] and solve for U(CE) using the risk averse/neutral/seeking function

strictly dominant strategy

best response to every strategy from the other player

pure strategy

choosing something to change an outcome // basically not randomizing = pure strategy

pareto efficiency

an outcome is Pareto Efficient if it is impossible to make one person happier without hurting another

• You can’t get a better deal without fucking someone else over ijbol

pareto improvement

an outcome is a Pareto Improvement over another if it makes at least one person happier without hurting anyone

****IF AN OUTCOME IS A PARETO IMPROVEMENT OVER ANOTHER, THEN THAT PREVIOUS OUTCOME WAS NOT PARETO EFFICIENT 

ZERO SUM GAMES: 

1. One player’s gain is the other player’s loss

2. Net payoff of ZERO in each box

pareto efficient! everyone gets fucked over lmfao

an allocation of an edgeworth box is pareto efficient if any only if

the two IC’s are tangent there

first welfare theorem

any competitive equilibrium is Pareto Efficient

⇒ as long as there is no:

1. Externalities

2. Market power

3. Incomplete information

second welfare theorem

all pareto efficient allocations can be supported as a competitive equilibrium for some endowments

infinitely many pareto optimal allocations are connected via

contract curve

slope of budget constraint in intertemporal consumption is

1 + r

borrowers IC is

below endowment

savers IC is

above endowment

interest rate increase is ___ for saver, ___ for borrower.

1. good

2. bad

interest rate increase
C1 inc effect, sub effect
c2 inc effect, sub effect

1. C1 INC: for savers, +
   for borrowers, —

2. C1 SUB: —

3. C2 INC: for savers, +
   for borrowers, —

interest rate decrease is ____ for borrowers and ____ for savers

1. good

2. bad

interest rate decrease
C1 inc effect, sub effect
c2 inc effect, sub effect

1. C1 INC: for savers, —
   for borrowers, +

2. C1 SUB: +

3. C2 INC: for savers, —
   for borrowers, +

4. —

slope of budget constraint for labor-leisure

wage

how to draw budget constraint

1. Save endowment today, multiply by interest rate to find out how much you get tomorrow 

   1. Add this to your endowment ⇒ that the y intercept

2. Pay back that value tomorrow, divide it by 1+r, and then add that quotient to the endowment today

wage increase in labor-leisure

1. LEISURE INC: +

2. LEISURE SUB: —

3. CONSUMP INC: +

4. CONSUMP SUB: +

hours worked increase/decrease is uncertain

wage decrease in labor-leisure

1. LEISURE INC: —

2. LEISURE SUB: +

3. CONSUMP INC: —

4. CONSUMP SUB: —

hours worked increase/decrease is uncertain

hidden attributes

hiding info from buyers ==> broken ass cars

hidden actions

hiding info from producers ==> popping donuts for your car insurance