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Exogenous variables
determined outside of model, ex. government tax
Endogenous variables
Determined inside the model, ex. what happens to the price of product x1
optimization principle
People try to choose the best patterns of consumption they afford
Equilibrium principle
prices adjust until the quantity demanded is equal to the quantity supplied
Pareto improvement
If we can find a new allocation that makes at least one person better off and nobody worse off
Competitive market
every renter pays p*, where supply = demand
Discriminating monopolist
1 agent owns all apartments and they know everyones individual WTP and they all pay their own WTP, starting fro greatest WTP to least WTP
Ordinary Monopolist
1 agent owns all apartment and knows demand curve but doesn’t know everyones WTP so can’t discriminate. Chooses a single price to max profits (might not be p*)
Rent control
The government chooses some maximum price Pc (might not be p*)
Budget lines
p1x1 + p2x2 = m
taxes in dollars
(m ± t) or (p+t)
percentage taxes
p(1+t) or m(1-t)
Subsidies in dollars
(p-s) or (m+s)
percentage subsidies
p(1-s) or m(1+s)
budget function
x2 = m/p2 - p1×1/p2
Completness axiom
any two bundles can be related with the weak preference
Reflexivity axiom
any bundle is at least as good as itself
Transitivity axiom
if x is preferred to y, and y is preferred to z, then x is preferred to z as well
Monotoncity axiom
if y bundle of goods is more goods then x bundle of goods, then as y is preferred over x ( this assumption is made only before satiation point) ( more goods in a bundle is the one that is preferred)
Convexity axiom
Prefer of variety or mix of goods. If you are indifferent between the good bundles of x and y, but you weakly prefer a 50/50 split that means your preference lies between the goods, have some sort of mix) rather than just having one good. - Applies to convex preferences only.
MRS (can also be considered WTP)
The amount of good 2 they are willing to give up for a small increase in good 1. MRS is the slope of the indifference curve ( aka do derivative).
what is cardinal utility
actual utility solely based on number value and not ranking