Econ 211 Exam 2 Quick Review.pdf

Exam Scope and Core Rules

Exam 2 covers Chapters 5–7 scheduled for Wed Oct 14. The material skips the behavioral economics psychological factors and the Ch 6 appendix.

Almost every calculation relies on standard formulas. For the midpoint formula, calculations must always use the average price and average quantity, never the starting values.

Elasticity Formulas and Interpretations

Midpoint Elasticity Formula

$E = \frac{Q_2 - Q_1}{P_2 - P_1} \times \frac{\text{avg}P}{\text{avg}Q}$

To apply this formula across different elasticity types, swap $P$ for income when calculating income elasticity, or swap $P$ for the other good's price when calculating cross-price elasticity.

Price Elasticity of Demand ($E_d$)

$E_d = \% \Delta Q_d \div \% \Delta P$

When interpreting the result, ignore the sign:

• Above $1$: Elastic

• Below $1$: Inelastic

• Exactly $1$: Unit elastic

Income Elasticity of Demand ($E_I$)

$E_I = \% \Delta Q_d \div \% \Delta \text{Income}$

Interpreting the sign and magnitude:

• Negative: Inferior good

• Between $0$ and $1$: Necessity

• Above $1$: Luxury good

Cross-Price Elasticity of Demand ($E_{CP}$)

$E_{CP} = \% \Delta Q_d \text{ of } A \div \% \Delta P \text{ of } B$

Interpreting the relationship between goods $A$ and $B$:

• Positive: Substitutes

• Negative: Complements

• $0$: Unrelated

Price Elasticity of Supply ($E_S$)

$E_S = \% \Delta Q_s \div \% \Delta P$

Supply becomes more elastic the more time passes.

Utility and Revenue

Total Revenue ($TR$)

$TR = P \times Q$

Total revenue represents gross sales receipts, not profit.

Marginal Utility ($MU$)

$MU = \Delta TU \div \Delta Q$

Marginal utility quantifies the extra satisfaction obtained from consuming one more unit of a good.

Utility Maximization Rule

$\frac{MU_a}{P_a} = \frac{MU_b}{P_b}$

To achieve utility maximization, a consumer must equate the marginal utility per dollar spent across all goods ($\frac{MU}{P}$) AND fully spend their entire budget.

Production and Cost Measures

Total, Average, and Fixed Cost Relationships

$TC = FC + VC$

$ATC = AVC + AFC$

$ATC = \frac{TC}{Q}$

$AVC = \frac{VC}{Q}$

$AFC = \frac{FC}{Q}$

Where $TC$ is total cost, $FC$ is fixed cost, $VC$ is variable cost, $ATC$ is average total cost, $AVC$ is average variable cost, and $AFC$ is average fixed cost.

Marginal Cost ($MC$)

$MC = \Delta TC \div \Delta Q = \Delta VC \div \Delta Q$

Because fixed cost does not change with output, it drops out of the marginal cost formula.

Productivity of Labor ($MP$ and $AP$)

$MP = \Delta Q \div \Delta L$

$AP = \frac{Q}{L}$

$MP$ represents the marginal product of labor (additional output per additional unit of labor $L$), whereas $AP$ represents the average product of labor (total output per unit of labor).