Download File - Shana M. McDermott, PhD

Review for Midterm 1
Microeconomics 300
Instructor: Shana M. McDermott
Fall 2012
Supply and Demand (Chapter 1-3)
 Prices measure the trade-offs available in the market place and coordinate the
independent decisions of the consumers and producers.
 Law of demand and supply
 Shifts in demand and supply curves
 Shocks to equilibrium price and quantity
 Elasticity of Demand/Supply- definitions, formula, interpretation
o Price elasticity
o Income elasticity
o Cross-price elasticity
o Supply elasticity
 Tax incidence and elasticity- who gets hurt more by a tax?
Consumer Choice (Chapter 4 and 5)
 Utility function; Deriving MU; Diminishing MU
 Indifference curves (graph, concept) and preference map
o Definition: combination of goods that give the same level of satisfaction
o Slope = MRS = -MUX/MUY
o Special cases: perfect substitutes & complements
 Budget lines (graph, formula)
o Definition: All the possible combinations of goods that can be purchased
o Slope = MRT = -PX/PY
 Conditions for optimal choice of goods- mathematical formula, graph
o Interior solution, corner solution (perfect substitutes)
o Applications- effect of price/income changes on optimal choice; better off or not?
o Labor-leisure model
 Deriving a Demand Curve from the consumer choice framework
o The relationship between the quantity demanded and price
 Deriving an Engel Curve from the consumer choice framework
o The relationship between the quantity demanded and income
 Graphical framework for analyzing the income and substitution (and total) effects of a
price change (including normal/inferior good implications, special cases such as Giffen
good)
 Labor supply curve: the relationship between hours worked and the wage rate.
Important discussion questions from the in-class experiment:
1. What is the equation for the budget line? The y-intercept? The x-intercept? The slope?
2. Can the consumer do better than bundle A? How?
3. Can the consumer do better than bundle B? How?
4. How do you geometrically identify the consumer’s best combination?
5. How do you algebraically determine the consumer’s best combination?
6. How do the budget lines from phase I and phase II compare? How do you think the utility
maximizing bundle will change when 𝑝𝑥 increases?
7. How might one use this information to find the consumer’s demand curve fox 𝑥?