microeconomics final exam cheat sheet, Cheat Sheet of Microeconomics

Download microeconomics final exam cheat sheet and more Cheat Sheet Microeconomics in PDF only on Docsity! ECON 101: Principles of Microeconomics (Fall 2013) Review Sheet (also known as “The Giant Flash Card”) for Topics Covered in Midterm 21 DO NOT BRING THIS REVIEW SHEET TO THE EXAM! The following topics have been covered in lectures and discussion sections after Midterm 1 and will be asked in Midterm 2. You are expected to know these and be able to solve the problems WITH ACCURACY and SPEED. Furthermore, you are expected to know the material covered for Midterm 1 (e.g. percentage change, equation of a line, demand curve, solving for equilibrium) as we will frequently use to solve the problems. Again, there will be 30 questions in 75 minutes, so you should average out 2.5 minutes per question. Even if some questions might take you less than 30 seconds, others might take as long as 5 minutes, spare your time accordingly. Rule of thumb: if the additional (marginal) benefit is greater than additional (marginal) cost, do it! Otherwise, don’t! (In fact, this is the main idea of every economic concepts!) You are maximizing the probability of getting the questions right, subject to the time constraint – if the additional time cost needed to get them right is higher the additional benefit, then you should do other questions! Topics studied so far are inter-related, you should expect something to cross-over with each other, e.g. production and cost will show up in perfect competition problem. Demand and Supply – The International Trade and Intervention • With international trade, what is the effect to the domestic demand/supply? What is the world price? What happen if world price is lower/higher than autarky equilibrium? What is the new supply or new demand curve? What is the new equilibrium? How to find the amount consumed? How to find the amount produced domestically? • With import tariff, what is the new demand/supply curve? How to solve for the new equilibrium? How to find the amount consumed? How to find the amount produced domestically? How to find government revenue? What is the deadweight loss? What is prohibitive import tariff? • With import quota, what is the new demand/supply curve? How to solve for the new equilibrium? How to find the amount consumed? How to find the amount produced domestically? How to find government revenue? What is the deadweight loss? Is the import quota binding? Real and Nominal Variables • Some Formulae: Real Price = Nominal Price CPI ⇥ Scale Factor CPI = Market Basket Price of Year t Market Basket Price of Base Year ⇥ Scale Factor • What is the market basket? How to find the market basket? What is the base year? What is CPI? How to calculate CPI? (Be careful with scale factor!) What is inflation? (Inflation is simply percentage change in CPI.) How to change the base year and re-calculate CPI and inflation? (By now you should know some trick about inflation when you change the base year.) More importantly, how to back out the information from the given data? (As you know, we won’t give you all the information needed!) • What is nominal price? What is real price? What is the percentage change in nominal price? What is the percentage change in real price? What would happen to nominal price and real price when the base year is changed? How can you take the price and go back and forth in time? 1 Prepared by Kanit Kuevibulvanich. (https://mywebspace.wisc.edu/kuevibulvani/web) This version: November 14, 2013. Disclaimer: Although summarized from textbook, homework and lectures, this note does not constitute as the official guidelines for the course, comments welcomed. 1 Elasticities and Total Revenue • What is regular percentage change? What is arc percentage change? • In general, what is elasticity? It is simply the ratio of percentage change of the cause (x) to percentage change of the effect (y), i.e. "y x = %y%x . So whatever you have in the world as cause and effect, you can measure in terms of elasticity. Hence, think about the price of a good causes the change in quantity demanded for that good (own-price elasticity of demand), to the quantity demanded for the other good (cross-price elasticity of demand), or to the quantity supplied for that good (price elasticity of supply). How about income causes change to quantity demanded (income elasticity of demand)? • The three formulation of elasticities: slope form, point elasticity, arc (midpoint) elasticity. Take the own-price elasticity of demand, clearly price of good x (p) causes the change in quantity demanded of good x (q), so we have the following formulation: (Slope form) "d p = %q %p = q q p p = q p · p q = 1 slope of demand curve · p q (Regular percentage elasticity) "d p = %q %p = q q p p = q2q1 q1 p2p1 p1 (Arc percentage elasticity) "d p = %q %p = q q p p = q2q1 ( q1+q22 ) p2p1 ( p1+p22 ) Note that point elasticity and midpoint elasticity are different by the base you use as the divisor (i.e. the base) – point method uses initial condition, arc method uses the average. The slope form means that, what is the elasticity instantenously at (p, q), while the other two means the change from situation 1 (p1, q1) to situation 2 (p2, q2). • In calculating cross-price and income elasticity of demand, we will use only regular percentage change in this class. • If you have demand curve/demand function, supply curve/supply function, you should be able to find and calculate the elasticities. Similarly, you should also be able to back out the demand curve/demand function, supply curve/supply function! • Hence, you can derive the formula for all elasticities we have studied. • Which elasticity you can take the absolute value (i.e. neglect the negative sign)? Why and why not? What is the meaning of each elasticity? Why is it normal good, inferior good, substitute and complement? Can you interpret the elasticities? • What is elasticity on the demand curve? Is it always the same throughout the demand curve? How is it changing? What is the point where revenue is maximized? The midpoint of demand curve is not the same as midpoint elasticity, but the elasticity of the midpoint of demand curve. Excise Tax and the Relationship to Elasticities • Which side of the market that the tax has been imposed? What is the effect of excise tax on demand or supply curve? How does each curve shift? How to find the quantity traded with tax, the price that consumer pays and producer receives? What is consumer surplus and producer surplus after the tax? What are the consumer tax incidence and producer tax incidence? What is the government revenue? What is the deadweight loss? • How are elasticities represented on the slope of demand and supply curves? What is the effect of elasticities of both consumer and producer on taxation? Which side of the market bears more of the burden? What is the fraction of burden born on each side of the market – slope of demand curve 2