Review Sheet for Second Midterm Exam - Principles of Microeconomics | ECON 101, Exams of Microeconomics

Download Review Sheet for Second Midterm Exam - Principles of Microeconomics | ECON 101 and more Exams Microeconomics in PDF only on Docsity! Review Sheet for the Second Midterm of Economics 101 (Prof. Kelly) The following is a list of topics that you should cover for the second midterm. This list should serve as a checklist for you to see whether you have studied everything you need to. You should expect questions on each of these topics on the exam. In order to do well on the exam you should review your lecture and section notes, and the appropriate chapters from the book. In addition, it is very important to work on the practice problems. Good luck! I. International Trade (Chapter 9): The following topics are important.  Equilibrium without trade.  The concept of World Price.  The gains and losses from trade for an exporting country and for an importing country. This gain or loss takes the form of an increase in the total surplus of an important. You should be able to recognise this increase in the diagram and also calculate its magnitude.  The effects of tariffs and import quotas. A tariff reduces consumer welfare and increases producer surplus and government revenue. A quota reduces consumer welfare and increases producer surplus and the surplus of the license-holder. I both cases, the reduction in consumer surplus is greater than the combined increase in the other two components. So a tariff or a quota reduces total welfare. This reduction is called the deadweight loss. Recognising and calculating this deadweight loss is important.  The arguments for restricting trade and how those arguments may be countered by using economic logic. II. Consumer Theory (Chapter 21): The following concepts are important in Consumer Theory.  Indifference Curve (Note that points on an indifference curve denote consumption bundles that give the same utility level to a consumer. A higher indifference curve denotes higher utility.)  Properties of indifference curves: They are downward sloping, never cross, and are bowed inward.  Budget Line (Slope of a budget line= - y x P P . The y-intercept of a budget line= yP I . The x-intercept is = xP I )  Movement and shift of the Budget Line. A change in income without any change in prices will change the intercepts but not the slope. So the budget line will shift out (if Income rises) or in (if income falls) in a parallel manner. If only Px changes, the x-intercept increases without any change in the y-intercept. Analogous movements occur if the price of y changes.  Optimal consumption is given by the point of tangency of the budget line with the highest possible indifference curve.  Income Effect and Substitution Effect. There is an easy way to distinguish between the two effects. The movement that takes place on the original indifference curve is the SE. This movement will be from the point of tangency of the original indifference curve and the original budget line (i.e. the original equilibrium) to the point of tangency of the original indifference curve and the imaginary budget line. Then, the movement from this tangency of the original indifference curve and the imaginary budget line to the new equilibrium (the point of tangency of an indifference curve and the new budget line) is the IE. (Refer to lecture notes for this section most carefully).  Price-consumption curve and Income-consumption curve.  Derivation of the demand curve. III. Externalities (Chapter 10): Note the following concepts.  Definition of externalities.  Positive externalities (external benefits) and Negative Externalities (external costs). There are external benefits and costs on the production side as well as the consumption side. Hence positive (or negative) production externalities, positive (or negative) consumption externalities  MPB- Marginal Private Benefit; MPC- Marginal Private Cost  MSB- Marginal Social Benefit; MSC- Marginal Social Cost.  The point of intersection of MPB and MSC is the market equilibrium. The point of intersection of MSB and MSC is the social optimum.  If there are no externalities, then MPC=MSC and MPB=MSB  Production Externalities create a difference between MPC and MSC. With positive (negative) production externalities, MSC lies below (above) MPC. As a result, the market output is less (more) than the socially optimal output.  Consumption Externalities create a difference between MPB and MSB. With positive (negative) consumption externalities, MSB lies above (below) MPC. As a result, the market output is less (more) than the socially optimal output.  The presence of externalities creates a deadweight loss (DWL). DWL is caused by the difference between the market output and the socially optimal output. If there is no difference, then there is no DWL. A very easy to calculate the DWL is to use the following formula; DWL= ))(( 2 1 ms QQyExternalit  , where Qs is the socially optimal output (MSC=MSB) and Qm is the market equilibrium output (MPC=MPB). Externality is the externality per unit. Note that you have to take the absolute value because deadweight loss can never be negative.  Total market surplus (TMS). With positive externality, TMS=CS+PS+ total external benefit. With negative externality, TMS=CS+PS- total external cost. Note that total external benefit (cost) = equilibrium market quantity* external benefit (cost) per unit.  Government intervention. The govt. should impose a tax if there is an external cost and grant a subsidy if there is an external benefit. The tax or the subsidy should be directed to the side that is creating the externality. Thus, positive