# Chapter 5: A Closed-Economy One-Period Macroeconomic Model

Size: px
Start display at page:

Transcription

1 Chapter 5: A Closed-Economy One-Period Macroeconomic Model Introduce the government. Construct closed-economy one-period macroeconomic model, which has: (i) representative consumer; (ii) representative firm; (iii) government. Economic efficiency and Pareto optimality. Experiments: Increases in government spending and total factor productivity.

2 Closed-Economy One-Period Macroeconomic Model Representative Consumer Representative Firm Competitive Equilibrium Experiments: What does the model tell us about the effects of changes in government spending and in total factor productivity?

3 A Model Takes Exogenous Variables and Determines Endogenous Variables Exogenous variables are determined outside a macroeconomic model. Given the exogenous variables, the model determines the endogenous variables. In experiments, we are interested in how the endogenous variables change when there are changes in exogenous variables.

4 Let s first look at the competitive equilibrium

5 Competitive Equilibrium Representative consumer optimizes given market prices. Representative firm optimizes given market prices. The labor market clears. The government budget constraint is satisfied, or G = T.

6 Competitive Equilibrium Recall that representative consumer s optimal consumption problem involved a graph with consumption and leisure

7 Competitive Equilibrium Recall that representative consumer s optimal consumption problem involved a graph with consumption and leisure representative firm s profit maximization problem involved a graph with labor and output

8 Competitive Equilibrium Recall that representative consumer s optimal consumption problem involved a graph with consumption and leisure representative firm s profit maximization problem involved a graph with labor and output We want to be able to put these two problems in one graph transform output into consumption transform labor into leisure

9 Resource Constraint In a competitive equilibrium, the incomeexpenditure identity is satisfied.

10 Derivation of RC This can be verified from the consumer s budget constraint.

11 The Production Function In equilibrium, N = h l, so This allows us to look output as a function of leisure

12 Production Function

13 Output as a Function of Leisure

14 Consumption as a Function of Leisure C = Y - G

15 Production Possibilities Frontier Production Possibilities Frontier (PPF): the technological relationship between consumption and leisure Marginal Rate of Transformation (MRT): slope of PPF, rate at which leisure can be converted in the economy into consumption goods through work Then MRT = MPN

16 Production Possibilities Frontier An increase in G shifts PPF downwards AB is infeasible as consumption is negative

17 Competitive Equilibrium Now we can put the representative consumer s optimal consumption problem and the representative firm s profit maximization problem in the same graph to find the competitive equilibrium

18 Competitive Equilibrium Slope = This figure brings together the representative consumer s preferences and the representative firm s production technology to determine a competitive equilibrium. AD: budget constraint DB: non-labor income

19 Key Properties of a Competitive Equilibrium = w MRS: slope of indifference curve MRT, MPN: slope of PPF w: slope of budget constraint

20 Now let s discuss the optimality of the competitive equilibrium

21 Optimality A competitive equilibrium is Pareto optimal if there is no way to rearrange production or to reallocate goods so that someone is made better off without making someone else worse off. The Pareto optimum is the allocation that a social planner would choose. The social planner s problem is to maximize consumer welfare given the technology and the resource constraints

22 Pareto Optimality

23 Key Properties of a Pareto Optimum In this model, the competitive equilibrium and the Pareto optimum are identical, as

24 First and Second Welfare Theorems These theorems apply to many macroeconomic models First Welfare Theorem: Under certain conditions, a competitive equilibrium is Pareto optimal. Second Welfare Theorem: Under certain conditions, a Pareto optimum is a competitive equilibrium.

25 When might competitive equilibria fail to be Pareto Optimal? Externalities Pollution (negative), fine architecture (positive) Distorting taxes Income tax, sales tax, property taxes are all distortionary (e.g. MRS < MPN = MRT) Price setters Monopolistic firms are not price takers

26 Now let s discuss how the competitive equilibrium changes in response to exogenous changes

27 Effects of an Increase in G Essentially a pure income effect T increases C decreases, l decreases Y increases, w falls

28 Equilibrium Effects of an Increase in Government Spending PPF shifts down by the increase in G Since we assume G=T, increase in T reduces consumer disposable income Consumption and leisure fall, employment and output rises

29 GDP, Consumption, and Government Expenditures The model correctly predicts that a large increase in G leads to an increase in output and a decrease in consumption

30 Effects of an Increase in z (or an increase in K) PPF shifts out, and becomes steeper income and substitution effects are involved. C increases, l may increase or decrease, Y increases, w increases

31 Increase in Total Factor Productivity Increase in z increase in MPN increase in w Income effect Consumption, leisure increase Substitution effect Substitute away from leisure

32 Effects of an Increase in Total Factor Productivity An increase in z leads to an increase in output and consumption. Labor may increase or decrease depending on the size of substitution vs. income effects

33 Deviations from Trend in Real GDP and the Solow Residual The model correctly predicts that an increase in z leads to an increase in output and consumption. It can also be consistent with procyclical labor and real wages if the subsitution effect is greater than the income effect of real wages.

34 Distortionary Taxes Let s extend the concept of competitive equilibrium to include distortionary taxes. Let s consider the example of labor income taxes. The household budget constraint is then C = w 1 t N S + π where t is the labor income tax rate. The firm s problem is unchanged.

35 Tax distorted Competitive Equilibrium (TDCE) The TDCE is where MRS l,c = w 1 t < w = MRT = MP N TDCE Not Pareto optimal Consumption goes down (income and substitution effects!) Leisure goes up (if substitution effect is larger than income effect)

36 Any questions? We are now ready to look at handout 3!

### Walter Nicholson, Amherst College Christopher Snyder, Dartmouth College PowerPoint Slide Presentation Philip Heap, James Madison University

Intermediate Microeconomics and Its Application 11th edition by Walter Nicholson, Amherst College Christopher Snyder, Dartmouth College PowerPoint Slide Presentation Philip Heap, James Madison University

### Welfare Economics. Philip A. Viton. May 17, Philip A. Viton CRP 781 () Welfare May 17, / 1

Welfare Economics Philip A. Viton May 17, 2012 Philip A. Viton CRP 781 () Welfare May 17, 2012 1 / 1 Economic Systems An economic system is a set of institutional arrangements for the exchange of goods

### Short-Run Versus Long-Run Elasticity (pp )

Short-Run Versus Long-Run Elasticity (pp. 38-46) Price elasticity varies with the amount of time consumers have to respond to a price Short-run demand and supply curves often look very different from their

### ECO232 Chapter 25 Homework. Name: Date: Use the following to answer question 1: Figure: Coffee and Comic Books

ECO232 Chapter 25 Homework Name: Date: Use the following to answer question 1: Figure: Coffee and Comic Books 1. (Figure: Coffee and Comic Books) Refer to the figure. A consumer has \$5 to spend on comic

### Cost-minimizing input combinations. Rush October 2014

Cost-minimizing input combinations Rush October 2014 Today s objectives Review marginal revenue productivity and firm resource demand Look at the optimal combination of resources for the competitive firm

### Section 1: Neoclassical welfare economics

Section 1: Neoclassical welfare economics (see Chapter 5 of the textbook: erman, Ma, McGilvray, Common) - the starting point of most economic analysis is the neoclassical general equilibrium theory - this

### UNIT 4 PRACTICE EXAM

UNIT 4 PRACTICE EXAM 1. The prices paid for resources affect A. the money incomes of households in the economy B. the allocation of resources among different firms and industries in the economy C. the

### Wallingford Public Schools - HIGH SCHOOL COURSE OUTLINE

Wallingford Public Schools - HIGH SCHOOL COURSE OUTLINE Course Title: Advanced Placement Economics Course Number: 3552 Department: Social Studies Grade(s): 11-12 Level(s): Advanced Placement Credit: 1

### BACHELOR OF BUSINESS. Sample FINAL EXAMINATION

BACHELOR OF BUSINESS Sample FINAL EXAMINATION Subject Code : ECO201 Subject Name : LABOUR ECONOMICS This examination carries 50% of the total assessment for this subject. Examiner(s) Moderator(s) Joyce

### Market Equilibrium, the Price Mechanism and Market Efficiency. Chapter 3

Market Equilibrium, the Price Mechanism and Market Efficiency Chapter 3 Equilibrium Equilibrium is defined as a state of rest, self-perpetuating in the absence of any outside disturbance. Example: a book

### David Besanko and Ronald Braeutigam. Prepared by Katharine Rockett Dieter Balkenborg. Microeconomics, 2 nd Edition

Microeconomics, nd Edition David esanko and Ronald raeutigam Chapter : General Equilibrium Theory Prepared by Katharine Rockett Dieter alkenborg 00 John Wiley & Sons, Inc. Trade involves more than one

### In this chapter, look for the answers to these questions

In this chapter, look for the answers to these questions What are economists two roles? How do they differ? What are models? How do economists use them? What are the elements of the Circular-Flow Diagram?

### Lecture 2: Market Structure I (Perfect Competition and Monopoly)

Lecture 2: Market Structure I (Perfect Competition and Monopoly) EC 105. Industrial Organization Matt Shum HSS, California Institute of Technology October 1, 2012 EC 105. Industrial Organization ( Matt

### Economics. Thinking Like An Economist. The Economist as Scientist. In this chapter, look for the answers to these questions: N.

C H A P T E R 2 Thinking Like An Economist P R I N C I P L E S O F Economics N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich 29 South-Western, a part of Cengage Learning, all rights reserved

### Economics 110 Midterm #2 Practice Multiple Choice Qs Spring 2014

Midterm #2 Practice Multiple Choice Questions: Elasticity is a. a measure of how much buyers and sellers respond to changes in market conditions. b. the study of how the allocation of resources affects

### ECONOMICS ASSIGNMENT CLASS XII MICRO ECONOMICS UNIT I INTRODUCTION. 4. Is free medicine given to patients in Govt. Hospital a scarce commodity?

ECONOMICS ASSIGNMENT CLASS XII MICRO ECONOMICS UNIT I INTRODUCTION 1. What is the Slope of PPC? What does it show? 2. When can PPC be a straight line? 3. Do all attainable combination of two goods that

### L2 Efficiency, Opportunity Cost, PPF

L2 Efficiency, Opportunity Cost, PPF Pareto Efficiency: A state in which it is impossible to make at least one individual better off without hurting the others. The action that makes at least one individual

### AP Microeconomics Review With Answers

AP Microeconomics Review With Answers 1. Firm in Perfect Competition (Long-Run Equilibrium) 2. Monopoly Industry with comparison of price & output of a Perfectly Competitive Industry (which means show

### Economics. In an economy, the production units are called (a) Firm (b) Household (c) Government (d) External Sector

Economics The author of the book "The General Theory of Employment Interest and Money" is (a) Adam Smith (b) John Maynard Keynes (c) Alfred Marshall (d) Amartya Sen In an economy, the production units

### Introduction to Economics II: Producer Theory

Introduction to Economics II: Producer Theory Leslie Reinhorn Durham University Business School October 2014 Plan of the Lecture Introduction The Case of Perfect Competition pro t maximization problem

### ECON 230-D2-002 Version 2. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

ECON 230-D2-002 Version 2 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The two largest auto manufacturers, Toyota and GM, have experimented

### 1.3. Levels and Rates of Change Levels: example, wages and income versus Rates: example, inflation and growth Example: Box 1.3

1 Chapter 1 1.1. Scarcity, Choice, Opportunity Cost Definition of Economics: Resources versus Wants Wants: more and better unlimited Versus Needs: essential limited Versus Demand: ability to pay + want

### Professor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 2

Economics 2 Spring 2016 rofessor Christina Romer rofessor David Romer SUGGESTED ANSWERS TO ROBLEM SET 2 1.a. Recall that the price elasticity of supply is the percentage change in quantity supplied divided

### INTA 630: International Economic Development LECTURE 3: THEORIES OF DEVELOPMENT I THE CLASSIC THEORIES OF GROWTH AND DEVELOPMENT

INTA 630: International Economic Development LECTURE 3: THEORIES OF DEVELOPMENT I THE CLASSIC THEORIES OF GROWTH AND DEVELOPMENT LECTURE 3: THEORIES OF DEVELOPMENT I FOUR MAJOR CLASSIC THEORIES OF DEVELOPMENT

### Chapter 14. Chapter Outline

Chapter 14 Labor Chapter Outline A Perfectly Competitive Firm s Demand for Labor Market Demand Curve for Labor An Imperfect Competitor s Demand for Labor Labor Supply Market Supply Curve Monopsony Minimum

Chapter 14 Labor Chapter Outline A Perfectly Competitive Firm s Demand for Labor Market Demand Curve for Labor An Imperfect Competitor s Demand for Labor Labor Supply Market Supply Curve Monopsony Minimum

### Monopoly. 3 Microeconomics LESSON 5. Introduction and Description. Time Required. Materials

LESSON 5 Monopoly Introduction and Description Lesson 5 extends the theory of the firm to the model of a Students will see that the profit-maximization rules for the monopoly are the same as they were

### ADVANCED PLACEMENT MICROECONOMICS COURSE SYLLABUS

ADVANCED PLACEMENT MICROECONOMICS COURSE SYLLABUS Economics is a way of looking at the choices people make regarding their time, money, and talent. Studying economics shows how goods and services are produced,

### Part II: Economic Growth. Part I: LRAS

LRAS & LONG-RUN EQUILIBRIUM - 1 - Part I: LRAS 1) The quantity of real GDP supplied at full employment is called A) hypothetical GDP. B) short-run equilibrium GDP. C) potential GDP. D) all of the above.

### The Model of Perfect Competition

The Model of Perfect Competition Key issues The meaning of perfect competition Characteristics of perfect competition and output under competition Competition and economic efficiency Wider benefits of

What Is Perfect Competition? Perfect competition is an industry in which Many firms sell identical products to many buyers. There are no restrictions to entry into the industry. Established firms have

### MEPS Preparatory and Orientation Weeks. Lectures by Kristin Bernhardt. Master of Science in Economic Policy. March 2012

MEPS Preparatory and Orientation Weeks Master of Science in Economic Policy March 2012 Lectures by Kristin Bernhardt Fundamentals of Microeconomics 1. Introduction 2. Markets 3. Consumers and Households

### PRINCIPLES OF ECONOMICS IN CONTEXT CONTENTS

PRINCIPLES OF ECONOMICS IN CONTEXT By Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Brian Roach, and Mariano Torras CONTENTS PART ONE The Context for Economic Analysis Chapter 0: Economics and Well-Being

### Notes for Chapter 18 Markets for Factors of Production. Why are apples cheaper (per pound) than grapes?

Notes for Chapter 18 Markets for Factors of Production Why is chicken cheaper than steak? Why are apples cheaper (per pound) than grapes? We know how to answer these questions. What about: Why do airline

### Chapter 28 The Labor Market: Demand, Supply, and Outsourcing

Chapter 28 The Labor Market: Demand, Supply, and Outsourcing Learning Objectives After you have studied this chapter, you should be able to 1. define marginal factor cost, marginal physical product of

### Classical Macroeconomic Theory and Economic Growth

Macro_C03_049_077.qxd 1/9/03 3:08 PM Page 49 Unit II Classical Macroeconomic Theory and Economic Growth Chapter 3 The Self-Adjusting Economy Classical Macroeconomic Theory: Employment, Output, and Prices

### Productivity, Output, and Employment. Chapter 3. Copyright 2009 Pearson Education Canada

Productivity, Output, and Employment Chapter 3 Copyright 2009 Pearson Education Canada This Chapter We will now shift from economic measurement to economic analysis In this lecture we will discuss: Production

### ECON MACROECONOMIC PRINCIPLES Instructor: Dr. Juergen Jung Towson University. J.Jung Chapter Introduction Towson University 1 / 69

ECON 202 - MACROECONOMIC PRINCIPLES Instructor: Dr. Juergen Jung Towson University J.Jung Chapter 2-4 - Introduction Towson University 1 / 69 Disclaimer These lecture notes are customized for the Macroeconomics

### Introduction Question Bank

Introduction Question Bank 1. Science of wealth is the definition given by 2. Economics is the study of mankind of the ordinary business of life given by 3. Science which tells about what it is & what

### Econ 001: Midterm 2 (Dr. Stein) Answer Key Nov 13, 2007

Instructions: Econ 001: Midterm 2 (Dr. Stein) Answer Key Nov 13, 2007 This is a 60-minute examination. Write all answers in the blue books provided. Show all work. Use diagrams where appropriate and label

### Principles of Macroeconomics, 11e - TB1 (Case/Fair/Oster) Chapter 2 The Economic Problem: Scarcity and Choice

Principles of Macroeconomics, 11e - TB1 (Case/Fair/Oster) Chapter 2 The Economic Problem: Scarcity and Choice 2.1 Scarcity, Choice, and Opportunity Cost 1) The process by which resources are transformed

### 1. T F The resources that are available to meet society s needs are scarce.

1. T F The resources that are available to meet society s needs are scarce. 2. T F The marginal rate of substitution is the rate of exchange of pairs of consumption goods or services to increase utility

### Tutor2u Economics Essay Plans Summer 2002

Microeconomics Revision Essay (7) Perfect Competition and Monopoly (a) Explain why perfect competition might be expected to result in an allocation of resources which is both productively and allocatively

### Lecture 10: THE AD-AS MODEL Reference: Chapter 8

Lecture 10: THE AD-AS MODEL Reference: Chapter 8 LEARNING OBJECTIVES 1.What determines the shape of the aggregate demand (AD) curve and what factors shift the entire curve. 2.What determines the shape

### Do not open this exam until told to do so. Solution

Do not open this exam until told to do so. Department of Economics College of Social and Applied Human Sciences K. Annen, Fall 003 Final (Version): Intermediate Microeconomics (ECON30) Solution Final (Version

### Math Recitation #5 October 20, 2009

Math Recitation #5 October 20, 2009 I. Production functions II. Isoquants and isocost lines III. Increasing, decreasing and constant returns to scale IV. Costs (average, marginal, total) V. Perfect competition

### Imperfect Competition

Imperfect Competition 6.1 There are only two firms producing a particular product. The demand for the product is given by the relation p = 24 Q, where p denotes the price (in dollars per unit) and Q denotes

### CHAPTER 3. Economic Challenges Facing Contemporary Business

CHAPTER 3 Economic Challenges Facing Contemporary Business Chapter Summary: Key Concepts Opening Overview Economics Microeconomics Macroeconomics A social science that analyzes the choices people and governments

### Advanced Microeconomic Theory. Chapter 7: Monopoly

Advanced Microeconomic Theory Chapter 7: Monopoly Outline Barriers to Entry Profit Maximization under Monopoly Welfare Loss of Monopoly Multiplant Monopolist Price Discrimination Advertising in Monopoly

### Problem Set 3 Eco 112, Spring 2011 Chapters covered: Ch. 6 and Ch. 7 Due date: March 3, 2011

Problem Set 3 Eco 112, Spring 2011 Chapters covered: Ch. 6 and Ch. 7 Due date: March 3, 2011 There are 30 multiple choice questions in this problem set. Answer these questions by the beginning of the class

### ECON 115. Industrial Organization

ECON 115 Industrial Organization 1. Tonight is a calculus review. 2. And a review of basic microeconomics. 3. We will do a couple of problems in class. First hour: Calculus Thinking on the margin. Introducing

### Unit 4: Consumer choice

Unit 4: Consumer choice In accordance with the APT programme the objective of the lecture is to help You to: gain an understanding of the basic postulates underlying consumer choice: utility, the law of

### Attribute Theory of Consumer Behavior

Attribute Theory of Consumer Behavior Lancaster, K. J. (1966). A new Approach to Consumer Theory. Journal of Political Economy. 74, 132-157. Traditional theories of consumer behavior do not take into account

### The Foundations of Microeconomics

The Foundations of Microeconomics D I A N N A D A S I L V A - G L A S G O W D E P A R T M E N T O F E C O N O M I C S U N I V E R S I T Y O F G U Y A N A 1 4 S E P T E M B E R, 2 0 1 7 Wk 3 Lectures I

### E.C.O.-6 Economic Theory

N 1 ASSIGNMENT SOLUTIONS GUIDE (2015-2016) E.C.O.-6 Economic Theory Disclaimer/Special Note: These are just the sample of the Answers/Solutions to some of the Questions given in the Assignments. These

### EC 201 Lecture Notes 1 Page 1 of 1

EC 201 Lecture Notes 1 Page 1 of 1 ECON 201 - Macroeconomics Lecture Notes 1 Metropolitan State University Allen Bellas The textbooks for this course are Macroeconomics: Principles and Policy by William

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

HW 2 - Micro - Machiorlatti MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) What is measured by the price elasticity of supply? 1) A) The price

### LONG RUN AGGREGATE SUPPLY

The Digital Economist Lecture 8 -- Aggregate Supply and Price Level Determination LONG RUN AGGREGATE SUPPLY Aggregate Supply represents the ability of an economy to produce goods and services. In the Long

### Intermediate Microeconomic Theory Economics 3070 Summer Introduction and Review: Chapters 1, 2 (plus corresponding study guide)

Intermediate Microeconomic Theory Economics 3070 Summer 1994 Professor M.J. Greenwood Office: Econ 208 Office Hours: 3:40-4:20 daily and by appointment A Term COURSE OUTLINE Part I. Text: Robert H. Frank,

### Introduction. Consumer Choice 20/09/2017

Consumer Choice Introduction Managerial Problem Paying employees to relocate: when Google wants to transfer an employee from its Seattle office to its London branch, it has to decide how much compensation

Commerce 295 Midterm Answers October 27, 2010 PART I MULTIPLE CHOICE QUESTIONS Each question has one correct response. Please circle the letter in front of the correct response for each question. There

### Which store has the lower costs: Wal-Mart or 7-Eleven? 2013 Pearson

Which store has the lower costs: Wal-Mart or 7-Eleven? Production and Cost 14 When you have completed your study of this chapter, you will be able to 1 Explain and distinguish between the economic and

### 1.1 Efficiency in economics What is efficiency in economics?

1 Economic Efficiency Efficiency is one of the most important concepts in A Level Economics. There are two aspects to economic : allocative and productive. Confusingly, there are many types of. Learn definitions

### 4. Unemployment (July 15, 2013)

Prof. Dr. Thomas Steger Advanced Macroeconomics II Lecture SS 2013 4. Unemployment (July 15, 2013) Introduction Neoclassical model Basic efficiency wage model Shapiro-Stiglitz model Search and matching

### The Markets for the Factors of Production THE DEMAND FOR LABOR

The Markets for the Factors of Factors of production are the inputs used to produce goods and services. The demand for a factor of production is a derived demand. A firm s demand for a factor of production

### Chapter 15: Monopoly. Notes. Watanabe Econ Monopoly 1 / 83. Notes. Watanabe Econ Monopoly 2 / 83. Notes

Econ 3 Introduction to Economics: Micro Chapter : Monopoly Instructor: Hiroki Watanabe Spring 3 Watanabe Econ 93 Monopoly / 83 Monopolistic Market Monopolistic Pricing 3 Inefficiency of Monopoly Price

### JANUARY EXAMINATIONS 2005

No. of Pages: (A) 7 No. of Questions: 26 EC1000A ' JANUARY EXAMINATIONS 2005 Subject Title of Paper ECONOMICS EC1000 MICROECONOMICS Time Allowed Two Hours (2 Hours) Instructions to candidates This paper

### 4/14/2016. Intermediate Microeconomics W3211. Lecture 18: Equilibrium with Firms 2. Today. The Story So Far. Quantity Taxes.

1 Intermediate Microeconomics W3211 Lecture 18: Equilibrium with Firms 2 Introduction Columbia University, Sring 2016 Mark Dean: mark.dean@columbia.edu 2 The Story So Far. 3 Today 4 Last lecture we talked

### Notes On IS-LM Model: Application Econ3120, Economic Department, St.Louis University

Notes On IS-LM Model: Application Econ3120, Economic Department, St.Louis University Instructor: Xi Wang Introduction In this class note, we assembled the pieces of the IS-LM model as a step toward understanding

### Journal of Industrial Organization Education

Journal of Industrial Organization Education Volume 2, Issue 1 2007 Article 1 Simulating Tariffs vs. Quotas with Domestic Monopoly John Gilbert, Utah State University Reza Oladi, Utah State University

### Notes on Chapter 10 OUTPUT AND COSTS

Notes on Chapter 10 OUTPUT AND COSTS PRODUCTION TIMEFRAME There are many decisions made by the firm. Some decisions are major decisions that are hard to reverse without a big loss while other decisions

### Adding Production to the Model

Adding Production to the Model 4.1 There are two people (A and B) and two goods (wheat and bread). One production process is available, a process by which one bushel of wheat can be turned into two loaves

### TOPIC 4. ADVERSE SELECTION, SIGNALING, AND SCREENING

TOPIC 4. ADVERSE SELECTION, SIGNALING, AND SCREENING In many economic situations, there exists asymmetric information between the di erent agents. Examples are abundant: A seller has better information

### Thinking Like an Economist

The Economist as a Scientist Thinking Like an Economist Chapter 2 The economic way of thinking... Involves thinking analytically and objectively. Makes use of the scientific method. Copyright 2001 by Harcourt,

### Fundamentals of Microeconomics Johns Hopkins University Center for Talented Youth

Fundamentals of Johns Hopkins University Center for Talented Youth Day Time Topic/Concepts Activity AM Introduction to Introductions, Honor Code, Class Rules and Expectations. Principles of Pre-assessment

### Essential Graphs for Microeconomics

Essential Graphs for Microeconomics Basic Economic Concepts! roduction ossibilities Curve Good X A F B C W Concepts: oints on the curve-efficient oints inside the curve-inefficient oints outside the curve-unattainable

### consumption function

1 Every day you make choices on what to do with the money you have. Should you splurge on a restaurant meal or save money by eating at home? Should you buy a new car, if so how expensive of a model? Should

### CHAPTER 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

CHAPTER 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets CHAPTER OUTLINE Perfect competition Demand at the market and firm levels Short-run output decisions Long-run decisions

### Competitive Markets: Applications

7784d_c10_409-461 5/23/01 6:48 AM Page 409 10 C H A P T E R Competitive Markets: Applications 10.1 THE INVISIBLE HAND 10.2 IMPACT OF AN EXCISE TAX Incidence of a Tax EXAMPLE 10.1 Gasoline Taxes 10.3 SUBSIDIES

### Total Costs. TC = TFC + TVC TFC = Fixed Costs. TVC = Variable Costs. Constant costs paid regardless of production

AP Microeconomics Total Costs TC = TFC + TVC TFC = Fixed Costs Constant costs paid regardless of production TVC = Variable Costs Costs that vary as production is changed Cost TFC TVC TFC Output Profit

### AP Microeconomics Chapter 4 Outline

I. Learning Objectives In this chapter students should learn: A. How to differentiate demand-side market failures and supply-side market failures. B. The origin of consumer surplus and producer surplus,

### CHAPTER 2 Production Possibilities Frontier Framework

CHAPTER 2 Production Possibilities Frontier Framework Chapter 2 introduces the basics of the PPF, comparative advantage, and trade. This is not exactly a tools of economics chapter; instead it explores

### Econ 121b: Intermediate Microeconomics

Econ 11b: Intermediate Microeconomics Dirk Bergemann, Spring 01 Week of 3/18-3/4 1 Lecture 14: Theory of Production We can use tools similar to those we used in the consumer theory section of the class

### MICRO EXAM REVIEW SHEET

MICRO EXAM REVIEW SHEET 1. Firm in Perfect Competition (Long-Run Equilibrium) 2. Monopoly Industry with comparison of price & output of a Perfectly Competitive Industry 3. Natural Monopoly with Fair-Return

### Framingham State College Department of Economics and Business Principles of Microeconomics 1 st Midterm Practice Exam Fall 2006

Name Framingham State College Department of Economics and Business Principles of Microeconomics 1 st Midterm Practice Exam Fall 2006 This exam provides questions that are representative of those contained

### Principles of Economics: Micro: Exam #1: Chapters 1-5 Page 1 of 7

Principles of Economics: Micro: Exam #1: Chapters 1-5 Page 1 of 7 print name on the line above as your signature INSTRUCTIONS: 1. This Exam #1 must be completed within the allocated time (i.e., between

### Thursday, October 13: Short and Long Run Equilibria

Amherst College epartment of Economics Economics 54 Fall 2005 Thursday, October 13: Short and Long Run Equilibria Equilibrium in the Short Run The equilibrium price and quantity are determined by the market

### WEEK 4: Economics: Foundations and Models

WEEK 4: Economics: Foundations and Models Economics: study of the choices people and societies make to attain their unlimited wants, given their scarce resources Market: group of buyers and seels of good

### 58.5% 17.3% 17.0% 7.1%

CHAPTER 7 - INTERNATIONAL TRADE THEORY In the first chapter of the book, we examined the nature of the global economy. We saw that the nations of the world are becoming more economically interdependent.

### The Economic Problem: Scarcity and Choice

Chapter 2 The Economic Problem: Prepared by: Fernando & Yvonn Quijano 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair The Economic Problem: 2 Chapter Outline Scarcity,

### Product Market Regulation and Market Work: A Benchmark Analysis

ON THE CAUSES AND CONSEQUENCES OF STRUCTURAL REFORMS FEBRUARY 28 29, 2008 Product Market Regulation and Market Work: A Benchmark Analysis Lei Fang Arizona State University Richard Rogerson Arizona State

### AP Microeconomics Chapter 10 Outline

I. Learning Objectives In this chapter students should learn: A. How the long run differs from the short run in pure competition. B. Why profits encourage entry into a purely competitive industry and losses

### Ecn Intermediate Microeconomic Theory University of California - Davis December 10, 2009 Instructor: John Parman. Final Exam

Ecn 100 - Intermediate Microeconomic Theory University of California - Davis December 10, 2009 Instructor: John Parman Final Exam You have until 12:30pm to complete this exam. Be certain to put your name,

### Third degree price discrimination. Welfare Analysis

Third degree price discrimination Welfare Analysis Third-degree rice discrimination and welfare Does third-degree price discrimination reduce welfare? not the same as being fair relates solely to efficiency

### CMSC 474, Introduction to Game Theory Analyzing Normal-Form Games

CMSC 474, Introduction to Game Theory Analyzing Normal-Form Games Mohammad T. Hajiaghayi University of Maryland Some Comments about Normal-Form Games Only two kinds of strategies in the normal-form game

### MICROECONOMICS II - REVIEW QUESTIONS I

MICROECONOMICS II - REVIEW QUESTIONS I. What is a production function? How does a long-run production function differ from a short-run production function? A production function represents how inputs are

### College Record: 59.7% 4 year school, 13.1% 2 year school, 9.9% trade school

Microeconomics SYLLABUS Jason Farone Blackhawk High School Beaver Falls, PA School Profile School Location and Environment: Blackhawk High School is a public school in Beaver Falls, PA, located 50 miles

### Asset Price Bubbles and Endogenous Growth [PRELIMINARY DRAFT] Abstract

Asset Price Bubbles and Endogenous Growth [PRELIMINARY DRAFT] Jong Kook Shin 1 Chetan Subramanian 2 Abstract This paper extends a simple Schumpeterian growth model to demonstrate that bubbles can generate