Review 1.pptx - Review Session 1 • • • • REVIEW...

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1 Review Session 1 Summary for Week 1 Case Study – Apple iPad Questions 1, 2, 3, 4, 5 Problems 1, 2, 3, 4, 5 REVIEW
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2 Week 1: Learning Objectives Content: Case Study Key Economic Concepts Supply & Demand curves Market mechanism Elasticities of Supply & Demand Effects of changing market conditions Theory of Consumer Behavior Consumer preference & indifference curve Budget line Consumer choice Marginal utility & Equal Marginal Principles
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3 Case Study: Apple iPad Does iPad still Sell? How to increase the demand for iPad? Think like an IT-economist. What are the factors that affect demand for iPad?
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4 Q1. Explain why for many goods, the long-run price elasticity of supply is larger than the short-run elasticity. Price Elasticity of supply = the % change in the quantity supplied divided by the % change in price In the Long Run, Firms can expand capacity by building new plants and hiring new permanent workers. Also, new firms can enter the market and add their output to total supply. larger long-run price elasticity. In the Short Run, An increase in price induces firms to produce more by using their facilities more hours per week, paying workers to work overtime & hiring new workers. However, there is a limit to how much firms can produce because they face capacity constraints in the short run. less elastic short-run supply elasticity. P Q E S S P % %
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5 Q 2. What are the four basic assumptions about individual preferences? Explain the significance or meaning of each. (1) Preferences are complete. The consumer is able to compare and rank all possible baskets. (3) More is preferred to less . All goods are desirable, and that the consumer will always prefer to have more of a good. (2) Preferences are transitive. If bundle A is preferred to bundle B and bundle B is preferred to bundle C, then we should be able to conclude that bundle A is preferred to bundle C. (4) Diminishing marginal rate of substitution. Indifference curves are convex, & the slope of the indifference curve increases (becomes less negative) as we move down along the curve. As a consumer moves down along her indifference curve she is willing to give up fewer units of the good on the vertical axis in exchange for one more unit of the good on the horizontal axis. This assumption also means that balanced market baskets are preferred to baskets that have a lot of one good & very little of the other good.
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6 Q3. What happens to the marginal rate of substitution (MRS) as you move along a convex indifference curve? A linear indifference curve? MRS measures how much of a good you are willing to give up in exchange for one more unit of the other good, keeping utility constant.
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