class18_review_ - Econ 51 Winter 2011 Class#18(review No...

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1 Econ 51, Winter 2011 Class #18 (review) • No class on Thursday, extended OH (8:15-12) in Landau 239. •Review sections this Friday (at regular time and location). •Special OH this week and next (see announcement). • Please make an effort to submit the course evaluation forms on Axess . It’s important for future generations. • Final on Friday next week. • Today: Review and some practice questions. Tuesday, March 8, 2011
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2 The final Review On Friday, March 18, 12:15-3:15PM . We’ll start exactly at 12:15 so don’t be late. Location: School of Education, CUBAUD (Cubberly Auditorium) . We’ll cover all the course material, including material covered before the midterm (though more emphasis is on material after the miderm). Will be 5 questions (this may change). Bring calculators, just in case. Tuesday, March 8, 2011
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3 Review Tuesday, March 8, 2011
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4 General principles Review The class tried to teach how to try to understand economic phenomena from a microeconomic view. Key points: • Economic agents are behaving rationally: they maximize utility (even if this is very complicated), and expect others to do the same. • Economic agents are selfish: all they care about is their own utility/ profits. To model more social attitude, we need to explicitly specify how one’s utility affects others’. • Economic agents respond to incentives. Economic agents will change their behavior only if they gain something from it. Without incentives, they won’t do what’s “right” unless it’s in their best interest. • Some math is useful to express the desires of economic agents. However, make sure your intuition agrees with the math. Tuesday, March 8, 2011
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5 Overview Review In Econ 50 you did individual decision making: maximizing utility by an individual, and maximizing profits by a firm. Most of Econ 51 is about interaction among multiple agents. As we saw along the way, this interaction can take many forms, and the form of interaction may significantly affect what we think will happen. The general structure: • Decisions under uncertainty (more of an Econ 50 topic) • General equilibrium: what will happen in multiple markets when several parties interact by taking prices as given. The main results: first and second welfare theorems. • We then saw how relaxing key assumptions leads to inefficiencies: – Externalities and public goods – Strategic considerations –Asymmetric information Tuesday, March 8, 2011
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6 Uncertainty Review Uncertainty is represented by states of the world s=1,2,...,S. Individuals have utility over consumption at different states: u(x 1 ,x 2 ,...,x S ) It is reasonable to argue that individuals have vNM (expected) utility functions: there exist probabilities π 1 ,..., π S and a function v( ) which is unique up to an affine transformation, such that: u(x 1 ,x 2 ,...,x S )= π 1 v(x 1 )+ π 2 v(x 2 )+...+ π S v(x S ) An individual is risk averse if he prefers the expected payoff of the gamble over the gamble. Risk aversion implies that v( ) is concave, i.e. v ′′ ( )<0.
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