ECON 251x: Topical Review for Second Midterm (Spring 2011)
(Chapters 5,6 9, 18)
The following is a
general guide
to the material we have covered since the first midterm. It is not
necessarily definitive.
NEW:
5. Uncertainty & Consumer behavior ( Chapter 5)
A.
Defined probability, Expected value, payoff.
Probability
: likelihood that a given outcome will occur
Subjective probability
is the perception that an outcome will occurs
Expected Value
: probabilityweighted average of the payoffs associated with a possible outcome
Payoff
: value associated with a possible outcome
B.
E
(
X
) = Pr
1
X
1
+ Pr
2
X
2
+ . . . + Pr
n
X
n
C. Derived how to measure risk, Def. Standard deviation
Deviation (Outcome minus Expected)
Deviation Squared
Weight Averaged Deviation
Squared (sum of “probability*deviation”)
Standard Deviation (Squared root)
D. Analyzed Risk averse, Risk neutral and risk loving choice behavior
Risk Adverse: Income increases, utility also increases but in a slower rate
Risk Seeker
Risk Neutral
Risk Premium: amount of money that you are willing to pay for certainty
E. Evaluated ways to reduce risk
Diversification
: practice of reducing risk by allocating resources to a variety of activities whose
outcomes are not closely related
The Law of Large Numbers
: the ability to avoid risk by operating on a large scale is based on
the law of large numbers, which tells us that although single events may be random and largely
unpredictable, the average outcome of many similar events can be predicted
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Actuarially fair:
characterizing a situation in which an insurance premium is equal to the
expected payout
1. The operation of the Firm and the Costs of Production Ch. 67
A. Characteristics of the Firm (Classnotes)
1. Teamwork, shirking and monitoring
•
Teamwork
: share equally, jobs and profits
•
Shirking
: when earnings are shared among the team, there is a tendency for shirking
•
Monitoring
: to reduce shirking; owner becomes the monitor sometimes
2. Role of Profits:
profits monitor the owner
B. Alternative periods of analysis
•
Long run
: all input are variable
•
Short run
: some inputs are fixed, some are variable
•
Market Period
: all inputs are fixed and outputs are fixed
B.
Explicit and implicit costs:
•
Explicit cost: cost that appears on your balance sheet, paying outside: accounting
cost
•
Implicit cost: economic cost (includes opportunity cost, therefore, it’s always
greater than accounting cost)
D. Elements of total cost, fixed and variable:
Total = Fixed + Variable
E. Law of diminishing marginal returns:
As you add more of one input to a fixed amount of other inputs, marginal product
declines (adding workers to a factory)
Over time, MP decreases, MC increases
F. Derived the interrelationships between ATC, AFC, AVC, MC and the rate of output
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 Spring '10
 Tontz
 Economics, Supply And Demand, run supply curve

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