Econ 100A In a Nutshell

# Econ 100A In a Nutshell - Econ 100A In a Nutshell 1...

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Unformatted text preview: Econ 100A In a Nutshell 1. Checklist 2. Important Terms/Definitions 1. The Free Entry Property —if there is free entry on the market, the profit is zero 2. Ordinal Property —a property that orders things without giving them numerical results 3. Cardinal Property —a property that “numerically” gives you some information, like if you add two utilities together, the utility you get is the sum of the other two utilities 4. MRTS —marginal rate of technical substitution 5. MRS —marginal rate of substitution 3. Preferences/Utility Functions Three Axioms of Consumer Theory The Three Axioms of Consumer Theory are: 1. Completeness This basically says that you must be able to order all of the commodity bundles (preferred to, less preferred to, indifferent to) 2. Transitivity If X is preferred to Y, and Y is preferred to Z, then X is preferred to Z 3. Non Satiation More is better! If you have bundles (2,3) and (3,3), the latter is preferred to the first one because it has more. 3.2 Marginal Rate of Substitution The MRS i/j (X) is the maximum amount of good j that the consumer is willing to give up in order to obtain an additional unit of good i . It’s like the value of good i in terms of good j . Note: The MRS is the absolute value of the slope of the tangent line at the indifference curve that passes through X. To Calculate MRS: ι/ ϕ ΜΡΣ (Ξ29 = ΜΥ ι ΜΥ ϕ Ωηερε, ΜΥ ι (Ξ29 = ∂Υ ∂ξ ι (Ξ29 3.3 Perfect Substitutes and Complements Two goods are perfect substitutes if the Marginal Rate of Substitution (MRS) is a constant. Two goods are perfect complements if they must be consumed in fixed proportions. Perfect Substitutes are represented by the function: U( x 1, x 2 ) = a x 1 + b x 2 , a,b > 0 MRS 12 (X)=(a/b) Perfect Complements are represented by the function: U( x 1, x 2 ) = min{ a x 1 ,b x 2 }, a,b > 0 3.4 Convexity of Preferences Preferences are convex because people prefer more diversified commodity bundles to more extreme indifferent commodity bundles. 4. Budget Constraints and Optimal Bundles 4.1 Terminology Budget Set : The set of all the commodity bundles the consumer can afford, given her income and the prices of goods. Denoted, B Budget Constraint : A commodity bundle X is said to satisfy or meet the budget constraint if it belongs to the budget set (ie X contained in B) Budget Line (A.K.A. Consumption Possibilities Frontier ): The budget line is the set of affordable commodity bundles such that the WHOLE income is spent purchasing them. A subset of the Budget Set, hence, denoted BL (Insert Graph Above)...
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Econ 100A In a Nutshell - Econ 100A In a Nutshell 1...

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