Econ Midterm Review

Econ Midterm Review - Exchange and Equilibrium...

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Econ Midterm Review Consumer Choice: Utility Maximization - Maximizing Consumer Satisfaction o Budget line and indifference curve are tangent o No higher level satisfaction can be attained o At the tangent, the MRS between the two goods = price ratio Maximized o The other points below or above are not maximized Cost Minimizing and Input Choice - Producing a Given Output at Minimum Cost o Isocost curves describe the combination of inputs to production where the cost is the same o Isocost is tangent to isoquant, shows that output can be produced at minimum cost with inputs L and K o Other input combinations of L and K yield the same output but at a higher Principle of Profit Maximization - Profit difference between total revenue and total cost: - Marginal revenue/cost change in revenue/cost - FINISH NOTES Welfare in the Market - Consumer and Producer Surplus (continued) - Producer surplus total profits of producer + rents to factor inputs
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Unformatted text preview: Exchange and Equilibrium Price-Initial preferences, competitive outcomes pareto efficiency -Endowment point is the lowest point where the two indifference curves meet Distortions in the Competitive market-Government policies o Minimum price/wage o Price (rental) control o Taxes vs. subsidies o Tariff and quota-Monopoly and market power o They have market power and can set the market price-Externalities o Individual marginal benefit/cost deviates from social benefit/cost Review Questions Question 1 P M MC = 1 P M E d No because the monopoly price depends on demand elasticity. There is not enough information to be so sure. It could be higher or lower, or even stay the same. Question 3 MR = MC 1) Monopoly: MR P; MR < P 2) Competitive: MR = P 3) Revenue = Price x Quantity a. Only when demand function is linear Question 5 QUESTION IS ON EXAM...
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Econ Midterm Review - Exchange and Equilibrium...

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