Consumption Economics Test 1
Terms
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- Price Elasticity of Demand
- (% change Q)/(% change P)
- Cross-price elasticity for complements
- e is less than 0
- Cross-price elasticity for substitutes
- e is greater than 0
- intertemporal choice
- choice of how much to consumer in the present vs. how much to consume in the future
- the opportunity cost of money is
- the interest rate
- PV
- money today (1+r) = money tomorrow
- x-intercept of the intertemporal budget constraint
- y1 + (y2/(1+r))
- y intercept of the intertemporal budget constraint
- y1*(1+r) + y2
- the budget constraint rotates around the...
- endowment point
- Endowment point
- your known income in period 1 and your expected income in period 2
- higher interest rates make the y intercept _____ in value and the x intercept _____ in value
- larger, smaller
- Marginal Rate of Time Preference (MRTP)
- abs(change in C2/change in C1)
- if MRTP is greater than 1, then...
- positive time preference, meaning it requires a lot of the good in the future to give up a little bit now
- if MRTP = 1, then...
- neutral time preference, meaning the person is indifferent between a unit of the good now and in the future
- if MRTP is less than 1.....
- negative time preference. willing to give up a lot of the good now for a little in the future
- assumptions about characteristics
- 1. the same for all consumers 2. amount can be measured objectively 3. may be obtained from several goods or services in a given group
- the Laspeyres and Paasche indices are more accurate when:
- 1. relative prices do not change very much 2. there is little substitution among goods
- Disadvantages to Paasche index
- 1. Understates the cost of maintaining a constant level of utility 2. Data problem: need to have up-to-date info on the quantities of goods and services consumed
- What kind of index is the CPI?
- Laspeyres
- Difficulties in computing CPI:
- 1. accounting for quality change 2. Accounting for new products
- the unitary model of the household
- HH behaves as if there is one decision maker, all income is pooled
- bargaining model of the household
- decisions that the HH makes are the outcomes of a bargaining process. income is NOT pooled.
- Cooperative bargaining households
- HH members work together to maximize the household's total utility
- Non-cooperative bargaining model
- HH members act strategically, playing a game with each other, HH member react to what the other HH member is doing
- Threat point
- the utility that husbands and wives would receive outside the marriage
- to maximize utility:
- set marginal cost = marginal utility OR set MRS = slope of budget constraint
- Budget Constraint Equation
- PxX+PyY=I
- Budget Constraint Slope
- -(Px/Py)
- Indifference Curve Slope
- Marginal Rate of Substitution (MRS)
- Marginal Benefit
- amount you would be willing to pay for one additional unit of the good
- MRS
- (change in y/change in x) and/or (MUy/MUx)
- Complements
- only consume goods in fixed proportions
- substitutes
- doesn't experience diminishing MRS as you approach axes
- Normal Good
- luxuries, necessities. Q increases as I increases
- inferior good
- Q decreases as I increases. e less than 0