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ECON STUDY REVIEW SHEET Objective functions- functions to be maximized or minimized Constraint- regulation for the objective function

to be maximized. Written in the PxX+PyY=I(also can be written as an inequality) Exogenous parameter- variable given from outside of the function, like PX or PY Endogenous variables- variables solved for within the function 2 types Controls: completely decided upon by an agent in the model Non-control: Decided through the model but not through any peculiar agent First order conditions Marginal utility for the objective function to be maximized(optimal utility for each good) 2nd order condition lets us know whether or not our results are maximums, minimums or do not yield either result. Conditions for successful preferences Anti-Reflexive- something is never preferred to itself Complete preferences everything within your preferences must be possibly compared with each other Transitive A must be preferred to b. B to c and A to C. We cannot make fragile inferences. Convex - The combinations of two bundles of goods added together should be preferred to either preference. Using the combination of AlhaX +(1-alphax) + AlphaY+ (1-ALphaY) = a superior optimized mix of some sort Non Satiation If the marginal utility of the function without LaGrange will be positive for positive values then, we can infer that all the money will be spent in the function. How to construct a utility function from a set of preferences? You are given a set of preferences and if applicable you can show through addition or even U(x,y,z)= Umax(x,y,z) Marginal Rate of Substitution- Is the marginal utility for y over marginal utility of x and is usually negative. This tells us the rate at which a consumer is willing to give up one good for another.

Marshallian demand Find the Mrs isolate variable x or y and plug it into the remaining partial derivative . We can Corner solutions A corner solution is when a good is not desirable at all when solved for x*(marshallian demand) The spot is touching the x axis and the consumer does not want to consume the good and is willing to trade it Positive monotonic transformation politely states that any transformation applied to the function should yield the same mrs ratio. Find the mrs ration to check Own price effect take the derivative of the marshallian demand function with respect to the parameters, should be negative and less than zero(think about the theory behind the effect) Cross price effect taking the derivative of the marshallian demand of one good with respect to the other. Usually yields a zero, which means the changes in price do not really yield a different pattern in consumption of the former good. If the cross price is negative then we have a complement good. If the cross price is positive then we have a substitute good . Income Effects Taking the derivative of the marshallian demand with respect to Income this usually yields a positive result. If income increase yields an increase in consumption or in demand, then we have a normal good. But if income increases and marshallian demand decreases then we have a inferior good.(cheap clothing) . Luxury Good is when an income increases and as a result we have an emergence of a demand for a new good or demand increases exponentially. Indifference Curves are the juxtaposition of the desire for two goods. You have a function ubar and you give it a number and solve for a single variable. Remember when graphing to keep the intervals at reasonable length so you can properly manifest the smoothness of your graph. Griffin (goods)paradox Within the income effect sometimes quantity demanded increases even though prices increase, It is a very rare occurrence. (Happened with the irish and potatoes) Homogeneity of degree zero- When you multiply a function by alpha and each alpha is canceled out; you get your degree of homogeneity. Indirect Utility To get your indirect utility function you must plug in your marshallian functions into their proper variables of the original utility function. This represents the consumers maximum utility when faced with a price level Engle Curve- describes how expenditure relates with income. To find/graph your engle curve, you take the demand function for one of your goods and you solve for Income and graph it on a Y-axis(income) and x-axis(demand).