Discussion 5

Midterm 1
• September 29th
• Can begin exam at 11am, must begin exam by 12:30pm
• Calculators are not allowed and not necessary
• Don’t cheat
• The best answers address the question as briefly as possible (i.e. what
happened to price? Answer: up, down, no change
• Online Head TA Review Session 3pm-5pm, come with questions
Midterm 1
• 12 questions long, 80 points
• Short answer, multi-part type questions
• Closed book and closed notes
• You will be provided virtual paper, but you can also provide your own
physical scratch paper
• It is on chp 1-7, and sections 1 and 2 from lecture
Necessary Condition for Maximizing Utility
• Last unit purchased or consumed
for all goods and services will be
proportional to its price
• MUx/Px = MUy/Py=…. MUz/Pz
for all goods and all income must
be spent
• We want to equalize the utils per
dollar across all items
Consumer Behavior
• We want to maximize utility
• Marginal utility: the utility derived from consuming an additional unit
of a good
• Thinking about consumption not resale
• Market system doesn’t maximize total social utility (good or service
goes to those who are willing and able to pay, not just those who
derive the most utility from a good or service)
Econ minutes 1-4
• 1: none!
• 2: elementary school pick up: charge out right fee of $25 (sunk cost)
or charge per each minute that they’re late. Rational actor won’t have
decision making be influenced by sunk costs, charging per minute will
incentives parents to pick up child quickly
• 3: Hurricanes: after there are news articles about how a good aspect
of hurricanes is that we can rebuild(=jobs?), not actually good, our
PPC is significantly reduced
• 4: none!
Econ Minutes 5-8
• 5: Fracking: fracking has reduced oil prices (inc of supply curve cause of new
technology), reduced revenue in oil rich countries. Why was fracking developed
in US? Maybe private property rights (if you own land where there is oil you
also own oil) so return to investing in fracking technology, also property right of
venture capitalists are protected, so they can invest in new companies
• 6: none!
• 7: commitment devices are based on: 10 ppl often don’t do what they say (new
years resolutions) 2)Incentives change behavior. Ex. If you don’t complete a task
(completing a project proposal) a referee will donate money to a cause that you
are morally opposed to (e.g. NRA)
• 8: none!
 Cross price elasticity

Elasticity
% change in Demand for good A/ % change
in Demand for good B
Complements: negative (inverse
relationship between price and demand)
Substitutes: positive (direct relationship
between price and demand)
Elasticity cont.
• Income
elasticity= %
change in
demand/ %
change in
income

Normal good: income elasticity of demand is positive

Luxury: income elasticity is greater than 1
Necessity: income elasticity is less than 1
Inferior good: income elasticity is negative
More Elasticity
Black Markets
Shift factors
Supply
• Changes in technology
• Changes in the price of inputs
• Expectations ( example, you are a
medical mask producer and had an
expectation back in January that
medical masks would be in really high
demand in the next few months)
• Taxes and subsidies ( lower/raise taxes
on an input, subsidize production)
Demand
• Tastes
• Level of income
• Price of good ( not a shift factor!! Think of
the law of demand)
• Price of other (related) goods
• Consumer expectations ( an example is an
expected increase or decrease in income)
• Taxes and subsidies (increase prices and
decrease prices of g/s)
• Number of consumers
Things to remember
• Be able to identify when there will be a change in quantity supplied (this
only happens when there is a change in price), and when supply increases
or decreases (biggest mistake I saw on the HW)
• Same for demand
• Law of demand: when price rises, quantity demand falls, and vice versa
• With concurrent shifts either equilibrium price or quantity will be
ambiguous
• Draw out graphs!! Even if there aren’t graphs on the exam know how to
draw the graphs so you can visually see what’s happening in a market