Mid-Term Two Study Guide



Second Mid-Term & Final Exam Study Checklist

I have no way of knowing for sure exactly what the professor will ask of you on the exam, but based on previous exams, lectures & the book, I think that focusing on the following subjects will help you do well.

 

Drawing Charts – the difference between an A grade and a C is often the correct labeling of your graphs. Be sure that you label the axes (Good X & Good Y for consumer maximization problems, and Price/Dollars and Quantity for firm optimization problems), be sure to label all your curves (ATC, AVC, MC, D , IC1IC2 ...)

If you shift your curves, be sure to show the shift with something like BL­­1  à BL­­2 (for a budget line shifting).

The exam covers two worlds, consumers (Chapters 9, 10, & 11) and firms (Chapters 12,13, 14 & 15). I’ll cover both sections separately; emphasizing with a “∎” the key topics you’re most likely to have questions on – this opinion based on previous exams and lectures.

 

Consumer Choice – Chapters 9, 10 & 11

 

Chap 9

Present Value – be prepared to do one of the calculations on Pgs 240-243. A Question Example: why might $10 today be more valuable than $13 next year?

The Difference between Economic Profit (which all our charts deal in) and Accounting Profit (which is what one usually thinks of when they think of profits). Pg 227

Examples of Implicit Costs and Explicit Costs. Pg 226

Principle of Marginal Analysis and the Optimal Quantity. Very basically, the Optimal Quantity is where MC = MB. Know basics of why this is. Pg 234-235, Figure 9-3.

Marginal Costs definition. Pg 231

Marginal Benefit – skim the basics at Pg 232-233

 

 

Chap 10 & Chap 11

Be prepared to draw the graph on Pg 284, Fig 11-7   – Note Labeled axes: Quantity of Good X & Q of Good Y. Note labels of Indifference Curves and Budget Line. Optimal Consumption Bundle.

! Be prepared to also note at what point the Budget Line hits each axis ( for the x-axis) Explained on page 282, Equations 11-8 & 9.

Read carefully pages 280 – 284, from The Tangency Condition to the Optimal Consumption Rule.

 

Budget Line, changes in prices & changes in income. Given either changes in prices &/or changes in income, be ready to shift or twist the Budget Line around. Examples with Fig 11-14 for Price Change, & Fig 11-15 for income change.

Substitute Goods – What do their indifference curves look like? Fig 11-10. What does this mean for the optimal consumption bundle? Edge Solution, you go with the cheapest, Fig 11-11. Be prepared to draw chart.

Compliments – What do their indifference curves look like? Fig 11-12. What does this mean for the optimal consumption bundle? A fixed proportion, the same ratio, pgs 288-289. Be prepared to draw chart.

Inferior Good vs Normal GoodBe ready to draw Fig 11-17, knowing which is the inferior good and which is the normal good. Intuition on pgs 292-295

Income Effect & Substitution Effect – Be ready to draw something like Fig 11-18, pgs 295 – 296.  Substitution Effect intuition Pg 263-264. Income Effect intuition Pg 264-265

Properties of Indifference Curves – pg 275

 Diminishing Marginal Utility – what’s the intuition behind why D.M.U. occurs? Pg 252. How does that affect the shape of indifference Curves? Bottom Pg 275.

Marginal Rate of Substitution – equations on page 279 and the intuition o page 280.

Optimal Consumption Rule Draw Fig 10-4, write equation 10-3. Understand the intuition. All on pg 261.

 

More basic background info on consumer choice.

Utils & Utility. Utils are arbitrary measures of one’s ‘happiness’ or ‘value’ from consuming different numbers of goods or services. Although abstract and immeasurable, Utility is required to do this kind of analysis. Pg 250.

Budget Constraint – The number of things you can buy are subject to how much income or wealth you have. Pg 253 – 254.

Consumption Bundles – For simplicity, we only deal in two-good worlds. In the real world our consumption bundle is made of the many thousands of goods and services in which we consume directly and indirectly. Many of the rules that apply to the ‘real world’ also apply to the two good world in the charts you’re learning.

Optimality, Utility to the Max - The presumption is that in the real world you buy things and work to get the bundle you’re happiest with. The Bundle is ‘shaped’ by your preferences (the shape of you indifference curves) and subject to the constraints of your income (Budget Line). Pg 255.

 

 

 

Chap 12, 13, 14 & 15 – Producers – the Firm’s Decisions.

 

Marginal Product of Labor (or capital) Eq 12-1, pg 305

Be able to draw Average Fixed Costs (AFC) curve, Average Variable Cost (AVC) curve, Average Total Cost (ATC) curve, and Marginal Cost (MC) curves. Pgs 314-318.

Where will the MC curve always intersect the ATC and AVC curves? Fig 12-9.

What does a typical Marginal Costs curve look like? Pg 318. Why is it shaped like this? Pg 317-318.

Short-Run vs Long-Run – Understand what’s going on in Fig 12-12. (basically, in the long-run all costs are variable: you can close or open factories in long run).

 

Chap 13 Perfect Competition

Short-Run – given various scenarios, be ready to draw and explain Figures 13-2, 13-3 & 13-4.

The Short Run firm’s supply curve. Figure 13-4. What does the firm’s SR Supply curve start from where MC=AVC? Pg 341 Fig 13-4.  State why the Shut Down Point is where MC=AVC, pg 341.

Break-Even Point, where MC=ATC (the minimum of the ATC curve). State why this is the Break even point. Pg 340.

Industry Supply curve. If there are 100 firms, the industry supply curve is just those 100 firm’s supply curves added together. Pg 345.

Short Run to Long Run Dynamics of Industry Supply curve. Figure 13-6, pg 346. Fig 13-6 has firm’s making economic profits in short-run, and it shows how those profits are eaten away in long-ruun. Imagine a question where there are firm’s making economic losses in SR, and show how industry supply curve shifts in the left as firm’s shut-down. A likely exam question.

Draw the firm in LR equilibrium (basically the chart in figure 13-2, Market Price=MR=MC=ATC)

Showing dynamics. Fig 13-7. I’ve never seen a question on this in past exams, but it is fair game.

 

Chap 14 Monopoly

Why Monopolies might exist – pgs 359-361.

How Monopolist maximizes profits, pg 367 Fig 14-6. Be ready to draw this. Know is where  In your drawing, be ready to show the area that represents monopolist’s profits. Compare Fig 14-6 to Fig 14-7. They are the same thing, just MC is shaped differently.

How is the monopolist’s MR curve shaped? Fig 14-5. Why are marginal revenues shaped like they are in Fig 14-5 & 14-6? Answer: pg 366.

Perfect Competition vs Monopoly – Be ready to draw and explain figures 14-8. You are comparing the Consumer Surplus (CS), PS and Deadweight Lose between P.C. and Monop. Is CS smaller or bigger? Is PS smaller or bigger? Show Deadweight Lose. What can you conclude about the desirability of monopolies to the public. All page 371. (a very typical exam question is to show this and explain it)

Regulation of Monopoly – basically, be ready to draw Fig 14-9, and explain what is going on. Pg 373-374. This is also a very typical final exam or mid-term question.

Price discrimination. Understand the basics, pg 376-377. Given basic direction, be ready to draw Fig 14-11.

 

 

Chap 15 Oligopoly

HHI – a very simple way to measure how oligopolistic some industries are.  Pg 389.

Understand intuition of duopoly example. Basically, the other firm’s actions are dependent on your actions. And vice-versa. You have a potentially very complicated strategic interaction. In our simplified world where firms aren’t legally allowed to collude with each other, this is summarized by the prisoner’s dilemma “game”. pgs 390–395.

Prisoner’s Dilemma, dominate strategies and Nash Equilibrium – be ready to draw from memory figures 15-1 and 15-2. Here is a typical exam question, (note that it assumes you know the answer without much direction in the question, sketchy) http://tiny.cc/VJigh  

Tit-for-Tat – prisoner’s dilemma has one answer in a single game. But if you repeat that game over and over you might get the two players to cooperate. Know fig 15-3 and intuition on pgs 398-400

Kinked Demand Curve – Fig 15-4. Be able to draw this from memory. Understand why the demand curve is kinked, why the MR curve is discontinuous (broken, cut at Q*) Finally, the point is to be able to explain why shifts in MC won’t effect the market q* and p*. Why is that? Pgs 401-402.


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