ECON 4001.01 1st EditionExam # 1 Study Guide Lectures: 1 - 8Lecture 1 (January 13th)What is the definition of economics?How people make choices, about what to make, what to buy, where and how much to work, what to do with leisure time, given that they have limited resources Lecture 2 (January 15th) What is studied in microeconomics?Microeconomics deals with individual economic units, their markets, and government action on these units.Define consumer, firm, and worker:A consumer is the economic agent that wans to maximize their wellbeing by consuming goods and services they value, but with a limited budget. A firm is the economic agent that can choosewhich products to make and services + output quantities to maximize profits, but is constrained by resources and costs. A worker is the economic agent that has the choice to work full or part time at any number of jobs for which they are qualified, but must sacrifice leisure time in order to work.List the factors that affect supply:1. Number of Sellers2. Technology3.Interests4.Expectations5.Input CostsList the factors that affect demand:1.Tastes2.Price of complements3.Income4.Number of buyers5.Expectations6. Price of SubstitutesLecture 3 (January 20th) What occurs when the price of good is too high? Too low? Why do these market states occur? What returns the market to equilibrium? How can the government force these market states?When the price of a good is too high, a surplus occurs. When the price of a good is too low, a shortage occurs. A surplus occurs because there is excess supply and inadequate demand, and ashortage occurs because there is excess demand and inadequate supply. No one factor returns the market to equilibrium, but rather the work of the “invisible hand” or tensions in the market overall eventually shift the market back to equilibrium. The government can set a price floor or ceiling, and, when binding, these can result in forced surplus or shortages.When supply shifts outward… Price goes down and quantity goes upWhen supply shifts inward… Price goes up and quantity goes downWhen demand shifts outward… Price and quantity go upWhen demand shits inward… Price and quantity go downWhat is the demand elasticity for Good A at P=$10 if the equation for demand is Qd = 10 - 0.5P?First plug in $10 to the equation for demand to find the quantity associated with that price:QD= 10-0.5(10)  10-5= 5Then plug in another price as a reference point for the change in price and demand (this can be any number)QD= 10-0.5(16)  10-8= 2Then to find elasticity, we use the formula EP= (P*ΔQD)/(QD* ΔP)So we plug in the numbers to get: EP= (10*3)/(5* 6)= 1The demand elasticity for this product is 1, and therefore this demand curve is unit elasticWhat constitutes a luxury good? An inferior good?A luxury good has an income elasticity >1 and an inferior good has a negative income elasticityLecture 4 (January 22th) What is the end goal of consumption for consumers?The goal is to increase our utility.Would a consumer rather consume at a point on an indifference curve farther from the origin or closer? (assume both points are obtainable with the consumer’s budget)The consumer would rather consume at a point on a curve farther from the origin because they would receive more satisfaction at this point because the consumer always prefers more to less,and if this point is within budget they will prefer it over a point where they would be under consuming.True or False: The intersection of two indifference curves is where the consumer reaches maximum satisfaction.False. Indifference curves can never intersect and the point of maximum satisfaction for theconsumer would be at the point where the indifference curve is tangent to the budget lineWhat does the graph for perfect substitutes look like? Perfect complements?The graph of perfect substitutes has straight lines, while the graph for perfect complements has L-shaped linesWhat is the impact on a budget line of a price change in one of the goods?The budget line will pivot inward or outward depending on whether it was an decrease in price or an increase in priceLecture 5 (January 27th) Where does the marginal rate of substitution equal the price ration between two goods on a graph?At the point where the indifference curve is tangent to the budget lineWhat is rationing?Rationing occurs when the government sets the price of a good or service and also the quantity of that good or service that the consumer can consume. This results in a less satisfied consumer because the rationing forces the consumer to consumer less of a good than desired at a certain price.Lecture 6 (January 29th) How can higher utility be achieved? What is the effect of that answer on the demand curve?Higher utility can be achieved through a higher income, which an increase in income would shiftthe demand curve outward.What does an Engel curve represent? What is the shape of the curve for a normal good?The Engel Curve represents the relationship between income and consumption of a good. The shape of the Engel Curve for a normal good is an upward sloping lineExplain the substitution and income effects:The income effect occurs when more of a good is consumed due to a increase in income (if it is a normal good) and less of the good when there is a decrease in income (if it is a normal good). If the good is an inferior good, the income effect will result is increased consumption when there is a decrease in income and an decrease in consumption when there is an increase in income. The substitution effects describes the effect of a lower price on the quantity of a good consumed. If the price for Good A goes down but the price for a substitute Good B remains the same, the quantity demanded of Good A increases and Good B decreases.What is a Giffen good?A Giffen good is a good that experiences an increase in consumption when there is an increase in the price of the good.True or False: The cross price elasticity for complements is negative.True.Lecture 7 (February 3rd) Who was the economist that is known for consumer demand without income or wealth impacts? The economist known for consumer demand with income and wealth impacts?Alfred Marshall is famous for consumer demand without income or wealth impacts, known as Marshallian Demand and John Hicks is known for consumer demand with income and wealth impacts, known as Hicksian Demand.What is consumer surplus? What effect do taxes have on consumer surplus?Consumer surplus is the