Study Questions For The First Exam
ECON 365
These questions are not designed to take the place of studying your notes and the reading assignments. Do not e-mail me and ask me to answer all or some of these questions for you. If you have missed class, it is your responsibility to get the notes from another student. Once you have answered these questions yourself, if you are unsure of any of your answers, let me know and I will tell you if you are correct or not. Don't be afraid to ask me questions, I just want you to try to answer the questions yourself first.
Topic: Review - The Nature and Method of Economics
How did we define economics in this class?
What two problems do economists address?
What does opportunity cost mean? Be able to apply the concept.
What are sunk costs?
What does marginal mean?
Explain the basic model most economists use: Rules - Incentives - Action - Outcome (be able to apply)
Why are there often unintended outcomes from rules?
How do we decide which rules are the "best"?
How did we define wealth in this class?
Why would an economist make this statement: "You can be the fastest person in the world when it comes to making widgets but that doesn't mean that you are efficient." Relate your answer to value and wealth.
How do external costs/benefits relate to our definition of efficient?
Topic: Pricing and the Demand and Supply Model
What is the law of demand?
What are the factors that effect the demand curve? Be able to graph a change (movement along or a shift)
What is the concept of the price elasticity of demand? Formula? What does the number mean?
What factors determine how price elastic a good will be with respect to demand? Theories?
What is the law of supply?
What are the factors that effect the supply curve? Be able to graph a change (movement along or shift)
What is the concept of the price elasticity of supply? Formula? What does the number mean?
What factors determine how price elastic a good will be with respect to supply? Theories?
What is a market price?
What is a surplus? Show on a graph.
What is a shortage? Show on a graph?
Why do we trade? Why do both parties benefit at the time of trade and how do we know?
What is consumer and producer surplus? Show on a graph.
Topic: Consumer Behavior - The majority of the exam will be from the material covered here on out.
What is a budget constraint? How is it graphed?
What does the slope of the budget constraint tell us?
Given your answer to two -- what would happen to the slope if the price of one of the goods on your axis increases? Decreased? Show on a graph.
What happens to your budget constraint when income decreases? Increases? Show on a graph.
What is a composite good?
Why might a consumer have a "kinked" budget constraint? Show on a graph and provide an example of when this might happen.
What does "preference ordering" mean with respect to a consumer?
What four assumptions do mainstream economists make regarding preference ordering?
What are indifference (or utility) curves? What is happening everywhere along an indifference curve? Graph.
What do our four assumptions about preference ordering imply about indifference curves? For example, why can't indifference curves cross? Why aren't they straight lines?
What is an indifference map? Graph.
What is the marginal rate of substitution mean and how is it found along an indifference curve?
How is the "best affordable bundle" found along a budget constraint using indifference curves? Graph.
With respect to budget constraints and indifference curves, what is a "corner solution" - what does it mean? Graph.
What do indifference curves look like (just think about the indifference curve and not about the budget constraint and make all necessary assumptions - remember, some of these are pretty far fetched) for: perfect substitutes, perfect complements, one good is a neutral, one good is a bad? Graph all.
Make sure you can analyze the question as to whether it is better to give cash or food stamps (or whatever) to a consumer using the rational choice model. What assumptions are made?
Topic: Utility and Consumer Choice
What is a utility function? Give an example.
Explain how each utility function relates to an indifference curve.
What is marginal utility?
What is the rule for the consumer that is "maximizing utility"? Explain why this situation maximized utility. Give an example and make sure you can do a problem using given marginal utility numbers and prices.
What is the difference between ordinal and cardinal utility? Which do economists usually use and why?
Topic: Marginal Utility Is Not Rocket Science by Frank Shostak - Alternative Theory of Diminishing Marginal Utility and Market Prices
The Austrian economists (Menger, Mises, Hayek, Deb, etc.) offer an alternative (from the mainstream discussed above) explanation for diminishing marginal utility. What is it?
Where do market prices come from given this theory of utility?
Following from your answer in three, explain why the cost of production cannot explain market prices.
What would an Austrian economist say about the real meaning behind the "equilibrium" in the supply and demand model?
Topic: Individual Demand
What is the substitution effect? Graph using budget constraint and indifference curves?
What is the income effect? Graph using budget constraint and indifference curves?
What is the price-consumption curve (PCC)? Derive one graphically? Explain.
From the PCC - you can derive a demand curve. Do this graphically.
What is the income-consumption curve (ICC)? Derive one graphically? Explain.
What is an Engel curve? Derive one graphically.
What is a normal and inferior good?
How would an Engel curve look for a normal good? Explain. Inferior good? Explain and derive graphically.
Be able to graphically demonstrate how a change in price (up or down) will lead to a 1) substitution effect and 2) income effect. Look at the handout on this - A Summary!
How does your analysis in 9 above change when comparing a 1) normal good, 2) inferior good, and 3) Giffen good?
What is a Giffen good? Under what circumstances, theoretically, might you find a Giffen good?
Derive an individual demand curve from the substitution and income effects from a price change graphically.
How will your demand curves differ when comparing a 1) normal good, 2) inferior good, and 3) Giffen good?
Make sure you can analyze the question as to how a consumer will change their consumption of a good if they are given an excise subsidy or lump sum -- or if they have to pay an excise tax or a lump sum tax -- using the rational choice model.
Also: make sure you have read the handouts assigned (listed below). Also make sure that you go over both the homework assignments and in class exercises - you are likely to see very similar questions on the exam.
"Economics and Measurement" by Gene Callahan (read by Thursday, Sept. 2) - I will hand out in class.
"Do Consumers Have Too Many Choices? in Consumer Affairs
"Marginal Utility is Not Rocket Science" (read for Thursday, Sept. 16)
"Income and Substitution Effects - A Summary" (read for Tuesday, Sept. 21)