## Thursday, October 26, 2006

### Quiz 5 due Tuesday Oct 31st

Quiz 5 – Consumer Theory
Professor Matthew Festa
Due in Class Tuesday Oct 31st

1) State the law of diminishing marginal utility. Reproduce the Total Utility Graph and Marginal Utility graph from the chapter and explain why Total Utility begins to decline after the 6th unit consumed (2 points).

2) State and explain all 4 theories of consumer behavior (1 points).

3) The marginal benefit Joe gains from going to watch the Mets is \$200 dollars while the marginal Utility he gets from going to the Movies is \$80 dollars. A met game costs \$100 dollars (this is the playoffs) while the movie of the week, which his girlfriend wants to see, costs \$10. Given a choose between the 2,which one would he choose that night? (2 points).

4) Consumer theory states that consumers will always manage their consumption so that the marginal benefit of one product equals the marginal benefit of another product. Explain why this is the case.

For reference, explain why MU/\$ of A = MU/\$ of B (1 points).

5) Joan has \$14 in income and she can spend the money on either pizza or ice cream. The price of pizza is \$2 dollars and the price of ice cream is 1\$. What combination of pizza and ice cream will she purchase given the following MB (which are not converted into MB per dollar terms!!!)

Pizza
1) 24
2) 20
3) 18
4) 16
5) 12
6) 6
7) 4

Ice cream
1) 10
2) 8
3) 7
4) 6
5) 5
6) 4
7) 3

### Class Handout for Production Theory

Lecture VII – Production Theory Chapter 9
Professor Matt Festa

I) Economic Costs
a. Opportunity cost- the cost of a resource used is the next best option you could have used the resource for
b. Explicit costs – costs the firm must make (like monetary payments for labor and supplies
c. Implicit costs – are the opportunity costs of using the resources.
d. Economic costs therefore include both explicit and implicit costs (even if you made a profit, the resources could in theory have been used for something else that was even more profitable. That alternative is a cost to economists that must be added in.
e. Economic profit = total revenue – economic cost
f. Accounting Profit = total revenue – total explicit costs.
g. Key graph on Page 153 (big time key graph!!!)

II) Short run Production costs
a. Fixed costs
b. Variable Costs
c. Total Cost = fixed + variable costs.
d. Average Fixed Costs
e. Average Variable Costs
f. Average Total Costs
g. Marginal Cost = change in total cost/change in q

III) Long run production Costs - Figure 9.7
IV) Economies of Scale
a. Labor specialization
b. Managerial specialization
c. EfficientCapital
d. Other factors
e. Note the first portion is the name of the blog, increasing returns (to scale).

### Class handout for Consumer Theory

Lecture VI – Consumer Theory Chapter 8
Professor Matt Festa

I) Demand Curve slopes down. Why?
a) Income effect
b) Substitution effect
c) Diminishing marginal utility
d) Remember Utility is the satisfaction or enjoyment you gain from a product

II) Total vs Marginal Utility
a) Focus on graph on Page 130
b) Economics works on the Margin, whether the consumer will consume the extra good rather than something else (whether another good or leisure).
c) Relation to elasticities, the further out on the demand curve you are, the more elastic is the demand curve. This is because you are more sensistive to a product if you have already consumed a large quantity of it!

III) Theories of consumer behavior
a) Rational behavior
b) Preferences
c) Budget Constraint
d) Prices

IV) Marginal Unit per Dollar
a) The rule is that consumers will maximize her satisfaction when she allocates her money income so that the last dollar spent on product A, the last on product b, yield equal amount of marginal benefit.
b) If this does not hold then the consumer can attain more satisfication changing their behavior. Since they are rational they will do so.
c) Further explanation of substitution and income effect.

## Friday, October 20, 2006

### Interesting application of economics

How to turn a red paper clip into a home? Click here

## Thursday, October 19, 2006

### Pollution taxes in the Washington Post

Remember that one way to solve an externality problem is to institute a tax. This Washington Post article discusses both the existence of the externality and the reasons why a tax has not been used to correct it, a classic case of government and market failure.

### Test Averages

The mean and median for the test grades are as follows:

7pm

average = 70.6
median = 66.3

8pm

average= 75.0
neduab = 76

### An Economist wins the Nobel Peace Prize

If you haven't heard, the Nobel Peace price has gone to an economist this year. Muhammad Yunus is an economist who developed micro credit. This bloomberg article provides a good background into exactly what microcredit actually is.

Essentially the problem Muhammad solved was the following. If you want to go to the bank and take out loan--for a new business, home, or whatever--the bank needs to be confident that you will pay them back the money they lent plus the interest rate they charge you. You and I can put up collateral in order to acquire the loan. So, for instance, if you buy a home your home is the collateral on the loan. If you don't pay, the bank gets your home. In poor countries this is not possible because people either don't have anything to offer as collateral or the property rights are so poor the ownership of the collateral is essentially meaningless. How to solve such a conundrum? Risk pooling, which you can read about in the article.

## Wednesday, October 18, 2006

### Adam Smith and limits of sympathy

This article is a good summary of the moral theory behind Adam Smith's economics. Essentially,

"This analysis might seem cynical, suggesting that apathy, not compassion, lies in the heart of man. But this is not what Smith means. He is emphasizing that humans are limited in the ability to sympathize - or empathize - in today's language. Smith was telling us that as much as we might feel sorry for unfortunate people halfway around the world, our genuine sympathy might not reach that far"

### Samuelson on energy independence

Here is a good article that discusses both a social cost (i.e. too much use of imported oil) combined with the complications of fixing it (i.e. government failure, rational ignorance).

## Monday, October 16, 2006

### Test Reminder

Just a friendly reminder that the first test is Tuesday Oct 12th, 2006. I hope the studying is going well.

### Books economist's should read

Marginal Revolution points us to this list. These are books good economic students should read.

Note: I have read about half of them

### Mankiw on externality taxes

Harvard Professor Greg Mankiw has a good post here on Pigovian taxes on oil production in California.

## Wednesday, October 11, 2006

### Quiz 4 (Due in Class Oct 12th)

EC208 - Intro to MicroEconomics Quiz 4 (Review for Test 1).

Professor Matthew Festa

Due in Class Thursday Oct 12th

1) Draw the supply and demand curve for orange sweatshirts. Paris Hilton and Nick Lachey begin wearing the orange color sweatshirts and Vogue magazine begins calling "orange the new green." (note that green was the previous in color, which was preceded by lavender). Show any shifts in the supply/demand curves and any change in price or output (2 points).

2) Draw the supply and demand curve for the Auto industry. The US and Japan (a big producer of steal) get into a huge fight and Japan cuts off trade (and thus steal supplies). Steal is needed to build cars. Show any shifts in the supply/demand curves and any change in price or output. (2 points).

3) Explain in words what the price elasticity of demand is. If the price of coffee rises 2% and the quantity demanded falls 0.5% is this in elastic or inelastic good. Show the calculation. (2 points).

4) Explain in words what the cross price elasticity of demand is. What three types of goods are there? If the price of tea falls 3% and the quantity demanded of coffee increases 6%, what type of good is this (2 points).

5) Draw the supply and demand for the shrimp fishing industry. A government study shows that the shrimp boats pollute the water which damages the water supplies for a neighboring village. What type of externality is this? Show what shift is needed to bring about the optimal output and price of Shrimp (2 points).