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Budget Constraint Formula

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M = Px times X + Px times Y

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Slope of Budget Constrain (BC)

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-Px/Py or (change in Y / change in X)

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Indifference Curve equals . . .

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the Slope of the Utility Function or ( change in Y / change in X) or - MUx/MUy

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Marginal Rate of Substitution

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How much of one good a consumer is willing to give up to get one more unit of another and stay indifferent.

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Max utility equals . . .

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utility function - λ(budget constrain)

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Price Consumption Curve (PCC)

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holding income and the price of Y/X constant, the PCC for a good X/Y is the set of optimal bundles traced on an indifference map as the price of X/Y varies

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Income Consumption Curve (ICC)

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holding the prices of X and Y constant, the ICC for a good X is the set of optimal bundles traced on an indifference map as income varies

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Elasticity = ε equals . .

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(P / Q) * ( 1 / slope of inverse demand function (ex P = 5 + Q) )

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If | ε | > 1 then . . .

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The change in demand will be greater than the change in price.

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Production function =

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Qf(K,L) K = capital , L = labor

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Demand function

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example

Q = 5 + P, inverse is P = Q - 5

Q = 5 + P, inverse is P = Q - 5

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Leontief production function

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Q = min(aK, bL)

it chooses the smallest input if aK was 7 and bL was 10 it would choose aK or 7

it chooses the smallest input if aK was 7 and bL was 10 it would choose aK or 7

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Production function is analogous to

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the Demand Function is analogous to

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The Indifference Curve is analogous to

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the Isoquant curve is analogous to

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The Budget Constrain is analogous to

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the Isocost curve is analogous to

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Utility Function is analogous to

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the Long run Production Function is analogous to

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Income Consumption Curve (ICC) is analogous to

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the Long run expansion path is analogous to

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Diminishing marginal returns in the short run causes

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and increase in marginal cost

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convex short run production function (SRPF) equals

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increasing marginal returns

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concave short run production function (SRPF) equals

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decreasing marginal returns

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if MPL > APL then

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AP is decreasing

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if MPL < APL then

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AP is increasing

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Short run variables:

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Fixed Cost (FC), Variable Cost (VC), Total Cost (TC), Average Fixed Cost (AFC), Average Variable Cost (AVC), Average Total Cost (ATC), and Marginal Cost (MC)

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Long run variable

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Isoquant Curve

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Isoquant Slope =

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( change in K / change in L) or - MPL / MPK

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In Cobb-Douglas the exponent

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tells us the returns to scale, x > 1 equals increasing, x = 1, constant, x < 1 decreasing

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Short run cost is

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TC = FC + VC

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Fixed Cost (FC) =

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FC = rK where r is the opportunity cost and K is the capital

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Variable Cost (VC) =

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VC = wL where w is the wage and L is the labor

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Total Cost Graph

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TC/Q

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ATC =

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VC/Q

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AVC =

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FC/Q

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AFC =

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(change in TC / change in Q) or ( change in VC / change in Q)

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Marginal Cost = MC =

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of decreasing marginal returns in labor/capital

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Increase in Marginal Cost is because

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TC = rK ( total cost of capital) + wL (total cost of labor)

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TC =

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- PL/PK or -w/r or (change in K / change in L)

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Isocost slope is

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MPL / PL = MPK / PK ( Marginal unit of production of labor per dollar spent on labor must be equal to marginal unit of production of capital per dollar spent on capital )

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( this might be wrong ) The maximum use of Labor and Capital comes when . . .

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change in LTC / change in Q

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( idk what LMC is ) LMC equals

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LTC / Q

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( idk what LAC is) LAC equals

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constant returns to scale

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if LMC = LAC

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decreasing returns to scale

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if LMC > LAC

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increasing returns to scale

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if LMC < LAC

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Price x Quantity

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Total Revenue (TR)

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FC + VC

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Total Cost (TC)

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TR ( P times Q) - TC ( ATC times Q)

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Economic Profit equals

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MC(dTC/dQ) = MR(dTR/dQ)

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Max Economic Profit when

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1. Standardized Product

2. Price Takers

3. Free entry/exit

4. Reflect information / all info is know

2. Price Takers

3. Free entry/exit

4. Reflect information / all info is know

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Characteristics of a Perfect Competitive Market

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( may be wrong) the market, demand

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Price under PC comes from ___, while the price from a monopoly comes from ____

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the price

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Under PC the Marginal Cost equals

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MR or dTC/dQ or MC

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Slope of the TC equals

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MC = MR (price in PC)

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perfect competition GRAPH

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we are even or making profit

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Economic Profit is maximized when

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1. Exclusive Control over a product

2. Economies of Scale

3. Patents

4. Network Economies ex facebook

5. Government Licenses and Patents

2. Economies of Scale

3. Patents

4. Network Economies ex facebook

5. Government Licenses and Patents

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If TR - TC >= 0

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study of strategic decision making

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Monopoly Conditions

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Best Response Analysis

Nash equilibrium

Backward induction ( Rollback Analysis)

Nash equilibrium

Backward induction ( Rollback Analysis)

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Marginal Revenue of a PC GRAPH

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Open Access:

1. Common Pool Resource Dilemma

2. Public Good

Asymmetric Information: One party has more information than the other.

"Lemons Problem" , example: used car market

Moral Hazard:

example: With insurance people might fake things, like with life insurance, they might lie that they do not smoke to pay less.

1. Common Pool Resource Dilemma

2. Public Good

Asymmetric Information: One party has more information than the other.

"Lemons Problem" , example: used car market

Moral Hazard:

example: With insurance people might fake things, like with life insurance, they might lie that they do not smoke to pay less.

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total revenue of a PC GRAPH

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An open access Market Failure: There is a public resource that is

1. Non-excludable (everyone can use it)

2. The good is non-rivalrous

1. Non-excludable (everyone can use it)

2. The good is non-rivalrous

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marginal revenue of a monopoly GRAPH

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An open access Market Failure:

1. Non-excludable (everyone can use it)

2. Rivalrous

1. Non-excludable (everyone can use it)

2. Rivalrous

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total revenue of a monopoly GRAPH

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Higher wages (decrease),

Higher prices for new materials (decrease)

Expectation of higher prices (decrease)

Bad Weather (decrease)

Improved technology (increase)

Lower interest rates (increase)

Increase in number of firms (increase)

Good weather(increase)

Higher prices for new materials (decrease)

Expectation of higher prices (decrease)

Bad Weather (decrease)

Improved technology (increase)

Lower interest rates (increase)

Increase in number of firms (increase)

Good weather(increase)

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Game Theory is

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Price of complement falls (increase)

Income rises, normal good (increases)

Population grows (increase)

Price decrease expected (increase)

Tastes shift in favor (increase)

Price of substitute falls (decreases)

Income rises, inferior good (decreases)

Income decline expected (decrease)

Income rises, normal good (increases)

Population grows (increase)

Price decrease expected (increase)

Tastes shift in favor (increase)

Price of substitute falls (decreases)

Income rises, inferior good (decreases)

Income decline expected (decrease)

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some terms for game theory

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1. Convexity in preferences

2. Transitive Preferences

3. Completeness (They know what they want)

4. More is better

2. Transitive Preferences

3. Completeness (They know what they want)

4. More is better

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Types of Market Failures

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Plug M, Px, and Py into M = Px times X + Py time Y, solve, then slope is change in Y over change in X or -Px/Py

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Common Pool Resource Dilemma

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Plug MUx,MUy, Px, and Py into the equation MUx/Px = MUy/Py, you should consume the good with the bigger number as you prefer that good.

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Public Good Dilemma

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Plug the wanted amount of utility into the Utiltiy Function example : want 20 units of utility, utility function U = x + 2y -> 20 = x +2y -> y = -1/2x + 10

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Determinates of Supply

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The supply function is upward sloping because it represents the different levels of price that sellers are willing to sell as some are willing to sell at higher prices than others.

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Determinates of Demand

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When | ε | < 1 there is a greater change in price than demand, and when | ε | is > 1 there is a greater change in demand than price.

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Characteristic of Rational Actor

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Use M , Px, and Py to make budget constraint, plug that and utility function with lambda and find derivative of each. Then set lambda = lambda and plug answers into the derivative of lambda

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How to graph Budget Constraint

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Given Market Demand ex: P = 66 - 2Q, plug in Q1 + Q2 for Q, then plug that into TR = P times Q. Then fine MR ( dTC/dQ) and set that equal to MC and solve for Q1/Q2. Then that is the Best Response Function Company 1 and Company 2 since they are identical. Then plug one of the BRF into the other and Solve for a Q, that is the quantity that should be produced, then Plug Q into the production function to find the total price.

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Solve for Marginal Utility in equilibrium conditions

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Same as Cournot but once you find the opponet firms Best Response Function you plug it into the Objective Function then solve again like Cournot Model.

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Graph Utility Function

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oligopoly model in which one firm sets its output before other firms do

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Why is the supply function upward sloping

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Set the Market Demand Function equal to the MC and some for Q then divide by 2 in order to find each firms Quantity produced.

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What do different levels of elasticity mean

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How to maximize utility

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Cournot Model Steps:

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Stackelberg Model Steps:

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Stackelberg Model Definition

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Bertrand Model Steps:

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