Midterm 2 Review Sheet PDF

Midterm 2 Review Sheet ====================== ***[Potential Exam Topics]*** Chapter 8 -- Utility and Demand =============================== - **What is utility and why do we care about it in economics?** Represents the satisfaction or benefit a consumer gains from consuming goods and s...

Midterm 2 Review Sheet ====================== ***[Potential Exam Topics]*** Chapter 8 -- Utility and Demand =============================== - **What is utility and why do we care about it in economics?** Represents the satisfaction or benefit a consumer gains from consuming goods and services. Total utility is the total benefit from consumption, while marginal utility is the additional utility from consuming one more unit. Understanding diminishing marginal utility (where marginal utility decreases as consumption increases) is key. - **What is a consumption choice/consumption possibility?** Defined by consumption possibilities (what a consumer can afford) and preferences (personal likes/dislikes). - **What is a budget line and how does it tell us how consumers act?** - Indicates possible consumption combinations within a consumer\'s income. - **How do price/incomes changes shift budget lines?** - Changes in prices or income shift this line. The slope of the budget line equals the relative price of goods. - **Know the difference between total utility and marginal utility.** - **Be able to calculate the optimal consumption choice from either.** - Total Utility: - Definition: Total utility is the cumulative satisfaction or benefit a person receives from consuming a certain quantity of goods or services. - Example: If consuming 3 apples provides 30 units of total utility, it means the aggregate satisfaction from those 3 apples is 30. - Marginal Utility: - Definition: Marginal utility is the additional utility (or satisfaction) gained from consuming one additional unit of a good or service. - Principle of Diminishing Marginal Utility: Generally, as more units of a good are consumed, the marginal utility of each subsequent unit decreases. - Example: If the marginal utility of the first apple is 15, the second is 10, and the third is 5, it shows diminishing utility with each additional apple consumed. - **Understand fully what a utility maximizing decision (UMD) is and what a consumer equilibrium is.** - Consumers aim to maximize utility given their budget constraints. This involves equalizing the marginal utility per dollar across all goods. This concept leads to the \"utility-maximizing rule,\" where consumers adjust purchases until the marginal utility per dollar is equalized for all goods they can afford. - **What is marginal utility per dollar, how do we calculate it, what does it mean for UMD?** - Definition: - Marginal utility per dollar, or MU/P, measures the additional utility gained from spending an extra dollar on a specific good. It allows consumers to assess the \"bang for their buck\" across different goods within a budget. - Calculation: - Formula: MU per dollar = Marginal Utility/Price - Meaning for Utility-Maximizing Decision (UMD): - Role in Decision-Making: To achieve a utility-maximizing decision, consumers should equalize the marginal utility per dollar spent on all goods in their consumption bundle. - Consumer Equilibrium: When the marginal utility per dollar is equal for all goods, the consumer has no incentive to reallocate spending. This point, known as consumer equilibrium, represents the optimal consumption choice. - **Know the predictions of marginal utility theory.** - Demand increases when prices fall (because the marginal utility per dollar increases), while demand for a good may decrease if its price rises. A fall in income reduces consumption for normal goods, while inferior goods might be consumed more if cheaper options are preferred. Chapter 9 -- Possibilities, Preferences, and Choices ==================================================== - **What are preferences?** Preferences are mapped using indifference curves, showing combinations of goods that give the consumer equal satisfaction. - **What is a budget equation?**\ A budget equation represents the relationship between a consumer's total income and their spending on various goods. It defines the total possible expenditure on goods within the limits of the consumer's income, given the prices of those goods. Px \* Qx + Py \* Qy = I - **What is a relative price?** Relative price is the price of one good in terms of another good. It reflects the opportunity cost of choosing to purchase one good over another. Relative Price = Px/Py - **What are indifference curves and how/why do economists use them?** Indifference curves are graphical representations of different combinations of two goods that provide a consumer with the same level of satisfaction or utility. Each point on an indifference curve represents a consumption bundle where the consumer is equally satisfied, meaning they have no preference for one combination over another on the same curve. Indifference curves help economists understand consumer preferences and trade-offs between goods. By observing the shape and position of indifference curves, economists can interpret the levels of satisfaction associated with different consumption bundles. - **Know what marginal rate of substitution is and know how to calculate it.** The marginal rate of substitution (MRS) represents the rate at which a consumer is willing to give up one good for another while maintaining the same utility level. -- Calculate using the slope - **What is a best affordable choice?** Consumers seek the highest attainable indifference curve within their budget, where the MRS equals the relative price. This point maximizes utility within the constraints of their budget. - **How does it change with respect to variations in price and income?** Changes in price create both substitution and income effects, impacting the quantity of goods consumed. For example, a price drop in a good increases consumption of that good due to both effects, while the income effect could reduce consumption if the good is inferior. - *Know how to recreate the examples from class.* Chapter 16 -- Public Choices, Public Goods, and Healthcare ========================================================== - **What is a public good?** - **Know the difference between rival/non-rival and excludable/non-excludable.** Defined as goods that are both non-rival (one person's use doesn't diminish another's) and non-excludable (people can't be prevented from using it). Examples include national defense. Public goods often face underprovision in a free market due to the \"free-rider problem,\" where individuals benefit without paying - **Know figure 16.2 (from the text) well (the four-fold classification).** A close-up of several different types of goods Description automatically generated - **What do we mean when we talk about public choices?** - **Be prepared to explain why governments exist, how the political marketplace/equilibrium arises, and how government failures manifest.** - i.e. when are public goods over vs under provisioned? Governments provide public goods, allocate resources, and intervene where markets fail, such as in healthcare and education. Healthcare has external benefits, leading to underprovision if left solely to the market. The government also mitigates failures like the free-rider problem. - **What is the free-rider problem and how does it relate to public goods?** The **free-rider problem** occurs when individuals benefit from a good or service without contributing to the cost of providing it. In other words, free riders enjoy the benefits without paying, relying instead on others to bear the expense. This behavior leads to underfunding or underprovision of the good, as fewer people are willing to pay when they can still receive the benefits at no personal cost. The free-rider problem is closely associated with public goods due to two defining characteristics of these goods: Non-Excludability and Non-Rivalry - **How can you calculate marginal social benefits?** MSB = Marginal Private Benefit (MPB) + Marginal External Benefit (MEB) - **What is rational ignorance?** This concept explains why voters may not acquire complete information on policies, as the cost of gathering information exceeds perceived benefits. - **Know why the government is involved in healthcare and education.** - **Why do failures exist in the market for healthcare?** The government plays a significant role in **healthcare** and **education** because these sectors generate substantial **positive externalities**---benefits that extend beyond the individual to society at large. Left solely to the market, healthcare and education would be **underprovided and unfairly distributed** due to factors such as high costs, access inequalities, and imperfect information. Government intervention aims to enhance social welfare by making these services more accessible and by encouraging levels of provision that match their societal value. Chapter 17 - Externalities ========================== - **What is an externality and what are the difference between the types of externalities?** These are unintended costs (negative) or benefits (positive) of a transaction that affect third parties. Examples include pollution (negative) and vaccinations (positive). Negative Production Externalities: Pollution from factories affects those not involved in production. Positive Consumption Externalities: Benefits of one's vaccination extend to others by reducing disease transmission. - **Know how to calculate marginal social costs.** MSC = Marginal Private Cost (MPC) + Marginal External Cost (MEC) - **What are property rights and how to do they relate to externalities?** - What does the Coase theorem state? **Property rights** are the legal rights to own, use, and dispose of resources or assets, such as land, buildings, or intellectual property. Well-defined and enforceable property rights allow individuals and organizations to control resources and use them in ways that maximize their benefits. The Coase theorem states that if: Property rights are clearly defined and enforceable, Transaction costs are low, and Only a small number of parties are involved, then private parties can negotiate and reach an efficient solution to an externality on their own, regardless of who initially holds the property rights. The theorem implies that the allocation of resources will be efficient, as long as the parties can bargain freely, and the outcome will be the same no matter who owns the initial rights. - **What are some potential ways the government mitigates pollution?** Governments have several strategies for mitigating pollution, often targeting air, water, and soil contamination. Here are some of the main approaches: Regulations and Standards: Governments set regulatory limits on pollutant emissions. Examples include air quality standards, waste discharge limits, and vehicle emission standards (such as the Clean Air Act in the U.S.). These regulations control the amount and types of pollutants industries, vehicles, and other sources can release. Incentives for Clean Energy: Many governments offer tax credits, grants, or subsidies for renewable energy sources like wind, solar, and hydro. This encourages companies and individuals to invest in cleaner energy options, reducing reliance on fossil fuels, a major source of pollution. Pollution Taxes and Carbon Pricing: Governments impose taxes or fees on companies based on the amount of pollution they emit. Carbon taxes and cap-and-trade systems, for example, make it costly for companies to pollute, motivating them to reduce emissions. - **What is the tragedy of the commons?** This issue arises when individuals overuse a common resource, depleting it. Examples include overfishing. Solutions include establishing property rights or implementing regulatory controls. - **What are marginal social benefits in the context of positive externalities?** In the context of positive externalities: 1. **Private Benefit**: This is the benefit received by the consumer or producer directly involved in the transaction. For example, the benefit an individual receives from their own education. 2. **External Benefit**: This is the benefit to others who are not directly involved in the transaction. For instance, an educated person may contribute to a more informed society, benefiting others. 3. **Marginal Social Benefit (MSB)**: This is the *total benefit to society* of one additional unit, combining both the private benefit and the external benefit. Mathematically, it's the sum of the marginal private benefit (MPB) and the marginal external benefit (MEB): MSB = MPB + MEB - **Why are some communities disproportionately exposed to pollution?** Some communities are disproportionately exposed to pollution due to a combination of social, economic, and political factors. Here are key reasons why these disparities exist: 1. **Economic Inequality**: Lower-income communities often lack the financial resources to resist the placement of polluting industries nearby. Land and housing in these areas tend to be more affordable, attracting facilities that produce pollution, such as factories, waste treatment plants, or highways. 2. **Historical Zoning and Redlining**: Discriminatory zoning practices and redlining---a practice that restricted home loans to certain racial groups---have historically confined marginalized groups to specific neighborhoods. These areas are often located near industrial zones or high-traffic areas, exposing residents to higher pollution levels. 3. **Lack of Political Power**: Communities with less political influence or representation may struggle to prevent the establishment of polluting facilities in their areas. Wealthier, more politically active neighborhoods often have more resources and political clout to oppose potentially harmful developments. 4. **Environmental Racism**: Systemic racism contributes to placing disproportionate environmental burdens on communities of color. Research has shown that Black, Indigenous, and other communities of color are more likely to be situated near environmental hazards, partly due to historic and ongoing racial biases in policy decisions.