ACE 474 EXAM 1 CONCEPTS || ANSWERED

cross price elasticity - CORRECT ANSWER compliments (negative) and substitutes (positive) own price elasticity - CORRECT ANSWER one good price elasticity formula - CORRECT ANSWER Exy = %ΔQ/%ΔP income elasticities - CORRECT ANSWER -inferior (1) -normal (as income increases you buy more, =0) -necessity (between 0 and 1) -luxury (1) midpoint method formula - CORRECT ANSWER (Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P2+P1)/2] maximization point - CORRECT ANSWER MRS=slope of the budget constraint= -P1/P2 intemporal budget constraint formulas - CORRECT ANSWER current consumption (C1): C1 + (C2)/(1+r) future consumption (C2): C2 + (C1)(1+r) endowment point - CORRECT ANSWER point where if you were to spend your income in each given period saver vs. borrower - CORRECT ANSWER saver is patient (higher utility); borrower is impatient marginal rate of time preference (MRTP) - CORRECT ANSWER |1+r| role of interest rates (in saving/borrowing) - CORRECT ANSWER if interest rates increase, the saver is better off because utility becomes higher keynes' model - CORRECT ANSWER the more money you have, the more you save (current income) (rich are expected to save more than poor) keynes' model limitations - CORRECT ANSWER -not supported post WW2 -thinks interest rates do not matter -the ratio of consumption stays the same even when income is increased fisher's intemporal choice model (two sisters) - CORRECT ANSWER tells us how rational consumers distribute consumption over time based on income (future and current - determined by interest rates) modigliani's life-cycle hypothesis limitations - CORRECT ANSWER -bequests -precautionary savings -consumers have other motives for savings besides retirement modigliani's life-cycle hypothesis (retirement) - CORRECT ANSWER assumes systematic variation in income over time (incomes falls after retirement) friedman's permanent income hypothesis (bonus/lottery) - CORRECT ANSWER takes into account negative and positive shocks (transitory income vs permanent income) friedman's permanent income hypothesis limitations - CORRECT ANSWER -does not take into account interest rates characteristics theory (lancaster approach) - CORRECT ANSWER consumers don't get utility from the good itself, but from the characteristics of the good (used to predict demand of products) u=f(c); c represents the characteristic useful to determine house price on the market neoclassical theory - CORRECT ANSWER u=f(x); x represents the good hedonic pricing - CORRECT ANSWER price consumers will pay for a characteristic -real estate -housing prices -consumer durables -CPI hedonic pricing limitations - CORRECT ANSWER -difficulty identifying appropriate set of characteristics -how many characteristics should be considered -what form (composite or individual) consumer price index (CPI) - CORRECT ANSWER measures changes in "cost of living" , amount consumer must spend to maintain a given standard of living (fails to take in substitutions/improvements) CPI formula - CORRECT ANSWER current (reference) basket / base basket CPI m