Review Session
Midterm: Feb 15 (W)
Scope of the exam
• Prices (Landsburg 2.1)
• Demand, supply, and equilibrium (Landsburg 1.1-
1.3)
• Gain from trade (Landsburg 2.2)
• The behavior of consumer (Landsburg 3.1-3.2)
Please bring photo ID and a calculator.
Prices
• Relative prices
• Absolute prices
The relative price of X in terms of Y
the abs price of X
the abs price of Y
• Inflation
Equilibrium
Suppose that a, b, c, d are constants. Give a
demand curve Q=a-bP and a supply curve
Q=c+dP.
1. What’s the equilibrium price
2. What’s the equilibrium quantity
Effect of a sales tax on
equilibrium
• Now the government imposes a sales tax t each
time you purchase a certain commodity.
1. What’s the new demand curve?
Q=a-b(P+t)
2. What’s the new equilibrium price and quantity?
Note: the equilibrium price is referred to as the tag
price + sales tax.
Effect of an excise tax on
equilibrium
• Now the government imposes an excise tax t
each time you purchase a certain commodity.
1. What’s the new supply curve?
Q=c+d(P-t).
2. What’s the new equilibrium price and quantity?
Note: the equilibrium price is referred to as the tag
price (of which the excise tax is included).
The sales tax and the excise tax have an identical
effect on equilibrium.
Effect of a subsidy on
equilibrium
Suppose now the government subsidizes the
consumers with $s for each unit of
agriculture product.
1. How would this subsidy policy affect
demand and supply?
2. What are the new market price and
quantity?
Behavior of Consumers
• Indifference curve
– Properties of well-behaved IC…
– Marginal value of X in terms of Y is the
subjective value of X measured by Y; equal to
the absolute value of the slope of IC at basket
(X,Y).
– Not-well-behaved ICs:
• Perfect substitutes (graph)
• Perfect complements (graph)
• Budget line:
– Effect of a price change on BL
– Effect of an income change on BL
– See class examples
Gain from trade
– Each person should specializes the task that
costs less compared with the other person(s).
Then we say this person has a comparative
advantage at this task.
– Class examples
– Carpenter/electrician examples in the textbook