# Shared Flashcard Set

## Details

Stanford Econ165 Lecture1 Fall2009 - Part I
International Finance Basics
26
Economics
09/22/2009

Term
 What is relative demand?
Definition
 The ratio of the demand for one good to the demand for another, represents general equilibrium in a two-good economy, where relative price adjusts to equate relative supply and relative demand
Term
 What are homothetic preferences?
Definition
 When individuals consume the same RATIO of two goods at ALL levels of income.   Someone making \$10k a year will spend the same ratio on goods as someone making \$100k a year.
Term
 What is autarky?
Definition
 An economy that is self-sufficient and does not engage in international trade.
Term
 What is the intuitive definition of MRS?
Definition
 Marginal rate of substitution is a consumers willingness to give up one good for more of another good while maintaining the same level of satisfaction.
Term
 What is an endowment economy?
Definition
 Where people are given an endowment of perishable consumption each period, and where money has no value.   Money has no value because stuff is perishable.
Term
 Given a budget constraint:   I = PcDc + PfDf   What is the slope?
Definition
 Slope = MRS = Pc/Pf   Because we can rewrite it:   Df = I/Pf - (Pc/Pf)Dc
Term
 If a budget constraint has a slope of Pc/Pf where C = clothing and F = food, Pc/Pf is the relative price of ___ measured in units of ___.
Definition
 Pc/Pf is the relative price of CLOTHING measured units of FOOD.
Term
 What is the budget line for an endowment of clothes and food?
Definition
 PcDc + PfDf = PcEc + PfEf
Term
 Given the following budget line for an endowment economy find the relative prices for food and clothes:   PcDc + PfDf = PcEc + PfEf
Definition
 (Pc/Pf)Dc + Df = (Pc/Pf)Ec + Ef
Term
 What are RELATIVE PRICES and why do they matter in an endowment economy?
Definition
 Relative prices are the ONLY prices that matter in an endowment economy because there is no money.
Term
 What is marginal utility of a good?
Definition
 The rate at which total utility changes as consumption of that good rises.
Term
 What is the mathematical definition monotonicity?
Definition
 When marginal utility is non-decreasing in both goods.   MUx > 0 MUy > 0
Term
 What is the intuition behind monotonicity?
Definition
 Monotonicity is when a consumer likes both goods (they both have positive marginal utility to him).
Term
 What does monotonicity imply about the slope / shape of the indifference curves?
Definition
 Indifference curves will have a negative slope and will be bowed inward from the origin
Term
 T/F: MRS is the slope of the indifference curves and is different at different points.
Definition
 True, consumers will have different desire to trade one good for another at one end of the IC than at the other end of the IC. MRS therefore changes along the curve.   NOTE: Not true for perfect substitutes.
Term
 What is the formula for MRS?
Definition
 MUx/MUy
Term
 What is the intuition behind a diminishing marginal rate of substitution of x for y?
Definition
 MRS will diminish as the amount of x increases along the indifference curve. Further along the x axis, consumer is LESS willing to give up y-axis goods to get more of x-axis goods. So, MRS or his willingness to substitute, gets lower.
Term
 What does diminishing MRS imply about indifference curves?
Definition
 They're bowed inwards to the origin.
Term
 What is the intuition behind increasing MRS?
Definition
 Indifference curves are bowed outwards from the origin, means consumer will be more willing to substitute more of y for more of x the further he moves along the x axis.
Term
 What are the 3 assumptions we make for utility functions?
Definition
 1) Monotonicity 2) Units of U not relevant, just order 3) MRS decreasing in absolute value
Term
 What is the intuition behind decreasing MRS?
Definition
 If a person has a lot of Y, they're willing to give up a lot of it to get more of X.   If a person has less of Y, they're willing ot give up less of it to get more of X.
Term
 When is the MRS constant?
Definition
 When X and Y are perfect substitutes.
Term
 When is MRS infinite?
Definition
 When there X and Y are perfect complements (no substitutability).
Term
 Using MUx,Px and MUy,Py what is the mathematical intuition behind maximizing utility?
Definition
 At MUx/Px = MUy/Py utility is maximized.   If either greater than or less than, utility can be increased and we are not yet at a maxima.
Term
 T/F: Utility is maximized when the slope of the budget constraint is equal to the price ratio.
Definition
 True.   MUx/Px = MUy/Py   MUx/MUy = Px/Py
Term
 Can it happen that   MUc/MUf > Pc/Pf OR MUc/MUf < PC/Pf   always?
Definition
 No, not if we assume MRS is strictly decreasing.
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