Macroeconomics 2HH3 - Chapter 4

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Macroeconomics 2HH3Chapter 4Consumer Firm Behaviour:The Work-Leasure Decisionand Profit Maximization

Key Terms

Solow residual

a measure of total factor productivity obtained as a residual fromthe production function, given measures of aggregate output, labourinput, and capital input

Cobb-Douglas production function

a particular mathematical form for the production functionthat fits Canadian aggregate data well

representative firm

a stand-in for all firms in the economy

decreasing returns to scale

a property of the production technology whereby if the firmincreases all inputs by a factor x, this increases the output byless than the factor x

increasing returns to scale

a property of the production technology whereby if thefirm increases all inputs by factor x, this increases theoutput by more than the factor x

constant returns to scale

a property of the production technology whereby if thefirm increases all inputs by a factor x, this increasesoutput by more than the factor x

marginal product

the additional output produced when another unit of a factorof production is added to the production process

total factor productivity

a variable in the production function that makes allfactors of production more productive if it increases

production function

a function describign the technological possibilities forconverting factor inputs into outputs

perfect substitutes

two goods with a constant marginal rate of substitutionbetween them

perfect complements

two goods that are always consumed in fixedproportions

labour supply curve

a relationship describing the quantity of labour suppliedfor each level of the real wage

substitution effect

the effect on the quantity consumed of a good of a price change,holding the consumer's welfare constant

income effect

the effect on the quantity consumed of a good of a pricechange, because of having effectivilly different income

pure income effect

the effect on the consumers optimal consumptionbundle because of a change in real disposale incomeholding prices constant

relative price

the price ofa good in units of another good

optimal consumption bundle

the consumption bundle for which the consumer is aswell off as possible while satifying the budget constraint

rational

describes a consumer who makes an informed optimization decision

budget constraint

condition that consuption equals wage incomeplus nonwage income minus taxes

lump-sum tax

a tax that is unaffected by the actions of teh consumeror firm being taxed

dividend income

profits of firms that are distributed to the consumer,who owns the firm

numeraire

a good in which prices are dominated

real wage

the wage rate in units of the consumption good

time constraint

condition that hours worked plus leisure time sumto total time available to the consumer

barter

and exchange of goods for goods

competitive behaviour

actions taken by a consumer or firm if market pricesare outside its control

marginal rate of substitution

minus the slope of indifference curve, or the rate atwhich the consumer is just willing to trade good foranother

indifference curve

a set if points that represent consumption budles among whicha consumer is indifferent

indifference map

a set of indifference curves representing a consumer'spreferences over goods: has the same information as theutility function

inferior good

a good for which consumption decreases as income increases

normal good

a good for which consumption increase as income increase

consumption bundle

a given consumption-leisure combination

utility function

a function that captures a consumer's preferences over goods

representative consumer

a stand-in for all consumers in the economy

leisure

time spend not working in the market

consumption good

a single good that represents an aggregation of all consumergoods in the economy

dynamic decision

a decision made by a consumer or firm for more thanone time period

static decision

a decision made by consumer or firm for only one time period

The Representative Firm

THE PROFIT MAXIMIZATION PROBLEM OFTHE REPRESENTATIVE FIRM

THE EFFECT OF A CHANGE IN TOTAL FACTORPRODUCTIVITY AND THE PRODUCTION FUNCTION

The Representative Consumer

CONSUMER OPTIMIZATION

An Example

Consumption and Leasureare Perfect Complements

The Representative Consumer and ChangesIn the Real Wage:Income and Substitution Effects

How Does the Representative ConsumerRespond to a Change in Real Dividends orTaxes

THE REPRESENTATIVE CONSUMER'S BUDGET CONTSTRAINGS

The Budget Constraint

The Consumers Real Disposal Income

THE REPRESENTATIVE CONSUMER'S PREFERENCES