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Micro Formula Sheet

This document contains definitions and formulas for key microeconomic concepts: 1) It defines the marginal rate of technical substitution (MRTS) as the rate at which one input can be substituted for another while maintaining production. 2) It provides formulas for marginal product of labor (MPL), marginal product of capital (MPK), elasticity of demand, and Shephard's Lemma. 3) It also summarizes the Slutsky equation, Roy's identity, duality, returns to scale, cost minimization, marginal cost, firm revenue, and the Lagrange multiplier λ.

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357 views

Micro Formula Sheet

This document contains definitions and formulas for key microeconomic concepts: 1) It defines the marginal rate of technical substitution (MRTS) as the rate at which one input can be substituted for another while maintaining production. 2) It provides formulas for marginal product of labor (MPL), marginal product of capital (MPK), elasticity of demand, and Shephard's Lemma. 3) It also summarizes the Slutsky equation, Roy's identity, duality, returns to scale, cost minimization, marginal cost, firm revenue, and the Lagrange multiplier λ.

Uploaded by

MC Bulletproof
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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MICRO FORMULA SHEET

 MRTS For A x α1 x β2
∂y ∂y
o It can be calculated as MRTS= ∂ x ÷ ∂ x
1 2
p1
o MRTS=
p2
2 p1 x dY P
 Where P= p ∧Y = x , dP × Y =σ
1 2

 this is elasticity of substitution


o MRTS = MPL/MPK
 MC=MR= p
∂c
 MC= ∂ q
 For F(L,K)
o Marginal Product of Labor
∂F
 M P L= ∂ L
o Marginal Product of Capital
∂F
 M PK= ∂ K
 Elasticity of demand for Y for good with price p
dY p
o ε D= ×
dp Y
o If ε D>1, then elastic demand; if ε D=1 then unit elasticity; if ε D<1
then demand is inelastic
 Sheppard’s Lemma
∂ e( p , u) h
o =xi ( p , u ) , wheree ( p , u ) =expenditure function
∂ pi
o This means that, if we hold utility constant, a small amount of
increase in price will lead to an increase in expenditures. The
increase in expenditures is equal to the amount of goods
purchased multiplied by the increase in price.
o Alternatively, partial derivative of cost function with respect to
input prices is the firm’s conditional input demand
 Slutsky Equation:
∂ x mi ( p , y ) ∂ x hi ( p ,u) ∂ xim ( p , y ) m
o = − ∙x j (p, y)
∂ pj ∂ pj ∂y
o The left side of the equation is the total change of demand of
good i after a change in the price of good j. The first term of the
right side is the substitution effect, holding utility constant. The
second term of the right side is income effect. It is the increase in
demand for good i responding to one unit of increase in income
multiplied by the amount of change in income caused by the price
change, multiplied by -1
 Roy’s Identity
¿ ¿
−∂ U ∂ U
o x m= ÷
∂ Px ∂Y
 Duality
o x hi ( p , u )=x mi ( p , e ( p ,u ) )
o where e ( p , u ) isthe expenditure function
 Returns to scale
o f (tK,tL) > tf (K, L) → increasing returns to scale
o f (tK,tL) < tf (K, L) → decreasing returns to scale
o f (tK,tL) = tf (K, L) → constant returns to scale
 To get cost function of a firm:
o min x ,x r 1 x 1 +r 2 x 2 s . t . production f ( x1 x 2)≥ q
1 2

o Find x1 and x2 in terms of r1, r2, and q, and replace x1 and x2 in r1x1 +
r2x2 to get the final cost function
o MC is partial derivative of cost function w.r.t q
 Firm revenue is given by pq
 λ is the utility that could be obtained with the next dollar of
consumption when x1 and x2 are at their equilibrium quantities
o essentially the impact on utility of relaxing the budget constraint
by 1 dollar

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