BECO Exam 2- Keeler - Assignment Essays

question

Goods with many close substitutes tend to have
A. more elastic demands
B. less elastic demands
C. price elasticities of demand that are unit elastic
D. income elasticities of demand that are negative

answer

A. More elastic demands

question

When the price of candy bars is $1.20, the quantity demanded is 490 per day. When the price falls to $1.00, the quantity demanded increases to 500. Given this information, we know that the demand for candy bars is (please use the Midpoint formula)
A. unit elastic
B. elastic
C. inelastic
D. perfectly inelastic

answer

C. Inelastic

question

If the price elasticity of demand for a good is 5, then a 10 percent increase in price results in a (please use the Algebraic Point formula)
A. 0.25 percent decrease in the quantity demanded
B. 2.00 percent decrease in the quantity demanded
C. 50.00 percent decrease in the quantity demanded
D. 100.00 percent decrease in the quantity demanded

answer

C. 50.00 percent decrease in the quantity demanded

question

If a 16 percent increase in price for a good results in a 7 percent decrease in quantity demanded, the price elasticity of demand is (please use the Algebraic Point formula and insert your solution as a positive number)

answer

0.44
Answer range +/- 0.25 (0.19 - 0.69 )

question

When large changes in price lead to no changes in quantity demanded, demand is perfectly
A. inelastic, and the demand curve will be vertical
B. inelastic, and the demand curve will be horizontal
C. elastic, and the demand curve will be vertical
D. elastic, and the demand curve will be horizontal

answer

A. inelastic, and the demand curve will be vertical

question

Which of the following could be the price elasticity of demand for a good for which a decrease in price would decrease total revenue?
A. 2.5
B. 3.3
C. 1
D. 0.8

answer

D. 0.8

question

Assume that the price elasticity of demand is 2 for a certain firm's product. If the firm raises price, the firm's managers can expect total revenue to
A. inferior goods
B. complements
C. inelastic
D. substitutes

answer

B. complements

question

An income elasticity less than zero tells us that the good is
A. a normal good
B. a Giffen good
C. an inferior good
D. an inelastic good

answer

C. an inferior good

question

Lemonade, a good with many close substitutes, should have an own price elasticity that is
A. unit elastic
B. relatively elastic
C. relatively inelastic
D. perfectly inelastic

answer

B. relatively elastic

question

The quantity consumed of a good is relatively unresponsive to changes in price whenever demand is
A. elastic
B. unit elastic
C. falling
D. inelastic

answer

D. inelastic

question

If the price elasticity of demand for steak is 0.4, an increase in price will lead to
A. a reduction in total revenue
B. an increase in total revenue
C. no change in total revenue
D. an increase or decrease in total revenue

answer

B. an increase in total revenue

question

If apples have an own price elasticity of 1.2 we know the demand is
A. unit elastic
B. indeterminate
C. elastic
D. inelastic

answer

C. elastic

question

Suppose a consumer with an income of $100 is faced with Px = $1 and Py = $0.50. What is the price ratio between good X (horizontal axis) and good Y (vertical axis)?
A. 0.50
B. -1
C. -2
D. -4

answer

C. -2

question

If the price of good X is $10 and the price of good Y is $5, how much of good X can the consumer purchase if her income is $15 and she spends it entirely on purchasing good X?
A. 0
B. 2
C. 3
D. 1.5

answer

D. 1.5

question

What is the maximum amount of good Y that can be purchased if X and Y are the only two goods available for purchase and Px = $5, Py = $10, X = 20, and I = 500?
A. 40
B. 25
C. 50
D. 75

answer

A. 40

question

Given that income is $500 and PX = $20 and PY = $5, what is the price ratio between goods X (horizontal axis) and Y (vertical axis)?
A.100
B. -4
C. -20
D. 25

answer

B. -4

question

Given that income is $300, the price of good Y is $15, and the price of good X is $20, what is the vertical intercept of the budget line?
A. 4,500
B. 300
C. 20
D. 15

answer

C. 20

question

What is the maximum amount of good X that can be purchased if X and Y are the only two goods available for purchase and Px = $10, Py = $20, Y = 5, and I = 400?
A. 80
B. 20
C. 40
D. 30

answer

D. 30

question

What is the maximum amount of good X that can be purchased if X and Y are the only two goods available for purchase and Px = $10, Py = $20, Y = 0, and I = 400?
A. 0
B. 20
C. 40
D. 30

answer

C. 40

question

What is the maximum amount of good Y that can be purchased if X and Y are the only two goods available for purchase and Px = $10, Py = $20, X = 0, and I = 400?
A. 10
B. 20
C. 5
D. 0

answer

B. 20

question

A consumer must divide $600 between the consumption of product X and product Y. The associated market prices are Px = $50 and Py = $40. What is the equation for the consumer's budget constraint?
A. 600 = 50X + 40Y
B. 600 = 50X - 40Y
C. 600 = 40X + 50Y
D. 600 = 40X - 50Y

answer

A. 600 = 50X + 40Y

question

Joe prefers a three-pack of soda to a six-pack. What properties does this preference violate?
A. completeness
B. transitivity
C. more is better
D. diminishing MRS

answer

C. more is better

question

A situation where a consumer says he does not know his preference ordering for bundles X and Y would violate the property of
A. more is better
B. completeness
C. substitutability
D. complementarity

answer

B. completeness

question

The absolute value of the slope of the indifference curve is called the
A. marginal revenue
B. average rate of substitution
C. marginal rate of substitution
D. marginal cos

answer

C. marginal rate of substitution

question

An increase in the price of good X will have what effect on the budget line on a normal X-Y graph?
A. a parallel outward shift of the line
B. an increase in the vertical intercept
C. a decrease in the horizontal intercept
D. a parallel inward shift of the lin

answer

C. a decrease in the horizontal intercept

question

If a consumer's income decreases, what will happen to the budget line?
A. It will shift outward
B. It will become steeper
C. It will become flatter
D. It will shift inward

answer

D. It will shift inward

question

If the price of good X increases, what will happen to the budget line?
A. It will shift outward
B. It will become steeper
C. It will become flatter
D. It will shift inward

answer

B. It will become steeper

question

The change in total output attributable to the last unit of an input is the
A. total product
B. average product
C. marginal product
D. average return

answer

C. marginal product

question

If the last unit of input increases total product, we know that the marginal product is
A. positive
B. negative
C. zero
D. indeterminate

answer

A. positive

question

A measure of the output produced per unit of an input is called
A. total product
B. average product
C. marginal product
D. indifference curve

answer

B. average product

question

The range over which the marginal product of labor is positive but decreasing, and total product is increasing at a decreasing rate is called
A. increasing marginal returns to labor
B. decreasing marginal returns to labor
C. negative marginal returns to labor
D. marginal rate of substitution

answer

B. decreasing marginal returns to labor

question

The idea that a consumer is limited to selecting a bundle of goods that is affordable is captured by the
A. budget constraint
B. indifference curve
C. isoquant
D. price changes

answer

A. budget constraint

question

A measure of the percentage change in one variable brought about by a 1% change in another variable

answer

Elasticities

question

(New value-old value)/old value

answer

Percentage change formula

question

Percentage change in the quantity demanded of a good in response to a 1% change in its price

answer

Price elasticity of demand

question

%change in Q/ %change in P

answer

Price elasticity of demand ALGEBRAIC POINT formula

question

Price elasticity of demand is a _________ measure

answer

Local

question

Price elasticity of demand will ALWAYS be _______. Because of the law of demand

answer

Negative

question

What is a problem with the algebraic point formula for price elasticity of demand?

answer

It gives different answers over the same range on the demand curve depending on what point we choose as the starting point

question

You should only use the algebraic point formula as...

answer

The basis for the midpoint (ARC) formula

question

(Change in Q/.5(Q1+Q2))/(Change in P/.5(P1+P2)

answer

Midpoint (ARC) formula for price elasticity of demand

question

Price elasticity of demand = 1

answer

Unit elastic

question

price elasticity of demand < 1

answer

Inelastic

question

price elasticity of demand > 1

answer

Elastic

question

A high P on the demand curve means it is..

answer

Elastic

question

A low P on the demand curve means it is..

answer

Inelastic

question

When it is at midpoint on the demand curve it means it is..

answer

Unit elastic

question

price elasticity of demand is connected to ______

answer

Firm revenue

question

TR = PxQ

answer

Total revenue formula within Price elasticity of demand

question

1. Closeness of substitutes
2. Proportion of income
3. Time horizon
4. Ease of storage
5. Type of good

answer

Factors that affect Price elasticity of demand

question

More substitutes implies it being more elastic
Ex. Not many substitutes for insulin or other drugs, so they are inelastic

answer

Closeness of substitutes

question

Higher proportion of income, the more elastic

answer

Proportion of income

question

The longer the time horizon, the more elastic

answer

Time horizon

question

The easier it is to store, the more elastic

answer

Ease of storage

question

The percent change in quantity as a result of a percent change in income

answer

Income elasticity

question

(%change in Q)/(%change in I)

answer

Income elasticity general formula

question

Income elasticity > 0

answer

Normal good (an increase in income leads to an increase in purchasing of the good)

question

Income elasticity > 1

answer

luxury good (the purchase at these goods increases more rapidly than income)

question

Income elasticity < 0

answer

inferior good
(Increases in income leads to a decrease in purchasing of the good)

question

The percent change in a as a result of a percent change in a price of a related product

answer

Cross price Elasticity

question

(% change Qx) / (% change Py)

answer

Cross price Elasticity general formula

question

Eq,p 1 > 0

answer

subitutues
(Because quantity of good x and price y more in the same direction)

question

Eq,p 1 < 0

answer

compliments
(Qx and Py more in opposite directions)

question

The % change in quantity supplied as a result of a % change in price
- Think.. Responsiveness of a quantity supplied (producers) to price changes

answer

Supply Elasticity

question

(% change Qs) / (% change P)

answer

Supply elasticity general formula

question

Es > 1 → elastic
0< Es < 1 → inelastic
Es = 1 → unit elastic

answer

Values of supply elasticity

question

An individuals is able to state which of any two options is preferred

answer

Completeness

question

If A i preferred to B, B > C, then A>C

answer

Transitivity

question

A person always prefers more of a good to less

answer

More is better

question

Completeness, Transitivity, More is better

answer

Consumer Behavior
(Assumptions about preferences)

question

the pleasure or satisfaction people get from their economic activity

answer

utility

question

A measure of happiness or well being

answer

utility and indifference curves

question

A curve that shows all the combinations of goods or services that provide the same level of utility (Shows bundles a consumer is "indifferent" between)

answer

Indifference curve

question

Negatively sloped, Higher indifference curves represent higher utility, Indifference curves cannot intersect

answer

Indifference curve properties

question

Because of trade offs
Want more x ? give up some y

answer

Negatively sloped

question

-(curves further from origin)
-U2 > U1
-More is better

answer

Higher indifference curves represent higher utility

question

Indifference curves describe ________

answer

tradeoffs: to get more of one good you must be willing to give up the other

question

the number of units of Y that must be sacrificed for a unit of X, to maintain a constant level of satisfaction

answer

Marginal Rate of Substitution (MRS) slope

question

every combination on U1 has the SAME level of satisfaction (utility) = the tradeoffs are, say they want more beer, they HAVE to give up a number of wings

answer

MRS example

question

absolute value of a slope of an indifference curve

answer

MRS

question

are willing to give up (MRS #) of X, for 1 more of Y and be at same utility

answer

MRS

question

can vary along the indifference curve, because the consumption of one good can be pushed too far

answer

Diminishing the MRS

question

as you work down and down the curve, it gets smaller and smaller

answer

Diminishing the MRS

question

1. Perfect substitutes
2. Perfect compliments

answer

Special types of indifference curves

question

this consumer should be willing to trade 1 Pepsi for 1 Coke, no matter how much of each they have

answer

Perfect substitutes

question

-Goods must be consumed together at the same ratio
-Typically, an L shape

answer

Perfect compliments

question

the limit that income places of the combinations of goods that an individual can buy

answer

Budget constraints

question

I = (PX) (X) + (PY) (Y)

answer

Budget constraints formula

question

All combinations under budget line =

answer

can afford without spending all your money

question

All combinations along the budget line =

answer

can afford but spending all your money

question

All combinations outside budget line=

answer

cannot afford

question

1. Changes in Income
2. Changes in Prices

answer

Budget Constraints Shifters

question

Will shift the entire budget line; Price of X and Y stay same and ONLY income shifts
-More income = can purchase more of both goods = shift outward
-Less income = will purchase less of both goods = shift inward

answer

Changes in Income

question

Will change the slope of the budget line
-If the Price of good X changes (B1)
· Increase in Px (B2) slope becomes flatter
· Decrease in Px (B3) slope becomes steeper

answer

Changes in Prices

question

The objective of the consumer is to choose the consumption bundle with the highest utility (highest indifference curve) while still being within their budget (budget constraint)

answer

Consumer Equilibrium (utility maximization)

question

Consume where MRS = Price ratio (MRS = Px/Py)
where slope of Indifference Curve = slope of budget constraint

answer

Utility maximization rule

question

utility maximization occurs at the point of _________ (just touching each other) between the indifference curve and the budget constraint

answer

tangency

question

Mathematical function that defines the maximum amount of output that can be produced with a given set of inputs

answer

Production Function

question

Q = F(K,L)

answer

Simple Two- Input Production Function
Q = level of output
K = quantity of capital input
L = quantity of labor input

question

Maximum level of output that can be produced with a given amount of inputs

answer

Total products

question

A measure of the output produced per unit of input

answer

Average product

question

APL = (Q/L)

answer

Average product of labor
"output per worker"

question

APK = (Q/K)

answer

Average Product of Capital :
"Output per machine / machine hour"

question

The change in total product (output) attributable to the last unit of an input
-The extra output obtained by using one more unit of labor/capital

answer

Marginal Product

question

(change in Q/ change in L)

answer

Marginal products of labor

question

(change in Q/ change in K)

answer

Marginal product of capital

question

The MP of an additional unit of output will at some point be lower than the MP of the previous unit.
- Ex: "Too many cooks in the kitchen."

answer

Law of Diminishing Returns ( diminishing marginal product)

question

Period of time where some factors of production (inputs) are fixed.

answer

short run

question

Period of time where all inputs are variable (can change)

answer

long run

question

if at least one input is fixed, we are in the __________ run

answer

short

question

A curve that shows the various combinations of inputs that will produce the same level of output

answer

Isoquants

question

every point along the curve, represents the same level of output

answer

Isoquant

question

The rate at which a producer can substitute between 2 inputs and maintain the same level of output
- Absolute value of the slope of the isoquant

answer

Marginal Rate of Technical Substitution (MRTS)

question

(change in K/ change in L)

answer

MRTS formula

question

The rate at which output increases in response to proportional increases in all inputs
- Think: If all inputs doubled, what would happen to output?

answer

Returns to scale

question

Doubling all inputs exactly doubles output

answer

Constant Returns to Scale (CRS)

question

Doubling all inputs more than doubles output

answer

Increasing Returns to Scale (IRS)

question

Doubling all inputs less than doubles output

answer

Decreasing Returns to Scale (DRS)

question

Combination of inputs that yield the same costs

answer

Isocosts

question

C= wL +rK

answer

Isocosts formula

C= cost
r = cost of capital (rental rate)
w= wage rate
K = amount of capital
L= amount of labor

question

To maximize profits, the firm must produce its output at the lowest possible cost

answer

cost minimization

question

Cost minimization input rule

answer

Produce where MRTSkr = w/r
MPL/MPK= w/r
Slope of isoquant = slope of isocost
MPL/w = MPK/r

question

- Cost that do not vary with output
Cost of fixed units used in production
For example, the costs of capital (machines in a factory)

answer

Fixed cost (FC)

question

- Cost that change when output is changed
Cost of inputs that vary with output
For example, the cost of labor (adding another shift)

answer

Variable cost (VC)

question

____= FC + VC

answer

question

All costs are variable/ No fixed costs

answer

Long Run costs

question

_____= TC/Q

answer

Average total cost

question

_____= FC/Q

answer

Average Fixed cost

question

______=VC/Q

answer

Average variable cost

question

the additional cost of producing one more unit of output

answer

Marginal Cost

question

(change in TC/ change in Q)

answer

Marginal Cost

1 of 131

question

Goods with many close substitutes tend to have
A. more elastic demands
B. less elastic demands
C. price elasticities of demand that are unit elastic
D. income elasticities of demand that are negative

answer

A. More elastic demands

question

answer

C. Inelastic

question

answer

C. 50.00 percent decrease in the quantity demanded

question

answer

0.44
Answer range +/- 0.25 (0.19 - 0.69 )

question

answer

A. inelastic, and the demand curve will be vertical

question

Which of the following could be the price elasticity of demand for a good for which a decrease in price would decrease total revenue?
A. 2.5
B. 3.3
C. 1
D. 0.8

answer

D. 0.8

question

answer

B. complements

question

An income elasticity less than zero tells us that the good is
A. a normal good
B. a Giffen good
C. an inferior good
D. an inelastic good

answer

C. an inferior good

question

Lemonade, a good with many close substitutes, should have an own price elasticity that is
A. unit elastic
B. relatively elastic
C. relatively inelastic
D. perfectly inelastic

answer

B. relatively elastic

question

The quantity consumed of a good is relatively unresponsive to changes in price whenever demand is
A. elastic
B. unit elastic
C. falling
D. inelastic

answer

D. inelastic

question

answer

B. an increase in total revenue

question

If apples have an own price elasticity of 1.2 we know the demand is
A. unit elastic
B. indeterminate
C. elastic
D. inelastic

answer

C. elastic

question

Suppose a consumer with an income of $100 is faced with Px = $1 and Py = $0.50. What is the price ratio between good X (horizontal axis) and good Y (vertical axis)?
A. 0.50
B. -1
C. -2
D. -4

answer

C. -2

question

If the price of good X is $10 and the price of good Y is $5, how much of good X can the consumer purchase if her income is $15 and she spends it entirely on purchasing good X?
A. 0
B. 2
C. 3
D. 1.5

answer

D. 1.5

question

What is the maximum amount of good Y that can be purchased if X and Y are the only two goods available for purchase and Px = $5, Py = $10, X = 20, and I = 500?
A. 40
B. 25
C. 50
D. 75

answer

A. 40

question

Given that income is $500 and PX = $20 and PY = $5, what is the price ratio between goods X (horizontal axis) and Y (vertical axis)?
A.100
B. -4
C. -20
D. 25

answer

B. -4

question

Given that income is $300, the price of good Y is $15, and the price of good X is $20, what is the vertical intercept of the budget line?
A. 4,500
B. 300
C. 20
D. 15

answer

C. 20

question

What is the maximum amount of good X that can be purchased if X and Y are the only two goods available for purchase and Px = $10, Py = $20, Y = 5, and I = 400?
A. 80
B. 20
C. 40
D. 30

answer

D. 30

question

What is the maximum amount of good X that can be purchased if X and Y are the only two goods available for purchase and Px = $10, Py = $20, Y = 0, and I = 400?
A. 0
B. 20
C. 40
D. 30

answer

C. 40

question

What is the maximum amount of good Y that can be purchased if X and Y are the only two goods available for purchase and Px = $10, Py = $20, X = 0, and I = 400?
A. 10
B. 20
C. 5
D. 0

answer

B. 20

question

answer

A. 600 = 50X + 40Y

question

Joe prefers a three-pack of soda to a six-pack. What properties does this preference violate?
A. completeness
B. transitivity
C. more is better
D. diminishing MRS

answer

C. more is better

question

A situation where a consumer says he does not know his preference ordering for bundles X and Y would violate the property of
A. more is better
B. completeness
C. substitutability
D. complementarity

answer

B. completeness

question

The absolute value of the slope of the indifference curve is called the
A. marginal revenue
B. average rate of substitution
C. marginal rate of substitution
D. marginal cos

answer

C. marginal rate of substitution

question

answer

C. a decrease in the horizontal intercept

question

If a consumer's income decreases, what will happen to the budget line?
A. It will shift outward
B. It will become steeper
C. It will become flatter
D. It will shift inward

answer

D. It will shift inward

question

If the price of good X increases, what will happen to the budget line?
A. It will shift outward
B. It will become steeper
C. It will become flatter
D. It will shift inward

answer

B. It will become steeper

question

The change in total output attributable to the last unit of an input is the
A. total product
B. average product
C. marginal product
D. average return

answer

C. marginal product

question

If the last unit of input increases total product, we know that the marginal product is
A. positive
B. negative
C. zero
D. indeterminate

answer

A. positive

question

A measure of the output produced per unit of an input is called
A. total product
B. average product
C. marginal product
D. indifference curve

answer

B. average product

question

answer

B. decreasing marginal returns to labor

question

The idea that a consumer is limited to selecting a bundle of goods that is affordable is captured by the
A. budget constraint
B. indifference curve
C. isoquant
D. price changes

answer

A. budget constraint

question

A measure of the percentage change in one variable brought about by a 1% change in another variable

answer

Elasticities

question

(New value-old value)/old value

answer

Percentage change formula

question

Percentage change in the quantity demanded of a good in response to a 1% change in its price

answer

Price elasticity of demand

question

%change in Q/ %change in P

answer

Price elasticity of demand ALGEBRAIC POINT formula

question

Price elasticity of demand is a _________ measure

answer

Local

question

Price elasticity of demand will ALWAYS be _______. Because of the law of demand

answer

Negative

question

What is a problem with the algebraic point formula for price elasticity of demand?

answer

It gives different answers over the same range on the demand curve depending on what point we choose as the starting point

question

You should only use the algebraic point formula as...

answer

The basis for the midpoint (ARC) formula

question

(Change in Q/.5(Q1+Q2))/(Change in P/.5(P1+P2)

answer

Midpoint (ARC) formula for price elasticity of demand

question

Price elasticity of demand = 1

answer

Unit elastic

question

price elasticity of demand < 1

answer

Inelastic

question

price elasticity of demand > 1

answer

Elastic

question

A high P on the demand curve means it is..

answer

Elastic

question

A low P on the demand curve means it is..

answer

Inelastic

question

When it is at midpoint on the demand curve it means it is..

answer

Unit elastic

question

price elasticity of demand is connected to ______

answer

Firm revenue

question

TR = PxQ

answer

Total revenue formula within Price elasticity of demand

question

1. Closeness of substitutes
2. Proportion of income
3. Time horizon
4. Ease of storage
5. Type of good

answer

Factors that affect Price elasticity of demand

question

More substitutes implies it being more elastic
Ex. Not many substitutes for insulin or other drugs, so they are inelastic

answer

Closeness of substitutes

question

Higher proportion of income, the more elastic

answer

Proportion of income

question

The longer the time horizon, the more elastic

answer

Time horizon

question

The easier it is to store, the more elastic

answer

Ease of storage

question

The percent change in quantity as a result of a percent change in income

answer

Income elasticity

question

(%change in Q)/(%change in I)

answer

Income elasticity general formula

question

Income elasticity > 0

answer

Normal good (an increase in income leads to an increase in purchasing of the good)

question

Income elasticity > 1

answer

luxury good (the purchase at these goods increases more rapidly than income)

question

Income elasticity < 0

answer

inferior good
(Increases in income leads to a decrease in purchasing of the good)

question

The percent change in a as a result of a percent change in a price of a related product

answer

Cross price Elasticity

question

(% change Qx) / (% change Py)

answer

Cross price Elasticity general formula

question

Eq,p 1 > 0

answer

subitutues
(Because quantity of good x and price y more in the same direction)

question

Eq,p 1 < 0

answer

compliments
(Qx and Py more in opposite directions)

question

The % change in quantity supplied as a result of a % change in price
- Think.. Responsiveness of a quantity supplied (producers) to price changes

answer

Supply Elasticity

question

(% change Qs) / (% change P)

answer

Supply elasticity general formula

question

Es > 1 → elastic
0< Es < 1 → inelastic
Es = 1 → unit elastic

answer

Values of supply elasticity

question

An individuals is able to state which of any two options is preferred

answer

Completeness

question

If A i preferred to B, B > C, then A>C

answer

Transitivity

question

A person always prefers more of a good to less

answer

More is better

question

Completeness, Transitivity, More is better

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Consumer Behavior
(Assumptions about preferences)

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the pleasure or satisfaction people get from their economic activity

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utility

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A measure of happiness or well being

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utility and indifference curves

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A curve that shows all the combinations of goods or services that provide the same level of utility (Shows bundles a consumer is "indifferent" between)

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Indifference curve

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Negatively sloped, Higher indifference curves represent higher utility, Indifference curves cannot intersect

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Indifference curve properties

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Because of trade offs
Want more x ? give up some y

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Negatively sloped

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-(curves further from origin)
-U2 > U1
-More is better

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Higher indifference curves represent higher utility

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Indifference curves describe ________

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tradeoffs: to get more of one good you must be willing to give up the other

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the number of units of Y that must be sacrificed for a unit of X, to maintain a constant level of satisfaction

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Marginal Rate of Substitution (MRS) slope

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every combination on U1 has the SAME level of satisfaction (utility) = the tradeoffs are, say they want more beer, they HAVE to give up a number of wings

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MRS example

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absolute value of a slope of an indifference curve

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MRS

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are willing to give up (MRS #) of X, for 1 more of Y and be at same utility

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MRS

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can vary along the indifference curve, because the consumption of one good can be pushed too far

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Diminishing the MRS

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as you work down and down the curve, it gets smaller and smaller

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Diminishing the MRS

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1. Perfect substitutes
2. Perfect compliments

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Special types of indifference curves

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this consumer should be willing to trade 1 Pepsi for 1 Coke, no matter how much of each they have

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Perfect substitutes

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-Goods must be consumed together at the same ratio
-Typically, an L shape

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Perfect compliments

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the limit that income places of the combinations of goods that an individual can buy

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Budget constraints

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I = (PX) (X) + (PY) (Y)

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Budget constraints formula

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All combinations under budget line =

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can afford without spending all your money

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All combinations along the budget line =

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can afford but spending all your money

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All combinations outside budget line=

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cannot afford

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1. Changes in Income
2. Changes in Prices

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Budget Constraints Shifters

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Changes in Income

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Will change the slope of the budget line
-If the Price of good X changes (B1)
· Increase in Px (B2) slope becomes flatter
· Decrease in Px (B3) slope becomes steeper

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Changes in Prices

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The objective of the consumer is to choose the consumption bundle with the highest utility (highest indifference curve) while still being within their budget (budget constraint)

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Consumer Equilibrium (utility maximization)

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Consume where MRS = Price ratio (MRS = Px/Py)
where slope of Indifference Curve = slope of budget constraint

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Utility maximization rule

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utility maximization occurs at the point of _________ (just touching each other) between the indifference curve and the budget constraint

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tangency

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Mathematical function that defines the maximum amount of output that can be produced with a given set of inputs

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Production Function

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Q = F(K,L)

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Simple Two- Input Production Function
Q = level of output
K = quantity of capital input
L = quantity of labor input

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Maximum level of output that can be produced with a given amount of inputs

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Total products

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A measure of the output produced per unit of input

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Average product

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APL = (Q/L)

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Average product of labor
"output per worker"

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APK = (Q/K)

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Average Product of Capital :
"Output per machine / machine hour"

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The change in total product (output) attributable to the last unit of an input
-The extra output obtained by using one more unit of labor/capital

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Marginal Product

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(change in Q/ change in L)

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Marginal products of labor

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(change in Q/ change in K)

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Marginal product of capital

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The MP of an additional unit of output will at some point be lower than the MP of the previous unit.
- Ex: "Too many cooks in the kitchen."

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Law of Diminishing Returns ( diminishing marginal product)

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Period of time where some factors of production (inputs) are fixed.

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short run

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Period of time where all inputs are variable (can change)

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long run

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if at least one input is fixed, we are in the __________ run

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short

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A curve that shows the various combinations of inputs that will produce the same level of output

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Isoquants

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every point along the curve, represents the same level of output

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Isoquant

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The rate at which a producer can substitute between 2 inputs and maintain the same level of output
- Absolute value of the slope of the isoquant

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Marginal Rate of Technical Substitution (MRTS)

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(change in K/ change in L)

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MRTS formula

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The rate at which output increases in response to proportional increases in all inputs
- Think: If all inputs doubled, what would happen to output?

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Returns to scale

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Doubling all inputs exactly doubles output

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Constant Returns to Scale (CRS)

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Doubling all inputs more than doubles output

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Increasing Returns to Scale (IRS)

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Doubling all inputs less than doubles output

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Decreasing Returns to Scale (DRS)

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Combination of inputs that yield the same costs

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Isocosts

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C= wL +rK

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Isocosts formula

C= cost
r = cost of capital (rental rate)
w= wage rate
K = amount of capital
L= amount of labor

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To maximize profits, the firm must produce its output at the lowest possible cost

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cost minimization

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Cost minimization input rule

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Produce where MRTSkr = w/r
MPL/MPK= w/r
Slope of isoquant = slope of isocost
MPL/w = MPK/r

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- Cost that do not vary with output
Cost of fixed units used in production
For example, the costs of capital (machines in a factory)

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Fixed cost (FC)

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- Cost that change when output is changed
Cost of inputs that vary with output
For example, the cost of labor (adding another shift)

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Variable cost (VC)

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____= FC + VC

answer

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All costs are variable/ No fixed costs

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Long Run costs

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_____= TC/Q

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Average total cost

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_____= FC/Q

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Average Fixed cost

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______=VC/Q

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Average variable cost

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the additional cost of producing one more unit of output

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Marginal Cost

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(change in TC/ change in Q)

answer

Marginal Cost

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