question
What is MC?
answer
marginal cost
question
What is the formula for MC?
answer
dC/dq, dVC/dq
question
what is AC?
answer
Average cost
question
What is the formula for AC?
answer
C/q, vc/q+f/q, avc+afc, cost/quantity
question
What is AVC?
answer
average variable cost
question
What is the formula for AVC?
answer
VC/Q, variable cost/quantity
question
What is AFC?
answer
average fixed cost
question
what is the formula for AFC?
answer
FC/Q, total fixed costs/quantity of output produced
question
what does it means when the AC is at a min?
answer
MC=AC, slope of Marginal Cost intersects with Average Cost
question
how do you find the AC minimum?
answer
1, find the AC (unless given, duh), 2, set MC=AC or make the first derivative in the average cost function = 0 and solve the equation when = 0
question
what changes when a lump sum is imposed?
answer
total cost, fixed cost, average cost, average fixed cost
question
what doesn't change when lump sum is imposed?
answer
marginal cost, variable cost, average cost
question
what doesn't change when unit tax is imposed?
answer
average fixed cost, fixed cost
question
What is an isoquant?
answer
a graph that shows all the combinations of capital and labor that can be used to produce a given amount of output
question
what is an isocost?
answer
the different combinations of factors of production that can be employed with a given total cost
question
what is the slope of the isoquant?
answer
Marginal Rate of Technical Substitution (MRTS)
question
what is the formula of MRTS?
answer
-MPL/MPk
question
What is cost minimization?
answer
the isoquant of labor and capital produces the preferred output at the lowest cost
question
what is the formula of cost minimization?
answer
(MPl/w) = (MPk/r)
question
(MPl/w) > (MPk/r)
answer
Hire more labor or reduce capital
question
(MPl/w) < (MPk/r)
answer
Hire more capital or reduce labor
question
what is economic costs?
answer
explicit + implicit costs
question
how do you calculate income elasticity?
answer
(dQ/dL) x income(l)/Q
question
what is consumer surplus?
answer
the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays, the top of demand slope - equilibrium?
question
holding the initial equilibruim price and quantity constant while varying the elasticity of demand, the loss in consumer surplus from a price increase will get smaller as the demand curve
answer
...
question
p = 80 - 2Q, calculate consumer surplus at the equilibrium market price and quantity assuming market price is $40
answer
consumer surplus is $400
question
p = 80 - 2Q, assuming market price is $40, calculate the new consumer surplus at the equilibrium market price and quantity when gov't imposed a $5 tax
answer
$306.25
question
how do you calculate cross-price elasticity?
answer
(change in quantity/change of price of unit a) x (price of unit a/quantity), (dQ/dPa) x price of unit a/quantity
question
how do you calculate price elasticity of demand?
answer
dQD/dp x (price/quantity)
question
how do you calculate price elasticity of supply?
answer
dQs/dp x (price/quantity)
question
price elasticity of supply
answer
the responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product's price
question
what is marginal rate of technical substitution? (MRTS)
answer
the quantity of one input (such as kapital) has to be reduced when one extra unit of another input (like labor) is used, so that output remains constant
question
what changes when a unit tax is imposed?
answer
average cost, average variable cost, marginal cost, variable cost, cost
question
Suppose that Chantal's utility for goods X and Y can be represented as U = (X^1/2)(Y^1/2). Good X costs $20 per unit and good Y costs $10 per unit. Chantal has $1000 to spend on both goods. How much X and Y will Chantal consume if she intends to spend all her money?
answer
1) MRS = MRT > Y/X = 20/10 > Y=2X
2) 1000 = 20X + 10Y
1000 = 20X + 10(2X)
1000 = 40X > x = 25
2) 1000 = 20X + 10Y
1000 = 20X + 10(2X)
1000 = 40X > x = 25
question
Suppose that Chantal's utility for goods X and Y can be represented as U = (X^1/2)(Y^1/2). Good X costs $20 per unit and good Y costs $10 per unit. Chantal has $1000 to spend on both goods. If the price of X increases to $40 per unit, how much X will consume?
answer
1) Y/X = 40/10 > Y=4X
2) 1000 = 40X +10Y
1000 = 40x + 10(4X)
X* = 1000/80 = 12.5
2) 1000 = 40X +10Y
1000 = 40x + 10(4X)
X* = 1000/80 = 12.5
question
Suppose that Frank's utility for goods X and Y can be represented as U=(X^1/2)(Y^1/2). Good X costs $10 per unit and good Y costs $50 per unit. Frank has $1000 to spend on both goods. How much X and Y will Frank consume if he intends to spend all of his money?
answer
...
question
Suppose that Frank's utility for goods X and Y can be represented as U=(X^1/2)(Y^1/2). Good X costs $10 per unit and good Y costs $50 per unit. Frank has $1000 to spend on both goods. Keeping the goods constant, what if Frank's income increased? How much of X would Frank consume?
answer
...
question
What's an Engel curve?
answer
An Engel curve shows the relationship between the quantity demanded of a single good and income, holding prices constant
question
Nancy chooses between the consumption of good X and good Y. Her income is equal to $100 and she faces prices px = $10 and py = $5. Her utility function is U(X,Y) = (X^1/2)(Y^1/2). How would her Engel curves look for both good X and good Y?
answer
...
question
what does it mean when your MPl < APl?
answer
average is decreasing
question
what does it mean when your MPl > APl?
answer
average is increasing
question
MRTS (marginal rate of technical substitution)
answer
Say the function is q = AL^aK^b
1) MPl = dq/dL = Aa(L^a-1)K^b-1, MPk = dq/dK =AB(L^a)(K^b-1)
2) MRTS = (Aa(L^a-1)K^b)/(AB(L^a)(K^b-1))
3) MRTS = -aK/bL
1) MPl = dq/dL = Aa(L^a-1)K^b-1, MPk = dq/dK =AB(L^a)(K^b-1)
2) MRTS = (Aa(L^a-1)K^b)/(AB(L^a)(K^b-1))
3) MRTS = -aK/bL
question
Remy spends her weekly income of $120 on chocolate, q1, and shampoo, q2. Intially, when the prices are p1 = $4 = p2, she buys q1 = 20, and q2 = 10. After the price changes to p1 = $2 and p2 = $6, she purchases q1 =6 and q2 = 18. Use a revealed preference argument to discuss whether or not she is maximizing her utility before and after the price changes. Remy is
answer
not maximizing utility because the quantities of the goods she consumes move in the same direction as the price changes
question
What is income elasticity of demand?
answer
the sensitivity of the quantity demanded for a certain good to a change in the real income of consumers who buy this good. When there is a change in consumers' incomes, it causes a change in the quantity demanded of a good or service if all other factors remain the same.
question
what does it mean if the income elasticity of demand for a good or service is greater than 1?
answer
the good or service is considered a luxury and it's very elastic. the quantity increases as income increases
question
What is a Giffen good?
answer
a good for which an increase in the price raises the quantity demanded, such as bread and rice
question
What is Giffen's Paradox?
answer
Giffen's paradox refers to the possibility that standard competitive demand, with nominal wealth held constant, can be upward sloping, violating the law of demand.
question
what does it mean when income elasticity is less than 1, but above 0?
answer
It's a normal (necessary) good. There's an increase in demand when there's a rise with income. positive correlation
question
what does it mean when income elasticity of a service/good is below zero?
answer
it's an inferior good. Their demand drop as consumers' income rise.
question
what is accounting cost?
answer
The actual expenses incurred in production that shows up on a firm's accounting statements or records. only the explicit costs, which are costs for which direct payments are made
question
what is the economic cost?
answer
Economic cost is the sum of all explicit and implicit (opportunity) costs of the business firm.
question
Jill took $50K that she had in savings and started her own business. If left in investments, she would have earned $5000 this year. Jill also left a job that paid her $60K a year and plans on paying herself $40K. Materials and other labor costs will be $70K. The company is located in a building that Jill owns. She has an insurance and mortgage payment of $20K. She could have rented the building out for $30K. What are the accounting and economic costs?
answer
The accounting cost includes only the explicit costs, which are costs for which direct payments are made:
- Jill's wage, materials and labor costs, and the mortgage and insurance payment:
Accounting cost = Jill's wage + Material & Labor + Mortgage & Insurance = 40,000 + 70,000 + 20,000 = $130,000.....
The economic cost includes the accounting cost ($130,000) plus the implicit cost of net foregone wages ($60,000−$40,000) plus foregone interest earnings ($5,000) plus net foregone rental earnings ($30,000 − $20,000). Thus the economic cost is: 130,000 + (60,000 - 40,000) + 5000 + 10000 = $165000...
- Jill's wage, materials and labor costs, and the mortgage and insurance payment:
Accounting cost = Jill's wage + Material & Labor + Mortgage & Insurance = 40,000 + 70,000 + 20,000 = $130,000.....
The economic cost includes the accounting cost ($130,000) plus the implicit cost of net foregone wages ($60,000−$40,000) plus foregone interest earnings ($5,000) plus net foregone rental earnings ($30,000 − $20,000). Thus the economic cost is: 130,000 + (60,000 - 40,000) + 5000 + 10000 = $165000...
question
What is the principle distinction between explicit costs and implicit costs?
answer
Explicit costs are direct, out-of-pocket payments, while implicit costs are all opportunity costs.
question
If a firm buys a building so as to have office space for its workers, the monthly opportunity cost of the building is best measured as
answer
The firm should ignore how much it paid for the building, which is reflected by the mortgage payment. The monthly value of the building to the firm is determined by the monthly opportunity cost of the building, that is, the monthly rent the firm could collect.
question
The Shaffer Auto Company has purchased a large parcel of land for $1 million. The company recently discovered that the land is contaminated and is worthless to all possible buyers. The opportunity cost of the land is
answer
$0, The firm should ignore how much it paid for the land in making its decision. This land has no alternative use since it is worthless to all possible buyers.
question
how to find variable cost?
answer
A firm's variable cost is the production expense that changes with the quantity of output produced
question
A firm has two plants that produce identical output. The cost functions are
C1=372q−4q2+1.0q3
and
C2=372q−20q2+0.5q3.
Part 2
At what output level does the average cost curve of each plant reach its minimum?
C1=372q−4q2+1.0q3
and
C2=372q−20q2+0.5q3.
Part 2
At what output level does the average cost curve of each plant reach its minimum?
answer
The average cost of production at plant 1 is
AC1=372−4q+1.0q2.
Further, the derivative of average cost at plant 1 is
dAC1/dq=−4+2(1.0)q.
Average cost is minimized where dAC1/dq=0:
−4+2(1.0)q=0
4=2(1.0)q
4=2.0q
4/2.0=q
2=q.
Thus, average cost is minimized where output equals 2.
The average cost of production at plant 2 is
AC2 = 372 -20q +.5q^2.
Further, the derivative of average cost at plant 2 is
d/dq2 = -20 + 2(0.5)q.
Average cost is minimized where d/dq = 0:
-20 + 2(0.5)q = 0
20 = 2(.5)q
20 = 1.0q
20 = q.
Thus, average cost is minimized where output equals 20.
AC1=372−4q+1.0q2.
Further, the derivative of average cost at plant 1 is
dAC1/dq=−4+2(1.0)q.
Average cost is minimized where dAC1/dq=0:
−4+2(1.0)q=0
4=2(1.0)q
4=2.0q
4/2.0=q
2=q.
Thus, average cost is minimized where output equals 2.
The average cost of production at plant 2 is
AC2 = 372 -20q +.5q^2.
Further, the derivative of average cost at plant 2 is
d/dq2 = -20 + 2(0.5)q.
Average cost is minimized where d/dq = 0:
-20 + 2(0.5)q = 0
20 = 2(.5)q
20 = 1.0q
20 = q.
Thus, average cost is minimized where output equals 20.
question
How to find marginal cost? pt 2
answer
change in total cost / change in quantity
question
Suppose the cost (C) of producing two goods, x and y, can be represented as
C(x,y)=ax+by+cxy.
Consider whether the firm experiences economies of scope. If there are economies of scope, then which of the following must be true?
C(x,y)=ax+by+cxy.
Consider whether the firm experiences economies of scope. If there are economies of scope, then which of the following must be true?
answer
c < 0
question
Economies of scope exist between book publishing and magazine publishing if
answer
the cost of producing the magazines and books together is less than producing them separately. We say there are economies of scope if it is less expensive to produce goods jointly than seperately.
question
A firm produces two products: q1 and q2. The firm's total cost curve is given by: TC = $1000 + 4q1q2 + 20q1 +40q2. If q1 = 40 and q2 = 60, does this firm has economies of scope?
answer
No! The average total cost of production decreases as a result of increasing the number of different goods produced.
question
What does it mean when SC is positive?
answer
It's cheaper to produce goods together
question
What does it mean when SC is negative?
answer
...
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