ECO308 Exam 2 - Assignment Essays

question

Total Effect

answer

substitution effect + income effect
Price of one good changes relative to another
1)one good becomes more expensive, other is less expensive
2)total purchasing power changes

question

Substitution effect

answer

change in quantity of a good when that good price changes, holding income and utility constant
buy more of the cheaper good

question

Income effect

answer

change in quantity demanded when theres a change in income, resulting from change in purchasing power
income doesnt actually change but consumer feels richer or poorer depending ∆ in purch power

question

Positive income effect

answer

As a result from gains from trade real incomes rise --> Consumers buy even more.

question

Giffen Goods

answer

goods that are exceptions to the law of demand where at very low prices, with consumers on low incomes and dependent upon the good for survival, as price rises, then so does demand

question

Compensating Variation

answer

the amount of money one would have to give a consumer to offset completely the harm from a price increase

question

Equivalent variation

answer

the amount of money one would have to take from a consumer to harm the consumer by as much as the price increase

question

CV =

answer

Old utility at new prices

question

EV =

answer

new utility at old prices

question

substitution effect
income effect

answer

A -> A"
A" -> B
Should reflect eachother on either side

question

Normality of a good is determined by

answer

Income effect

question

Labor-Leisure Model

answer

...

question

Production Assumptions

answer

- single good
- already chose which product
-Capital (K) and Labor (L)
- outputs increase with inputs
-Inputs characterized by diminishing marginal returns
- firm can employ unlimited capital and labor at fixed prices

question

Production Function

answer

Q = f(L,K)

question

Short Run vs Long run production

answer

SR - atleast one factor is fixed
LR - both factors are variable

question

Marginal Product of Labor (MPL) =

answer

(∆q)/(∆L)
- for continuous production function = (dq)/dL)

question

What MPL asks

answer

how much additional output does one additional worker provide
- we expect MPL to be positive but decreasing when capital is fixed
-increase at a decreasing rate

question

Long Run production outputs.. (isoquants)

answer

Can be the same at different variables
- isoquants show combinations of labor that produce the same amount of output
- slope of isoquant shows tradeoffs at any point

question

Slope of the Isoquant =

answer

MRTS

question

MRTS =

answer

-∆K/∆L = (MPL)/(MPK)
describes amount of K needed to keep output constant given 1 unit change in L

question

Isoquant shapes - straight v curved

answer

Straight - imply inputs are relatively substitutable
Curved - imply that inputs are relatively complementary

question

When MRTS is constant

answer

perfect substitutes - traded off inconstant ratio

question

Perfect complements

answer

must be used in a fixed ratio as a part of prod process

question

Returns to scale

answer

change in output when all inputs are increased or decreased in the same proportion

question

Constant returns to scale

answer

double inputs, doubles outputs

question

Increasing returns to scale (decreasing RTS)

answer

changing all inputs by same proportion changes output more than proportionally (less than proportionally)

question

Norms in RTS

answer

CRS is considered normal - still see IRS (learning by doing) and DRS (not accounting for all inputs, regulatory burden and compliance costs)

question

Cobb douglas Returns

answer

should always have diminishing returns

question

Explicit Costs

answer

direct, out of pocket payments for inputs

question

Implicit Costs

answer

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur

question

Sunk Costs

answer

should be ignored
form of fixed cost
not considered in a shutdown

question

Sunk Cost fallacy

answer

letting sunk costs affect a firms operating decisions

question

Short Run costs

answer

Fixed input so there is come form of fixed cost

question

Total Cost (q) =

answer

f(q) + a
VC + FC

question

Average Costs

answer

(AFC, AVC, ATC) any costs divided by quantity produced (q)

question

Marginal Cost =

answer

(∆TC)/ ∆Q = (∆FC)/∆q
(dTC)/(dq)

question

MC curve intersects ATC and AVC at their

answer

Minimums

question

Long Run Costs

answer

factors are variable
Minimize cost while meeting production target

question

Isocosts

answer

all combinations of inputs that result in the same total expenditure

question

Costs are minimized at

answer

MRTS = w/r

question

Long run expansion path

answer

shows long-run total cost curve by plotting lowest cost association with each amount of total output

question

Where production is optimal (costs minimized without compromising production)

answer

Where isocost is tangential to isoquant

question

tangency condition

answer

MRTS = MPL/MPK = w/r
MPK/r = MPL/w

question

Cost Minimizing Bundle steps

answer

1 - Find MRTS = MPL/MPK
2 - find optimal capital and labor ratio (MRTS = w/r)
3 - Use production function and target output to solve for optimal bundle - use optimal ratio from S2 to substitute in function
4 - calculate total cost

question

Short Run vs Long run expansion paths

answer

LR - s shaped
SR - straight (Horizontal)

Long run marginal cost curve will be flatter than SRMC in general

question

Economies of Scale

answer

Costs rise more slowly than production
LRMC < LRATC

question

Constant Economies of scale

answer

costs rise at the same rate as output
LRMC = LRATC

question

Diseconomies of scale

answer

costs rise more quickly than production
LRMC > LRATC

question

U shape of LRATC implies

answer

cost per unit falls (economies of scale) and eventually as output rises considerably, diseconomies of scale take hold

question

Causing factors of diseconomies of scale

answer

Overcrowding, over-utilization of capital, org complexity

question

Returns to scale vs economies of scale

answer

RTS = how prod changes when all inputs are changed by a common factor

question

Economies of scope

answer

refers to simultaneous production of multiple products at a lower cost than if a firm made each separately

question

Why a firm might observe economies of scope

answer

Flexible inputs or production processes
expertise across several products/services (eg - life and auto insurance)

question

Perfect Competition Characteristics

answer

Many firms, no product differentiation, no barriers to entry

question

Monopolistic Comp Characteristics

answer

Many firms, product differentiation, no barriers

question

Oligopoly characteristics

answer

Few firms, possible prod differentiation, some barriers to entry

question

5 conditions of perfect competition

answer

1 - homogenous product, consumers indifferent
2 - many firms
3 - no barriers to entry OR exit - both long run
4 - complete info
5 - no transaction costs

question

PC firms are

answer

price takers
no one firm can affect the market price by its outputs or price it buys inputs

question

Shutdown Rule - short run

answer

If TR ≥ TVC then the firm will stay open
If TR<TVC the firm will shutdown
AKA if AVC curve is above the P,MR then it will shutdown

question

Short Run supply curve

answer

Marginal Cost curve

question

Shutdown rule continuted

answer

Firm will only produce when P> min(AVC)

question

All long run perfectly competitive firms earn

answer

zero economic profit, but they will never earn negative economic profit

question

AVC and ATC are always

answer

U shaped

question

Gap between ATC and AVC curves is the ___ which gets ___ as production increases

answer

AFC, gets closer together

question

MC always intersects the __ and __ at their lowest points

answer

AVC ATC

question

The long run TC curve is always ____ to the SR TC curve. This implies that the ____ will always envelope the _____.

answer

less than or equal, LRATC curve, SRATC curve

question

LRMC =

answer

derivative of LRTC

question

check for economies of scale

answer

∫LRATC = LRATC'
FInd Q
∫LRATC'
see if x>0
if so Q = minimum

question

Where is a firm maximizing profit

answer

MR =TC'=P

question

Minimum Price needed to produce?

answer

AVC'
Check SOC to see its >0
Plug back into AVC

question

Why firms continue producing when economic profit is zero

answer

Because its economic profit so it is still better than their next best option -> and could still be making an accounting profit depends on the firm

question

Income effect (on graph)

answer

B - A"

question

Substitution Effect (on graph)

answer

A" -A

question

Total Effect (on graph)

answer

B -A

1 of 74

question

Total Effect

answer

substitution effect + income effect
Price of one good changes relative to another
1)one good becomes more expensive, other is less expensive
2)total purchasing power changes

question

Substitution effect

answer

change in quantity of a good when that good price changes, holding income and utility constant
buy more of the cheaper good

question

Income effect

answer

change in quantity demanded when theres a change in income, resulting from change in purchasing power
income doesnt actually change but consumer feels richer or poorer depending ∆ in purch power

question

Positive income effect

answer

As a result from gains from trade real incomes rise --> Consumers buy even more.

question

Giffen Goods

answer

goods that are exceptions to the law of demand where at very low prices, with consumers on low incomes and dependent upon the good for survival, as price rises, then so does demand

question

Compensating Variation

answer

the amount of money one would have to give a consumer to offset completely the harm from a price increase

question

Equivalent variation

answer

the amount of money one would have to take from a consumer to harm the consumer by as much as the price increase

question

CV =

answer

Old utility at new prices

question

EV =

answer

new utility at old prices

question

substitution effect
income effect

answer

A -> A"
A" -> B
Should reflect eachother on either side

question

Normality of a good is determined by

answer

Income effect

question

Labor-Leisure Model

answer

...

question

Production Assumptions

answer

question

Production Function

answer

Q = f(L,K)

question

Short Run vs Long run production

answer

SR - atleast one factor is fixed
LR - both factors are variable

question

Marginal Product of Labor (MPL) =

answer

(∆q)/(∆L)
- for continuous production function = (dq)/dL)

question

What MPL asks

answer

how much additional output does one additional worker provide
- we expect MPL to be positive but decreasing when capital is fixed
-increase at a decreasing rate

question

Long Run production outputs.. (isoquants)

answer

Can be the same at different variables
- isoquants show combinations of labor that produce the same amount of output
- slope of isoquant shows tradeoffs at any point

question

Slope of the Isoquant =

answer

MRTS

question

MRTS =

answer

-∆K/∆L = (MPL)/(MPK)
describes amount of K needed to keep output constant given 1 unit change in L

question

Isoquant shapes - straight v curved

answer

Straight - imply inputs are relatively substitutable
Curved - imply that inputs are relatively complementary

question

When MRTS is constant

answer

perfect substitutes - traded off inconstant ratio

question

Perfect complements

answer

must be used in a fixed ratio as a part of prod process

question

Returns to scale

answer

change in output when all inputs are increased or decreased in the same proportion

question

Constant returns to scale

answer

double inputs, doubles outputs

question

Increasing returns to scale (decreasing RTS)

answer

changing all inputs by same proportion changes output more than proportionally (less than proportionally)

question

Norms in RTS

answer

CRS is considered normal - still see IRS (learning by doing) and DRS (not accounting for all inputs, regulatory burden and compliance costs)

question

Cobb douglas Returns

answer

should always have diminishing returns

question

Explicit Costs

answer

direct, out of pocket payments for inputs

question

Implicit Costs

answer

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur

question

Sunk Costs

answer

should be ignored
form of fixed cost
not considered in a shutdown

question

Sunk Cost fallacy

answer

letting sunk costs affect a firms operating decisions

question

Short Run costs

answer

Fixed input so there is come form of fixed cost

question

Total Cost (q) =

answer

f(q) + a
VC + FC

question

Average Costs

answer

(AFC, AVC, ATC) any costs divided by quantity produced (q)

question

Marginal Cost =

answer

(∆TC)/ ∆Q = (∆FC)/∆q
(dTC)/(dq)

question

MC curve intersects ATC and AVC at their

answer

Minimums

question

Long Run Costs

answer

factors are variable
Minimize cost while meeting production target

question

Isocosts

answer

all combinations of inputs that result in the same total expenditure

question

Costs are minimized at

answer

MRTS = w/r

question

Long run expansion path

answer

shows long-run total cost curve by plotting lowest cost association with each amount of total output

question

Where production is optimal (costs minimized without compromising production)

answer

Where isocost is tangential to isoquant

question

tangency condition

answer

MRTS = MPL/MPK = w/r
MPK/r = MPL/w

question

Cost Minimizing Bundle steps

answer

question

Short Run vs Long run expansion paths

answer

LR - s shaped
SR - straight (Horizontal)

Long run marginal cost curve will be flatter than SRMC in general

question

Economies of Scale

answer

Costs rise more slowly than production
LRMC < LRATC

question

Constant Economies of scale

answer

costs rise at the same rate as output
LRMC = LRATC

question

Diseconomies of scale

answer

costs rise more quickly than production
LRMC > LRATC

question

U shape of LRATC implies

answer

cost per unit falls (economies of scale) and eventually as output rises considerably, diseconomies of scale take hold

question

Causing factors of diseconomies of scale

answer

Overcrowding, over-utilization of capital, org complexity

question

Returns to scale vs economies of scale

answer

RTS = how prod changes when all inputs are changed by a common factor

question

Economies of scope

answer

refers to simultaneous production of multiple products at a lower cost than if a firm made each separately

question

Why a firm might observe economies of scope

answer

Flexible inputs or production processes
expertise across several products/services (eg - life and auto insurance)

question

Perfect Competition Characteristics

answer

Many firms, no product differentiation, no barriers to entry

question

Monopolistic Comp Characteristics

answer

Many firms, product differentiation, no barriers

question

Oligopoly characteristics

answer

Few firms, possible prod differentiation, some barriers to entry

question

5 conditions of perfect competition

answer

1 - homogenous product, consumers indifferent
2 - many firms
3 - no barriers to entry OR exit - both long run
4 - complete info
5 - no transaction costs

question

PC firms are

answer

price takers
no one firm can affect the market price by its outputs or price it buys inputs

question

Shutdown Rule - short run

answer

If TR ≥ TVC then the firm will stay open
If TR<TVC the firm will shutdown
AKA if AVC curve is above the P,MR then it will shutdown

question

Short Run supply curve

answer

Marginal Cost curve

question

Shutdown rule continuted

answer

Firm will only produce when P> min(AVC)

question

All long run perfectly competitive firms earn

answer

zero economic profit, but they will never earn negative economic profit

question

AVC and ATC are always

answer

U shaped

question

Gap between ATC and AVC curves is the ___ which gets ___ as production increases

answer

AFC, gets closer together

question

MC always intersects the __ and __ at their lowest points

answer

AVC ATC

question

The long run TC curve is always ____ to the SR TC curve. This implies that the ____ will always envelope the _____.

answer

less than or equal, LRATC curve, SRATC curve

question

LRMC =

answer

derivative of LRTC

question

check for economies of scale

answer

∫LRATC = LRATC'
FInd Q
∫LRATC'
see if x>0
if so Q = minimum

question

Where is a firm maximizing profit

answer

MR =TC'=P

question

Minimum Price needed to produce?

answer

AVC'
Check SOC to see its >0
Plug back into AVC

question

Why firms continue producing when economic profit is zero

answer

Because its economic profit so it is still better than their next best option -> and could still be making an accounting profit depends on the firm

question

Income effect (on graph)

answer

B - A"

question

Substitution Effect (on graph)

answer

A" -A

question

Total Effect (on graph)

answer

B -A

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