Econ-E321 Final Review - Assignment Essays

question

What are the four assumptions about consumer preference?

answer

Ordinal rankability (consumers can rank goods), more is better (consumers want more of any good), Transitivity (logical consistency in ranking), Consumers are willing to give up less as they receive more

question

Utility

answer

how satisfied consumers are

question

What does the utility function represent?

answer

it relates the goods consumed to the overall utility level

question

indifference curve

answer

plots all the possible consumption bundles with the same level of utility

question

what does MRS tell us about the consumer?

answer

MRS is the marginal rate of substitution and it describes how much of one good a consumer is willing to give up for another good

question

Marginal Utility

answer

additional utility received from another unit of a good

question

What does the steepness vs flatness of an indifference curve tell us about a consumer?

answer

A flatter curve means that a consumer is willing to give up more of good x for good y and a steeper curve is the opposite

question

what does the Perfect substitutes utility curve look like?

answer

The curve in a straight downward sloping line

question

what does the Perfect complements utility curve look like?

answer

an L shape

question

what are the three assumptions about income in consumer behavior?

answer

all goods are at a fixed price, consumers can buy as much as they want, consumers have a fixed amount of income

question

Budget constraint

answer

all possible consumption combinations of goods that someone can afford when all income is spent

question

Budget constraint formula

answer

income/Py - Px/Py(Qx)

question

what can change the budget constraint?

answer

A change in income will shift the budget constraint outward and a change in price will pivot the budget constraint along an axis

question

optimal consumption

answer

the point of tangency between a consumers indifference curve and their budget constraint line. Shows the max utility attainable within a budget

question

How is higher utility represented on a graph?

answer

The indifference curve shifts outward

question

income effect

answer

the change in consumption from a change in purchasing power (change in price)

question

What variables are held constant to isolate income effect?

answer

relative prices are held constant

question

Normal good

answer

consumption increases when income increases

question

Inferior good

answer

consumption decreases as income increases

question

Luxury good

answer

normal good with income elasticity greater than one

question

Income expansion path

answer

line that crosses through all optimal consumption points of different budgets

question

When is the income expansion path useful?

answer

Better for comparing relative quantities

question

Engel curve

answer

shows the points of an income expansion path on a graph with income on the y axis and a good on the x axis

question

When is the Engel useful?

answer

better for focusing on just one good

question

How can a demand curve be derived from indifference curves?

answer

By observing the quantity consumed at different prices

question

Why does the demand curve slope downward?

answer

Because at higher prices less is demanded

question

Substitution effect

answer

change in consumption resulting from a change in relative prices (new price same utility)

question

What variables are held constant to isolate substitution effect?

answer

purchasing power and utility are held constant

question

Giffen good

answer

a good for which an increase in the price raises the quantity demanded

question

If demand for one good increases when the price of another good falls, are the two goods complements or substitutes?

answer

complements

question

How does the market demand curve relate to individual demand curves?

answer

the market demand curve is the sum of all individual demand curves, the market demand curve must also be flatter than any individual demand curve

question

What does the shape of an indifference tell us about two goods

answer

The more convex an indifference curve is, the closer the two goods are to being complements. the flatter the curve the closer the two goods are to being substitutes

question

What is the difference between short and long run production?

answer

In the short run capital is fixed and labor changes. In the long run both inputs are variable

question

Production function

answer

relates the quantities of inputs that a producer uses to the quantity of output it obtains from them

question

variable costs

answer

change with output

question

Fixed costs

answer

independent of output

question

Isoquant

answer

curve representing combinations of inputs that produce the same output

question

What does it mean when isoquants are further from the origin?

answer

Further from the origin means a higher level of output

question

Why can't two isoquant cross?

answer

because if two isoquants did, it would imply that the same quantities of inputs yield two different quantities of output.

question

Marginal rate of technical substitution (MRTS)

answer

rate at which a firm can trade labor for capital and still produce the same level of output

question

What does the curvature of isoquants imply?

answer

straighter isoquants mean that labor and capital are substitutes and more curved means they are closer to complements

question

Isocost line

answer

line representing all input combinations that yield the same cost

question

What does the slope of the isocost line tell us?

answer

It describes how costly the inputs of labor and capital are

question

How does the income expansion path relate to a firm's total cost curve?

answer

it shows how input choices change with output

question

Law of diminishing returns

answer

if capital is constant, each additional worker produces less output than the last

question

Average product

answer

Quantity/Labor

question

Marginal Product

answer

change in quantity/change in labor

question

MRTSxy

answer

MPl/MPk

question

How does technological change affect a firm's output?

answer

A change in technology alters the combination of inputs required in the production process.

question

When is a production function said to have constant returns to scale, increasing returns to scale, or decreasing returns to scale?

answer

A decreasing returns to scale occurs when the proportion of output is less than the desired increased input during the production process. increasing returns to scale is the opposite

question

accounting cost

answer

cost of raw materials and capital equipment

question

economic cost

answer

opportunity cost, what you give up to make an economic decision

question

economic profit

answer

revenue - economic cost

question

sunk cost fallacy

answer

a framing effect in which people make decisions about a current situation based on what they have previously invested in the situation

question

Why is the fixed cost curve horizontal

answer

Because fixed costs do not change in the short run

question

Why does the variable cost curve have a positive slope?

answer

Because variable costs increase as production increases

question

Average Fixed Cost (AFC)

answer

FC/Q

question

Average Variable Cost (AVC)

answer

VC/Q

question

Average Total Cost (ATC)

answer

(FC + VC) / Q

question

Why do fixed costs not affect marginal cost?

answer

Because fixed costs remain the same for each additional unit of output

question

Why is a firm's short-run total cost greater than its long-run total cost?

answer

Because in the long run the firm can make more flexible adjustments

question

economies of scale

answer

costs rise more slowly than production

question

constant economies of scale

answer

costs rise at the same rate as output

question

diseconomies of scale

answer

costs rise more quickly than production

question

economies of scope

answer

lower costs as a result of simultaneous production of multiple products

question

perfectly competitive industry

answer

many firms, identical products, no barriers to entry

question

Why does a perfectly competitive firm face a horizontal demand curve?

answer

Because in a perfectly competitive industry all firms are price takers and are not able to influence the price of a product.

question

profit

answer

TR - TC

question

What is the relationship between the market price and marginal cost when a perfectly competitive firm is maximizing its profit

answer

In a perfectly competitive market, P = MC = MR

question

How does a firm decide to shut down?

answer

shut down if TR is less than VC

question

What is a perfectly competitive firm's short-run supply curve?

answer

The area of the MC curve that is above AVC

question

Producer surplus

answer

TR - VC

question

When will firms decide to enter an industry? When will a firm exit an industry?

answer

Firms will enter the industry until profit is driven to zero

question

When do economists say that a market is in a long-run competitive equilibrium?

answer

when P = MC = MR

question

increasing cost industry

answer

costs increase when competitors enter the industry

question

decreasing cost industry

answer

downward sloping long run supply, costs decrease when competitors enter the industry

question

Demand curve in a perfectly competitive industry

answer

the marginal revenue equals demand in a perfectly competitive industry

1 of 77

question

What are the four assumptions about consumer preference?

answer

question

Utility

answer

how satisfied consumers are

question

What does the utility function represent?

answer

it relates the goods consumed to the overall utility level

question

indifference curve

answer

plots all the possible consumption bundles with the same level of utility

question

what does MRS tell us about the consumer?

answer

MRS is the marginal rate of substitution and it describes how much of one good a consumer is willing to give up for another good

question

Marginal Utility

answer

additional utility received from another unit of a good

question

What does the steepness vs flatness of an indifference curve tell us about a consumer?

answer

A flatter curve means that a consumer is willing to give up more of good x for good y and a steeper curve is the opposite

question

what does the Perfect substitutes utility curve look like?

answer

The curve in a straight downward sloping line

question

what does the Perfect complements utility curve look like?

answer

an L shape

question

what are the three assumptions about income in consumer behavior?

answer

all goods are at a fixed price, consumers can buy as much as they want, consumers have a fixed amount of income

question

Budget constraint

answer

all possible consumption combinations of goods that someone can afford when all income is spent

question

Budget constraint formula

answer

income/Py - Px/Py(Qx)

question

what can change the budget constraint?

answer

A change in income will shift the budget constraint outward and a change in price will pivot the budget constraint along an axis

question

optimal consumption

answer

the point of tangency between a consumers indifference curve and their budget constraint line. Shows the max utility attainable within a budget

question

How is higher utility represented on a graph?

answer

The indifference curve shifts outward

question

income effect

answer

the change in consumption from a change in purchasing power (change in price)

question

What variables are held constant to isolate income effect?

answer

relative prices are held constant

question

Normal good

answer

consumption increases when income increases

question

Inferior good

answer

consumption decreases as income increases

question

Luxury good

answer

normal good with income elasticity greater than one

question

Income expansion path

answer

line that crosses through all optimal consumption points of different budgets

question

When is the income expansion path useful?

answer

Better for comparing relative quantities

question

Engel curve

answer

shows the points of an income expansion path on a graph with income on the y axis and a good on the x axis

question

When is the Engel useful?

answer

better for focusing on just one good

question

How can a demand curve be derived from indifference curves?

answer

By observing the quantity consumed at different prices

question

Why does the demand curve slope downward?

answer

Because at higher prices less is demanded

question

Substitution effect

answer

change in consumption resulting from a change in relative prices (new price same utility)

question

What variables are held constant to isolate substitution effect?

answer

purchasing power and utility are held constant

question

Giffen good

answer

a good for which an increase in the price raises the quantity demanded

question

If demand for one good increases when the price of another good falls, are the two goods complements or substitutes?

answer

complements

question

How does the market demand curve relate to individual demand curves?

answer

the market demand curve is the sum of all individual demand curves, the market demand curve must also be flatter than any individual demand curve

question

What does the shape of an indifference tell us about two goods

answer

The more convex an indifference curve is, the closer the two goods are to being complements. the flatter the curve the closer the two goods are to being substitutes

question

What is the difference between short and long run production?

answer

In the short run capital is fixed and labor changes. In the long run both inputs are variable

question

Production function

answer

relates the quantities of inputs that a producer uses to the quantity of output it obtains from them

question

variable costs

answer

change with output

question

Fixed costs

answer

independent of output

question

Isoquant

answer

curve representing combinations of inputs that produce the same output

question

What does it mean when isoquants are further from the origin?

answer

Further from the origin means a higher level of output

question

Why can't two isoquant cross?

answer

because if two isoquants did, it would imply that the same quantities of inputs yield two different quantities of output.

question

Marginal rate of technical substitution (MRTS)

answer

rate at which a firm can trade labor for capital and still produce the same level of output

question

What does the curvature of isoquants imply?

answer

straighter isoquants mean that labor and capital are substitutes and more curved means they are closer to complements

question

Isocost line

answer

line representing all input combinations that yield the same cost

question

What does the slope of the isocost line tell us?

answer

It describes how costly the inputs of labor and capital are

question

How does the income expansion path relate to a firm's total cost curve?

answer

it shows how input choices change with output

question

Law of diminishing returns

answer

if capital is constant, each additional worker produces less output than the last

question

Average product

answer

Quantity/Labor

question

Marginal Product

answer

change in quantity/change in labor

question

MRTSxy

answer

MPl/MPk

question

How does technological change affect a firm's output?

answer

A change in technology alters the combination of inputs required in the production process.

question

When is a production function said to have constant returns to scale, increasing returns to scale, or decreasing returns to scale?

answer

A decreasing returns to scale occurs when the proportion of output is less than the desired increased input during the production process. increasing returns to scale is the opposite

question

accounting cost

answer

cost of raw materials and capital equipment

question

economic cost

answer

opportunity cost, what you give up to make an economic decision

question

economic profit

answer

revenue - economic cost

question

sunk cost fallacy

answer

a framing effect in which people make decisions about a current situation based on what they have previously invested in the situation

question

Why is the fixed cost curve horizontal

answer

Because fixed costs do not change in the short run

question

Why does the variable cost curve have a positive slope?

answer

Because variable costs increase as production increases

question

Average Fixed Cost (AFC)

answer

FC/Q

question

Average Variable Cost (AVC)

answer

VC/Q

question

Average Total Cost (ATC)

answer

(FC + VC) / Q

question

Why do fixed costs not affect marginal cost?

answer

Because fixed costs remain the same for each additional unit of output

question

Why is a firm's short-run total cost greater than its long-run total cost?

answer

Because in the long run the firm can make more flexible adjustments

question

economies of scale

answer

costs rise more slowly than production

question

constant economies of scale

answer

costs rise at the same rate as output

question

diseconomies of scale

answer

costs rise more quickly than production

question

economies of scope

answer

lower costs as a result of simultaneous production of multiple products

question

perfectly competitive industry

answer

many firms, identical products, no barriers to entry

question

Why does a perfectly competitive firm face a horizontal demand curve?

answer

Because in a perfectly competitive industry all firms are price takers and are not able to influence the price of a product.

question

profit

answer

TR - TC

question

What is the relationship between the market price and marginal cost when a perfectly competitive firm is maximizing its profit

answer

In a perfectly competitive market, P = MC = MR

question

How does a firm decide to shut down?

answer

shut down if TR is less than VC

question

What is a perfectly competitive firm's short-run supply curve?

answer

The area of the MC curve that is above AVC

question

Producer surplus

answer

TR - VC

question

When will firms decide to enter an industry? When will a firm exit an industry?

answer

Firms will enter the industry until profit is driven to zero

question

When do economists say that a market is in a long-run competitive equilibrium?

answer

when P = MC = MR

question

increasing cost industry

answer

costs increase when competitors enter the industry

question

decreasing cost industry

answer

downward sloping long run supply, costs decrease when competitors enter the industry

question

Demand curve in a perfectly competitive industry

answer

the marginal revenue equals demand in a perfectly competitive industry

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