Econ midterm II - Assignment Essays

question

total utility

answer

the total satisfaction you derive from consumption, either the total utility of a particular good or the total utility of consumption in general

question

marginal utility

answer

change in your total utility from one-unit change in your consumption of a good

question

law of diminishing marginal utility

answer

the more of a good a person consumes per period, the smaller the increase in total utility from consuming one or more unit

question

consumer equilibrium

answer

condition in which an individual’s budget is exhausted and the last dollar spent on each good yields the same marginal utility, utility is maximized

question

marginal valuation

answer

the dollar value of marginal utility derived from consuming each additional into of a good

question

consumer surplus

answer

difference between the most a consumer is willing to pay for a particular good and what they actually pay

question

indifference curve

answer

shows all combinations of goods that provide consumer with the same level of utility

question

marginal rate of substitution (MRS)

answer

indicates the number of “x” that you are willing to give up to get more units of “y,” neither gaining nor losing utility

question

law of diminishing marginal rate of substitution

answer

as your consumption of “x” increases, the number of “y” you are willing to give up to get one more unit of “x” decreases

-consumer will not give all of one good up

question

indifference map

answer

a graphical representation of a consumer’s taste

question

budget line

answer

depicts all possible combinations of “x” and “y,” given their prices and your budget

question

slope of a budget line

answer

the indifference curve indicates what you are willing to buy, the budget line shows what you are able to buy -> combine graphs to see what consumers are willing and able to buy

question

explicit costs

answer

opportunity cost of resources employee by a firms that takes the form of cash payments

question

implicit costs

answer

a firms opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment

question

accounting profit

answer

a firm’s total revenue – explicit costs

question

economic profit

answer

a firms total revenue – its explicit and implicit costs

question

normal profit

answer

the accounting profit earned when all resources earn their opportunity costs

question

variable resources

answer

that can be varied in the short run to increase or decrease production (labor)

question

fixed resources

answer

cannot be varied in the short run

question

short run

answer

period during which at least one of a firm’s resources is fixed

question

long run

answer

a period in which all resources under the firm’s control are variable

question

total product

answer

total output produced by a firm

question

production function

answer

relationship between the amount of resources employed and a firm’s total product

question

marginal product

answer

change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant

question

increasing marginal returns

answer

marginal product of a variable resource increases as each additional unit of that resource is employed

question

law of diminishing marginal returns

answer

as more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

question

fixed costs

answer

any production cost that is independent of the firm’s rate of output

question

variable costs

answer

any production cost that changes as the rate of the output changes

question

total costs

answer

the sum of fixed cost and variable cost (TC = FC + VC)

question

average variable cost

answer

variable cost / output (AVC = VC/q)

question

average total cost

answer

total cost divided by output (ATC= TC/q), the sum of the average fixed costs and average variable cost (ATC= AFC + AVC)

question

long-run average cost curve (planning curve)

answer

a curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies

question

economics of a scale

answer

forces that reduce a firm’s average cost as the scale of operation increase in the long run

question

diseconomies of a scale

answer

forces that may eventually increase a firm’s average cost as the scale of operation increase in the long run

question

constant long-run average cost

answer

a cost that occurs when long run average cost neither increases nor decreases with changes in the firm size

question

isoquant curve

answer

a curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output

question

characteristics of an isoquant curve

answer

-isoquants farther from the origin represent greater output rates

-isoquants have negative slopes because along a given isoquant, the quantity of labor employed inversely relates the to the quantity of capital employed

-isoquants do no intersect because each isoquant refers to a specific rate of output

-isoquants are usually convex to the origin

question

marginal rate of technical substitution

answer

the rate at which labor substitutes for capital without affecting output

question

isocost curve

answer

identifies all combinations of capital and labor the firm can hire for a given total cost

-slope = wages/rent

question

expansion path

answer

the line formed by connecting tangency points

question

commodity

answer

a standardized product, a product that does not differ across producers

-wheat, gold

question

price taker

answer

a firm that faces a given market price and whose quantity supplied as no effect on that price

question

marginal revenue

answer

change in total revenue from selling an additional unit (in perfect competition, marginal revenue = price)

question

golden rule of profit maximization

answer

to maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue = marginal cost

question

average revenue

answer

total revenue divided by output, average revenue = market price

- AR=TR/q

question

short-run firm supply

answer

curve that shows the quantity a firm supplies at each price in the short run, in perfect competition, the portion of a firms marginal cost curve that intersects and rises above the low point on its average variable cost curve

question

short-run industry supply curve

answer

curve that indicates the quantity supplied by the industry at each price in the short run, in perfect competition, the horizontal sum of each firms short run supply curve

question

constant-cost industry

answer

and industry that can expand or contract without affecting the long run per-unit cost of production, curve is horizontal

question

increasing-cost industry

answer

an industry that faces higher per-unit production costs as industry output expands in the long run, curve slopes upward

question

producer efficiency

answer

the condition that exists when market output is produced using the least-cost combination of inputs, minimum average cost in the long run

question

allocative efficiency

answer

the condition that exists when firms produce the output most preferred by consumers, marginal benefits = marginal cost

question

producer surplus

answer

a bonus for producers in the short run, the amount by which total revenue from production exceeds variable costs

question

social welfare

answer

overall well-being of people in the economy, maximized when marginal cost of production = marginal benefit to consumers

question

barrier to entry

answer

any impediment that prevents new firms from entering an industry and competing on an equal basis with existing firms

-legal restrictions, economies of a scale, control of essential resources

question

patent

answer

a legal barrier that grants its holder exclusive right to sell a product for 20 years from the date the patent was filed

-pharmaceuticals- takes 3-5 years to hit the market

question

licenses

answer

federal and state

question

natural monopoly

answer

one firm can supply market demand at a lower average cost per unit

question

innovation

answer

the process of turning invention into a marketable product

question

economies of a scale

answer

sometimes a monopoly occurs when a firm experiences economies of scale, as reflected by a downward sloping, long run average cost curve

Example: electricity, insulin

question

price maker

answer

a firm that must find the profit maximizing price when the demand curve for is output slopes downward

question

deadweight loss of monopoly

answer

net loss to society when a firm uses its market power to restrict output and increase price

question

rent seeking

answer

activities undertaken by individuals or firms to influence public policy in a way that will increase their incomes

question

price discrimination

answer

increasing profit by charging different groups of consumers different prices when the price difference are not justified by differences in costs

question

perfectly discriminating monopolists

answer

a monopolist who charges a different price for each unit sold (monopolist’s dream)

question

monopolistic competition

answer

a market structure with many firms selling products that are substitutes but different enough that each firms demands curve slopes downward, firm entry is relatively easy

question

characteristics of monopolistic competition

answer

-these firms are price makers

-barriers to entry are low

-enough sellers for there to be competition

-can act dependently or interdependently

question

product differentiation

answer

physical, location, services, product image

question

physical differentiation

answer

packaging, color, weight, visual appeal, advertising

question

location differentiation

answer

spatial, price, type of store product is sold in, location (customer convenience)

question

service differentiation

answer

free delivery, guarantees, speed/efficiency, WiFi

question

product image differentiation

answer

endorsements, all natural, image/brand, loyalty, environmentally friendly, charity

question

excess capacity

answer

the difference between a firms profit maximizing quantity and the quantity that minimizes average

question

oligopoly

answer

a market structure characterized by a few firms whose behavior is interdependent

question

undifferentiatied oligopoly

answer

an oligopoly that sells a commodity or a product that does not differ across supplier

question

differentiated oligopoly

answer

an oligopoly that sells products that differ across suppliers

question

collusion

answer

an agreement among firms to increase economic profit by dividing the market or fixing the prices

question

cartel

answer

a group of firms that agree to coordinate the production and pricing decisions to act like a monopolist

question

price leader

answer

a firm whose price is adopted by other firms in the industry

1 of 78

question

total utility

answer

the total satisfaction you derive from consumption, either the total utility of a particular good or the total utility of consumption in general

question

marginal utility

answer

change in your total utility from one-unit change in your consumption of a good

question

law of diminishing marginal utility

answer

the more of a good a person consumes per period, the smaller the increase in total utility from consuming one or more unit

question

consumer equilibrium

answer

condition in which an individual’s budget is exhausted and the last dollar spent on each good yields the same marginal utility, utility is maximized

question

marginal valuation

answer

the dollar value of marginal utility derived from consuming each additional into of a good

question

consumer surplus

answer

difference between the most a consumer is willing to pay for a particular good and what they actually pay

question

indifference curve

answer

shows all combinations of goods that provide consumer with the same level of utility

question

marginal rate of substitution (MRS)

answer

indicates the number of “x” that you are willing to give up to get more units of “y,” neither gaining nor losing utility

question

law of diminishing marginal rate of substitution

answer

as your consumption of “x” increases, the number of “y” you are willing to give up to get one more unit of “x” decreases

-consumer will not give all of one good up

question

indifference map

answer

a graphical representation of a consumer’s taste

question

budget line

answer

depicts all possible combinations of “x” and “y,” given their prices and your budget

question

slope of a budget line

answer

the indifference curve indicates what you are willing to buy, the budget line shows what you are able to buy -> combine graphs to see what consumers are willing and able to buy

question

explicit costs

answer

opportunity cost of resources employee by a firms that takes the form of cash payments

question

implicit costs

answer

a firms opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment

question

accounting profit

answer

a firm’s total revenue – explicit costs

question

economic profit

answer

a firms total revenue – its explicit and implicit costs

question

normal profit

answer

the accounting profit earned when all resources earn their opportunity costs

question

variable resources

answer

that can be varied in the short run to increase or decrease production (labor)

question

fixed resources

answer

cannot be varied in the short run

question

short run

answer

period during which at least one of a firm’s resources is fixed

question

long run

answer

a period in which all resources under the firm’s control are variable

question

total product

answer

total output produced by a firm

question

production function

answer

relationship between the amount of resources employed and a firm’s total product

question

marginal product

answer

change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant

question

increasing marginal returns

answer

marginal product of a variable resource increases as each additional unit of that resource is employed

question

law of diminishing marginal returns

answer

as more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

question

fixed costs

answer

any production cost that is independent of the firm’s rate of output

question

variable costs

answer

any production cost that changes as the rate of the output changes

question

total costs

answer

the sum of fixed cost and variable cost (TC = FC + VC)

question

average variable cost

answer

variable cost / output (AVC = VC/q)

question

average total cost

answer

total cost divided by output (ATC= TC/q), the sum of the average fixed costs and average variable cost (ATC= AFC + AVC)

question

long-run average cost curve (planning curve)

answer

a curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies

question

economics of a scale

answer

forces that reduce a firm’s average cost as the scale of operation increase in the long run

question

diseconomies of a scale

answer

forces that may eventually increase a firm’s average cost as the scale of operation increase in the long run

question

constant long-run average cost

answer

a cost that occurs when long run average cost neither increases nor decreases with changes in the firm size

question

isoquant curve

answer

a curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output

question

characteristics of an isoquant curve

answer

-isoquants farther from the origin represent greater output rates

-isoquants have negative slopes because along a given isoquant, the quantity of labor employed inversely relates the to the quantity of capital employed

-isoquants do no intersect because each isoquant refers to a specific rate of output

-isoquants are usually convex to the origin

question

marginal rate of technical substitution

answer

the rate at which labor substitutes for capital without affecting output

question

isocost curve

answer

identifies all combinations of capital and labor the firm can hire for a given total cost

-slope = wages/rent

question

expansion path

answer

the line formed by connecting tangency points

question

commodity

answer

a standardized product, a product that does not differ across producers

-wheat, gold

question

price taker

answer

a firm that faces a given market price and whose quantity supplied as no effect on that price

question

marginal revenue

answer

change in total revenue from selling an additional unit (in perfect competition, marginal revenue = price)

question

golden rule of profit maximization

answer

to maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue = marginal cost

question

average revenue

answer

total revenue divided by output, average revenue = market price

- AR=TR/q

question

short-run firm supply

answer

question

short-run industry supply curve

answer

curve that indicates the quantity supplied by the industry at each price in the short run, in perfect competition, the horizontal sum of each firms short run supply curve

question

constant-cost industry

answer

and industry that can expand or contract without affecting the long run per-unit cost of production, curve is horizontal

question

increasing-cost industry

answer

an industry that faces higher per-unit production costs as industry output expands in the long run, curve slopes upward

question

producer efficiency

answer

the condition that exists when market output is produced using the least-cost combination of inputs, minimum average cost in the long run

question

allocative efficiency

answer

the condition that exists when firms produce the output most preferred by consumers, marginal benefits = marginal cost

question

producer surplus

answer

a bonus for producers in the short run, the amount by which total revenue from production exceeds variable costs

question

social welfare

answer

overall well-being of people in the economy, maximized when marginal cost of production = marginal benefit to consumers

question

barrier to entry

answer

any impediment that prevents new firms from entering an industry and competing on an equal basis with existing firms

-legal restrictions, economies of a scale, control of essential resources

question

patent

answer

a legal barrier that grants its holder exclusive right to sell a product for 20 years from the date the patent was filed

-pharmaceuticals- takes 3-5 years to hit the market

question

licenses

answer

federal and state

question

natural monopoly

answer

one firm can supply market demand at a lower average cost per unit

question

innovation

answer

the process of turning invention into a marketable product

question

economies of a scale

answer

sometimes a monopoly occurs when a firm experiences economies of scale, as reflected by a downward sloping, long run average cost curve

Example: electricity, insulin

question

price maker

answer

a firm that must find the profit maximizing price when the demand curve for is output slopes downward

question

deadweight loss of monopoly

answer

net loss to society when a firm uses its market power to restrict output and increase price

question

rent seeking

answer

activities undertaken by individuals or firms to influence public policy in a way that will increase their incomes

question

price discrimination

answer

increasing profit by charging different groups of consumers different prices when the price difference are not justified by differences in costs

question

perfectly discriminating monopolists

answer

a monopolist who charges a different price for each unit sold (monopolist’s dream)

question

monopolistic competition

answer

a market structure with many firms selling products that are substitutes but different enough that each firms demands curve slopes downward, firm entry is relatively easy

question

characteristics of monopolistic competition

answer

-these firms are price makers

-barriers to entry are low

-enough sellers for there to be competition

-can act dependently or interdependently

question

product differentiation

answer

physical, location, services, product image

question

physical differentiation

answer

packaging, color, weight, visual appeal, advertising

question

location differentiation

answer

spatial, price, type of store product is sold in, location (customer convenience)

question

service differentiation

answer

free delivery, guarantees, speed/efficiency, WiFi

question

product image differentiation

answer

endorsements, all natural, image/brand, loyalty, environmentally friendly, charity

question

excess capacity

answer

the difference between a firms profit maximizing quantity and the quantity that minimizes average

question

oligopoly

answer

a market structure characterized by a few firms whose behavior is interdependent

question

undifferentiatied oligopoly

answer

an oligopoly that sells a commodity or a product that does not differ across supplier

question

differentiated oligopoly

answer

an oligopoly that sells products that differ across suppliers

question

collusion

answer

an agreement among firms to increase economic profit by dividing the market or fixing the prices

question

cartel

answer

a group of firms that agree to coordinate the production and pricing decisions to act like a monopolist

question

price leader

answer

a firm whose price is adopted by other firms in the industry

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