question
Who is a rational consumer?
answer
A consumer that knows what he or she wants and takes advantage of an available opportunity.
question
What is utility?
answer
A measure of consumer satisfaction that the consumer derives from consumption of goods and services. It allows us to begin thinking about rational consumer choice. It allows us to understand behavior, but don't expect to measure in practice. (consumers use consumption to produce utility)
question
What is an individuals consumption bundle?
answer
The collection of all the goods and services consumed by that individual. It is a personal matter.
question
What is an individuals utility function?
answer
Gives the total utility generated by his or her consumption bundle.
question
What is a unit?
answer
A unit of utility.
question
What does the concept of utility function do?
answer
It is a way of representing the fact that when people consume, they take into account their preferences and tastes in a more or less rational way.
question
To maximize total utility, consumers must do what?
answer
They must focus on marginal utility.
question
What is marginal utility?
answer
The CHANGE in total utility of consuming one more unit.
question
How does a marginal utility curve act?
answer
It slopes downward because of diminishing marginal utility. At some point, consuming an additional unit will reduce the total utility.
question
How is marginal benefit curve created?
answer
By plotting points at the midpoint of the unit intervals. Not ALL marginal utility curves eventually become negative, but it is generally accepted to do so.
question
What shows all the consumption's available when all the income is spent?
answer
A budget line.
question
Do we need to consider all the consumption possibilities that lie within the budget line?
answer
No.
question
What is the determining factor that means a person will consume a consumption bundle on a budget line?
answer
A budget constraint.
question
What is the point on the budget line that maximizes total utility?
answer
A consumption bundle.
question
What is the optimal consumption budget ?
answer
The consumption bundle that maximizes a person's total utility given the budget constraint.
question
What does it mean when a person decides to consume more of one thing?
answer
That he will be consuming less of another.
question
Where is the optimal consumption bundle located on a curve?
answer
At the highest point.
question
Marginal analysis is used to gain insight into what kinds of questions?
answer
"How much" questions.
question
T/F. Budget constraints can affect all aspects of life, not just money.
answer
True. Closet space for example.
question
What requires that a person's total expenditures be no more than income?
answer
Budget constraint.
question
What are the set of consumption bundles that satisfy the budget constraint?
answer
The consumers consumption possibilities.
question
A consumer that spends all of his or her chooses a point on what?
answer
His or her budget line.
question
Why does the budget line slope downward?
answer
Because on a budget line a consumer must less of one item in order to consume more of another.
question
The consumption choice that maximizes total utility given the consumer's budget constraint is what?
answer
Optimal consumption bundle.
question
How do you find a consumers optimal consumption choice?
answer
By finding the total utility of each consumption bundle on his budget line and then choosing the bundle at which total utility is maximized (peak).
question
A marginal decision is one of what?
answer
How to spend the marginal dollar.
question
What is marginal utility per dollar?
answer
The additional utility of spending one more dollar on that good or service.
question
Marginal analysis solves what?
answer
The "how much" decision by weighing costs and benefits at the margin. (the benefit of doing a little big more versus the cost of doing a little bit more)
question
What is the objective of your consumption decision?
answer
To maximize the utility that your limited budget can deliver.
question
How do you find the marginal utility per dollar?
answer
Divide the marginal utility of an item by it's price.
question
Because of diminishing marginal utility, what happens to the marginal utility per pound as you consumer more?
answer
It goes down. Which means his marginal utility per dollar also goes down as the qty of good consumed goes up.
question
How do you determine an optimal consumption bundle?
answer
When the marginal utility per dollar is the same on both items.
question
What is the utility-maximizing principle of marginal analysis?
answer
At the optimal consumption bundle, the marginal utility per dollar for each item is the same. (this applies regardless of how many different kinds of items are consumed)
question
Whenever marginal utility per dollar is higher for one good than another good, the consumer should do what?
answer
Spend $1 more on the good with the higher marginal utility per dollar and $1 less on the other. By doing this, the consumer will move closer to his or her optimal consumption bundle.
question
What is a marginal product of an input?
answer
The marginal product of an input is the additional quantity of output that is produced by using one more unit of input.
question
How do you calculate the marginal product of labor?
answer
Change in qty of output/change in qty of labor
question
What is the significance of the slope of the total product curve?
answer
It is equal to the marginal product of labor. (rise over run)(change in the qty of output over the change in qty of labor)
question
What is the production function?
answer
The relationship between the quantity of the variable input (labor measured in # of workers) and the quantity of output (wheat measured in # of bushels) for a given qty of the fixed input.
question
What happens tot he total product curve when more and more workers are hired?
answer
It flattens out because the marginal product of labor declines.
question
What is the basis of diminishing returns?
answer
If "all things are held fixed", each successive unit of input will raise production by less than the last. (straight line)
question
Marginal product is the slope of what?
answer
...
question
If marginal product is less than average product, what happens?
answer
Then the average declines.
question
If marginal product is more than the average product, what happens?
answer
Then the average rises.
question
If the marginal product is equal to the average product, then what happens?
answer
Then the average does not change!
question
Why does the total cost curve get steeper as output increases?
answer
Because labor includes diminishing returns.
question
What are fixed costs?
answer
Costs that are independent of output. (rent, building, machinery) - often called "overhead costs"
question
What are variable costs?
answer
Costs that vary with output. (wages, utility, production materials)
question
A firms' _____ are costs that increase as qty. produced increases. These costs often show ____ illustrated by the increasingly steeper slope of the total cost curve.
answer
variable costs, diminishing marginal returns
question
A firm's ____ are costs that are incurred even if there is no output. In the short run, these costs _____ as production increases.
answer
fixed costs, do not change
question
A change in total cost divided by change in output is what?
answer
Marginal Costs
question
The sum of all costs that change as output changes divided by the number of units produced is what?
answer
Average Variable Costs (VC/Q)
question
What is the change in total cost divided by the change in qty?
answer
Marginal Costs (Change TC/Change Q)
question
What is total cost divided by qty of output?
answer
Average Total Cost (TC/Q)
question
The U-shape of the marginal cost curve is closely related to the hump-shape of the marginal product curve. The increasing portion of the marginal product curve corresponds with the decreasing portion of the marginal cost curve. The decreasing portion of the marginal product curve corresponds with the increasing portion of the marginal cost curve. The peak of the marginal product curve corresponds with the minimum of the marginal cost curve
answer
The marginal cost curve and the marginal product curve are inversely related.
question
Why does the marginal cost curve always intersect the average total cost curve at the minimum average total cost.
answer
...
question
When marginal cost is higher then Average Variable Cost, will AVC be increasing or decreasing?
answer
...
question
T/F. The ATC is increasing when the MC is increasing?
answer
False
question
What time period is one in which all costs are variable?
answer
Long Run
question
What determines the shape of the long-run average total cost curve?
answer
Scale (the size of a firms operation) is often
question
What is economics of scale?
answer
A proportionate saving in costs gained by an increased level of production. (cost goes down as production increases)
question
What is constant returns to scale?
answer
It occurs when increasing the number of inputs leads to an equivalent increase in the output. (Price stays the same)
question
What is dis-economics of scale?
answer
An economic concept referring to a situation in which economies of scale no longer function for a firm. Rather than experiencing continued decreasing costs per increase in output, firms see an increase in marginal cost when output is increased. (costs go up)
question
How do you determine the marginal utility per dollar?
answer
Divide the marginal utility of the item by it's cost. (Marginal utility / price)
question
What does the marginal utility per dollar mean?
answer
This gives you the amount of "utils" that is added to the total utility from the last dollar spent on that item. It is used as a comparison to determine which item the consumer would be better off spending more money on.
question
When a consumer buys more of one item because it has a higher marginal utility than the other item, what eventually happens?
answer
The marginal utility of that item will eventually fall (because of diminishing marginal utility), what that of the other item will rise. Eventually the marginal utility of the two items will equal.
question
What does it mean when a consumer is getting equal marginal utility for both items?
answer
The consumer is then maximizing utility!
question
When there is a graph showing a budget constraint, how do you determine which item to buy more of from a specific point?
answer
1. Calculate the price per item of both items
2. Divide the price per item from the marginal utility for that item
3. Compare the numbers. The largest number has the highest marginal utility.
* Ignore the rest of the graph!
2. Divide the price per item from the marginal utility for that item
3. Compare the numbers. The largest number has the highest marginal utility.
* Ignore the rest of the graph!
question
If the marginal utility of the two items being consumed aren't the same, what does that mean?
answer
That the consumer is not doing the best that he can. When the two numbers are the same, he is maximizing utility.
question
In equilibrium, what has to happen?
answer
Relative marginal utilities of goods will equal their relative prices.
question
What is an optimal consumption bundle?
answer
The consumption bundle that maximizes a consumer's total utility given his or her budget constraint.
question
How do you find the optimal consumption bundle?
answer
The point where the total utility is maximized.
question
How do you solve for an optimal consumption bundle from a bunch of numbers?
answer
1. First determine the consumption bundles that are affordable.
2. List those consumption bundles in a table
3. List total utility from each bundle is calculated
4. The largest "total utility" is the optimal consumption bundle
2. List those consumption bundles in a table
3. List total utility from each bundle is calculated
4. The largest "total utility" is the optimal consumption bundle
question
What is the process of turning inputs into outputs?
answer
Production
question
The cost structure of a firm depends on what?
answer
The nature of the production process.
question
What is the relationship between the quantity of inputs a firm uses and the quantity of output it produces?
answer
Production Function
question
What is a fixed input?
answer
An input whose quantity is fixed for a period and cannot be varied.
question
What is a variable input?
answer
An input whose quantity the firm uses can vary at any time.
question
What is the period in which all inputs can be varied?
answer
The Long Run.
question
What is the period in which at least one input is fixed?
answer
The Short Run.
question
What shows how the quantity of output depends on the quantity of the variable input for a given quantity of the fixed input?
answer
The Total Product Curve.
question
What is the marginal product of labor?
answer
The change in output that results from employing an added unit of labor.
question
What costs show a diminishing marginal returns based on the increasingly steeper slope of the total cost curve?
answer
Variable Costs.
question
Why do short-run and long-run average total cost curves differ?
answer
Because a firm can choose it's fixed costs in the long run.
question
What is average total cost?
answer
The sum of the average fixed costs and the average variable costs.
question
What shows how the quantity of output depends on the quantity of the variable input, for a given qty of the fixed input.
answer
Total product curve
question
On a total product curve, is the output located on the vertical or horizontal axis?
answer
Vertical axis. The variable output is measured on the horizontal axis.
question
What shows the production function graphically?
answer
The total product curve.
question
Why does the total product curve slope upward?
answer
Because more product is produced as more workers are employed. It also eventually starts flattening because the marginal product of labor declines as more and more workers are employed.
question
What is the marginal product of an input?
answer
It is the additional quantity of output that is produced by using one more unit of that input.
question
What is the slope of the total product curve equal to?
answer
The marginal product of labor. The slope of the total product curve is the change of output "rise" divided by the change in the qty of labor "run".
question
The marginal product of labor MPL is measured on what axis?
answer
Vertical
question
When are there diminishing returns to an input?
answer
When an increase in the qty of that input, all else held the same, reduces that inputs marginal product.
question
How does diminishing returns of labor affect the marginal product of labor MPL curve?
answer
It is negatively sloped.
question
The position of the total product curve of a given input depends on what?
answer
The quantities of other inputs. Both the total product curve and the marginal product curve of the remaining input will both shift.
question
To translate information about a firms production function into information about it's costs, we need to know how much the firm must pay for what?
answer
It's inputs.
question
What is a total cost curve?
answer
A curve that shows how total cost depends on the qty of output.
question
On a total cost curve, what is located on the vertical axis?
answer
The total costs. Output is measured on the horizontal axis.
question
Why does the total cost curve slope upward?
answer
Because the number of workers employed and hence the costs increases as the output increases. It gets steeper as output increases because of diminishing return of labor.
question
What is a tariff?
answer
A tax placed on imports.
question
What is the effect of tariffs?
answer
The effect of a tariff on a good is to reduce the goods consumption, increase domestic production and reduce imports.
question
What is comparative advantage?
answer
The ability to produce a good at a lower relative cost.
question
What is a quota?
answer
A limit on the amount of imports. It has the same impact on output and consumption as a tariff, except that the government does not collect any tax revenue.
question
What is the disadvantage of tariffs?
answer
Consumers lose more than others gain because of dead weight loss.
question
What is absolute advantage?
answer
Ability to produce a good with fewer inputs.
question
What is the law of comparative advantage?
answer
Nations are better off when they produce goods they have a comparative advantage in supplying.
question
When the US imports items, what happens to the price and US wages of the item imported?
answer
Importing and item lowers the US wages and lowers the US price for the item.
question
What is the opportunity cost of something?
answer
The amount that must be given up to pursue another decision.
question
What causes a country to import a product?
answer
That the world cost is less than the domestic cost for that item.
question
When a domestic market begins to export goods to and import goods from a foreign market, what must be the case?
answer
Producers in the exporting industry may be better off.
question
According to the marginal decision rule, if the marginal benefit is less than marginal cost, what should happen?
answer
The activity should be reduced.
question
Profit computed using explicit costs as the only measure of cost is what?
answer
Accounting profit.
question
What are explicit costs?
answer
A direct payment made to others when running a business.
question
How much revenue must a person make in order to not regret quitting their job to start a business?
answer
To not regret quitting her job, her economic profit must be at least zero.
question
Whenever marginal benefit is less than marginal cost, the decision maker should do ___ of the activity?
answer
Less.
question
What is the purpose of behavioral economics?
answer
To determine why people make decisions that appear to be irrational.
question
If a star quarterback turns down a multi-million-dollar offer from the NFL to return for his senior year of college, he may be exhibiting what type of irrational behavior?
answer
Misperception of opportunity costs.
question
Marginal Analysis is relevant for what type of decisions?
answer
The "how much".
question
What is a systematic mistake that leads to irrational decisions?
answer
Overconfidence
question
What is loss aversion?
answer
The tendency to strongly prefer avoiding losses to acquire gains.
question
If marginal costs remain constant, the marginal cost curve is what?
answer
Horizontal
question
What is accounting profit?
answer
The monetary costs that a firm pays out and the revenue it receives. It is the bookkeeping profit. (Revenue - costs) Accounting profit is ALWAYS higher than economic profit
question
What is economic profit?
answer
The difference between the revenue received from the sale of an output and the opportunity costs of the inputs used. (Always lower than accounting profit)
question
How do you figure accounting profit from economic profit?
answer
You add back in the implicit costs that were subtracted for the economic profit.
question
What is marginal analysis?
answer
Looking at the additional benefits of an activity compared to the additional costs.
question
What is marginal benefit?
answer
An additional benefit that a person obtains from consuming one more unit of an item.
question
A rational economic decision what?
answer
May or may not result in the largest economic payoff.
question
T/F. Do sunk costs affect economic profit?
answer
True.
question
What is status quo bias?
answer
A preference for the current state of affairs.
question
What is bounded rationality?
answer
When individuals make decision, their rationality is limited by the information they have, their cognitive limitations, and the time they have available to make the decision.
question
What is the habit of mentally assigning dollars to different accounts so that some dollars are worth more than others is what?
answer
Mental accounting (values some dollars more than others)
question
The ___ is the amount by which an additional unit of activity increases its cost?
answer
Marginal cost
question
T/F. The government should spend whatever amount is necessary to save a life?
answer
False
question
The amount by which an additional unit of an activity increases total cost is what?
answer
Marginal cost.
question
How do you calculate the slope of a budget line?
answer
Slope = Price of X/Price of Y
question
A consumers spending is restricted because of what?
answer
Budget constraint.
question
How to determine marginal utility per dollar?
answer
Divide the marginal utility of an item by its cost.
question
The income effect will play a greater role in a consumers spending if the good what?
answer
Accounts for a substantial share of the consumer's spending.
question
To say that you can't have too much of a good thing means that for any good that you enjoy....
answer
higher consumption will always lead to higher utility.
question
What are the rules of maximizing utility?
answer
1. All of the income must be spent.
2. The marginal utility is the same for both items.
2. The marginal utility is the same for both items.
question
How do you determine marginal utility per dollar when given cost per item and total utility?
answer
Divide the total utility of the item by the cost to get the marginal utility per dollar for each item produced. Then compare the marginal utility for each additional item.
question
The optimum consumption bundle should do what?
answer
Maximizes a person's utility given his budget constraint.
question
The substitution effect always involves a change in consumption in what?
answer
The opposite direction to the price change.
question
What is the income effect?
answer
The change in an individuals income and how that change will impact the quantity demanded of an item
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