question
How do you find the optimal L and K in a basic cobb douglas function
answer
MPL/MPK = w/r, then switch into terms of Q for the cost function
question
How do you find the optimal L and K in a basic perfect subs/linear function?
answer
If MRTS>w/r, then K=0, if MRTS<w/r, the L=0, if MRTS=w/r, any combo
question
How do you find the optimal L and K in a basic perfect compliments problem?
answer
Same amount of K and L for each, so you use as much as you can
question
Cobb Douglas: Convex or Concave? What does this say about MRTS?
answer
Convex, diminishing MRTS means value of K compared to L decreases
question
What does it mean if w/r = 2?
answer
2 units of K are equal to 1 unit of L
question
What are Isoquants, How are they presented on the graph? What is their significance?
answer
Different combos of L & K that create the same quantity. Their slope is -MRTS. Help find optimal L and K
question
What are Isocosts, How are they presented on the graph? What is their significance?
answer
Different combos of L & K that impact the same cost. The slope is -w/r, tangent to MRTS. Help to find optimal L and K
question
What is opportunity cost
answer
The loss you faced doing one thing over the other
question
What is the first order condition?
answer
Setting the Δ of a function = 0 to find the critical point. This is why MR is set = to MC
question
What is the constraint line? What is its relevance?
answer
The constraint line indicates opportunity cost and the line in which your loss is the same. It helps to find the optimal choice of production when the point is on the constraint line and the level curve is tangent
question
How do you find the constraint line?
answer
You will be given a y= function and a comparative function. Isolate x1 and x2 in comparative. x1 will give the slope of the constraint line. The y function gives the level curve
question
How do you find the constraint line used in perfect compliment functions?
answer
Set x1=x2 and isolate x2. Then check to make sure values of x1 and x2 check out, and its on a kink. Once done, make sure point is also on constraint line.
question
What is a level curve?
answer
It is the Δ of x1/ Δ x2. When the slope of the level curve=the slope of the constraint line, it is the optimal mix
question
How is finding optimal mix different in linear functions?
answer
It can be anywhere on the constraint line, as the level curve is constant.
question
What occurs in economies of scale? How can you tell by looking at an equation or graph?*
answer
AC is decreasing
question
What occurs in diseconomies of scale? How can you tell by looking at an equation or graph?*
answer
AC is increasing
question
What are the different equations to find profit?
answer
Rev-Cost
q(p-AC)
pq-VC-FC
VP-FC
q(p-AC)
pq-VC-FC
VP-FC
question
What is the equation to find short-run costs? Marginal Cost? Average Cost? Marginal Profit? Marginal Revenue? Price?
answer
C=FC+q(VC)
ΔC/Δq
C/q
MR-MC
MR=p
p=ΔR/Δq
ΔC/Δq
C/q
MR-MC
MR=p
p=ΔR/Δq
question
What does area between MR and MC represent?
answer
Variable Profit (Without FC included)
question
What does area below MR represent?
answer
Total revenue (pq)
question
What is the second order condition?
answer
For a q to be a max, MR=MC, MR is increasing, and the point is above the minimum AC
question
What is the learning curve?
answer
Firms have the advantage by being in the business longer, as their production is running smoothly.
question
If MR>MC what do you do?
answer
Increase the q
question
If p<AVC, what do you do?
answer
Shutdown
question
What does area below MC represent?
answer
Variable Cost
question
How do you find the Supply Curve?
answer
Switch MC around to isolate q.
question
What is Market Supply?
answer
The supply function multiplied by however many firms there are.
question
What is elasticity? How do you find elasticity of Supply?
answer
The %change in y resulting from a %change in x. ΔSupply(p/q)
question
How can you find VC, min AVC, and AC from C
answer
C= 10q+.2q^2
VC= 10q+.2q^2
AVC= 10+.2q
min AC= 10
VC= 10q+.2q^2
AVC= 10+.2q
min AC= 10
question
What is Producer Surplus?
answer
Producer Surplus is the difference between market price and the lowest producers could sell the product for. PS=VP
question
What is Consumer Surplus?
answer
Consumer Surplus is the difference between market price and the highest a consumer would pay for the product.
question
What is Competitive Input Demand and when is it used?*
answer
Profit= pq-(wL+rK+FC)
question
What is the term if elasticity>1? <1? =1?
answer
elastic, inelastic, and unit elastic
question
What is the Cost function in terms of FC and VC? What is it for cost minimization in a Cobb Douglas
answer
C=FC+VC(q)
C=wL+rK
C=wL+rK
question
What is the MRS
answer
The slope of an indifference curve
question
What is Variable Profit on a graph? Profit? Consumer Surplus? Producer Surplus?
answer
VP=PS on a graph, first triangle under MC. Profit is the rectangle under p. CS is the top triangle in Supply and Demand.
question
How can you tell if a good is normal or inferior? How do you calculate elasticity?
answer
...
question
What is a normal good? Inferior good?
answer
Normal - as Income goes up so does consumption. Inferior - as Income goes up consumption goes down
question
How can you tell if price is too high or low using demand and supply
answer
If Supply>Demand, price is too high. Vice versa
question
What is deadweight loss
answer
Total surplus that is lost when not operating at equilibrium
question
What does supply show? Demand?
answer
Supply - what it costs to produce a good. Demand - price willing to be paid by consumer
question
What is efficiency? Total surplus?
answer
Efficiency is the operation at equilibrium. Total Surplus is what both consumers and producers gain at the production point.
question
What is implied in long term equilibrium?
answer
efficient outcome (no DWL) firms earn 0 profit, adjust inputs freely
question
What is said about Variable Profit if it is above AVC
answer
It is positive
question
What is the budget line
answer
...
question
in utility function if PX/PY<MRS?
answer
If MRS>, y=0
question
If demand is inelastic what happens to CS? Elastic
answer
Inelastic hurts more, price changes less (necessity like medicine) and therefor consumers lose more when they can't purchase, higher utility. If elastic, it matters less to them and CS goes up.
question
If the supply and demand curves for a product both decrease, then equilibrium:
answer
...
question
If supply is inelastic what happens to CS? Elastic
answer
Elastic it rises, inelastic it falls.
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