question
Total Net Utility
answer
total utility - total expenditure or willingness to pay- actually paid
question
Marginal Net Utility
answer
marginal utility - price. consumer goal is to maximize tnu
question
Optimal Purchase Rule
answer
In order to maximize total net utility, marginal utility = price
question
Marginal Utility > Price
answer
Buy more of a good
question
Marginal Utility < Price
answer
Buy less of a good
question
Marginal Utility Curve and Demand Curve
answer
Marginal utility = demand curve for consumer
question
Behavioral Economics
answer
-consumers do not always act rationally
-real cost of a purchase = its opportunity cost
-consumers surplus= total utility ($) - total expenditure
-below demand curve line
-real cost of a purchase = its opportunity cost
-consumers surplus= total utility ($) - total expenditure
-below demand curve line
question
Inferior Good
answer
Things you need- basic
question
Normal Good
answer
Things you use extra money to spend on- luxury
question
Market Demand
answer
Horizontal sum of individual demand curve
question
Law of Demand
answer
-as price decreases, quantity demanded in a market increases
- market demand slopes downward to the right
- market demand slopes downward to the right
question
Price Elasticity of Demand
answer
Percentage change in quantity demanded divided by percentage change in price
question
Elastic Demand
answer
-percent change is greater than quantity demanded
-demand curve is horizontal, elasticity = infinity
-demand curve is horizontal, elasticity = infinity
question
Inelastic Demand
answer
-percent change is less than quantity demanded
-demand curve is vertical, elasticity= 0
-demand curve is vertical, elasticity= 0
question
Unit-elastic
answer
Price can rise while revenue stays unaffeccted
question
Price Elasticity of Demand Formula
answer
(% change in Q.D.)/(% change in price)
question
Midpoint Method Formula
answer
[(Q2 - Q1)/(Q1+Q2)/2]/[(P2-P1)/(P1+P2)/2]
question
Total Expenditure
answer
Price x Quantity
question
Total Revenue
answer
Price x Quantity
question
When Demand is Elastic
answer
-price decrease leads to increase in total revenue
-price increase leads to decrease in total revenue
-when change in price and change in total revenue go in same direction, demand is elastic
-price increase leads to decrease in total revenue
-when change in price and change in total revenue go in same direction, demand is elastic
question
When Demand is Inelastic
answer
-decrease in price leads to decrease in total revenue
-increase in price leads to increase in total revenue
-increase in price leads to increase in total revenue
question
When Demand is Unitelastic
answer
Decrease/increase in price leads to no change in total revenue
question
Determinants of Elasticity of Demand
answer
1. nature of the good- luxuries ( elastic demand ) necessities ( inelastic demand )
2. availability of close substitutes
3. share of consumer budget- more expensive, more elastic demand
4. passage of time after a price change
2. availability of close substitutes
3. share of consumer budget- more expensive, more elastic demand
4. passage of time after a price change
question
Income Elasticity of Demand
answer
% change in Q.D./ % change in income
-income elasticity is pos, good is normal
-income elasticity is neg, good is inferior
-income elasticity is pos, good is normal
-income elasticity is neg, good is inferior
question
Cross Elasticity of Demand
answer
(% change in QD of good X)/(% change in $ of good Y)
-cross elasticity is pos, X & Y are substitutes
-cross elasticity is neg , X & Y are complimentary
-cross elasticity is pos, X & Y are substitutes
-cross elasticity is neg , X & Y are complimentary
question
Price Elasticity of Supply
answer
% change in Q.S/ % change in price
question
Short Run Costs
answer
Any time period in which a firm has a commitment it can not get out of
question
Long Run Costs
answer
Firms commitment has ended and they are free to make any decision
question
Fixed Cost
answer
Amount of cost does not change when output changes
question
Variable Cost
answer
Changes as output changes
question
Production with One Variable Input (short run)
answer
-only one input is variable
-quantities of all other inputs will not be changed
-quantities of all other inputs will not be changed
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Average Physical Product
answer
Total Physical Product/ Quantity of input
question
Marginal Physical Product
answer
Change in output (TPP) resulting from a one unit increase in input
question
Law of Diminishing Marginal Return
answer
Increasing amount of any one input, holding amounts of all other inputs constant, ultimately leads to lower marginal return to the expanding input
question
Marginal Revenue Product
answer
...
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All cost relationships
answer
TC = TF C + TVC or AC x Q
AFC = TFC/Q
AVC = TVC/Q
AC = TC/Q or AFC + AVC
TVC = TC - TFC or AVC X Q
TFC = AFC X Q or TC- TVC
AFC = TFC/Q
AVC = TVC/Q
AC = TC/Q or AFC + AVC
TVC = TC - TFC or AVC X Q
TFC = AFC X Q or TC- TVC
question
What happens when there is a rise in fixed cost and optimum quantity and price?
answer
(fixed cost rises by $10)
-total cost rises by $10 for each output level
-total profit goes down by $10
-profit maximizing output and price remain the same
-total cost rises by $10 for each output level
-total profit goes down by $10
-profit maximizing output and price remain the same
question
Net benefit
answer
goal- maximize net benefit
net benefit = total benefit - total cost
- use marginal approach (MB=MC)
net benefit = total benefit - total cost
- use marginal approach (MB=MC)
question
What is the slope of the total cost curve?
answer
Marginal cost
- slope of TR = slope of TC when output quantity is greatest or MR = MC
- slope of TR = slope of TC when output quantity is greatest or MR = MC
question
What is the slope of total revenue?
answer
Marginal revenue - change in y over change in x
question
Optimal (profit maximizing) quantity of output
answer
-where marginal profit = 0 - aka MR = MC
-if there is not a quantity where MR=MC select highest output quantity where MR > MC
-if there is not a quantity where MR=MC select highest output quantity where MR > MC
question
Marginal Revenue < Marginal Cost
answer
Firm should decrease output or raise price- total profit will increase
question
Marginal Revenue > Marginal Cost
answer
Firm should increase output or lower price- total profit will increase
question
Marginal Profit
answer
-the addition to total profit resulting from one more unit of output
-slope of total profit curve
-marginal profit = change in total profit/ change in quantity of output
-marginal profit = MR - MC
-indicates to owners whether increasing costs is optimal
-slope of total profit curve
-marginal profit = change in total profit/ change in quantity of output
-marginal profit = MR - MC
-indicates to owners whether increasing costs is optimal
question
Marginal Analysis
answer
profit maximization
question
Marginal Cost
answer
change in total cost/ change in quantity
question
Marginal Revenue
answer
change in TR/ change in Q
question
Average Revenue
answer
price or total revenue/ quantity
question
Total Cost
answer
total fixed cost + total variable cost
question
Economic Profit < 0
answer
revenue generated by firm is not enough to cover all opportunity costs- business will go under if changes are not made by firm
question
Economic Profit = 0
answer
firm covers all opportunity costs, total revenue is just enough
question
Economic Profit > 0
answer
firm is covering all opportunity costs and has some revenue left over to reward owners
question
Economic profit vs accounting profit looking at total revenue
answer
TR=$100
-monetary outlay for purchases inputs = 40
-opportunity cost of owners inputs = 60
-accounting profit = TR - O.C. of inputs
=100 - 60
- economic profit = TR - (O.C. = monetary outlay)
= 100 (60 + 40)
-monetary outlay for purchases inputs = 40
-opportunity cost of owners inputs = 60
-accounting profit = TR - O.C. of inputs
=100 - 60
- economic profit = TR - (O.C. = monetary outlay)
= 100 (60 + 40)
question
Accounting Profit
answer
-total profit = total revenue - total cost
- total revenue = price x quantity sold
- total revenue = price x quantity sold
question
Firm selects quantity
answer
market determines price- because of demand curve
question
Firm selects price
answer
quantity sold is up to consumers because of demand curve
question
Optimal decision
answer
one, among all possible decisions, which best achieves the decision makers goal
question
MRP < price of input
answer
use less input
question
MRP > price of input
answer
use more input
question
Optimal (profit maximizing) quantity of an input
answer
quantity where MRP = price of an input. If there is no where MRP= price use it where MRP > price
question
Determining how much of the variable the firm should use
answer
-assume firms goal is to maximize profit where profit = total revenue - total cost then use marginal analysis (MR=MC)
question
Price elasticity of demand is defined as
answer
percentage change in quantity demanded divided by percentage change in price
question
If the price of gasoline rises by 20 percent and consumption of gasoline falls 5 percent,
answer
demand is inelastic.
question
Demand is said to be elastic when percentage changes in quantity demanded are
answer
higher than the percentage changes in price
question
A demand curve is described as perfectly inelastic if
answer
the same quantity is purchased regardless of price
question
A demand curve is described as perfectly elastic if
answer
any quantity can be sold at a given price
question
Elasticity provides a guide to both
answer
responsiveness of quantity demanded to a change in price and change in revenue as price changes
question
Total expenditure by a buyer is equal to the
answer
price times quantity demanded at any point along the demand curve
question
A price cut will decrease the revenue a firm receives if the demand for its product is
answer
inelastic
question
Regarding demand elasticity, which of the following statements is correct?
answer
If demand for seller's product is elastic, a price increase will decrease total revenue
question
John's Bait Shop was surprised to learn that when it raised prices by 10 percent, total revenue was unaffected. This is because the elasticity for bait is
answer
unit elastic
question
A 10 percent increase in the cost of restaurant meals, which are a luxury, will most likely
answer
decrease the purchase of meals by more than 10 percent.
question
If both matches and automobile prices increase by 10 percent, consumers will likely buy
answer
approximately the same quantity of matches and fewer automobiles
question
A relatively large increase in the cost of electricity would like
answer
increase the use of gas and decrease the use of electricity after a time lapse
question
The demand for a new effective drug for the cure of AIDS would most likely be
answer
highly inelastic
question
The relationship between a change in consumer income and a resulting change in demand for a good is
answer
income elasticity of demand
question
If two goods are complements, their cross elasticity of demand will normally be
answer
a negative number
question
If the cross elasticity of demand for potato chips and pretzels equals 1.5,
answer
potato chips and pretzels must be substitutes
question
The short run is the time period during which
answer
some of the firm's input decisions are constrained by previous commitments
question
In the long run,
answer
all of the firm's input quantities are variable
question
Which of the following observations is true?
answer
In the long run, more costs become variable
question
The case of production with a single variable input is analogous to
answer
a controlled laboratory experiment in which the scientist permits one variable to change at a time
question
The total physical product of an input is the same thing as its
answer
output
question
The marginal physical product of an input is the
answer
addition to output from using one more unit of an input
question
In which zone does the total physical product reach it maximum value?
answer
Diminishing marginal return
question
A total product curve shows the
answer
relationship between units of inputs and total output
question
Which of the following statements is equivalent to the law of diminishing marginal return
answer
Too many cooks spoil the broth
question
The marginal revenue product of an hour of labor used in steel production is equal to
answer
its marginal physical product times the price of steel
question
The rule for the optimal use of any input says that
answer
when MRP is greater than price, it pays to expand resource use
question
Which of the following indicates an input is being overused relative to the optimal level?
answer
MRP < P of input
question
The optimum quantity of an input occurs when
answer
marginal revenue product equals input price
question
In arriving at the quantity of output and price of its product, a company
answer
Chooses either output or price, and consumer demand determines the other
question
The difference between economic profit and accountant's definition of profit is that an economist's total cost counts the ____ of inputs
answer
opportunity cost
question
Ben quit his job as an economics professor to become a golf professional. He gave up his salary ($40,000) and invested his retirement fund of $50,000 (which was earning 10 percent interest) in this venture. After all expenses, his net winnings (profit) were $45,000. Ben's economic profits were
answer
zero
question
For any firm, price always equals
answer
Average revenue
question
Marginal revenue is the addition to a firm's revenue from
answer
a one-unit change in output
question
Company A manufactures a single automotive component. It had total revenue of $100,000 and an economic profit of $20,000. What is the price of the component it manufactures?
answer
($100,000/quantity sold)
question
To find its profit-maximizing output level, a firm should operate where
answer
MC = MR
question
If MC > MR,
answer
output should be reduced
question
If at an output of 4,000 units Sloan Company is making an economic profit and marginal profit is $20 per unit, the firm should
answer
increase output until marginal profit falls to zero
question
Once the profit-maximizing output where MR = MC is determined, price is set by
answer
the demand curve
question
If fixed cost rises,
answer
The profit maximizing level of output would not change
question
To determine total cost, the business person must know
answer
input quantity and input price
question
Marginal cost is the
answer
change in total cost resulting from the production of one more unit of output
question
On Naomi's pig farm, Naomi hires all the labor used, grows all the grain fed to the pigs, and owns the barn. The costs used to calculate the total cost curve include
answer
the cost of labor, the cost of growing grain, and the opportunity cost of the barn
question
Which of the following is a fixed cost?
a. electricity
b.worker bonuses
c. mortgage on the building
d. steel to produce refrigerators
a. electricity
b.worker bonuses
c. mortgage on the building
d. steel to produce refrigerators
answer
a. electricity
question
Which of the following is a variable cost for an airline?
A. rent of airport space
B. insurance
C. property taxes
D. jet fuel
A. rent of airport space
B. insurance
C. property taxes
D. jet fuel
answer
d. jet fuel
question
The typical average cost curve line
answer
first declines to a minimum and then increases as output increases
question
in the typical AC curve, the downward-sloping part is attributable to
answer
spreading fixed costs over larger outputs and increasing returns to the variable inputs
question
When economies of scale exist
answer
production costs per unit decline as output expands
question
A firm's production process shows constant returns to scale. It can produce 5,000 widgets at a total cost of $2,500 and 10,000 widgets at an average cost of __________ .
answer
$0.50
question
If doubling the quantity of inputs more than doubles the quantity of outputs, the firm is experiencing
answer
Increasing returns to scale
question
if a firm increases inputs by 15% and output increases by 12.5% the firm is experiencing
answer
decreasing returns to scale
question
Total cost
answer
TF C + TVC or AC x Q
question
Average Fixed Cost
answer
TFC/Q
question
Average Variable Cost
answer
TVC/Q
question
Average Cost
answer
TC/Q or AFC + AVC
question
Total Variable Cost
answer
TC - TFC or AVC x Q
question
Total Fixed Cost
answer
AFC x Q or TC- TVC
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