Exam 1: Ch. 1,2,3,5 - Assignment Essays

question

Economic Profit

answer

the difference between total revenue and total opportunity cost of producing the firm's g/s; what you make above and beyond your next best option (opportunity cost)

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Accounting Profit

answer

the total amount of money taken in from sales (total revenue or price time quantity sold) minus the dollar cost of producing g/s. Show up on income statement

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Net Present Value

answer

the present value of the income stream generated by a project minus the current cost of the project

question

Perpetuity

answer

continuous cash flows

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Marginal Cost

answer

change in total costs arising from a change in the managerial control variable Q

MC = TC' where TC = total cost, FC = fixed costs, VC = variable cost, MC = Marginal Cost

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Marginal Benefit

answer

change in total benefits arising from a change in the managerial control variable Q

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Opportunity Cost

answer

explicit (accounting) cost of a resource plus the implicit cost of giving up its best alternative use. Generally higher than accounting costs because it includes the dollar value of costs and any implicit costs. Implicit costs are hard to measure and managers often have to collect this data on their own

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Change in Demand

answer

changes in variables other than the price of a good, such as income or the price of another good, lead to a change in demand. This corresponds to a shift of the entire demand curve

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Change in Quantity Demanded

answer

changes in the price of a good lead to a change in the quantity demanded of that good. This corresponds to a movement along a given demand curve

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Normal Goods

answer

a good for which an increase (decrease) in income leads to an increase (decrease) in the demand for that good ex. Steak, airline travel, designer clothes; as income goes up consumers tend to buy more of these types of goods

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Inferior Goods

answer

a good for which an increase (decrease) in income leads to a decrease (increase) in the demand for that good ex. Bologna, bus travel, generic jeans; as income goes up consumers typically consume less of these goods as each price

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Substitutes

answer

goods for which an increase (decrease) in the price of one good leads to an increase (decrease) in the demand for the other good; goods are substitutes when an increase in the price of one good increases the demand for the other good

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Complements

answer

goods for which an increase (decrease) in the price of one good leads to a decrease (increase) in the demand for the other good

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Consumer Surplus

answer

value consumers get from a good but do not have to pay for

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Producer Surplus

answer

the amount producers receive in excess of the amount necessary to induce them to produce the good

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Non-Pecuniary Price

answer

not paid in dollars but in opportunity cost

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Excise Tax

answer

tax on each unit of output sold, where the tax revenue is collected from the supplier

question

Informative Advertising

answer

induces more consumers to buy

question

Persuasive Advertising

answer

influences the demand by altering the underlying tastes of consumers

question

Demand Shifters

answer

income, advertising and consumer tastes, price of related goods, population, consumer expectations

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Supply Shifters

answer

input prices, technology or government regulations, number of firms, substitutes in production, taxes, producer expectations

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Own Price Elasticity

answer

measure of the responsiveness of the quantity demanded of a good to a change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good

EQx,Px = %ΔQx/%ΔPx = Q'x (Px/Qx)

question

Cross-Price Elasticity

answer

measure of responsiveness of the demand for a good to the changes in the price of a related good; the percentage change in the quantity demanded of one good divided by the percentage change in the price of a related good

EQx,Py = %ΔQx/%ΔPy = Q'y(Py/Qx)

question

Income Elasticity

answer

measure of responsiveness of the demand for a good to changes in consumer income; the percentage change in quantity demanded divided by the percentage change in income

EQx,M = %ΔQx/%ΔM

question

Advertising Elasticity

answer

measure of how responsive sales are to changes in advertising

EQx,A = %ΔQx/%ΔA

question

Elastic Demand

answer

if absolute value of the own price elasticity of demand is greater than 1

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Inelastic Demand

answer

if the absolute value of the own price elasticity is less than 1

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Unitary Elastic

answer

if the absolute value of the own price elasticity of demand is equal to 1

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Perfectly Elastic

answer

if the own price elasticity is infinite in absolute value, demand curve is horizontal

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Perfectly Inelastic

answer

if the own price elasticity is zero, demand curve is vertical

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Average Fixed Cost

answer

fixed costs divided by the number of units of output

AFC = FC / Q

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Average Total Cost

answer

total cost divided by units of output

ATC = TC / Q

question

Average Variable Cost

answer

variable costs divided by units of output

AVC = VC / Q

question

Constant Returns to Scale

answer

exist when long run average costs remain constant as output is increased

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Cost Complementarity

answer

when the marginal cost of producing one type of output decreases when the output of another good is increased

question

Diseconomies of Scale

answer

exist whenever long-run average costs increase as output increases

question

Economies of Scale

answer

exist whenever long-run average costs increase as output increases

question

Economies of Scope

answer

exist when the total cost of producing two products within the same firm is lower than when the products are produces by separate firms

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Isocost

answer

line that represents the combinations of inputs that will cost the producer the same amount of money

question

Isoquant

answer

defines the combination of inputs that yield the same level of output

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Law of diminishing MRTS

answer

property of a production function stating that as less of one input is used, increasing amounts of another input must be employed at produce the same level of output

question

Law of diminishing marginal returns

answer

states that the marginal product of an additional unit of an input will at some point be lower than the marginal product of the previous unit

question

Leontief Production Function

answer

production function that assumes that inputs are used in fixed proportions

question

Marginal Product

answer

change in total output attributable to the last unit of input

question

MRTS (marginal rate of technical substitution)

answer

rate at which a producer can substitute between inputs two inputs and maintain the same level of output

MRTSKL = MPL / MPK

To minimize cost of producing produce where MPa / a = MPB / b

question

Fixed Costs

answer

costs that do not change with changes in output; include the costs of fixed inputs used in production

question

Variable Costs

answer

costs that change with changes in output; include the costs of inputs that vary with output

question

Sunk Costs

answer

cost that is forever lost after it has been paid

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Present Value Formula

answer

PV=FV/(1+r)^t, where r = discount rate and t = # year (used for single cash flow)

question

Present Value of a Perpetuity

answer

PV = CF1 / (r - g), where CF = cash flow

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Net Benefit

answer

N(Q) = B(Q) - C(Q)

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Marginal Net Benefit

answer

MNB(Q) = MB(Q) - MC(Q)

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Profit Maximizing Point is where:

answer

MB(Q) = MC(Q)

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Demand Function

answer

QDx = f (Px, Py, M, H), where Px = price of x, Py = price of y, M = consumer income, and H = all else

question

Supply Function

answer

QSx = f (Px, Pr, W, H), where Pr = price of technologically related goods, W = price of inputs

question

Equilibrium is where:

answer

QDx = QSx

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Area of triangle

answer

½ bh, where b = base and h = height

question

Total Cost

answer

Fixed Costs + Variable Costs

question

Formula for change in revenue when firm sells 2 related products:

answer

ΔR = [Rx(1+ EQx,Px ) + Ry EQx,Py ] X %ΔPx, where R = revenue

1 of 59

question

Economic Profit

answer

the difference between total revenue and total opportunity cost of producing the firm's g/s; what you make above and beyond your next best option (opportunity cost)

question

Accounting Profit

answer

the total amount of money taken in from sales (total revenue or price time quantity sold) minus the dollar cost of producing g/s. Show up on income statement

question

Net Present Value

answer

the present value of the income stream generated by a project minus the current cost of the project

question

Perpetuity

answer

continuous cash flows

question

Marginal Cost

answer

change in total costs arising from a change in the managerial control variable Q

MC = TC' where TC = total cost, FC = fixed costs, VC = variable cost, MC = Marginal Cost

question

Marginal Benefit

answer

change in total benefits arising from a change in the managerial control variable Q

question

Opportunity Cost

answer

question

Change in Demand

answer

changes in variables other than the price of a good, such as income or the price of another good, lead to a change in demand. This corresponds to a shift of the entire demand curve

question

Change in Quantity Demanded

answer

changes in the price of a good lead to a change in the quantity demanded of that good. This corresponds to a movement along a given demand curve

question

Normal Goods

answer

question

Inferior Goods

answer

question

Substitutes

answer

question

Complements

answer

goods for which an increase (decrease) in the price of one good leads to a decrease (increase) in the demand for the other good

question

Consumer Surplus

answer

value consumers get from a good but do not have to pay for

question

Producer Surplus

answer

the amount producers receive in excess of the amount necessary to induce them to produce the good

question

Non-Pecuniary Price

answer

not paid in dollars but in opportunity cost

question

Excise Tax

answer

tax on each unit of output sold, where the tax revenue is collected from the supplier

question

Informative Advertising

answer

induces more consumers to buy

question

Persuasive Advertising

answer

influences the demand by altering the underlying tastes of consumers

question

Demand Shifters

answer

income, advertising and consumer tastes, price of related goods, population, consumer expectations

question

Supply Shifters

answer

input prices, technology or government regulations, number of firms, substitutes in production, taxes, producer expectations

question

Own Price Elasticity

answer

question

Cross-Price Elasticity

answer

question

Income Elasticity

answer

measure of responsiveness of the demand for a good to changes in consumer income; the percentage change in quantity demanded divided by the percentage change in income

EQx,M = %ΔQx/%ΔM

question

Advertising Elasticity

answer

measure of how responsive sales are to changes in advertising

EQx,A = %ΔQx/%ΔA

question

Elastic Demand

answer

if absolute value of the own price elasticity of demand is greater than 1

question

Inelastic Demand

answer

if the absolute value of the own price elasticity is less than 1

question

Unitary Elastic

answer

if the absolute value of the own price elasticity of demand is equal to 1

question

Perfectly Elastic

answer

if the own price elasticity is infinite in absolute value, demand curve is horizontal

question

Perfectly Inelastic

answer

if the own price elasticity is zero, demand curve is vertical

question

Average Fixed Cost

answer

fixed costs divided by the number of units of output

AFC = FC / Q

question

Average Total Cost

answer

total cost divided by units of output

ATC = TC / Q

question

Average Variable Cost

answer

variable costs divided by units of output

AVC = VC / Q

question

Constant Returns to Scale

answer

exist when long run average costs remain constant as output is increased

question

Cost Complementarity

answer

when the marginal cost of producing one type of output decreases when the output of another good is increased

question

Diseconomies of Scale

answer

exist whenever long-run average costs increase as output increases

question

Economies of Scale

answer

exist whenever long-run average costs increase as output increases

question

Economies of Scope

answer

exist when the total cost of producing two products within the same firm is lower than when the products are produces by separate firms

question

Isocost

answer

line that represents the combinations of inputs that will cost the producer the same amount of money

question

Isoquant

answer

defines the combination of inputs that yield the same level of output

question

Law of diminishing MRTS

answer

property of a production function stating that as less of one input is used, increasing amounts of another input must be employed at produce the same level of output

question

Law of diminishing marginal returns

answer

states that the marginal product of an additional unit of an input will at some point be lower than the marginal product of the previous unit

question

Leontief Production Function

answer

production function that assumes that inputs are used in fixed proportions

question

Marginal Product

answer

change in total output attributable to the last unit of input

question

MRTS (marginal rate of technical substitution)

answer

rate at which a producer can substitute between inputs two inputs and maintain the same level of output

MRTSKL = MPL / MPK

To minimize cost of producing produce where MPa / a = MPB / b

question

Fixed Costs

answer

costs that do not change with changes in output; include the costs of fixed inputs used in production

question

Variable Costs

answer

costs that change with changes in output; include the costs of inputs that vary with output

question

Sunk Costs

answer

cost that is forever lost after it has been paid

question

Present Value Formula

answer

PV=FV/(1+r)^t, where r = discount rate and t = # year (used for single cash flow)

question

Present Value of a Perpetuity

answer

PV = CF1 / (r - g), where CF = cash flow

question

Net Benefit

answer

N(Q) = B(Q) - C(Q)

question

Marginal Net Benefit

answer

MNB(Q) = MB(Q) - MC(Q)

question

Profit Maximizing Point is where:

answer

MB(Q) = MC(Q)

question

Demand Function

answer

QDx = f (Px, Py, M, H), where Px = price of x, Py = price of y, M = consumer income, and H = all else

question

Supply Function

answer

QSx = f (Px, Pr, W, H), where Pr = price of technologically related goods, W = price of inputs

question

Equilibrium is where:

answer

QDx = QSx

question

Area of triangle

answer

½ bh, where b = base and h = height

question

Total Cost

answer

Fixed Costs + Variable Costs

question

Formula for change in revenue when firm sells 2 related products:

answer

ΔR = [Rx(1+ EQx,Px ) + Ry EQx,Py ] X %ΔPx, where R = revenue

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