FSU ECO3101 Midterm Review, Intermediate Micro Quiz Answers, Intermediate Microeconomics Midterm (Quizzes), FSU ECO 3101 EXAM 1, ECO 3101 Final Exam, ECO 3101 Mid-Term, ECO 3101 MIDTERM

Q: Budget Constraint Formula

M= [P_X] X+[P_Y] Y (M/Px)-(Py/Px)*Y = X

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Fully Rational Agents

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Non-Random Behavior, Common Objectives, Avoid Emotion decision making, not for practical living

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What shifts the demand curve?

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income, prices of related goods, tastes, expectations, number of buyers

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What shifts the supply curve?

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input prices, technology, number of sellers, expectations

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Consumer Choice

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Bundles and Budgets

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Bundle

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Specific combination of goods

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Budget Constraint

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Set of Bundles that exhaust income at given prices

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Budget Constraint Formula

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M= [P_X]X+[P_Y]Y

(M/Px)-(Py/Px)*Y = X

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slope of budget constraint

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-Px/Py

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Opportunity Costs are dictated by

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Price Change (they do not change when income changes)

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Increase in Real Income

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Income increases and/or Prices decrease of One Good: New Bundles lost and New Bundles Gained

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Decrease in Real Income

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Income goes down/or Price Increases of One Good: Some Bundles Lost, No Bundles Gainedq

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Key Properties of Preference Ordering

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Completeness, Transitivity, Monotonicity and Convexity

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Completeness (Preference Properties)

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All possible bundles are ranked

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Transitivity (Preference Properties)

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Internal Consistency

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Monotonicity (Preference Properties)

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more is better

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Convexity (Preference Properties)

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Combinations preferred to extremes, balanced consumption

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Key Properties of Indifference Curves

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Ubiquitous, Parallel, Negative Slope, Diminishing Slope

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Why are indifference curves pointed up (Preference Properties)

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Convexity

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How do we demonstrate if we want more of x than y? (Preference Properties)

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Completeness

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Indifference Curve

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graphical representation of Preferences

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Ubiquitous (Indifference Curves)

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Any possible bundle has an IC passing through it [it has to have ranking as well]

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Parallel (Indifference Curves)

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Indifference curves cannot cross each other

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Negative Slope (Indifference Curves)

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Sacrifice needed to maintain utility (you are giving one good up for the other)

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Why are indifference curves negative sloping?

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An upward sloping Indifference curve means that both goods are being both increased and you cannot be indifferent due to Monotonicity

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Diminishing Slope (Indifference Curves)

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Indifference Curves become less steep as they move down and to their right

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Why are Indifference Curves diminishing?

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As we move from 1 extreme bundle down toward an equal parting, it gets more satisfying. If you keep going down, you end up going to another extreme bundle that is not as favorable.

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Convexity says (Indifference Curves)

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ICs are curved

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Convexity Property of Preferences

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Balance is Important. The more of one good we have, the more we need in order to give up one unit of another good.

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Budget Constraints have

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Constant Slopes

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ICs have a

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Constantly Changing Slope

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Marginal Rate of Substitution (MRS)

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(the rate at which a consumer would be willing to trade off one good for another) Slope of the IC. (change of good x/ change of good y) dx/dy

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Perfect Substitutes

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We dont care about a perfect balance in consumption. We stretch the IC (straight Lines)

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Perfect Complements

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goods that a consumer will consume in the same ratio regardless of their relative price. We violate Monotonicity (right angles)

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Perfect Substitutes vs Perfect Complements

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Perfect Substitutes have no preference for balance, so convexity is gone. Perfect Complements have hyper specific balance requirements, so convexity is as strong as possible

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Budget Constraints are _ to our highest IC

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Tangent (two lines touch in one place and don't cross)

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What does the point of tangency mean?

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The Price Ratio (the slope of the budget constraint) is equal to the marginal rate of substitution (slope of the indifference curve)

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Price Ratio

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the price of good on the horizontal axis divided by the price of the good on the vertical axis. -Px/Py

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What happens when Convexity is not important

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Marginal Rate of Substitute is not equal to the Price Ratio. We do not care about a balance in two goods.

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Corner Solutions

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Extreme Bundles (lightly curved straight lines)

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When do we see the Corner Solution

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IC not strongly convexity. Implies easily substitutable goods [not perfect]

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Changes in Real Income

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results in a consumer's welfare changing, but a change in real income does not necessarily result in the consumer becoming better or worse off

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Interest Rate

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PV(M2)=M2/(1+r)

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Utility

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Ability or capacity of a good or service to be useful and give satisfaction to someone.

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Optimal Consumer Choice

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an affordable combination of goods and services that maximizes a consumer's utility. (MUx/MUy=Px/Py)

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MRS and Utility

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MUx/MUy=Px/Py

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What is the purpose of the demand curve

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Measure how consumers respond to changes in price of a good

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Engel Curve

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A graphical representation of how income changes quantity demanded (for income instead of price)

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Two effects of price change

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substitution effect and income effect

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Translating the Budget Constraint to a Individual Demand Curve

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For each price, we have a quantity demanded

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As price changes we see someone's _ change

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utility

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As Price Falls the consumer move to ___ ICs

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Higher (getting happier as price falls)

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Normal vs. Inferior Goods

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Normal goods are goods that the individual wants; e.g. steak, nice car, computer, etc.

Inferior goods are goods that the individual uses because they have to, e.g. public transit. As individual's income rises, the individual uses fewer inferior goods - not gonna use public transit if you can afford a car.

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Substitution Effect

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other goods become more attractive

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Income Effect

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the change in consumption resulting from a change in real income

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Substitution effect___ works against price change

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always

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Total Effect

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income effect + substitution effect

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The Income effect ___ on the good

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Depends (Normal vs Inferior)

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An Increase in Real Income causes

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decrease demand for inferior goods and increase in normal goods

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Movement from original bundle to hypothetical

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substitution effect

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The Substitution Effects Always Reduces the ____ Demanded of the good whose ____ ____

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Quantity, Price Increased

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Movement from Hypothetical Bundle to actual bundle is the

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income effect

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For Inferior Goods, The Income effect works ___ the substitution effect

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against (The substitution effect is so strong that it over shoots the total effect, so the income effect has to work back in the other direction)

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For Perfect Complements

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There is no Substitution effect only income effect (still right angles)

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For Perfect Substiutes

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The Substitution Effect is the only thing that is occuring

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How to Find Market Demand

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1. Rewrite as Q=
2. Add Qx+Qe=Qm
3. Rewrite as P=...

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price elasticity of demand

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the responsiveness of consumers in a market to changes in market price
(Percentage Change in Qd [quantity demanded] resulting in % change in price]

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Elastic Chart

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Elastic e < -1
Unit Elastic e = -1
Inelastic e > 0

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Elasticity formula

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% change in quantity / % change in price
or
(change in Q/ Qo) / (Change in Price/P0)
or
Change in Q/ Change in P x (p/q)
or
[mostly this] P/Q x 1/slope

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| E | > 1 (Elasticity and expenditure)

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a price reduction increases total expenditure, a price decrease reduces

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| E | = 1 (Elasticity and expenditure)

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Total Expenditure is at its maximum)

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| E | < 1 (Elasticity and expenditure)

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A price reduction reduces total expenditure; a price increase increases it

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Determinants of Elasticity

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Substitute Possibilities (No close substitutes = less elasticity and smaller Substitute Effect), Share of Budget (large purchase items are more elastic, larger income effect), Direction of Income Effect (normal goods are more elastic than inferior goods as the income effect reinforces substitution effect) and Time (over time people are able to adjust better

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Income Elasticity

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responsiveness of average consumer for a particular good to change in income (percentage change in quantity demanded resulting in a change in income)

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Income Elastic Formula

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Em= (Change in Quantity/ Quantity)/ (change in M/M) or

Em= (Change in Q/Change in M) x M/Q

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If Em>1

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Luxury Good

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Em<1

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Necessity Good

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If Em<0

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Inferior Good

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cross price elasticity

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responsiveness of consumers for a particular good to changes in price of another good (percentage change in quantity demanded of good x resulting in a % change in price y)

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cross price elasticity formula

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Ex,y = (%Δ Qx / Qx)/(% Δ PY/ PY)

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Production

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Any process that uses identifiable inputs to create measurable output

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Production Function

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Maximum possible output from input bundle (Q=fx)

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Profits (pi)

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p*q-c(q) (Revenues-Costs)

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Problems with Production Functions

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Incentive Problems and Bounded Rationality

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Strengths of Production Functions

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Clear Relevance
Captures Market Dynamics
Makes Everything Simplier

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Long Run

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amount of time needed to change amounts of all inputs in production

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Short Run

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Time horizon which at least one input quantity may not be adjusted (in the short-run, inputs are either variable (may be changed) or fixed)

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Q=2KL
A firm owns one factory and varies with labor. Rewrite the Function

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Q=2L

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law of diminishing returns

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as equal amounts of a variable are sequentially added while others are kept fixed, the additional output increments will diminish (i.e. more and more of an input creates more of an output, but at smaller and smaller gains)

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Total Product

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Amount of output as a function of the amount of variable input (i.e. the short run version of a production function)

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Marginal Product

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change in out due to a 1-unit change in a variable input (rate of change; derviate)

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marginal product of labor

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Change in Quantity/ Change in Labor
or
the derivative of Total Product
dTP/dL

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MPL is the

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slope of the Total Product Curve

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Average Product

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Total Output Divided by the amount of the variable input

Q/L

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How do we represent our function graphically

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1.) Quantity Produced
2.) solve for K in terms of L

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Isoquant

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all combinations of variable inputs that yield a given level of output

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Marginal Rate of Technical Substitution

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The rate at which one input may be substituted for another without altering output.

Change of K/ Change of L

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Consumer Utility is represented with

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Indifference Curves

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Firm Production is represented with

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Isoquants

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Returns to Scale

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change in output brought on by change in inputs. (measures efficiency, not total output)

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Economies of Scale

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offer insight into firm size and competitiveness in an industry

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Increasing Returns to Scale

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a proportional increase in all inputs results in more than proportional increase in output

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Decreasing Returns to Scale

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a proportional increase in all inputs results in less than proportional increase in output

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Constant Returns to Scale

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a proportional increase in all inputs results in an equally proportional increase in output

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How to Calculate RTS:

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tf(K,L) and f(tK,tL)

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If tf(K,L) > f(tK,tL)

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(multiplying both inputs by t gets us less than t times the output)

Decreasing Returns to Scale

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If tf(K,L) < f(tK,tL)

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(multiplying both inputs by t gets us more than t times the input)

Increasing Returns to Scale

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If tf(K,L) = f(tK,tL)

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Constant Returns to Scale

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DRTS leads to a competitive market with

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many small firms

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IRTS leads to a small competitive market with

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few large firms

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Total Cost Forumla

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(rK+wL)
FC+VC

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rental rate

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capital

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FC (Fixed Cost)

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VC (variable Cost)

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Average Fixed Cost

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FC/Q

((rk)/Q)

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Average Variable Cost

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VC/Q

((wL)/Q)

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Average Total Cost

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TC/Q

((rk+wL)/Q)

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Marginal Cost formula

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change in total cost / change in quantity

or

dTC/dQ

(change in FC + change in VC)/Q

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Total Cost Curve

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a graphical representation showing how the cost of producing one more unit depends on the quantity that has already been produced

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Marginal Cost Curve

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(MP intersects AP at maximum point on AVC curve)
MC=w/MP

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MP and MC relationship

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w(1/AP)= w/AP

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AP and AVC relationship

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Isocost Line

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Prices allow us to see the Firms

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by finding the point of tangency between the isocost line and the isoquant

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How do we find the Optimal Production with Firms

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-w/r

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Slope of the Isocost

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by finding the optimal production

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How to find the Long Run Average Cost Curve

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LMC=LAC

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Slope of LRTC

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Constant Returns to Scale Graphed

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Flat LRAC

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Increasing Returns to Scale Graphed

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Declining LRAC (over a large span of Q)

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Decreasing Returns to Scale Graphed

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LRAC (long run average cost curve)

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the short run or long run process by which a firm determines the price and output level that returns the greatest profit

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Increasing LRAC (over a large span of Q)

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total revenue - total costs (explicit and implicit)

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profit maximization

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total revenue - total explicit cost

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Economic Profit

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1.) Product is Homogeneous
2.) Firms cannot affect market price- they are price takers
3.) Perfect Information as both consumers and producers have full information
4.) No barriers to entry in the long-run

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Accounting Profit

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MC=MR

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Critical Assumptions for Perfect Competition

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TR-VC-FC ≥ -FC
or
TR ≥ VC
or
PQ ≥ VC
or [mostly]
P≥AVC

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short run profit maximization

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-Profit= -FC

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When to Produce

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for individual firms, the dollar amount they benefit by producing the profit maximizing level of output (i.e. benefit of not shutting down)

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When to Shutdown

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MC curve above AVC

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producer surplus

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may choose to produce and earn positive or negative economic profit (cannot exit market as only long run can do that)

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short-run individual supply curve

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where price is equal to ATC

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In the short run firms

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All Costs are Variable as firms are able to purchase or sell.
No Barriers to Entry: Firms may enter or leave freely.

All Firms in a market exhibiting long run equilibrium earn zero economic profits

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A firms break even point is

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Measure of Welfare in the Market

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Perfect Competition in the Long Run

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Taxes
Quantity Based: Excise Tax
Price Based: Ad velorem tax (per dollar)
Price Controls (Ceilings and Floors)
Tariffs and Quotas

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Surplus

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decreases demand (shifts left)

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Distortions in Surplus

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decreases supply (shift left)

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Excise Tax on Buyers

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(P-P2)Q2*

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Excise Tax on Sellers

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(P2 + x - P)Q2*

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Tax incidence for sellers

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the marginal rate of substitution of one good for another good.

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tax incidence for buyers

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-7/15

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The slope of an indifference curve reveals:

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the slope of the budget line will not change.

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A consumer has $100 per day to spend on product A, which has a unit price of $7, and product B, which has a unit price of $15. What is the slope of the budget line if good A is on the horizontal axis and good B is on the vertical axis?

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represent the quantity of each good that could be purchased if all of the budget were allocated to that good.

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Suppose that the prices of good A and good B were to suddenly double. If good A is plotted along the horizontal axis,

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Px/Py

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The endpoints (horizontal and vertical intercepts) of the budget line:

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any of the above are possible.

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A consumer maximizes satisfaction at the point where his valuation of good X, measured as the amount of good Y he would willingly give up to obtain an additional unit of X, equals:

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2 lemonades for each popcorn.

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The fact that Alice spends no money on travel:

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the additional satisfaction from consuming one more unit of a good.

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The price of lemonade is $0.50; the price of popcorn is $1.00. If Fred has maximized his utility by purchasing lemonade and popcorn, his marginal rate of substitution will be:

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Px/Py = money income.

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Marginal utility measures:

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if A is more expensive than B, then Xavier must prefer A over B.

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Oscar consumes only two goods, X and Y. Assume that Oscar is not at a corner solution, but he is maximizing utility. Which of the following is NOT necessarily true?

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the marginal utility of apples decreases.

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The principle of revealed preference would say that if Xavier chooses market basket A over market basket B then:

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none of the above.

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As we move downward along a demand curve for apples,

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both goods are normal.

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The change in the price of one good has no effect on the quantity demanded of another good. These goods are:

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substituition

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When the income-consumption curve has a positive slope throughout its entire length, we can conclude that

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It will lead to an increase in consumption only for a normal good.

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The change in the quantity demanded of a good resulting from a change in relative price with the level of utility held constant is called the ________ effect.

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less,less

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Which of the following is true concerning the income effect of a decrease in price?

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has shifted to the right.

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Assume that yogurt is a normal good. If the price of yogurt rises, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good.

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there are more substitutes for sirloin steak than for all meats.

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Recently, Skooterville has experienced a large growth in population. As a result, the market demand curve for housing in Skooterville:

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consumer surplus.

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The market demand for sirloin steak is probably more elastic than the market demand for all meat because

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increases

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The difference between what a consumer is willing to pay for a unit of a good and what must be paid when actually buying it is called

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A monopolist can charge as high a price as it likes.

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When the price of wood (which is an input in the production of furniture) falls, the consumer surplus associated with the consumption of furniture

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higher; smaller

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Which of the following statements is not a correct characterization of a pure monopoly?

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equate marginal revenue and marginal cost.

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Compared to the equilibrium price and quantity sold in a competitive market, a pure monopolist will charge a ________ price and sell a ________ quantity.

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the quantity supplied at any particular price depends on the market demand curve.

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To find its profit-maximizing output level, a pure monopolist will

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set price above marginal cost.

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The pure monopolist has no supply curve because

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Monopoly power results from the ability to

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a decrease in consumer surplus in the widget market.

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What is the value of the Lerner index under perfect competition?

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pays a price for the factor of production that depends on the number of units purchased.

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If the market for widgets is suddenly monopolized, we should expect:

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a degree of monopsony power.

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Unlike a firm buying a particular factor of production in a perfectly competitive market, a pure monopsonist

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The average expenditure curve
The marginal expenditure curve
Both c) and d)

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n the personal computer market, some large manufacturers are able to buy computer components (e.g., disk drives, memory chips) at lower prices than smaller firms in the market. This outcome indicates that the large firms haver

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The marginal rate of substitution of one good for another good

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Cole's Coal Company is the only employer in a remote and mountainous region of the country, so the firm is a monopsony buyer of labor in the market. If the local population declines and there are fewer qualified coal miners available, which one of the curves used to determine the monopsony outcome in this market shifts?

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The assumption of a diminishing marginal rate of substitution

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The slope of an indifference curve reveals

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Horizontal lines

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Indifference curves are convex to the origin because

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Transitivity

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Envision a graph with meat on the horizontal axis and vegetables on the vertical axis. A strict vegetarian would have indifference curves that are

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-7/15

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If a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. This assumption is called

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6 packages of hot dogs and 6 packages of buns

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answer

Marginal benefit equals marginal cost

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Sue views hot dogs and hot dog buns as perfect complements in her consumption, and the corners of her indifference curves follow the 45-degree line. Suppose the price of hot dogs is $5 per package (8 hot dogs), the price of buns is $3 per package (8 hot dog buns), and Sue's budget is $48 per month. What is her optimal choice under this scenario?

answer

120

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Satisfaction from consumption is maximized when

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Increasing pepsi consumption and reducing hamburger consumption

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Monica consumes only goods A and B. Suppose that her marginal utility from consuming good A is equal to 1/Qa, and her marginal utility from consuming good B is 1/Qb. If the price of A is $0.50, the price of B is $4.00, and Monica's income is $120.00, how much of good A will she purchase?

answer

The marginal utility of x may be positive or negative (depending on the quantity of X and Y consumed)

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Bill currently uses his entire budget to purchase 5 cans of pepsi and 3 hamburgers per week. The price of pepsi is $1 per can, the price of a hamburger is $2, Bill's marginal utility from pepsi is 4, and his marginal utility from hamburgers is 6. Bill could increase his utility by?

answer

8 units

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Suppose your utility from consuming X and Y is expressed as u(X,Y) = ln(XY) where ln() is the natural logarithm operator. Given this information, which of the following statements is NOT true?

answer

-dY/dX = MUx(X,Y)/MUy(X,Y)

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Suppose your utility function for food (F) and clothing (C) is u(F,C) = F + 4C. If you reduce your clothing consumption by 2 units, how much do you have to increase your food consumption in order to maintain the same utility level?

answer

Utility is maximized, and all income is spent

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Which of the following expressions in the fgure represents the marginal rate of substitution, MRSxy?

answer

Food is an inferior good and clothing a normal good

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Which of the following is true at each point along a price-consumption curve?

answer

The substitution effect

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Thee effect of a decrease in the price of food, as depicted in the figure, leads us to believe that

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The income effect

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After a good falls in price, consumers tend to buy more of the good that has become cheaper and less of those goods that are now relatively more expensive. This fact is called

answer

25,000

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A change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant, is referred to as

answer

rise; fall

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A local retailer has decided to carry a well-known brand of shampoo. The marketing department tells them that the quarterly demand by an average man is:
Qd = 3 - 0.25P
and the quarterly demand by an average woman is:
Qd = 4 - 0.5P
The market consists of 10,000 men and 10,000 women. How may bottles of shampoo can they expect to sell if they charge $6 per bottle?

answer

Consumer expenditures on gasoline increase over the short run and decline over the long run.

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Suppose that the demand for artichokes (Qa) is given as:
Qa = 200 - 4P
Use the information in Scenario 4.2. Suppose that the price of artichokes is increased slightly from $10. The total expenditure by consumers on artichokes will ________ and the number of artichokes sold will ________.

answer

Demand curve becomes more elastic due to the bandwagon effect

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Recent research estimates that the short-run price elasticity of demand for gasoline in the US is -0.3, and the long-run price elasticity of demand is -1.4. What happens if the government increases the federal gasoline tax?

answer

Only if no important factors other than price affect demand

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Software companies continually work to develop new features of their products that make it easier for users to interact and share their work. As more of these features are embedded in the software, what happens to the individual demand curve for the software products?

answer

A 1% increase in income will lead to a 1.5% increase in seeing movies at the theater. Your demand for movies is elastic with respect to income.

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When would it be plausible to describe the demand for a product by drawing a straight line, Q=a - bP?

answer

Subsitutes

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If your income elasticity of demand for going to the movie theater is 1.5, then

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Complements

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If the price of Apple's iPhone generates a cross-price elasticity for Samsung's Galaxy of 0.7 then these two products are

answer

A production function

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If the price of iPhones generates a cross-price elasticity for apple watches of -0.6 then these two products are

answer

A time period in which at least one input is fixed

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A function that indicates the maximum output per unit of time that a firm can produce, for every combination of inputs with a given technology, is called

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The marginal product of an input will eventually decline

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The short run is

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Capital, plant size, & labor

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According to the law of diminishing returns

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Marginal returns

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Which of the following inputs are variable in the long run?

answer

The addition to total output due to the addition of the last unit of an input, holding all other inputs constant

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The law of diminishing returns refers to diminishing

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Marginal product cuts average product from above, at the maximum point of average product

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The marginal product of an input is

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MP = 1.5 cars

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What describes the graphical relationship between average product & marginal product?

answer

Even though any given production process exhibits diminishing returns, labor productivity increases with technological improvements

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You operate a car detailing business with a fixed amount of machinery (capital), but you have recently altered the number of workers that you employ per hour. Three employees can generate an average product of 4 cars per person in each hour, and five employees can generate an average product of 3 cars per person in each hour. What is the marginal product of labor as you increase the labor from three to five employees?

answer

AP = 5K

Because: you divide 5KL/L and labor gets cancelled

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This figure shows the impact of technological improvements and conveys the idea that

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Is a curve that shows all the combinations of inputs that yield the same total output

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Joe owns a coffee house and produces coffee drinks under the production function q = 5KL where q is the number of cups generated per hour, K is the number of coffee machines (capital), and L is the number of employees hired per hour (labor). What is the average product of labor?

answer

Rate at which the firm can replace capital with labor without changing the output rate

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An isoquant

answer

Ratio of the marginal products of the inputs

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If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the

answer

Labor, capital

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The marginal rate of technical substitution is equal to the

answer

I is true
II is false

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A construction company builds roads with machinery (capital, K) and labor (L). If we plot the isoquants for the production function so that labor is on the horizontal axis, then a point on the isoquant with a small MRTS (in absolute value) is associated with high ________ use and low ________ use.

answer

One hour

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I. The numerical labels attached to indifference curves are meaningful only in an ordinal way.
II. The numerical labels attached to isoquants are meaningful only in an ordinal way.

answer

Increasing returns to scale for all output levels

question

Consider a firm facing MRTS = K/(4L) with capital (K) on the vertical axis of the isoquant map. Suppose L=100 hours and K=400 machine hours at the current level of output. How much additional labor is required to maintain output if we reduce capital by one machine hour?

answer

q = K + L

question

A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function C=L0.5M0.75. This production function exhibits

answer

No, we cannot change all of the production inputs in the short run

question

Which of the following production functions exhibits constant returns to scale?

answer

Sell to ABC corporation

question

Does it make sense to consider the returns to scale of a production function in the short run?

answer

Is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold

question

Farmer Jones bought his farm for $75,000 in 1975. Today the farm is worth $500,000, and the interest rate is 10 percent. ABC Corporation has offered to buy the farm today for $500,000 and XYZ Corporation has offered to buy the farm for $530,000 one year from now. Farmer Jones could earn net profit of $15,000 (over and above all of his expenses) if he farms the land this year. What should he do?

answer

-4/5

question

Constantine purchased 100 shares of IBM stock several years ago for $150 per share. The price of these shares has fallen to $55 per share. Constantine's investment strategy is "buy low, sell high." Therefore, he will not sell his IBM stock until the price rises above $150 per share. If he sells at a price lower than $150 per share he will have "bought high and sold low." Constantine's decision:

answer

The marginal product of labor is 3 times the marginal product of capital

question

Assume that a firm spends $500 on two inputs, labor (graphed on the horizontal axis) and capital (graphed on the vertical axis). If the wage rate is $20 per hour and the rental cost of capital is $25 per hour, the slope of the isocost curve will be

answer

Input combinations that can be purchased for a given total cost

question

With its current levels of input use, a firm's MRTS is 3 (when capital is on the vertical axis and labor is on the horizontal axis). This implies

answer

Bubba adds grilled chicken sandwiches to the menu

question

An isocost line reveals the

answer

I is false
II is true

question

Bubba Burgers has discovered there are economies of scope available to the restaurant. Which is most likely to be a response to this discovery?

answer

Output is being produced at minimum cost

question

I. Whenever a firm's average variable costs are falling as output rises, marginal costs must be falling too.
II. Whenever a firm's average total costs are rising as output rises, average variable costs must be rising too.

answer

The optimal capital-labor ratio remains the same

question

When an isocost line is just tangent to an isoquant, we know that

answer

Both are true

question

Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e., one pilot for each plane). If the wage rate paid to the pilots increases relative to the rental rate of capital for the airplanes, then

answer

Price ceilings are enacted in an attempt to keep prices low for those who need the product. However, when the market price is not allowed to rise to the equilibrium level, quantity demanded exceeds quantity supplied, and thus a shortage occurs.

question

I. The more easily factors of production can be substituted for one another (for example, capital can be used to reduce waste water), the more effective the fee will be in reducing effluent.
II. The greater the degree of substitution of capital for waste water, the less the firm will have to pay in effluent fees.

answer

Price floors prevent a price from falling below a certain level. When a price floor is set below the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result.

question

Why does a price ceiling prevent the market from reaching equilibrium prices and quantities?

answer

demand is perfectly inelastic -- Q does not change at all when price changes (vertical demand curve)
Ex) essential goods

question

Why does a price floor prevent the market from reaching equilibrium prices and quantities?

answer

demand is inelastic -- demand is relatively unresponsive to a price change

question

If price elasticity of demand = 0,

answer

demand is unit elastic -- % change in demand is the same as % change in price

question

If price elasticity of demand is < 1,

answer

demand is elastic -- demand is responsive to a price change

question

If price elasticity of demand = 1,

answer

demand is perfectly elastic -- if price increases even slightly, D=0

question

If price elasticity of demand > 1,

answer

supply is perfectly inelastic -- does not respond to change in demand (perfectly vertical)

question

If price elasticity of demand is infinite,

answer

supply is inelastic -- supply is relatively unresponsive to change in demand

question

If price elasticity of supply = 0,

answer

supply is perfectly elastic -- change in demand does not change price (perfectly horizontal)

question

If price elasticity of supply < 1,

answer

supply is elastic -- supply is relatively responsive to change in demand

question

If price elasticity of supply is infinite,

answer

S&D helps us make predictions about perfectly competitive markets and when all firms and consumers are price takers.

question

If price elasticity of supply > 1,

answer

1) many buyers and sellers
2) identical products
3) all market agents have full information
4) transaction costs are negligible
5) firms can easily enter and exit

question

What are the assumptions of the supply and demand model?

answer

1) monopoly/monopsony
2) differentiated goods
3) asymmetrical information
4) transportation is not free
5) new firms cannot enter easily or face threats

question

When is it appropriate to use a supply and demand model?

answer

1) complete --> when facing 2 bundles {a, b}, a consumer can rank them so that a}b, b}a, or a~b
2) transitivity --> consumer preferences are logically consistent
3) monotonicity (more is better) --> all else equal, more of a good is preferred

question

When is it NOT appropriate to use a supply and demand model?

answer

-have a negative slope (willing to give up some to get more of other goods)
-further from the origin (0,0), preferred (the more, the better)
-convex toward 0 (decreasing marginal utility
-Indifference curves cannot cross

question

What are the properties of a rational consumer's preferences?

answer

Price, income of consumers, prices of related goods, preferences of consumers, externalities

question

What are the properties of indifference curves?

answer

relates consumer's utility to their demand curve -- PCC slopes up because utility is higher when more can be consumed (more is better)

question

What other factors might drive demand, but are not captured in the demand curves from class?

answer

the relationship between the quantity demanded of a single good and income, holding prices constant

question

Price Consumption Curve (PCC)

answer

If EI is > 0, the good is normal
If EI is < 0, the good is inferior
*refer to last page of notes

question

Engel Curve

answer

A price increase shrinks the opportunity set --> effectively reduces income

question

How is the shape of the Engel curve determined by the income elasticity of demand? (if goods are normal or inferior)

answer

Changing the price of 1 good changes the relative price of the other good

question

How does a change in income relate to a change in price?

answer

MRS (slope of IC) = MRT (slope of BC)
MUx/Px = MUy/Py
The budget line is tangent to the indifference curve at the bundle chosen

question

How does a change in the price of one good change the total opportunity set?

answer

How responsive consumers are to price change
If cross price elasticity > 0, goods are substitutes
If cross price elasticity < 0, goods are complements

question

How do you know if a consumer chooses optimally?

answer

E = %ΔQ/%ΔP = ΔQ/ΔP P/Q = dQ/dP P/Q

question

Cross Price Elasticity

answer

Downward sloping and straight

question

What is the formula for finding elasticity?

answer

L-shaped

question

If two goods are perfect substitutes, then the indifference curves for those two goods would be

answer

Set of numbers that reflect the relative rankings of bundles of goods

question

If two goods are perfect complements, then the indifference curves for those two goods would be

answer

3/x

question

Utility

answer

the marginal rate of substitution of one good for another good.

question

What is the derivative of ln (x^3) with respect to x

answer

the assumption of a diminishing marginal rate of substitution.

question

The slope of an indifference curve reveals:

answer

horizontal lines.

question

Indifference curves are convex to the origin because of:

answer

Transivity

question

Envision a graph with meat on the horizontal axis and vegetables on the vertical axis. A strict vegetarian would have indifference curves that are:

answer

There will be no effect on the budget line.

question

If a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. This assumption is called:

answer

None of the above

question

If prices and income in a two-good society double, what will happen to the budget line?

answer

-7/15

question

Suppose a consumer only purchases food and clothing, and food is plotted along the horizontal axis of the consumer's indifference map. If the price of food and clothing increase and income does not change, then the budget line changes by rotating:

-clockwise about the fixed vertical axis intercept.
-counter-clockwise about the fixed vertical axis intercept.
-clockwise about the fixed horizontal axis intercept.
-counter-clockwise about the fixed horizontal axis intercept.
-none of the above

answer

marginal benefit equals marginal cost.

question

answer

•Completeness -every choice is ranked •Transitivity -if A>Band B>C, then A>C
•Monotonicity -more is better
•Convexity -combinations preferred to extremes (e.g. some X and some Y is better than all X and zero Y)

question

Satisfaction from consumption is maximized when:

answer

ICs cannot slope upward. This would violate monotonicity.
Ubiquitous -any possible bundle has an IC which passes through it
•Parallel -ICs can't cross each other
•Negative slope -sacrifice in order to maintain same level of utility
•Diminishing slope-ICs become less steep when you move down and to the right

question

Properties of indifference curves

answer

Change in U/ Change in X

question

Implications of IC Properties

answer

MU of X
/
MU of Y

question

Marginal utility of x formula

answer

Opportunity set

question

Marginal rate of substitution formula

answer

•Increases in income shift- the budget line away from the origin.
•Decreases in income shi- the budget line toward the origin.
•Income changes do not change the slope of the budget line.

question

any bundle on or below the budget line:

answer

•The steps are as follows
:1.Define constraint (budget line)
2.Find MRS
3.Set MRS equal to price ra)o and plug in constraint
4.Solve for op)mal quan))es

question

possible effects on the budget line

answer

Normal : Consume more as income increases.

Inferior: Initially consume more as income increases, but at some point income is large enough that consumption of the inferior good falls.

question

To mathema)cally find the op)mal bundle,

answer

-buy more of a good because other people are buying it
•Social media and Microsoft Office
•Bandwagon effect

question

Normal vs Inferior Good

answer

buy less of a good because other people are buying it
•Ski tickets, road trips
•Snob effect: limited editions and rare items

question

Positive Network Externalities

answer

There are two different effects underlying the decreased demand for (normal) good X after an increase in Px•

Substitution effect -X is now relatively more expensive, making other goods more attractive (i.e. change in opportunity costs). Consume less of X and more of Y.
•Income effect -a higher Px shrinks the opportunity set, effectively reducing purchasing power. Just as in a reduction of income, consume less of everything.
(A decrease in Px would have the opposite effects.)

Know the graphs for the different effects

question

Negative Network Externalities

answer

Whichever good is cheaper is all that matters for perfect substitutes, so the substitution effect is the driving factor.

question

What are the responses to price changes

answer

The substitution effect is zero since the fixed ratio is what matters.

question

Perfect Substitutes Characteristics

answer

Adding up all of the individual demand curves gives us the aggregate demand curve.

question

Perfect Complements Characteristics

answer

Just as in the graphs, the key is to add Q (not P).

1.Rearrange in terms of Q
2.Sum Q
3.Rearrange in terms of P

question

aggregate demand curve.

answer

•Price changes alter aggregate demand in a predictable direction.
•Income changes are not so clear, especially if there are distributional changes.

question

Market demand via math

answer

When we buy something, we almost always would have paid more than the price to acquire it.

•The difference between our maximum willingness-to-pay (WTP) and the price is called consumer surplus

question

Changes to Aggregate Demand

answer

•A higher price reduces the quantity demanded, but by how much?
•Price elasticity of demand (!): the percentage change in QD , given a 1% increase in the price

•Ex: if a 1% price increase in the Spotify subscription price decreases subscribers by 2%, the elasticity is -2.

question

Consumer Surplus

answer

•If E >1, consumers respond to price changes. They are elastic
.•If E =1, consumers respond to price change with a proportional change in consumption. This is referred to as unitary elastic.
•If E <1, consumers are less responsive to price changes. They are inelastic.
•If E=∞, consumers will stop purchasing the good if there is even a slight price increase. They are perfectly elastic and can be represented by a horizontal demand curve.
•If E=0, consumers will buy the good at any price. They are perfectly inelastic and can be represented by a vertical demand curve.

question

Price elasticity of demand (!):

answer

(Change in Q / Av Q) / (Change in P / Av P)

question

Different Elasticities and their meaning

answer

In elastic region, quantity demanded will increase by more than 1% for a 1% price decrease.At !=1, expenditure is at the maximum.

Optimal situation for firms maximizing revenue. More on that later...As elasticity decreases in magnitude, consumers becomes less sensitive to price.

A 1% price decrease generates less than a 1% increase in quantity, decreasing total expenditure.

question

Calculating Elasticities (Formula)

answer

•Availability of substitutes -can you switch to something similar? Closer substitutes equal larger substitution effects.
-Uber/Lyft vs local utility provider

•Time -if you need it now, you'll deal with the price.
-Broken phone vs broken headphones•
-Note there can be short-run and long-run elasticities.

•Habit -if it is part of the routine or you are dependent on it, you will be less sensitive to changes in price.
-Coffee, tobacco, etc.

•Proportion of budget -more expensive items have larger income effects which (for normal goods) reinforce the substitution effect.
-Trips abroad vs socks

question

Elasticities and Expenditure

answer

Utility is maximized, and all income is spent.

question

What makes consumers more / less elastic?

answer

the substitution effect.

question

What is true at each point along a price-consumption curve?

answer

the income effect.

question

After a good falls in price, consumers will tend to buy more of the good that has become cheaper
and less of those goods that are now relatively more expensive. This fact is called:

answer

a 1% increase in income will lead to a 1.5% increase in seeing movies at the theater. Your demand for movies is elastic with respect to income.

question

A change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant, is referred to as:

answer

•The firm uses inputs in their production process to generate output.

•Common inputs:

•Labor (L): human effort. Many types, including skilled and unskilled.

•Capital (K): Goods used to produce other goods. Machines, buildings, technology, etc.

•Materials (M): Raw goods such as oil, lumber, etc.•Land

question

If your income elasticity of demand for going to the movie theater is 1.5, then

answer

Q= F(K,L,M;A)
•The highest output Q that can be generated given inputs.
•It would be feasible for the firm to produce less than this at given inputs, but that would be inefficient.
•A is a technology parameter. Usually given, this value shifts the level of output for the same level of inputs.
More simply- Q= F(K,L)

question

Inputs for the production function

answer

the amount of Q produced for a given set of inputs.•Simply Q=F(K,L),&for a specific K and L.

question

The production function formula

answer

he change in output given a 1-unit increase in a particular input.

MP= change in Q(K,L) / change in an Input

question

Total product:

answer

total product divided by total input.

AP= Q(K,L) / Input

question

Marginal product:

answer

•Short run -time horizon over which at least one input cannot be adjusted.
•Ex: You expect your food truck will receive a lot of business at the festival this weekend. You can purchase more ingredients and hire additional workers but you're stuck with the size of the kitchen.

•Long run -time horizon over which all inputs can be adjusted.
•Ex: Business is booming. Over the next few years, you may want to buy an extra truck or open a traditional restaurant.

question

Average product

answer

-as equal amounts of an input are sequentially added to to the production process while holding all others fixed, output increments will eventually diminish.•In other words, increasing an input will increase output but at smaller and smaller gains.

question

Production and Time
•How quickly can the firm adjust inputs to maximize output?

answer

Along an isoquant, the firm maintains the same output but varies the combination of inputs.

question

•Law of Diminishing (Marginal) Returns

answer

•MRTS: the rate at which one input may be substituted for another without altering the level of output.
- ( MP l / MP k)

The MRTS is the slope of the isoquant, which is also equal to the ratio of marginal productivities.

question

Isoquants

answer

doubling inputs more than doubles output

question

Marginal Rate of Technical Substitution

answer

doubling inputs increases output by less than double

question

Increasing Returns to Scale

answer

Decreasing -if a firm grows too large it will become less efficient. Better to have many small firms (competition).
•Increasing -the bigger the better, at least from an efficiency standpoint. Better to have fewer, large firms.
•Constant -can support any firm size.

question

Decreasing Returns to Scale

answer

a Production Function

question

Important of returns to scale

answer

actual expenses to produce output; explicit costs
•Cost of new tractor, computer, etc.

question

A function that indicates the maximum output per unit of time that a firm can produce, for every combination of inputs with a given technology, is called:

answer

cost of next best alternative; implicit costs
•What are you giving up to attend college? Go to class today?

question

Accounting costs

answer

accounting costs + opportunity costs

•Note that opportunity costs are often hard to think about, but are important in decision-making, nevertheless.

question

Opportunity costs:

answer

FC= rK where r is rate of capitial

VC= wL where w is wage rate

TC= VC + FC

question

Economic costs

answer

The change in total cost for a given change in output. Always positive but could be increasing or decreasing.

Change in cost (q) / Change (q)

question

Fixed, Variable, and Total costs formulas

answer

Always positive, but can rise or fall depending on q.

Cost (q) / q

question

Marginal cost: and its formla

answer

FC / q

VC/ q

question

Average Total Cost

answer

Initially, labor is more productive, but diminishing returns take effect.
•As MP rises, MC falls (and vice versa).

question

Average Fixed Cost:
average variable cost

answer

MC intersects ATC at the minimum of the ATC curve. (Ray from origin is tangent to TC curve.)

MC intersects AVC at the minimum of the AVC curve.(Ray from origin is tangent to VC curve.)

question

Problem in the Short Run

answer

•From last time, we know that MP intersects AP at the the maximum of the AP curve
. •Due to diminishing returns, subsequent inputs have lower MP and will "pull down" the AP curve through lower averages of less productive inputs.

•Not coincidentally, the MC curve intersects the AVC curve at the minimum of the AVC curve. •Due to increasing costs of producing additional quantities, MC will "pull up" the average as subsequent Q become more costly to produce and larger MC increase the average.

question

MC , ATC , AVC on a graph

answer

•Outside of the short run, firms can adjust all inputs.
•Optimal point is where isoquant line is tangent to isocostline.•Spending the least amount on inputs to reach a given output.

•Firm's problem is analogous to consumer's problem•Instead of facing a given budget constraint, firms choose an isocostline (by choosing inputs).
•Instead of trying to reach the highest indifference curve subject to BC, firms try to operate on the lowest IL for a desired quantity.

question

MC and MP and their relationship to Averages on the graph

answer

C= rK + wL

Slope = - w/r

question

givens In the Long Run

answer

Select the combination of inputs where the isoquant is tangent to the isocost line.

A change in input prices will (for most isoquants) change the optimal bundle of inputs

question

Isocost Lines formulas

answer

This occurs where MRTS = (MPl / MPk) = ( W / R)

question

How to find cost minimization

answer

•Increase inputs by n, output increases by n
•Every additional unit has the same marginal cost: Long run average cost curve (LAC) is constant

question

how to solve : What is the optimal capital-labor ratio for this firm?

answer

1.Homogeneous good -Firm A's product is a perfect substitute for Firm B's product. No product differentiation.

2.Price takers -firms cannot affect the market price; they take the price as given. If they raise their prices they lose all customers to someone else.

3.Perfect information -both consumers and producers have full information. No asymmetric information (e.g. moral hazard, adverse selection, etc.).

4.Free entry/exit -no barriers to entry (e.g. patents, licensing, etc.). If a firm wants to start producing in a particular market they can. If a firm wants to exit a market they can liquidate all of their resources in the LR.

question

Constant Returns to Scale

answer

•If p > AVC, it is better to produce at a loss.
•If p < AVC, it is better to shut down production.

question

Analysis under Perfect Competition includes the following assumptions:

answer

•Producer surplus = Revenue -Variable Costs
•Accounting Profit = Revenue -Explicit Costs (Variable and Fixed)
•Economic Profit = Revenue -Explicit Costs -Implicit Costs

In the SR, when fixed costs are positive, PS will be greater than profit.

question

Key question: How do we lose the leastamount of money?

answer

is referred to as the total welfare of society.
•The efficient outcome is where total welfare/surplus is maximized

question

Important Differences

answer

They are the same thing: subsidies = negative taxes

Many different kinds
•Sales, income, corporate, capital gains, property, estate, etc.
•Ad valorem -applied as percentage of price (e.g. 7.5% sales tax)
•Excise -fixed amount based on quantity (e.g. $6.50 per gallon of alcohol); sometimes called "specific"

question

The sum of CS and PS is ...

answer

Es / Es - Ed (Elasticities)

Whichever is more elastic, consumer or producer, will bear more of the burden of a tax

question

Taxes and Subsidies

answer

•The EITC works as a wage subsidy, primarily for low-income working mothers
•Supply increases and competes down the market wage, but the EITC tops it up above original.
•PS increases, as does CS.
•Incidence?•Government pays for subsidy.
•While there is no surplus (unemployment), there is still DWL.

question

Pass-through, or buyer's burden:

answer

true

question

Effects of the EITC

answer

Find the max amount of each good you can buy when you exhaust income. those values are the intercept on the axis
Change in Y / Change in X is just the slope of the budget line

question

. For a monopolist, at every output level, average revenue is equal to price.
true or false

answer

1.Define constraint (budget line)
2.Find MRS
3.Set MRS equal to price ra)o and plug in constraint
4.Solve for op)mal quan))es

question

What is the first step in making a budget line

answer

find price consumption line by drawing a line through the bundles on ICs. Then make anew chart below and transpose the points from the price consumptions line and create the agg IC

question

To mathemacally find the optmal bundle, focus on the tangency point.

answer

•Technology increases production for any given level of capital and labor.

question

How do we predict how much of a good will be consumed at anyprice?

answer

-Start with Q= F(K,L)
-Multiply inputs by a constant " n "
-Compare that output to the initial output multiplied by the same constant " n "

If nQ < F(nK,nL) then its IRTS
if nQ = F(nK,nL) then its CRTS
If nQ > F(nK,nL) then its DRTS

question

Tech innovation and relation to capital and labor

answer

MC falls and vice versa

question

Finding Returns to Scale Mathematically

answer

question

in the SR ; as MP rises.....

answer

when the market price is equal ATC the firm makes zero economic profits.Once the market price is greater than ATC, the firm makes positive economic profits.

question

Assumptions when in perfect competition

answer

•Monopoly conditions are satisfied
•Unique good (no substitutes)
•One seller (no competitors
)•Barriers to entry (no threat of competition)
•Consumers cannot resell good

•Different buyers must have different elasticities
•If everyone has the same sensitivity to price, there is no way to charge different prices.

question

Breakeven point

answer

•Instead of setting one monopoly price, charge everyone their willingness-to-pay (WTP).
•MR is now the same as demand curve. Extract all consumer surplus.

question

When can a firm price discriminate?

answer

charge different prices based on quantity of good purchased.
•Per unit: small vs large coffee
•Block pricing: data charges on cell phone plan, utility bills

question

•1st degree price discrimination

answer

divide consumers into different groups and charge them different prices.

question

•2nd Degree Price Discrimination

answer

charge different prices based on time of purchase.

question

•3rd Degree Price Discrimination

answer

charge one fee for entry and another fee per unit

question

Intertemporal price discrimination

answer

adjust prices seasonally, daily, hourly, or even by the second.

question

Two-part tariffs -

answer

is the additional benefit accrued to others as Q increases by one unit.

question

Peak load pricing strat

answer

I and II are false.

question

The marginal external benefit (MEB)

answer

an increase in supply that will bring price down to the level it was before the demand shift.

question

Use the following statements to answer this question:
I. Markets that have only a few sellers cannot be highly competitive.
II. Markets with many sellers are always perfectly competitive.

answer

F(x)= G(x)/ H(x)

F1(x)= (top D X bottom - Top X Bottom D)/ Bottom squared (abs val)

question

In a constant-cost industry, an increase in demand will be followed by:

answer

when there are limits on which values x
can take
say the limit is between 0 and 5 but you get x=8. the answer would then be x=5

question

Taking the derivative of a fraction

answer

consumer surplus is the top triangle within the bounds of demand and supply. producer surplus is on the bottom.

question

• Constrained maximization

answer

Excess supply
(surplus) - above equilibrium
Excess demand
(shortage) - under equilibrium

question

Where to find consumer and producer surplus in a perfect equilibrium model?

answer

the curve "moves" when price or quantity change but the curve Shifts due to :
things such as Battery technology improves
making it cheaper to make
smartwatches.

question

Surplus vs Shortage

answer

-Shifts in the supply curve
• Technology
• Factor prices (e.g. wages, raw materials, interest rates)
• Weather
• Number of firms in the market

-Shifts in the demand curve
• Income
• Tastes/preferences
• Prices of other goods (substitutes vs. complements)
• Population

question

Moving Along vs Shifting along supply curve

answer

The price will increase by less than $100

question

What shifts the demand and supply curves

answer

• Completeness - every choice is ranked
• Transitivity - if A > B and B > C, then A > C
• Monotonicity - more is better(ID curve shifting up the supply curve line
• Convexity - combinations preferred to extremes (e.g. some X and some Y is
better than all X and zero Y)

question

What happens when a tax of $ 100 is levied on producers?
What if the tax is levied on the consumer?

answer

cant have two point on the ID curve "on top" of eachother
ICs cannot slope upward. This would violate monotonicity
ICs cannot cross. This would violate transitivity.

question

Properties of indifference curves

answer

substitutes- straight line from on product to the other.
compliment- curve takes on an L shape along the compliment parameters

question

Things indifference curves cannot do

answer

How much X would you be willing to give up to receive one more unit
of Y, remaining on the same IC?
• This depends on your starting point and your preferences

question

• Perfect substitutes indifference curve and
Perfect complements

answer

each additional unit of good X provides less utility

question

Marginal Rate of Substitution

answer

MUx = Change in Utility / Change in X
MUy= change in utitlity / Change in y

question

Diminishing marginal utility

answer

can be represented as the ratio of
marginal utilities

MRS= MUx/MUy

question

Marginal Utility formula

answer

Without scarcity, there would be no problem to solve.
Maximize utility subject to constraints
• Given income and prices, we can determine what bundles are
feasible.

question

Marginal rate of substitution Formula

answer

1)The first step is to find the maximum
number of each good you could
purchase given your income.
2)The maximum amounts of each good
are their respective intercepts.
Connecting the two gives you the
budget line.
3)You can choose any bundle on or below
the budget line: opportunity set.
Spending all of your income puts you
on the budget line.

question

Budget constraint assumptions

answer

Income:
• Increases in income shift- the budget line away from the origin.
• Decreases in income shift- the budget line toward the origin.
• Income changes do not change the slope of the budget line.

Price :
Changing the price of one good changes the relative price of the
other good.
• A price increase, by shrinking the opportunity set, effectively reduces
your income.
• A price decrease has the opposite effect as it expands the opportunity
set.
• Note that prices can change simultaneously and in different
directions.

question

Steps when finding budget constraints

answer

for a regular IC - Pick the point where the curve of the IC is tangent with the budget constraint

Perfect substitute ICs- Spend everything on
the cheapest good

Perfect compliment ICs- Buy mix at the kink which is tangent to the budget line

question

Budget constraint price VS income changes

answer

focus on the tangency
point
• The steps are as follows:
1. Define constraint (budget line)
2. Take the derivative of U with respect to both goods to find MRS
3. Set MRS equal to price ratio and plug in constraint
4. Solve for optimal quantities

question

Choosing a bundle when budget constraint and indifference curve is known

answer

Normal - Consume more as income
increases.
Inferior- Initially consume more but at certain point one begins to buy less as income increases.

question

How to mathematically find the optimal bundle?

answer

Positive Network Externalities - buy more of a good because other people
are buying it
• Negative Network Externalities - buy less of a good because other people
are buying it

question

• Normal vs. inferior goods

answer

Substitution effect - X is now relatively more expensive, making other goods
more attractive (i.e. change in opportunity costs). Consume less of X and
more of Y.
• Income effect - a higher Px shrinks the opportunity set, effectively reducing
purchasing power. Just as in a reduction of income, consume less of
everything.

(A decrease in Px would have the opposite effects.)
For an inferior good, the income
effect works in the opposite
direction.

question

• Positive Network VS Negative Network Externalities

answer

go back to slides
Labor supply example

question

• There are two different effects underlying the decreased demand for
(normal) good X after an increase in Px

answer

substitutes - Whichever good is cheaper is all
that matters for perfect substitutes, so the substitution effect is the driving factor.

compliment- The substitution effect is
zero since the fixed ratio is
what matters.

question

know how to recognize all three effects of a price change on a graph

answer

-Start with the initial budget line
-Since these are perfect
complements and we know the
optimal ratio, we know the
initial bundle.
-Adjust to new prices via budget line how ever many times it changes
-Start with the blank relationship
between hot dog price and
quantity of hot dogs consumed.Transpose each data point from
the previous graph.

question

Perfect substitute and compliment effects of a price change

answer

Just as in the graphs, the key is to add Q (not P).
Mario's demand for mushrooms: P = 24 − 2Qm
Luigi's demand for mushrooms: P = 16 − 8Ql
1. Rearrange in terms of Q
2. Sum Q
3. Rearrange in terms of P

Aggregating individual demand to market
demand allows us to calculate consumer surplus
for the entire market.

question

Tobias prefers to consume hot dogs and hot dog buns in a precise 1:1
ratio.
• What kind of good is this?
• The price of hot dogs increases from $1 to $2 to $3. Hot dog buns
remain constant at $1. Tobias has $12 total.
• What is the demand curve for hot dogs?

Steps to complete

answer

the percentage change in QD given a 1%
increase in the price
• Ex: if a 1% price increase in the Spotify subscription price decreases
subscribers by 2%, the elasticity is -2

question

Finding Market demand via math

answer

• If (E) > 1 , consumers respond to price changes. They are elastic.
• If (E) = 1 , consumers respond to price change with a proportional
change in consumption. This is referred to as unitary elastic.
• If (E) < 1 , consumers are less responsive to price changes. They are
inelastic.
• If (E) = ∞ , consumers will stop purchasing the good if there is even a
slight price increase. They are perfectly elastic and can be represented
by a horizontal demand curve.
• If (E) = 0 , consumers will buy the good at any price. They are
perfectly inelastic and can be represented by a vertical demand curve.

question

Price elasticity of demand (E):

answer

E= ( change in Q/ Q) / (change in P/ P)
If you're given a graph or not given a demand equation, use the arc
elasticity method.
• Use average Q and P
If you're given a demand equation, use point elasticity method.
• Example: Find elasticity if Q = 100 - 4P and price is $10
• Take derivative to find Change in Q over Change in P
• Plug in price to find Q.

question

Elasticities

answer

-Availability of substitutes - can you switch to something similar? Closer
substitutes equal larger substitution effects.
• Uber/Lyft vs local utility provider
-Time - if you need it now, you'll deal with the price.
• Broken phone vs broken headphones
• Note there can be short-run and long-run elasticities.
-Habit - if it is part of the routine or you are dependent on it, you will be less
sensitive to changes in price.
• Coffee, tobacco, etc.
-Proportion of budget - more expensive items have larger income effects
which (for normal goods) reinforce the substitution effect

question

Calculating Elasticities

answer

• Labor (L): human effort. Many types, including skilled and unskilled.
• Capital (K): Goods used to produce other goods. Machines, buildings,
technology, etc.
• Materials (M): Raw goods such as oil, lumber, etc.
• Land

question

What makes consumers more / less elastic?

answer

Q = F(K, L,M ; A)
• The highest output Q that can be generated given inputs.
• It would be feasible for the firm to produce less than this at given inputs, but that would
be inefficient.
• A is a technology parameter. Usually given, this value shifts the level of output
for the same level of inputs.
• More simply: Q = F(K, L)

question

• Common inputs in production

answer

the amount of Q produced for a given set of inputs.
• Simply Q = F(K, L) for a specific K and L.
• How many frozen bananas can you make if you work L hours?

question

The Production Function

answer

the change in output given a 1-unit increase in a
particular input.
MP= Change in Q (K,L)/ Change in input

question

• Total product

answer

total product divided by total input.
AP= Total Q(K,L)/ Total input

question

Marginal product

answer

We often hear how investment increases wages. Why/how
• What happens when we increase K from 10 to 20?
• Higher productivity for each worker, potentially higher wages.
• Think of extreme: small business with one worker who keeps profits. If a new
computer helps her increase production, her wages increase.
• Disclaimer: this conclusion depends on the production function.

question

Average product

answer

Technology increases production for any given level of capital and labor.
• A level shift up can be "good" for humanity: food to feed 7B people.
A change that affects the shape of the production function can be "bad" for
humanity: substitute capital for labor (e.g. automate jobs).

question

Impact of Capital on Wages

answer

time horizon over which at least one input cannot be
adjusted.
• Ex: You expect your food truck will receive a lot of business at the festival this
weekend. You can purchase more ingredients and hire additional workers but
you're stuck with the size of the kitchen.

question

How technology effects capital and Labor (K,L)

answer

time horizon over which all inputs can be adjusted.
• Ex: Business is booming. Over the next few years, you may want to buy an
extra truck or open a traditional restaurant.

question

Short run

answer

• Law of Diminishing (Marginal) Returns - as equal amounts of an input
are sequentially added to to the production process while holding all
others fixed, output increments will eventually diminish.
• In other words, increasing an input will increase output but at smaller and
smaller gains.
• Capital is typically used as the example of a fixed input in the SR (e.g.
factory size), though labor may be difficult to adjust as well (e.g. labor
contracts).

question

• Long run

answer

• In the long run, firms can choose all inputs.
• Build a larger factory, relocate to another country, etc.
• What combinations of inputs generate the same level of output?
Example: Q = 4KL
How many ways can we produce Q = 4?
Solve for K in terms of L: K = 1/L

question

Production in the Short run

answer

Budget restraints for a firms production . just like ID curves at any point on the line has the same Utility

question

Production in the Long Run

answer

• MRTS: the rate at which one input may be substituted for another
without altering the level of output

Work out examples for this , Most definitly will be a multi part on the exam

question

Isoquant

answer

• Increasing Returns to Scale - doubling inputs more than doubles output.Additional unit costs less to produce than the previous

• Constant Returns to Scale - doubling inputs doubles output. Increase inputs by n, output
increases by n

• Decreasing Returns to Scale - doubling inputs increases output by less than double. Additional unit costs more to produce than the previous

• This is different from the Law of Diminishing Returns. DRTS applies to output
when all inputs are increased. LDR is based changes to one input, holding
others fixed.

question

Marginal Rate of Technical Substitution (MRTS)

answer

Start with generic Q = f(K,L)
Multiply inputs by a constant, n. Compare that output, F(nK,nL), to
the initial output multiplied by the same constant, nQ
• IRTS if nQ < F(nK,nL)
• CRTS if nQ = F(nK,nL)
• DRTS if nQ> F(nK,nL)

question

• What happens if you use the same production process and input ratios, but vary the size of inputs?

answer

Decreasing - if a firm grows too large it will become less efficient. Better to
have many small firms (competition).
• Increasing - the bigger the better, at least from an efficiency standpoint.
Better to have fewer, large firms.
• Constant - can support any firm size.

question

Finding Returns to Scale

answer

actual expenses to produce output; explicit costs
• Cost of new tractor, computer, etc.

question

Importance of Returns to Scale

answer

cost of next best alternative; implicit costs
• What are you giving up to attend college? Go to class today?

question

• Accounting costs

answer

accounting costs + opportunity costs
• Note that opportunity costs are often hard to think about, but are important
in decision-making, nevertheless.

question

Opportunity costs

answer

expenses already made that cannot be recovered
• These should be ignored when making decisions; too late to matter
• Ex: You bought an app that you thought would help you with your coursework. A
different paid app was released that is even better for your work. What should you do?

question

Economic costs

answer

• Fixed costs - cannot adjust these in the short run
Variable costs - adjustable in the short run
Total costs - exactly what it sounds like
Tc = VC + FC

question

Sunk costs:

answer

Marginal cost= Change in cost (q) / Change in q
often considered the most important consideration in economic analysis

Average Total Cost: Cost (q)/ q
always positive bu can rise or fall depending on q

Average Fixed Cost= Fixed cost / q

Average Variable Cost= Variable cost / q

Know the graphical effects of these in the short run

question

Total cost , Fixed cost, Variable costs in the short run

answer

we know that MP intersects AP at the the maximum of the AP curve

Not coincidentally, the MC curve intersects the AVC curve at the minimum
of the AVC curve.

MC= w / MP (l)

AVC= w/ AP (l)

question

Cost Equations

answer

Outside of the short run, firms can adjust all inputs.
• Optimal point is where isoquant line is tangent to isocost line.
• Spending the least amount on inputs to reach a given output.
• Firm's problem is analogous to consumer's problem
• Instead of facing a given budget constraint, firms choose an isocost line (by
choosing inputs).
• Instead of trying to reach the highest indifference curve subject to BC, firms
try to operate on the lowest IL for a desired quantity

question

Important Relationships to do with Costs

answer

This occurs where MRTS =
MP (l) / MP (k) = w / r
• If a firm is cost-minimizing the above can be written as MP (l) / w = MP (k) / r

question

Long run Cost assumptions

answer

• Economies of Scope: C(q1,q2) < or equal to C(q1) + C(q2)

• Diseconomies of Scope:C(q1,q2)> or equal to
C(q1) + C(q2)

question

What is the optimal capital-labor ratio for this firm?

answer

• Over time, firms may become better at making their product, causing their
LAC to fall.
• This is different than economies of scale!
• Ex: aircraft contract bids

question

• Is it possible to reduce costs by producing two different (but related)
goods?

answer

the marginal rate of substitution of one good for another good.

question

Dynamic Changes in Cost

answer

The equation y = Pb B + Pw W defines all the (B,W) pairs that cost exactly y.

question

The slope of an indifference curve reveals:

answer

The slope of an indifference curve reveals

question

Budget equation

answer

indifference curves are convex at the origin because

question

the marginal rate of substitution of one good for another

answer

Envision a graph with meat on the horizontal axis and vegetables on the vertical axis. A strict vegetarian would have indifference curves that are:

question

the assumption of diminishing marginal rate of substitution

answer

If a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. This assumption is called:

question

horizontal lines

answer

you have an opinion about any possibility combination

question

transitivity

answer

you are no worse off with more

question

completeness

answer

prefer mixture over extremes

question

monotonicity

answer

If prices and income in a two-good society double, what will happen to the budget line?

question

convexity

answer

question

there will be no effect on the budget line

answer

question

-7/15

answer

satisfaction for consumption is maximized

question

6 hot dogs 6 buns

answer

Monica consumes only goods A and B. Suppose that her marginal utility from consuming good A is equal to 1/Qa, and her marginal utility from consuming good B is 1/Qb. If the price of A is $0.50, the price of B is $4.00, and the Monica's income is $120.00, how much of good A will she purchase?

question

marginal benefit equals marginal cost

answer

Bill currently uses his entire budget to purchase 5 cans of Pepsi and 3 hamburgers per week. The price of Pepsi is $1 per can, the price of a hamburger is $2, Bill's marginal utility from Pepsi is 4, and his marginal utility from hamburgers is 6. Bill could increase his utility by:

question

120

answer

An individual consumes products X and Y and spends $25 per time period. The prices of the two goods are $3 per unit for X and $2 per unit for Y. The consumer in this case has a utility function expressed as:
U(X,Y) = .5XY

a. Express the budget equation mathematically.
b. Determine the values of X and Y that will maximize utility in the consumption of X and Y.
c. Determine the total utility that will be generated per unit of time for this individual.

question

increase pepsi reduce burger

answer

question

.....

answer

Which of the following claims is true at each point along a price-consumption curve?

question

8 units

answer

After a good falls in price, consumers will tend to buy more of the good that has become cheaper
and less of those goods that are now relatively more expensive. This fact is called:

question

utility is maximized and all income is spent

answer

A change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant, is referred to as:

question

substitution effect

answer

question

income effect

answer

Suppose that the demand for artichokes (Qa) is given as:

Qa = 200 - 4P

Use the information in Scenario 4.2. Suppose that the price of artichokes is increased slightly from $10. The total expenditure by consumers on artichokes will ________ and the number of artichokes sold will ________.

question

25,000

answer

Recent research estimates that the short-run price elasticity of demand for gasoline in the U.S. is -0.3, and the long-run price elasticity of demand is -1.4. What happens if the government increases the federal gasoline tax?

question

rise, fall

answer

question

increase in short run decrease in long run

answer

When would it be plausible to describe the demand for a product by drawing a straight line, ?

question

demand becomes more elastic due to bandwagon

answer

If your income elasticity of demand for going to the movie theater is 1.5, then

question

only if no important factors other than price affect demand

answer

If the price of Apple's iPhone generates a cross-price elasticity for Samsung's Galaxy of 0.7 then these two products are

If the price of iPhone's generates a cross-price elasticity for Apple Watches of -0.6 then these two products are

question

a 1% increase in income will lead to a 1.5% increase in seeing movies at the theater. Your demand for movies is elastic with respect to income.

answer

A function that indicates the maximum output per unit of time that a firm can produce, for every combination of inputs with a given technology, is called:

question

substitutes compliments

answer

short run is

question

a production function

answer

long run is

question

at least one input is fixed

answer

According to the law of diminishing returns:

question

all variables can be changed

answer

the law of diminishing returns refers to

question

the marginal product of an input will eventually decline.

answer

the marginal product of an input is

question

marginal returns

answer

What describes the graphical relationship between average product and marginal product?

question

the addition to total output due to the addition of the last unit of an input, holding all other inputs constant

answer

question

Marginal product cuts average product from above, at the maximum point of average product.

answer

question

1.5 cars

answer

An isoquant:

question

AP=5K

answer

If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the:

question

is a curve that shows all the combinations of inputs that yield the same total output.

answer

The marginal rate of technical substitution is equal to the:

question

rate at which the firm can replace capital with labor without changing the output rate.

answer

question

marginal product of the inputs

answer

Use the following statements to answer this question.
I. The numerical labels attached to indifference curves are meaningful only in an ordinal way.
II. The numerical labels attached to isoquants are meaningful only in an ordinal way.

question

labor, capital

answer

question

I. is true II. is false

answer

A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function This production function exhibits:

question

one hour

answer

Which of the following production functions exhibits constant returns to scale?

question

increasing returns to scale for all outputs

answer

Does it make sense to consider the returns to scale of a production function in the short run?

question

q= k + l

answer

A firm's total cost function is given by:

TC = 4000 + 5Q + 10Q2

Fill out the following, use ^2 to indicate a squared value and / to indicate division. Put one space on either side of + and - signs.

Total Fixed Cost:
Average Fixed Cost:
Total Variable Cost:
Average Variable Cost:
Average Total Cost:
Marginal Cost:

question

no because we cannot change all the production inputs

answer

question

4000
4000/q
5q+10q^2
5+10q
4000/q+5+10q
5+20q

answer

question

sell to ABC corporation

answer

Which of the following is NOT an expression for the cost minimizing combination of inputs?

question

is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold.

answer

With its current levels of input use, a firm's MRTS is 3 (when capital is on the vertical axis and labor is on the horizontal axis). This implies:

question

anything without wage and rental rate

answer

A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm:

question

the marginal product of labor is 3 times the marginal product of capital

answer

An isocost line reveals the

question

could reduce the cost of producing its current output level by employing more labor and less capital.

answer

Bubba Burgers has discovered there are economies of scope available to the restaurant. Which is most likely to be a response to this discovery?

question

input combinations that can be purchased for a given total cost.

answer

Use the production function: Q = 4L1/2K1/2.

Refer to Scenario 7.3. Suppose that your firm decides to double its output to 400. To achieve this level of output the firm will have to:

question

bubba adds grilled chicken sandwiches

answer

Consider the following statements when answering this question:
I. Whenever a firm's average variable costs are falling as output rises, marginal costs must be falling too.
II. Whenever a firm's average total costs are rising as output rises, average variable costs must be rising too.

question

exactly double its inputs.

answer

When an isocost line is just tangent to an isoquant, we know that:

question

I is false, and II is true.

answer

question

output is being produced at minimum cost

answer

Acme Container Corporation produces egg cartons that are sold to egg distributors. Acme has estimated this production function for its egg carton division:
Q = 25L0.6K0.4,
where in one thousand carton lots, in person hours, and in machine hours. Acme currently pays a wage of $10 per hour and considers the relevant rental price for capital to be $25 per hour. Determine the optimal capital-labor ratio that Acme should use in the egg carton division.

question

the optimal capital-labor ratio remains the same

answer

Three Guys From Nowhere's short-run cost function is:

LaTeX: C\left(q,K\right)=\frac{0.5q^2}{K}+0.25K C ( q , K ) = 0.5 q 2 K + 0.25 K

where q is the number of pizzas produced and K is the number of ovens. Currently, TGFN's is leasing 4 ovens in the short run.

Calculate the average total cost of producing 10 pizzas

The manager is considering leasing 5 additional ovens. If TGFN's adds 5 more ovens, what is the average total cost of producing 10 pizzas?

question

14/15

answer

An effluent fee is imposed on a steel firm to reduce the amount of waste materials that it dumps in a river. Use the following two statements to answer this question:
I. The more easily factors of production can be substituted for one another (for example, capital can be used to reduce waste water), the more effective the fee will be in reducing effluent.
II. The greater the degree of substitution of capital for waste water, the less the firm will have to pay in effluent fees.

question

1.35 .78

answer

Marvel Studios uses 15 green screens to produce 10 units of output per period. Marvel's short-run cost function is:

LaTeX: C\left(q,K\right)=\frac{15q^2}{K}+12K C ( q , K ) = 15 q 2 K + 12 K

where q is the number of units produced and K is the number of green screens Marvel leases. Marvel's long-run cost function is: LTC(q) = 26.8q.

If Marvel used 4 fewer green screens in the short-run, would short-run average total costs increase or decrease?

Does Marvel's long-run cost curve exhibit increasing, constant, or decreasing returns to scale? (one word)

question

both true

answer

Crash Industries makes Wumpa Pies with the production function LaTeX: K^{0.5}L^{0.5} K 0.5 L 0.5 . The wage rate is 16 and the rental rate of capital is 4.

A) Suppose that the manager wants to produce 144 pies. How much K and L should be employed to minimize costs?

K =

, L =

B ) What is the cost of producing 144 pies?

C) Suppose that the manager is faced with the same problem as in (A) except that he has a fixed amount of K. In fact, K = 64. How much L should be employed to minimize costs? L =
16

D) and what is the total cost?

question

decrease constant

answer

undefined

question

28,72, 2304, 324, 5440

answer

undefined

1 of 468

question

Fully Rational Agents

answer

Non-Random Behavior, Common Objectives, Avoid Emotion decision making, not for practical living

question

What shifts the demand curve?

answer

income, prices of related goods, tastes, expectations, number of buyers

question

What shifts the supply curve?

answer

input prices, technology, number of sellers, expectations

question

Consumer Choice

answer

Bundles and Budgets

question

Bundle

answer

Specific combination of goods

question

Budget Constraint

answer

Set of Bundles that exhaust income at given prices

question

Budget Constraint Formula

answer

M= [P_X]X+[P_Y]Y

(M/Px)-(Py/Px)*Y = X

question

slope of budget constraint

answer

-Px/Py

question

Opportunity Costs are dictated by

answer

Price Change (they do not change when income changes)

question

Increase in Real Income

answer

Income increases and/or Prices decrease of One Good: New Bundles lost and New Bundles Gained

question

Decrease in Real Income

answer

Income goes down/or Price Increases of One Good: Some Bundles Lost, No Bundles Gainedq

question

Key Properties of Preference Ordering

answer

Completeness, Transitivity, Monotonicity and Convexity

question

Completeness (Preference Properties)

answer

All possible bundles are ranked

question

Transitivity (Preference Properties)

answer

Internal Consistency

question

Monotonicity (Preference Properties)

answer

more is better

question

Convexity (Preference Properties)

answer

Combinations preferred to extremes, balanced consumption

question

Key Properties of Indifference Curves

answer

Ubiquitous, Parallel, Negative Slope, Diminishing Slope

question

Why are indifference curves pointed up (Preference Properties)

answer

Convexity

question

How do we demonstrate if we want more of x than y? (Preference Properties)

answer

Completeness

question

Indifference Curve

answer

graphical representation of Preferences

question

Ubiquitous (Indifference Curves)

answer

Any possible bundle has an IC passing through it [it has to have ranking as well]

question

Parallel (Indifference Curves)

answer

Indifference curves cannot cross each other

question

Negative Slope (Indifference Curves)

answer

Sacrifice needed to maintain utility (you are giving one good up for the other)

question

Why are indifference curves negative sloping?

answer

An upward sloping Indifference curve means that both goods are being both increased and you cannot be indifferent due to Monotonicity

question

Diminishing Slope (Indifference Curves)

answer

Indifference Curves become less steep as they move down and to their right

question

Why are Indifference Curves diminishing?

answer

As we move from 1 extreme bundle down toward an equal parting, it gets more satisfying. If you keep going down, you end up going to another extreme bundle that is not as favorable.

question

Convexity says (Indifference Curves)

answer

ICs are curved

question

Convexity Property of Preferences

answer

Balance is Important. The more of one good we have, the more we need in order to give up one unit of another good.

question

Budget Constraints have

answer

Constant Slopes

question

ICs have a

answer

Constantly Changing Slope

question

Marginal Rate of Substitution (MRS)

answer

(the rate at which a consumer would be willing to trade off one good for another) Slope of the IC. (change of good x/ change of good y) dx/dy

question

Perfect Substitutes

answer

We dont care about a perfect balance in consumption. We stretch the IC (straight Lines)

question

Perfect Complements

answer

goods that a consumer will consume in the same ratio regardless of their relative price. We violate Monotonicity (right angles)

question

Perfect Substitutes vs Perfect Complements

answer

Perfect Substitutes have no preference for balance, so convexity is gone. Perfect Complements have hyper specific balance requirements, so convexity is as strong as possible

question

Budget Constraints are _ to our highest IC

answer

Tangent (two lines touch in one place and don't cross)

question

What does the point of tangency mean?

answer

The Price Ratio (the slope of the budget constraint) is equal to the marginal rate of substitution (slope of the indifference curve)

question

Price Ratio

answer

the price of good on the horizontal axis divided by the price of the good on the vertical axis. -Px/Py

question

What happens when Convexity is not important

answer

Marginal Rate of Substitute is not equal to the Price Ratio. We do not care about a balance in two goods.

question

Corner Solutions

answer

Extreme Bundles (lightly curved straight lines)

question

When do we see the Corner Solution

answer

IC not strongly convexity. Implies easily substitutable goods [not perfect]

question

Changes in Real Income

answer

results in a consumer's welfare changing, but a change in real income does not necessarily result in the consumer becoming better or worse off

question

Interest Rate

answer

PV(M2)=M2/(1+r)

question

Utility

answer

Ability or capacity of a good or service to be useful and give satisfaction to someone.

question

Optimal Consumer Choice

answer

an affordable combination of goods and services that maximizes a consumer's utility. (MUx/MUy=Px/Py)

question

MRS and Utility

answer

MUx/MUy=Px/Py

question

What is the purpose of the demand curve

answer

Measure how consumers respond to changes in price of a good

question

Engel Curve

answer

A graphical representation of how income changes quantity demanded (for income instead of price)

question

Two effects of price change

answer

substitution effect and income effect

question

Translating the Budget Constraint to a Individual Demand Curve

answer

For each price, we have a quantity demanded

question

As price changes we see someone's _ change

answer

utility

question

As Price Falls the consumer move to ___ ICs

answer

Higher (getting happier as price falls)

question

Normal vs. Inferior Goods

answer

question

Substitution Effect

answer

other goods become more attractive

question

Income Effect

answer

the change in consumption resulting from a change in real income

question

Substitution effect___ works against price change

answer

always

question

Total Effect

answer

income effect + substitution effect

question

The Income effect ___ on the good

answer

Depends (Normal vs Inferior)

question

An Increase in Real Income causes

answer

decrease demand for inferior goods and increase in normal goods

question

Movement from original bundle to hypothetical

answer

substitution effect

question

The Substitution Effects Always Reduces the ____ Demanded of the good whose ____ ____

answer

Quantity, Price Increased

question

Movement from Hypothetical Bundle to actual bundle is the

answer

income effect

question

For Inferior Goods, The Income effect works ___ the substitution effect

answer

against (The substitution effect is so strong that it over shoots the total effect, so the income effect has to work back in the other direction)

question

For Perfect Complements

answer

There is no Substitution effect only income effect (still right angles)

question

For Perfect Substiutes

answer

The Substitution Effect is the only thing that is occuring

question

How to Find Market Demand

answer

1. Rewrite as Q=
2. Add Qx+Qe=Qm
3. Rewrite as P=...

question

price elasticity of demand

answer

the responsiveness of consumers in a market to changes in market price
(Percentage Change in Qd [quantity demanded] resulting in % change in price]

question

Elastic Chart

answer

Elastic e < -1
Unit Elastic e = -1
Inelastic e > 0

question

Elasticity formula

answer

% change in quantity / % change in price
or
(change in Q/ Qo) / (Change in Price/P0)
or
Change in Q/ Change in P x (p/q)
or
[mostly this] P/Q x 1/slope

question

| E | > 1 (Elasticity and expenditure)

answer

a price reduction increases total expenditure, a price decrease reduces

question

| E | = 1 (Elasticity and expenditure)

answer

Total Expenditure is at its maximum)

question

| E | < 1 (Elasticity and expenditure)

answer

A price reduction reduces total expenditure; a price increase increases it

question

Determinants of Elasticity

answer

question

Income Elasticity

answer

responsiveness of average consumer for a particular good to change in income (percentage change in quantity demanded resulting in a change in income)

question

Income Elastic Formula

answer

Em= (Change in Quantity/ Quantity)/ (change in M/M) or

Em= (Change in Q/Change in M) x M/Q

question

If Em>1

answer

Luxury Good

question

Em<1

answer

Necessity Good

question

If Em<0

answer

Inferior Good

question

cross price elasticity

answer

responsiveness of consumers for a particular good to changes in price of another good (percentage change in quantity demanded of good x resulting in a % change in price y)

question

cross price elasticity formula

answer

Ex,y = (%Δ Qx / Qx)/(% Δ PY/ PY)

question

Production

answer

Any process that uses identifiable inputs to create measurable output

question

Production Function

answer

Maximum possible output from input bundle (Q=fx)

question

Profits (pi)

answer

p*q-c(q) (Revenues-Costs)

question

Problems with Production Functions

answer

Incentive Problems and Bounded Rationality

question

Strengths of Production Functions

answer

Clear Relevance
Captures Market Dynamics
Makes Everything Simplier

question

Long Run

answer

amount of time needed to change amounts of all inputs in production

question

Short Run

answer

Time horizon which at least one input quantity may not be adjusted (in the short-run, inputs are either variable (may be changed) or fixed)

question

Q=2KL
A firm owns one factory and varies with labor. Rewrite the Function

answer

Q=2L

question

law of diminishing returns

answer

question

Total Product

answer

Amount of output as a function of the amount of variable input (i.e. the short run version of a production function)

question

Marginal Product

answer

change in out due to a 1-unit change in a variable input (rate of change; derviate)

question

marginal product of labor

answer

Change in Quantity/ Change in Labor
or
the derivative of Total Product
dTP/dL

question

MPL is the

answer

slope of the Total Product Curve

question

Average Product

answer

Total Output Divided by the amount of the variable input

Q/L

question

How do we represent our function graphically

answer

1.) Quantity Produced
2.) solve for K in terms of L

question

Isoquant

answer

all combinations of variable inputs that yield a given level of output

question

Marginal Rate of Technical Substitution

answer

The rate at which one input may be substituted for another without altering output.

Change of K/ Change of L

question

Consumer Utility is represented with

answer

Indifference Curves

question

Firm Production is represented with

answer

Isoquants

question

Returns to Scale

answer

change in output brought on by change in inputs. (measures efficiency, not total output)

question

Economies of Scale

answer

offer insight into firm size and competitiveness in an industry

question

Increasing Returns to Scale

answer

a proportional increase in all inputs results in more than proportional increase in output

question

Decreasing Returns to Scale

answer

a proportional increase in all inputs results in less than proportional increase in output

question

Constant Returns to Scale

answer

a proportional increase in all inputs results in an equally proportional increase in output

question

How to Calculate RTS:

answer

tf(K,L) and f(tK,tL)

question

If tf(K,L) > f(tK,tL)

answer

(multiplying both inputs by t gets us less than t times the output)

Decreasing Returns to Scale

question

If tf(K,L) < f(tK,tL)

answer

(multiplying both inputs by t gets us more than t times the input)

Increasing Returns to Scale

question

If tf(K,L) = f(tK,tL)

answer

Constant Returns to Scale

question

DRTS leads to a competitive market with

answer

many small firms

question

IRTS leads to a small competitive market with

answer

few large firms

question

Total Cost Forumla

answer

(rK+wL)
FC+VC

question

answer

rental rate

question

answer

capital

question

FC (Fixed Cost)

answer

question

VC (variable Cost)

answer

question

Average Fixed Cost

answer

FC/Q

((rk)/Q)

question

Average Variable Cost

answer

VC/Q

((wL)/Q)

question

Average Total Cost

answer

TC/Q

((rk+wL)/Q)

question

Marginal Cost formula

answer

change in total cost / change in quantity

or

dTC/dQ

(change in FC + change in VC)/Q

question

Total Cost Curve

answer

a graphical representation showing how the cost of producing one more unit depends on the quantity that has already been produced

question

Marginal Cost Curve

answer

(MP intersects AP at maximum point on AVC curve)
MC=w/MP

question

MP and MC relationship

answer

w(1/AP)= w/AP

question

AP and AVC relationship

answer

Isocost Line

question

Prices allow us to see the Firms

answer

by finding the point of tangency between the isocost line and the isoquant

question

How do we find the Optimal Production with Firms

answer

-w/r

question

Slope of the Isocost

answer

by finding the optimal production

question

How to find the Long Run Average Cost Curve

answer

LMC=LAC

question

Slope of LRTC

answer

Constant Returns to Scale Graphed

question

Flat LRAC

answer

Increasing Returns to Scale Graphed

question

Declining LRAC (over a large span of Q)

answer

Decreasing Returns to Scale Graphed

question

LRAC (long run average cost curve)

answer

the short run or long run process by which a firm determines the price and output level that returns the greatest profit

question

Increasing LRAC (over a large span of Q)

answer

total revenue - total costs (explicit and implicit)

question

profit maximization

answer

total revenue - total explicit cost

question

Economic Profit

answer

question

Accounting Profit

answer

MC=MR

question

Critical Assumptions for Perfect Competition

answer

TR-VC-FC ≥ -FC
or
TR ≥ VC
or
PQ ≥ VC
or [mostly]
P≥AVC

question

short run profit maximization

answer

-Profit= -FC

question

When to Produce

answer

for individual firms, the dollar amount they benefit by producing the profit maximizing level of output (i.e. benefit of not shutting down)

question

When to Shutdown

answer

MC curve above AVC

question

producer surplus

answer

may choose to produce and earn positive or negative economic profit (cannot exit market as only long run can do that)

question

short-run individual supply curve

answer

where price is equal to ATC

question

In the short run firms

answer

All Costs are Variable as firms are able to purchase or sell.
No Barriers to Entry: Firms may enter or leave freely.

All Firms in a market exhibiting long run equilibrium earn zero economic profits

question

A firms break even point is

answer

Measure of Welfare in the Market

question

Perfect Competition in the Long Run

answer

Taxes
Quantity Based: Excise Tax
Price Based: Ad velorem tax (per dollar)
Price Controls (Ceilings and Floors)
Tariffs and Quotas

question

Surplus

answer

decreases demand (shifts left)

question

Distortions in Surplus

answer

decreases supply (shift left)

question

Excise Tax on Buyers

answer

(P-P2)Q2*

question

Excise Tax on Sellers

answer

(P2 + x - P)Q2*

question

Tax incidence for sellers

answer

the marginal rate of substitution of one good for another good.

question

tax incidence for buyers

answer

-7/15

question

The slope of an indifference curve reveals:

answer

the slope of the budget line will not change.

question

answer

represent the quantity of each good that could be purchased if all of the budget were allocated to that good.

question

Suppose that the prices of good A and good B were to suddenly double. If good A is plotted along the horizontal axis,

answer

Px/Py

question

The endpoints (horizontal and vertical intercepts) of the budget line:

answer

any of the above are possible.

question

A consumer maximizes satisfaction at the point where his valuation of good X, measured as the amount of good Y he would willingly give up to obtain an additional unit of X, equals:

answer

2 lemonades for each popcorn.

question

The fact that Alice spends no money on travel:

answer

the additional satisfaction from consuming one more unit of a good.

question

The price of lemonade is $0.50; the price of popcorn is $1.00. If Fred has maximized his utility by purchasing lemonade and popcorn, his marginal rate of substitution will be:

answer

Px/Py = money income.

question

Marginal utility measures:

answer

if A is more expensive than B, then Xavier must prefer A over B.

question

Oscar consumes only two goods, X and Y. Assume that Oscar is not at a corner solution, but he is maximizing utility. Which of the following is NOT necessarily true?

answer

the marginal utility of apples decreases.

question

The principle of revealed preference would say that if Xavier chooses market basket A over market basket B then:

answer

none of the above.

question

As we move downward along a demand curve for apples,

answer

both goods are normal.

question

The change in the price of one good has no effect on the quantity demanded of another good. These goods are:

answer

substituition

question

When the income-consumption curve has a positive slope throughout its entire length, we can conclude that

answer

It will lead to an increase in consumption only for a normal good.

question

The change in the quantity demanded of a good resulting from a change in relative price with the level of utility held constant is called the ________ effect.

answer

less,less

question

Which of the following is true concerning the income effect of a decrease in price?

answer

has shifted to the right.

question

answer

there are more substitutes for sirloin steak than for all meats.

question

Recently, Skooterville has experienced a large growth in population. As a result, the market demand curve for housing in Skooterville:

answer

consumer surplus.

question

The market demand for sirloin steak is probably more elastic than the market demand for all meat because

answer

increases

question

The difference between what a consumer is willing to pay for a unit of a good and what must be paid when actually buying it is called

answer

A monopolist can charge as high a price as it likes.

question

When the price of wood (which is an input in the production of furniture) falls, the consumer surplus associated with the consumption of furniture

answer

higher; smaller

question

Which of the following statements is not a correct characterization of a pure monopoly?

answer

equate marginal revenue and marginal cost.

question

Compared to the equilibrium price and quantity sold in a competitive market, a pure monopolist will charge a ________ price and sell a ________ quantity.

answer

the quantity supplied at any particular price depends on the market demand curve.

question

To find its profit-maximizing output level, a pure monopolist will

answer

set price above marginal cost.

question

The pure monopolist has no supply curve because

answer

question

Monopoly power results from the ability to

answer

a decrease in consumer surplus in the widget market.

question

What is the value of the Lerner index under perfect competition?

answer

pays a price for the factor of production that depends on the number of units purchased.

question

If the market for widgets is suddenly monopolized, we should expect:

answer

a degree of monopsony power.

question

Unlike a firm buying a particular factor of production in a perfectly competitive market, a pure monopsonist

answer

The average expenditure curve
The marginal expenditure curve
Both c) and d)

question

answer

The marginal rate of substitution of one good for another good

question

answer

The assumption of a diminishing marginal rate of substitution

question

The slope of an indifference curve reveals

answer

Horizontal lines

question

Indifference curves are convex to the origin because

answer

Transitivity

question

Envision a graph with meat on the horizontal axis and vegetables on the vertical axis. A strict vegetarian would have indifference curves that are

answer

-7/15

question

If a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. This assumption is called

answer

6 packages of hot dogs and 6 packages of buns

question

answer

Marginal benefit equals marginal cost

question

answer

120

question

Satisfaction from consumption is maximized when

answer

Increasing pepsi consumption and reducing hamburger consumption

question

answer

The marginal utility of x may be positive or negative (depending on the quantity of X and Y consumed)

question

answer

8 units

question

Suppose your utility from consuming X and Y is expressed as u(X,Y) = ln(XY) where ln() is the natural logarithm operator. Given this information, which of the following statements is NOT true?

answer

-dY/dX = MUx(X,Y)/MUy(X,Y)

question

answer

Utility is maximized, and all income is spent

question

Which of the following expressions in the fgure represents the marginal rate of substitution, MRSxy?

answer

Food is an inferior good and clothing a normal good

question

Which of the following is true at each point along a price-consumption curve?

answer

The substitution effect

question

Thee effect of a decrease in the price of food, as depicted in the figure, leads us to believe that

answer

The income effect

question

After a good falls in price, consumers tend to buy more of the good that has become cheaper and less of those goods that are now relatively more expensive. This fact is called

answer

25,000

question

A change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant, is referred to as

answer

rise; fall

question

answer

Consumer expenditures on gasoline increase over the short run and decline over the long run.

question

answer

Demand curve becomes more elastic due to the bandwagon effect

question

answer

Only if no important factors other than price affect demand

question

answer

A 1% increase in income will lead to a 1.5% increase in seeing movies at the theater. Your demand for movies is elastic with respect to income.

question

When would it be plausible to describe the demand for a product by drawing a straight line, Q=a - bP?

answer

Subsitutes

question

If your income elasticity of demand for going to the movie theater is 1.5, then

answer

Complements

question

If the price of Apple's iPhone generates a cross-price elasticity for Samsung's Galaxy of 0.7 then these two products are

answer

A production function

question

If the price of iPhones generates a cross-price elasticity for apple watches of -0.6 then these two products are

answer

A time period in which at least one input is fixed

question

A function that indicates the maximum output per unit of time that a firm can produce, for every combination of inputs with a given technology, is called

answer

The marginal product of an input will eventually decline

question

The short run is

answer

Capital, plant size, & labor

question

According to the law of diminishing returns

answer

Marginal returns

question

Which of the following inputs are variable in the long run?

answer

The addition to total output due to the addition of the last unit of an input, holding all other inputs constant

question

The law of diminishing returns refers to diminishing

answer

Marginal product cuts average product from above, at the maximum point of average product

question

The marginal product of an input is

answer

MP = 1.5 cars

question

What describes the graphical relationship between average product & marginal product?

answer

Even though any given production process exhibits diminishing returns, labor productivity increases with technological improvements

question

answer

AP = 5K

Because: you divide 5KL/L and labor gets cancelled

question

This figure shows the impact of technological improvements and conveys the idea that

answer

Is a curve that shows all the combinations of inputs that yield the same total output

question

answer

Rate at which the firm can replace capital with labor without changing the output rate

question

An isoquant

answer

Ratio of the marginal products of the inputs

question

If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the

answer

Labor, capital

question

The marginal rate of technical substitution is equal to the

answer

I is true
II is false

question

answer

One hour

question

I. The numerical labels attached to indifference curves are meaningful only in an ordinal way.
II. The numerical labels attached to isoquants are meaningful only in an ordinal way.

answer

Increasing returns to scale for all output levels

question

answer

q = K + L

question

A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function C=L0.5M0.75. This production function exhibits

answer

No, we cannot change all of the production inputs in the short run

question

Which of the following production functions exhibits constant returns to scale?

answer

Sell to ABC corporation

question

Does it make sense to consider the returns to scale of a production function in the short run?

answer

Is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold

question

answer

-4/5

question

answer

The marginal product of labor is 3 times the marginal product of capital

question

answer

Input combinations that can be purchased for a given total cost

question

With its current levels of input use, a firm's MRTS is 3 (when capital is on the vertical axis and labor is on the horizontal axis). This implies

answer

Bubba adds grilled chicken sandwiches to the menu

question

An isocost line reveals the

answer

I is false
II is true

question

Bubba Burgers has discovered there are economies of scope available to the restaurant. Which is most likely to be a response to this discovery?

answer

Output is being produced at minimum cost

question

answer

The optimal capital-labor ratio remains the same

question

When an isocost line is just tangent to an isoquant, we know that

answer

Both are true

question

answer

question

answer

question

Why does a price ceiling prevent the market from reaching equilibrium prices and quantities?

answer

demand is perfectly inelastic -- Q does not change at all when price changes (vertical demand curve)
Ex) essential goods

question

Why does a price floor prevent the market from reaching equilibrium prices and quantities?

answer

demand is inelastic -- demand is relatively unresponsive to a price change

question

If price elasticity of demand = 0,

answer

demand is unit elastic -- % change in demand is the same as % change in price

question

If price elasticity of demand is < 1,

answer

demand is elastic -- demand is responsive to a price change

question

If price elasticity of demand = 1,

answer

demand is perfectly elastic -- if price increases even slightly, D=0

question

If price elasticity of demand > 1,

answer

supply is perfectly inelastic -- does not respond to change in demand (perfectly vertical)

question

If price elasticity of demand is infinite,

answer

supply is inelastic -- supply is relatively unresponsive to change in demand

question

If price elasticity of supply = 0,

answer

supply is perfectly elastic -- change in demand does not change price (perfectly horizontal)

question

If price elasticity of supply < 1,

answer

supply is elastic -- supply is relatively responsive to change in demand

question

If price elasticity of supply is infinite,

answer

S&D helps us make predictions about perfectly competitive markets and when all firms and consumers are price takers.

question

If price elasticity of supply > 1,

answer

1) many buyers and sellers
2) identical products
3) all market agents have full information
4) transaction costs are negligible
5) firms can easily enter and exit

question

What are the assumptions of the supply and demand model?

answer

1) monopoly/monopsony
2) differentiated goods
3) asymmetrical information
4) transportation is not free
5) new firms cannot enter easily or face threats

question

When is it appropriate to use a supply and demand model?

answer

question

When is it NOT appropriate to use a supply and demand model?

answer

question

What are the properties of a rational consumer's preferences?

answer

Price, income of consumers, prices of related goods, preferences of consumers, externalities

question

What are the properties of indifference curves?

answer

relates consumer's utility to their demand curve -- PCC slopes up because utility is higher when more can be consumed (more is better)

question

What other factors might drive demand, but are not captured in the demand curves from class?

answer

the relationship between the quantity demanded of a single good and income, holding prices constant

question

Price Consumption Curve (PCC)

answer

If EI is > 0, the good is normal
If EI is < 0, the good is inferior
*refer to last page of notes

question

Engel Curve

answer

A price increase shrinks the opportunity set --> effectively reduces income

question

How is the shape of the Engel curve determined by the income elasticity of demand? (if goods are normal or inferior)

answer

Changing the price of 1 good changes the relative price of the other good

question

How does a change in income relate to a change in price?

answer

MRS (slope of IC) = MRT (slope of BC)
MUx/Px = MUy/Py
The budget line is tangent to the indifference curve at the bundle chosen

question

How does a change in the price of one good change the total opportunity set?

answer

How responsive consumers are to price change
If cross price elasticity > 0, goods are substitutes
If cross price elasticity < 0, goods are complements

question

How do you know if a consumer chooses optimally?

answer

E = %ΔQ/%ΔP = ΔQ/ΔP P/Q = dQ/dP P/Q

question

Cross Price Elasticity

answer

Downward sloping and straight

question

What is the formula for finding elasticity?

answer

L-shaped

question

If two goods are perfect substitutes, then the indifference curves for those two goods would be

answer

Set of numbers that reflect the relative rankings of bundles of goods

question

If two goods are perfect complements, then the indifference curves for those two goods would be

answer

3/x

question

Utility

answer

the marginal rate of substitution of one good for another good.

question

What is the derivative of ln (x^3) with respect to x

answer

the assumption of a diminishing marginal rate of substitution.

question

The slope of an indifference curve reveals:

answer

horizontal lines.

question

Indifference curves are convex to the origin because of:

answer

Transivity

question

Envision a graph with meat on the horizontal axis and vegetables on the vertical axis. A strict vegetarian would have indifference curves that are:

answer

There will be no effect on the budget line.

question

If a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. This assumption is called:

answer

None of the above

question

If prices and income in a two-good society double, what will happen to the budget line?

answer

-7/15

question

answer

marginal benefit equals marginal cost.

question

answer

question

Satisfaction from consumption is maximized when:

answer

question

Properties of indifference curves

answer

Change in U/ Change in X

question

Implications of IC Properties

answer

MU of X
/
MU of Y

question

Marginal utility of x formula

answer

Opportunity set

question

Marginal rate of substitution formula

answer

•Increases in income shift- the budget line away from the origin.
•Decreases in income shi- the budget line toward the origin.
•Income changes do not change the slope of the budget line.

question

any bundle on or below the budget line:

answer

•The steps are as follows
:1.Define constraint (budget line)
2.Find MRS
3.Set MRS equal to price ra)o and plug in constraint
4.Solve for op)mal quan))es

question

possible effects on the budget line

answer

Normal : Consume more as income increases.

Inferior: Initially consume more as income increases, but at some point income is large enough that consumption of the inferior good falls.

question

To mathema)cally find the op)mal bundle,

answer

-buy more of a good because other people are buying it
•Social media and Microsoft Office
•Bandwagon effect

question

Normal vs Inferior Good

answer

buy less of a good because other people are buying it
•Ski tickets, road trips
•Snob effect: limited editions and rare items

question

Positive Network Externalities

answer

question

Negative Network Externalities

answer

Whichever good is cheaper is all that matters for perfect substitutes, so the substitution effect is the driving factor.

question

What are the responses to price changes

answer

The substitution effect is zero since the fixed ratio is what matters.

question

Perfect Substitutes Characteristics

answer

Adding up all of the individual demand curves gives us the aggregate demand curve.

question

Perfect Complements Characteristics

answer

Just as in the graphs, the key is to add Q (not P).

1.Rearrange in terms of Q
2.Sum Q
3.Rearrange in terms of P

question

aggregate demand curve.

answer

•Price changes alter aggregate demand in a predictable direction.
•Income changes are not so clear, especially if there are distributional changes.

question

Market demand via math

answer

When we buy something, we almost always would have paid more than the price to acquire it.

•The difference between our maximum willingness-to-pay (WTP) and the price is called consumer surplus

question

Changes to Aggregate Demand

answer

question

Consumer Surplus

answer

question

Price elasticity of demand (!):

answer

(Change in Q / Av Q) / (Change in P / Av P)

question

Different Elasticities and their meaning

answer

question

Calculating Elasticities (Formula)

answer

question

Elasticities and Expenditure

answer

Utility is maximized, and all income is spent.

question

What makes consumers more / less elastic?

answer

the substitution effect.

question

What is true at each point along a price-consumption curve?

answer

the income effect.

question

After a good falls in price, consumers will tend to buy more of the good that has become cheaper
and less of those goods that are now relatively more expensive. This fact is called:

answer

a 1% increase in income will lead to a 1.5% increase in seeing movies at the theater. Your demand for movies is elastic with respect to income.

question

A change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant, is referred to as:

answer

question

If your income elasticity of demand for going to the movie theater is 1.5, then

answer

question

Inputs for the production function

answer

the amount of Q produced for a given set of inputs.•Simply Q=F(K,L),&for a specific K and L.

question

The production function formula

answer

he change in output given a 1-unit increase in a particular input.

MP= change in Q(K,L) / change in an Input

question

Total product:

answer

total product divided by total input.

AP= Q(K,L) / Input

question

Marginal product:

answer

question

Average product

answer

question

Production and Time
•How quickly can the firm adjust inputs to maximize output?

answer

Along an isoquant, the firm maintains the same output but varies the combination of inputs.

question

•Law of Diminishing (Marginal) Returns

answer

question

Isoquants

answer

doubling inputs more than doubles output

question

Marginal Rate of Technical Substitution

answer

doubling inputs increases output by less than double

question

Increasing Returns to Scale

answer

question

Decreasing Returns to Scale

answer

a Production Function

question

Important of returns to scale

answer

actual expenses to produce output; explicit costs
•Cost of new tractor, computer, etc.

question

A function that indicates the maximum output per unit of time that a firm can produce, for every combination of inputs with a given technology, is called:

answer

cost of next best alternative; implicit costs
•What are you giving up to attend college? Go to class today?

question

Accounting costs

answer

accounting costs + opportunity costs

•Note that opportunity costs are often hard to think about, but are important in decision-making, nevertheless.

question

Opportunity costs:

answer

FC= rK where r is rate of capitial

VC= wL where w is wage rate

TC= VC + FC

question

Economic costs

answer

The change in total cost for a given change in output. Always positive but could be increasing or decreasing.

Change in cost (q) / Change (q)

question

Fixed, Variable, and Total costs formulas

answer

Always positive, but can rise or fall depending on q.

Cost (q) / q

question

Marginal cost: and its formla

answer

FC / q

VC/ q

question

Average Total Cost

answer

Initially, labor is more productive, but diminishing returns take effect.
•As MP rises, MC falls (and vice versa).

question

Average Fixed Cost:
average variable cost

answer

MC intersects ATC at the minimum of the ATC curve. (Ray from origin is tangent to TC curve.)

MC intersects AVC at the minimum of the AVC curve.(Ray from origin is tangent to VC curve.)

question

Problem in the Short Run

answer

question

MC , ATC , AVC on a graph

answer

question

MC and MP and their relationship to Averages on the graph

answer

C= rK + wL

Slope = - w/r

question

givens In the Long Run

answer

Select the combination of inputs where the isoquant is tangent to the isocost line.

A change in input prices will (for most isoquants) change the optimal bundle of inputs

question

Isocost Lines formulas

answer

This occurs where MRTS = (MPl / MPk) = ( W / R)

question

How to find cost minimization

answer

•Increase inputs by n, output increases by n
•Every additional unit has the same marginal cost: Long run average cost curve (LAC) is constant

question

how to solve : What is the optimal capital-labor ratio for this firm?

answer

question

Constant Returns to Scale

answer

•If p > AVC, it is better to produce at a loss.
•If p < AVC, it is better to shut down production.

question

Analysis under Perfect Competition includes the following assumptions:

answer

question

Key question: How do we lose the leastamount of money?

answer

is referred to as the total welfare of society.
•The efficient outcome is where total welfare/surplus is maximized

question

Important Differences

answer

question

The sum of CS and PS is ...

answer

Es / Es - Ed (Elasticities)

Whichever is more elastic, consumer or producer, will bear more of the burden of a tax

question

Taxes and Subsidies

answer

question

Pass-through, or buyer's burden:

answer

true

question

Effects of the EITC

answer

Find the max amount of each good you can buy when you exhaust income. those values are the intercept on the axis
Change in Y / Change in X is just the slope of the budget line

question

. For a monopolist, at every output level, average revenue is equal to price.
true or false

answer

1.Define constraint (budget line)
2.Find MRS
3.Set MRS equal to price ra)o and plug in constraint
4.Solve for op)mal quan))es

question

What is the first step in making a budget line

answer

find price consumption line by drawing a line through the bundles on ICs. Then make anew chart below and transpose the points from the price consumptions line and create the agg IC

question

To mathemacally find the optmal bundle, focus on the tangency point.

answer

•Technology increases production for any given level of capital and labor.

question

How do we predict how much of a good will be consumed at anyprice?

answer

question

Tech innovation and relation to capital and labor

answer

MC falls and vice versa

question

Finding Returns to Scale Mathematically

answer

question

in the SR ; as MP rises.....

answer

when the market price is equal ATC the firm makes zero economic profits.Once the market price is greater than ATC, the firm makes positive economic profits.

question

Assumptions when in perfect competition

answer

question

Breakeven point

answer

•Instead of setting one monopoly price, charge everyone their willingness-to-pay (WTP).
•MR is now the same as demand curve. Extract all consumer surplus.

question

When can a firm price discriminate?

answer

charge different prices based on quantity of good purchased.
•Per unit: small vs large coffee
•Block pricing: data charges on cell phone plan, utility bills

question

•1st degree price discrimination

answer

divide consumers into different groups and charge them different prices.

question

•2nd Degree Price Discrimination

answer

charge different prices based on time of purchase.

question

•3rd Degree Price Discrimination

answer

charge one fee for entry and another fee per unit

question

Intertemporal price discrimination

answer

adjust prices seasonally, daily, hourly, or even by the second.

question

Two-part tariffs -

answer

is the additional benefit accrued to others as Q increases by one unit.

question

Peak load pricing strat

answer

I and II are false.

question

The marginal external benefit (MEB)

answer

an increase in supply that will bring price down to the level it was before the demand shift.

question

Use the following statements to answer this question:
I. Markets that have only a few sellers cannot be highly competitive.
II. Markets with many sellers are always perfectly competitive.

answer

F(x)= G(x)/ H(x)

F1(x)= (top D X bottom - Top X Bottom D)/ Bottom squared (abs val)

question

In a constant-cost industry, an increase in demand will be followed by:

answer

when there are limits on which values x
can take
say the limit is between 0 and 5 but you get x=8. the answer would then be x=5

question

Taking the derivative of a fraction

answer

consumer surplus is the top triangle within the bounds of demand and supply. producer surplus is on the bottom.

question

• Constrained maximization

answer

Excess supply
(surplus) - above equilibrium
Excess demand
(shortage) - under equilibrium

question

Where to find consumer and producer surplus in a perfect equilibrium model?

answer

the curve "moves" when price or quantity change but the curve Shifts due to :
things such as Battery technology improves
making it cheaper to make
smartwatches.

question

Surplus vs Shortage

answer

question

Moving Along vs Shifting along supply curve

answer

The price will increase by less than $100

question

What shifts the demand and supply curves

answer

question

What happens when a tax of $ 100 is levied on producers?
What if the tax is levied on the consumer?

answer

cant have two point on the ID curve "on top" of eachother
ICs cannot slope upward. This would violate monotonicity
ICs cannot cross. This would violate transitivity.

question

Properties of indifference curves

answer

substitutes- straight line from on product to the other.
compliment- curve takes on an L shape along the compliment parameters

question

Things indifference curves cannot do

answer

How much X would you be willing to give up to receive one more unit
of Y, remaining on the same IC?
• This depends on your starting point and your preferences

question

• Perfect substitutes indifference curve and
Perfect complements

answer

each additional unit of good X provides less utility

question

Marginal Rate of Substitution

answer

MUx = Change in Utility / Change in X
MUy= change in utitlity / Change in y

question

Diminishing marginal utility

answer

can be represented as the ratio of
marginal utilities

MRS= MUx/MUy

question

Marginal Utility formula

answer

Without scarcity, there would be no problem to solve.
Maximize utility subject to constraints
• Given income and prices, we can determine what bundles are
feasible.

question

Marginal rate of substitution Formula

answer

question

Budget constraint assumptions

answer

question

Steps when finding budget constraints

answer

question

Budget constraint price VS income changes

answer

question

Choosing a bundle when budget constraint and indifference curve is known

answer

Normal - Consume more as income
increases.
Inferior- Initially consume more but at certain point one begins to buy less as income increases.

question

How to mathematically find the optimal bundle?

answer

Positive Network Externalities - buy more of a good because other people
are buying it
• Negative Network Externalities - buy less of a good because other people
are buying it

question

• Normal vs. inferior goods

answer

question

• Positive Network VS Negative Network Externalities

answer

go back to slides
Labor supply example

question

• There are two different effects underlying the decreased demand for
(normal) good X after an increase in Px

answer

question

know how to recognize all three effects of a price change on a graph

answer

question

Perfect substitute and compliment effects of a price change

answer

question

answer

the percentage change in QD given a 1%
increase in the price
• Ex: if a 1% price increase in the Spotify subscription price decreases
subscribers by 2%, the elasticity is -2

question

Finding Market demand via math

answer

question

Price elasticity of demand (E):

answer

question

Elasticities

answer

question

Calculating Elasticities

answer

question

What makes consumers more / less elastic?

answer

Q = F(K, L,M ; A)
• The highest output Q that can be generated given inputs.
• It would be feasible for the firm to produce less than this at given inputs, but that would
be inefficient.
• A is a technology parameter. Usually given, this value shifts the level of output
for the same level of inputs.
• More simply: Q = F(K, L)

question

• Common inputs in production

answer

the amount of Q produced for a given set of inputs.
• Simply Q = F(K, L) for a specific K and L.
• How many frozen bananas can you make if you work L hours?

question

The Production Function

answer

the change in output given a 1-unit increase in a
particular input.
MP= Change in Q (K,L)/ Change in input

question

• Total product

answer

total product divided by total input.
AP= Total Q(K,L)/ Total input

question

Marginal product

answer

question

Average product

answer

question

Impact of Capital on Wages

answer

question

How technology effects capital and Labor (K,L)

answer

time horizon over which all inputs can be adjusted.
• Ex: Business is booming. Over the next few years, you may want to buy an
extra truck or open a traditional restaurant.

question

Short run

answer

question

• Long run

answer

question

Production in the Short run

answer

Budget restraints for a firms production . just like ID curves at any point on the line has the same Utility

question

Production in the Long Run

answer

• MRTS: the rate at which one input may be substituted for another
without altering the level of output

Work out examples for this , Most definitly will be a multi part on the exam

question

Isoquant

answer

question

Marginal Rate of Technical Substitution (MRTS)

answer

question

• What happens if you use the same production process and input ratios, but vary the size of inputs?

answer

Decreasing - if a firm grows too large it will become less efficient. Better to
have many small firms (competition).
• Increasing - the bigger the better, at least from an efficiency standpoint.
Better to have fewer, large firms.
• Constant - can support any firm size.

question

Finding Returns to Scale

answer

actual expenses to produce output; explicit costs
• Cost of new tractor, computer, etc.

question

Importance of Returns to Scale

answer

cost of next best alternative; implicit costs
• What are you giving up to attend college? Go to class today?

question

• Accounting costs

answer

accounting costs + opportunity costs
• Note that opportunity costs are often hard to think about, but are important
in decision-making, nevertheless.

question

Opportunity costs

answer

question

Economic costs

answer

• Fixed costs - cannot adjust these in the short run
Variable costs - adjustable in the short run
Total costs - exactly what it sounds like
Tc = VC + FC

question

Sunk costs:

answer

question

Total cost , Fixed cost, Variable costs in the short run

answer

we know that MP intersects AP at the the maximum of the AP curve

Not coincidentally, the MC curve intersects the AVC curve at the minimum
of the AVC curve.

MC= w / MP (l)

AVC= w/ AP (l)

question

Cost Equations

answer

question

Important Relationships to do with Costs

answer

This occurs where MRTS =
MP (l) / MP (k) = w / r
• If a firm is cost-minimizing the above can be written as MP (l) / w = MP (k) / r

question

Long run Cost assumptions

answer

• Economies of Scope: C(q1,q2) < or equal to C(q1) + C(q2)

• Diseconomies of Scope:C(q1,q2)> or equal to
C(q1) + C(q2)

question

What is the optimal capital-labor ratio for this firm?

answer

• Over time, firms may become better at making their product, causing their
LAC to fall.
• This is different than economies of scale!
• Ex: aircraft contract bids

question

• Is it possible to reduce costs by producing two different (but related)
goods?

answer

the marginal rate of substitution of one good for another good.

question

Dynamic Changes in Cost

answer

The equation y = Pb B + Pw W defines all the (B,W) pairs that cost exactly y.

question

The slope of an indifference curve reveals:

answer

The slope of an indifference curve reveals

question

Budget equation

answer

indifference curves are convex at the origin because

question

the marginal rate of substitution of one good for another

answer

Envision a graph with meat on the horizontal axis and vegetables on the vertical axis. A strict vegetarian would have indifference curves that are:

question

the assumption of diminishing marginal rate of substitution

answer

If a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. This assumption is called:

question

horizontal lines

answer

you have an opinion about any possibility combination

question

transitivity

answer

you are no worse off with more

question

completeness

answer

prefer mixture over extremes

question

monotonicity

answer

If prices and income in a two-good society double, what will happen to the budget line?

question

convexity

answer

question

there will be no effect on the budget line

answer

question

-7/15

answer

satisfaction for consumption is maximized

question

6 hot dogs 6 buns

answer

Monica consumes only goods A and B. Suppose that her marginal utility from consuming good A is equal to 1/Qa, and her marginal utility from consuming good B is 1/Qb. If the price of A is $0.50, the price of B is $4.00, and the Monica's income is $120.00, how much of good A will she purchase?

question

marginal benefit equals marginal cost

answer

question

120

answer

question

increase pepsi reduce burger

answer

question

.....

answer

Which of the following claims is true at each point along a price-consumption curve?

question

8 units

answer

After a good falls in price, consumers will tend to buy more of the good that has become cheaper
and less of those goods that are now relatively more expensive. This fact is called:

question

utility is maximized and all income is spent

answer

A change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant, is referred to as:

question

substitution effect

answer

question

income effect

answer

Suppose that the demand for artichokes (Qa) is given as:

Qa = 200 - 4P

Use the information in Scenario 4.2. Suppose that the price of artichokes is increased slightly from $10. The total expenditure by consumers on artichokes will ________ and the number of artichokes sold will ________.

question

25,000

answer

question

rise, fall

answer

question

increase in short run decrease in long run

answer

When would it be plausible to describe the demand for a product by drawing a straight line, ?

question

demand becomes more elastic due to bandwagon

answer

If your income elasticity of demand for going to the movie theater is 1.5, then

question

only if no important factors other than price affect demand

answer

question

a 1% increase in income will lead to a 1.5% increase in seeing movies at the theater. Your demand for movies is elastic with respect to income.

answer

A function that indicates the maximum output per unit of time that a firm can produce, for every combination of inputs with a given technology, is called:

question

substitutes compliments

answer

short run is

question

a production function

answer

long run is

question

at least one input is fixed

answer

According to the law of diminishing returns:

question

all variables can be changed

answer

the law of diminishing returns refers to

question

the marginal product of an input will eventually decline.

answer

the marginal product of an input is

question

marginal returns

answer

What describes the graphical relationship between average product and marginal product?

question

the addition to total output due to the addition of the last unit of an input, holding all other inputs constant

answer

question

Marginal product cuts average product from above, at the maximum point of average product.

answer

question

1.5 cars

answer

An isoquant:

question

AP=5K

answer

If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the:

question

is a curve that shows all the combinations of inputs that yield the same total output.

answer

The marginal rate of technical substitution is equal to the:

question

rate at which the firm can replace capital with labor without changing the output rate.

answer

question

marginal product of the inputs

answer

question

labor, capital

answer

question

I. is true II. is false

answer

A farmer uses M units of machinery and L hours of labor to produce C tons of corn, with the following production function This production function exhibits:

question

one hour

answer

Which of the following production functions exhibits constant returns to scale?

question

increasing returns to scale for all outputs

answer

Does it make sense to consider the returns to scale of a production function in the short run?

question

q= k + l

answer

question

no because we cannot change all the production inputs

answer

question

4000
4000/q
5q+10q^2
5+10q
4000/q+5+10q
5+20q

answer

question

sell to ABC corporation

answer

Which of the following is NOT an expression for the cost minimizing combination of inputs?

question

is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold.

answer

With its current levels of input use, a firm's MRTS is 3 (when capital is on the vertical axis and labor is on the horizontal axis). This implies:

question

anything without wage and rental rate

answer

A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of capital is 5. The firm:

question

the marginal product of labor is 3 times the marginal product of capital

answer

An isocost line reveals the

question

could reduce the cost of producing its current output level by employing more labor and less capital.

answer

Bubba Burgers has discovered there are economies of scope available to the restaurant. Which is most likely to be a response to this discovery?

question

input combinations that can be purchased for a given total cost.

answer

Use the production function: Q = 4L1/2K1/2.

Refer to Scenario 7.3. Suppose that your firm decides to double its output to 400. To achieve this level of output the firm will have to:

question

bubba adds grilled chicken sandwiches

answer

question

exactly double its inputs.

answer

When an isocost line is just tangent to an isoquant, we know that:

question

I is false, and II is true.

answer

question

output is being produced at minimum cost

answer

question

the optimal capital-labor ratio remains the same

answer

question

14/15

answer

question

1.35 .78

answer

question

both true

answer

question

decrease constant

answer

undefined

question

28,72, 2304, 324, 5440

answer

undefined

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