Micro EconMidterm 2 - Assignment Essays

question

total utility

answer

the total satisfaction a consumer derives from consumption; it could refer to either the total utility of consuming a particular good or the total utility from all consumption

question

marginal utility

answer

The change in your total utility from a one-unit change in your consumption of a good

question

law of diminishing marginal utility

answer

the more of a good a person consumes per period, the smaller the increase in total utility from consuming one more unit, other things constant

question

consumer equilibrium

answer

The condition in which an individual consumer's budget is spent and the last dollar spent on each good yields the same marginal utility; therefore, utility is maximized.

question

marginal valuation

answer

the dollar value of the marginal utility derived from consuming each additional unit of a good

question

consumer surplus

answer

The difference between the most a consumer would pay for a given quantity of a good and what the consumer actually pays

question

long-run average cost curve

answer

a curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve

question

economies of scale

answer

forces that reduce a firm's average cost as the scale of operation increases in the long run

question

diseconomies of scale

answer

forces that may eventually increase a firm's average cost as the scale of operation increases in the long run

question

Constant Long-Run Average Cost

answer

a cost that occurs when, over some range of output, long run average cost neither increases nor decreases with changes in firm size

question

production function

answer

identifies the maximum quantities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology (The PF can be presented as an equation, a graph, or a table)

question

Isoquant curve

answer

A curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output.

Properties:

1. When they are farther from the origin they represents greater output rates

2. Have negative slopes because along the given curve, the quantity of labor employed inversely relates to the quantity of capital employed

3. they do not intersect because each curve refers to a specific rate of output

4. They are usually convex to the origin

question

marginal rate of technical substitution (MRTS)

answer

the rate at which labor substitutes for capital without affecting output

question

Isocost Line

answer

identifies all combinations of capital and labor the firm can hire for a given total cost

question

Expansionists path

answer

the Line formed by connecting tangency points

question

market structure

answer

important features of a market, such as the number of firms, product uniformity across firms, firms' ease of entry and exit, and forms of competition

question

perfect competition

answer

a market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run

question

commodity

answer

a standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold

question

price taker

answer

a firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm

question

marginal revenue

answer

the change revenue from selling an additional unit; in perfect competition, marginal revenue is also the market price

question

golden rule of profit maximization

answer

to maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures

question

average revenue

answer

total revenue divided by output, or AR=TR/q; in all market structures, average revenue equals the market price

question

Short-Run Firm Supply Curve

answer

a curve that shows the quantity a firm supplies at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve

question

short-run industry supply curve

answer

a curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm's short-run supply curve

question

long-run industry supply curve

answer

a curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in market demand

question

constant cost industry

answer

an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal

question

increasing cost industry

answer

an industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward

question

Producer Efficiency

answer

the condition that exists when market output is produced using the least-cost combination of inputs; minimum average cost in the long run

question

allocative efficiency

answer

the condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost

question

producer surplus

answer

a bonus for producers in the short run; the amount by which total revenue from production exceeds variable costs

question

social welfare

answer

the overall well-being of people in the economy; maximized when the marginal cost of production equals the marginal benefit to consumers

question

Monopoly

answer

a sole producer of a product for which there are no close substitutes

question

barrier to entry

answer

any impediment that prevents new firms from entering an industry and competing on an equal basis with existing firms

- legal restrictions

- economies of scale

- contort of essential resources

question

patent (legal restriction)

answer

a legal barrier to entry that grants its holder the exclusive rights to sell a product for 20 years from the date the patent application is filed (pharmaceuticals)

question

licenses

answer

federal and state

control the people in industries

question

natural monopoly

answer

one firm can supply market demand at a lower average cost per unit that could two or more

question

innovation

answer

the process of turning an invention into a marketable product

question

economies of scale (monopoly)

answer

sometimes a monopoly occur when a firm experiences economies of scale, as reflected by a downward sloping, long run average cost curve.

question

price maker

answer

a firm that must find the profit maximizing price when the demand curve for its output slopes downward

firms w market power

question

deadweight loss of monopoly

answer

net loss to society when a firm uses its market power to restrict output and increase price

question

substitution effect

answer

the impact that a change in a product's price has on its relative expensiveness and consequently on the quantity demanded of that good.

question

income effect

answer

the impact that a change in the price of a product has on a consumer's real income and consequently on the quantity demanded of that good

question

monopolistic competition

answer

A market structure with many competitors selling products that are substitutes but different enough that each firm's demand curve slopes downwards; entry is relatively easy

-price makers

-barriers to entry are low

-act independently or interdependently

question

product differentiation

answer

4 different ways

1. physical differences: packaging, colors, weight, etc

2. location- spatial differentiation

3. services

4. product image

question

excess capacity

answer

the difference between a firm's profit-maximizing quantity and the quantity that minimize average

question

rent seeking

answer

activities undertaken by individuals or firms to influence public policy in a way that will increase their outcomes

question

price discrimination

answer

Increasing profit by charging different groups of consumers' different prices when the price differences are not justified by differences in costs

question

perfectly discriminating monopolist

answer

a monopolist who charges a different price for each unit sold; also called the monopolist's dream

question

economic cost

answer

the value of all resources used to produce a good or service; opportunity cost

question

explicit costs

answer

The actual payments a firm makes to its factors of production and other suppliers.

question

implicit costs

answer

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur

question

accounting profit

answer

total revenue - explicit costs

question

normal profit

answer

the accounting profit earned when all resources earn their opportunity cost

question

economic profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

total product

answer

total output produced by the firm

question

Marginal Product (MP)

answer

The additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resource employed.

question

Average Product (AP)

answer

The total output produced per unit of a resource employed (total product divided by the quantity of that employed resource).

question

law of diminishing returns

answer

the principle that, at some point, adding more of a variable input, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline

question

fixed cost

answer

a cost that does not change, no matter how much of a good is produced

question

variable costs

answer

costs that vary with the quantity of output produced

question

total costs

answer

fixed costs + variable costs

question

Average Fixed Cost (AFC)

answer

total fixed costs divided by quantity of output

question

Average Variable Cost (AVC)

answer

total variable costs divided by quantity of output

question

Average Total Cost (ATC)

answer

total costs divided by quantity of output

question

marginal cost

answer

the cost of producing one more unit of a good

question

constant returns to scale

answer

the property whereby long-run average total cost stays the same as the quantity of output changes

question

minimum efficient scale (MES)

answer

the lowest level of output at which a firm can minimize long-run average total cost

question

pure competition

answer

the market structure that exists when there are many small businesses selling one standardized product

question

pure monopoly

answer

A market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm has considerable control over product price, and in which nonprice competition may or may not be found.

question

Oilogopoly

answer

involves only a few sellers of a standardized product, so each firm is affected by its rival's decisions and must take those decisions into account in determining its own price and output

question

break-even point

answer

the point at which the costs of producing a product equal the revenue made from selling the product

question

MR=MC rule

answer

The principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost.

question

fallacy of composition

answer

the incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or the whole

question

creative destruction

answer

the hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies

question

simultaneous consumption

answer

a product's ability to satisfy a large number of consumers at the same time

question

network effects

answer

increases in the value of a product to each user, including existing users, as the total number of users rises

question

X-inefficiency

answer

the production of output, whatever its level, at a higher average (and total) cost than is necessary for producing that level of output

question

rent-seeking behavior

answer

The actions by persons, firms, or unions to gain special benefits from government at the taxpayers' or someone else's expense.

question

socially optimal price

answer

The price of a product that results in the most efficient allocation of an economy's resources and that is equal to the marginal cost of the product.

question

fair-return price

answer

the price of a product that enables its producer to obtain a normal profit and that is equal to the average total cost of producing it

question

nonprice competition

answer

a way to attract customers through style, service, or location, but not a lower price

question

four-firm concentration ratio

answer

the percentage of total industry sales accounted for by the top four firms in the industry

question

Herfindahl Index

answer

the difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost

question

undifferentiated oligopoly

answer

An oligopoly that sells a commodity, or a product that does not differ across suppliers, such as an ingot of steel or a barrel of oil

question

differentiated oligopoly

answer

An oligopoly that sells products that differ across suppliers, such as automobiles or breakfast cereal

question

collusion

answer

an agreement among firms to increase economic profit by dividing the market or fixing the prices

question

cartel

answer

a group of firms that agree to coordinate the production and pricing decisions to act like a monopolist

question

price leader

answer

a firm whose price is adopted by other firms in the industry

1 of 88

question

total utility

answer

the total satisfaction a consumer derives from consumption; it could refer to either the total utility of consuming a particular good or the total utility from all consumption

question

marginal utility

answer

The change in your total utility from a one-unit change in your consumption of a good

question

law of diminishing marginal utility

answer

the more of a good a person consumes per period, the smaller the increase in total utility from consuming one more unit, other things constant

question

consumer equilibrium

answer

The condition in which an individual consumer's budget is spent and the last dollar spent on each good yields the same marginal utility; therefore, utility is maximized.

question

marginal valuation

answer

the dollar value of the marginal utility derived from consuming each additional unit of a good

question

consumer surplus

answer

The difference between the most a consumer would pay for a given quantity of a good and what the consumer actually pays

question

long-run average cost curve

answer

a curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve

question

economies of scale

answer

forces that reduce a firm's average cost as the scale of operation increases in the long run

question

diseconomies of scale

answer

forces that may eventually increase a firm's average cost as the scale of operation increases in the long run

question

Constant Long-Run Average Cost

answer

a cost that occurs when, over some range of output, long run average cost neither increases nor decreases with changes in firm size

question

production function

answer

question

Isoquant curve

answer

A curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output.

Properties:

1. When they are farther from the origin they represents greater output rates

2. Have negative slopes because along the given curve, the quantity of labor employed inversely relates to the quantity of capital employed

3. they do not intersect because each curve refers to a specific rate of output

4. They are usually convex to the origin

question

marginal rate of technical substitution (MRTS)

answer

the rate at which labor substitutes for capital without affecting output

question

Isocost Line

answer

identifies all combinations of capital and labor the firm can hire for a given total cost

question

Expansionists path

answer

the Line formed by connecting tangency points

question

market structure

answer

important features of a market, such as the number of firms, product uniformity across firms, firms' ease of entry and exit, and forms of competition

question

perfect competition

answer

a market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run

question

commodity

answer

a standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold

question

price taker

answer

a firm that faces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm

question

marginal revenue

answer

the change revenue from selling an additional unit; in perfect competition, marginal revenue is also the market price

question

golden rule of profit maximization

answer

to maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures

question

average revenue

answer

total revenue divided by output, or AR=TR/q; in all market structures, average revenue equals the market price

question

Short-Run Firm Supply Curve

answer

question

short-run industry supply curve

answer

a curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm's short-run supply curve

question

long-run industry supply curve

answer

a curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in market demand

question

constant cost industry

answer

an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal

question

increasing cost industry

answer

an industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward

question

Producer Efficiency

answer

the condition that exists when market output is produced using the least-cost combination of inputs; minimum average cost in the long run

question

allocative efficiency

answer

the condition that exists when firms produce the output most preferred by consumers; marginal benefit equals marginal cost

question

producer surplus

answer

a bonus for producers in the short run; the amount by which total revenue from production exceeds variable costs

question

social welfare

answer

the overall well-being of people in the economy; maximized when the marginal cost of production equals the marginal benefit to consumers

question

Monopoly

answer

a sole producer of a product for which there are no close substitutes

question

barrier to entry

answer

any impediment that prevents new firms from entering an industry and competing on an equal basis with existing firms

- legal restrictions

- economies of scale

- contort of essential resources

question

patent (legal restriction)

answer

a legal barrier to entry that grants its holder the exclusive rights to sell a product for 20 years from the date the patent application is filed (pharmaceuticals)

question

licenses

answer

federal and state

control the people in industries

question

natural monopoly

answer

one firm can supply market demand at a lower average cost per unit that could two or more

question

innovation

answer

the process of turning an invention into a marketable product

question

economies of scale (monopoly)

answer

sometimes a monopoly occur when a firm experiences economies of scale, as reflected by a downward sloping, long run average cost curve.

question

price maker

answer

a firm that must find the profit maximizing price when the demand curve for its output slopes downward

firms w market power

question

deadweight loss of monopoly

answer

net loss to society when a firm uses its market power to restrict output and increase price

question

substitution effect

answer

the impact that a change in a product's price has on its relative expensiveness and consequently on the quantity demanded of that good.

question

income effect

answer

the impact that a change in the price of a product has on a consumer's real income and consequently on the quantity demanded of that good

question

monopolistic competition

answer

A market structure with many competitors selling products that are substitutes but different enough that each firm's demand curve slopes downwards; entry is relatively easy

-price makers

-barriers to entry are low

-act independently or interdependently

question

product differentiation

answer

4 different ways

1. physical differences: packaging, colors, weight, etc

2. location- spatial differentiation

3. services

4. product image

question

excess capacity

answer

the difference between a firm's profit-maximizing quantity and the quantity that minimize average

question

rent seeking

answer

activities undertaken by individuals or firms to influence public policy in a way that will increase their outcomes

question

price discrimination

answer

Increasing profit by charging different groups of consumers' different prices when the price differences are not justified by differences in costs

question

perfectly discriminating monopolist

answer

a monopolist who charges a different price for each unit sold; also called the monopolist's dream

question

economic cost

answer

the value of all resources used to produce a good or service; opportunity cost

question

explicit costs

answer

The actual payments a firm makes to its factors of production and other suppliers.

question

implicit costs

answer

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur

question

accounting profit

answer

total revenue - explicit costs

question

normal profit

answer

the accounting profit earned when all resources earn their opportunity cost

question

economic profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

total product

answer

total output produced by the firm

question

Marginal Product (MP)

answer

question

Average Product (AP)

answer

The total output produced per unit of a resource employed (total product divided by the quantity of that employed resource).

question

law of diminishing returns

answer

question

fixed cost

answer

a cost that does not change, no matter how much of a good is produced

question

variable costs

answer

costs that vary with the quantity of output produced

question

total costs

answer

fixed costs + variable costs

question

Average Fixed Cost (AFC)

answer

total fixed costs divided by quantity of output

question

Average Variable Cost (AVC)

answer

total variable costs divided by quantity of output

question

Average Total Cost (ATC)

answer

total costs divided by quantity of output

question

marginal cost

answer

the cost of producing one more unit of a good

question

constant returns to scale

answer

the property whereby long-run average total cost stays the same as the quantity of output changes

question

minimum efficient scale (MES)

answer

the lowest level of output at which a firm can minimize long-run average total cost

question

pure competition

answer

the market structure that exists when there are many small businesses selling one standardized product

question

pure monopoly

answer

question

Oilogopoly

answer

involves only a few sellers of a standardized product, so each firm is affected by its rival's decisions and must take those decisions into account in determining its own price and output

question

break-even point

answer

the point at which the costs of producing a product equal the revenue made from selling the product

question

MR=MC rule

answer

question

fallacy of composition

answer

the incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or the whole

question

creative destruction

answer

the hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies

question

simultaneous consumption

answer

a product's ability to satisfy a large number of consumers at the same time

question

network effects

answer

increases in the value of a product to each user, including existing users, as the total number of users rises

question

X-inefficiency

answer

the production of output, whatever its level, at a higher average (and total) cost than is necessary for producing that level of output

question

rent-seeking behavior

answer

The actions by persons, firms, or unions to gain special benefits from government at the taxpayers' or someone else's expense.

question

socially optimal price

answer

The price of a product that results in the most efficient allocation of an economy's resources and that is equal to the marginal cost of the product.

question

fair-return price

answer

the price of a product that enables its producer to obtain a normal profit and that is equal to the average total cost of producing it

question

nonprice competition

answer

a way to attract customers through style, service, or location, but not a lower price

question

four-firm concentration ratio

answer

the percentage of total industry sales accounted for by the top four firms in the industry

question

Herfindahl Index

answer

the difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost

question

undifferentiated oligopoly

answer

An oligopoly that sells a commodity, or a product that does not differ across suppliers, such as an ingot of steel or a barrel of oil

question

differentiated oligopoly

answer

An oligopoly that sells products that differ across suppliers, such as automobiles or breakfast cereal

question

collusion

answer

an agreement among firms to increase economic profit by dividing the market or fixing the prices

question

cartel

answer

a group of firms that agree to coordinate the production and pricing decisions to act like a monopolist

question

price leader

answer

a firm whose price is adopted by other firms in the industry

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