Microeconomics Chapters 11-15, 19 Midterm #2

question

Production

answer

Transformation of factors into goods and services

question

Profit

answer

Total revenue - total cost

question

3 purposes of a firm

answer

To organize factors of production
To produce goods
To sell goods to individuals businesses or governments

question

Total cost

answer

Explicit payments to the factors of production plus the opportunity cost of the factors provided by the owners of the firm

question

Total revenue

answer

The amount a firm receives for selling its product or service plus any increase in the value of assets owned by the firm

question

Economic profit

answer

(explicit and implicit revenues)-(explicit and implicit cost)

question

Long-run decision

answer

Firm chooses among all possible production techniques (inputs are variable)

question

Short-run decision

answer

The firm is constrained in regard to what production decisions it can make (inputs are fixed)

question

Marginal product

answer

The additional output that will be forthcoming from an additional worker, ceteris paribus

question

Average product

answer

Output per worker

question

Production function

answer

The relationship between inputs and outputs

question

The law of diminishing marginal productivity

answer

As more and more of an input is added to an existing set of inputs, the additional output one gets from that additional input is going to fall

question

Average total cost

answer

(Total cost) / (qty produced)

question

Average fixed cost

answer

(Fc)/(Q)

question

Average variable cost

answer

(Vc)/(Q)

question

Marginal cost

answer

The increase or decrease in total cost from increasing (decreasing) the level of output by one unit

question

Technical efficiency

answer

As few inputs as possible are used to produce a given output

question

Economically efficient

answer

Lowest possible cost to produce a given output

question

Accounting profit

answer

(Explicit revenue)-(Explicit cost)

question

Implicit revenue

answer

This is included in economists' determination of profit and the increases in the value of assets owned by the firm

question

Implicit cost

answer

Includes opportunity cost of time and capital provided by the owners of the firm

question

Law of diminishing marginal productivity

answer

As more and more of a variable input is added to a fixed input the additional output that a firm gets will eventually be decreasing... also causes marginal and average costs to rise

question

ATC is rising

answer

MC>ATC

question

ATC is constant

answer

MC=ATC

question

ATC is falling

answer

MC<ATC

question

MC curve

answer

This curve goes through the minimum points of the AVX and ATC

question

Constant returns to scale

answer

Where LRAC do not change with an increase in output

question

Depreciation

answer

The loss of value in a good or service over time

question

Diseconomies of scale

answer

When LRAC increase as output increases

question

Economies of scale

answer

When LRAC decreases as output increases

question

Economies of scope

answer

When costs of producing products are interdependent so that it's less costly for a firm to produce one good when it's already producing another

question

Indivisible setup cost

answer

The cost of an indivisible input for which a certain minimum amount of production must be undertaken before the input becomes economically feasible to use

question

Minimum efficient level of production

answer

The amount of production that spreads setup costs out sufficiently for a firm to undertake production profitably

question

Monitoring cost

answer

Costs incurred by the organizer of production seeing to it that its employees do what they are supposed to do

question

Technological change

answer

An increase in the range of production techniques that leads to more efficient ways of producing goods as well as the production of new and better goods

question

Technically efficient

answer

Economically efficient production processes must be _______

question

Economically efficient

answer

Technically efficient processes don't need to be ______

question

LRAC

answer

U-shaped... economies of scale initially cause ATC to decrease; diseconomies eventually cause ATC to increase

question

Production

answer

A social and technical phenomenon... which is why team spirit is an important concept and diseconomies of scale occur

question

Diminishing marginal productivity

answer

Why do MC and SRAC curves slope upward?

question

LRAC

answer

This curve slopes upward because of diseconomies of scale

question

Above

answer

SRAC curves are always above or below LRAC curves?? This is due to the "envelope relationship"

question

Entrepreneur

answer

An individual who sees an opportunity to sell an item at a price higher than the average cost of producing it

question

Barriers to entry

answer

Social, political, or economic impediments that prevent firms from entering a market

question

answer

Change in total cost that accompanies a change in output

question

answer

Change in total revenue associated with a change in quantity

question

MSC

answer

Horizontal sum of all the firms' marginal cost curves taking account of any changes in input prices that might occur

question

Normal profit

answer

The amount the owners of businesses would have received in the next-best alternative (This term is almost a substitute to opportunity cost)

question

Perfectly competitive market

answer

MC=MR=P
To determine loss at the profit-maximizing level of output, subtract the ATC at that level of output from the price and multiply the result by the output level
Firms will shutdown if price falls below AVC
A perfectly competitive firm is in LR equilibrium only when it is earning zero economic profit, or when price equals the minimum of LRAC

question

Price taker

answer

A firm or individual who takes the price determined by market supply and demand as a given

question

Profit-maximizing condittion

answer

MC=MR=P

question

Shutdown point

answer

The point below which the firm will be better off if it temporarily shuts down instead of staying in business (this occurs when price drops below average variable cost)

question

Conditions for a perfect competition

answer

buyers and sellers are price takers
no barriers to entry
firms' products are identical

question

Marginal cost curve

answer

The supply curve of a competitive firm is its ______________

question

MC=MR

answer

To find profit-maximizing level of output for a perfect competitor, find the level of output where _______________

question

Profit loss

answer

In the short run, competitive firms can make a __________ or _________

question

answer

In the long run, competitive firms make ______ profits

question

Profit

answer

Graphically, __________ is the vertical distance between the price of the good and the ATC curve at the maximizing level of output times that level of output

question

Because if there were profit to be made, more firms would enter the market and the market price would go down to eliminate the profit available

answer

Why do markets make zero profit in the long term?

question

Horizontal

answer

Constant-cost industries correspond to a ____________ LRS

question

Upward

answer

Increasing-cost industries have _____________ sloping LRS curves

question

Downward

answer

Decreasing-cost industries have _____________ sloping LRS curves

question

Monopoly

answer

A market structure in which one firm makes up the entire market

question

Increasing

answer

If MR > MC, the monopolist gains profit by _____________ output

question

Decreasing

answer

If MR < MC, the monopolist gains profit by _____________ output

question

Maximizing

answer

If MR = MC, the monopolist is _____________ profit

question

Do not

answer

Monopolists do or do not always make a profit

question

Patent

answer

Legal protection of a technical innovation that gives the person holding it the sole right to use that innovation

question

Welfare loss

answer

If a monopoly charges a price higher than that the demanders are willing to pay, then a _____________ is created

question

Price discrimination

answer

To charge different prices to different groups or individuals (students or wall street workers)

question

Welfare loss

answer

Price discrimination eliminates _____________

question

MC=MR=D

answer

How is price discrimination an effective practice to eliminate welfare loss? (in reference to curves)

question

Natural Monopoly

answer

An industry in which a single firm can produce at a lower cost than two or more firms (i.e. better technology)

question

Characteristics of monopolistic competition

answer

1) Many sellers
2) Differentiated products
3) Multiple dimensions of competition
4) Easy entry of new firms in the long run

question

Output affects price

answer

A monopolist must take into account how

question

Natural ability
Economies of scale
Government restrictions

answer

Three important barriers to entry

question

Technology
Learning by doing
Decrease in input prices

answer

Causes for a LRAC to shift down (3)

question

Necessary for expansion of firms' markets

answer

Why are economies of scale important in long run production decisions

question

They prevent a firm from expanding and can lead to breaking it up into more efficient smaller production units

answer

How do diseconomies of scale influence firms?

question

As the LRAC is a U-shaped curve, the various SRACs will come in and hit the LRAC at one production point

answer

Explain the envelope relationship

1 of 80

question

Production

answer

Transformation of factors into goods and services

question

Profit

answer

Total revenue - total cost

question

3 purposes of a firm

answer

To organize factors of production
To produce goods
To sell goods to individuals businesses or governments

question

Total cost

answer

Explicit payments to the factors of production plus the opportunity cost of the factors provided by the owners of the firm

question

Total revenue

answer

The amount a firm receives for selling its product or service plus any increase in the value of assets owned by the firm

question

Economic profit

answer

(explicit and implicit revenues)-(explicit and implicit cost)

question

Long-run decision

answer

Firm chooses among all possible production techniques (inputs are variable)

question

Short-run decision

answer

The firm is constrained in regard to what production decisions it can make (inputs are fixed)

question

Marginal product

answer

The additional output that will be forthcoming from an additional worker, ceteris paribus

question

Average product

answer

Output per worker

question

Production function

answer

The relationship between inputs and outputs

question

The law of diminishing marginal productivity

answer

As more and more of an input is added to an existing set of inputs, the additional output one gets from that additional input is going to fall

question

Average total cost

answer

(Total cost) / (qty produced)

question

Average fixed cost

answer

(Fc)/(Q)

question

Average variable cost

answer

(Vc)/(Q)

question

Marginal cost

answer

The increase or decrease in total cost from increasing (decreasing) the level of output by one unit

question

Technical efficiency

answer

As few inputs as possible are used to produce a given output

question

Economically efficient

answer

Lowest possible cost to produce a given output

question

Accounting profit

answer

(Explicit revenue)-(Explicit cost)

question

Implicit revenue

answer

This is included in economists' determination of profit and the increases in the value of assets owned by the firm

question

Implicit cost

answer

Includes opportunity cost of time and capital provided by the owners of the firm

question

Law of diminishing marginal productivity

answer

As more and more of a variable input is added to a fixed input the additional output that a firm gets will eventually be decreasing... also causes marginal and average costs to rise

question

ATC is rising

answer

MC>ATC

question

ATC is constant

answer

MC=ATC

question

ATC is falling

answer

MC<ATC

question

MC curve

answer

This curve goes through the minimum points of the AVX and ATC

question

Constant returns to scale

answer

Where LRAC do not change with an increase in output

question

Depreciation

answer

The loss of value in a good or service over time

question

Diseconomies of scale

answer

When LRAC increase as output increases

question

Economies of scale

answer

When LRAC decreases as output increases

question

Economies of scope

answer

When costs of producing products are interdependent so that it's less costly for a firm to produce one good when it's already producing another

question

Indivisible setup cost

answer

The cost of an indivisible input for which a certain minimum amount of production must be undertaken before the input becomes economically feasible to use

question

Minimum efficient level of production

answer

The amount of production that spreads setup costs out sufficiently for a firm to undertake production profitably

question

Monitoring cost

answer

Costs incurred by the organizer of production seeing to it that its employees do what they are supposed to do

question

Technological change

answer

An increase in the range of production techniques that leads to more efficient ways of producing goods as well as the production of new and better goods

question

Technically efficient

answer

Economically efficient production processes must be _______

question

Economically efficient

answer

Technically efficient processes don't need to be ______

question

LRAC

answer

U-shaped... economies of scale initially cause ATC to decrease; diseconomies eventually cause ATC to increase

question

Production

answer

A social and technical phenomenon... which is why team spirit is an important concept and diseconomies of scale occur

question

Diminishing marginal productivity

answer

Why do MC and SRAC curves slope upward?

question

LRAC

answer

This curve slopes upward because of diseconomies of scale

question

Above

answer

SRAC curves are always above or below LRAC curves?? This is due to the "envelope relationship"

question

Entrepreneur

answer

An individual who sees an opportunity to sell an item at a price higher than the average cost of producing it

question

Barriers to entry

answer

Social, political, or economic impediments that prevent firms from entering a market

question

answer

Change in total cost that accompanies a change in output

question

answer

Change in total revenue associated with a change in quantity

question

MSC

answer

Horizontal sum of all the firms' marginal cost curves taking account of any changes in input prices that might occur

question

Normal profit

answer

The amount the owners of businesses would have received in the next-best alternative (This term is almost a substitute to opportunity cost)

question

Perfectly competitive market

answer

question

Price taker

answer

A firm or individual who takes the price determined by market supply and demand as a given

question

Profit-maximizing condittion

answer

MC=MR=P

question

Shutdown point

answer

The point below which the firm will be better off if it temporarily shuts down instead of staying in business (this occurs when price drops below average variable cost)

question

Conditions for a perfect competition

answer

buyers and sellers are price takers
no barriers to entry
firms' products are identical

question

Marginal cost curve

answer

The supply curve of a competitive firm is its ______________

question

MC=MR

answer

To find profit-maximizing level of output for a perfect competitor, find the level of output where _______________

question

Profit loss

answer

In the short run, competitive firms can make a __________ or _________

question

answer

In the long run, competitive firms make ______ profits

question

Profit

answer

Graphically, __________ is the vertical distance between the price of the good and the ATC curve at the maximizing level of output times that level of output

question

Because if there were profit to be made, more firms would enter the market and the market price would go down to eliminate the profit available

answer

Why do markets make zero profit in the long term?

question

Horizontal

answer

Constant-cost industries correspond to a ____________ LRS

question

Upward

answer

Increasing-cost industries have _____________ sloping LRS curves

question

Downward

answer

Decreasing-cost industries have _____________ sloping LRS curves

question

Monopoly

answer

A market structure in which one firm makes up the entire market

question

Increasing

answer

If MR > MC, the monopolist gains profit by _____________ output

question

Decreasing

answer

If MR < MC, the monopolist gains profit by _____________ output

question

Maximizing

answer

If MR = MC, the monopolist is _____________ profit

question

Do not

answer

Monopolists do or do not always make a profit

question

Patent

answer

Legal protection of a technical innovation that gives the person holding it the sole right to use that innovation

question

Welfare loss

answer

If a monopoly charges a price higher than that the demanders are willing to pay, then a _____________ is created

question

Price discrimination

answer

To charge different prices to different groups or individuals (students or wall street workers)

question

Welfare loss

answer

Price discrimination eliminates _____________

question

MC=MR=D

answer

How is price discrimination an effective practice to eliminate welfare loss? (in reference to curves)

question

Natural Monopoly

answer

An industry in which a single firm can produce at a lower cost than two or more firms (i.e. better technology)

question

Characteristics of monopolistic competition

answer

1) Many sellers
2) Differentiated products
3) Multiple dimensions of competition
4) Easy entry of new firms in the long run

question

Output affects price

answer

A monopolist must take into account how

question

Natural ability
Economies of scale
Government restrictions

answer

Three important barriers to entry

question

Technology
Learning by doing
Decrease in input prices

answer

Causes for a LRAC to shift down (3)

question

Necessary for expansion of firms' markets

answer

Why are economies of scale important in long run production decisions

question

They prevent a firm from expanding and can lead to breaking it up into more efficient smaller production units

answer

How do diseconomies of scale influence firms?

question

As the LRAC is a U-shaped curve, the various SRACs will come in and hit the LRAC at one production point

answer

Explain the envelope relationship

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