Professor Erhardt Microeconomics Exam 2

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 total utility from all consumption

question

Marginal Utility

answer

the change in total utility derived from a one-unit change in 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.

question

Consumer Equilibrium

answer

the condition in which an individual consumers 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 maximum amount that a consumer is willing to pay for a given quantity of a good and what the consumer actually pays
Example: Marginal Value of Free Medical Care

question

Marginal Value of Free Medical Care Story:

answer

tried to cut down on the number of seniors who are using the healthcare network in California. They were using it too much because senior citizens are very concerned about their health and use it often for check ups. They also become friends with doctors. The first few times the senior citizens came to the doctor, they had to pay one dollar. There was an 8% drop in visits after the dollar charge was instated. People who actually needed to go to the doctor were now able to.

question

Indifference Curve

answer

shows all combinations of goods that provide the consumer with the same satisfaction, or the same utility (the consumer finds all combinations on a curve equally preferred)

question

Marginal Rate of Substitution

answer

the number of "A" you are willing to give up to get more of "B", neither gaining nor losing utility in the process

question

The Law of Diminishing Rate of Subsitutions

answer

states that as your consumption of "A" increases, the amount of "B" you are willing to give up to get another "A" declines

question

Indifference Map

answer

a graphical representation of a consumer's tastes. Each curve reflects a different level of utility

question

Budget Line

answer

Combinations of goods, able to buy, consumption possibilities frontier. Depicts all possible combinations of videos and pizzas, given their prices and your budget.

question

Explicit Cost

answer

Opportunity cost of resources employed by a firm that takes the form of cash payments

question

Implicit Cost

answer

A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment

question

Accounting Profit

answer

a firm's total revenue minus its explicit costs

question

Economic Profit

answer

a firm's total revenue minus explicit and implicit costs

question

Normal Profit

answer

the accounting profit earned when all resources earn their opportunity cost

question

Variable Resources

answer

any resource that can be varied in the short run to increase or decrease production. (about 3 months)

question

Fixed Resource

answer

any resource that cannot be varied in the short run
(capital investment- usually a year)

question

Short Run

answer

a period during which at least ONE of a firm's resources is FIXED (usually 3 months)

question

Long Run

answer

a period during which ALL resources under the firm's control are VARIABLE (usually one year)

question

Total Product

answer

the total output produced by a firm

question

Marginal Product

answer

the change in total product that occurs when the use of a particular resource increases by 1 unit, all other resources constant

question

Increasing Marginal Returns

answer

the marginal product of a variable resource increases as each additional unit of that resource is employed

question

Law of Diminishing Marginal Returns

answer

as more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

question

Fixed Cost

answer

Any production cost that is independent of the firm's rate of output

question

Variable Cost

answer

Any production cost that changes as the rate of output changes

question

Total Cost

answer

The sum of fixed cost and variable cost, or
FC + VC =

question

Average Variable Cost

answer

Variable cost divided by output, or VC/q =

question

Average Total Cost

answer

Total cost divided by output
TC/q =
The sum of average fixed cost and average variable cost
AFC + AVC =

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
ie: at the movies

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
example: billions and billions of burgers

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 (can be represented as an equation, 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.

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

Expansion 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 in total revenue from selling an additional unit; in perfect competition, this 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 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
ex: pencil cost

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
ex: mining industry

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

Barrier to Entry

answer

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

question

Patent

answer

a legal barrier to entry that grants its holder the exclusive right to sell a product for 20 years from the date the patent application is filed
ie Pharmaceuticals

question

Innovation

answer

the process of turning an idea into a marketable product

question

Economies of Scale

answer

-Sometimes, a monopoly occurs when a firm experiences this, as reflected by a downward sloping, long run average cost curve
-i.e.: electricity

question

Case Study 1: Diamonds are Forever

answer

Great Depression= Lower diamond prices, DeBeers control the world supply of uncut diamonds
To increase consumer demand:
-Marketing-> "a diamond is forever"
*Durable, lasts forever, as should love. Remain in the family, not sold. Retain value over time
Operation of DeBeers:
-Limit the supply of rough diamonds
*Buyers= Wholesalers. No negotiations. Box of uncut diamonds at a set price.
-Violates US antitrust laws
-Mid 1990s= lose control of some rough diamond supplies
*Russia
*Australia (Argyle)
*Canada (Yellowknife)
-Mid 90s= 90%; 2012= 40%
-Synthetic Diamonds
-2006 Settle lawsuits ($300 mill)
*Comply with antitrust laws; Americans=5% of world pop, 1/3 of the world's retail price
-Blood diamonds; conflict diamonds

question

Price Maker

answer

a firm that must find the profit maximizing price when the demand curve for its output slopes downward [Graph: Monopoly]

question

Deadweight Loss of Monopoly

answer

Net loss to society when a firm uses its market power to restrict output and increase price [Graph: Losses from monopoly]

question

Rent Seeking

answer

Activities undertaken by individuals or firms to influence public policy in a way that will increase their incomes
ex: The Mail Monopoly

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

Monopolistic Competition

answer

a market structure with many firms selling products that are substitutes but different enough that each firm's demand curve slopes downward; firm entry is relatively easy. These type of firms are price makers. Barriers to entry are low, but enough sellers that they behave competitively. They can act independently or unterdependently

question

The Mail Monopoly

answer

The U.S. post office has a monopoly on First Class mail, no other company is allowed to send First Class mail. Email, fax and text messaging took the place of FCM and disrupted the distribution. Employee pensions have caused prices at the U.S.P.S. to rise, especially fuel costs.

question

Product Differentiation

answer

Products differentiate themselves in 4 basic ways:
1) Physical Differences: packaging, colors, weight
2) Location: spatial differentiation, price/convenience stores
3) Services: free delivery, guarantees, toll free numbers
4) Product Image: endorsements, all natural, image/brand loyalty, environmentally friendly

question

Fast Forward Case Study

answer

Video tape industry popped up with all these movie rental chains across the country. Used to charge a membership fee. Had dynamic growth for 10 years. The demand dropped. Excess Capacity develops, and a switch to DVD, which ruined VHS collections. Membership fees have now been dropped, essentially obsolete, has been replaced by Netflix.

question

Excess Capacity

answer

the difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost. [ In monopolistic competition, firms fall short of producing the quantity that would achieve the lowest average cost... as opposed to perfect competition]

question

Oligopoly

answer

a market structure characterized by a few firms whose behavior is interdependent

question

Undifferentiated Oligopoly

answer

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

question

Collusion

answer

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

question

The Unfriendly Skies

answer

The airline industry, since 2001, they have been the beneficiary of a lot of government bailout money. Since 2008, Continental merged with United Airlines, Northwest and Delta have also merged. Near perfect oligopoly

question

Differentiated Oligopoly

answer

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

question

Cartel

answer

a group of firms that agree to coordinate the production and pricing decisions to act like a monopolist (OPEC is the leader)

question

Price Leader

answer

a firm whose price is adopted by other firms in the industry. ie: airlines

question

Excludability

answer

the property of a good whereby a person can be prevented from using it.

question

Rivalry in Consumption

answer

the property of a good whereby one person's use diminishes other people's use

question

Private Goods

answer

goods that are both excludable and rival in consumption.

question

Public goods

answer

goods that are neither excludable nor rival in consumption.
Example: National Defense

question

Common resources

answer

goods that are rival in consumption but not excludable.

question

Free rider

answer

a person who receives the benefit of a good but avoids paying for it.

question

the tragedy of commons

answer

a parable that illustrates why common resources are used more than is desirable from the stand point of society as a whole.
Environmental degradation is an example of this (air and water pollution)

question

important common resources

answer

clean air and water

question

externality

answer

the encompassed impact of one person's actions on the well-being of a bystander.

question

Negative externaility

answer

type of externality that has an adverse impact (ex: pollution)

question

Positive Externality

answer

type of externality that has a beneficial impact (ex: someone making a baseball field)

question

Cost-Benefit Analysis

answer

the study that compares the costs and benefits to society of providing a public good

question

Internalizing Externality

answer

altering incentives so that people take account of the external effects of their actions

1 of 90

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 total utility from all consumption

question

Marginal Utility

answer

the change in total utility derived from a one-unit change in 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.

question

Consumer Equilibrium

answer

the condition in which an individual consumers 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 maximum amount that a consumer is willing to pay for a given quantity of a good and what the consumer actually pays
Example: Marginal Value of Free Medical Care

question

Marginal Value of Free Medical Care Story:

answer

question

Indifference Curve

answer

shows all combinations of goods that provide the consumer with the same satisfaction, or the same utility (the consumer finds all combinations on a curve equally preferred)

question

Marginal Rate of Substitution

answer

the number of "A" you are willing to give up to get more of "B", neither gaining nor losing utility in the process

question

The Law of Diminishing Rate of Subsitutions

answer

states that as your consumption of "A" increases, the amount of "B" you are willing to give up to get another "A" declines

question

Indifference Map

answer

a graphical representation of a consumer's tastes. Each curve reflects a different level of utility

question

Budget Line

answer

Combinations of goods, able to buy, consumption possibilities frontier. Depicts all possible combinations of videos and pizzas, given their prices and your budget.

question

Explicit Cost

answer

Opportunity cost of resources employed by a firm that takes the form of cash payments

question

Implicit Cost

answer

A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment

question

Accounting Profit

answer

a firm's total revenue minus its explicit costs

question

Economic Profit

answer

a firm's total revenue minus explicit and implicit costs

question

Normal Profit

answer

the accounting profit earned when all resources earn their opportunity cost

question

Variable Resources

answer

any resource that can be varied in the short run to increase or decrease production. (about 3 months)

question

Fixed Resource

answer

any resource that cannot be varied in the short run
(capital investment- usually a year)

question

Short Run

answer

a period during which at least ONE of a firm's resources is FIXED (usually 3 months)

question

Long Run

answer

a period during which ALL resources under the firm's control are VARIABLE (usually one year)

question

Total Product

answer

the total output produced by a firm

question

Marginal Product

answer

the change in total product that occurs when the use of a particular resource increases by 1 unit, all other resources constant

question

Increasing Marginal Returns

answer

the marginal product of a variable resource increases as each additional unit of that resource is employed

question

Law of Diminishing Marginal Returns

answer

as more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

question

Fixed Cost

answer

Any production cost that is independent of the firm's rate of output

question

Variable Cost

answer

Any production cost that changes as the rate of output changes

question

Total Cost

answer

The sum of fixed cost and variable cost, or
FC + VC =

question

Average Variable Cost

answer

Variable cost divided by output, or VC/q =

question

Average Total Cost

answer

Total cost divided by output
TC/q =
The sum of average fixed cost and average variable cost
AFC + AVC =

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
ie: at the movies

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
example: billions and billions of burgers

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.

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

Expansion 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 in total revenue from selling an additional unit; in perfect competition, this 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 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
ex: pencil cost

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
ex: mining industry

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

Barrier to Entry

answer

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

question

Patent

answer

a legal barrier to entry that grants its holder the exclusive right to sell a product for 20 years from the date the patent application is filed
ie Pharmaceuticals

question

Innovation

answer

the process of turning an idea into a marketable product

question

Economies of Scale

answer

-Sometimes, a monopoly occurs when a firm experiences this, as reflected by a downward sloping, long run average cost curve
-i.e.: electricity

question

Case Study 1: Diamonds are Forever

answer

question

Price Maker

answer

a firm that must find the profit maximizing price when the demand curve for its output slopes downward [Graph: Monopoly]

question

Deadweight Loss of Monopoly

answer

Net loss to society when a firm uses its market power to restrict output and increase price [Graph: Losses from monopoly]

question

Rent Seeking

answer

Activities undertaken by individuals or firms to influence public policy in a way that will increase their incomes
ex: The Mail Monopoly

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

Monopolistic Competition

answer

question

The Mail Monopoly

answer

question

Product Differentiation

answer

question

Fast Forward Case Study

answer

question

Excess Capacity

answer

question

Oligopoly

answer

a market structure characterized by a few firms whose behavior is interdependent

question

Undifferentiated Oligopoly

answer

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

question

Collusion

answer

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

question

The Unfriendly Skies

answer

question

Differentiated Oligopoly

answer

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

question

Cartel

answer

a group of firms that agree to coordinate the production and pricing decisions to act like a monopolist (OPEC is the leader)

question

Price Leader

answer

a firm whose price is adopted by other firms in the industry. ie: airlines

question

Excludability

answer

the property of a good whereby a person can be prevented from using it.

question

Rivalry in Consumption

answer

the property of a good whereby one person's use diminishes other people's use

question

Private Goods

answer

goods that are both excludable and rival in consumption.

question

Public goods

answer

goods that are neither excludable nor rival in consumption.
Example: National Defense

question

Common resources

answer

goods that are rival in consumption but not excludable.

question

Free rider

answer

a person who receives the benefit of a good but avoids paying for it.

question

the tragedy of commons

answer

a parable that illustrates why common resources are used more than is desirable from the stand point of society as a whole.
Environmental degradation is an example of this (air and water pollution)

question

important common resources

answer

clean air and water

question

externality

answer

the encompassed impact of one person's actions on the well-being of a bystander.

question

Negative externaility

answer

type of externality that has an adverse impact (ex: pollution)

question

Positive Externality

answer

type of externality that has a beneficial impact (ex: someone making a baseball field)

question

Cost-Benefit Analysis

answer

the study that compares the costs and benefits to society of providing a public good

question

Internalizing Externality

answer

altering incentives so that people take account of the external effects of their actions

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order