test two interm micro - Assignment Essays

question

budget constraint

answer

a curve that describes the entire set of consumption bundles a consumer can purchase by spending all income

question

feasible bundle

answer

Any combination of goods on ot below the budget constraint that the consumer has the income to purchase

question

infeasible bundle

answer

Any combination of goods above ot to the right of the budget line that the consumer cannot afford to purchase

question

A special Case: of consumer optimally consumers

answer

Corner solution
Interior Solution

question

Corner solution

answer

A utility maximizing bundle located at the "corner" of the budget constraints where the consumers purchase only one of two goods

question

interior solutions

answer

A utility maximizing bundle that contains positive quantities of both goods

question

income effect

answer

the change in a consumer's consumption choices that results from a change in the purchasing power of the consumer's income

question

normal good

answer

A good for which consumption rises when income rises

question

For normal goods the income effect is . . .

answer

positive

question

inferior good

answer

A good for which consumption decreases when income rises

question

necessity goods

answer

normal goods with an income elasticity between 0 and 1 rise with income but at a slower rate

question

luxury good

answer

are goods with income elasticity greater than 1

question

If good X is normal and good Y is inferior, following a loss of income:

answer

the new optimal bundle will contain more X and less Y

question

substitution effect

answer

The change in a consumer's consumption that results from a change in the relative prices of two goods

question

income effect

answer

Is the change in a conumer's consumption choices that result from a change in the purchasing power of the consumer's income

question

An increase in price or decrease in income leads to

answer

Demand curve shifts downward

question

Some rules for substitution effect

answer

1. Involve comparisons of bundles that lie on the same indifference curve
2. The direction of the effect on quantity consumed for a given change in
3. If the good's relative price falls, the substitution effect causes the consumer to want more of it
4. If the good's relative price rises, the substitution effect causes the consumer to want less of it

question

Some rules for income effects

answer

1. Involve comparisons of bundles that lie on two different indifference curves
2. The direction of the effect on quantity consumed for a given change in the relative price of the good is ambiguous and depends on whether the good is normal or inferior
3. If the good is normal, than a fall in either its price or the price of the other good will cause the consumer to want more of it. ( A drop in any price, even of another good, increases the effective income of the consumer.) If the good is inferior, then a price drop will cause to want less of it
4. If the good is normal, then a rise in either its price or the price of the other good will cause the consumer to want less of it. If the good is inferior, than a rise in either price will cause the consumer to want more if it

question

Engel Curve

answer

shows the relationship between income and quantity of a good demanded. Whether an increase in come raises or reduces the quantity demanded of a good depends on the type of good

question

total effect

answer

On the quantity demanded of a good in response to a change in its own price can be broken down into two components

question

Goods are substitutes if . . .

answer

A price increase in one leads to an increase in demand for the other, due to consumers switching awaying from the now more expensive good and toward the substitute

question

Goods are complements if. . . .

answer

An increase in one's price causes demand for the other to fall. Complements aregoods that are often consumed together

question

A --> A'

answer

Substitution effect

question

A' --> B

answer

Income effect

question

Substitution effect is what the consumers want . . .

answer

considering prices but not income

question

Px/Py

answer

price ratio

question

Marginal Rate of Substitution (MRS) equation

answer

MUx/ MUy

question

Marginal Rate of Substitution

answer

the ratio of the marginal utility of one good to the marginal utility of another

question

What does it mean when ratio of prices = MRS

answer

...

question

production function

answer

Describes how much output can be made from different combinations of outputs

question

Production function

answer

Q=f(K.L) a function of capital (K) and Labor (L)

question

Assumptions for production

answer

1. Only produce a signle goos
2. Already chosen the goof
3. Goal is to minimize costs
4. Only 2 inputs: K+L
5. Capital is fixed in the short run
6. More inputs make more outputs
7. Production exibits diminsihing marginal returns to labor + capital
8. Firm can buy as much K+L as it wants at fixed prices
9. Firms can issue stock+ borrow

question

diminishing marginal product

answer

Decline in the rate of output (not output itself)

question

Short run production

answer

Capital is fixed

Chose L such that they achieve an output goal at a min. cost.

question

Long run production

answer

Capital is NOT fixed

Subsitiion between labor & capital can occur

question

Producer Analysis

answer

Constrained minimization (optimizatin)

question

Cost maximization

answer

Firm produces a specific quanity of an output at min. cost.

question

Isoquant

answer

"some quantity" - combinations of K and L that yield the same output (similar to indifference curves)

Further out from the origin means higher output.
- Can't intersect
- Convex to the origin

question

slope of isoquant

answer

Trade off between the production abilities of K +L

question

slope of an isoquant is

answer

MP (L)/ MP (K)

question

Marginal Rate of Technical Solution

answer

MRTS (L,K)

The negatice of the slope o the isoquant

question

Curvature of Isoquants : Relativly surved

answer

K+L are not close substitutes

question

Curvature of Isoquants: Relatively straight

answer

K+L are close substitutes

question

Linear Isoquants

answer

Imply that inputs are substituted at a constant rate, independent of the input levels employed.

Constant MRTS(LK) and are perfect substitutes

question

L-shaped isoquant

answer

Perfect Complements
- Proportion of cab drive and getting somewhere

question

Isocosts

answer

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

question

Price of Inputs: W and R

answer

Wage rate of labor (W) and rental rate on capital (R)

question

-W/r

answer

slope of isocosts

question

slope of isocosts

answer

The cost consequences of trading one unit of capital for another unit of labor

question

What do the slopes of Isocosts look like?

answer

All have the same slope higher costs isocosts further out from origin

question

Producers Problem

answer

Producers Q (with line over it) is

question

Return to scale

answer

Changes in the amount of Q in response to a proportional change in K+L

question

Return to scale: constant

answer

Output changes by the same proportion

question

return to scale: increasing

answer

Output changes by more proportinally

question

Return to scale decreasing

answer

Output changes by less proportinally

question

Total Factor Productivity (TFP)

answer

Growth that can change production so thay more output is made w/ same level of outputs (positive technical change)

question

Accounting costs

answer

direct cost of operating a business

question

opportunity costs

answer

cost of the next best option

question

what is the formula for total cost

answer

fixed cost (capital) + variable cost (labor driven)

question

sunk cost

answer

Costs that once they are paid, cannot be recovered

question

sunk cost fallacy

answer

we let sunk costs impact decisions

question

fixed

answer

Don't vary w/ output (more capital)

question

Variable

answer

vary w. output (more labor)

question

Why in the long run are all costs variable?

answer

We assume in the long run the company will be able to make adjustments

question

ATC (Average Total Cost)

answer

The total cost per unit of output
TC / q
q = level of output

question

AFC (Average Fixed Cost)

answer

The fixed cost per unit of output
FC / q
q = level of output

question

AFC falls when

answer

output is increased

question

AVC (Average Variable Cost) Formula

answer

AVC = VC / Q

question

ATC and AVC are what shape?

answer

U shaped

question

AFC is always

answer

falling

question

Marginal cost interests ATC, AFC and AVC at what point ?

answer

Each of their lowest points

question

Marginal Cost (MC)

answer

An additional cost of producing the next unit of output

question

When MC < ATC(avc), ATC is

answer

FALLING, if we produce one more unit of Q

question

When MC > ATC (AVC)

answer

ATC will increase if you produce more of unit Q

question

MC= ATC (AVC)

answer

ATC(AVC) is at the minimum

question

Will costs be hgiher in the SR or LR?

answer

Lower because costs in the SR are fixed. You can make adjustments as needed

question

In the Long run (LR) you have flexibility. . .

answer

...

question

Economies of Scale

Economies

answer

LR TC rises at a slower rate than output rises

question

diseconomies of scale

answer

long-run average total costs rises at a faster rate than output rises

question

constant economies of scale

answer

LR TC rises at the sam rate

question

What do the utility and indifference curve describe?

answer

the budget constraint

question

What does the budget constraint line describe?

answer

Which bundle are feasible

question

Consumers face a constrained optimization problem meaning ?

answer

Maximize utility, subject to income and market prices

question

Why is tangency key to finding the optimal bundle?

answer

Because it is where the slope of the indifference curve us equal to the slope of the budget constraint

question

If two consumers have different preferences? Will they have the same MRS at their optimal bundles?

answer

Yes, because they face the same ratio of prices. But that doesn't mean they have the same optimal bundle

question

Should a form factor in sunk costs when making decisions?

answer

No, this is known as sunk cost fallacy

question

Income expansion path

answer

A curve that connects cosumers optimal bundles at each income level

question

What are some components of the income expansion path ?

answer

- Only two goods represented
- When both goods are normal goods, the path is positively sloped
- If the slope of the income path is negative, one of the goods is an inferior good
- Income levels can't be directly observed on the curve becuase both axes represent quantities of goods

question

What does Engel Curve show?

answer

Shows the relationship between quantity of a good consumed and a cosumer's income

question

What does it mean if the engel curve has a positive slope?

answer

The good is a normal good at that income level

question

What does it mean if an engel curve had a negative slope?

answer

The good is an inferior good at that income level

question

The substitution and income effect occur?

answer

Simultaneously, we never actually observe them separately

question

When do we observe the total effect>

answer

After a price change

question

The total effect of a change in a price is ?

answer

The sum of the subsitution and income effects

question

Total Effect Formula

answer

Substituion effect + income effect

question

Isolating the Substitution Effect

answer

Determine the bundle of goods that would have been chosen at the new price while maintaining utility experienced before the price change

question

Isolating the Income Effect

answer

The change in quantites demanded due to the changes in conumers purchasing power after the change in prices

question

substitution effect

answer

is the difference in quantities between A and A'

question

income effect

answer

Is the difference in quantities between A' and B

question

Why does the income effect increase with the amount spent on a good?

answer

The more you can get from trading off consumption of that good

question

When the price of a substitute good increases, we expect consumption of the primary good to . . .?

answer

increase

question

When the price of a complement increase, we expect consumption of the primary good to . . . ?

answer

decrease

question

An increase in the price of a substitute causes the demand curve to shift ?

answer

Outward

question

A decrease in the price of a complement causes the demand curve to shift?

answer

Outward

question

A decrease in price of a substitute cause the demand curve to shift?

answer

Inward

question

An increase in the price of a complement causes the demand curve to shift?

answer

Inward

question

The market demand curve is found by?

answer

Summing horizontally the indiv. demand curves

question

Final goods

answer

A goof that is bought by a consumer

question

Intermediate goods

answer

A good that is used to produce another good

question

Inputs are characterized by ___

answer

diminishing returns

question

cost minimization

answer

Refers to the firm's goal of producing a specific quantity of output at minimum cost

question

isocost "same cost"

answer

Show all of the input combinations that yield the same costs

C= RK+WL

question

What is the meaning for the formulas C=RK+WL

answer

Where C is total cost, R is the "rental rate" of capital, and W is the wage. You then rearange this funvtion . . . .

question

The firms problem is one of constrained minimization meaning ?

answer

Firms minimize cost subject to a given amount of production. Cost minimization is achieved by adjusting the ratio of capital to labor

question

Cost minimizing condition?

answer

Costs are minimized when the marginal product per dollar spent is equalized across inpits

1 of 115

question

budget constraint

answer

a curve that describes the entire set of consumption bundles a consumer can purchase by spending all income

question

feasible bundle

answer

Any combination of goods on ot below the budget constraint that the consumer has the income to purchase

question

infeasible bundle

answer

Any combination of goods above ot to the right of the budget line that the consumer cannot afford to purchase

question

A special Case: of consumer optimally consumers

answer

Corner solution
Interior Solution

question

Corner solution

answer

A utility maximizing bundle located at the "corner" of the budget constraints where the consumers purchase only one of two goods

question

interior solutions

answer

A utility maximizing bundle that contains positive quantities of both goods

question

income effect

answer

the change in a consumer's consumption choices that results from a change in the purchasing power of the consumer's income

question

normal good

answer

A good for which consumption rises when income rises

question

For normal goods the income effect is . . .

answer

positive

question

inferior good

answer

A good for which consumption decreases when income rises

question

necessity goods

answer

normal goods with an income elasticity between 0 and 1 rise with income but at a slower rate

question

luxury good

answer

are goods with income elasticity greater than 1

question

If good X is normal and good Y is inferior, following a loss of income:

answer

the new optimal bundle will contain more X and less Y

question

substitution effect

answer

The change in a consumer's consumption that results from a change in the relative prices of two goods

question

income effect

answer

Is the change in a conumer's consumption choices that result from a change in the purchasing power of the consumer's income

question

An increase in price or decrease in income leads to

answer

Demand curve shifts downward

question

Some rules for substitution effect

answer

question

Some rules for income effects

answer

question

Engel Curve

answer

shows the relationship between income and quantity of a good demanded. Whether an increase in come raises or reduces the quantity demanded of a good depends on the type of good

question

total effect

answer

On the quantity demanded of a good in response to a change in its own price can be broken down into two components

question

Goods are substitutes if . . .

answer

A price increase in one leads to an increase in demand for the other, due to consumers switching awaying from the now more expensive good and toward the substitute

question

Goods are complements if. . . .

answer

An increase in one's price causes demand for the other to fall. Complements aregoods that are often consumed together

question

A --> A'

answer

Substitution effect

question

A' --> B

answer

Income effect

question

Substitution effect is what the consumers want . . .

answer

considering prices but not income

question

Px/Py

answer

price ratio

question

Marginal Rate of Substitution (MRS) equation

answer

MUx/ MUy

question

Marginal Rate of Substitution

answer

the ratio of the marginal utility of one good to the marginal utility of another

question

What does it mean when ratio of prices = MRS

answer

...

question

production function

answer

Describes how much output can be made from different combinations of outputs

question

Production function

answer

Q=f(K.L) a function of capital (K) and Labor (L)

question

Assumptions for production

answer

question

diminishing marginal product

answer

Decline in the rate of output (not output itself)

question

Short run production

answer

Capital is fixed

Chose L such that they achieve an output goal at a min. cost.

question

Long run production

answer

Capital is NOT fixed

Subsitiion between labor & capital can occur

question

Producer Analysis

answer

Constrained minimization (optimizatin)

question

Cost maximization

answer

Firm produces a specific quanity of an output at min. cost.

question

Isoquant

answer

"some quantity" - combinations of K and L that yield the same output (similar to indifference curves)

Further out from the origin means higher output.
- Can't intersect
- Convex to the origin

question

slope of isoquant

answer

Trade off between the production abilities of K +L

question

slope of an isoquant is

answer

MP (L)/ MP (K)

question

Marginal Rate of Technical Solution

answer

MRTS (L,K)

The negatice of the slope o the isoquant

question

Curvature of Isoquants : Relativly surved

answer

K+L are not close substitutes

question

Curvature of Isoquants: Relatively straight

answer

K+L are close substitutes

question

Linear Isoquants

answer

Imply that inputs are substituted at a constant rate, independent of the input levels employed.

Constant MRTS(LK) and are perfect substitutes

question

L-shaped isoquant

answer

Perfect Complements
- Proportion of cab drive and getting somewhere

question

Isocosts

answer

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

question

Price of Inputs: W and R

answer

Wage rate of labor (W) and rental rate on capital (R)

question

-W/r

answer

slope of isocosts

question

slope of isocosts

answer

The cost consequences of trading one unit of capital for another unit of labor

question

What do the slopes of Isocosts look like?

answer

All have the same slope higher costs isocosts further out from origin

question

Producers Problem

answer

Producers Q (with line over it) is

question

Return to scale

answer

Changes in the amount of Q in response to a proportional change in K+L

question

Return to scale: constant

answer

Output changes by the same proportion

question

return to scale: increasing

answer

Output changes by more proportinally

question

Return to scale decreasing

answer

Output changes by less proportinally

question

Total Factor Productivity (TFP)

answer

Growth that can change production so thay more output is made w/ same level of outputs (positive technical change)

question

Accounting costs

answer

direct cost of operating a business

question

opportunity costs

answer

cost of the next best option

question

what is the formula for total cost

answer

fixed cost (capital) + variable cost (labor driven)

question

sunk cost

answer

Costs that once they are paid, cannot be recovered

question

sunk cost fallacy

answer

we let sunk costs impact decisions

question

fixed

answer

Don't vary w/ output (more capital)

question

Variable

answer

vary w. output (more labor)

question

Why in the long run are all costs variable?

answer

We assume in the long run the company will be able to make adjustments

question

ATC (Average Total Cost)

answer

The total cost per unit of output
TC / q
q = level of output

question

AFC (Average Fixed Cost)

answer

The fixed cost per unit of output
FC / q
q = level of output

question

AFC falls when

answer

output is increased

question

AVC (Average Variable Cost) Formula

answer

AVC = VC / Q

question

ATC and AVC are what shape?

answer

U shaped

question

AFC is always

answer

falling

question

Marginal cost interests ATC, AFC and AVC at what point ?

answer

Each of their lowest points

question

Marginal Cost (MC)

answer

An additional cost of producing the next unit of output

question

When MC < ATC(avc), ATC is

answer

FALLING, if we produce one more unit of Q

question

When MC > ATC (AVC)

answer

ATC will increase if you produce more of unit Q

question

MC= ATC (AVC)

answer

ATC(AVC) is at the minimum

question

Will costs be hgiher in the SR or LR?

answer

Lower because costs in the SR are fixed. You can make adjustments as needed

question

In the Long run (LR) you have flexibility. . .

answer

...

question

Economies of Scale

Economies

answer

LR TC rises at a slower rate than output rises

question

diseconomies of scale

answer

long-run average total costs rises at a faster rate than output rises

question

constant economies of scale

answer

LR TC rises at the sam rate

question

What do the utility and indifference curve describe?

answer

the budget constraint

question

What does the budget constraint line describe?

answer

Which bundle are feasible

question

Consumers face a constrained optimization problem meaning ?

answer

Maximize utility, subject to income and market prices

question

Why is tangency key to finding the optimal bundle?

answer

Because it is where the slope of the indifference curve us equal to the slope of the budget constraint

question

If two consumers have different preferences? Will they have the same MRS at their optimal bundles?

answer

Yes, because they face the same ratio of prices. But that doesn't mean they have the same optimal bundle

question

Should a form factor in sunk costs when making decisions?

answer

No, this is known as sunk cost fallacy

question

Income expansion path

answer

A curve that connects cosumers optimal bundles at each income level

question

What are some components of the income expansion path ?

answer

question

What does Engel Curve show?

answer

Shows the relationship between quantity of a good consumed and a cosumer's income

question

What does it mean if the engel curve has a positive slope?

answer

The good is a normal good at that income level

question

What does it mean if an engel curve had a negative slope?

answer

The good is an inferior good at that income level

question

The substitution and income effect occur?

answer

Simultaneously, we never actually observe them separately

question

When do we observe the total effect>

answer

After a price change

question

The total effect of a change in a price is ?

answer

The sum of the subsitution and income effects

question

Total Effect Formula

answer

Substituion effect + income effect

question

Isolating the Substitution Effect

answer

Determine the bundle of goods that would have been chosen at the new price while maintaining utility experienced before the price change

question

Isolating the Income Effect

answer

The change in quantites demanded due to the changes in conumers purchasing power after the change in prices

question

substitution effect

answer

is the difference in quantities between A and A'

question

income effect

answer

Is the difference in quantities between A' and B

question

Why does the income effect increase with the amount spent on a good?

answer

The more you can get from trading off consumption of that good

question

When the price of a substitute good increases, we expect consumption of the primary good to . . .?

answer

increase

question

When the price of a complement increase, we expect consumption of the primary good to . . . ?

answer

decrease

question

An increase in the price of a substitute causes the demand curve to shift ?

answer

Outward

question

A decrease in the price of a complement causes the demand curve to shift?

answer

Outward

question

A decrease in price of a substitute cause the demand curve to shift?

answer

Inward

question

An increase in the price of a complement causes the demand curve to shift?

answer

Inward

question

The market demand curve is found by?

answer

Summing horizontally the indiv. demand curves

question

Final goods

answer

A goof that is bought by a consumer

question

Intermediate goods

answer

A good that is used to produce another good

question

Inputs are characterized by ___

answer

diminishing returns

question

cost minimization

answer

Refers to the firm's goal of producing a specific quantity of output at minimum cost

question

isocost "same cost"

answer

Show all of the input combinations that yield the same costs

C= RK+WL

question

What is the meaning for the formulas C=RK+WL

answer

Where C is total cost, R is the "rental rate" of capital, and W is the wage. You then rearange this funvtion . . . .

question

The firms problem is one of constrained minimization meaning ?

answer

Firms minimize cost subject to a given amount of production. Cost minimization is achieved by adjusting the ratio of capital to labor

question

Cost minimizing condition?

answer

Costs are minimized when the marginal product per dollar spent is equalized across inpits

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