Micro. Economics Exam 2
Your company incurs a cost for fire insurance, which, in the short run, is fixed. What happens to this cost in the long run?
Becomes a variable cost
Eating too much today based on an expectation you will reduce your food intake at some later date in order to lose weight is a an example of what type of flaw in decision making?
Being unrealistic about future behavior
The limited amount of income available to consumers to spend on good and services is known as the _______
Budget constraint
Which of the following is a true statement? A. The fewer substitutes available for a product, the greater the price elasticity of demand. B. The more time that passes, the more Inelastic the demand for a product becomes. C. When an item represents a small portion of our total budget, demand for that item is likely to be Inelastic. D. All of the above
C.
Indifference curves do not....
Cross
MRS ________ as we move ____ on the IC
Decreases; down
The demand curve for an inferior curve is ___________ sloping while the demand curve for a Giffen good is ___________ sloping
Downward;upward
An indifference curve shows combinations and of consumption bundles that maximize a consumers utility. True or False
False
Utility refers to how much consumers utilize a product or service. True or False
False
When a consumer moved down his or her indifference, the gain from consuming more of one good will exceed the loss in utility from consuming less of the other good. True or False
False
What does economic profit consider?
It considers both implicit and explicit costs
When does The Law of Diminishing Marginal Utility occur?
It happens when we experience diminishing "additional" satisfaction as we consume more of a particular good or service
marginal utility
It is the additional satisfaction from consuming one more unit of good/service
Total utility
It is the total satisfaction from consumption of goods and services
What does the indifference curve show?
It shows a combination of goods and services among which we are indifferent
Explicit costs
Money is in the picture
What does an accounting profit consider
Only the explicit costs
Implicit costs
Pecuniary costs
In considering consumers' attitudes towards fairness, which of the following have economists found to be true?
People attempt to treat others fairly, even if doing so makes them worse off financially
What does the production function do?
Shows the relationship between inputs and outputs.
Utility is
Subjective and cannot be measured
What does the principal of rational choice state?
That we should spend our money on goods and services that give the most marginal utility per dollar
Elasticity
a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
When graphing a conventional short-run production function, we place ___________ on the horizontal axis and __________ on the vertical axis
a variable input and output.
The explicit cost of production is also called
accounting cost
minimum efficient scale is the level of output at which
all economies of scale have been exhausted
The short run is a period of time where __________ while the long run is a period of time where ____________
at least one input is fixed, all inputs are variable
What do economists call the study of situations in which people act in ways that do not appear to be economically rational?
behavioral economics
Marginal product =
change in total product/change in labor input
When there are more substitutes for a product, the ____________ for the product is __________.
demand; more price elastic
Economic cost of production differ from accounting costs in that
economic cost adds the opportunity cost of a firm using its own resources while accounting cost does not.
The downward sloping part of the long run average total cost curve is where the firm is achieving
economies of scale
What are sometimes called accounting costs?
explicit costs
The marginal utility from consuming the second ice cream cone is the:
extra satisfaction you get from consuming the second ice cream cone
In the short run, the cost that is independent of the amount of output produced is called
fixed cost
Total Cost:
fixed costs + variable costs
What does price elasticity of demand measure?
how much the quantity demanded responds to a change in the price of that good
When the marginal product of labor is greater than the average product of labor, then the average product of labor must be:
increasing
The substitution effect for a normal good is _________ while the substitution effect for an inferior good is _________.
inversely related to price, inversely related to price
A firm has successfully adopted a positive technological change when
it can produce more output using the same inputs
What is the name for the additional output that a firm produces as a result of hiring one more worker?
marginal product of labor
According to the law of diminishing marginal utility, as the consumption of a particular good increases:
marginal utility decreases
The optimal combination of pizza and coke is the one where the:
marginal utility per dollar spent on pizza equals the marginal utility per dollar spent on coke
The income effect for a normal good is _________ while the income effect for an inferior good is ___________
negative, positive
Which of the following is known as the highest-valued alternative that must be given up in order to engage in an activity
opportunity cost
If the total utility increases with additional consumption of a good, then the marginal utility is:
positive
The relationship between the inputs used by the firm and the maximum output it can produce is known as the
production function
capital-intensive technology is....
technology that relies heavily on capital instead of human labor
Labor intensive technology is.....
technology that relies heavily on human labor instead of capital
The budget line shows
the affordable combinations of goods and services you can buy with your income
The average product is
the average amount produced by each unit of a variable factor of production
What is a budget constraint?
the limited amount of income available to consumers to spend on goods and services
What is technology?
the processes a firm uses to turn inputs into outputs of goods and services
When network externalities are present, the usefulness of:
the product increases as more consumers use it
The basic activity of a firm is
to use inputs to produce outputs of goods and services
Accounting profit =
total revenue - explicit costs
Economic profit =
total revenue - total cost
Profit =
total revenue - total cost
Suppose that the elasticity of demand for a product is 2.0. What will happen to total revenue as a firm increases the price?
total revenue will decrease
The total utility of consuming two slices of pizza is the
total satisfaction you get from consuming the two slices of pizza
If the income effect of a price change for an inferior good is larger than the substitution effect, the demand curve will be:
upward sloping
Indifference curves are bowed inward toward the origin. Why?
Because it gets harder to substitute one good for another
When demand is elastic, a decrease in price leads to:
An increase in total revenue
If the quantity demanded of peanut butter falls by 12% when income rises by 10%, then peanut butter is:
An inferior good
Terms of elasticity
- Price Elasticity of Demand - Price Elasticity of Supply - Cross Price Elasticity - Income Elasticity
A short run is when
At least one of a firm's inputs is fixed (Capital (K))
Types of Price Elasticity of Demand
1. Perfectly Inelastic Demand 2. Perfectly Elastic Demand 3. Unit Elastic Demand 4. Elastic Demand 5. Inelastic Demand
The substitution effect is the change in the quantity demanded of a good results from ________ holding constant the effect of the price change on consumer purchasing power
A change in price making the good more or less expensive relative to other goods
Elasticity of Supply
A measure of the response of the quantity of a good supplied to a change in price of that good. Likely to be positive in output markets
cross-price elasticity of demand
A measure of the response of the quantity of one good demanded to a change in the price of another good
income elasticity of demand
A measure of the responsiveness of demand to changes in income
What are examples of a production function?
A schedule, a graph, or a mathematical expression
What is a preference map?
A series of indifference curves. It is a graphical representation of our tastes
In a long run
All inputs can vary
marginal product
The additional output that can be produced by adding one more unit of a specific input
Total Revenue
The amount a firm receives from the sale of its profit
Total product is:
The amount produced with the given technology
substitution effect
The change in quantity demanded because relative price has changed
Income effect
The change in the quantity demanded because we are poorer or richer (purchasing power)
Marginal utility
The change in total utility divided by the change in quantity
The income effect is the change in quantity demanded of a good that results from __________ holding all factors constant.
The effect of a price change on consumer purchasing power
Utility
The satisfaction we get from consumption
Marginal Rate of Substitution (MRS)
The slope of an indifference curve; it shows the rate at which we would be willing to trade off one good for another
Indifference curves are sloped down. Why?
There is a trade off
Which of the following mistakes do consumers commonly makes when deciding which products or services they want to consume?
They fail to ignore sunk costs
Costs that are spent and cannot be changed in the period of time under consideration (short-run). They do not change as output changes
Total Fixed Cost (Fixed Cost)
The costs that change as output changes
Total Variable Cost (Variable Cost)
Along an indifference curve, the slope tells us the rate at which the consumer is willing to trade off one product for another while keeping the consumer's utility constant. True or False
True
The optimal combination of pizza and coke you should consume is the one
Where your marginal utility is equal for both