Micro Test 2

variable cost

the sum of all payments made to the firm's variable factors of production

perfectly discriminating monopolist

a firm that charges each buyer exactly his or her reservation price

price setter

a firm that has at least some control over the market price of its product

economic rent

that part of the payment for a factor of production that exceeds the owner's reservation price, the price below which the owner would not supply the factor

Producer surplus

the amount by which price exceeds the seller's reservation price

marginal revenue

the change in a firm's total revenue that results from a one-unit change in output

Consumer surplus

the difference between a buyer's reservation price for a product and the price actually paid

accounting profit

the difference between a firm's total revenue and its explicit costs

economic profit (or excess profit)

the difference between a firm's total revenue and the sum of its explicit and implicit costs

Real price

the dollar price of a good relative to the average dollar price of all other goods

marginal cost

the increase in total cost that results from carrying out one additional unit of an activity

pure monopoly

the only supplier of a unique product with no close substitutes

normal profit

the opportunity cost of the resources supplied by a firm's owners, equal to accounting profit minus economic profit

implicit costs

the opportunity costs of the resources supplied by the firm's owners

hurdle method of price discrimination

the practice by which a seller offers a discount to all buyers who overcome some obstacle

price discrimination

the practice of charging different buyers different prices for essentially the same good or service

total cost

the sum of all payments made to the firm's fixed and variable factors of production

fixed cost

the sum of all payments made to the firm's fixed factors of production

Law of diminishing marginal utility

the tendency for the additional utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point

Profit

the total revenue a firm receives from selling its product minus the total cost of producing it

Average Total Cost (ATC)

total cost divided by total output

Economic profit is equal to:

total revenue minus the sum of explicit and implicit costs.

Average Variable Cost (AVC)

variable cost divided by total output

Average variable cost is defined as:

variable cost divided by total output.

Suppose you own a small business. Last month, your total revenue was $6,000. In addition, you paid: $1,000 in monthly rent for office space, $200 in monthly rent for equipment, $3,000 to your workers in wages for the month, and $1,000 for the supplies you used that month. If you correctly determine that your economic profit last month was negative $200, then it must be true that:

your implicit costs are $1,000 per month.

Accounting profit minus implicit costs equals:

economic profit.

Nominal price

the absolute price of a good in dollar terms

Marginal utility

the additional utility gained from consuming an additional unit of a good

optimal combination of goods

the affordable combination that yields the highest total utility

price taker

a firm that has no influence over the price at which it sells its product

profit-maximizing firm

a firm whose primary goal is to maximize the difference between its total revenues and total costs

Profitable firm

a firm whose total revenue exceeds its total cost

market power

a firm's ability to raise the price of a good without losing all its sales

perfectly competitive market

a market in which no individual supplier has significant influence on the market price of the product

Total revenue minus both explicit and implicit costs defines a firm's:

profit.

An increase in consumers' demand for espresso will lead to an increase in ______, while an increase in the number of firms producing espresso will lead to a(n) ______.

quantity supplied; increase in supply

Any consumer trying to decide whether to buy a given good or service will base the decision on his or her reservation price and the existing market price. The consumer will purchase the good or service only if the buyer's

reservation price is equal to or higher than the market price

Rational Spending Rule

spending should be allocated across goods so that the marginal utility per dollar is the same for each good

Law of demand

people do less of what they want to do as the cost of doing it rises

A firm's profit equals:

(P − ATC) × Q [(price minus average total cost) times the quantity sold].

Which of the following statements is true?

Accounting profit is greater than or equal to economic profit.

Invisible Hand Theory

Adam Smith's theory that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources

Which of the following is NOT a characteristic of a perfectly competitive market?

Each firm in the market sells a somewhat different variant of the good.

Suppose that each week Fiona buys 16 peaches and 4 apples at her local farmer's market. Both kinds of fruit cost $1 each. From this we can infer that:

If Fiona is maximizing her utility, then her marginal utility from the 16th peach she buys must be equal to her marginal utility from the 4th apple she buys.

Ann lives in Princeton, New Jersey, and commutes by train each day to her job in New York City (20 round trips per month). When the price of a round trip goes up from $10 to $20, she responds by consuming exactly the same number of trips as before, while spending $200 per month less on restaurant meals. Does the fact that her quantity of train travel is completely unresponsive to the price increase imply that Ann is not a rational consumer?

No

explicit costs

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

Which of the following factors would impact a buyer's reservation price for a given good or service?

The cost of producing the item; Peer influence

Which of the following is NOT an example of an explicit cost?

The income the owner could have earned in his or her next best employment opportunity.

deadweight loss

The loss of consumer and producer surplus caused by disparity between price and marginal cost

Which of the following statements about implicit costs is true?

They measure the forgone opportunities of the firm's owners.

Sue gets a total of 20 utils per week from her consumption of pizza and a total of 40 utils per week from her consumption of yogurt. The price of pizza is $1 per slice, the price of yogurt is $1 per cup, and she consumes 10 slices of pizza and 20 cups of yogurt each week. Which of the following statements is correct regarding Sue's current consumption of pizza and yogurt?

We cannot determine if Sue is maximizing her total utility with the information provided.

Suppose you and your friend go out for dinner. Your friend orders a cheeseburger and fries. When your food first arrives, you ask your friend if you can have one of his fries. He looks at you like you are crazy and says, "No!" Then a few minutes later, after you both have started eating, you ask again, and your friend reluctantly says, "Sure. Go ahead." An economist's explanation for your friend's change of heart is most likely to be that:

Your friend's marginal utility from eating additional fries declines as he eats more of them, so he's more likely to share with you after he's eaten a few.

You are having lunch at an all-you-can-eat buffet. If you are rational, what should be your marginal utility from the last morsel of food you swallow? Marginal utility from the last morsel of food you swallow should be

Zero

cost-plus regulation

a method of regulation under which the regulated firm is permitted to charge prices that cover explicit costs of production plus a markup to cover the opportunity cost of resources provided by the firm's owners

natural monopoly

a monopoly that results from economies of scale

long run

a period of time of sufficient length that all the firm's factors of production are variable

short run

a period of time sufficiently short that at least some of the firm's factors of production are fixed

constant returns to scale

a production process is said to have constant returns to scale if, when all inputs are changed by a given proportion, output changes by the same proportion

increasing returns to scale (economies of scale)

a production process is said to have increasing returns to scale if, when all inputs are changed by a given proportion, output changes by more than that proportion

law of diminishing returns

a property of the relationship between the amount of a good or service produced and the amount of a variable factor required to produce it; the law says that when some factors of production are fixed, increased production of the good eventually requires ever-larger increases in the variable factor

efficient (or Pareto efficient)

a situation is efficient if no change is possible that will help some people without harming others

perfect hurdle

a threshold that completely segregates buyers whose reservation prices lie above it from others whose reservation prices lie below it, imposing no cost on those who jump the hurdle

economic loss

an economic profit that is less than zero

monopolistic competition

an industry structure in which a large number of firms produce slightly differentiated products that are reasonably close substitutes for one another

Oligopoly

an industry structure in which a small number of large firms produce products that are either close or perfect substitutes

factor of production

an input used in the production of a good or service

variable factor of production

an input whose quantity can be altered in the short run

fixed factor of production

an input whose quantity cannot be altered in the short run

Barrier to entry

any force that prevents firms from entering a new market

allocative function of price

changes in prices direct resources away from overcrowded markets and toward markets that are underserved

rationing function of price

changes in prices distribute scarce goods to those consumers who value them most highly

A rational seller will sell another unit of output:

if the cost of making another unit is less than the revenue gained from selling another unit.

Any consumer trying to decide whether to buy a given good or service will base the decision on his or her reservation price and the existing market price. When making this decision, the buyer's reservation price measures the

marginal benefit: what the buyer is willing to pay

Any consumer trying to decide whether to buy a given good or service will base the decision on his or her reservation price and the existing market price. The market price measures the

marginal cost: the amount the buyer will actually have to pay

The primary objective of most private firms is to:

maximize profit.

A situation is efficient if it is:

not possible to find a transaction that will make at least one person better off without harming others.

A seller's supply curve shows the seller's:

opportunity cost of producing an additional unit of output at each quantity.