ECON 1510 Test #2

Free entry and exit of firms is a characteristic of

perfectly competitive industries.

The difference between the price a seller actually receives for a good and the seller's reservation price is

producer surplus.

If a consumer buys two different goods, the rational spending rule requires that the

ratio of marginal utility to price be equal for the two goods.

The role that prices play in distributing scarce goods and services to those consumers who value them the most highly is known as the ______ function of price.

rationing

The law of demand indicates that as the cost of an activity

rises, less of the activity will occur.

total surplus

the sum of producer surplus and consumer surplus

Average total cost is defined as

total cost divided by total output

Accounting profit is equal to

total revenue minus explicit costs.

Economic profit is equal to

total revenue minus the sum of explicit and implicit costs.

Average variable cost is defined as

variable cost divided by total output

According to economists, the satisfaction people get from their consumption activities is called

Utility

The short run is best defined as

a period of time sufficiently short that at least one factor of production is fixed.

A pure monopoly exists when:

a single firm produces a good with no close substitutes

The role that prices play in directing resources away from overcrowded markets and towards markets that are underserved is known as the ______ function of price.

allocative

An imperfectly competitive firm is one that

has at least some influence over the market price.

A price setter is a firm that

has some degree of control over its price.

law of diminishing marginal utility

he tendency for marginal utility to decline as consumption increases beyond some point is called

A price-taker faces a demand curve that is

horizontal at the market price

The most important challenge facing a firm in a perfectly competitive market is deciding

how much to produce.

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.

A fixed factor of production

is fixed only in the short run

A variable factor of production

is variable in both the short run and the long run.

Both a perfectly competitive firm and a monopolist find that

it is best to expand production until the benefit and the cost of the last unit produced are equal.

If a firm operates in an oligopoly, it is

one of a small number of firms that produce goods that are either close or perfect substitutes.

A profit-maximizing perfectly competitive firm must decide

only how much to produce, taking price as fixed.

A monopolistically competitive firm is one

of many firms that sell products that are close but not perfect substitutes.

The additional utility gained from consuming an additional unit of a good is called

marginal utility.

Which of the following is a defining characteristic of all perfectly competitive markets?

All firms sell the same standardized product.

optimal

The ______ combination of goods is the combination that yields the highest total utility given a consumer's income.

real price.

The dollar price of a good relative to the average dollar price of all other goods is the good's

resources; satisfaction

The goal of utility maximization is to allocate your ______ in order to maximize your ______.

maximize utility

The rational spending rule is derived from the consumer's desire to

total utility; 1

The term marginal utility denotes the amount by which ______ changes when consumption changes by ______ unit(s).

profit

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

A good is characterized by network economies if it

becomes more valuable as more people own it.

Price discrimination means charging

different prices to different buyers for essentially the same good or service.

Generally, ______ motivates firms to enter an industry, while ______ motivates firms to exit an industry.

economic profit; economic loss

A natural monopoly is a monopoly that arises from

economies of scale

Patents, which confer market power, are intended to

encourage innovation by helping firms recoup the costs of research and development.

Barriers to entry are forces that

limit new firms from joining an industry.

In general, perfectly competitive firms maximize their profit by producing the level of output at which

marginal cost equals price.

The monopolist will maximize profits at the output level for which

marginal revenue equals marginal cost.

Economic theory assumes that a firm's goal is to

maximize its economic profit.

The primary objective of most private firms is to

maximize profit

The primary objective of an imperfectly competitive firm is to

maximize profit.

Explicit costs

measure the payments made to the firm's factors of production.

Consumer surplus is the cumulative difference between

the amount consumers are willing to pay and the price they actually pay.

Economies of scale exist when

the average cost of production falls as output rises.

Marginal cost is calculated as

the change in total cost divided by the change in output.

Consumer Surplus

the difference between the most a buyer would be willing to pay for a product and the price actually paid