Econ Exam 2

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The term "constant returns to scale" describes a situation where

expanding all inputs does not change the average cost of production

If a paper mill shuts down its operations for three months so that it produces nothing, its __________________ will be reduced to zero?

variable costs

increasing returns to scale

when long-run average total cost declines as output increases

Characteristics of Perfect Competition

1. Many buyers and many sellers. 2. The goods offered for sale are largely the same. 3. Firms can freely enter or exit the market.

3 Factor of decision making

1.Taking into account monetary costs but ignoring non-monetary opportunity costs 2.Failing to ignore sunk costs 3.Being unrealistic about their own future behavior

If a firm is experiencing _____________________, then as the quantity of output rises, the average cost of production rises

Decreasing Returns to Scale

elastic demand curve

Flat slope

he elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in __________

Price

inelastic demand curve

steep

Price elasticity of demand is defined as

the percentage change in quantity demanded divided by the percentage change in price

elasticity formula

% change in quantity / % change in price

Total Cost Formula

TC = TFC + TVC

In order to determine the average variable cost, the firm's variable costs are divided by

The quantity of output

AFC formula

FC/Q

A price cut will increase the total revenue a firm receives if the demand for its product is

Elastic

In microeconomics, the term _____________________ is synonymous with economies of scale.

Increasing Returns to scale

Total Revenue Formula

P x Q

Marcella operates a small, but very successful art gallery. All but one of the following can be classified as a variable cost arising from the physical inputs Marcella requires to operate her business. Which is it?

Physical Space for Gallery

Fixed Cost Formula

TC - VC = FC

variable cost formula

TC-FC

ATC formula

TC/Q

In order to calculate marginal cost, the change in ______________ is divided by the amount of change in quantity

either total cost or variable cost

The price elasticity of demand measures the

responsiveness of quantity demanded to a change in price

___________ include all spending on labor, machinery, tools, and supplies purchased from other firms

Total Costs

AVC formula

VC/Q

______________ include all of the costs of production that increase with the quantity produced

Variable costs

In order to determine ____________, the firm's total costs must be divided by the quantity of its output.

Average costs

The term _____________ is used to describe the additional cost of producing one more unit

Marginal Cost

Why in the long run are there zero profits in a PC market?

So many firms are creating homogenous products, cost will get spread thinner due to increasing supply

When demand is inelastic

consumers are not very responsive to changes in price.

If a solar panel manufacturer wants to look at its total costs of production in the short run, which of the following would provide a useful starting point?

divide total costs into two categories: fixed costs that can't be changed in the short run and variable costs that can be

1. A firm's ___________ consist of expenditures that must be made before production starts that typically, over the short run, _______________ regardless of the level of production

fixed costs; do not change,

Fixed costs are important because, at least in the ___________, the firm _______________.

short run; cannot alter them

law of diminishing marginal utility

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

Icome Elasticity of Demand

%∆Q/%∆Income

law of diminishing returns

When additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines.

marginal cost formula

change in TC/change in Q

Demand is said to be _____________ when the quantity demanded is not very responsive to changes in price

inelastic

____________________________ occur when the marginal gain in output diminishes as each additional unit of input is added

Diminishing marginal returns

The term __________________ describes a situation where the quantity of output rises, but the average cost of production falls.

Economies of Scale

Demand is said to be ___________ when the quantity demanded is very responsive to changes in price

Elastic

Taxes on goods with __________ demand curves will tend to raise more tax revenue for the government than taxes on goods with __________ demand curves

Elastic; Inelastic

The longer the time period considered, the more the elasticity of supply tends to

Increase

Why would labor be treated as a variable cost?

producing larger quantities of a good or service generally requires more workers

marginal product of labor

the change in output from hiring one additional unit of labor


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