Quiz 3

The price of good x is $1.50 and that of good y is $1. Assume a consumer has maximized his utility subject to a budget constraint. If the marginal utility of the last unit consumed of good y is 30 then the marginal utility of the last unit of good x consumed must be

45

what is the basic consumer problem?

A consumer (purchaser of priced quantifiable goods in a market) is often modeled as facing a problem of utility maximization given a budget constraint

law of diminshing marginal returns

As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

fixed costs

Costs that do not vary with the quantity of output produced

The average variable cost curve is U‑shaped because of

increasing marginal returns and decreasing marginal returns

what is the relationship between normal profit and economic profit?

Economic Profit is the remaining surplus left after deducting total costs from total revenue. Normal Profit is the least amount of profit needed for its survival

How does an economist view costs differently than an accountant?

Economists treat costs in a slightly different way, called, unsurprisingly, economic costs. Whereas an accountant needs to know what costs have accrued over the past year, an economist wants to examine costs as they relate to the firm's decision-making

what happens in an industry if economic profit is positive?

If economic profit is positive, there is incentive for firms to enter the market.

implicit costs

input costs that do not require an outlay of money by the firm

What is marginal utility?

The change in total utility when an extra unit of output is consumed.

what is the long run average cost curve?

The long-run average cost (LRAC) curve shows the firm's lowest cost per unit at each level of output,

what is the difference between the long run and short run?

The short run is a period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied. The long run is a period of time in which the quantities of all inputs can be varied

explicit cost

a cost that involves spending money

The U.S. steel industry is an example of

an industry with a large range of output where economies of scale exist

variable resource

any resource that can be varied in the short run to increase or decrease production

how is marginal utility calculated?

change in total utility/change in quantity or units

If a good has a zero price then the rational consumer will

continue to purchase it so long as marginal utility is positive.

average fixed cost

fixed cost divided by the quantity of output

If accounting profit is positive then economic profit

may be positive, negative, or zero

The principle of diminishing marginal utility

says that additional units of a good will yield less and less extra satisfaction to the consumer during a given period of time

normal profit

the accounting profit earned when all resources earn their opportunity cost

consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Marginal Cost (MC)

the change in total costs associated with a one-unit change in output

Marginal utility is best defined as

the change in total utility resulting from consuming one more or one less unit of the good.

What is a budget constraint?

the limit on the consumption bundles that a consumer can afford

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

fixed resources

the quantity and quality of the factors of production are fixed

What is utility?

the want-satisfying power of a good or service

average total cost

total cost divided by the quantity of output

economic profit

total revenue minus total cost, including both explicit and implicit costs

accounting profit

total revenue minus total explicit cost

The sum of the marginal utilities up to any point is known as

total utility

average variable cost

variable cost divided by the quantity of output