Econ Exam 2

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Short Run

-as long as there are any fixed costs, we are in the short run -the firm can operate when total revenue covers variable cost -the firm can shut down when variable costs are greater than total revenue

Imperfect Competition

-demand curve slopes downward to the right -has to lower price to sell more

Causes of U-shaped Curves

-economies of scale -law of diminishing returns -diseconomies of scale

Perfect Competition

-market structure with many well-informed sellers and buyers of an identical product and no barriers to entering or leaving the market "price takers" -perfect mobility: no barriers -perfect knowledge: everyone know every possible economic opportunity

Maximizing Utility

-spend our money on what will give us the most utility -As we consume more of a good or service, its utility declines -we will keep buying more of a good or service until our marginal utility falls to the level of the price

Long Run

-the length of time it takes all fixed costs to become variable costs -break-even

Market Structures

-way in which a market is organized, based largely on the number of firms in the industry and how competitive that industry is -perfect competition, monopoly, monopolistic competition, and oligopoly

Implicit Cost

-what the owner could have earned if he worked for someone else instead of running this firm -opportunity cost of the financial capital that has been invested in the business

Suppose you buy eight pairs of shoes every spring. This year, your shoe store has a huge sale and you end up buying 12 pairs. How does your consumer surplus now compare to how much it would have been had there been no sale? A. It is higher. B. It remains the same. C. It is lower.

A. It is higher

If a restaurant served free steaks, people would consume more and more steaks until their ________ fell to zero. A. marginal utility B. total utility C. consumer surplus D. None of the choices are correct.

A. marginal utility

Suppose you own your own pizzeria. All of the following are implicit costs except A. the gasoline used when you deliver pizzas. B. the wages you could make making pizza for your competitors. C.the interest forgone on the money you invested in your restaurant.

A. the gasoline used when you deliver pizzas.

Average Fixed Cost

AFC = Fixed Cost/Output

Average Total Cost

ATC = Total Cost/Output -declines with output for a while but eventually levels off and then begins to rise

Average Variable Cost

AVC = Variable Cost/Output -variable cost rises with output -declines with output for a while but eventually levels off and then begins to rise

Mutual Fund

An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors.

If fixed cost is $10,000, variable cost is $5,000 at an output of 2 and $9,000 at an output of 3, how much is marginal cost at an output of 3? A. $3,000 B. $4,000 C. $5,000 D. $8,000 E. There is not enough information to determine marginal cost

B. $4,000

When average total cost is declining: (draw below showing ATC declining in red) A. MC must be greater than ATC B. MC must be less than ATC C. AVC must be declining D. AVC must be rising

B. MC must be less than ATC

Which would be the most accurate statement? A. No one enjoys a consumer surplus. B. We enjoy a consumer surplus on many goods and services. C. We enjoy a consumer surplus on all goods and services.

B. We enjoy a consumer surplus on many goods and services.

We will keep buying digital music downloads from the Internet until the marginal utility of the music downloads A.rises to the price of the download. B. falls to the price of the download. C. is greater than the price of the download D. is less than the price of the download.

B. falls to the price of the download.

If you were in the middle of the desert, came upon a lemonade stand, and paid $20 for a glass of lemonade, A. you would definitely be overpaying. B. you would have gotten at least $20 of utility from the lemonade. C. there is no way to determine whether or not you overpaid.

B. you would have gotten at least $20 of utility from the lemonade.

As you buy more and more of an item, your total utility ______ and your marginal utility _______. A. rises, rises B. falls, falls C. rises, falls D. falls, rises

C. rises, falls

Mr. Noriega paid $700 for each of three suits. Since all of the suits were pleasing to his taste, he would have been willing to pay according to this schedule: $950 for the first suit, $800 for the second suit, and $700 for the third suit. How much was his consumer surplus? A. $100 B. $150 C. $250 D. $350

D. $350

A monopolist is always a large firm. T or F?

F

The monopolist does not always produce at an output in which MC = MR. T or F?

F

The monopolist is an imperfect competitor and has a horizontal demand curve T or F?

F

The monopolist produces at the minimum point of her ATC curve. T or F?

F

The MC curve intersects the AVC and ATC curves at their minimum points some of the time T or F?

F all the time

The phrase "spreading the overhead" refers to the decrease in total fixed cost that occurs as a firm increases its output. T or F?

F decrease of average fixed cost

ATC always declines with rising output. T or F?

F falls and rise

As output rises, AFC rises T or F?

F it keeps falling

Very few business firms have any control over price in perfect competition T or F?

F none do

As output increases, eventually economies of scale become larger than diseconomies of scale. T or F?

F the opposite

Balance of Trade

Positive balance means we have sold more to other countries than we have purchased. A negative balance of trade means the opposite has occurred.

Federal Funds Rate

Rate member banks charge each other for short-term borrowing

Prime Rate

Rate of interest charged by banks to the biggest customers.

Discount Rate

Rate of interest charged member banks by the Federal Reserve Bank.

Costs

Sales - Costs = Profit OR Total Revenue - Total Costs = Profit

A firm produces at that output at which marginal cost = marginal revenue all of the time. T or F?

T

A monopoly is a firm that produces all the output in an industry. T or F?

T

A monopoly is an imperfect competitor. T or F?

T

A monopoly is both a firm and an industry. T or F?

T

A natural monopoly is beneficial to consumers. T or F?

T

AFC always declines with rising output. T or F?

T

In perfectly competitive markets, economic profits send signals to other producers to enter the market. T or F?

T

Price is always read off the demand curve. T or F?

T

The marginal cost curve intersects both the AVC curve and the ATC curve at their minimum points. T or F?

T

The monopolist can sell more output by lowering price. T or F?

T

The monopolist's demand and marginal revenue curves are two separate curves. T or F?

T

In the short run the ATC curve is above the AVC curve. T or F?

T also in the long run

Per Capita GDP

The GDP divided by the nation's population. This figure better enables you to determine how well the people there live.

Budget Deficit

The amount the government spends above the amount they take in with tax revenues.

National Debt

The total amount owed to all the holders of U.S. debt instruments. (Treasury Bills, Bonds and Notes along with Savings Bonds)

Explicit Cost

cost of labor, rent, interest etc

Why does the MC curve pass through the AVC and ATC curves at their minimum points?

each marginal value changes the average value

Utility

how much you are willing to pay for something

Why does AVC rises before ATC does?

in order for ATC to rise it needs AVC to rise first and overcome the AFC which continues to fall

Marginal Utility

the additional utility derived from consuming one more unit of a good or service

Marginal Cost

the cost of producing one additional unit of output

Consumer Surplus

the difference between what you pay for some good or service and what you would have been willing to pay

Total Utility

the utility you derive from consuming a certain number of units of a good or service

Economies of Scale

when a firm increases its plant size or labor employed by a certain percentage, its output increases by a larger percentage and its average total cost decreases

Diseconomies of Scale

when long-run average total cost increases as output increases

Marginal Analysis

comparing the benefit of doing a little bit more of some activity with the cost of doing a little bit more of that activity; marginal benefit versus marginal cost

Monopoly

-a firm that produces all the output in an industry; no close substitutes -have market power because no competition; imperfect competition -has price-setting power but constrained by the position and elasticity of its demand curve -can lower output to allow the price to rise

Dow Jones Average

Index number derived from the prices of thirty industrial stocks. There are far more accurate stock market barometers but it is the Dow that the investor wants to hear

Peak Efficiency Point

MC = ATC

Profit Maximization and Loss Minimizing Point

MC = MR

Total Cost

Total Cost = Fixed + Variable Costs

Total Profit

Total Profit = Output (Price - ATC)

Total Revenue

Total Revenue = Price x Output

Gross Domestic Product

Total value of all goods and services produced in one country in one year.

Money Market Instruments

Treasury Bills, Notes and Bonds. These are sold to finance the budget deficits

Law of Diminishing Returns

as a firm uses more of a variable input, with a given quantity of fixed inputs, the marginal product of the variable input eventually decreases

Law of Diminishing Marginal Utility

as we consume more and more of a good or service, we like it less and less

Economic Profit

calculated to determine whether the firm should remain in business; not accounting profit: to determine firm's tax


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