ECON201 - MICROECONOMICS MIDTERM 2

If MC is less than AVC, then AVC will: (Tall people in the room example)

AVC will DECREASE if MC is less than AVC.

What is the "Law of Diminishing Marginal Returns?

At SOME POINT, as more and more of one input is added, the MP on that input will decrease. Example: Adding a bunch of workers to a construction site only increases production for a certain amount, then it's just becomes a bunch of workers sitting around.

What is the law of Diminishing MU?

At SOME POINT, as more-and-more of an item is consumed, the MU will decrease.

Which gets "paid out" first; bonds or shares?

Bonds are paid first, THEN shares.

What are the two categories of a cost?

Fixed: Doesn't vary with production quantity. Variable: Depends on Production Quantity

What does it mean if a product has 1.5 Income Elasticity?

For every 1% increase or decrease in income, people will buy 1.5% more or less of a product.

If MP Increases, what happens to MC?

If MP increases, MC will decrease.

What does it mean for a product to be inelastic? What effect does it have on total revenue?

If Price INCREASES, then Quantity will DECREASE A LITTLE. Steep Demand curve. TR WILL increase

What does it mean for a product to be elastic? How does that affect total revenue?

If price INCREASES, Quantity will DECREASE A LOT. Relatively flat demand curve. TR will decrease.

What does it mean for a product to be unit elastic? What effect does that have on TR?

If price INCREASES, Quantity will DECREASE an equal amount. Example: Price Increases 6%, Quantity will decrease 6%. Total Revenue will remain the same.

Give an example of fixed and variable costs.

Labor is a variable cost (easy to hire and fire). Capital is a fixed cost (hard to quickly change).

What is Income Elasticity? How is it measured?

Looks at how much Quantity changes when people's Income changes. (% changes in Quantity / % changed in Income)

How is Marginal Cost (MC) Calculated?

MC = (Change in Total Cost / Change in Quantity) Can also be calculated as: (Change in TVC / Change in Quantity) since TFC never changes.

Where does an MC curve intersect the AVC and ATC curves?

MC curves intersect the AVC and ATC curves at their lowest point.

How is Marginal Product (MP) Calculated?

MP = (Change in Total Output / Change in Input Quantity)

How is Marginal Utility (MU) Calculated?

MU = (Change in Total Utility / Change in Quantity)

What is the equation for solving how much "bang for your buck" a good brings you? *Hint: has to do with Marginal Utility

Marginal Utility / Price

What is an Economy of Scale?

Means a large company can produce at a LOWER ATC than a small company. Small companies cannot compete in this model.

What is a Diseconomy of Scale?

Means small companies can produce at a LOWER ATC than a large company. Large companies cannot compete in this model.

Income Elasticity is positive for ____________, but negative for ____________. (Hint: Types of Goods)

Normal Goods = Positive Income Elasticity Inferior Goods = Negative Income Elasticity

How do you calculate Average Total Cost (ATC)?

ATC = (Total Cost / Quantity)

How do you measure Price Elasticity?

% Changed in Quantity / % Changed in Price

How do you calculate percent changed for price elasticity?

(New Value - Old Value) / Average of Values

What are the characteristics of a partnership?

-More than one owner -Tend to be medium sized

What are common Elasticity Determinants?

-Number and similarity of substitutes -Luxury Items vs. Necessities -% of buyers income a good costs (Inexpensive items tend to be inelastic) -Time for buyers to adjust to new prices

What are the characteristics of a sole proprietorship?

-Single Owner -Unlimited Liability -Smaller -Profits taxed once at owners income rate

What are common characteristics of corporations?

-Tend to be large. -Tend to be publicly traded. -Many Owners -Taxed Twice -Corporate Veil -Can easily raise financial capital.

How is Average Total Cost (ATC) Calculated?

ATC = (Total Costs / Quantity)

IF MC is LESS than ATC, then ATC will:

ATC will DECREASE if MC is less than ATC.

If MC is MORE than ATC, then ATC will:

ATC will INCREASE when MC is more than ATC.

How do you calculate Average Variable Cost (AVC)?

AVC = (Total Variable Cost / Quantity)

How is Average Variable Cost (AVC) Calculated?

AVC = (Total Variable Costs / Quantity)

What is a franchise?

A business that rents another company's name and sells it's product in return for logistics, management, and help running the business.

What is a bond?

A loan to a company that someone can buy. The company then pays the owner of the bond back with interest.

How do you calculate the Average Fixed Cost AFC?

AFC = (Total Fixed Cost / Quantity)

How is Average Fixed Cost (AFC) Calculated?

AFC = (Total Fixed Costs / Quantity)

What happens to AFC as Q increases?

AFC will DECREASE as Q increases.

Mix-and-Match: Cross price elasticity is: A. Positive B. Negative C. Close to 0 1. Unrelated Items 2. Substitutes 3. Compliments

Cross Price Elasticity is: -Positive for Substitutes -Negative for Compliments -Close to 0 for Unrelated Items

How do you determine if something is elastic, inelastic, or unit elastic?

P Elasticity = (% changed in Quantity / % changed in Price) If the ABSOLUTE VALUE of the Elasticity value is: >1 then the product is elastic <1 then it's inelastic =1, then it's unit elastic

How do Economists measure revenue and cost? (When is it "counted")

Revenue is counted when it COMES INTO the firm (NOT at the time of sale). Cost is calculated when money LEAVES the firm and has opportunity cost accounted for.

How can corporations raise financial capital?

Selling stock and bonds.

How is Total Cost (TC) Calculated?

TC = (Total Fixed Costs + Total Variable Costs)

What is TR? How is it calculated?

TR = Total Revenue. The total amount of money COMING INTO the firm. Calculated by multiplying Price by Quantity.

How is Total Utility (TU) Calculated?

TU = Sum of all MU values

How is Total Variable Cost (TVC) calculated?

TVC = Sum of all Marginal Costs (MC)

What demand determinant is mostly related to Utility?

Taste

What is a Marginal Product? How is it Calculated?

The EXTRA amount of output per 1 additional unit of input. MP = (Change in Total Output (Product) / Change in Input Quality)

What is Marginal Cost? How is it calculated?

The EXTRA cost of producing one more unit of output. MC = (Change in Total Cost / Change in Input Quantity)

What is Marginal Utility?

The EXTRA happiness received from consuming one more unit of an item.

What are some determining factors when assessing Input Cost?

The costs that went into an item: -Labor -Materials -Location The productivity of the input.

What is Total Utility? How is Total Utility calculated?

The cumulative total utility received from the entire amount consumed. Calculated by adding up all the MU values.

What is Price Elasticity?

The relationship between how much Q changes when P changes; in relation to Total Revenue. Asks the Question: For every 1% change in price, how will quantity change?

What is cross-price elasticity? How is it measured?

The relationship between the demand for one item when the price of a different item changes. Calculated by: (% change in Quantity of X / % Change in Price of Y) X = Good #1 Y = Good #2

What is the "Agency Problem"?

The separation of ownership and control of corporations, both with different goals that leads to a conflict in "end-goals". (Maximize Profit for Business Owners vs. Maximize Personal Wealth and Perks for Business Controllers)

What is the goal of the consumer?

To maximize happiness, subject to Budget Constraint

True or False? The productivity of any resource depends on the amount of resources used.

True. A worker with no tools is less productive.

True or False? For Utility Maximization to exist, it requires: (MUx / Px) = (MUy / Py) = (MUz / Pz) With x, y, and z being separate goods

True. Each additional product bought must bring AT LEAST the same amount of MU as the previous item for Utility to be maximized.

True or False? The law of Diminishing MU is responsible for demand curves being downward sloping AND the Law of Demand.

True. The Law of Diminishing Return causes Demand Curves to be downward sloping and the Law of Demand to be true.