Micro. Economics Exam 2

Your company incurs a cost for fire insurance, which, in the short run, is fixed. What happens to this cost in the long run?

Becomes a variable cost

Eating too much today based on an expectation you will reduce your food intake at some later date in order to lose weight is a an example of what type of flaw in decision making?

Being unrealistic about future behavior

The limited amount of income available to consumers to spend on good and services is known as the _______

Budget constraint

Which of the following is a true statement? A. The fewer substitutes available for a product, the greater the price elasticity of demand. B. The more time that passes, the more Inelastic the demand for a product becomes. C. When an item represents a small portion of our total budget, demand for that item is likely to be Inelastic. D. All of the above

C.

Indifference curves do not....

Cross

MRS ________ as we move ____ on the IC

Decreases; down

The demand curve for an inferior curve is ___________ sloping while the demand curve for a Giffen good is ___________ sloping

Downward;upward

An indifference curve shows combinations and of consumption bundles that maximize a consumers utility. True or False

False

Utility refers to how much consumers utilize a product or service. True or False

False

When a consumer moved down his or her indifference, the gain from consuming more of one good will exceed the loss in utility from consuming less of the other good. True or False

False

What does economic profit consider?

It considers both implicit and explicit costs

When does The Law of Diminishing Marginal Utility occur?

It happens when we experience diminishing "additional" satisfaction as we consume more of a particular good or service

marginal utility

It is the additional satisfaction from consuming one more unit of good/service

Total utility

It is the total satisfaction from consumption of goods and services

What does the indifference curve show?

It shows a combination of goods and services among which we are indifferent

Explicit costs

Money is in the picture

What does an accounting profit consider

Only the explicit costs

Implicit costs

Pecuniary costs

In considering consumers' attitudes towards fairness, which of the following have economists found to be true?

People attempt to treat others fairly, even if doing so makes them worse off financially

What does the production function do?

Shows the relationship between inputs and outputs.

Utility is

Subjective and cannot be measured

What does the principal of rational choice state?

That we should spend our money on goods and services that give the most marginal utility per dollar

Elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

When graphing a conventional short-run production function, we place ___________ on the horizontal axis and __________ on the vertical axis

a variable input and output.

The explicit cost of production is also called

accounting cost

minimum efficient scale is the level of output at which

all economies of scale have been exhausted

The short run is a period of time where __________ while the long run is a period of time where ____________

at least one input is fixed, all inputs are variable

What do economists call the study of situations in which people act in ways that do not appear to be economically rational?

behavioral economics

Marginal product =

change in total product/change in labor input

When there are more substitutes for a product, the ____________ for the product is __________.

demand; more price elastic

Economic cost of production differ from accounting costs in that

economic cost adds the opportunity cost of a firm using its own resources while accounting cost does not.

The downward sloping part of the long run average total cost curve is where the firm is achieving

economies of scale

What are sometimes called accounting costs?

explicit costs

The marginal utility from consuming the second ice cream cone is the:

extra satisfaction you get from consuming the second ice cream cone

In the short run, the cost that is independent of the amount of output produced is called

fixed cost

Total Cost:

fixed costs + variable costs

What does price elasticity of demand measure?

how much the quantity demanded responds to a change in the price of that good

When the marginal product of labor is greater than the average product of labor, then the average product of labor must be:

increasing

The substitution effect for a normal good is _________ while the substitution effect for an inferior good is _________.

inversely related to price, inversely related to price

A firm has successfully adopted a positive technological change when

it can produce more output using the same inputs

What is the name for the additional output that a firm produces as a result of hiring one more worker?

marginal product of labor

According to the law of diminishing marginal utility, as the consumption of a particular good increases:

marginal utility decreases

The optimal combination of pizza and coke is the one where the:

marginal utility per dollar spent on pizza equals the marginal utility per dollar spent on coke

The income effect for a normal good is _________ while the income effect for an inferior good is ___________

negative, positive

Which of the following is known as the highest-valued alternative that must be given up in order to engage in an activity

opportunity cost

If the total utility increases with additional consumption of a good, then the marginal utility is:

positive

The relationship between the inputs used by the firm and the maximum output it can produce is known as the

production function

capital-intensive technology is....

technology that relies heavily on capital instead of human labor

Labor intensive technology is.....

technology that relies heavily on human labor instead of capital

The budget line shows

the affordable combinations of goods and services you can buy with your income

The average product is

the average amount produced by each unit of a variable factor of production

What is a budget constraint?

the limited amount of income available to consumers to spend on goods and services

What is technology?

the processes a firm uses to turn inputs into outputs of goods and services

When network externalities are present, the usefulness of:

the product increases as more consumers use it

The basic activity of a firm is

to use inputs to produce outputs of goods and services

Accounting profit =

total revenue - explicit costs

Economic profit =

total revenue - total cost

Profit =

total revenue - total cost

Suppose that the elasticity of demand for a product is 2.0. What will happen to total revenue as a firm increases the price?

total revenue will decrease

The total utility of consuming two slices of pizza is the

total satisfaction you get from consuming the two slices of pizza

If the income effect of a price change for an inferior good is larger than the substitution effect, the demand curve will be:

upward sloping

Indifference curves are bowed inward toward the origin. Why?

Because it gets harder to substitute one good for another

When demand is elastic, a decrease in price leads to:

An increase in total revenue

If the quantity demanded of peanut butter falls by 12% when income rises by 10%, then peanut butter is:

An inferior good

Terms of elasticity

- Price Elasticity of Demand - Price Elasticity of Supply - Cross Price Elasticity - Income Elasticity

A short run is when

At least one of a firm's inputs is fixed (Capital (K))

Types of Price Elasticity of Demand

1. Perfectly Inelastic Demand 2. Perfectly Elastic Demand 3. Unit Elastic Demand 4. Elastic Demand 5. Inelastic Demand

The substitution effect is the change in the quantity demanded of a good results from ________ holding constant the effect of the price change on consumer purchasing power

A change in price making the good more or less expensive relative to other goods

Elasticity of Supply

A measure of the response of the quantity of a good supplied to a change in price of that good. Likely to be positive in output markets

cross-price elasticity of demand

A measure of the response of the quantity of one good demanded to a change in the price of another good

income elasticity of demand

A measure of the responsiveness of demand to changes in income

What are examples of a production function?

A schedule, a graph, or a mathematical expression

What is a preference map?

A series of indifference curves. It is a graphical representation of our tastes

In a long run

All inputs can vary

marginal product

The additional output that can be produced by adding one more unit of a specific input

Total Revenue

The amount a firm receives from the sale of its profit

Total product is:

The amount produced with the given technology

substitution effect

The change in quantity demanded because relative price has changed

Income effect

The change in the quantity demanded because we are poorer or richer (purchasing power)

Marginal utility

The change in total utility divided by the change in quantity

The income effect is the change in quantity demanded of a good that results from __________ holding all factors constant.

The effect of a price change on consumer purchasing power

Utility

The satisfaction we get from consumption

Marginal Rate of Substitution (MRS)

The slope of an indifference curve; it shows the rate at which we would be willing to trade off one good for another

Indifference curves are sloped down. Why?

There is a trade off

Which of the following mistakes do consumers commonly makes when deciding which products or services they want to consume?

They fail to ignore sunk costs

Costs that are spent and cannot be changed in the period of time under consideration (short-run). They do not change as output changes

Total Fixed Cost (Fixed Cost)

The costs that change as output changes

Total Variable Cost (Variable Cost)

Along an indifference​ curve, the slope tells us the rate at which the consumer is willing to trade off one product for another while keeping the​ consumer's utility constant. True or False

True

The optimal combination of pizza and coke you should consume is the one

Where your marginal utility is equal for both