Econ Exam 2
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
