Econ202- Exam 2- Ch.6-9

In perfect competition, when a firm is making positive economic profit in the short run, then new firms enter the market causing the market supply curve to __________ and the market price to __________.

shift rightward, decrease

The wage rate can be considered:

the price of leisure.

The short-run industry supply curve is;

the sum of the individual firm supply curves.

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

the variable input, output

When should a firm shut down?

when the firm is at the point where marginal revenue exactly equals average variable cost so there is no reason to continue production. MR=AVC- SHUTDOWN

In the long-run, economic profits will be;

zero

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

Which of these factors does not constrain household consumption decisions?

marital status

Which of these are financial securities that represent promises to repay a fixed amount of funds? Stocks, Bonds, or Options

Bonds

The mathematical expression of the relationship between inputs and outputs in known as the;

production function.

In the long run, the amount of financial capital available in an economy is constrained by the:

savings rate

A firm in perfect competition earns profit if:

price is greater than average total cost

The process of transforming some combination of inputs into output is known as;

production

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

production function

What is the total revenue for a firm producing 500 widgets that cost $80 each to produce and can be sold for $120?

60,000 ** Total revenue= Units x amount they are sold for - it has nothing to do with how much they cost to produce

CHAPTER 9

Begin Here:

__________ equals the firm's revenues minus its explicit costs.

Accounting profit

What happens to average fixed costs when total annual fixed costs are $80,000 and the firm increases annual output from 100,000 units to 200,000 units?

Average fixed costs fall from $0.80 a unit to $0.40 a unit.

Suppose you have a fixed amount of income and spend equal amounts on two goods, X and Y. The price of good X is Px = $10, and the price of good Y is Py = $5. The marginal utility of X is MUx = 60 utils, and the marginal utility of Y is MUy = 15 utils. How should the consumption of X and Y change, if at all, to increase utility?

Consumption of good X should increase, and consumption of good Y should decrease. ** One dollar spent on good X generates 6 utils (i.e., 60 utils / $10 = 6 utils per dollar). Conversely, one dollar spent on good Y generates only 3 utils (i.e., 15 utils / $5 = 3 utils per dollar). Therefore, you can increase total utility by reducing the amount spent on good Y and spending that amount on good X.

If total revenues are than total variable costs the firm will .

Less; shut down

Which of these factors will cause an increase in industry supply?

Lower input costs

In the short run, the firm should:

Operate if price > average variable cost. **As long as price is higher than the variable cost, the firm can cover variable costs and put some money towards covering fixed costs. The firm will be operating at a loss but the loss will be less than it would be if the firm shut down.

If increasing your consumption of pizza from 3 to 4 slices increases your utility, which of the following must be true?

The marginal utility of the fourth slice of pizza must be positive. **Marginal utility is the amount of satisfaction you get from consuming the next unit of some good or service. Therefore, if your total utility increases from consuming one more slice of pizza then the utility gained from that slice has to be positive. At some point, the marginal utility from consuming one more slice of pizza will turn negative.

When is output lower than the efficient level?

When marginal benefit is greater than marginal cost

When is output higher than the efficient level?

When marginal benefit is less than marginal cost

What level of output maximizes profit?

Where MR=MC MR- Marginal Revenue MC- Marginal Cost

New investment is more likely to occur in industries earning;

above normal profits

Which of these factors is a source of economies of scale?

bargaining power

START OF CHAPTER 7

begin below:

The situation where a firm is earning exactly a normal rate of return is known as;

breaking even

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

budget constraint

In the long run a firm;

can vary all inputs.

Our _________ is the set of options that is defined and limited by our budget constraint.

choice set

A(n) __________ occurs when long-run average costs increase with output.

diseconomy of scale ** When a firm is able to lower long-run average costs by increasing output, it is known as an economy of scale. Economies of scale occur in industries with very high fixed costs. Increasing output enables a firm to spread those fixed costs over more and more units and therefore lower the long run average costs of production.

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

economies of scale

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

extra satisfaction you get from consuming the second ice cream cone

The shutdown point occurs when price the lowest level of average variable cost.

falls below

If a firm's revenues fall below the point needed to cover variable costs the firm will shut down operations and bear losses equal to;

fixed cost

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

fixed cost

One of the characteristics of perfect competition is;

homogeneous (same) products. **Perfectly competitive markets are characterized by homogeneous products, freedom of entry and exit, a large number of buyers and sellers, and equal access to information.

If interest rates move higher and I decide to save less money this reduction in savings is due to the:

income effect

On the backward-bending segment of the labor supply curve, if wage increases you will work:

less hours **The existence of a backward-bending labor supply curve is due to the fact that at very high wages you can afford more leisure time and therefore will want to work less. So, in this case higher wages result in you working fewer hours.

The optimal economic decision is to continue any activity, investing or otherwise, up to the point where:

marginal benefit equals marginal cost

The income effect for a normal good is __________ while the income effect for an inferior good is __________.

negative, positive

What term do economists use to refer to the minimum amount that investors must earn on the funds they invest in a firm, expressed as a percentage of the amount invested?

normal rate of return

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

The scale of manufacturing facility that minimizes long-run average costs is the;

optimal scale of plant. *Competition will force a firm to use the optimal scale since higher profits will attract new competitors and push all firms to operate at the most efficient level in order to stay in business. *Economies of scale occur when long-run average costs are falling and diseconomies of scale occur when long-run average costs are rising.

The process of dividing total fixed costs by more units of output is called;

spreading overhead

In the long run, the amount of investment a firm can make is dependent on:

the amount of household savings

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

the effect of a price change on consumer purchasing power *For example, if the price of a good falls, you now have more disposable income and will consume more of that good if it is a normal good. This increase in quantity demanded is due to the income effect. The income effect will cause you to decrease consumption of an inferior good.

Mr. Davis hired another worker in his production facility and noticed that this worker did not increase his plant's output by as much as the previous worker he hired. This lower output is an example of;

the law of diminishing returns.

The substitution effect is the change in the quantity demanded of a good that 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 *The substitution effect is the change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power. When the price of a good changes, it either lowers or raises the opportunity costs of consuming that good. This change in opportunity cost will in turn cause the quantity demanded to go up or down as people adjust their consumption patterns

Diseconomies of Scale

Diseconomies of scale occur when long-run average cost is increasing as output increases. This is represented by the upward-sloping part of the long-run average cost curve.

__________ equals the firm's revenues minus all implicit and explicit costs.

Economic Profit

Economies of Scale

Economies of scale happen when the long run average cost decreases as output increases. This is represented by the downward-sloping part of the long-run average cost curve.

Minimum efficient scale is the level of output at which:

all economies of scale have been exhausted ** Output beyond this point will not lower long-run average cost. Graphically this is the point where the curve ceases to fall and typically flattens out at this point to generate constant returns to scale.

If the number of people in a publishing company does not go up or down with the quantity of books it publishes, then how should we categorize the salaries and benefits paid to these employees?

as part of a fixed cost

Which of the following is considered an explicit cost?

cost of labor

The optimal level of production is one where;

costs are minimized for a given output level.

In the short run a firm will continue to produce as long as revenues;

cover total variable costs.

Which of the following are sometimes called accounting costs?

explicit

The economic signal that will trigger resource reallocation of society's resources is;

higher prices and profits. *As prices and profits rise firms will leave unprofitable industries and move into the profitable industry until those excess profits have been driven back to normal levels.

One hundred workers digging a pond with shovels is an example of;

labor-intensive technology.

Accounting profits will always be __________ economic profit.

larger than

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

positive

Profit is maximized

at the point where MR=MC

Payments made for the use of money are known as:

interest *Profits are the return to a firm for taking risk and making good investment decisions. A firm or individual will make a profit if they sell goods or services for an amount that exceeds the cost to produce them.

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 *If the price rises for a normal good or inferior good, then consumers will substitute a cheaper product due to the substitution effect. The reverse will occur if price falls.

If the price of a normal good​ falls, the substitution effect suggests that we will purchase​ ________ of that​ good, and the income effect suggests that we will purchase​________ of that good.

more; more

The total utility of consuming two slices of pizza is the:

total satisfaction you get from consuming the two slices of pizza

According to the inequality, the marginal utility per dollar spent on good X is less than the marginal utility per dollar spent on good Y. According to the rule of equal marginal utility per dollar spent, what can a consumer do to increase total utility for a given budget from consumption of goods X and Y?

A consumer can increase total utility for a given budget by consuming more good Y and less good X.

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 **Economists define the long run as the period of time sufficient to be able to adjust all inputs. This distinction is critical since economic decision-making may differ depending on the time horizon.

The capital market is the collective set of institutions that exist in order to:

funnel household savings to firms

If the average total cost curve is above the demand curve, then this firm is:

having economic losses

In the short run, a profit-maximizing firm will produce where price is equal to;

marginal cost. **If price is greater than marginal cost the firm can produce more units and increase profits. If price is below marginal cost the firm will reduce production until it falls back to the point where marginal cost is equal to price.

CHAPTER 8

Begin here:

________ refers to the satisfaction a person receives from consuming a particular good or service.

Utility

Which of these costs are affected by the level of output produced?

variable cost