Micro Exam 2 Chapters 6-8
long run equilibrium
where all firms earn zero economic profits producing the output level where P=MR=MC and P=AC
When a firm doubles its inputs and finds that its output has more than doubled, this is known as:
Economies of scale
law of diminishing marginal utility
each subsequent unit of a good consmed provides less additional utility
If total utility is increasing, then marginal utility:
May either be increasing or decreasing, but it must be greater than zero
market structure
the conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold
exit
the long run process of reducing production in response to a sustained pattern of losses
price taker
the pressure of competing firms forces it to accept the prevailing equilibrium price in the market
break even point
the price the firm receives is exactly equal to its average cost of production
substitution effect
occurs when a price changes and consumers have an incentive to consume less of a good with a relatively higher price and more of the good with a relatively lower price
implicit costs
represent opportunity cost of using resources that the firm already owns
total utility
satisfaction derived from consumer choices
marginal utility
additional utility provided by one additional unit of consumption. Change in total utility/change in quantity
production technologies
alternative methods of combining inputs to produce output
firm
an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs
If Price < ATC...
...then the firm earns a loss
perfect competition
1. many firms produce identical products 2. many buyers are available to buy the product and many sellers are available to sell it 3. sellers and buyers have all relevant information to make rational decisions about the product 4. free entry and exit into and out of the market
If a more efficient technology was discovered by a firm, there would be:
A downward shift in the MC curve
The utility from a specific product is:
A measure of one's preference or taste for it
If the demand curve faced by an individual firm is downward-sloping, the firm cannot be a:
A purely competitive firm
What is the best synonym for "marginal" in economics?
Additional
In a purely competitive industry, each firm:
Can easily enter or exit the industry
Resources are efficiently allocated when production occurs at that output level where price:
Equals marginal cost
Economic profits are:
Equal to the difference between accounting profits and implicit costs
Cash expenditures a firm makes to pay for resources are called:
Explicit costs
Which of the following is a reason why individual firms under pure competition would not find it gainful to advertize their product? The market demand curve cannot be increased Firms do not make long-run profits Firms produce a homogeneous product The quantity of the product demanded is very large
Firms produce a homogeneous product
"The bigger the volume, the lower the cost, and we pass these savings on to you" is a familiar slogan. It implies the situation shown in the above graph:
Graph A
Fixed costs are those costs which are:
Independent of the rate of output
The main difference between the short run and the long run is that:
In the short run, some inputs are fixed and some are variable
A patent gives a firm the power to charge a price that:
Is higher than marginal cost
A purely competitive firm does not try to sell more of its product by lowering its price below the market price because:
It can sell all it wants to at the market price
Which would indicate that a firm is operating under conditions of pure competition and is being productively efficient?
It produces at the minimum average total cost
If a consumer is initially in equilibrium, an increase in money income will:
Move the consumer to a new equilibrium on a higher indifference curve
Do fixed costs change with the level of output?
No
Based on the graph above, the firm is earning:
Normal profits, since its price just covers ATC
Diseconomies of scale occur mainly because:
Of the inherent difficulties involved in managing and coordinating a large business enterprise
Which would be an implicit cost for a firm? The cost: Paid for leasing a building for the firm Of wages foregone by the owner of the firm Paid for production supplies for the firm Of worker wages and salaries for the firm
Of wages foregone by the owner of the firm
In pure competition, if the market price of the product is initially higher than the minimum average cost of the firms, then:
Other firms will enter the industry and the industry supply will increase
In which market model are the conditions of entry into the market easiest?
Pure competition
The market for agricultural products such as wheat or corn would best be described by which market model?
Pure competition
The reason why people are charged for an additional can of soda they get from a soda machine, but are not charged for an additional paper taken from a newspaper dispensing machine, is that the marginal utility of an additional:
Soda diminishes slowly, but the marginal utility of an additional paper is close to zero
According to the law of diminishing marginal returns:
The additional output generated by additional units of an input will diminish
What defines marginal utility?
The additional satisfaction from consuming one more unit of a product
Profit=
total revenue - total cost
Which situation is consistent with the law of diminishing marginal utility? The more pizza Joe eats, the less he enjoys an additional slice Joe's marginal utility from eating pizza becomes positive after eating three slices Joe's marginal utility from eating pizza reaches a maximum when total utility is zero The more pizza Joe eats, the more he enjoys an additional slice
The more pizza Joe eats, the less he enjoys an additional slice
The opportunity cost of doing or getting something is best and fully defined as:
The value of the best alternative that is given up in order to do or get something
Refer to the above graph. If the firm is producing at Q1, the area of 0ADQ1 represents:
Total cost
economic profit
total revenue - total costs (explicit and implicit)
The satisfaction or pleasure one gets from consuming a good or service is called:
Utility
The representative firm in a purely competitive industry:
Will earn zero economic profit in the long run
behavioral economics
a branch of economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean different things to individuals depending on the situation
accounting profit
a cash concept: total revenue - explicit costs
income effect
a higher price means that the buying power of income has been reduced which leads to buying less of that (normal) good
Do variable costs change with the level of output?
Yes
economies of scale
as quantity of output increases, cost per unit decreases
constant returns to scale
expanding all inputs proportionately does not change average cost of production
production
includes any process or service that creates value, including transportation, distribution, wholesale, and retail sales
revenue
income from selling a firm's products: price * quantity
Factors of production
natural resources (land and raw materials) labor capital technology entrepreneurship
shutdown point
level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the firm should shut down immediately.
production function
mathematical equation that explains the relationship between inputs and outputs Q= f[NR, L, K, t, E]
explicit costs
out of pocket costs; actual payments
long run
period of time during which all factors are variable
short run
period of time during which at least some factors of production are fixed
Profit-maximizing firms + utility maximizing consumers =
productive and allocative efficiency
average profit
profit/quantity of output produced, aka profit margin
marginal revenue
shows additional revenue gained from selling one more unit. In perfect competition, this equals price.
budget constraint
shows the possible combinations of 2 goods that are affordable given a consumer's limited income
marginal product
the additional output of one more worker
average total cost
total cost/quantity of output produced: cost on average of producing a given quantity
fungible
the idea that units of a good are capable of mutual substitution with each other and carry equal value to the individual
average variable cost
variable cost/quantity of output
factor payments
what the firm pays for the use of the factors of production
entry
when new firms enter the industry in response to increased industry profits
What is the profit-maximizing choice?
where MR=MC
Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. Refer to the above information. The economic profits of Harvey's firm in the first year were:
$160,000
A purely competitive firm currently producing 20 units of output earns marginal revenues of $12 from each extra unit of output it sells. If it sells 30 units, then its total revenues would be:
$360
Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. Refer to the above information. The implicit costs of Harvey's firm in the first year were:
$60,000
Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. Refer to the above information. The explicit costs of Harvey's firm in the first year were:
$605,000
Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. Refer to the above information. The total revenues of Harvey's firm in the first year were:
$825,000
If Price > ATC...
...then the firm earns an economic profit
If Price = ATC...
...then the firm earns zero economic profit
Variable costs are:
Costs that change with the level of production
Refer to the above graph. It represents a profit-maximizing firm producing under conditions of pure competition. When the firm is in equilibrium in the short run, its average fixed cost is:
DE
In pure competition, each extra unit of output that a firm sells will yield a marginal revenue that is:
Equal to the price
Many people do not steal or commit fraud because to them, the resulting feelings of guilt and uneasiness make the
Marginal cost of the act increase
After eating four slices of pizza, you are offered a fifth slice for free. You turn down the fifth slice. Your refusal indicates that the:
Marginal utility is positive for the fourth slice and negative for the fifth slice
If a purely competitive firm is facing a situation where the price of its product is lower than the average cost, then all of the following applies, except: The firm is suffering losses, and if things are not expected to improve, the firm will leave the industry Other firms will want to enter the industry because of the positive economic profits The firm may be earning some accounting profits, but less than what it could earn elsewhere The firm may earn economic profits in the long run if it expands its plant in order to exploit economies of scale.
Other firms will want to enter the industry because of the positive economic profits
To derive the demand curve of a product in indifference curve analysis, the:
Tastes and preferences of the consumer are assumed to be fixed
Creative destruction is most often associated with:
Technological advance
Refer to the above graph. If the firm is producing at Q1, the area BADE represents:
Total fixed cost
Which of the following statements is correct? Total utility is the product of multiplying price times marginal utility Marginal utility is the cumulation or summation of total utility Total utility is the cumulation or summation of marginal utility Total utility is the change in marginal utility as quantity consumed increases
Total utility is the cumulation or summation of marginal utility
Refer to the above graph. If the firm is producing at Q1, the area 0BEQ1 represents:
Total variable cost
diseconomies of scale
as the level of output and the scale rises, average costs rise as well
marginal cost
change in total cost/change in output: cost of producing one more unit of output
variable inputs
those that can easily be increased or decreased in a short period of time
fixed inputs
those that can't easily be increased or decreased in a short period of time
