Micro Unit 3 Chapters 10 and 11
What are three pitfalls in consumer decision making?
1. ignore non monetary opportunity cots 2. fail to ignore sunk costs 3. consumers are unrealistic about future behavior
What cost measure is equal to AFC + AVC
ATC
How are implicit costs different from explicit costs?
An explicit cost is a cost that involves spending money, while an implicit cost is a nonmonetary cost.
All of the following cost measures reach their minimum points when they are equal to the value of marginal cost, except one. Which cost measure is the exception? A. average total cost B. average fixed cost C. average variable cost
B
The rule of equal marginal utility per dollar spent suggests that consumers maximize utility by... A. minimizing the marginal utility per dollar spent across goods and services. B. equalizing the marginal utility per dollar spent across goods and services. C. maximizing the marginal rate of substitution. D. maximizing marginal utility for each good or service. E. equalizing marginal utility across goods and services.
B
When does the law of diminishing marginal utility hold true? A. It does not hold true for necessities. B. It holds true in most situations involving the consumption of a good. C. It holds true in every situation. D. It has not proven to be true.
B
In consumer decision-making, sunk costs should A. be treated as nonmonetary costs. B. be treated as monetary costs. C. be ignored.
C
In deciding between consuming more goods now or saving money, consumers should do which of the following? A. Choose an amount of current spending which gives them the highest total utility. B. Allocate their spending to which of the two they like best. C. Choose an amount of current spending on goods and savings so that the marginal utility per dollar of both are equal. D. Weigh the additional utility they get from consumption.
C
A market demand curve is derived by A. adding vertically the individual demand curves. B. adding the substitution effect and the price effect. C. dding horizontally the individual marginal utility curves. D. adding horizontally the individual demand curves.
D
In the presence of shortages, why would a firm, such as a restaurant with people waiting for a table or a theater with people waiting for a ticket, not raise prices when doing so would seem to increase profits? A. Increasing prices might result in short run gains at the expense of long run profits. B. Increasing prices might be seen as unfair. C. Increasing prices requires the firm to pay substantial "switching costs." D. Both a and b.
D
What happens when consumption of a product is path dependent? A. The technology used to produce the product has a specific growth path. B. The product can sell for a higher price when it is new and there are no similar products consumers can buy than when it is older and consumers can choose to buy substitutes for the product. C. The consumption path that a product follows depends on the firm that uses the best technology to produce it. D. The cost of switching to a product with a better technology gives the product with the initial technology an advantage.
D
Network externalities are likely to be important for products that A. are widely used. B. use inferior technology. C. are perishable. D. are inexpensive. E. both a and b.
E
T or F: Rules of thumb are guides to decision making that always produce optimal choices.
False
What is the main reason that firms eventually encounter diseconomies of scale as they keep increasing the size of their store or factory?
Firms have difficulty coordinating production
What is the difference in the short run and the long run?
In the short run, at least one of the firm's inputs is fixed, while in the long run, the firm is able to vary all its inputs, adopt new technology, and change the size of its physical plant.
How can marginal cost be expressed mathematically? Marginal cost (MC) can be expressed as
MC = changeTC / changeQ
Is utility measurable?
No
T or F: If network externalities result in market failure, government intervention in these markets might improve economic efficiency.
T
What is the definition of marginal utility?
The change in utility from consuming an additional unit of a good or service.
T or F: If people are uncertain whether the price of a product is high or low, they often compare the price to the previous price of the product.
True
In regards to an indifference curve, how should a consumer maximize utility?
a consumer needs to be on the highest indifference curve, given his or her budget constraint
define sunk cost
a cost that has already been paid and cannot be recovered
What is an indifference curve?
a curve that shows the combinations of consumption bundles that give the consumers the same utility
What are implicit costs?
a nonmonetary opportunity cost.
What is a market failure?
a situation in which the market fails to produce the efficient level of output
What is the law of diminishing returns? The law of diminishing returns states that
adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline.
What does the fixed cost / the quantity of output produced equal?
average fixed cost
What does the total cost / quantity of output produced equal?
average total cost
What does the variable cost / the quantity of output produced equal?
average variable cost
Your company incurs a cost for store rent, which, in the short run, is fixed. What happens to this cost in the long run? In the long run, the cost of store rent
becomes a variable cost
What is the income effect?
change in QD of a good due to a change in price on consumer purchasing power, holding all other factors constant
What is the substitution effect?
change in QD of a good due to a change in the price making the good more or less expensive than other goods, holding all other factors constant
What is technological change?
change in the ability of a firm to produce a given level of output with a given quantity of inputs
What is the definition of marginal cost?
change in total cost due to producing one more good or service
What does the law of diminishing marginal utility say?
consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time
What is the long run average cost curve?
curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed
What way does a market demand curve slope?
downward
What types of costs are economic costs?
explicit (accounting) and implicit costs
What type of costs are accounting costs?
explicit costs
When the marginal cost of labor is increasing, what is happening to marginal cost of output?
falls
Any cost that remains unchanged as output changes represents a firm's...
fixed cost
define opportunity cost
highest valued alternate that must be given up to engage in an activity
Three mistakes consumers often make are...
ignoring nonmonetary opportunity costs, failing to ignore sunk costs, and being overly optimistic about the future.
What does a budget constraint indicate?
indicates the limited amount of income available to consumers to spend on goods and services.
As marginal product labor increases, what happens to the marginal cost output?
it decreases.
As marginal product labor decreases, what happens to the marginal cost output?
it increases.
What is the minimum efficient scale?
level of output at which all economies of scales are exhausted
Does the law of diminishing returns apply to the long run?
no
Marginal utility is more useful than total utility in consumer decision making because...
optimal decisions are made at the margin
At the point of optimal consumption, the MRS is equal to the ratio of the...
price of the product on the horizontal axis and the price of the product on the vertical axis to the
Anchoring is...
relating a value to some other known value even is the second value is irrelevant.
What is a network externality?
situation in which the usefulness of a product increases with the numbers of consumers who use it
Behavioral economics is the study of...
situations in which people make choices that do not appear to be economically rational.
As output increases, the vertical distance between average total cost and average variable cost curves gets _______ and equals _______.
smaller; AFC
define endowment effect
tendency of people to be unwilling to sell a good they already own even if they are offered a price greater than the price they would be willing to pay to buy the good if they didn't already own it
define marginal product of labor
the additional output a firm produces as a result of hiring one more worker
What does the short-run production function hold constant? A short-run production function holds constant
the amount of captial
define marginal cost
the change in a firm's total cost from producing one more unit of a good or service
What is the economic definition of utility?
the enjoyment or satisfaction people receive from consuming goods and services
A firm's production function is best described as
the inputs employed by a firm and the maximum output it can produce with those inputs.
define short run
the period of time during which at least one of a firm's outputs is fixed
define long run
the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of the physical plant
What is technology?
the processes a firm uses to turn inputs into outputs of goods and services.
What is the marginal rate of substitution?
the rate at which a consumer would be willing to trade off one good or service for another
What is the effect on outputs when technological change occurs?
the same output can be produced with fewer inputs and more output can be produced from the same inputs
What is path dependence?
the technology that was first available has advantages over better technologies that were developed later.
What is the difference between total cost and variable cost in the long run? In the long run,
the total cost of production equals the variable cost of production.
What is the rule of equal marginal utility?
to maximize utility, consumers should spend their income so that the least dollar spent on each product gives them the same MU; equalize MU/P
Any cost that changes as output changes represents a firm's...
variable cost
Which costs are affected by the level of output produced?
variable costs
What are constant returns to scale?
when a firm's long run average costs remain unchanged as it increases output
Economies of sale occur...
when a firm's long-run average costs decrease with output.
What are diseconomies of sale?
when a firm's long-run average costs increase with output.