ECO 101 Exam 2

question

Explicit costs

answer

a cost that requires an outlay of money (for example, an explicit cost of another year in school includes tuition)

question

Implicit costs

answer

a cost that does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone (wages forgone because of being a full-time student)

question

Marginal analysis

answer

analysis that involves comparing marginal benefits and marginal costs

question

Marginal Cost

answer

the additional cost incurred by producing one more unit of that good or service

question

Marginal Benefit

answer

the additional benefit derived from producing one more unit of a good or service

question

Sunk cost

answer

a cost that has already been incurred and is not recoverable

question

Accounting profit equation

answer

revenue - explicit costs

question

Economic profit equation

answer

revenue - explicit costs - implicit costs

question

Types of decisions

answer

1. A choice between two alternatives ("either-or")
2. A more complex choice that requires us to choose at the margin ("how much")

question

Principle of "either-or" decision making

answer

when faced with an "either-or" choice between two activities, choose the one with the positive economic profit

question

Utility

answer

the value or satisfaction from consumption

question

Consumption bundle (of an individual)

answer

the collection of all the goods and services consumed by a that individual

question

Utility function (of an individual)

answer

the total utility generated by an individual's consumption bundle

question

Marginal utility (MU)

answer

the change in utility from consuming an additional unit

question

Diminishing marginal utility

answer

each additional unit of a good adds less to utility than the previous unit

question

Rational decision maker

answer

always chooses the available option that leads to the outcome he or she most prefers

question

Irrational decision maker

answer

chooses an option that leaves him or her worse off than choosing another available option would have left him or her

question

Budget Constraint

answer

requires that the cost of a consumer's consumption bundle be no more than the consumer's income

question

Budget Line

answer

shows the consumption bundles available to a consumer who spends all of his or her income

question

Consumer equilibrium

answer

The condition in which an individual consumer's budget is spent and the last dollar spent on each good yields the same marginal utility; therefore, utility is maximized.

question

Optimal consumption bundle

answer

the one that maximizes a consumer's total utility given his or her budget constraint

question

Substitution effect (of a change in the price of a good)

answer

the change in the quantity consumed of that good as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive

question

Income effect (of a change in the price of a good)

answer

the change in the quantity consumed of a good that results from a change in the consumer's purchasing power due to the change in the price of the good

question

Normal goods

answer

Increase in the price of a good causes consumers' purchasing power to drop and reduces consumption (and vice versa)

question

Inferior goods

answer

Increase in the price of a good causes consumers' purchasing power to drop and increases consumption (and vice versa)

question

Giffen good

answer

a very rare inferior good for which the income effect outweighs the substitution effect and the demand curve slopes upward

question

Preferences

answer

...

question

Production function

answer

the relationship between the quantity of inputs a firm uses and the quantity of output it produces

question

Short run

answer

the period in which at least one input is fixed

question

Long run

answer

the period in which all inputs can be varied

question

Marginal product

answer

•the change in output resulting from a one-unit increase in the amount of labor input (ΔQ/ΔL)

question

Diminishing returns

answer

when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input

question

Marginal cost

answer

the change in total cost generated by one additional unit of output

question

Marginal cost equation

answer

change in total cost / change in quantity

question

Average total cost equation

answer

total cost/quantity

question

Average fixed cost equation

answer

fixed cost/quantity

question

Average variable cost equation

answer

variable cost/quantity

question

Short-run vs. long-run costs

answer

All inputs are variable in the long run. This means that in the long run, fixed cost (like factory size) may also vary

question

Increasing returns to scale (economies of scale)

answer

when long-run average total cost declines as output increases

question

Decreasing returns to scale (diseconomies of scale)

answer

when long-run average total cost increases as output increases

question

Constant returns to scale

answer

when long-run average total cost is constant as output increases

question

Cost-minimization

answer

a firm's goal of producing a specific quantity of output at minimum cost

question

Factor of production

answer

earns income from the selling of its services over and over again (for example, an oven) but an input cannot (for example, wheat)

question

Human capital

answer

the improvement in labor produced by education and knowledge that is embodied in the workforce

question

Physical capital

answer

often referred to simply as "capital"—consists of manufactured productive resources such as equipment, buildings, tools, and machines

question

Market power

answer

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

question

Allocation of resources

answer

decision on how to divide scarce resources among different uses

question

Demand for labor

answer

a "derived demand" that results from the demand of the output being produced.

question

Shifts in labor demand

answer

1. Changes in prices of goods
2. Changes in supply of other factors
3. Changes in technology

question

Individual labor supply curve

answer

shows how the quantity of labor supplied by an individual depends on that individual's wage rate

question

Shifts in labor supply

answer

1. Changes in preferences and social norms
2. Changes in population
3. Changes in opportunities
4. Changes in wealth

question

Value of marginal product

answer

A firm is willing to hire a worker when the worker increases the firm's revenues more than the firm's costs

question

Value of marginal product of labor equation

answer

the output of the next worker × the product's price

question

Marginal productivity theory

answer

every factor of production is paid the equilibrium value of its marginal product

question

Equilibrium value of the marginal product of a factor

answer

the additional value produced by the last unit of that factor employed in the factor market as a whole

question

Efficiency wage model

answer

paying an above- equilibrium wage as an incentive for better performance

question

Labor market equilibrium

answer

...

1 of 57

question

Explicit costs

answer

a cost that requires an outlay of money (for example, an explicit cost of another year in school includes tuition)

question

Implicit costs

answer

a cost that does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone (wages forgone because of being a full-time student)

question

Marginal analysis

answer

analysis that involves comparing marginal benefits and marginal costs

question

Marginal Cost

answer

the additional cost incurred by producing one more unit of that good or service

question

Marginal Benefit

answer

the additional benefit derived from producing one more unit of a good or service

question

Sunk cost

answer

a cost that has already been incurred and is not recoverable

question

Accounting profit equation

answer

revenue - explicit costs

question

Economic profit equation

answer

revenue - explicit costs - implicit costs

question

Types of decisions

answer

1. A choice between two alternatives ("either-or")
2. A more complex choice that requires us to choose at the margin ("how much")

question

Principle of "either-or" decision making

answer

when faced with an "either-or" choice between two activities, choose the one with the positive economic profit

question

Utility

answer

the value or satisfaction from consumption

question

Consumption bundle (of an individual)

answer

the collection of all the goods and services consumed by a that individual

question

Utility function (of an individual)

answer

the total utility generated by an individual's consumption bundle

question

Marginal utility (MU)

answer

the change in utility from consuming an additional unit

question

Diminishing marginal utility

answer

each additional unit of a good adds less to utility than the previous unit

question

Rational decision maker

answer

always chooses the available option that leads to the outcome he or she most prefers

question

Irrational decision maker

answer

chooses an option that leaves him or her worse off than choosing another available option would have left him or her

question

Budget Constraint

answer

requires that the cost of a consumer's consumption bundle be no more than the consumer's income

question

Budget Line

answer

shows the consumption bundles available to a consumer who spends all of his or her income

question

Consumer equilibrium

answer

The condition in which an individual consumer's budget is spent and the last dollar spent on each good yields the same marginal utility; therefore, utility is maximized.

question

Optimal consumption bundle

answer

the one that maximizes a consumer's total utility given his or her budget constraint

question

Substitution effect (of a change in the price of a good)

answer

the change in the quantity consumed of that good as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive

question

Income effect (of a change in the price of a good)

answer

the change in the quantity consumed of a good that results from a change in the consumer's purchasing power due to the change in the price of the good

question

Normal goods

answer

Increase in the price of a good causes consumers' purchasing power to drop and reduces consumption (and vice versa)

question

Inferior goods

answer

Increase in the price of a good causes consumers' purchasing power to drop and increases consumption (and vice versa)

question

Giffen good

answer

a very rare inferior good for which the income effect outweighs the substitution effect and the demand curve slopes upward

question

Preferences

answer

...

question

Production function

answer

the relationship between the quantity of inputs a firm uses and the quantity of output it produces

question

Short run

answer

the period in which at least one input is fixed

question

Long run

answer

the period in which all inputs can be varied

question

Marginal product

answer

•the change in output resulting from a one-unit increase in the amount of labor input (ΔQ/ΔL)

question

Diminishing returns

answer

when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input

question

Marginal cost

answer

the change in total cost generated by one additional unit of output

question

Marginal cost equation

answer

change in total cost / change in quantity

question

Average total cost equation

answer

total cost/quantity

question

Average fixed cost equation

answer

fixed cost/quantity

question

Average variable cost equation

answer

variable cost/quantity

question

Short-run vs. long-run costs

answer

All inputs are variable in the long run. This means that in the long run, fixed cost (like factory size) may also vary

question

Increasing returns to scale (economies of scale)

answer

when long-run average total cost declines as output increases

question

Decreasing returns to scale (diseconomies of scale)

answer

when long-run average total cost increases as output increases

question

Constant returns to scale

answer

when long-run average total cost is constant as output increases

question

Cost-minimization

answer

a firm's goal of producing a specific quantity of output at minimum cost

question

Factor of production

answer

earns income from the selling of its services over and over again (for example, an oven) but an input cannot (for example, wheat)

question

Human capital

answer

the improvement in labor produced by education and knowledge that is embodied in the workforce

question

Physical capital

answer

often referred to simply as "capital"—consists of manufactured productive resources such as equipment, buildings, tools, and machines

question

Market power

answer

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

question

Allocation of resources

answer

decision on how to divide scarce resources among different uses

question

Demand for labor

answer

a "derived demand" that results from the demand of the output being produced.

question

Shifts in labor demand

answer

1. Changes in prices of goods
2. Changes in supply of other factors
3. Changes in technology

question

Individual labor supply curve

answer

shows how the quantity of labor supplied by an individual depends on that individual's wage rate

question

Shifts in labor supply

answer

1. Changes in preferences and social norms
2. Changes in population
3. Changes in opportunities
4. Changes in wealth

question

Value of marginal product

answer

A firm is willing to hire a worker when the worker increases the firm's revenues more than the firm's costs

question

Value of marginal product of labor equation

answer

the output of the next worker × the product's price

question

Marginal productivity theory

answer

every factor of production is paid the equilibrium value of its marginal product

question

Equilibrium value of the marginal product of a factor

answer

the additional value produced by the last unit of that factor employed in the factor market as a whole

question

Efficiency wage model

answer

paying an above- equilibrium wage as an incentive for better performance

question

Labor market equilibrium

answer

...

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ECO 101 Exam 2

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