ECON 206 Exam 2

question

Total utility

answer

the total satisfaction a consumer gets from a certain good.

question

Marginal utility

answer

the additional satisfaction obtained from consuming one more unit of a good.

question

Ceteris paribus

answer

the utility that a consumer derives from an additional unit of a particular product is assumed to diminish as total consumption of the product increases. In other words, we assume diminishing marginal utility

question

Maximizing Utility: Consumers arrange their consumption to maximize total utility. This is achieved when _____.

answer

the marginal utility per dollar is the same for all goods.

question

maximizing utility example: Take lattes (L) and scones (S) again. If you told me that your last latte (which cost $4) made you 120 units happier, but the last scone (which cost $2) only made you 20 units happier, then we would have...

answer

120/4= 30 > 20/2= 10 or in equation form MUl/Pl > MUs/Ps

question

If the consumer's utility is maximized, then this condition must hold

answer

MUL/PL = MUS/PS

question

substitution effect

answer

only the response to the change in relative prices. It reduces the quantity demanded of a good whose (relative) price has increased, and it increases the quantity demanded of the goods whose (relative) price has fallen.

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Accounting Profits=

answer

Revenues - Explicit Costs

question

Economic Profits=

answer

Accounting Profits - Implicit Costs

question

Implicit cost

answer

the opportunity costs of the owner's time
and money.

question

Firms raise financial capital in two ways:

answer

debt & equity

question

Production function

answer

relates inputs to outputs. It shows the maximum quantity of output (q) that can be obtained with different input levels. We write the input labor as L, and input capital as K. In general terms, q = f(L,K) Ex: q = 2 L2K -0.5 L3

question

The total quantity of output produced in a certain period of time is also called the _______.

answer

total product

question

The ______ is a period of time during which some of the firm's factors of production are fixed.

answer

short run

question

The output we get per unit of labor is called the __________.

answer

average product of labor

question

By contrast, the _________ of labor refers to the The additional output we get from one more unit of labor.

answer

Marginal Product
-MP is not a fixed number. At low levels, adding workers may allow for specialization, so the Marginal Product may be greater for worker #3 than for #2.
But as more workers are added to a fixed amount of capital, the Marginal Product must fall at some point.

question

Average-Marginal Relationship

answer

In the graph, AP rises whenever MP is above it.
MP > AP means that the additional worker's contribution to
output exceeded the average worker's contribution, so the
average is being "pulled up."
We also see that AP falls whenever MP is below it.
MP < AP means the marginal worker's output is below average, so the average is being "dragged down."
When MP=AP we see that AP is neither rising nor falling.

question

Costs in the Short Run

answer

Total cost= total fixed cost + total variable cost
TC=TFC+TVC
The same is true per unit of output:
Average Total Cost = Average Fixed Cost + Average Variable Cost
ATC=AFC+AVC

question

The level of output where ATC is at its minimum is called the ______ of the firm.

answer

capacity

question

A firm that is producing at an output less than that is said to have ______.

answer

excess capacity

question

In the long run all input levels are variable. There are no more _________ of production.

answer

fixed factors (and no fixed costs)

question

A change in price has two distinct effects: it alters ___1__ & it changes ___2___.

answer

1. relative prices
2. consumers' real income

question

A profit-maximizing firm will choose the ____1___ that produces a given level of output in the _____2___.

answer

1. mix of inputs
2. cheapest way

question

Costs are minimized when the__1___ is equal to ___2___.

answer

1. marginal product of capital per dollar spent on a unit of capital
2. marginal product of labor per dollar spent on a unit of labor.
*equation: MPk/Pk=MPl/Pl or MPk/MPl=Pk/Pl meaning that the relative contributions (to output) of the last units of each input should equal their relative prices.

question

The Principle of Substitution

answer

This condition for cost-minimiszation also says that when the right-hand side changes, then the left-hand side must change too. In response to changing relative factor prices, firms will adjust the quantities of the inputs used.

question

Principle substitution, In response to an increase in the price of machines (pK)...

answer

firms will use fewer machines (less K), which raises MPK, and hire more people (more L), which reduces MPL

question

Short-run cost functions show the lowest cost of producing each level of output when ____.

answer

capital is fixed

question

Long-run cost functions show the lowest cost of producing each level of output when ___.

answer

all inputs can be varied

question

This flexibility means costs are almost always lower in the long run. In other words, long-run average cost (LRAC) will always be lower than short-run average total cost (SRATC), except at one point:

answer

(see graph in notes)

question

A market with many firms, all doing the same thing is
best described by the model of ____.

answer

Perfect Competition

question

Perfect Competition, Assumptions:

answer

-Firms are free to enter the industry
-There are many small firms
-All firms are selling a homogenous project
-The consumers are well-informed

question

The last three assumptions imply that an individual firm has no control over the price of the good. We say such a firm is a _____.

answer

Price-Taker.

question

Selling more output usually changes a firm's revenue. The change in revenue per extra unit of output is called _____.

answer

Marginal Revenue
MR=TR/Q

question

A firm in ____1_____ is a price taker, and the price doesn't change when it sells more output. But for firms that choose their own prices we will see that ___2___

answer

1. perfect competition MR=p
2. MR>p

question

Any profit-maximizing firm will produce the output level (q*) where the last unit's contribution to revenue _1_is the same as its contribution to cost _2_.

answer

1. MR
2. MC

question

In long-run equilibrium, the remaining firms:

answer

-have reached capacity, and are earning zero economic profit.

question

monopolist

answer

the only firm in an industry. It has the
entire demand curve to itself.
ex: the cable company, the local electricity company, makers of new prescription drugs

question

single-price monopolist

answer

charges the same price for all units. When it wants to sell more, it reduces the price on all units.

question

A monopolist chooses both the ___1___ and the ___2__.

answer

1. output level
2. price (highest)

question

We know that in perfectly competitive markets there can't be any __________ in the long run.

answer

positive economic profits

question

But a monopolist can maintain positive economic profits as long as it remains a monopolist, that is, as long as there are ___1___ Some ___1___ are natural. Other __1___are created by law, using patents,
copyrights, and trademarks.

answer

1. entry barriers

question

With large setup costs and increasing returns to scale we have a ________.

answer

Natural monopoly

1 of 42

question

Total utility

answer

the total satisfaction a consumer gets from a certain good.

question

Marginal utility

answer

the additional satisfaction obtained from consuming one more unit of a good.

question

Ceteris paribus

answer

question

Maximizing Utility: Consumers arrange their consumption to maximize total utility. This is achieved when _____.

answer

the marginal utility per dollar is the same for all goods.

question

answer

120/4= 30 > 20/2= 10 or in equation form MUl/Pl > MUs/Ps

question

If the consumer's utility is maximized, then this condition must hold

answer

MUL/PL = MUS/PS

question

substitution effect

answer

question

Accounting Profits=

answer

Revenues - Explicit Costs

question

Economic Profits=

answer

Accounting Profits - Implicit Costs

question

Implicit cost

answer

the opportunity costs of the owner's time
and money.

question

Firms raise financial capital in two ways:

answer

debt & equity

question

Production function

answer

question

The total quantity of output produced in a certain period of time is also called the _______.

answer

total product

question

The ______ is a period of time during which some of the firm's factors of production are fixed.

answer

short run

question

The output we get per unit of labor is called the __________.

answer

average product of labor

question

By contrast, the _________ of labor refers to the The additional output we get from one more unit of labor.

answer

question

Average-Marginal Relationship

answer

question

Costs in the Short Run

answer

Total cost= total fixed cost + total variable cost
TC=TFC+TVC
The same is true per unit of output:
Average Total Cost = Average Fixed Cost + Average Variable Cost
ATC=AFC+AVC

question

The level of output where ATC is at its minimum is called the ______ of the firm.

answer

capacity

question

A firm that is producing at an output less than that is said to have ______.

answer

excess capacity

question

In the long run all input levels are variable. There are no more _________ of production.

answer

fixed factors (and no fixed costs)

question

A change in price has two distinct effects: it alters ___1__ & it changes ___2___.

answer

1. relative prices
2. consumers' real income

question

A profit-maximizing firm will choose the ____1___ that produces a given level of output in the _____2___.

answer

1. mix of inputs
2. cheapest way

question

Costs are minimized when the__1___ is equal to ___2___.

answer

question

The Principle of Substitution

answer

question

Principle substitution, In response to an increase in the price of machines (pK)...

answer

firms will use fewer machines (less K), which raises MPK, and hire more people (more L), which reduces MPL

question

Short-run cost functions show the lowest cost of producing each level of output when ____.

answer

capital is fixed

question

Long-run cost functions show the lowest cost of producing each level of output when ___.

answer

all inputs can be varied

question

This flexibility means costs are almost always lower in the long run. In other words, long-run average cost (LRAC) will always be lower than short-run average total cost (SRATC), except at one point:

answer

(see graph in notes)

question

A market with many firms, all doing the same thing is
best described by the model of ____.

answer

Perfect Competition

question

Perfect Competition, Assumptions:

answer

-Firms are free to enter the industry
-There are many small firms
-All firms are selling a homogenous project
-The consumers are well-informed

question

The last three assumptions imply that an individual firm has no control over the price of the good. We say such a firm is a _____.

answer

Price-Taker.

question

Selling more output usually changes a firm's revenue. The change in revenue per extra unit of output is called _____.

answer

Marginal Revenue
MR=TR/Q

question

A firm in ____1_____ is a price taker, and the price doesn't change when it sells more output. But for firms that choose their own prices we will see that ___2___

answer

1. perfect competition MR=p
2. MR>p

question

Any profit-maximizing firm will produce the output level (q*) where the last unit's contribution to revenue _1_is the same as its contribution to cost _2_.

answer

1. MR
2. MC

question

In long-run equilibrium, the remaining firms:

answer

-have reached capacity, and are earning zero economic profit.

question

monopolist

answer

the only firm in an industry. It has the
entire demand curve to itself.
ex: the cable company, the local electricity company, makers of new prescription drugs

question

single-price monopolist

answer

charges the same price for all units. When it wants to sell more, it reduces the price on all units.

question

A monopolist chooses both the ___1___ and the ___2__.

answer

1. output level
2. price (highest)

question

We know that in perfectly competitive markets there can't be any __________ in the long run.

answer

positive economic profits

question

answer

1. entry barriers

question

With large setup costs and increasing returns to scale we have a ________.

answer

Natural monopoly

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ECON 206 Exam 2

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