Exam 1

question

Scarcity

answer

Unlimited wants exceed the limited resources available to fulfill those wants

question

Sunk costs

answer

costs that have already been incurred and cannot be recovered

question

Fixed costs

answer

Costs that do not vary with the quantity of output produced

question

marginal benefit

answer

the extra benefit of adding one unit

question

marginal cost

answer

the cost of producing one more unit of a good

question

What is the decision-making rule?

answer

higher marginal benefit means go for it

question

Specialization

answer

the concentration of the productive efforts of individuals and firms on a limited number of activities

question

What are the primary economic roles for government?

answer

Private property rights and contracts; monetary system; unemployment and capacity utilization; competition; incentives; fairness

question

production possibilities frontier

answer

shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

question

diminishing marginal return

answer

a level of production in which the marginal product of labor decreases as the number of workers increases

question

Relationship between marginal return and marginal cost

answer

diminishing marginal returns lead to an increase in marginal cost

question

Increasing marginal cost

answer

each additional unit costs more to produce than the previous one

question

economic efficiency

answer

wise use of available resources so that costs do not exceed benefits

question

allocative efficiency

answer

the particular mix of goods and services most highly valued by society

question

technical efficiency

answer

Using methods to produce goods and services that minimize costs of producing or maximize output given our inputs.

question

law of demand

answer

consumers buy more of a good when its price decreases and less when its price increases

question

normal good

answer

a good that consumers demand more of when their incomes increase

question

inferior good

answer

a good that consumers demand less of when their incomes increase

question

does a change in price change demand?

answer

No it changes quantity demanded

question

What happens during a shortage?

answer

price increases; quantity demanded decreases; quantity supplied increases

question

What happens when there's a surplus?

answer

price decreases; quantity demanded increases; quantity supplied decreases

question

elastic demand

answer

demand in which changes in price have large effects on the amount demanded

question

inelastic demand

answer

demand in which changes in price have little or no effect on the amount demanded

question

what determines how elastic demand is for any good?

answer

Number of substitutes; if the good is a necessity; percentage of income spent on the good; length of time for adjustment

question

which is steeper; inelastic or elastic

answer

inelastic demand curve

question

Price elasticty of supply

answer

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

question

What are the signs for elasticity of supply and demand?

answer

EOS is always positive; EOD is always negative

question

What is the primary influence on the price elasticity of supply?

answer

the ability of the producer to increase production

question

How does income elasticity of demand relate to normal good?

answer

If the IEOD is positive, the good is a normal good

question

How does rising income relate to income elasticity of demand?

answer

If rising income causes the demand to decrease, then IEOD is an inferior good

question

income elasticity of demand

answer

% change in quantity demanded / % change in income

question

utility

answer

the capacity to be useful and provide satisfaction

question

marginal utility

answer

satisfaction or usefulness obtained from acquiring one more unit of a product

question

marginal analysis

answer

the study of the costs and benefits of doing a little bit more of an activity versus a little bit less

question

consumer surplus

answer

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

question

Substitution

answer

if price increases, quantity decreases because consumers seek less expensive alternatives

question

Income (normal good)

answer

If price increases, demand decreases because an increase in price= less purchasing power therefore decreasing consumption

question

Income (inferior good)

answer

If price increases, quantity increases because the reduction in purchasing power will lead to an increase in the consumption of all inferior goods

question

What are the factors of production?

answer

land, labor, capital

question

production function

answer

the relationship between quantity of inputs used to make a good and the quantity of output of that good

question

characteristics of short-run production function

answer

less steep slope as more workers added

question

marginal product

answer

the increase in output that arises from an additional unit of input

question

marginal product and average product relationship

answer

marginal product draws average product toward itself

question

Law of Diminishing Marginal Returns

answer

principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease

question

relate total product and marginal cost

answer

as total product increases, marginal cost decreases slightly then increases

question

relate marginal product and marginal costs

answer

when marginal product increase, marginal cost decrease

question

accounting profits

answer

total revenue - explicit costs

question

economic profits

answer

total revenues minus explicit and implicit costs
total revenues- total opportunity costs
accounting profits-implicit costs

question

profit maximization

answer

setting prices so that total revenue is as large as possible relative to total costs

question

what happens to average cost in the short run?

answer

AC decreases as output increases; then ac increases due to diminishing marginal returns

question

constant returns to scale

answer

the property whereby long-run average total cost stays the same as the quantity of output changes

question

economies of scale

answer

the property whereby long-run average total cost falls as the quantity of output increases

question

what are the causes of economies of scales

answer

specialization of all inputs; dimensional factors; larger volume equipment

question

diseconomies of scale

answer

the property whereby long-run average total cost rises as the quantity of output increases

question

If the economy is producing at a point inside the production possibilities frontier, which of the following must be true?

answer

More of both goods can be produced

question

What is true about an economic model?

answer

It makes simplifying assumptions to provide a simpler version of a complex problem so that it may be studied and understood

question

Assume that the price in a market s currently below equilibrium price. Explain why the situation will change

answer

There is a shortage since qd>qs; buyers are willing to pay more for goods ad sellers can raise prices; qd decreases and qs increases; the shortage decline and a new equilibrium is reached

question

an increase in the price of inputs will cause the equilibrium price to____ and the equilibrium quantity to ____

answer

increase; decrease

question

an increase in the price of a substitute good will cause the equilibrium price of its substitute to ___ and the equilibrium quantity to _____

answer

increase; increase

question

a decrease in the price of a complimentary good will cause the equilibrium price of its complimentary to ___ and the equilibrium quantity to _____

answer

increase; increase

question

what is true about the government setting maximum prices?

answer

a max price will cause a shortage of a good to be produced only if the max price is below the equilibrium

question

The price elasticity of demand will be _____ if demand is elastic

answer

more than one

question

a change in supply will have a ____ effect on quantity for relatively more elastic demand curve than a relatively less elastic one

answer

greater

question

a change in supply will have a ____ effect on price for relatively more inelastic demand curve than a relatively more elastic one

answer

greater

question

an increase in an effective minimum legal price will do what to prices and quantities sold

answer

Prices will increase and quantity decrease

question

Price elasticity measures how....

answer

the quantity increases when price decreases

question

if the price of a good falls and, because of the income effect, t consumption of the good also decreases, we know that the good is

answer

an inferior good

question

For most goods, the reason the demand curve slopes downward is...

answer

the income effect of a price change is less than the substitution effect, and the substitution effect of a price increase always caused reduction in consumption

question

the law of diminishing marginal returns is the cause of ___ marginal product and ____marginal cost

answer

decreasing;increasing

question

Will a change in fixed costs change total cost?

answer

yes

question

Will a change in fixed costs change total variable cost?

answer

question

Will a change in fixed costs change average cost?

answer

yes

question

Will a change in fixed costs change marginal cost?

answer

question

Marginal cos is the slope of

answer

the total cost curve

question

With increasing marginal cost, if marginal cost=average cost, average cost at this point must be

answer

at is minimum point

question

If average product is increasing as the variable input increases, which is true?

answer

average cost must be decreasing

question

Which of the following is a cause of diminishing marginal productivity?

answer

In the short run, labor runs out of available capital as more labor gets added to the production process

question

In a model with only labor and capital as inputs, in the short run the amount of____is fixed, while in the long run the amount of ____ is variable

answer

either labor or capital; both labor and capital

question

Variable cost ____while fixed cost_____as output____in the short run

answer

rises; stays the same; increases

question

When a firm earns zero economic profits, it does which of the following?

answer

has a positive accounting profit

question

The marginal product of labor can be defined as?

answer

The change in output level as the result of hiring another worker

question

In the short run, the law of diminishing marginal product is the cause of

answer

not...higher wages; decreased firm output; diseconomies of scale

question

What is true about the long-run average cost curve?

answer

It's a function which shows the lowest average cost of producing any output level

question

As a firm increases output, long-run average costs typically

answer

fall, hit a minimum, then rise

question

Which of the following is NOT one of the reasons a firm might be expected to experiences economies of scale

answer

Reducing issues with diminishing marginal product of labor

question

When a firm gets so large than coordination, and other inputs become costly and difficult, it is experencing

answer

diseconomies of scale

question

When a firm is experiencing economies of scale, the long-run average cost curve is

answer

downward sloping

question

When can diseconomies of scale occur?

answer

In the long run

question

If the long-run average cost curve is horizontal, it implies that the firm is experencing

answer

constant returns to scale

question

Suppose a firm doubles its inputs and is experiencing diseconomies of scale then

answer

output will increase, but less than double

question

Suppose that the costs of all inputs decreases. What will happen to the long-run cost curve?

answer

The curve will shift downward illustrating that any level of output can now be produced at a lower average cost

1 of 91

question

Scarcity

answer

Unlimited wants exceed the limited resources available to fulfill those wants

question

Sunk costs

answer

costs that have already been incurred and cannot be recovered

question

Fixed costs

answer

Costs that do not vary with the quantity of output produced

question

marginal benefit

answer

the extra benefit of adding one unit

question

marginal cost

answer

the cost of producing one more unit of a good

question

What is the decision-making rule?

answer

higher marginal benefit means go for it

question

Specialization

answer

the concentration of the productive efforts of individuals and firms on a limited number of activities

question

What are the primary economic roles for government?

answer

Private property rights and contracts; monetary system; unemployment and capacity utilization; competition; incentives; fairness

question

production possibilities frontier

answer

shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

question

diminishing marginal return

answer

a level of production in which the marginal product of labor decreases as the number of workers increases

question

Relationship between marginal return and marginal cost

answer

diminishing marginal returns lead to an increase in marginal cost

question

Increasing marginal cost

answer

each additional unit costs more to produce than the previous one

question

economic efficiency

answer

wise use of available resources so that costs do not exceed benefits

question

allocative efficiency

answer

the particular mix of goods and services most highly valued by society

question

technical efficiency

answer

Using methods to produce goods and services that minimize costs of producing or maximize output given our inputs.

question

law of demand

answer

consumers buy more of a good when its price decreases and less when its price increases

question

normal good

answer

a good that consumers demand more of when their incomes increase

question

inferior good

answer

a good that consumers demand less of when their incomes increase

question

does a change in price change demand?

answer

No it changes quantity demanded

question

What happens during a shortage?

answer

price increases; quantity demanded decreases; quantity supplied increases

question

What happens when there's a surplus?

answer

price decreases; quantity demanded increases; quantity supplied decreases

question

elastic demand

answer

demand in which changes in price have large effects on the amount demanded

question

inelastic demand

answer

demand in which changes in price have little or no effect on the amount demanded

question

what determines how elastic demand is for any good?

answer

Number of substitutes; if the good is a necessity; percentage of income spent on the good; length of time for adjustment

question

which is steeper; inelastic or elastic

answer

inelastic demand curve

question

Price elasticty of supply

answer

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

question

What are the signs for elasticity of supply and demand?

answer

EOS is always positive; EOD is always negative

question

What is the primary influence on the price elasticity of supply?

answer

the ability of the producer to increase production

question

How does income elasticity of demand relate to normal good?

answer

If the IEOD is positive, the good is a normal good

question

How does rising income relate to income elasticity of demand?

answer

If rising income causes the demand to decrease, then IEOD is an inferior good

question

income elasticity of demand

answer

% change in quantity demanded / % change in income

question

utility

answer

the capacity to be useful and provide satisfaction

question

marginal utility

answer

satisfaction or usefulness obtained from acquiring one more unit of a product

question

marginal analysis

answer

the study of the costs and benefits of doing a little bit more of an activity versus a little bit less

question

consumer surplus

answer

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

question

Substitution

answer

if price increases, quantity decreases because consumers seek less expensive alternatives

question

Income (normal good)

answer

If price increases, demand decreases because an increase in price= less purchasing power therefore decreasing consumption

question

Income (inferior good)

answer

If price increases, quantity increases because the reduction in purchasing power will lead to an increase in the consumption of all inferior goods

question

What are the factors of production?

answer

land, labor, capital

question

production function

answer

the relationship between quantity of inputs used to make a good and the quantity of output of that good

question

characteristics of short-run production function

answer

less steep slope as more workers added

question

marginal product

answer

the increase in output that arises from an additional unit of input

question

marginal product and average product relationship

answer

marginal product draws average product toward itself

question

Law of Diminishing Marginal Returns

answer

principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease

question

relate total product and marginal cost

answer

as total product increases, marginal cost decreases slightly then increases

question

relate marginal product and marginal costs

answer

when marginal product increase, marginal cost decrease

question

accounting profits

answer

total revenue - explicit costs

question

economic profits

answer

total revenues minus explicit and implicit costs
total revenues- total opportunity costs
accounting profits-implicit costs

question

profit maximization

answer

setting prices so that total revenue is as large as possible relative to total costs

question

what happens to average cost in the short run?

answer

AC decreases as output increases; then ac increases due to diminishing marginal returns

question

constant returns to scale

answer

the property whereby long-run average total cost stays the same as the quantity of output changes

question

economies of scale

answer

the property whereby long-run average total cost falls as the quantity of output increases

question

what are the causes of economies of scales

answer

specialization of all inputs; dimensional factors; larger volume equipment

question

diseconomies of scale

answer

the property whereby long-run average total cost rises as the quantity of output increases

question

If the economy is producing at a point inside the production possibilities frontier, which of the following must be true?

answer

More of both goods can be produced

question

What is true about an economic model?

answer

It makes simplifying assumptions to provide a simpler version of a complex problem so that it may be studied and understood

question

Assume that the price in a market s currently below equilibrium price. Explain why the situation will change

answer

There is a shortage since qd>qs; buyers are willing to pay more for goods ad sellers can raise prices; qd decreases and qs increases; the shortage decline and a new equilibrium is reached

question

an increase in the price of inputs will cause the equilibrium price to____ and the equilibrium quantity to ____

answer

increase; decrease

question

an increase in the price of a substitute good will cause the equilibrium price of its substitute to ___ and the equilibrium quantity to _____

answer

increase; increase

question

a decrease in the price of a complimentary good will cause the equilibrium price of its complimentary to ___ and the equilibrium quantity to _____

answer

increase; increase

question

what is true about the government setting maximum prices?

answer

a max price will cause a shortage of a good to be produced only if the max price is below the equilibrium

question

The price elasticity of demand will be _____ if demand is elastic

answer

more than one

question

a change in supply will have a ____ effect on quantity for relatively more elastic demand curve than a relatively less elastic one

answer

greater

question

a change in supply will have a ____ effect on price for relatively more inelastic demand curve than a relatively more elastic one

answer

greater

question

an increase in an effective minimum legal price will do what to prices and quantities sold

answer

Prices will increase and quantity decrease

question

Price elasticity measures how....

answer

the quantity increases when price decreases

question

if the price of a good falls and, because of the income effect, t consumption of the good also decreases, we know that the good is

answer

an inferior good

question

For most goods, the reason the demand curve slopes downward is...

answer

the income effect of a price change is less than the substitution effect, and the substitution effect of a price increase always caused reduction in consumption

question

the law of diminishing marginal returns is the cause of ___ marginal product and ____marginal cost

answer

decreasing;increasing

question

Will a change in fixed costs change total cost?

answer

yes

question

Will a change in fixed costs change total variable cost?

answer

question

Will a change in fixed costs change average cost?

answer

yes

question

Will a change in fixed costs change marginal cost?

answer

question

Marginal cos is the slope of

answer

the total cost curve

question

With increasing marginal cost, if marginal cost=average cost, average cost at this point must be

answer

at is minimum point

question

If average product is increasing as the variable input increases, which is true?

answer

average cost must be decreasing

question

Which of the following is a cause of diminishing marginal productivity?

answer

In the short run, labor runs out of available capital as more labor gets added to the production process

question

In a model with only labor and capital as inputs, in the short run the amount of____is fixed, while in the long run the amount of ____ is variable

answer

either labor or capital; both labor and capital

question

Variable cost ____while fixed cost_____as output____in the short run

answer

rises; stays the same; increases

question

When a firm earns zero economic profits, it does which of the following?

answer

has a positive accounting profit

question

The marginal product of labor can be defined as?

answer

The change in output level as the result of hiring another worker

question

In the short run, the law of diminishing marginal product is the cause of

answer

not...higher wages; decreased firm output; diseconomies of scale

question

What is true about the long-run average cost curve?

answer

It's a function which shows the lowest average cost of producing any output level

question

As a firm increases output, long-run average costs typically

answer

fall, hit a minimum, then rise

question

Which of the following is NOT one of the reasons a firm might be expected to experiences economies of scale

answer

Reducing issues with diminishing marginal product of labor

question

When a firm gets so large than coordination, and other inputs become costly and difficult, it is experencing

answer

diseconomies of scale

question

When a firm is experiencing economies of scale, the long-run average cost curve is

answer

downward sloping

question

When can diseconomies of scale occur?

answer

In the long run

question

If the long-run average cost curve is horizontal, it implies that the firm is experencing

answer

constant returns to scale

question

Suppose a firm doubles its inputs and is experiencing diseconomies of scale then

answer

output will increase, but less than double

question

Suppose that the costs of all inputs decreases. What will happen to the long-run cost curve?

answer

The curve will shift downward illustrating that any level of output can now be produced at a lower average cost

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