Microeconomics Test 2 (CH 20-CH21)

question

Factors affecting choice

answer

•Limited income necessitates choice.
•Consumers make choices purposefully.
•One good can be substituted for another.
•Consumers must make decisions without perfect information, but knowledge & past experience will help.

question

diminishing marginal utility

answer

Law of _______________ _____________ ___________
as the rate of consumption increases, the marginal utility derived from consuming additional units of a good will decline

question

consumer equilibrium

answer

each consumer will maximize his satisfaction by ensuring that the last dollar spent on each commodity yields an equal proportion of marginal utility
MUa/Pa = MUb/Pb

question

Substitution effect

answer

as a product's price falls, the consumer will buy more of it and less of other, now comparatively more expensive, products

question

Income effect

answer

as a price falls, a consumer's real income rises and so induces the individual to buy more of both it and other goods

question

price elasticity of demand

answer

reveals the responsiveness of the amount purchased to a change in price
% change in quantity demanded/% change in price

question

Expanded formula

answer

[(Q0-Q1) / (Q0+Q1)] / [(P0-P1)/(P0+P1)]

question

Inelastic

answer

if the absolute value is less than 1 demand is __________

question

Elastic

answer

If the absolute value is greater than 1 demand is ___________

question

Unitary elastic

answer

if the absolute value is equal to 1 demand is _____________
-the % change in quantity demanded due to an increase in price is = % change in price. Sales revenue is constant

question

Perfectly inelastic

answer

Any increase in the price results in no decrease in the quantity demanded (Consumers' purchases)
-is mythical because substitution and income effects prevent this from happening in the real world

question

relatively inelastic

answer

an increase in price results in a smaller % reduction in sales
-addictive goods have no substitutes

question

Relatively elastic

answer

A % increase in price leads to a larger % reduction in purchases
The quantity purchased will be highly sensitive to changes in price

question

Perfectly elastic

answer

consumers will buy all at the market price, but none will be sold above the market price

question

substitutes

answer

the greater the availability of ________________, the more elastic demand is more elastic

question

total budget

answer

as the share of ___________ ______________ spent on the product increases, demand is more elastic

question

second law of demand

answer

Demand is more elastic in the long run

question

income elasticity of demand

answer

indicates the responsiveness of a product's demand to a change in income
% change QD/% change I
(Don't take absolute value)

question

normal good

answer

a good with a positive income elasticity of demand
-as income expands, demand will rise

question

inferior goods

answer

goods with negative income elasticity
-as income expands, the demand will decline

question

price elasticity of supply

answer

a measure of how much the quantity supplied of a good responds to a change in the price of that good
% change QS/% change in P

question

residual claimants

answer

the firm owners
have the right to revenue after costs have been paid

question

shirking

answer

working at less than maximum production

question

contracting

answer

owner contracts with individual workers who work independently

question

team production

answer

workers are hired by a firm to work together under supervision

question

principal-agent problem

answer

arises when the lack of information makes it difficult for the purchaser (principal) to determine whether the seller (agent) is acting in the principal's best interest

question

proprietorship

answer

A business owned by one person
make up 72% of firms by number, but only 4% of total business revenue

question

partnership

answer

owned by two or more people
10% of firms by number, and 14% of business revenues

question

corporation

answer

owned by stockholders (LLC-members)
the owner's liability is limited to their explicit investment
18% of the firms, and 82% of business revenue

question

cost efficiency

answer

competition
compensation and management incentives
threat of a corporate takeover

question

explicit costs

answer

result when a monetary payment is made

question

implicit costs

answer

involve resources owned by the firm that do not involve a monetary payment

question

total cost

answer

=explicit costs + implicit costs

question

economic profit

answer

total revenue minus total cost, including both explicit and implicit costs
occurs only when the rate of return is above the normal market rate of return

question

normal profit rate

answer

zero economic profit, yielding just the competitive rate of return on the capital of owners

question

accounting profit

answer

total revenue minus expenses of the firm over a period of time
often excludes implicit costs such as opportunity cost of equity capital
generally GREATER than economic profit

question

law of diminishing returns

answer

as more units of a variable resource are applied to a fixed resource, output will eventually increase by a smaller and smaller amount

question

Marginal costs

answer

when a firm faces diminishing returns, _____________ _________ will rise with output
Consider this cost for short-run decisions

question

LRATC curve

answer

a curve that shows the minimum average cost of producing each output level possible (all possible degrees of scale)

question

3 reasons

answer

____ _____________ why per unit costs will be reduced as output expands: (Economies of scale)
-mass production
-specialization
-improvements in production as a result of experience

question

Diseconomies of scale

answer

increases in cost per unit when output increases due to inefficiencies and monitoring problems

question

Constant returns to scale

answer

Unit costs that are constant as the scale of the firm is altered. Neither economics nor diseconomies of scale are present.

question

factors shifting cost curve

answer

prices of resources, taxes, regulations, technology

question

sunk costs

answer

costs that have already been incurred and cannot be recovered

question

ATC

answer

consider this cost for long-run decisions

1 of 45

question

Factors affecting choice

answer

question

diminishing marginal utility

answer

Law of _______________ _____________ ___________
as the rate of consumption increases, the marginal utility derived from consuming additional units of a good will decline

question

consumer equilibrium

answer

each consumer will maximize his satisfaction by ensuring that the last dollar spent on each commodity yields an equal proportion of marginal utility
MUa/Pa = MUb/Pb

question

Substitution effect

answer

as a product's price falls, the consumer will buy more of it and less of other, now comparatively more expensive, products

question

Income effect

answer

as a price falls, a consumer's real income rises and so induces the individual to buy more of both it and other goods

question

price elasticity of demand

answer

reveals the responsiveness of the amount purchased to a change in price
% change in quantity demanded/% change in price

question

Expanded formula

answer

[(Q0-Q1) / (Q0+Q1)] / [(P0-P1)/(P0+P1)]

question

Inelastic

answer

if the absolute value is less than 1 demand is __________

question

Elastic

answer

If the absolute value is greater than 1 demand is ___________

question

Unitary elastic

answer

if the absolute value is equal to 1 demand is _____________
-the % change in quantity demanded due to an increase in price is = % change in price. Sales revenue is constant

question

Perfectly inelastic

answer

Any increase in the price results in no decrease in the quantity demanded (Consumers' purchases)
-is mythical because substitution and income effects prevent this from happening in the real world

question

relatively inelastic

answer

an increase in price results in a smaller % reduction in sales
-addictive goods have no substitutes

question

Relatively elastic

answer

A % increase in price leads to a larger % reduction in purchases
The quantity purchased will be highly sensitive to changes in price

question

Perfectly elastic

answer

consumers will buy all at the market price, but none will be sold above the market price

question

substitutes

answer

the greater the availability of ________________, the more elastic demand is more elastic

question

total budget

answer

as the share of ___________ ______________ spent on the product increases, demand is more elastic

question

second law of demand

answer

Demand is more elastic in the long run

question

income elasticity of demand

answer

indicates the responsiveness of a product's demand to a change in income
% change QD/% change I
(Don't take absolute value)

question

normal good

answer

a good with a positive income elasticity of demand
-as income expands, demand will rise

question

inferior goods

answer

goods with negative income elasticity
-as income expands, the demand will decline

question

price elasticity of supply

answer

a measure of how much the quantity supplied of a good responds to a change in the price of that good
% change QS/% change in P

question

residual claimants

answer

the firm owners
have the right to revenue after costs have been paid

question

shirking

answer

working at less than maximum production

question

contracting

answer

owner contracts with individual workers who work independently

question

team production

answer

workers are hired by a firm to work together under supervision

question

principal-agent problem

answer

arises when the lack of information makes it difficult for the purchaser (principal) to determine whether the seller (agent) is acting in the principal's best interest

question

proprietorship

answer

A business owned by one person
make up 72% of firms by number, but only 4% of total business revenue

question

partnership

answer

owned by two or more people
10% of firms by number, and 14% of business revenues

question

corporation

answer

owned by stockholders (LLC-members)
the owner's liability is limited to their explicit investment
18% of the firms, and 82% of business revenue

question

cost efficiency

answer

competition
compensation and management incentives
threat of a corporate takeover

question

explicit costs

answer

result when a monetary payment is made

question

implicit costs

answer

involve resources owned by the firm that do not involve a monetary payment

question

total cost

answer

=explicit costs + implicit costs

question

economic profit

answer

total revenue minus total cost, including both explicit and implicit costs
occurs only when the rate of return is above the normal market rate of return

question

normal profit rate

answer

zero economic profit, yielding just the competitive rate of return on the capital of owners

question

accounting profit

answer

total revenue minus expenses of the firm over a period of time
often excludes implicit costs such as opportunity cost of equity capital
generally GREATER than economic profit

question

law of diminishing returns

answer

as more units of a variable resource are applied to a fixed resource, output will eventually increase by a smaller and smaller amount

question

Marginal costs

answer

when a firm faces diminishing returns, _____________ _________ will rise with output
Consider this cost for short-run decisions

question

LRATC curve

answer

a curve that shows the minimum average cost of producing each output level possible (all possible degrees of scale)

question

3 reasons

answer

____ _____________ why per unit costs will be reduced as output expands: (Economies of scale)
-mass production
-specialization
-improvements in production as a result of experience

question

Diseconomies of scale

answer

increases in cost per unit when output increases due to inefficiencies and monitoring problems

question

Constant returns to scale

answer

Unit costs that are constant as the scale of the firm is altered. Neither economics nor diseconomies of scale are present.

question

factors shifting cost curve

answer

prices of resources, taxes, regulations, technology

question

sunk costs

answer

costs that have already been incurred and cannot be recovered

question

ATC

answer

consider this cost for long-run decisions

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Microeconomics Test 2 (CH 20-CH21)

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