Microeconomics Test 2 (CH 20-CH21) - Custom Scholars
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# Microeconomics Test 2 (CH 20-CH21)

question
Factors affecting choice
•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
Law of _______________ _____________ ___________
as the rate of consumption increases, the marginal utility derived from consuming additional units of a good will decline
question
consumer equilibrium
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
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
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
reveals the responsiveness of the amount purchased to a change in price
% change in quantity demanded/% change in price
question
Expanded formula
[(Q0-Q1) / (Q0+Q1)] / [(P0-P1)/(P0+P1)]
question
Inelastic
if the absolute value is less than 1 demand is __________
question
Elastic
If the absolute value is greater than 1 demand is ___________
question
Unitary elastic
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
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
an increase in price results in a smaller % reduction in sales
question
Relatively elastic
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
consumers will buy all at the market price, but none will be sold above the market price
question
substitutes
the greater the availability of ________________, the more elastic demand is more elastic
question
total budget
as the share of ___________ ______________ spent on the product increases, demand is more elastic
question
second law of demand
Demand is more elastic in the long run
question
income elasticity of demand
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
a good with a positive income elasticity of demand
-as income expands, demand will rise
question
inferior goods
goods with negative income elasticity
-as income expands, the demand will decline
question
price elasticity of supply
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
the firm owners
have the right to revenue after costs have been paid
question
shirking
working at less than maximum production
question
contracting
owner contracts with individual workers who work independently
question
team production
workers are hired by a firm to work together under supervision
question
principal-agent problem
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
A business owned by one person
make up 72% of firms by number, but only 4% of total business revenue
question
partnership
owned by two or more people
10% of firms by number, and 14% of business revenues
question
corporation
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
competition
compensation and management incentives
threat of a corporate takeover
question
explicit costs
result when a monetary payment is made
question
implicit costs
involve resources owned by the firm that do not involve a monetary payment
question
total cost
=explicit costs + implicit costs
question
economic profit
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
zero economic profit, yielding just the competitive rate of return on the capital of owners
question
accounting profit
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
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
when a firm faces diminishing returns, _____________ _________ will rise with output
Consider this cost for short-run decisions
question
LRATC curve
a curve that shows the minimum average cost of producing each output level possible (all possible degrees of scale)
question
3 reasons
____ _____________ 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
increases in cost per unit when output increases due to inefficiencies and monitoring problems
question
Constant returns to scale
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
prices of resources, taxes, regulations, technology
question
sunk costs
costs that have already been incurred and cannot be recovered
question
ATC
consider this cost for long-run decisions
1 of 45
question
Factors affecting choice
•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
Law of _______________ _____________ ___________
as the rate of consumption increases, the marginal utility derived from consuming additional units of a good will decline
question
consumer equilibrium
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
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
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
reveals the responsiveness of the amount purchased to a change in price
% change in quantity demanded/% change in price
question
Expanded formula
[(Q0-Q1) / (Q0+Q1)] / [(P0-P1)/(P0+P1)]
question
Inelastic
if the absolute value is less than 1 demand is __________
question
Elastic
If the absolute value is greater than 1 demand is ___________
question
Unitary elastic
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
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
an increase in price results in a smaller % reduction in sales
question
Relatively elastic
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
consumers will buy all at the market price, but none will be sold above the market price
question
substitutes
the greater the availability of ________________, the more elastic demand is more elastic
question
total budget
as the share of ___________ ______________ spent on the product increases, demand is more elastic
question
second law of demand
Demand is more elastic in the long run
question
income elasticity of demand
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
a good with a positive income elasticity of demand
-as income expands, demand will rise
question
inferior goods
goods with negative income elasticity
-as income expands, the demand will decline
question
price elasticity of supply
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
the firm owners
have the right to revenue after costs have been paid
question
shirking
working at less than maximum production
question
contracting
owner contracts with individual workers who work independently
question
team production
workers are hired by a firm to work together under supervision
question
principal-agent problem
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
A business owned by one person
make up 72% of firms by number, but only 4% of total business revenue
question
partnership
owned by two or more people
10% of firms by number, and 14% of business revenues
question
corporation
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
competition
compensation and management incentives
threat of a corporate takeover
question
explicit costs
result when a monetary payment is made
question
implicit costs
involve resources owned by the firm that do not involve a monetary payment
question
total cost
=explicit costs + implicit costs
question
economic profit
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
zero economic profit, yielding just the competitive rate of return on the capital of owners
question
accounting profit
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
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
when a firm faces diminishing returns, _____________ _________ will rise with output
Consider this cost for short-run decisions
question
LRATC curve
a curve that shows the minimum average cost of producing each output level possible (all possible degrees of scale)
question
3 reasons
____ _____________ 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
increases in cost per unit when output increases due to inefficiencies and monitoring problems
question
Constant returns to scale
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
prices of resources, taxes, regulations, technology
question
sunk costs
costs that have already been incurred and cannot be recovered
question
ATC
consider this cost for long-run decisions

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