Principles of Economics Midterm 2

question

offshore outsourcing

answer

hiring people in another country to perform various tasks, further contributes to inequality, still relatively small compares with more traditional trade

question

Trade Protection Arguments

answer

1. natural security
2. domestic employment (creates new jobs in other industries)
3. infant industry (new industry needs a temporary period of protection of develop)

question

Sunk Costs

answer

have to be incurred regardless of whether or not you take an action

question

explicit costs

answer

require outlay of money

question

implicit costs

answer

opportunity costs, the dollar value of benefits forgone

question

profit

answer

total revenue- total cost
TR-TC

question

total revenue

answer

Price x Quantity

question

accounting profit

answer

does not account for implicit costs

question

economic profit

answer

accounts for implicit costs, helps businesses and individuals make better informed decisions

question

marginal cost

answer

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

question

increasing marginal cost

answer

each additional unit costs more to produce than the previous one

question

constant marginal cost

answer

each additional unit costs the same to produce as the previous one

question

decreasing marginal cost

answer

each additional unit costs less to produce than the previous one, learning effect as workers gain more experience

question

marginal benefit

answer

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

question

diminishing marginal benefit

answer

each additional unit of the activity yields less benefit than the previous unit
-true for consumption of almost any product

question

marginal benefit of production

answer

additional money the firm earns from selling one more unit= marginal revenue

question

optimal quantity

answer

the quantity that generates the highest possible total profit/net-benefit

question

profit-maximizing principle of marginal analysis

answer

the largest quantity at which the marginal benefit is greater than or equal to the marginal cost

question

net benefit

answer

total benefit- total cost

question

irrational decision maker

answer

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

question

confirmation bias

answer

give greater weight to evidence that fits our existing beliefs

question

loss adversion

answer

individuals value an item lost more than gaining the same item

question

salience bias

answer

give greater weight to evidence that is more easily accessible

question

recency bias

answer

give greater weight to newer information

question

utility

answer

the value or satisfaction from consumption

question

marginal utility (MU)

answer

the change in utility from consuming an additional unit

question

diminishing marginal utility

answer

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

question

optimal consumption bundle

answer

MUx/Px = MUy/Py
marginal utility spend per dollar on all goods is the same

question

substitution effect

answer

the change in 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

answer

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

question

normal good

answer

substitution effect: substitute away from product (consume less)
income effect: less effective income, reduce consumption
price increases, consume less

question

inferrior good

answer

substitute effect: substitute away from product (consume less)
income effect: less effective income, increase consumption
-consume more or less

question

Giffen good

answer

if consumption goes up when price increases
upward sloping demand curve

question

marginal product of labor

answer

what is the additional output contributed by each worker

question

MPL

answer

change in Q/change in L

question

fixed cost

answer

cost that does not depend on the quantity of output produced, it is the cost of the fixed input

question

variable cost

answer

cost the depends on the quantity of output produced, the cost of the variable input

question

Total Cost (TC)

answer

FC + VC or ATC * Q

question

Marginal Cost (MC)

answer

change in TC/change in Q
check mark shaped

question

Average total cost (ATC)

answer

TC/Q or AFC + AVC
u shaped curve

question

Average Fixed Cost (AFC)

answer

FC/Q
downward sloping

question

Average variable cost (AVC)

answer

VC/Q
faster upward sloping

question

There are increasing returns to scale (economies of scale) when

answer

long-run average total cost declines as output increases (economies of scale)

question

There are decreasing returns to scale when

answer

long-run average total cost increases as output increases (diseconomies to scale)

question

There are constant returns to scale when

answer

long-run average total cost is constant as output increases

question

Perfect competition

answer

many buyers and sellers
one seller/buyer has no impact on price
homogenous product
free entry and exit in the industry
long-run zero economic profit

question

Marginal revenue (MR)

answer

the change in total revenue from selling one more unit of a product
change in total revenue/ Q

question

optimal output rule

answer

profit is maximized at the level of output for which MR=MC

question

if MR>MC

answer

producing more will add profit

question

if MR<MC

answer

producing less will add profit

question

if TR>TC

answer

the firm is profitable

question

if TR<TC

answer

the firm incurs a loss
long-run exits industry

question

if TR=TC

answer

firm breaks even

question

if P>ATC

answer

the firm is making a profit

question

if P<ATC

answer

the firm is making a loss
-short-run shut down

question

if P=ATC

answer

the firm is breaking even

question

SR industry supply curve

answer

horizontal sum of all individuals firm's supply curves

1 of 57

question

offshore outsourcing

answer

hiring people in another country to perform various tasks, further contributes to inequality, still relatively small compares with more traditional trade

question

Trade Protection Arguments

answer

1. natural security
2. domestic employment (creates new jobs in other industries)
3. infant industry (new industry needs a temporary period of protection of develop)

question

Sunk Costs

answer

have to be incurred regardless of whether or not you take an action

question

explicit costs

answer

require outlay of money

question

implicit costs

answer

opportunity costs, the dollar value of benefits forgone

question

profit

answer

total revenue- total cost
TR-TC

question

total revenue

answer

Price x Quantity

question

accounting profit

answer

does not account for implicit costs

question

economic profit

answer

accounts for implicit costs, helps businesses and individuals make better informed decisions

question

marginal cost

answer

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

question

increasing marginal cost

answer

each additional unit costs more to produce than the previous one

question

constant marginal cost

answer

each additional unit costs the same to produce as the previous one

question

decreasing marginal cost

answer

each additional unit costs less to produce than the previous one, learning effect as workers gain more experience

question

marginal benefit

answer

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

question

diminishing marginal benefit

answer

each additional unit of the activity yields less benefit than the previous unit
-true for consumption of almost any product

question

marginal benefit of production

answer

additional money the firm earns from selling one more unit= marginal revenue

question

optimal quantity

answer

the quantity that generates the highest possible total profit/net-benefit

question

profit-maximizing principle of marginal analysis

answer

the largest quantity at which the marginal benefit is greater than or equal to the marginal cost

question

net benefit

answer

total benefit- total cost

question

irrational decision maker

answer

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

question

confirmation bias

answer

give greater weight to evidence that fits our existing beliefs

question

loss adversion

answer

individuals value an item lost more than gaining the same item

question

salience bias

answer

give greater weight to evidence that is more easily accessible

question

recency bias

answer

give greater weight to newer information

question

utility

answer

the value or satisfaction from consumption

question

marginal utility (MU)

answer

the change in utility from consuming an additional unit

question

diminishing marginal utility

answer

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

question

optimal consumption bundle

answer

MUx/Px = MUy/Py
marginal utility spend per dollar on all goods is the same

question

substitution effect

answer

the change in 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

answer

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

question

normal good

answer

substitution effect: substitute away from product (consume less)
income effect: less effective income, reduce consumption
price increases, consume less

question

inferrior good

answer

substitute effect: substitute away from product (consume less)
income effect: less effective income, increase consumption
-consume more or less

question

Giffen good

answer

if consumption goes up when price increases
upward sloping demand curve

question

marginal product of labor

answer

what is the additional output contributed by each worker

question

MPL

answer

change in Q/change in L

question

fixed cost

answer

cost that does not depend on the quantity of output produced, it is the cost of the fixed input

question

variable cost

answer

cost the depends on the quantity of output produced, the cost of the variable input

question

Total Cost (TC)

answer

FC + VC or ATC * Q

question

Marginal Cost (MC)

answer

change in TC/change in Q
check mark shaped

question

Average total cost (ATC)

answer

TC/Q or AFC + AVC
u shaped curve

question

Average Fixed Cost (AFC)

answer

FC/Q
downward sloping

question

Average variable cost (AVC)

answer

VC/Q
faster upward sloping

question

There are increasing returns to scale (economies of scale) when

answer

long-run average total cost declines as output increases (economies of scale)

question

There are decreasing returns to scale when

answer

long-run average total cost increases as output increases (diseconomies to scale)

question

There are constant returns to scale when

answer

long-run average total cost is constant as output increases

question

Perfect competition

answer

many buyers and sellers
one seller/buyer has no impact on price
homogenous product
free entry and exit in the industry
long-run zero economic profit

question

Marginal revenue (MR)

answer

the change in total revenue from selling one more unit of a product
change in total revenue/ Q

question

optimal output rule

answer

profit is maximized at the level of output for which MR=MC

question

if MR>MC

answer

producing more will add profit

question

if MR<MC

answer

producing less will add profit

question

if TR>TC

answer

the firm is profitable

question

if TR<TC

answer

the firm incurs a loss
long-run exits industry

question

if TR=TC

answer

firm breaks even

question

if P>ATC

answer

the firm is making a profit

question

if P<ATC

answer

the firm is making a loss
-short-run shut down

question

if P=ATC

answer

the firm is breaking even

question

SR industry supply curve

answer

horizontal sum of all individuals firm's supply curves

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Principles of Economics Midterm 2

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