Public Sector Economics Midterm 1

question

Elasticity

answer

the percentage change that will occur in one variable in response to a 1% increase in another variable

Sensitivity of demand to a change in price

question

own price elasticity of demand

answer

% change in quantity demanded/% change in price

sensitivity of demand to a change in price

question

What influences demand?

answer

consumer preferences, income, demographics, socio-economic factors, role of prices

question

What changes the demand curve?

answer

own price, price of substitutes, price of complements, income, preferences, population, seasonality

question

What shifts the demand curve?

answer

price of complements, price of substitutes, income, population, preferences, seasonality

question

Complements

answer

increase in the price of one leads to a decrease in the quantity demanded of another

items that can (or must) be used together

As price of complement good increases, decline in quantity demanded of original good decreases even if that price doesn't change

question

Substitutes

answer

increase in the price of one good leads to an increase in the quantity demanded of the other

items that can (or must) be used in place of another item

If there are few substitutesa product will be less sensitive to price changes, especially if it is one that is essential, demand becomes more price sensitive as more substitutes exist

question

Utility Theory

answer

Assumptions about Consumer Preferences◦More is better◦Consumers can rank preferences◦Diminishing returns◦Consumers rank desirability of productsUtility Functions◦Describing well-being and consumptionMarginal Utility◦Added benefit is focus of consumersLaw of Diminishing Marginal Utility◦Marginal utility eventually declines for everything

question

marginal utility

answer

extra utility gained from one additional unit of a good or service

question

marginal rate of substitution

answer

slope of indifference curve; ratio of the marginal utilities

the value that the individual placers on 1 extra unit of a good in terms of another

question

indifference curves

answer

represents all combinations of market baskets that provide a consumer with the same level of satisfaction

-along indifference curve, change in utility = 0, but MRS is not zero

question

impacts of price changes

answer

income effect - Able to move to a different indifference curve due to changing budget

substitution effect - Trade-off between items (movement around indifference curve) due to changing relative prices

question

substitution effect

answer

Trade-off between items (movement around indifference curve) due to changing relative prices

question

income effect

answer

Able to move to a different indifference curve due to changing budget

question

cross price elasticity of demand

answer

percentage change in the quantity demanded for a good that results from a 1% increase in the price of another good

= % change in quantity of Y/ % change in price of X

For complements < 0

For substitutes > 0

If the goods are unrelated = 0

question

income elasticity

answer

sensitivity of consumption to income changes

% change in quantity demanded/% change in income

question

normal good

answer

Consumption goes up as incomes increase

question

inferior good

answer

Consumption goes down as incomes increase

question

production

answer

the use of input(s) to create an output that has economic value

question

production process

answer

how a firm combines the various inputs to create an output

question

technical efficiency

answer

Relates to the physical capacity of the production process

Producing a certain amount of output for the least-cost

question

economic efficiency

answer

Occurs when all firms select inputs based on costs

Marginal cost equals (input) marginal revenue product

question

production function

answer

A function showing the maximum relationship between certain levels of inputs and the resulting output - not related to prices

question

marginal product

answer

Marginal product is the slope of the total product curve at any point (tangent)

Change in Q/ change in X

question

average product

answer

Average product is the slope of line from the origin to the total product curve, Q/X

question

law of diminishing marginal returns

answer

As the quantity of a variable input increases, the resulting rate of output increase eventually diminishes

question

isoquants

answer

A line showing different input combinations that can be used to produce the same level of output

The slope of the isoquant tells us a lot about the substitutability of inputs -As we lower one input we usually need to increase the other input

question

Marginal rate of technical substitution

answer

slope of isoquant

change in Y/change in X

Formally the amount of one input that must be substituted for another to maintain a constant output

question

ridge lines

answer

Mark where marginal product curves turn negative, or put another way the slope of the isoquant is positive

- producing outside of ridge lines is irrational

question

marginal revenue product

answer

Amount of (total) revenue generated by employing that last unit of input (X)

change in TR/change in X

MP x MR

question

marginal cost

answer

change in total cost/change in quantity

question

isocost curves

answer

Linking the amounts of inputs that lead to a constant total cost is an isocost curve

Slope is ratio: - Px/ PY

question

expansion paths

answer

describes combinations of labor and capital that the firm will choose to minimize costs at each output level

By combining the isocost lines and isoquant curves we can plot the various output levels that are optimal for the firm

Optimal set of input combinations at different levels of production or output

question

constant returns to scale

answer

When a given percentage increase in all inputs leads to an identical percentage increase in output

question

increasing returns to scale

answer

When the proportional increase in output is larger than an underlying proportional increase in input

if output more than doubles when inputs are doubled

question

decreasing returns to scale

answer

When output increases at a rate less than the proportionate increase in inputs

output less than doubles when inputs double

question

output elasticity

answer

% change in output (Q)/ % change in all inputs (X)

question

short run costs

answer

The short run is an operating period during which at least one input is fixed

That fixed input may not be employed in the optimal manner

Managerial decisions are constrained

question

marginal cost

answer

change in total cost/change in quantity

slope of total cost curve

question

average total cost

answer

TC/Q

question

long run costs

answer

The long run is the planning period with complete input flexibility

All inputs can be employed in the optimal manner

question

cost elasticity

answer

%change inTC/%change in Q

question

economies of scale

answer

can double output for less than twice the cost

Capacity - Output level at which short-run average costs are minimized

Minimum efficient scale - Output level at which long-run average costs are minimized

question

economies of scope

answer

joint output of a single firm is greater than the output that could be achieved by two different firms each producing a single product

There may be cost advantages from producing complementary products

Can shield the firm from risk by diversification

question

point elasticity

answer

price elasticity of demand at a particular point on the demand curve

question

arc elasticity

answer

the elasticity calculated over a range in prices

question

perfect substitutes

answer

marginal rate of substitution of one for the other is constant

question

perfect complements

answer

indifference curves shaped as right angles

question

utility

answer

the numerical score representing the satisfaction that a consumer gets from a market basket

question

consumer surplus

answer

the difference between the maximum amount that a consumer is willing to pay for a good and the amount that the consumer actually pays

question

opportunity cost

answer

the cost of the next best thing

question

sunk costs

answer

costs that have been incurred and cannot be recovered

question

diseconomies of scale

answer

doubling of output requires more than twice the cost

1 of 53

question

Elasticity

answer

the percentage change that will occur in one variable in response to a 1% increase in another variable

Sensitivity of demand to a change in price

question

own price elasticity of demand

answer

% change in quantity demanded/% change in price

sensitivity of demand to a change in price

question

What influences demand?

answer

consumer preferences, income, demographics, socio-economic factors, role of prices

question

What changes the demand curve?

answer

own price, price of substitutes, price of complements, income, preferences, population, seasonality

question

What shifts the demand curve?

answer

price of complements, price of substitutes, income, population, preferences, seasonality

question

Complements

answer

question

Substitutes

answer

question

Utility Theory

answer

question

marginal utility

answer

extra utility gained from one additional unit of a good or service

question

marginal rate of substitution

answer

slope of indifference curve; ratio of the marginal utilities

the value that the individual placers on 1 extra unit of a good in terms of another

question

indifference curves

answer

represents all combinations of market baskets that provide a consumer with the same level of satisfaction

-along indifference curve, change in utility = 0, but MRS is not zero

question

impacts of price changes

answer

question

substitution effect

answer

Trade-off between items (movement around indifference curve) due to changing relative prices

question

income effect

answer

Able to move to a different indifference curve due to changing budget

question

cross price elasticity of demand

answer

question

income elasticity

answer

sensitivity of consumption to income changes

% change in quantity demanded/% change in income

question

normal good

answer

Consumption goes up as incomes increase

question

inferior good

answer

Consumption goes down as incomes increase

question

production

answer

the use of input(s) to create an output that has economic value

question

production process

answer

how a firm combines the various inputs to create an output

question

technical efficiency

answer

Relates to the physical capacity of the production process

Producing a certain amount of output for the least-cost

question

economic efficiency

answer

Occurs when all firms select inputs based on costs

Marginal cost equals (input) marginal revenue product

question

production function

answer

A function showing the maximum relationship between certain levels of inputs and the resulting output - not related to prices

question

marginal product

answer

Marginal product is the slope of the total product curve at any point (tangent)

Change in Q/ change in X

question

average product

answer

Average product is the slope of line from the origin to the total product curve, Q/X

question

law of diminishing marginal returns

answer

As the quantity of a variable input increases, the resulting rate of output increase eventually diminishes

question

isoquants

answer

question

Marginal rate of technical substitution

answer

slope of isoquant

change in Y/change in X

Formally the amount of one input that must be substituted for another to maintain a constant output

question

ridge lines

answer

Mark where marginal product curves turn negative, or put another way the slope of the isoquant is positive

- producing outside of ridge lines is irrational

question

marginal revenue product

answer

Amount of (total) revenue generated by employing that last unit of input (X)

change in TR/change in X

MP x MR

question

marginal cost

answer

change in total cost/change in quantity

question

isocost curves

answer

Linking the amounts of inputs that lead to a constant total cost is an isocost curve

Slope is ratio: - Px/ PY

question

expansion paths

answer

question

constant returns to scale

answer

When a given percentage increase in all inputs leads to an identical percentage increase in output

question

increasing returns to scale

answer

When the proportional increase in output is larger than an underlying proportional increase in input

if output more than doubles when inputs are doubled

question

decreasing returns to scale

answer

When output increases at a rate less than the proportionate increase in inputs

output less than doubles when inputs double

question

output elasticity

answer

% change in output (Q)/ % change in all inputs (X)

question

short run costs

answer

The short run is an operating period during which at least one input is fixed

That fixed input may not be employed in the optimal manner

Managerial decisions are constrained

question

marginal cost

answer

change in total cost/change in quantity

slope of total cost curve

question

average total cost

answer

TC/Q

question

long run costs

answer

The long run is the planning period with complete input flexibility

All inputs can be employed in the optimal manner

question

cost elasticity

answer

%change inTC/%change in Q

question

economies of scale

answer

question

economies of scope

answer

question

point elasticity

answer

price elasticity of demand at a particular point on the demand curve

question

arc elasticity

answer

the elasticity calculated over a range in prices

question

perfect substitutes

answer

marginal rate of substitution of one for the other is constant

question

perfect complements

answer

indifference curves shaped as right angles

question

utility

answer

the numerical score representing the satisfaction that a consumer gets from a market basket

question

consumer surplus

answer

the difference between the maximum amount that a consumer is willing to pay for a good and the amount that the consumer actually pays

question

opportunity cost

answer

the cost of the next best thing

question

sunk costs

answer

costs that have been incurred and cannot be recovered

question

diseconomies of scale

answer

doubling of output requires more than twice the cost

Continue to order Get a quote

Public Sector Economics Midterm 1

Recent Posts

Recent Comments

Calculate the price of your order

Our guarantees

Money-back guarantee

Zero-plagiarism guarantee

Free-revision policy

Privacy policy

Fair-cooperation guarantee