tamug microeconomics theory exam 2 - Custom Scholars
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# tamug microeconomics theory exam 2

question
compensating variation
amount of money that exactly compensates the consumer for a change in circumstances
question
consumer surplus
net benefit a consumer receives from participating in the market for some good
question
consumer surplus calc
CS= sum of net benefits for all units
question
effects of price change: substitution effect
good becomes more expensive relative to all other goods, consumers shift their purchases away from the more expensive good and toward other goods
question
effects of price change: income effect
question
uncompensated price change
consists of a price change with no change in income
question
compensated price change
consists of a price change and an income change that together leave the consumers well being unaffected
question
production possibilities set
contains all combinations of inputs and outputs that are possible, given the firms technology
question
efficient production frontier
contains the combinations of inputs and outputs that the firm can achieve using efficient production methods
question
production function
states the amount of output a firm can produce from given amounts of input using efficient production methods
question
average product of labor
amount of output divided by the number of workers employed
question
marginal product of labor
extra output produced due to the marginal units of labor, per unit labor
question
law of diminishing marginal returns
the marginal product of an input eventually declines as its use is increased holding all other inputs fixed
question
productive input principle
increasing the amounts of all inputs strictly increases the amount of output the firm can produce
question
isoquant
identifies all the input combinations a firm can use to efficiently produce a given amount of output
question
family of isoquants
consists of the isoquants corresponding to all possible output levels
question
properties of isoquants
- thin
- do not slope upward
- boundary between input combinations that produce more than a given amount of output and those that produce less
- isoquants for same technology do not cross
- higher level isoquants lie farther from the origin
question
input substitution for 3 special production technologies
1. perfect substitutes: functions of 2 inputs are identical so that a firm can exchange one for another at a fixed rate
2. perfect complements: when 2 inputs must be combined in a fixed ratio
3. Cobb Douglas production function:
question
constant returns to scale
when a proportional change in all inputs produce the same proportional change in output
question
increasing returns to scale
when a proportional change in all inputs produces a more than proportional change in output
question
decreasing returns to scale
when a proportional change in all inputs produces a less than proportional change in output
question
technological change
when a firms ability to turn inputs into outputs changes over time
question
higher productivity
when a firm can produce more output using the same amounts of inputs
question
factor-neutral technical change
a productivity improvement that keeps the MRTS unchanged at every input combination
question
total cost: variable cost
costs of inputs that vary with the firms output level (ex: labor, materials)
question
total cost: fixed cost
costs of inputs whose use does not vary with the firms output level
question
fixed costs: avoidable and sunk
- avoidable: firm does not incur the cost if it produces no output
- sunk: cost that is incurred even if the firm decides to not operate
question
opportunity cost
cost associated with forgoing the opportunity to employ a resource in its best alternative use
question
isocost line
contains all the input combinations with the same cost
question
interior choice
least cost input combinations uses every input
question
interior solution
when the least cost input is an interior choice, always satisfies the tangency condition
question
boundary solution
the least-cost input combination excludes some inputs
question
average cost
cost per unit of output produced, averaged over all units produced
question
marginal cost
extra cost the firm incurs per unit of output added
question
economies of scale
average cost falls as firms produce more -> cost rises less proportionally than the increase in output
question
diseconomies of scale
average cost rises as firms produce more -> cost rises more proportionally, than the increase in output
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question
compensating variation
amount of money that exactly compensates the consumer for a change in circumstances
question
consumer surplus
net benefit a consumer receives from participating in the market for some good
question
consumer surplus calc
CS= sum of net benefits for all units
question
effects of price change: substitution effect
good becomes more expensive relative to all other goods, consumers shift their purchases away from the more expensive good and toward other goods
question
effects of price change: income effect
question
uncompensated price change
consists of a price change with no change in income
question
compensated price change
consists of a price change and an income change that together leave the consumers well being unaffected
question
production possibilities set
contains all combinations of inputs and outputs that are possible, given the firms technology
question
efficient production frontier
contains the combinations of inputs and outputs that the firm can achieve using efficient production methods
question
production function
states the amount of output a firm can produce from given amounts of input using efficient production methods
question
average product of labor
amount of output divided by the number of workers employed
question
marginal product of labor
extra output produced due to the marginal units of labor, per unit labor
question
law of diminishing marginal returns
the marginal product of an input eventually declines as its use is increased holding all other inputs fixed
question
productive input principle
increasing the amounts of all inputs strictly increases the amount of output the firm can produce
question
isoquant
identifies all the input combinations a firm can use to efficiently produce a given amount of output
question
family of isoquants
consists of the isoquants corresponding to all possible output levels
question
properties of isoquants
- thin
- do not slope upward
- boundary between input combinations that produce more than a given amount of output and those that produce less
- isoquants for same technology do not cross
- higher level isoquants lie farther from the origin
question
input substitution for 3 special production technologies
1. perfect substitutes: functions of 2 inputs are identical so that a firm can exchange one for another at a fixed rate
2. perfect complements: when 2 inputs must be combined in a fixed ratio
3. Cobb Douglas production function:
question
constant returns to scale
when a proportional change in all inputs produce the same proportional change in output
question
increasing returns to scale
when a proportional change in all inputs produces a more than proportional change in output
question
decreasing returns to scale
when a proportional change in all inputs produces a less than proportional change in output
question
technological change
when a firms ability to turn inputs into outputs changes over time
question
higher productivity
when a firm can produce more output using the same amounts of inputs
question
factor-neutral technical change
a productivity improvement that keeps the MRTS unchanged at every input combination
question
total cost: variable cost
costs of inputs that vary with the firms output level (ex: labor, materials)
question
total cost: fixed cost
costs of inputs whose use does not vary with the firms output level
question
fixed costs: avoidable and sunk
- avoidable: firm does not incur the cost if it produces no output
- sunk: cost that is incurred even if the firm decides to not operate
question
opportunity cost
cost associated with forgoing the opportunity to employ a resource in its best alternative use
question
isocost line
contains all the input combinations with the same cost
question
interior choice
least cost input combinations uses every input
question
interior solution
when the least cost input is an interior choice, always satisfies the tangency condition
question
boundary solution
the least-cost input combination excludes some inputs
question
average cost
cost per unit of output produced, averaged over all units produced
question
marginal cost
extra cost the firm incurs per unit of output added
question
economies of scale
average cost falls as firms produce more -> cost rises less proportionally than the increase in output
question
diseconomies of scale
average cost rises as firms produce more -> cost rises more proportionally, than the increase in output

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