tamug microeconomics theory exam 2

question

compensating variation

answer

amount of money that exactly compensates the consumer for a change in circumstances

question

consumer surplus

answer

net benefit a consumer receives from participating in the market for some good

question

consumer surplus calc

answer

CS= sum of net benefits for all units

question

effects of price change: substitution effect

answer

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

answer

consumer purchasing power falls, and must adjust their purchases accordingly

question

uncompensated price change

answer

consists of a price change with no change in income

question

compensated price change

answer

consists of a price change and an income change that together leave the consumers well being unaffected

question

production possibilities set

answer

contains all combinations of inputs and outputs that are possible, given the firms technology

question

efficient production frontier

answer

contains the combinations of inputs and outputs that the firm can achieve using efficient production methods

question

production function

answer

states the amount of output a firm can produce from given amounts of input using efficient production methods

question

average product of labor

answer

amount of output divided by the number of workers employed

question

marginal product of labor

answer

extra output produced due to the marginal units of labor, per unit labor

question

law of diminishing marginal returns

answer

the marginal product of an input eventually declines as its use is increased holding all other inputs fixed

question

productive input principle

answer

increasing the amounts of all inputs strictly increases the amount of output the firm can produce

question

isoquant

answer

identifies all the input combinations a firm can use to efficiently produce a given amount of output

question

family of isoquants

answer

consists of the isoquants corresponding to all possible output levels

question

properties of isoquants

answer

- 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

answer

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

answer

when a proportional change in all inputs produce the same proportional change in output

question

increasing returns to scale

answer

when a proportional change in all inputs produces a more than proportional change in output

question

decreasing returns to scale

answer

when a proportional change in all inputs produces a less than proportional change in output

question

technological change

answer

when a firms ability to turn inputs into outputs changes over time

question

higher productivity

answer

when a firm can produce more output using the same amounts of inputs

question

factor-neutral technical change

answer

a productivity improvement that keeps the MRTS unchanged at every input combination

question

total cost: variable cost

answer

costs of inputs that vary with the firms output level (ex: labor, materials)

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total cost: fixed cost

answer

costs of inputs whose use does not vary with the firms output level

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fixed costs: avoidable and sunk

answer

- 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

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opportunity cost

answer

cost associated with forgoing the opportunity to employ a resource in its best alternative use

question

isocost line

answer

contains all the input combinations with the same cost

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interior choice

answer

least cost input combinations uses every input

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interior solution

answer

when the least cost input is an interior choice, always satisfies the tangency condition

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boundary solution

answer

the least-cost input combination excludes some inputs

question

average cost

answer

cost per unit of output produced, averaged over all units produced

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marginal cost

answer

extra cost the firm incurs per unit of output added

question

economies of scale

answer

average cost falls as firms produce more -> cost rises less proportionally than the increase in output

question

diseconomies of scale

answer

average cost rises as firms produce more -> cost rises more proportionally, than the increase in output

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question

compensating variation

answer

amount of money that exactly compensates the consumer for a change in circumstances

question

consumer surplus

answer

net benefit a consumer receives from participating in the market for some good

question

consumer surplus calc

answer

CS= sum of net benefits for all units

question

effects of price change: substitution effect

answer

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

answer

consumer purchasing power falls, and must adjust their purchases accordingly

question

uncompensated price change

answer

consists of a price change with no change in income

question

compensated price change

answer

consists of a price change and an income change that together leave the consumers well being unaffected

question

production possibilities set

answer

contains all combinations of inputs and outputs that are possible, given the firms technology

question

efficient production frontier

answer

contains the combinations of inputs and outputs that the firm can achieve using efficient production methods

question

production function

answer

states the amount of output a firm can produce from given amounts of input using efficient production methods

question

average product of labor

answer

amount of output divided by the number of workers employed

question

marginal product of labor

answer

extra output produced due to the marginal units of labor, per unit labor

question

law of diminishing marginal returns

answer

the marginal product of an input eventually declines as its use is increased holding all other inputs fixed

question

productive input principle

answer

increasing the amounts of all inputs strictly increases the amount of output the firm can produce

question

isoquant

answer

identifies all the input combinations a firm can use to efficiently produce a given amount of output

question

family of isoquants

answer

consists of the isoquants corresponding to all possible output levels

question

properties of isoquants

answer

question

input substitution for 3 special production technologies

answer

question

constant returns to scale

answer

when a proportional change in all inputs produce the same proportional change in output

question

increasing returns to scale

answer

when a proportional change in all inputs produces a more than proportional change in output

question

decreasing returns to scale

answer

when a proportional change in all inputs produces a less than proportional change in output

question

technological change

answer

when a firms ability to turn inputs into outputs changes over time

question

higher productivity

answer

when a firm can produce more output using the same amounts of inputs

question

factor-neutral technical change

answer

a productivity improvement that keeps the MRTS unchanged at every input combination

question

total cost: variable cost

answer

costs of inputs that vary with the firms output level (ex: labor, materials)

question

total cost: fixed cost

answer

costs of inputs whose use does not vary with the firms output level

question

fixed costs: avoidable and sunk

answer

- 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

answer

cost associated with forgoing the opportunity to employ a resource in its best alternative use

question

isocost line

answer

contains all the input combinations with the same cost

question

interior choice

answer

least cost input combinations uses every input

question

interior solution

answer

when the least cost input is an interior choice, always satisfies the tangency condition

question

boundary solution

answer

the least-cost input combination excludes some inputs

question

average cost

answer

cost per unit of output produced, averaged over all units produced

question

marginal cost

answer

extra cost the firm incurs per unit of output added

question

economies of scale

answer

average cost falls as firms produce more -> cost rises less proportionally than the increase in output

question

diseconomies of scale

answer

average cost rises as firms produce more -> cost rises more proportionally, than the increase in output

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tamug microeconomics theory exam 2

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