ECO 2023 Fall 2020 Midterm 2 Review

Flashcards covering core microeconomic concepts from ECO 2023 Midterm 2, including perfect competition, consumer equilibrium, costs of production, risk and utility, and course policies.

Profit-Maximizing Condition for a Competitive Firm

The condition where a perfectly competitive firm maximizes profit by producing the output where price equals marginal cost ($P = MC$). When $P > MC$, the firm is not yet maximizing profit and can increase its profit by expanding output.

Efficient Market

A financial market, such as the stock market, where asset prices fully reflect available information, meaning that future price changes are not easily predicted.

Marginal Revenue in Perfect Competition

The change in total revenue from selling one additional unit of output, which in a perfectly competitive market is always equal to the market price ($MR = P$).

Firm Response to an Upward Shift in Cost Curves

When a competitive firm's marginal cost ($MC$) and average total cost ($ATC$) curves shift upward while market price remains unchanged, the firm decreases its production quantity and its profit decreases.

Consumer Equilibrium Condition with Equal Marginal Utilities

The optimal consumption state where marginal utility per dollar spent is equalized across all goods ($\frac{MU_A}{P_A} = \frac{MU_B}{P_B}$). If the marginal utility of two goods is identical at equilibrium, their prices must also be identical.

Industry Response to Subnormal Profit

When existing competitive firms earn an economic return below normal profit (such as earning $\$100{,}000$ when normal profit is $\$150{,}000$), firms incur an economic loss and some will eventually close down and exit the market.

Short-Run Operating Condition with an Economic Loss

The operating rule where a perfectly competitive firm incurs an economic loss but continues producing because the market price covers average variable cost ($P < ATC$ and $P > AVC$).

Adjustment when Marginal Cost Exceeds Marginal Revenue

When a perfectly competitive firm operates at an output level where $MC > MR$, it cannot change the market price and must decrease its output to increase profits.

Budget Line Rotation from a Price Decrease

A reduction in the price of the good plotted on the horizontal axis causes the budget line to rotate outward along that axis and become flatter.

Preference of Points Above an Indifference Curve

Any consumption bundle located in the region above an indifference curve yields higher total satisfaction and is strictly preferred to any bundle lying on the indifference curve.

Short-Run Economic Loss at Shutdown for Giuseppe's Pizza

If Giuseppe's Pizza shuts down, its loss equals its total fixed cost of $\$10$ per hour, calculated by subtracting the first unit's variable cost of $\$8$ from its total cost of $\$18$.

Marginal Cost ($MC$)

The additional cost of producing one more unit of output, calculated as the change in total cost ($\Delta TC / \Delta Q$); for Giuseppe's Pizza, producing the second unit increases total cost from $\$18$ to $\$30$, resulting in an $MC$ of $\$12$.

Average Variable Cost ($AVC$) Curve

A per-unit cost curve that starts out large, gets smaller until reaching a minimum, and then gets larger as output expands.

Paradox of Value

The economic observation that an essential good such as water yields a larger total consumer surplus and a smaller marginal utility than a non-essential good like gold.

Limited Liability

A legal structure where owners (shareholders) of a corporation are not required to cover all the firm's losses or liabilities if the business becomes bankrupt.

Market Demand Contraction in Perfect Competition

A decline in industry demand that drives down market price, leading existing competitive firms to incur an economic loss and prompting some firms to shut down.

Minimum Efficient Scale Condition ($MC = ATC$)

The relationship stating that the marginal cost curve intersects the average total cost curve precisely at the minimum point of the average total cost curve.

Short-Run vs. Long-Run Cost Horizon

A distinction where lease expenses are a fixed cost and labor wages are a variable cost in the short run, while all inputs and obligations become variable costs in the long run.

Risk-Differentiated Insurance Pricing

An insurer's practice of charging higher insurance rates to risky drivers ($2\%$ accident probability) than to safe drivers ($0.5\%$ accident probability) because the cost of insuring higher-risk drivers is greater.

Barriers to Entry

Legal, technological, or financial obstacles preventing new competitors from entering an industry, which are absent in a perfectly competitive market.

Independence of Indifference Curves from Income

The economic principle that consumer indifference curves represent tastes and preferences; therefore, a change in consumer income does not rotate or shift the indifference curves.

Optimal Consumption Bundle for Lisa

With a budget of $\$28$, soda priced at $\$3$, and pizza priced at $\$4$, Lisa maximizes total utility by purchasing $4$ sodas and $4$ pizzas, which equalizes marginal utility per dollar: \frac{90}{\3} = \frac{120}{\4} = 30.

Principal-Agent Problem

The conflict of interest that occurs when agents (employees/managers) act in their own interest rather than the interest of the principal (owners), often resolved through incentive pay schemes.

Market Supply Shifts and Individual Firm Profits

In a competitive market equilibrium, the exit of many firms causes the profit of each remaining firm to increase, while the entry of many new firms causes the profit of each initial firm to decrease.

Expected Utility from Wealth

The probability-weighted sum of utility across potential outcomes; for an investment yielding $\$50$ ($90\text{ utils}$) half the time and $\$150$ ($180\text{ utils}$) half the time, expected utility is $0.5 \times 90 + 0.5 \times 180 = 135\text{ utils}$.

Consumer Equilibrium

The point of optimal consumption where the consumer spends their entire budget (is on the budget line) and achieves the highest attainable indifference curve.

Double Taxation

A feature of corporations where profits are taxed first at the corporate level and subsequently taxed again as personal income when distributed to owners.

Economic Profit

Total revenue minus the opportunity cost of all inputs, including normal profit; a firm earns economic profit when its price exceeds average total cost ($P > ATC$).

UF ID Scantron Error Penalty

The exam administration penalty under which a student who incorrectly bubbles their UF ID number loses $2$ questions on the exam.

Grade Check Request Window

The course policy window allowing students exactly $1\text{ week}$ after curved test scores are posted to request a grade check via email.