Econ exam #2

Chapters 7,9,13,14,15

Who bears the burden of an excise tax

If demand is inelastic, consumers bear a larger share of the tax burden; if supply is inelastic, producers bear more of the burden.

what is the formula for deadweight loss

0.5(Tax amount)(Q_eq - Q_sold)

what is the profit maximizing principle

optimal quantity is the largest quantity where MB is greater than MC

what is the law of diminishing marginal utility

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

Substitution Effect

consumers may alter their consumption of goods based on changes in prices of substitute goods

Income Effect

a consumer may change their consumption of goods based on changes in their purchasing power of a good. Applies to normal goods.

Income effect for inferior goods

The income effect dominates the substitution effect when it comes to inferior goods.

what are diminishing returns

decrease in the rate of change of total product

Marginal Product of Labor Formual

ΔQuantity Produced /ΔLabor

Average Product of Labor Formula

Total Product / Labor

what is the minimum-cost output

the point where MC= ATC which is also the min of ATC

Short Run

The period in which at least one input is fixed and cannot be changed. Firms can vary output by adjusting variable inputs, but cannot enter or exit the industry.

Long Run

Period in which all inputs are variable. Firms can fully adjust their scale of production, and new firms can enter or existing firms can exit the industry.

when should a firm shut-down in the short run

when price < average variable cost

Total Profit Formula with totals

TR - TC

Total Profit Formula

Quantity sold * (Price - ATC)

Formula for reduction in CS after an imposed excise tax

0.5*(P_buyer - P_old)(Q_old - Q_new)

Formula for reduction in PS after an imposed excise tax

0.5*(P_old - P_seller)(Q_old - Q_new)

what is implicit cost

The opportunity cost of using resources you already own rather than selling or renting them to someone else. They represent foregone income

what is explicit cost

A direct, out-of-pocket payment made to an outside party for resources or inputs, such as wages, rent, or materials

Formula for accounting profit

Revenue - explicit cost

Formula for economic profit

revenue - explicit - imiplicit

Sunk cost fallacy

the mistake of letting unrecoverable costs influence future decision, when only future costs and benefits should matter

marginal cost formula

ΔTC / ΔQ

what is an optimal bundle

the combo of goods that maximizes a consumer’s utility given their budget. Where the marginal utilities per dollar of the two goods are equal

what is the relationship between MPL and MC

when MPL is rising, marginal cost falls and vice versa. If each worker producers more, each unit costs less to produce.

what is a price taker

a firm that accepts the market price as given and cannot influence it. Raising the price means losing all customers to the firms competition.

what is the long run equilibrium condition

In perfect competition, long run equilibrium is where P = MC = ATC = ATC_min. Profits attract entry and losses cause exit until economic profit equals zero and firms produce at their most effiicient scale.

what is the relationship between the short run supply curve and MC

for any given price a firm will supply the quantity where MC equals that price. The MC curve above the AVC shutdown point therefore maps each price to a quantity supplied.