ECON 2306 Test #2

Utility

satisfaction

Isoutility

equal satisfaction

Marginal utility

the benefit gained from consuming one additional unit of a good or service

Formula for marginal utility?

total budget/price of good

ΔTU/ΔQ

Formula for budget constraint if only 2 goods may be purchased?

rise/run on budget constraint line

I=PxQx+PyQy

Slope of the budget constraint?

Px/Py

Slope of the isoutility curve?

(ΔTUx/ΔQx)/(ΔTUy/ΔQy)

MUx/MUy

Characteristics of an isoutility curve?

1. equal satisfaction

2. can not cross

3. higher curves are preferred to lower curves

4. slopes are negative

5. shape of curve refers to the law of diminishing marginal utility

Intransivity

when the isoutility curves cross

where A>B & B>C but C>A

Formula for consumer equilibrium?

MUx/Px=MUy/Py

Formula for producer equilibrium?

MPk/Pk=MPl/Pl

What happens to a budget constraint when the price of one good changes?

results in a rotation of the budget constraint

What happens to a budget constraint when more income is received?

results in a parallel shift to the budget constraint

How is the vertical intercept of a budget constraint determined?

income/price of good y

I/Py

How is the horizontal intercept of a budget constraint determined?

income/price of good x

I/Px

What is meant by the law of demand?

the various quantities

of a good and service

which a consumer

is both willing and able

to purchase

at various prices

per unit of time

ceteris paribus

What is meant by production?

product is any process by which resource are transformed into goods and services

What is the formula for a Cobb-Douglas Production Function?

output=f(capital, labor)

Q=f(K, L)

What is meant by returns to scale?

How product related to cost

IRS=2* inputs, output will be more than double

CRS=2* inputs, output will be exactly double

DRS=2* inputs, output will be less than double

What is meant by the marginal product of labor (MPL)?

measure of the physical increase in the output of a firm or economy; it is the output that results from hiring one additional worker

What is meant by the marginal product of capital (MPK)?

the additional production a company experiences by adding one unit of capital

How can a Cobb-Douglas Production Function be used to calculate MPL & MPK?

MPL= ΔQ/ΔL

APL= Q/L

MPK= ΔQ/ΔK

How does a short-run production function differ from a long-run production function (graphically)?

short-run= at least 1 fixed input

long-run= can be all variable inputs

What is meant by isoquant?

equal quantity

What is meant by the law of diminishing marginal utility?

as successive units of a good are consumed, the additional satisfaction obtained falls

What is meant by the law of diminishing marginal product?

as successive equal increase in a variable factor of production are added to fixed factors of production, such as labor, add to fixed factor of production will result in smaller increase in output or decline

What are the 3 stages of production in a short-run production function?

1. increase in increasing rate

2. increase in slower rate

3. decrease

How can a production function be used to determine the marginal product of labor?

when total production is in stage 1- increase in increasing rate, MPL also increase

when TP/production function is increasing in decreasing rate, MPL will decrease

when TP is decreasing, MPL will be negative

How can a production function be used to determine the average product of labor?

APL never be negative but will go close to zero

when APL is at max, APL=MPL

APL rise up to point B and decline but remain positive

Formula for MPL?

ΔQ/ΔL

Formula for APL?

Q/L

How do MPL and APL relate to the cost curves?

when MPL is at it's peak, MC curve is at its minimum

when APL is at it's peak, AVC curve is at its minimum

What are fixed costs?

do not vary with output, costs that do not change due to output production

What are variable costs?

varies with the rate of production, costs that do not vary with output

Formula for total cost (TC)?

TC=TFC+TVC

TC=ATC*Q

Formula for total fixed cost (TFC)?

TFC=TC-TVC

TFC=AFC*Q

Formula for total variable cost (TVC)?

TVC=TC-TFC

TVC=AVC*Q

Formula for average total cost (ATC)?

ATC=AFC+AVC

ATC=TC/Q

Formula for average fixed cost (AFC)?

AFC=ATC-AVC

AFC=TFC/Q

Formula for average variable cost (AVC)?

AVC=ATC-AFC

AVC=TVC/Q

Formula for MC?

MC=ΔTC/ΔQ

MC=ΔTFC/ΔQ

Formula for MR?

MR=ΔTR/ΔQ

Formula for profit maximization?

MR=MC

Formula for cost-minimization of all inputs?

MC=ATC

MC=AVC

What is known about TC and TFC when output is equal to zero?

TC=TFC because TVC=0 when Q=0

What things are equal when output is equal to zero?

TFC=TC

What things are equal when output is equal to one?

TC=ATC

TVC=AVC=MC

TFC=AFC

What is the shape of TC?

have height of fixed cost and shape of variable cost

What is the shape of TFC?

straight horizontal line

What is the shape of TVC?

curve facing upward

What is the shape of MC?

MC crosses ATC at its minimum point

How does the MPL curve relate to MC?

marginal cost decreases as labor increases, but when MPL reaches max point MC reaches min point, as MPL decreases MC increases

What are the reasons for economies of scale?

specialization of labor, managerial specialization, increase use of capital equipment, geometric growth, diminishing factor

How does returns to scale differ from economies of scale?

CRS no changes in long run average cost when output increases

economic scale decreases in long run average cost resulting from increasing in output

What is meant by MES?

the lowest rate of output at which long run average cost are minimized

What is meant by diseconomies of scale?

increase in long run average costs when output increases, average curve slope upward

Formula for profit?

P=Q(P-ATC)

If P>ATC

economic profit

If P=ATC

no economic profit/normal economic profit

If P

economic loss

If AVC

P>AVC minimize losses by production

If P

shutdown

What is meant by MR and MC?

MR is change in total revenue resulting from a one unit change in output

MC is change in total cost due to one unit change in production rate

What should a profit-maximizing firm do if MR>MC?

each additional unit of output adds more to total revenue than to total cost, so the additional unit should be produced

What should a profit-maximizing firm do if MR

each unit produced adds more to total cost than to total revenue, so this unit should not be produced

What should a profit-maximizing firm do if MR=MC?

profit maximization occur

Perfect competition

firms approaching infinity

ease of entry/exit into industry

standardized product

zero market power

What are the ways in which a market structure can be characterized?

# of firms

type of product

degree of market power

ease of entry/exit to/from industry

buzzwords

graphs

Formula for economic profit?

P>ATC

Formula for normal profit?

P=ATC

Formula for loss minimization?

AVC

Formula for shutdown?

P

What determines whether a firm should shut down or continue to operate at a loss?

if P is less than AVC then shutdown

In terms of high-fixed cost or low-fixed cost firms, what types of firms are more likely to shut down?

high

In terms of high-fixed cost or low-fixed cost firms, what types of firms are more likely to operate at a loss?

low

In the short run, a firm must be able to cover which type of cost in order for it to make sense for the firm to operate?

variable

Types of market structures?

monopoly, duopoly, oligopoly, monopolistic competition, perfect competition

Monopoly

one firm

Duopoly

two firms

Oligopoly

few firms

Monopolistic competition

many firms

Perfect competition structure

firms approaching infinity

Price-taker

take the price (perfect competition)

Price-maker

makes the price (monopoly)

How is the demand curve for a firm in perfect competition determined?

market supply

What are the various things that the demand curve for a PC firm equal?

D=AR=MR=P

What are the various misconceptions regarding monopoly firms?

charge highest price possible

guaranteed to make a profit

monopolies have supply curves in which price increases then quantity supplied increases

What is the MR curve for a PC firm?

MR=D, horizontal line

What is the MR curve for a monopoly?

negative slope