EC270 Final Exam Review

What is the Market Demand curve?

A horizontal sum of the individual consumer's demand curves

Standard demand function

Quantity of good j as a function of price and incomes; xj(p1, p2, M)

Inverse demand function

Price of good j as a function of quantity; Pj(Xj)

What are the two ways aggregate demand can be viewed?

Standard demand function and inverse demand function

What does the price of xj measure?

The marginal rate of substitution (MRS) between xj and all other goods, hence why pj represents the marginal willingness to pay WTP for an extra unit of xj

What does Pj measure?

The marginal willingness to pay for an extra unit of xj

What does elasticity mean?

The sensitivity of one variable with respect to another and is measured as a ratio of percentages

What is arc-elasticity?

An "average" of own-price elasticity of demand over an interval of values for p; usually computed using 2 points

If the increase in price causes a little decrease in quantity per price, what happens to the seller's revenues?

Seller's revenues will rise

If the increase in price causes a large decrease in quantity per price, what happens to the seller's revenues?

Seller's revenue will fall

If the increase in price causes a proportional change in quantity per price, what happens to the seller's revenue?

The seller's revenue remains unchanged

What is p(q)?

The seller's inverse demand function where the price at which the seller can sell q units

What is the marginal revenue?

The rate at which revenue changes with the number of units sold

When price of elasticity is measured in a different unit and a question requires you to convert the units, what would the difference in the output be?

There would be no change since price elasticity of demand doesn't have units since the measurement is scaled

What is cost function?

Must be different than zero int the short run (due to fixed cost) and as a function of output, it must be increasing. Also describes the minimum cost of producing any level of output given the input prices.

What is the average cost?

Measures the cost per unit of output.

What is the average fixed cost?

Fixed cost divided by quantity; As a function of output, this must be decreasing

What is the variable cost?

As a function of output, this equals zero when output equals zero

What is fixed cost?

Cost that must be paid regardless of the level of output the firm produces, in which the number is constant