Microeconomics Exam 2

Formula for Price Elasticity of Demand

% change in quantity / % change in price

what makes a good elastic?

greater than 1, causes a big change in quantity, price sensitive

what makes a good inelastic?

less than 1, causes a small change in quantity, not price sensitive

what makes a good unit elastic?

equal to 1, no change

Formula for Total Revenue

Price x Quantity sold

Formula for Cross Price Elasticity

% change of Quantity A / % change in Price B

Substitutes have a (+/-) cross price elasticity

positive

Complements have a (+/-) cross price elasticity

negative

Normal goods have a (+/-) elasticity

positie

Inferior goods have a (+/-) elasticity

negative

Private cost

cost to producer

Social cost

cost to society

Positive externality

unpaid benefit

Negative externality

cost imposed on third party

Is a positive externality underproduced or overproduced?

underproduced

Is a negative externality underproduced or overproduced?

overproduced

Rival good

one person using it, DOES impact another using it

Nonrival good

one person using it DOES NOT impact another using it

Nonexcludable good

free

Excludable good

paid

Public Good

non rival, non excludable

Private Good

rival, excludable

Common Resource

rival, nonexcludable

Club Good

nonrival, and excludable

Tragedy of the Commons

overuse of shared resources

Coase Theorem

low transaction costs, mutual agreement, clear property rights, and whoever values it most gets it.

With negative externalities, when quantity decreases, what happens to the price?

It increases

With positive externalities, when quantity is increased, what happens to price?

It increases

Total Utility

Total satisfaction

Marginal Utility

additional satisfaction

Law of Diminishing Marginal Utility

each additional unit gives less satisfaction

Utility Maximization Rule

MUa/Pa = MUb/Pb

What does the budget line represent?

what you can afford

What do indifference curves show?

combinations of equal happiness

What is a consumption bundle?

one combination of goods

Explicit costs

actual money; rent & wages

Implicit costs

opportunity costs

Accounting profit

Revenue - explicit costs

Economic profits

Revenue − (Explicit + Implicit)

Marginal Product (MP)

change in output

Average Product (AP)

output per worker

Law of Diminishing Returns

adding more workers leads to less extra output

Fixed costs

doesn’t change (rent)

Variable costs

changes with output

Total costs

fixed cost + variable cost

Avg Fixed Cost

Fixed cost / Quantity

Avg Variable Cost

Variable cost / Quantity

Avg Total Cost

Total Cost / Quantity

Marginal Cost

cost of producing one more unit

In Economies of scale when LRATC is decreasing, what is it called?

economies of scale

When LRATC is decreasing, should quantity increase or decrease?

Increase

When LRATC is increasing, should quantity increase or decrease?

decrease

When LRATC is constant, should quantity increase or decrease?

neither, leave it alone!

What are the assumptions of Decision Making?

1. Rational behavior

2. Ranked preferences

3. Limit Income and scarcity

4. Know prices

What are the common mistakes in Decision Making?

1. Opportunity cost is incorrect or forgotten

2. Unequally valuing money

3. overconfidence

4. unrealistic about future behaviors

5. Loss Aversion

6. Focused on status quo