ECON 2010, Midterm #2 (Fall 2026)

Utility

Satisfaction gained from an activity

Choice equals…

Utility + Price. Used to match QS to QD.

Total Utility

Total satisfaction gained from consumption

Marginal Utility

Additional unit of satisfaction gained from each additional unit of a good consumed

The Total Utility graph is…

A /^ sloping curve — up, and then down a little.

The Marginal Utility graph is…

A straight / line.

Principle of Diminishing MU

The MU of each additional unit of a good consumed decreases as consumption increases

Rational-Choice Analysis

People will make utility-maximizing choices (people prefer to have more than to have less)

Maximal Utility equals…

MUx/Px = MUy/Py

When MUx/Px > MUy/Py …

Consume more of good X

Income Effect

Reduction in QD, because an increase in price makes people poorer

Substitution Effect

Reduction in QD, because the relative price (compared to other goods) has risen

Effects that are the basis for the Law of Demand

Income Effect, Substitution Effect

Opportunity Cost

MU per dollar given up from consuming the next-best alternative for a given good

Bounded Rationality

Rules of thumb/operating on autopilot — often used over the principles of rational-choice when consumers make decisions.

Conspicuous Consumption

Consuming with the primary motive of showing off to others

Assumptions of Rational-Choice

Decisions are costless, tastes are given, individuals maximize utility

Basis for the Law of Supply

Assumptions for rational-choice analysis — decisions are costless, tastes are given, individuals maximize utility.

Status Quo Bias

Our actions are influenced by our current situations

Market systems allocate goods to…

Those with the means to pay — not necessarily those who need them the most (total social utility not maximized)

Requirements for maximizing MU

All $ had must be spent, MUx/Px = MUy/Py

Progressive Tax

As income increases, taxes as a percentage of income increase

Progressive Taxation is rational under…

The Law of Diminishing MU. The MU of a person’s additional income decreases as their total income increases.

Assumptions required for progressive taxation

Income affects utility (more = better), everyone has the same utility function for income, the government can transfer $ at a low cost, the LDMU applies to income, total societal income is fixed (i.e., people don’t work less when their taxes increase)

Total profit equals…

Total Revenue (TR) - Total Costs (TC)

Accounting Costs

Include only explicit financial costs of a good

Economic Costs

Include the implicit and explicit opportunity costs of a good (e.g., time spent, self-owned resources, etc.)

Sunk Costs

Costs already spent/that are unrecoverable (e.g., tuition for a semester)

Variable Costs

Costs that change depending on the level of production

Production

Transformation of factors into goods and services

Firm

Institution that transforms factors of production into goods and services

Firms…

Organize factors of production, produce goods/services, sell produced goods to individuals/businesses/the government

Total Costs

Explicit payments to the factors of production + opportunity costs of the factors provided

Total Revenue

The amount a firm receives for selling its product/service + any increase in the value of the assets owned by the firm

Economic profit equals…

(Explicit + implicit revenue) - (explicit + implicit costs)

Long-Run Decisions

A firm chooses between all possible production techniques (size of plant, machine type/quantity, etc.)

Short-Run Decisions

A firm is constrained in regard to what production decisions it can make

In the long run…

All inputs are variable

In the short run…

some inputs are fixed

Marginal Product

The additional output gained from an additional worker

Average Product

The average output per worker

Production Function

The relationship between the inputs/factors of production and their outputs (i.e., the maximum amount of outputs that can be derived from a given number of inputs)

The Law of Diminishing Marginal Productivity (Flowerpot Law)

As more and more of a variable input is added to an existing fixed input, the additional output gained from each additional input will eventually fall

Fixed Costs

Already spent and cannot be changed in the period of time under consideration

Variable Costs

Costs that change as output changes — i.e., worker salaries

Average Total Cost (ATC) equals…

Total Cost ÷ Quantity produced, AFC + AVC

Average Fixed Cost (AFC) equals…

Fixed Costs (FC) ÷ Quantity produced

Average Variable Cost (AVC) equals…

Variable Costs (VC) ÷ Quantity produced

Marginal Cost (MC)

Increase/decrease in total cost from increasing/decreasing the level of output by one unit

The Marginal Cost Curve…

Goes through the minimum point of the ATC curve and AVC curve — each of these curves is U-shaped.

The Average Fixed Cost (AFC) Curve…

Slopes down continuously

When marginal cost exceeds average cost…

Average cost must be rising

When marginal cost is less than average cost…

Average cost must be falling

Why do MC Curves always intersect the AC curve at its minimum?

Because when marginal cost is less than average cost, average cost must be falling, and when marginal cost exceeds average cost, then average cost must be rising.

When MC equals the minimum point of AVC, what is true about the average productivity and marginal productivity of workers?

Marginal productivity and average productivity are equal — meaning that average productivity is at its peak.

When productivity curves are falling, why do their corresponding cost curves rise?

Because as productivity falls, costs per unit increase — the same inputs generate fewer units.

If MC > ATC, then ATC is…

Rising

If MC = ATC, then ATC is…

At its lowest point

If MC < ATC, then ATC is…

Falling

If MC > AVC, then AVC is…

Rising

If MC = AVC, then AVC is…

At its lowest point

If MC <AVC, then AVC is…

Falling

Why does the MC curve intersect the AVC curve at its minimum point?

Because the AVC will continue to fall as long as MC is below it.

Sole Proprietorship

Firm owned by a single person

Partnership

Firm owned by a small group of people

Coorperation

Firm owned by many people/shareholders — has the advantage of limited liability

Limited Liability

Legal principle that separates a business entity from its owners, capping an owner's financial loss to the amount they invested or promised to the company

Public Firms

Have no single owner, but rather, many owners — companies you can purchase stock

in. Follow strict regulations to report financial information.

Private Firms

Ownership is held within a small group of people or a family — corporations can also be this type of firm (e.g., Mars)

How do firms generate money for their owners?

Owners are listed as residual income claimants, and after all bills are paid, the profit is redistributed among the claimants

Legally, firms have…

Rights and obligations — e.g., they can be sued

Scopes of boundaries for a firm when making decisions

Horizontal, Vertical, Geographical

Horizontal Scope

The breadth of products and services a firm offers — e.g., how many products does Apple choose to produce

Vertical Scope

Make vs. Buy decisions — e.g., should Apple produce its own USB ports, touchscreens, etc? Or should they purchase them from someone else?

Geographical Scope

Where a firm chooses to operate — e.g., should Apple open stores in Latin America, or remain a US-exclusive company?

Four Types of Inputs

Land, Labor, Capital, Entrepreneurship

Economists look at firms as…

Black boxes — an input enters the box, is transformed, and exits as a final product/output good to be sold

Land

ALL natural resources (e.g., trees, land, water, minerals, portions of the electromagnetic spectrum, etc.)

Labor

ALL human inputs provided by the people working for a firm. (e.g., engineers, accountants, janitors, salespeople, etc.)

Human capital (education) can…

Make labor more productive

Capital (K)

All of the physical equipment and technology used by a firm (e.g., machines,
buildings, etc.) — also includes goods used in the production of other goods (e.g., computers are used to code software, trucks are used to transport goods) — does NOT include financial capital (stocks, bonds, cash, etc.)

Entrepreneurship

The exploitation of market opportunities by individuals based solely on personal visions that others either don’t see or can’t bear the risk of acting on — “a risk taker, resource manager, innovator — both creator and destroyer.”

How do you decide which combination of inputs to choose?

By selecting the one that yields the cheapest cost of production — ethical concerns are normative statements.

Technical Efficiency

A production process uses as few inputs as possible to produce a given level of output

Economical Efficiency

The method that produces a given level of output at the lowest possible cost

If a process is economically efficient, is it also technically efficient?

Yes — Since economic efficiency requires minimizing total cost, a firm cannot achieve it if it isn’t technically efficient as well.

If a process is technically efficient, is it also economically efficient?

Not necessarily — a process is technically efficient as long as it does not waste physical resources, but to be economically efficient, a process must also be the least expensive option among all the technically efficient possibilities

Why does the Law of Diminishing Marginal Productivity not apply in the long run?

Because in the long run, all inputs are variable

The most important determinants of economical efficiency in the long run are…

Economies and diseconomies of scale

Production exhibits economies of scale when…

The LRAC decreases as total output increases

Indivisible Setup Costs

The initial, fixed cost of an essential input (e.g., a large furnace) that cannot be scaled down into smaller, fractional sizes and requires a high minimum volume of output before it becomes economically practical to use.

Why are larger production runs often cheaper per unit than smaller production runs?

Because of economies of scale — when a factory produces a higher volume of goods, the average cost to make each individual item decreases.

The only thing that can influence the shape of the LRAC

Economies of scale

Why can only economies of scale influence the shape of the LRAC?

Because in the long run, all inputs are variable.

What is the minimum efficient level of production?

The amount of production that spreads out setup costs sufficiently for a firm to be profitable — the market is large enough for firms to take advantage of economies of scale.

In a perfectly competitive market, the minimum efficient level of production for a firm thinking of entering the market is…

Where the ATC is at a minimum

Production exhibits diseconomies of scale when…

Long-run average total costs increase as output increases — or, when output has decreasing returns to scale

Diseconomies of scale usually occur when…

Firms get large

Diminishing marginal productivity does not cause…

Diseconomies of scale

Diminishing Marginal Productivity

The decline in productivity caused by increasing units of a variable input being added to a fixed input