Economics Exam Review: Elasticity Concepts

This set of flashcards covers key terms and concepts related to elasticity in economics as discussed in the lecture notes.

Price Elasticity of Demand

How much quantity demanded responds to a change in price

Which of the following goods is most likely to have an elastic demand

Airline tickets for vacation travel.

 If demand for a good is inelastic and the seller increases its price, total revenue will:

Increase.

The midpoint formula is preferred for calculating elasticity because it

Avoids bias caused by different bases for percentage changes.

 A positive cross-price elasticity of demand indicates that the two goods are

Substitutes.

Which of the following statements about the elasticity of supply is true

Supply tends to become more elastic as producers have more time to adjust.

The law of diminishing marginal utility states that:

Additional satisfaction from consuming extra units of a good declines beyond some point.

Consumers maximize total utility when

 The marginal utility per dollar is equal across goods.

The demand curve can be derived from the law of diminishing marginal utility because

Lower prices are needed to persuade consumers to buy additional units.

 If the price of a good falls, the substitution effect causes consumers to

Purchase more of the good whose relative price has fallen.

Considering the Utility definition, a budget line shows

The trade-off between two goods given income and prices.

Behavioral economics differs from neoclassical economics because it

Incorporates psychological and social factors into decision-making.

A shopper goes to a store intending to buy one item but ends up buying several more after seeing “limited-time offers” and “only 2 left in stock” tags. Which behavioral concept best explains this shopper’s behavior?

Cognitive bias triggered by emotional (System 1) thinking

According to Prospect Theory, people tend to

Be risk-averse for gains and risk-seeking for losses

The concept of time inconsistency explains why individuals may

Prefer smaller immediate rewards over larger future rewards

A company notices employees are unhappy with a bonus plan that rewards only the top 5% of performers, even though total pay in the company has increased

Fairness and social comparison 

Economic costs differ from accounting costs because they include:

Explicit and implicit costs.

The income a firm forgoes by using its own resources rather than renting them out is called

Opportunity cost

Which of the following best describes the law of diminishing returns?

Adding more variable inputs to a fixed input increases total output at a decreasing rate.

Which of the following costs does not change when output changes?

Fixed cost

Marginal cost (MC) is defined as:

The change in total cost divided by the change in output.

Which statement correctly describes the relationship between MC and ATC?

MC intersects ATC at ATC’s minimum point.

 In the long run, a firm experiences economies of scale when:

Output increases and long-run average costs fall.

A firm that becomes too large and suffers from coordination and management problems is experiencing:

Diseconomies of scale.

The minimum efficient scale (MES) refers to:

The lowest output level that minimizes long-run average costs.

Which of the following is an example of an implicit cost?

Interest that could have been earned on the owner’s invested capital.