microeconomics 2

how do you calculate marginal utility

you subtract the total utility in the first column before from the total utility in the column after EX: 190 - 100 = 90

concept of diminishing marginal utility

total utility increases while marginal utility decreases

Goods where demand declines as income rises

inferior goods

An inferior good occurs when people trim back on a good as income rises, because

hey can now afford the more expensive choices that they prefer

example of an inferior good

a higher-income household might eat fewer hamburgers or be less likely to buy a used car, and instead eat more steak and buy a new car.

The substitution effect occurs when

a price changes and consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price

The income effect is that a higher price means, in effect,

the buying power of income has been reduced (even though actual income has not changed), which leads to buying less of the good

profit =

total revenue - total cost

total revenue =

price x quantity

Explicit costs

out-of-pocket costs, that is, actual payments

examples of explicit costs

Wages that a firm pays its employees or rent that a firm pays for its office

The total amount of money a firm receives from selling its products before it must pay any costs is known as ________.

total revenue

accounting profit =

total revenue - total explicit costs

economic profit =

total revenue - (total explicit costs + total implicit cost)

implicit cost =

interest x total explicit cost

economic profit is less than

accounting profit

difference between economic profit and accounting profit

economic profit treats implicit costs as costs but accounting profit does not

The price a firm charges for a good, the output produced, and labor employed are all directly dependent upon __________.

cost conditions, product conditions

Fixed inputs

those that can’t easily be increased or decreased in a short period of time EX buildings

Fixed inputs define the firm’s

maximum output capacity

Variable inputs

those that can easily be increased or decreased in a short period of time EX ingredients

explains why adding more workers will eventually decrease or have no effect on output.

the law of diminishing marginal product

_________ are what the firm pays for the use of the factors of production.

factor payments

average cost =

total quantity / output

A ______ cost is the cost of inputs that increase or decrease with production.

variable

Profit margin is synonymous with the term _______ and tells whether or not total profit will be positive.

average profit

Factor payments are what the firm pays for

the use of the factors of production

A firm has to choose between two technologies; both produce same output with one being labor intensive and other being capital intensive. The firm will use labor intensive technology when _________________.

wages are less than interest rate

Economies of scale refers to the situation where

as the quantity of output goes up, the cost per unit goes down

In which of the following scenarios will economies of scale occur?

when the LRATC decreases as quantity increases

When do constant returns to scale occur?

when the LRATC remains constant as quantity increases

Given that there are significant economies of scale involved in making flat screen television sets, the cost of manufacturing a flat screen television set most likely will ____________________.

fall as the industry matures

When the long-run average cost (LRAC) _________ as output increases, a firm is experiencing ________ of scale.

increases; diseconomies

Which of the following accurately explains why firms in perfectly competitive markets are price takers?

the pressure of competition forces all firms to accept the prevailing equilibrium price in the market.

Total revenue for a perfectly competitive firm is

a straight line sloping up.

The marginal revenue curve shows the

additional revenue gained from selling one more unit.

the formula for marginal revenue is

change in total revenue / change in quantity

total revenue =

price x quantity

a perfectly competitive firm is a

price taker

Price > ATC

Firm earns an economic profit

Price = ATC

Firm earns zero economic profit

Price < ATC

firm earns a loss

The intersection of the average variable cost curve and the marginal cost curve shows

the price where the firm would lack enough revenue to cover its variable costs, it is called the shutdown point

A firms supply curve is equal to _________________ above the minimum point on the ________________curve.

marginal cost; average variable cost

True or false?
A decrease in supply in the short-run will lead to decreased prices in the long-run.

false

constant cost industry

as demand increases, the cost of production for firms stays the same

increasing cost industry

as demand increases, the cost of production for firms increases

decreasing cost industry

as demand increases the costs of production for the firms decreases

as demand increases the costs of production for the firms decreases

the supply curve shifts to the right,

in a ______ industry, an increase in market demand and price will result in a rightward shift in supply, new firms will enter, and supply will stop at the point where the new long-run equilibrium intersects at the previous market price.

constant cost

Productive efficiency means

producing without waste, so that the choice is on the production possibility frontier

Allocative efficiency means that among the points on the production possibility frontier

the chosen point is socially preferred—at least in a particular and specific sense

What term is best described as the idea that the particular mix of goods a society produces represents the combination that society most desires?

allocative efficiency

Which of the following are other terms for the break-even point?

long-run equilibrium, zero economic profit

Which of the following is true about firms exiting a perfectly competitive market?

Exiting the market occurs in response to a sustained pattern of losses.

Productive efficiency occurs when _______.

• a perfectly competitive market is in long-run equilibrium

• an economy is operating on its production possibilities curve

• price equals minimum average total cost

monopoly is a market with

no competition at all, and firms have a great deal of market power

Barriers to entry are the

legal, technological, or market forces that discourage or prevent potential competitors from entering a market

what are the 2 types of monopolies

natural and legal

natural monopolies

the barriers to entry are something other than legal prohibition.

legal monopolies

laws prohibit (or severely limit) competition.

A natural monopoly occurs when

the quantity demanded is less than the minimum quantity it takes to be at the bottom of the long-run average cost curve

the combination of patents, trademarks, copyrights, and trade secret law

is called intellectual property

predatory pricing

a firm uses the threat of sharp price cuts to discourage competition

What do economists say is problematic with the allocative efficiency of a monopoly?

Consumers will suffer from a monopoly because it will sell a lower quantity in the market at a higher price compared to a firm in a perfectly competitive market.

A monopolist's perceived demand curve is the same as the market demand curve. The price the monopolist firm charges is constrained by what?

market demand

Which of the following is a true statement about the relationship between perceived demand and market demand?

In a monopoly, perceived demand equals market demand.

A decrease in supply in the short-run will lead to decreased prices in the long-run.

false

In a(n) ______ industry, an increase in market demand and price will result in a rightward shift in supply, new firms will enter, and supply will stop at the point where the new long-run equilibrium intersects at the previous market price.

constant cost

What term is best described as the idea that the particular mix of goods a society produces represents the combination that society most desires?

allocative efficiency

Which of the following are other terms for the break-even point?

long-run equilibrium; zero economic profit

Which of the following is true about firms exiting a perfectly competitive market?

Exiting the market occurs in response to a sustained pattern of losses.

Productive efficiency occurs when _______.

a perfectly competitive market is in long-run equilibrium; an economy is operating on its production possibilities curve; price equals minimum average total cost

Barriers to entry occur in a monopoly market because ________.

legal, technological, or market forces discourage or prevent potential competitors from entering the market

What do economists say is problematic with the allocative efficiency of a monopoly?

Consumers will suffer from a monopoly because it will sell a lower quantity in the market at a higher price compared to a firm in a perfectly competitive market.

Looking at the table, explain why HealthPil's profit-maximizing price is $800. (HealthPill is a monopoly.)

Marginal revenue is equal to marginal cost.

monopolist's perceived demand curve is the same as the market demand curve. The price the monopolist firm charges is constrained by what?

market demand

Which of the following statements is false?

Allocatively efficient firms are typically monopolists, whereas perfectly competitive firms are allocatively inefficient.

Which of the following is a true statement about the relationship between perceived demand and market demand?

In a monopoly, perceived demand equals market demand.