401 Midterm Flashcards
What is cross-price elasticity of demand?
Measures how the quantity demanded of one good responds to a change in the price of another good, indicating whether goods are substitutes or complements.
What is marginal revenue?
The additional revenue generated from selling one more unit of a good or service.
What is the marginal revenue product of labor?
The additional revenue generated from employing one more unit of labor, calculated as the marginal product of labor multiplied by the marginal revenue.
What is the marginal product of labor?
The additional output produced by employing one more unit of labor.
What kind of elasticity is the following: Ep = 0
Perfectly inelastic
What kind of elasticity is the following: 0 > Ep > -1
Inelastic (e.g., gasoline)
What kind of elasticity is the following: Ep < -1
Elastic (e.g., recreation)
What kind of elasticity is the following: Ep = -infinity
Perfectly elastic
What kind of elasticity is the following: Ep > 0
Veblen Good (luxuries that show status and are demanded due to the price) or a Giffen Good (where inferior quality means demand rises with an increase in price for other goods)
What is the difference between a Veblen good and a Giffen good?
Veblens are luxury goods, Giffens are inferior.
What kind of good has Ey > 0?
A normal good
What kind of good has Ey < 0?
Inferior goods
What kind of good has 1 > Ey > 0?
Necessities
What kind of good has Ey > 1?
Luxury goods
What kind of good has Epo > 0? (CTK)
Substitute goods
What kind of good has Epo < 0?
Complements
If demand is inelastic, what should firms do to their prices?
Firms should always raise their prices.
Markup equation and what it means
% markup = P - MC / P = -1/Ep The MC side calculates the current markup, while the Ep side calculates the optimal markup. Note: only use the markup equation when demand is elastic.
If the demand for a good is price-elastic, a cut in price will what?
What is the equation that backs this up (MR related to Ep)
Lead to an increase in quantity demanded and an increase in the firm’s revenue, this is because when a good is price elastic MR is greater than 0
MR = P(1+1/Ep)
A good that has highly elastic demand is most likely to
Have a large number of substitutes
A firm will maximize profits and revenues at the same price when
The marginal cost is negligible or zero
