Chapter 2

Question 1

Cost

Answer 1

inverse of benefit or value; listed in terms of dollars

Question 2

Cost doesn’t matter…

Answer 2

feelings about price do

Question 3

Cost always means

Answer 3

opportunity cost

Question 4

opportunity cost is

Answer 4

what you give up when you incur cost

Question 5

cost is the value of…

Answer 5

next best alternative (NBA), which is subjective

Question 6

concept of choice implies

Answer 6

cost

Question 7

opportunity cost is about

Answer 7

getting most out of resources

Question 8

Accounting profit

Answer 8

what is on the books

Question 9

economic profit

Answer 9

EP = (Accounting Profit) - (Opportunity cost)

Question 10

A negative economic profit means

Answer 10

destroying value to society scarce resources

Question 11

A positive economic profit means

Answer 11

adding value to society scarce resources

Question 12

Profits signal

Answer 12

economic profit creation

Question 13

Diminishing Marginal Return is about

Answer 13

How you allocate resources

Question 14

Law of DMR

Answer 14

As more units of a variable resource are combined with a fixed number of another resource, then using additional units of variable resource will eventually increase output at decreasing rate.

Question 15

Diminishing returns

Answer 15

= point where additional unit means marginal product is at peak, and beyond that a point at which Marginal product is zero

Question 16

If marginal cost is lower than Average cost….

Answer 16

AC must fall

Question 17

DMR means that marginal costs will begin to rise, eventually

Answer 17

AC will

Question 18

Two kinds of cost

Answer 18

Fixed, Variable

Question 19

Costs differ by

Answer 19

time horizon

Question 20

Sunk cost fallacy

Answer 20

costs, once incurred, and cannot be recouped, should not affect future decisions

Question 21

Formula for Average Cost

Answer 21

AC = (Total Cost/Quantity) = (FC/Q) + (VC/Q)

Question 22

AC curve will always be

Answer 22

U shaped; Fixed costs overwhelm variable costs, eventually variable costs overwhelm fixed costs

Question 23

Economies of scale

Answer 23

• you’re gaining more by producing more

- As output increases, AC will decline as fixed costs can be spread over more units

Question 24

Diseconomies of scale

Answer 24

• AC will not slope downward over entire range of output

- As some point AC will begin o rise because MC will be upwards sloping and DMR will dominate

Question 25

Average cost does not

Answer 25

tell a firm how much to produce to maximize profit

Question 26

if a firm is maximizing profit, its producing so that

Answer 26

MC = MR

Question 27

If MC does not equal MR

Answer 27

you’re loosing money at the margin

Question 28

MC > MR

Answer 28

Marginal unit costs more to make than sell for, scale back production

Question 29

MR > MC

Answer 29

Not producing enough, increasing production

Question 30

MC will always intersect average cost

Answer 30

on graph at lowest point

Question 31

Supply =

Answer 31

MC

Question 32

Supply curves tell you

Answer 32

for any given quantity how much the firm needs to price per unit of output for it to be firms worthwhile to bring to market

Question 33

Natural monopoly

Answer 33

when one firm dominates industry; if they tried to charge excessive prices, new startups may rise

Question 34

Demand =

Answer 34

(MB) Marginal benefit, in dollars, due to DMU [The more of an identical item consumed, less additional satisfaction = less money willing to pay for it

Question 35

Equillibrium

Answer 35

no one has any incentive to change behavior

Question 36

When S = D

Answer 36

quantity demanded just equals the number of items firm is willing to bring to market