Chapter 5-8

Question 1

What is marginal utility ?

Answer 1

the amount of satisfaction a consumer gets from having one more good or service. .

Question 2

What is the law of diminishing marginal utility?

Answer 2

additional utility decreases with every unit added

Question 2

What is the price of elasticity of demand?

Answer 2

change in quantity demanded of a good or service divided change in price.

Question 3

What is the price of elasticity?

Answer 3

percent change of quantity demanded/supplied divided by change in price

Question 4

What is the price elasticity of supply?

Answer 4

change in quantity supplied divided by change in price

Question 5

What does “elastic” demand or supply mean?

Answer 5

It means there was a high responsiveness to price change

Question 6

What does “inelastic” demand or supply mean?

Answer 6

It means there was a low responsiveness to price change.

Question 7

What is tax incidence?

Answer 7

how the burden of a tax is divided between consumers and producers

Question 8

What happens to tax when demand is elastic?

Answer 8

The buyer pays the tax

Question 9

What happens to tax when demand is inelastic?

Answer 9

The firm pays the tax

Question 10

What happens to elasticity in the long run?

Answer 10

In the long run elasticity becomes greater because the consumer have more options in the long run than the short run

Question 11

What is utility?

Answer 11

satisfaction

Question 12

What are the two approaches of maximizing utility

Answer 12

• Calculate marginal utility per dollar
• Show it graphically

Question 13

What is the substitution effect?

Answer 13

it occurs when the price of good changes and people choose the lower price good over the higher price good

Question 14

What is the income effect?

Answer 14

A higher price causes a reduction in buying power leading to a person buying less of that good.

Question 15

How does a price increase of a good affect the budget constraint?

Answer 15

It causes the line to move inward

Question 16

What is the Labor-Leisure Budget Constraint?

Answer 16

shows the relationship between working and leisure. Depending on the utility maximizing choice a person may choose to work more or take more time off.

Question 17

What causes the backward bending labor supply curve?

Answer 17

a rise in wages causes less hours of labor

Question 18

What are explicit costs?

Answer 18

out of pocket costs

Question 19

What are implicit costs?

Answer 19

the cost of resources already owned by the firm that could have been put to some other use

Question 20

What is accounting profit?

Answer 20

total revenue minus explicit costs

Question 21

What is economic profit?

Answer 21

total revenue minus total costs

Question 22

What are the four different market structures?

Answer 22

• Perfect competition
• Monopolistic competition
• Oligopoly
• Monopoly

Question 23

What are factor payments?

Answer 23

What the firm pays for the use of factors in production (e.g. raw materials, rent, wages)

Question 24

What are average costs?

Answer 24

total costs divided by quantity of output

Question 25

What are variable costs?

Answer 25

cost of variable inputs (e.g. labor)

Question 26

What are fixed costs?

Answer 26

cost of fixed inputs

Question 27

What is average variable costs?

Answer 27

variable costs divided by quantity of output

Question 28

What are marginal costs?

Answer 28

additional costs of producing one more unit of output

Question 29

What are the 4 assumptions of perfect competition?

Answer 29

• Firms produce a identical product
• There are many buyers and many sellers
• Sellers and buyers have information to make rational decisions
• Firms can enter and leave at anytime

Question 30

What is a price taker?

Answer 30

A perfectly competitive firm. The pressure of competing firms forces them to accept the equilibrium price.

Question 31

What are the two ways of maximizing profit?

Answer 31

• marginal revenue=marginal costs
• total revenue > total costs

Question 32

How can you tell if the a firm makes profit?

Answer 32

If the market price if higher than the firms cost of production

Question 33

How can you tell if the firm is not making profit?

Answer 33

If the market price is lower than the firms cost of production

Question 34

If a firm doesn’t make money does it shutdown immediately or stay in the market?

Answer 34

If a firm that is able to pay it’s fixed costs even though they are not making profit will continue to limp along.

Question 35

In the long run how to firms enter and exit the market?

Answer 35

Firms will enter the market and expand so long as they are profitable. A firm will exit when in the long run it has greatly reduced production to the point where the losses are too great to continue.