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Principles of Economics > Class Exercises > Flashcards

Class Exercises Flashcards

1
Q

How do you calculate the slope of a supply curve?

A

The slope of the supply curve is ΔP / ΔQ, where ΔP is the change in price and ΔQ is the change in quantity supplied.

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2
Q

How do you calculate the price elasticity of demand?

A

Price elasticity of demand = (ΔQ / Q) / (ΔP / P), where ΔQ is the change in quantity demanded, Q is the original quantity, ΔP is the change in price, and P is the original price.

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3
Q

How do you calculate income elasticity of demand?

A

Income elasticity of demand = (ΔQ / Q) / (ΔI / I), where ΔQ is the change in quantity demanded, Q is the original quantity, ΔI is the change in income, and I is the original income.

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4
Q

What is the formula for cross-price elasticity of demand?

A

Cross-price elasticity of demand = (ΔQx / Qx) / (ΔPy / Py), where Qx is the quantity of good X, Py is the price of good Y, and the changes refer to changes in demand for X due to changes in the price of Y.

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5
Q

How do you calculate deadweight loss due to a tax?

A

Deadweight loss = 1/2 * tax * (Q_before - Q_after), where Q_before is the quantity traded before the tax and Q_after is the quantity traded after the tax.

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6
Q

What is the Lagrangian function for utility maximization with a budget constraint?

A

L = U(X, Y) + λ(B - Px * X - Py * Y), where U is the utility function, Px and Py are the prices of goods X and Y, and B is the budget.

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7
Q

How do you decompose the substitution and income effects for a price change?

A

Substitution effect: Change in consumption due to relative price changes, holding utility constant. Income effect: Change in consumption due to the change in real purchasing power caused by the price change.

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8
Q

How do you identify a normal good based on income elasticity?

A

A normal good has a positive income elasticity of demand, meaning demand increases as income rises.

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9
Q

How do you calculate the utility-maximizing bundle using the marginal rate of substitution (MRS)?

A

Set MRS = Px / Py, where MRS is the rate at which the consumer is willing to trade one good for another, and Px and Py are the prices of goods X and Y, then solve for the optimal bundle under the budget constraint.

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10
Q

How do you find the optimal level of labor supply in a labor-leisure model?

A

Use the utility function U(C, L) with the budget constraint wL + Y = C, where w is the wage, L is labor, and Y is other income. The optimal labor supply occurs when the marginal rate of substitution (MRS) between leisure and consumption equals the wage rate.

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11
Q

How do you calculate marginal revenue (MR) in perfect competition?

A

MR = ΔTR / ΔQ, where ΔTR is the change in total revenue and ΔQ is the change in quantity sold.

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12
Q

How do you calculate average fixed cost (AFC)?

A

AFC = TFC / Q, where TFC is total fixed cost and Q is the quantity produced.

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13
Q

How do you calculate marginal cost (MC)?

A

MC = ΔTVC / ΔQ, where TVC is total variable cost and ΔQ is the change in output.

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14
Q

How do you find the breakeven point for a firm?

A

The breakeven point occurs when total revenue equals total cost (TR = TC), or equivalently when price equals average total cost (P = ATC).

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15
Q

How do you determine the shutdown point for a firm?

A

The shutdown point occurs when the price is equal to the average variable cost (P = AVC), meaning the firm cannot cover its variable costs and should cease production in the short run.

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16
Q

How do you apply the Lagrangian method for cost minimization?

A

The Lagrangian method involves solving L = f(K, L) + λ(R - wL - rK), where K and L are capital and labour, and R is the total budget, to find the optimal combination of inputs.

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17
Q

How do you calculate the marginal productivity of labor (MPL)?

A

MPL = ΔQ / ΔL, where ΔQ is the change in output and ΔL is the change in labor input.

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18
Q

How do you calculate the marginal productivity of capital (MPK)?

A

MPK = ΔQ / ΔK, where ΔQ is the change in output and ΔK is the change in capital input.

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19
Q

How do you calculate the marginal rate of technical substitution (MRTS)?

A

MRTS = MPL / MPK, which shows the rate at which labor can be substituted for capital while maintaining the same level of output.

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20
Q

How do isoquants and isocost lines help in determining cost minimization?

A

Isoquants represent combinations of inputs (K, L) that produce the same output, while isocost lines represent combinations of inputs that cost the same. The optimal point is where an isoquant is tangent to an isocost line, indicating the lowest cost for a given output level.

21
Q

How do you calculate marginal revenue (MR) in perfect competition?

A

MR = ΔTR / ΔQ, where ΔTR is the change in total revenue and ΔQ is the change in quantity sold.

22
Q

How do you calculate average fixed cost (AFC)?

A

AFC = TFC / Q, where TFC is total fixed cost and Q is the quantity produced.

23
Q

How do you calculate marginal cost (MC)?

A

MC = ΔTVC / ΔQ, where TVC is total variable cost and ΔQ is the change in output.

24
Q

How do you find the breakeven point for a firm?

A

The breakeven point occurs when total revenue equals total cost (TR = TC), or equivalently when price equals average total cost (P = ATC).

25
Q

How do you determine the shutdown point for a firm?

A

The shutdown point occurs when the price is equal to the average variable cost (P = AVC), meaning the firm cannot cover its variable costs and should cease production in the short run.

26
Q

How do you apply the Lagrangian method for cost minimization?

A

The Lagrangian method involves solving L = f(K, L) + λ(R - wL - rK), where K and L are capital and labour, and R is the total budget, to find the optimal combination of inputs.

27
Q

How do you calculate the marginal productivity of labor (MPL)?

A

MPL = ΔQ / ΔL, where ΔQ is the change in output and ΔL is the change in labor input.

28
Q

How do you calculate the marginal productivity of capital (MPK)?

A

MPK = ΔQ / ΔK, where ΔQ is the change in output and ΔK is the change in capital input.

29
Q

How do you calculate the marginal rate of technical substitution (MRTS)?

A

MRTS = MPL / MPK, which shows the rate at which labor can be substituted for capital while maintaining the same level of output.

30
Q

How do isoquants and isocost lines help in determining cost minimization?

A

Isoquants represent combinations of inputs (K, L) that produce the same output, while isocost lines represent combinations of inputs that cost the same. The optimal point is where an isoquant is tangent to an isocost line, indicating the lowest cost for a given output level.

31
Q

How do you calculate profit using the profit function?

A

Profit (π) = Total Revenue (TR) - Total Cost (TC), or π = Pq - C(q), where P is price, q is output, and C(q) is the total cost function.

32
Q

How do you calculate the marginal cost from a total cost function?

A

Marginal cost (MC) is the derivative of the total cost function C(q) with respect to output q, or MC = ΔTC / Δq.

33
Q

How do you derive the firm’s supply curve from the marginal cost function?

A

The supply curve is derived from the portion of the marginal cost (MC) curve that lies above the average variable cost (AVC), as firms supply where P = MC in perfect competition.

34
Q

How do you find the equilibrium price and quantity in a competitive market?

A

Set the market supply function equal to the market demand function (QS = QD) and solve for price (P). Then, substitute P back into either function to find the equilibrium quantity (Q).

35
Q

How do you calculate a firm’s total cost (TC) given a cost function?

A

Use the total cost function formula, such as C(q) = Fixed Costs + Variable Costs, and substitute the output (q) to find the total cost at that production level.

36
Q

How do you calculate the impact of a sales tax on a firm’s marginal cost?

A

The sales tax increases the marginal cost by the amount of the tax, shifting the marginal cost curve upward and leading to higher prices and reduced output.

37
Q

How do you calculate a firm’s output in a perfectly competitive market?

A

In a perfectly competitive market, the firm produces where P = MC. Set the market price equal to the firm’s marginal cost function and solve for q (output).

38
Q

How do you determine a firm’s profit-maximizing output level?

A

A firm’s profit-maximizing output level occurs where marginal revenue (MR) equals marginal cost (MC). In perfect competition, MR = P, so the firm sets output where P = MC.

39
Q

How do you calculate equilibrium quantity using the demand and supply functions?

A

Set the market demand function equal to the market supply function and solve for the equilibrium quantity Q by isolating Q in the equation.

40
Q

How does industry entry or exit affect long-run equilibrium?

A

In the long run, firms enter if there are economic profits, driving prices down, or exit if there are losses, driving prices up, until firms earn zero economic profit and P = MC = ATC.

41
Q

Oligopolistic pricing strategy most likely results in a demand curve that is:
(a) Kinked
(b) Vertical
(c) Horizontal

A

(a) Kinked

42
Q

Collusion is less likely in a market when:
(a) The product is homogeneous
(b) Companies have similar market shares
(c) The cost structures of companies are similar

A

(b) Companies have similar market shares

43
Q

. Over time, the market share of the dominant company in an oligopolistic market will
most likely:
(a) Increase
(b) Decrease
(c) Remain the same

A

(b) Decrease

44
Q

What are the characteristics of a monopolistically competitive market?
What happens to the equilibrium price and quantity in such a market if one firm introduces a new, improved product?

A

Characteristics of Monopolistic Competition:
Many firms
Differentiated products
Free entry and exit
Some control over price
Effect of a New, Improved Product:

Equilibrium price: Increases for the improved product

Equilibrium quantity: Increases for the firm with the new product

45
Q

Why is the firm’s demand curve flatter than the total market demand curve in monopolistic competition? Suppose a monopolistically competitive firm is making a profit in
the short run. What will happen to its demand curve in the long run?

A

Flatter Firm Demand Curve:
Firm demand curve is flatter because of close substitutes; consumers can easily switch to competitors.

Long-Run Effect on Demand Curve:
New firms enter, increasing competition.
Demand curve shifts left and becomes more elastic, reducing profits to zero in the long run.

46
Q

Cournot Model Definition:

A

Oligopoly model where firms decide quantities simultaneously, assuming competitors’ output is fixed. Each firm maximizes profit based on this assumption.

47
Q

Stackelberg Model Definition:

A

Oligopoly model where one firm (leader) sets its output first, and the other firm (follower) chooses its output based on the leader’s decision.

48
Q

Bertrand Model Definition:

A

Oligopoly model where firms compete by setting prices simultaneously, assuming the competitor’s price is fixed. Leads to a price equal to marginal cost in equilibrium.

Principles of Economics (7 decks)

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