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Econ Spring 2020 > Econ Exam 1 > Flashcards

Econ Exam 1 Flashcards

1
Q

Economic Assumptions of Perfectly Competitive Market

A

1) firms are price takers (large #, sell identical products, full info on both sides, low transaction costs, firms can freely enter/exit market)
2) cannot sell above market price
3) perfect mobility of production factors
4) no externalities

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2
Q

Production Function

A

q= f (L, K), usually K is fixed in the short run, lariable labor

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3
Q

Marginal Product of Labor

A

MPL= dq/dL = d [f (K,L)]/ dL “additional output produced by an additional unit of labor”

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4
Q

Average Product of Labor

A

APL = q/L “ratio of output to unit of labor”

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5
Q

Relationship between APL and MPL

A

APL max. when APL= MPL, both rise at first, but when MPL crosses over APL, they both fall, a firm will only operate if MPL is positive

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6
Q

Law of Diminishing Marginal Returns

A

holding all other inputs + tech constant an increase in input will lead to diminishing increase in output

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7
Q

Long Run

A

K and L variable

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8
Q

Isoquant

A

curve of efficient combinations of inputs for fixed amount of q (cardinal not just ordinal)

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9
Q

Properties of Isoquant

A
  • farther from origin= greater level of output
  • cannot cross
  • downward slope
  • thin
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10
Q

Reinstatement Effect

A

technology requires new kinds of labor but labor still has comparative advantage (e.g. cyber security jobs)

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11
Q

Perfect Substitutability Isoquants

A

Isoquants that are straight line (demand direction)

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12
Q

Fixed Proportions Isoquants

A

Right angle isoquants (e.g. Leontief, workers and lawnmowers

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13
Q

Marginal Rate of Technical Substitution (MRTS)

A

“how many unites of K the firm can replace with extra unit of L”, MRTS= change in K/ change in L

MRTS= dK/dL = -MPL/MPK

instantaneous slope of isoquant line

Basically the MRS but the two goods are L and K

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14
Q

Why does MRTS diminish along convex isoquant?

A

the more L a firm employs the fewer K would be needed to replace, if firm employs very little L, you would need a lot of K to replace one unit of L

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15
Q

What measures the curve of the isoquant?

A

Elasticity of Substitution (K and L)

d(K/L)/dMRTS [MRTS/(K/L)]

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16
Q

Types of Elasticity of Substitution (K and L)

A

omega = 1/1-price

Linear: omega = infinity
Leontief: omega approaches 0
Cobb Douglass: omega = 1

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17
Q

Constant Returns to Scale

A

x% increase in input yields x% increase in output

Test: f(2L + 2K) = 2 f(L, K)

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18
Q

Increasing Returns to Scale

A

increase input yields greater increase in output
Test: f(2L + 2K) greater than 2 f(L, K)
Usually happens with specialization

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19
Q

Decreasing Returns to Scale

A

increase input yields less increase in output
Test: f(2L + 2K) less than 2 f(L,K)
Usually happens when organizing/coordinating production is difficult

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20
Q

Explicit Cost

A

direct out-of-pocket (part of opportunity cost)

21
Q

Implicit Cost

A

reflect a foregone opportunity (part of opportunity cost)

22
Q

Opportunity Cost

A

Value of “best alternative”
Total opportunity cost = explicit + implicit
*do not include sunk cost

23
Q

Opportunity cost of capital

A

unclear, if rented it =rent

If $ could have been invested elsewhere, then it’s market rate return on investment

24
Q

Short Run Total Cost Function

A

Total Cost = Vc (q) + F

25
Q

Sunk Cost

A

not included in opportunity cost *need more details

26
Q

Marginal Cost (MC)

A

Mc = dC(q)/dq *derivative of cost function wrt q

“additional cost as firm produces 1 more unit of output”

27
Q

Average Fixed Cost (AFC)

A

F/q

28
Q

Average Variable Cost (AVC)

A

VC/Q

C/q = AVC + AFC

29
Q

Average Cost

A

AC = AVC + AFC

= cost/q

30
Q

Relationship between Marginal and average costs in short run

A

MC = W (1/MPL) since labor is fungible in short run, MC and MPL are inversely related

31
Q

Long Run Costs

A

everything is variable in the long run

32
Q

Isocost

A

Combination of inputs yielding same total cost
C= WL + rK
or K = C/r -(w/r)L

33
Q

Cost Minimizing

A

(MPL/W) = (MPK/R) bang for buck for labor and capital are equivalent

34
Q

Economies of Scale

A

LRAC decreases as Q increases (from increasing returns to scale, can be from learning by doing)

35
Q

No Economies of Scale

A

No change/ constant LRAC as Q increases

36
Q

Diseconomies of Scale

A

LRAC increases as Q increases (usually result of decreasing returns to scale)

37
Q

Economies of Scope

A

Cheaper to produce joint goods than seperately

38
Q

How can you tell if something is in economy of scope?

A

SC= [C(Q1, 0) + C(0, Q2) - C (Q1, Q2)}/[C(Q1, Q2)
If SC greater than 0, join production is cheaper
if SC less than 0, join production more expensive

39
Q

What is the shape of the Production Possibilities Frontier for an economy of scope?

A

Bowed away from origin

40
Q

Profit Maximization Assumptions

A
  • Firms are price takers
  • both buyers and sellers have info about prices
  • transaction costs negligible
  • firms freely enter/exit market (but cannot sell above market price)
  • firms face horizontal demand curve @ market price
41
Q

Profit Function

A

Profit = Rev (q) - C (q)

42
Q

Profit Maximization (solve for q)

A

Profit = Rev (q) - C (q)
To find profit max, take derivative of profit wrt q, set equal to 0, solve for q
Max is when MR(q)= MC(q)
In perfect competition MR=P

43
Q

Short Run Shut-Down Decision

A

Shut down if revenue is less than variable cost
pq < VC
“if market price is less than min. of short run average variable cost”
ignore sunk cost- variable cost is the only that matters in shut down decision in short run

44
Q

Long Run Shut Down decision

A

if expected profits < 0

shut down point = minimum of LRAC curve

45
Q

Long Run Market Supply

A

Assuming identical firms, free entry, and constant input price
LR market supply is horizontal at min. LRAC

*LR market supply will not be flat if 1) entry limited, 2) firms differ, 3) input prices vary w/ output

46
Q

Theory of Second Best

A

if an economy has two (or more) distortions alleviating only one may not improve welfare

47
Q

Producer Surplus

A

Amount above supply below price “amount above marginal cost that suppliers would have supplied at but didn’t have to”

48
Q

Deadweight Loss

A

foregone economic activity brought about by a market distortion; net loss to economic welfare

49
Q

Price Support- Deficiency Payment

A

Government sets P and pays (p-market clearing price),

“gov pays difference between guarantee and market price”

Econ Spring 2020 (1 decks)

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