Essential Flashcards

Before exam

1
Q

Determinants of
Price Elasticity

A
  1. # of Substitutes
  2. % of income spent
  3. Time period involved
    Time↑ ⇒ ε↑
  4. Sustainability
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2
Q

Explain & Classify
when ε = |-0.3|

A

For every 1% change in Price
there will be a
0.3% difference in
Qty Demanded
in the Opposite Direction
& classified as InElastic (ε<1)

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3
Q

InElastic Demand ↑
% of Tax
Paid by Cx ↑ or ↓?

A

% of Tax Paid by Cx ↑

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4
Q

Gov set price for Monopolist to produce the
Best Allocation of prod from Society’s viewpoint
is called ___

where Price = ___

A

Socially Optimum Price

P = MC =AR
(MC ╳ DD)
Allocative Efficiency
$ paid for last unit = $ of producing the unit
& match social DD

SOMA

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5
Q

Gov set price for Monopolist to earn
Normal Profits only is called ___

where Price = ___

A

Fair-Return Price

P = AC =AR
(AC ╳DD)
Productive Efficiency
unit produced @ lowest possible cost

FRAP

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6
Q

Decision Making with curves of
1. AVC
2. MC
3. AC

A
  1. AVC for shut down/produce
  2. MC for best output
    MC intersects MR
  3. AC for Profit/Loss
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7
Q

4 Types of Economies

A
  1. Co-operative
    Foraging, egalitarian, no hierarchy/leader/army
    (Kibbutz)
  2. Command
    Totalitarian (elite group)
  3. Customary
    Traditional/Religious
    Landowners (royalty/aristocracy/church)
  4. Competitive
    Market
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8
Q

Where is
the Point of
Diminishing Returns

A

Max. MP / Min. MC

Tho Output (TP)
Rate of ↑

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9
Q

Where is
the Point of
Max. Productivity

A

Max. AP / Min. AVC

if repeated, find where
MP=AP

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10
Q

Where is
the Point of
Max. Output
(Max Total Product)

A

MP = 0
(MC = ∞ doesn’t exist)

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11
Q

Where is
Economic Capacity

A

Min. ATC
經濟產能

the output at min. short-term
avg (total) cost curve

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12
Q

3 Situations
Avg Costs ↓

cutting costs

A
  1. $ of Fixed/Var. Inputs↓
    (cost)
  2. Tech↑(⇒ MP↑)
  3. Output ↑@ Excess Capacity
    or Output ↓ Above Economic Capacity

Costs↓⇒ Curves↓

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13
Q

Formula Comparison

Marginal Product MP
vs
Marginal Cost MC

A

MP = ∆TP/∆L

. ΔTVC
MC = ———
. ΔTP

TP: total production

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14
Q

2 Reasons why larger firms produces lower AC than smaller firms

A

Economies of Scale

  1. Technical Economies
    a. adv from labour division
    b. mngt specialization
    c. machine specialization
  2. Pecuniary Economies
    a. lower borrowing cost
    e.g. interest rate

    b. buy/sell in bulk
    c. sell by product
    d. lower mktg & advertise cost
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15
Q

In Monopoly industry,
how to find
Max TR Total Revenue

A

Find where
Marginal Rev MR = 0

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16
Q

In Monopoly industry,
how to find
Max Tπ Total Profit

A

Find OUTPUT where
MR = MC
or
slope of TR = TC
or
TR - TC is greatest

17
Q

In Monopoly industry,
how to find
Break-Even Output

A

AR = AC
TR = TC

18
Q

A Monopolist will
ONLY Produce More
when DD is
Elastic / Inelastic ?

Why?

A

Elastic

Monopolist can sell more only by lowering $
⇒ Elastic DD

19
Q

2 Forms of
Price Discrimination

A

Dicriminations among
1. Units Purchased
- law of dinimishing marginal utility buyers don’t value units equally
- Cx buy additional units for lower $
- not relevant to cost of prod
- e.g. BOGO

2. Buyer Groups
- diff. Cx groups, diff. dd & value, diff. elasticities
- no possibility of resale

20
Q

Lump-Sum Profits Tax
is a fixed cost which
increases Monopolist’s __ Cost
and __ Total Profit
While Output & Price __
& Cx pay __

A

Average (Total) Cost
Total Profit ↓
Output & Price unaffected
Cx pay 0

21
Q

Monopoly Sales Tax
is per unit sales tax
increases Monopolist’s __ Cost
and __ Total Profit
While Output & Price __
& Cx pay __

A

Marginal Cost MC
Total Profit ↓
While Output ↓ & Price ↑
Cx pay partly

22
Q

Gov set price for Monopolist to produce the
Best Allocation of prod from Society’s viewpoint
is called ___

where Price = ___

A

Socially Optimum Price

P = MC =AR
(MC ╳ DD)
Allocative Efficiency
$ paid for last unit = $ of producing the unit
& match social DD

SOMA

23
Q

Gov set price for Monopolist to earn
Normal Profits only
is called ___

where Price = ___

A

Fair-Return Price

P = AC =AR
(AC ╳DD)
Productive Efficiency
unit produced @ lowest possible cost

FRAP

24
Q

Why MR always < Price $
for Monopolist?

A
  1. Monopolist ctrl either $ or Qty
  2. DD curve is downward sloping
    ⇒ ↓ $ to sell more ⇒ ↓ Revenue
  3. Selling additional unit earns
    less revenue than the previous unit
    ⇒ MR < $
25
A Monopolist prod more units if DD is __ & prod no units if DD is ___
When DD is Elastic ⇒ Prod ↑ Inelastic ⇒ Prod x
26
Monopolistic Competition 1. Produce __ / Charges $ __ than Perfect Competition 2. Productive efficiency? 3. Allocative efficiency?
1. Produce - / Charge $ + than Perfect Competition 2. No *prod < min ATC output* *$ > min ATC $* 3. No *$ > MC*
27
A firm should shut down if **Loss from Prod.** > ____ & **Sales Price** < ____
Loss from Prod. > **Total Fixed Costs** & Sales Price < **Avg. Variable Costs**
28
Rival will follow to drop $ BUT NOT follow to raise $ __ DD Curve
**Kinked** DD Crv Elastic Above current $ Inelastic Below current $
29
**Type of Good** when Income Elasticity Coefficient εᵧ > 1 1 > εᵧ > 0 0 > εᵧ
εᵧ > 1 **Normal-Luxury** *Income Elastic* 1 > εᵧ > 0 **Normal-Necessity** *Income InElastic* 0 > εᵧ **Inferior** *Negative Income Elastic*
30
When Cross Elasticity of Demand εAB > 0 & εAB < 0
εAB > 0, good is **Substitute** εAB < 0, good is **Complement**