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ECON 600 > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

What is economic profit?

A

The difference between total revenue and total opportunity cost.

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2
Q

What is the importance of incentives?

A

All other things held constant, people are more likely to do something that has an incentive attached to it. Incentives affect how resources are used and how hard workers work.

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3
Q

What is marginal benefit?

A

The additional benefit that arise by using an additional unit of the item.

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4
Q

What is marginal cost?

A

The additional cost incurred by using an additional unit of the item.

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5
Q

What is the formula for the Present Value of a lump-sum future amount?

A

PV = FV/(1+i)^n

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6
Q

What is the formula for the Present value of a stream of future amounts?

A

PV = (FV/(1+i)^1) + (FV2/(1+i)^2) + … + FV/(1+i)^n

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7
Q

What is the formula for Present value of a perpetuity?

A

PV = [CF/(1+i)] + [CF/(1+i)^2] + [CF/(1+i)^3] + …
OR
PV = CF/i

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8
Q

What is a normal good?

A

A good for which an increase (decrease) in income leads to an increase (decrease) in the demand for that good.

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9
Q

What is an inferior good?

A

A good for which an increase (decrease) in income leads to a decrease (increase) in the demand for that good.

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10
Q

What is a substitute good?

A

Goods for which an increase (decrease) in the price of one good leads to an increase (decrease) in the demand for the other good.

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11
Q

What is a complement good?

A

Goods for which an increase (decrease in the price of one good leads to a decrease (increase) in the demand for the other good.

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12
Q

What is the formula for the inverse demand function?

A

Px = (Qdx - A)/alpha x

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13
Q

What is the formula for the inverse supply function?

A

Px = (Qsx - beta)/beta x

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14
Q

In the demand function, what is the test for substitute/complement?

A

alpha y >0 - substitute

alpha y <0 - complement

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15
Q

In the demand function, what is the test for normal/inferior good?

A

alpha m > 0 normal good

alpha m < 0 inferior good

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16
Q

In the demand function, what does alpha x indicate?

A

If alpha x is negative, then an increase in price will decrease quantity demanded.

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17
Q

What is consumer surplus?

A

The value consumers get from a good but don’t have to pay for it.

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18
Q

What is producer surplus?

A

The amount of producers receive in excess of the amount necessary to induce them to produce the good.

19
Q

What is a price ceiling?

A

The maximum legal price that can be charged in a market.

20
Q

What is own price elasticity?

A

A measure of the responsiveness of the quantity demanded of a good to a change in the price of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good.

21
Q

What is the definition of elastic demand?

A

Absolute value of own price elasticity is greater than 1

22
Q

What is the definition of inelastic demand?

A

Absolute value of the own price elasticity is less than 1

23
Q

What is the definition of unit elastic demand?

A

Absolute value of the own price elasticity is equal to 1

24
Q

What factors determine elasticity?

A

availability of substitutes, expenditure share, and time

25
Q

What is the relationship between revenue and demand elasticity?

A

Revenue is maximized when at unit elastic

26
Q

What is cross-price elasticity?

A

A measure of responsiveness of the demand for a good to changes in the price of a related good; the percentage change in the quantity demanded of one good divided by the percentage change in the price of a related good.

27
Q

What is income elasticity?

A

A measure of the responsiveness of the demand for a good to changes in consumer income; the percentage change in quantity demanded divided by the percentage change in income.

28
Q

How do you find the market rate of substitution?

A

slope of the budget line

29
Q

How do you find the marginal rate of substitution?

A

slope of the indifference curve

30
Q

PROBLEM: A lotto winner can choose between a single lump-sum payout of $105M this year or $200M in 25 years. Assume that the interest rate is 3%. Which is the better deal?

A

Lump Sum

31
Q

The manager of automated products is contemplating the purchase of a new machine that will generate revenue of $5000 for the next 5 years. Assume that the interest rate is 3%. What is the maximum price that he is willing to pay for the machine?

A

$22,898

32
Q

What is the value of a firm that generates profit of $30,000 every year? Assume that the interest rate is 3%.

A

$1M

33
Q

What is the equation for own price elasticity?

A

Eqxpx = alpha x (Px/Qx) OR (%changeQ/%changeP)

34
Q

What is the formula for cross price elasticity?

A

Eqxpy = alpha y (Py/Qx)

35
Q

What is the formula for income elasticity?

A

Eqxm = alpha m (M/Qx)

36
Q

What number defines an elastic good? inelastic?

A

Absolute value of >1 is elastic

Absolute value of <1 is inelastic

37
Q

If a company has an elastic good, what should it do to maximize revenue?

A

Decrease price

38
Q

If a company has an inelastic good, what happens to the firms revenue when it decreases prices?

A

With price decreases comes revenue decreases

39
Q

What is the indifference curve?

A

A curve that defines the combinations of two goods that give a consumer the same level of satisfaction.

40
Q

What is the marginal rate of substitution?

A

The rate at which a consumer is willing to substitute one good for another good and still maintain the same level of satisfaction; the slope of the indifference curve.

41
Q

What is the budget line?

A

The bundles of goods that exhaust a consumer’s income.

42
Q

What is the market rate of substitution?

A

The rate at which one good may be traded for another in the market; the slope of the budget line.

Mkt rate of sub = -Px/Py

43
Q

What is consumer equilibrium?

A

The equilibrium consumption bundle is the affordable bundle that yields the greatest satisfaction to the consumer.

The tangent point between indifference curve and the budget line when MRS=Px/Py

44
Q

What is the formula for utility maximization condition?

A

MRS=Px/Py

ECON 600 (3 decks)

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