Exam

Question 1

Price elasticity of demand

Answer 1

The price elasticity is a measure of the responsiveness of changes in price. Formally, It’s defined as the percentage change in the quantity demanded that results from a 1% change in its price.

Question 2

Elasticity =
Slope=

Answer 2

= price/quantity * 1/slope
= change in price / change in quantity

Question 3

unit elastic

Answer 3

Total expenditure is at a maximum

Question 4

Price elasticity of supply

Answer 4

the percentage change in quantity supplied that occurs in response to a 1% change in price.

Question 5

cross-price elasticity of demand

Answer 5

the percentage by which the quantity demanded of the first good changes in response to a
1 percent change in the price of the second

Question 6

Elasiticity

Answer 6

bigger then 1 (over equalibrium), Highly responsive

Question 7

comparative advantage

Answer 7

one person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person’s opportunity cost

Question 8

absolute advantage

Answer 8

one person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person

Question 9

law of diminishing returns

Answer 9

a property of the relationship between the amount of a good or service produced and the amount
of a variable factor required to produce it; the law says that when some factors of production are fixed, increased production of the good eventually requires ever-larger increases in the variable factor

Question 10

the law of supply

Answer 10

relies on the law of diminishing returns. Applies in short run, but not longrun

Question 11

law of diminishing marginal utility

Answer 11

the tendency for the additional
utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point

Question 12

The law of demand

Answer 12

people do less of what they want to do as the cost of doing it rises

Question 13

rational person

Answer 13

someone with well-defined goals who tries to fulfill those goals as best he or she can

Question 14

cost-benefit principle

Answer 14

an individual should take an action if, and only if, the extra benefits from taking the action or at least as great as the extra costs

Question 15

scarcity principle

Answer 15

(also called the No-Free-Lunch Principle): Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another.

Question 16

oppertunity cost

Answer 16

the value of what must be forgone to undertake an activity

Question 17

market power

Answer 17

a firm’s ability to raise the price of a good without losing all its sales

Question 18

perfectly competative market

Answer 18

market in which no individual supplier has significant influence on the market price of the product

Question 19

socially optimal quantity

Answer 19

the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good

Question 20

Marginal cost/benefit

Answer 20

the increase in total cost/benefit that results from carrying out one additional unit of an activity

Question 21

Substitution affect

Answer 21

the change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes

Question 22

complements

Answer 22

two goods are complements in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease causes a rightward shift)

Question 23

economic surplus

Answer 23

the benefit of taking an action minus its cost

Question 24

profit

Answer 24

the total revenue a firm receives from the sale of its product minus all costs—explicit and implicit—incurred in producing it

Question 25

imperfectly competative firm

Answer 25

(or price setter) a firm that has at least some control over the market price of its product

Question 26

Economic surplus

Answer 26

is the benefit of taking an action minus its cost.

Question 27

rational spending rule

Answer 27

spending should be allocated across goods so that the marginal utility per dollar is the same for each.

Question 28

The rule that sets the optimal level of consumption

Answer 28

The optimal, or utility maximizing, combination must satisfy the rational spending rule

Question 29

income elasticity of demand

Answer 29

the percentage by which a good’s quantity demanded changes in response to a 1 percent change in income

Question 30

inelastic

Answer 30

less then 1 ( below equalibrium), Highly unresponsive

Question 31

input prices

Answer 31

prices that change to prodution cost as well as the possobilites for supply

Question 32

perfectky inelastic

Answer 32

demand is perfectly inelastic with
respect to price if price elasticity of demand is zero

Question 33

perfectly elastic

Answer 33

demand is perfectly elastic with respect to price if price elasticity of demand is infinite

Question 34

unregulated market

Answer 34

no taxes, subsides or decided prices

Question 35

total revenue =

Answer 35

(or total expenditure) the dollar amount that consumers spend on a product (P × Q) is equal to the dollar amount that sellers receive

Question 36

Total cost (TC) =

Answer 36

the sum of all payments made to the firm’s fixed and variable factors of production

Question 37

rational spending rule

Answer 37

spending should be allocated across goods so that the marginal utility per dollar is the same for each.