Exam 2 Flashcards

1
Q

Consumer’s optimal choice definition

A
  • tangent of the constraint and indifference curve

- find the pt on the budget constraint that is on the highest indifference curve

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2
Q

consumer’s optimal choice equation

A

MRSxy=Px/Py

marginal rate of substitution = price ratio

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3
Q

price ratio

A

Px/Py

how many units of ‘y’ HAVE to give up to get one more unit of ‘x’

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4
Q

marginal rate of substitution

A

MUx/MUy

-how many units of ‘y’ WILLING to give up for one more unit of ‘x’

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5
Q

if MRS>price ratio, then

A

level of utility rises

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6
Q

an increase in income (for normal goods) causes

A
  • the budget constraint to shift to the right parallel

- new optimal is made

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7
Q

income consumption curve

A

-connection of all the optimal points

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8
Q

Engel curve

A
  • quantity v income
  • if pos slope- normal good
  • if neg slope-inferior good
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9
Q

change in price effect on the budget constraint

A

curve rotates out off the y-intercept

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10
Q

total effect

A

=substitution effect+income effect

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11
Q

substitution effect

A

-as prices rise, buy more of the relatively cheaper goods

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12
Q

income effect

A

-change in consumers’ consumption choices that result from a change in purchasing power of income

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13
Q

to extract substitution effect

A
  1. take new budget constraint and shift in parallel until it’s tangent to the old indifference curve
  2. new point is A’
  3. the difference in Q between A and A’ is the substitution effect
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14
Q

to extract the income effect

A
  1. take new budget constraint and shift in parallel until it’s tangent to the old indifference curve
  2. new point is A’
  3. the difference in Q between B and A’ is the substitution effect
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15
Q

law of demand 2 reasons why

A
  • as price decreases the Qd increases
    1. the good gets relatively cheaper than substitutes (buy more)
    2. the real income increases
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16
Q

the income effect (inferior goods)

A

will be neg.

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17
Q

Giffen good

A
  • violates the law of demand

- has a positive slope demand curve

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18
Q

production function

A

Q=f(K,L)

Q-KaLb

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19
Q

variable input

A

Q can be changed over a relatively short period of time

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20
Q

fixed input

A

Q can’t be changed over time

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21
Q

long run

A

period of time that is long enough that all inputs can be variable

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22
Q

short run

A

period of time where at least one input is fixed

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23
Q

Increasing the amt of labor…

A
  • can take advantage of specialization and division of labor

- increasing returns

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24
Q

diminishing returns

A
  • as keep adding labor the output increases by smaller and smaller amts, eventually going negative
  • starts when marginal product goes down
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25
average product of labor=
total output/#workers
26
marginal product of labor
increase of output for hiring one more worker
27
MPL>APL then APL
rises | cause producing more than the average
28
MPL
falls | cause producing less than the average
29
isoquants
series of lines that show all combinations of inputs that produce the same level of output
30
marginal rate of technical substitution=
=ΔK/ΔL ALSO the slope of the isoquant -the rate at which one input can be substituted for another without altering the total level of output -WILLING
31
optimal input combination
MPL/MPK=w/r
32
w/r
have to | price ratio
33
opportunity costs
economic costs; what you give up when you make a decision
34
accounting costs
something that involves an outlay of money
35
total economic costs
=opp costs+acct. costs
36
economic profit
TR-economic costs
37
accounting profits
=TR-accting costs
38
sunk costs
costs that once paid cannot be recovered
39
sunk cost fallacy
- the mistake that you make when you let sunk costs affect future decisions - everyone does it sometimes...rational behavior
40
perfect competition
many firms; identical products; no barriers to entry
41
typical firm in perfect competition
- horizontal demand curve - price taker - no impact on the market price - perfectly elastic demand - if charged above market price, then sales go to 0 immediately
42
marginal revenue
increase in TR from selling one more unit
43
if MR>MC
produce
44
when MR=MC in perfect competition
stop producing because at profit maximization
45
short run supply curve
the portion of the MC curve that lies above the AVC curve
46
if P>ATC then
firms make a profit
47
short run firm will produce at a loss as long as,
producing reduces the size of the loss
48
long run equilibrium
MC=ATC (low point)
49
when more firms enter the industry:
-supply increases -no profits-no more entry -P=ATC still make accounting profit not economic
50
normal profit
making money but no more than @ next best alternative (no economic profit)
51
firm working at a loss in the long run
can't do it | -exit industry cause of repeated losses
52
as long as P>AVC
the firm should produce in the short run
53
when P
the firm should shut down in the short run
54
minimum of the AVC curve
the shut down point
55
If P
leave the industry in the long run
56
Constant cost industry
- total costs do not change with total industry output - long run supply curve horizontal - demand goes up, profit increases, more firms enter the industry, goes back to original price level
57
Increasing cost industry
- total costs increase with increases in industry output - positive sloping long run supply curve - demand goes up, price goes up, more firms enter, production costs go up, price level ends up being higher than the originial
58
decreasing cost industry
- total costs decrease with increases in industry output - neg. sloping long run supply curve - demand goes up, price goes up, more enter, production costs go down, price levels lower than original
59
Does price change more in the long run or the short run?
-the short run b/c the LRE stays the same and the short run price falls
60
Does industry wide Q change more in the short run or the long run?
- the long run b/c more firms exit the market cause P go down - demand and supply change making it more significant