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Econ 303 Micro > Exam 2 > Flashcards

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
Q

average product of labor=

A

total output/#workers

26
Q

marginal product of labor

A

increase of output for hiring one more worker

27
Q

MPL>APL then APL

A

rises

cause producing more than the average

28
Q

MPL<APL then APL

A

falls

cause producing less than the average

29
Q

isoquants

A

series of lines that show all combinations of inputs that produce the same level of output

30
Q

marginal rate of technical substitution=

A

=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
Q

optimal input combination

A

MPL/MPK=w/r

32
Q

w/r

A

have to

price ratio

33
Q

opportunity costs

A

economic costs; what you give up when you make a decision

34
Q

accounting costs

A

something that involves an outlay of money

35
Q

total economic costs

A

=opp costs+acct. costs

36
Q

economic profit

A

TR-economic costs

37
Q

accounting profits

A

=TR-accting costs

38
Q

sunk costs

A

costs that once paid cannot be recovered

39
Q

sunk cost fallacy

A
  • the mistake that you make when you let sunk costs affect future decisions
  • everyone does it sometimes…rational behavior
40
Q

perfect competition

A

many firms; identical products; no barriers to entry

41
Q

typical firm in perfect competition

A
  • 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
Q

marginal revenue

A

increase in TR from selling one more unit

43
Q

if MR>MC

A

produce

44
Q

when MR=MC in perfect competition

A

stop producing because at profit maximization

45
Q

short run supply curve

A

the portion of the MC curve that lies above the AVC curve

46
Q

if P>ATC then

A

firms make a profit

47
Q

short run firm will produce at a loss as long as,

A

producing reduces the size of the loss

48
Q

long run equilibrium

A

MC=ATC (low point)

49
Q

when more firms enter the industry:

A

-supply increases
-no profits-no more entry
-P=ATC
still make accounting profit not economic

50
Q

normal profit

A

making money but no more than @ next best alternative (no economic profit)

51
Q

firm working at a loss in the long run

A

can’t do it

-exit industry cause of repeated losses

52
Q

as long as P>AVC

A

the firm should produce in the short run

53
Q

when P<AVC

A

the firm should shut down in the short run

54
Q

minimum of the AVC curve

A

the shut down point

55
Q

If P<ATC then firms will

A

leave the industry in the long run

56
Q

Constant cost industry

A
  • 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
Q

Increasing cost industry

A
  • 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
Q

decreasing cost industry

A
  • 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
Q

Does price change more in the long run or the short run?

A

-the short run b/c the LRE stays the same and the short run price falls

60
Q

Does industry wide Q change more in the short run or the long run?

A
  • the long run b/c more firms exit the market cause P go down
  • demand and supply change making it more significant

Econ 303 Micro (3 decks)

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