Exam 2

Question 1

Price Elasticity of Demand

Answer 1

Measures consumers responsiveness to change in price

Question 2

Elasticity of Demand Equation

Answer 2

E of D = (% Δ quantity) ÷ (% Δ price)

Question 3

Cross price Elasticity of Demand

Answer 3

Exy =%Δ Qdx ÷ %Δ PY
Exy>0 is a substitute
Exy

Question 4

Price Elasticity of Supply

Answer 4

Responsiveness of suppliers to changes in price

Question 5

Marginal Utility Equation

Answer 5

MU = ΔTU ÷ ΔQ

Question 6

Marginal Utility

Answer 6

Additional satisfaction obtained from consuming a good

Question 7

Diminishing Marginal Utility

Answer 7

As you consume more of a good, the additional satisfaction you obtain from each additional unit of the good tends to fall

Question 8

Law of Diminishing Marginal Utility

Answer 8

Eventually MU↓ as Q↑

Question 9

Consumer Equilibrium Rules

Answer 9

1) All income is spent
2) Total utility is maximized
3) MUa ÷ Pa = MUb ÷ Pb OR as equal as they can be

Question 10

Consumer Surplus

Answer 10

1. CS=how much you’re willing to Pay - Actual Price

2. Your willingness to pay is higher than price

Question 11

Explicit Costs

Answer 11

Expenses facility would pay for resources

Question 12

Accounting Profit Equation

Answer 12

Accounting Profit = Total revenue - Explicit Costs

Question 13

Implicit Costs

Answer 13

The amount that you’re forgoing by starting another business or having another source of income

Question 14

Economic Profit Equation

Answer 14

Economic Profit = TR - Explicit Costs - Implicit Costs

Question 15

Long run vs. Short run

Answer 15

• Short Run
	○ You also have at least one fixed resource
	○ Every firm has a short run
• Long Run
	○ All resources are variable
	○ No fixed costs

Question 16

Marginal Product Equation

Answer 16

MP=ΔTP or ΔQ ÷ ΔL

Question 17

IMR

Answer 17

Increasing Marginal Returns
○ Marginal Product increases as Labor↑
○ TP↓ at increasing rate

Question 18

DMR

Answer 18

Diminishing Marginal Returns
○ MP↓ as L↑
○ TP↑ at Decreasing Rate
○ Most firms operate at this level

Question 19

NMR

Answer 19

Negative Marginal Returns

○ MP

Question 20

Marginal Cost Equation

Answer 20

MC = ΔTC ÷ ΔQ

Question 21

Economies of Scale

Answer 21

1. As you produce more your costs per unit drops
2. LRATC↓ as Q↑
3. Ex. Increase inputs by 10% output increases by 15%
   ○ Cost per unit goes down

Question 22

Constant Average Costs

Answer 22

1. LRATC stays the same as Q↑

2. Increases inputs by 10% output increases by 10%

Question 23

Diseconomies of Scale

Answer 23

1. LRATC↑ as Q↑
2. Increase inputs by 10% output increases by 6%
   ○ Price per unit goes up