Microeconomics 1 Flashcards
A consumption bundle is a ________
collection of 1 or more commodities
What do we mean when we say that consumer preferences are transitive :
if a consumer prefers A to B and B is preferred to C
Framing is the tendency to rely on the _______________
context in which a choice
is described when making a
decision.
If the demanded quantity of a good increases with a larger price then we speak of a:
as the price of food falls, attainable _______ increases and the consumer buys more food.
utility
The lower the price of the product, the higher the level of ________
utility
A consumer’s purchasing power increases with a ___________ price
lower
At every point on the demand curve, the consumer is _________ utility
by satisfying the condition that the marginal rate of substitution (MRS)
of food for clothing equals the ratio of the prices of food and clothing.
maximizing
If the indifference curves are steeper than the budget line (Mux/Muy > Px/Py) the optimum is to produce only the good on the :
X axis
If the indifference curves are flatter than the budget line (Mux/Muy < Px/Py ) the optimum is to produce only the good on the :
Y axis
If the indifference curves and the budget line have the same slope (Mux/Muy = Px/Py) any combination on the budget line is the :
optimum
The banana market is in equilibrium and the demand for bananas is unit elastic. After an early frost the production of bananas drops by 10%. How does this change the equilibrium price of bananas
The equilibrium price increases by 10%
In economics, the marginal rate of substitution (MRS) is the amount of a good that a consumer is willing to
consume compared to another good, as long as the new good is equally satisfying.
Richard spends his whole income to consume positive quantities of X and Y, so MRS = MUX/MUY = 3 and PX/PY = 2.
In order to maximize its utility, Richard must
consume more of x and less of y
When two goods are perfect complements, they are consumed _______________
proportionately ; so an example of an utility function for perfect complements could be U=min(F,2C)
For durable goods such as refrigerators demand in the short run is more :
price elastic than in the long run
As long as we account for and measure all of the firm’s resources properly, we will find that economic cost equals the
oppurtunity cost
accounting cost includes actual expenses plus ________
depreciation charges for capital equipment
Sunk costs should not influence firm’s decisions, because these costs ________
cannot be changed by decisions
A good example of a sunk cost is:
For example, consider the purchase of specialized equipment for a plant. Suppose the equipment can be used to do only what it was originally designed for and cannot be converted for alternative use. The expenditure on this equipment is a sunk cost. Because it has no alternative use, its opportunity cost
is zero. Thus it should not be included as part of the firm’s economic costs.
Last year it paid $500,000 for an option to buy a building in the city.
The option gives the firm the right to buy the building at a cost of $5,000,000, so
that if it ultimately makes the purchase its total expenditure will be $5,500,000.
Now it finds that a comparable building has become available in the same city
at a price of $5,250,000. Which building should it buy?
The firm should buy the original building because the 500 000 is a sunk cost and should not be considered in the decision of the firm. Therefore the firm should take the building which costs without the SUNK cost 5 mil rather than the one that costs 5.25 mil
If a plant’s equipment is too specialized to be of use in
any other industry, it is said to be a _______ cost
sunk
Why is it important to distinguish fixed costs from sunk costs?
Because fixed costs influence the firm’s decision whereas sunk costs do not
Example of amortizing a sunk cost
A company that spent $600 million for a chip-fabrication plant (clearly a sunk cost) might amortize the expenditure over six years and treat it as a fixed cost of $100 million per year.
Marginal cost is sometimes called an ____________
incremental cost
A marginal cost is an increase in cost that results from ______________
producing an extra unit of output
Because fixed cost does not change as the firm’s level of output changes, marginal cost equals the ___________
increase in the variable cost (delta VC/q)
Average total cost is used interchangeably with _______ and _______
AC and average economic cost
Policy of treating a one-time expenditure as an annual cost spread out over some number of years
amortization
Formula for average variable cost :
VC/q
When it comes to costs, in the short run there are _______
both variable and fixed costs
When it comes to costs, in the long run there are only ________
variable costs
Change in VC = w * change in labour
another formula for marginal cost is the
per-unit cost of the extra labor (w)times the amount of extra labor needed to produce the extra output ∆L.
MC = w/deltaq/deltaL=
MC= w/MPl
Suppose, for example, that the marginal product of labor is 3 and the wage rate is $30 per hour. What is the marginal cost of producing an additional unit of output:
MC = 30/3 = 10 Dollars
Graphically total cost is the vertical sum of :
AVC and AFC
Marginal cost crosses the average variable cost and average total cost curves at _________
their minimum point
Why does the marginal cost curve intersect AVC and ATC at their minimum points?
Because, at the lowest point, the curves become equal to each other.
In the long run a firm has much more __________
flexibility
User cost of capital is the sum of _______
interest cost of capital and depreciation cost of capital
Formula for Marginal Rate of technical substitution
MPL/MPK
Economic cost includes
oppurtunity costs
for the economic costs of an entrepreuner it is important to count how much the entrepreuner would have _____
EARned if he worked for someone else and here ignore the salary he earns as an entrepreuner
Function showing the highest
output that a firm can produce for
every specified combination of
inputs.
production function
The short run is the period of time when_________
quantities of one or more factor of production cannot be changed
when mrts is fixed there is a _____ solution
corner
the different combinations of labour and capital that produce the same output lie on the same _______ curve
isoquant
APL is equal to MPL when the line going from 0 to the point has the same ________ as the _______
slope; tangent
In the short run the formula for marginal cost is:
wage rate (w) divided by MPL
In Paasche’s index __________ year quantities are taken as weights
current
For long term production function q=min(Q,L) what is not possible?
substitution ; hence this function matches perfect complements the best
What does a function given by Q=Min(K,L) mean?
This means that inputs must be used in fixed proportions; starting from those proportions, if usage of one input is increased without another being increased, output will not change. For example, a firm with five employees will produce five units of output as long as it has at least five units of capital.
If marginal cost < avc then ____ is decreasing
avc
if mc>avc then avc is
increasing
diminishing marginal product leads to
increasing marginal costs
user cost of capital =
depreciation of capital + interest rate on capital
Formula for isocost line =
C= wL + rK
Slope of the isocost line =
dK/dL or -w/r
The short-run expansion path is a
horizontal; linear curve
The long-run expansion path doesn’t have to be _______
linear
How does the isocost graph look like for firms that have CONSTANT RETURNS TO SCALE
isoquants are EQUIDISTANT
In constant returns to scale output always ________ when we double all inputs
doubles
In decreasing returns to scale when input is doubled ; output is ________
less than doubled
In increasing returns to scale when input is doubled ; output is ___________
more than doubled
How does the isocost graph look like for firms that have decreasing returns to scale
Isoquants get farther apart as you move outward
How does the isocost graph look like for firms that have increasing returns to scale
Isoquants get closer together as you move outward
If a firm has increasing returns to scale it may potentially lead to the creation of :
monopolies
economies of scale is producing one product in
bulk
economies of scope offer
a range of products
in economies of scale with larger output the ________ falls
average cost per unit
A good example of economies of scope
Amazon
If MPL/w > MPK/r the firm should use _____ (less/more) capital and _____ (less/more) labor to minimize costs.
less; more
The _____ run is a period of time during which at least one factor of production is fixed.
short
Graphically, what is the distance between total cost (TC) and variable cost (VC)?
fixed cost
Insert one word OR mathematical operator into the following expression to demonstrate the cost-minimizing input rule.
MPL/MPK ___?___ w/r
equals
When the price of labor rises, firms have a tendency to use
less labour and more capital
The short-run production function is generally expressed as a function of which of the following inputs?
Labour only
When C(Q1,0) + C(Q2,0) > C(Q1,Q2), we say that _____ _____ _____ exist (3 words)
economies of scope exist
The marginal rate of technical substitution between labor and capital is (select all that apply)
a) the absolute value of the slope of the isoquant
b) MPL/MPK
e) The rate at which labor and capital can be substituted for each other
As output increases, what happens to the difference between ATC and AVC?
decreases
The _____ run is a period of time during which a manager can change all factors of production.
long
A production function that assumes that inputs are relatively substitutable is called a _____.
Cobb-Douglas production function (L^aK^a)
The different combinations of labor and capital that produce the same
amount of output lie on the same:
isoquant curve
Isocost curve is a producer’s
budget line
Reference point
is a point/perspective from which a consumer makes a decision. Example of this is: A person living in Nowa Iwiczna paying a rent of £600/mo might look at WWA’s £3000/mo and think that its unfair and it’s a scam so he won’t move there. At the same time for a citizen of WWA, Nowa Iwiczna is a bargain.
True/false: a monopolist will increase its output if the government institutes a binding price
ceiling.
True because A monopolist has an incentive to restrict output in order to inflate price. If the government
mandates a price ceiling, this motive dissipates, and thus the monopolist will produce more.
Increasing returns to scale signifies:
A declining long run average cost
This describes as situation in which a buyer and a seller possess different information about a transaction
Asymmetric information
The lemons problem
With asymmetric information low quality goods can drive high quality goods out of the market
The consumers always spend the same amount of money on this good when the elasticity is
unitary meaning that it has a value of -1.
For durable goods the demand is more ________ in the short run than in the long run
elastic
ATC are minimal when they are equal to
MC
If a firm has increasing returns to scale this means that its costs are :
declining in the long run (decling average costs)
An information cascade occurs when:
when one’s action depends on the actions of others which were also based on others
when firm a and firm b choose a cooperative outcome they choose the outcome that ______
maximizes total gains
Fairness is a bias in economics which concerns _______
making decision based off of moral rules
Rules of thumb are essentially
mental shortcuts
Salience is the cognitive bias that _____-
predisposes shoppers to focus on items that are more prominent in valuie
after a government levies a tax on a monopoly which formula changes
you add t to the equation for price (P+T)
The indifference curve is a straight line for
perfect substitutes
The indifference curve is L-shaped for
perfect complements
Moral Hazard
Moral hazard is a situation where the behavior of one party may change to the detriment of another after the transaction has taken place. For example, a person with insurance against automobile theft may be less cautious about locking their car because the negative consequences of vehicle theft are now (partially) the responsibility of the insurance company.
Adverse Selection
A phenomenon that occurs when the parties on one side of the market, who have information not known to others, self-select in a way that adversely affects the parties on the other side of the market.
In the average cost curve, there is a point where production reaches a minimum. What is that minimum called?
The minimum is referred to as the optimum level of output or productively efficient level of output.
What is the short run in the microeconomic theory?
The short-run is the period where at least 1 factor of production is fixed and cannot be changed.
What is the long-run in the microeconomic theory?
The long-run is the period where no factors of production are fixed and where all factors of production can be changed.
Accounting Cost =
Salary (your salary as entrepreuner is also included) + Other Expenses
Economic cost includes
all the implicit and explicit costs
Economic Cost =
Salary + Other Expenses + Opportunity Cost (Rent + Forgone Salary)
Joe quits his computer programming job, where he was earning a salary of $50,000 per
year, to start his own computer software business in a building that he owns and was
previously renting out for $24,000 per year. In his first year of business he has the following
expenses: salary paid to himself, $40,000; rent, $0; other expenses, $25,000. Find the
accounting cost and the economic cost associated with Joe’s computer software business.
