Microeconomics MID TERM

Question 1

microeconomics -

Answer 1

Branch of economics that deals with the behavior of individual economic units—consumers, firms, workers, and investors—as well as the markets that these units comprise

Question 2

macroeconomics

Answer 2

Branch of economics that deals with aggregate economic variables, such as the level and growth rate of national output, interest rates, unemployment, and inflation

Question 3

market

Answer 3

Collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products.

Question 4

market definition

Answer 4

Determination of the buyers, sellers, and range of products that should be included in a particular market.

Question 5

arbitrage

Answer 5

The practice of buying at a low price at one location and selling at a higher price in another

Question 6

perfectly competitive market

Answer 6

Market with many buyers and sellers, so that no single buyer or seller has a significant impact on the price

Question 7

supply curve

Answer 7

Relationship between the quantity of a good that producers are willing to sell and the price of the good

Question 8

S shows…

Answer 8

The supply curve shows how the quantity of a good offered for sale changes as the price of the good changes. The supply curve is upward sloping: The higher the price, the more firms are able and willing to produce and sell. If production costs fall, firms can produce the same quantity at a lower price or a larger quantity at the same price.

Question 9

demand curve:

Answer 9

Relationship between the quantity of a good that consumers are willing to buy and the price of the good

Question 10

THE DEMAND CURVE

Answer 10

The demand curve, labeled D, shows how the quantity of a good demanded by consumers depends on its price. The demand curve is downward-sloping; holding other things equal, consumers will want to purchase more of a good as its price goes down. The quantity demanded may also depend on other variables, such as income, the weather, and the prices of other goods. For most products, the quantity demanded increases when income rises. A higher income level shifts the demand curve to the right (from D to D′).

Question 11

SHIFTING THE DEMAND CURVE

Answer 11

If the market price were held constant at P1, we would expect to see an increase in the quantity demanded—say, from Q1 to Q2 , as a result of consumers’ higher incomes. Because this increase would occur no matter what the market price, the result would be a shift to the right of the entire demand curve.

Question 12

substitutes

Answer 12

Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other

Question 13

complements

Answer 13

Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other.

Question 14

In economics, market clearing is

Answer 14

the process by which, in an economic market, the supply of whatever is traded is equated to the demand so that there is no leftover supply or demand.

Question 15

equilibrium (or market clearing) price

Answer 15

Price that equates the quantity supplied to the quantity demanded

Question 16

market mechanism

Answer 16

Tendency in a free market for price to change until the market clears.

Question 17

surplus

Answer 17

Situation in which the quantity supplied exceeds the quantity demanded.

Question 18

shortage

Answer 18

Situation in which the quantity demanded exceeds the quantity supplied.

Question 19

When the supply curve shifts to the right,

Answer 19

the market clears at a lower price P3 and a larger quantity Q3

Question 20

When the demand curve shifts to the right,

Answer 20

the market clears at a higher price P3 and a larger quantity Q3

Question 21

elasticity

Answer 21

Percentage change in one variable resulting from a 1-percent increase in another.

Question 22

price elasticity of demand

Answer 22

Percentage change in quantity demanded of a good resulting from a 1-percent increase in its price.

Question 23

infinitely elastic demand

Answer 23

Principle that consumers will buy as much of a good as they can get at a single price, but for any higher price the quantity demanded drops to zero, while for any lower price the quantity demanded increases without limit.

Question 24

completely inelastic demand

Answer 24

Principle that consumers will buy a fixed quantity of a good regardless of its price.

Question 25

theory of consumer behavior

Answer 25

Description of how consumers allocate incomes among different goods and services to maximize their wellbeing.

Question 26

Consumer behavior is best understood in three distinct steps:

Answer 26

1. Consumer Preferences
2. Budget Constraints
3. Consumer Choices

Question 27

market basket (or bundle)

Answer 27

List with specific quantities of one or more goods.

Question 28

Completeness:

Answer 28

Preferences are assumed to be complete. In other words, consumers can compare and rank all possible baskets. Thus, for any two market baskets A and B, a consumer will prefer A to B, will prefer B to A, or will be indifferent between the two. By indifferent we mean that a person will be equally satisfied with either basket. Note that these preferences ignore costs. consumer might prefer steak to hamburger but buy hamburger because it is cheaper.

Question 29

Transitivity:

Answer 29

Preferences are transitive. Transitivity means that if a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. Transitivity is normally regarded as necessary for consumer consistency.

Question 30

More is better than less:

Answer 30

Goods are assumed to be desirable—i.e., to be good. Consequently, consumers always prefer more of any good to less. In
addition, consumers are never satisfied or satiated; more is always better, even if just a little better.

Question 31

indifference curve

Answer 31

Curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction.

Question 32

indifference map

Answer 32

Graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent.

Question 33

The magnitude of the slope of an indifference curve measures

Answer 33

the consumer’s marginal rate of substitution (MRS) between two goods.

Question 34

marginal rate of substitution (MRS)

Answer 34

Maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good.

Question 35

CONVEXITY

Answer 35

Observe that the MRS falls as we move down the indifference curve. The decline in the MRS reflects our fourth assumption regarding consumer preferences: a diminishing marginal rate of substitution. When the MRS diminishes along an indifference curve, the curve is convex.

Question 36

perfect substitutes

Answer 36

Two goods for which the marginal rate of substitution of one for the other is a constant.

Question 37

perfect complements

Answer 37

Two goods for which the MRS is zero or infinite; the indifference curves are shaped as right angles.

Question 38

utility

Answer 38

Numerical score representing the satisfaction that a consumer gets from a given market basket.

Question 39

utility function

Answer 39

Formula that assigns a level of utility to individual market baskets.

Question 40

budget constraints

Answer 40

Constraints that consumers face as a result of limited incomes

Question 41

budget line

Answer 41

All combinations of goods for which the total amount of money spent is equal to income.

Question 42

A change in income (with prices unchanged) causes the

Answer 42

budget line to shift parallel to the original line (L1).

Question 43

A change in the price of one good (with income unchanged) causes the

Answer 43

budget line to rotate about one intercept.

Question 44

The maximizing market basket must satisfy two conditions:

Answer 44

1. It must be located on the budget line.

2. It must give the consumer the most preferred combination of goods and services.

Question 45

Satisfaction is maximized (given the budget constraint) at the point where

Answer 45

MRS = P(F)/P(C)

Question 46

marginal benefit

Answer 46

Benefit from the consumption of one additional unit of a good

Question 47

marginal cost

Answer 47

Cost of one additional unit of a good.

Question 48

satisfaction is maximized when

Answer 48

the marginal benefit—the benefit associated with the consumption of one additional unit of food—is equal to the marginal cost—the cost of the additional unit of food. The marginal benefit is measured by the MRS.

Question 49

corner solution

Answer 49

Situation in which the marginal rate of substitution for one good in a chosen market basket is not equal to the slope of the budget line.

Question 50

When a corner solution arises,

Answer 50

the consumer maximizes satisfaction by consuming only one of the two goods.

Question 51

marginal utility (MU)

Answer 51

Additional satisfaction obtained from consuming one additional unit of a good.

Question 52

diminishing marginal utility

Answer 52

Principle that as more of a good is consumed, the consumption of additional amounts will yield smaller additions to utility.

Question 53

equal marginal principle

Answer 53

The principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods.

Question 54

Our analysis of demand proceeds in six steps:

Answer 54

1. We begin by deriving the demand curve for an individual consumer.
2. With this foundation, we will examine the effect of a price change in more detail.
3. Next, we will see how individual demand curves can be aggregated to determine the market demand curve.
4. We will go on to show how market demand curves can be used to measure the benefits that people receive when they consume products, above and beyond the expenditures they make.
5. We then describe the effects of network externalities—i.e., what happens when a person’s demand for goods also depends on the demands of other people.
6. Finally, we will briefly describe some of the methods that economists use to obtain empirical information about demand.

Question 55

A reduction in the price of food, with income and the price of clothing fixed, causes

Answer 55

the consumer to choose a different market basket.

Question 56

price-consumption curve

Answer 56

Curve tracing the utility-maximizing combinations of two goods as the price of one changes.

Question 57

individual demand curve

Answer 57

Curve relating the quantity of a good that a single consumer will buy to its price.

Question 58

The individual demand curve has two important properties:

Answer 58

1. The level of utility that can be attained changes as we move along the curve.
2. At every point on the demand curve, the consumer is maximizing 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

Question 59

income-consumption curve

Answer 59

Curve tracing the utility-maximizing combinations of two goods as a consumer’s income changes.

Question 60

An increase in income, with the prices of all goods fixed, causes

Answer 60

consumers to alter their choice of market baskets.

Question 61

An increase in a person’s income can lead to:

Answer 61

less consumption of one of the two goods being purchased.

Question 62

Engel curve

Answer 62

Curve relating the quantity of a good consumed to income.

Question 63

Two goods are substitutes if

Answer 63

an increase in the price of one leads to an increase in the quantity demanded of the other.

Question 64

Two goods are complements if

Answer 64

an increase in the price of one good leads to a decrease in the quantity demanded of the other.

Question 65

Two goods are independent if

Answer 65

a change in the price of one good has no effect on the quantity demanded of the other.

Question 66

A fall in the price of a good has two effects:

Answer 66

1. Consumers will tend to buy more of the good that has become cheaper and less of those goods that are now relatively more expensive. This response to a change in the relative prices of goods is called the substitution effect.
2. Because one of the goods is now cheaper, consumers enjoy an increase in real purchasing power. The change in demand resulting from this change in real purchasing power is called the income effect.

Question 67

substitution effect

Answer 67

Change in consumption of a good associated with a change in its price, with the level of utility held constant.

Question 68

income effect

Answer 68

Change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant.

Question 69

A decrease in the price of food has

Answer 69

an income effect and a substitution effect.

Question 70

Giffen good

Answer 70

Good whose demand curve slopes upward because the (negative) income effect is larger than the substitution effect.

Question 71

When food is an inferior good, and when the income effect is large enough to dominate the substitution effect, the demand curve will be

Answer 71

upward-sloping

Question 72

market demand curve

Answer 72

Curve relating the quantity of a good that all consumers in a market will buy to its price.

Question 73

The market demand curve is obtained by

Answer 73

summing our three consumers’ demand curves DA, DB, and DC.

Question 74

Two points should be noted:

Answer 74

1. The market demand curve will shift to the right as more consumers enter the market.
2. Factors that influence the demands of many consumers will also affect market demand.

Question 75

The aggregation of individual demands into market becomes important in practice when market demands are built up from the demands of different demographic groups or from consumers located in different areas.

Answer 75

Laikas mohitukui

Question 76

INELASTIC DEMAND

Answer 76

When demand is inelastic, the quantity demanded is relatively unresponsive to changes in price. As a result, total expenditure on the product increases when the price increases.

Question 77

ELASTIC DEMAND

Answer 77

When demand is elastic, total expenditure on the product decreases as the price goes up.

Question 78

isoelastic demand curve

Answer 78

Demand curve with a constant price elasticity

Question 79

consumer surplus

Answer 79

Difference between what a consumer is willing to pay for a good and the amount actually paid.

Question 80

CONSUMER SURPLUS

Answer 80

Consumer surplus is the total benefit from the consumption of a product, less the total cost of purchasing it.

Question 81

CONSUMER SURPLUS GENERALIZED

Answer 81

For the market as a whole, consumer surplus is measured by the area under the demand curve and above the line representing the purchase price of the good.

Question 82

To examine the ways that people can compare and choose among risky alternatives, we take the following steps:

Answer 82

1. In order to compare the riskiness of alternative choices, we need to quantify risk.
2. We will examine people’s preferences toward risk.
3. We will see how people can sometimes reduce or eliminate risk.
4. In some situations, people must choose the amount of risk they wish to bear.
5. Sometimes demand for a good is driven partly or entirely by speculation— people buy the good because they think its price will rise.

Question 83

probability

Answer 83

Likelihood that a given outcome will occur.

Question 84

expected value

Answer 84

shows us what would be the average payoff of different

scenarios

Question 85

payoff

Answer 85

Value associated with a possible outcome.

Question 86

The expected value measures the central tendency—

Answer 86

the payoff or value that we would expect on average

Question 87

variability

Answer 87

Extent to which possible outcomes of an uncertain event differ

Question 88

deviation

Answer 88

Extent to which possible outcomes of an uncertain event differ.

Question 89

standard deviation

Answer 89

Square root of the weighted average of the squares of the deviations of the payoffs associated with each outcome from their expected values

Question 90

OUTCOME PROBABILITIES FOR TWO JOBS

Answer 90

The distribution of payoffs associated with Job 1 has a greater spread and a greater standard deviation than the distribution of payoffs associated with Job 2. Both distributions are flat because all outcomes are equally likely.

Question 91

UNEQUAL PROBABILITY OUTCOMES

Answer 91

The distribution of payoffs associated with Job 1 has a greater spread and a greater standard deviation than the distribution of payoffs associated with Job 2. Both distributions are peaked because the extreme payoffs are less likely than those near the middle of the distribution.

Question 92

expected utility

Answer 92

Sum of the utilities associated with all possible outcomes, weighted by the probability that each outcome will occur.

Question 93

risk averse

Answer 93

Condition of preferring a certain income to a risky income with the same expected value.

Question 94

risk loving

Answer 94

Condition of preferring a risky income to a certain income with the same expected value.

Question 95

risk neutral

Answer 95

Condition of preferring a risky income to a certain income with the same expected value.

Question 96

risk premium

Answer 96

Maximum amount of money that a risk-averse person will pay to avoid taking a risk.

Question 97

The risk premium, CF, measures the

Answer 97

amount of income that an individual would give up to leave her indifferent between a risky choice and a certain one.

Question 98

diversification

Answer 98

Practice of reducing risk by allocating resources to a variety of activities whose outcomes are not closely related.

Question 99

negatively correlated variables

Answer 99

Variables having a tendency to move in opposite directions.

Question 100

mutual fund

Answer 100

Organization that pools funds of individual investors to buy a large number of different stocks or other financial assets.

Question 101

positively correlated variables

Answer 101

Variables having a tendency to move in the same direction.

Question 102

THE LAW OF LARGE NUMBERS

Answer 102

Insurance companies are firms that offer insurance because they know that when they sell a large number of policies, they face relatively little risk. The ability to avoid risk by operating on a large scale is based on the law of large numbers, which tells us that although single events may be random and largely unpredictable, the average outcome of many similar events can be predicted.

Question 103

ACTUARIAL FAIRNESS

Answer 103

When the insurance premium is equal to the expected payout

Question 104

actuarially fair -

Answer 104

Characterizing a situation in which an insurance premium is equal to the expected payout.

Question 105

value of complete information

Answer 105

Difference between the expected value of a choice when there is complete information and the expected value
when information is incomplete.

Question 106

asset

Answer 106

Something that provides a flow of money or services to its owner

Question 107

risky asset

Answer 107

Asset that provides an uncertain flow of money or services to its owner.

Question 108

riskless (or risk-free) asset

Answer 108

Asset that provides a flow of money or services that is known with certainty (užtikrintumas)

Question 109

return

Answer 109

Total monetary flow of an asset as a fraction of its price.

Question 110

real return

Answer 110

Simple (or nominal) return on an asset

Question 111

expected return

Answer 111

Return that an asset should earn on average.

Question 112

actual return

Answer 112

Return that an asset earns.

Question 113

The Trade-Off Between Risk and Return

Answer 113

Let’s denote the risk-free return on the Treasury bill by Rf. Because the return is risk free, the expected and actual returns are the same. In addition, let the expected return from investing in the stock market be Rm and the actual return be rm.

Question 114

Price of risk

Answer 114

Extra risk that an investor must incur to enjoy a higher expected return.

Question 115

An investor is dividing her funds between two assets—

Answer 115

Treasury bills, which are risk free, and stocks. To receive a higher expected return, she must incur some risk.

Question 116

The budget line describes

Answer 116

the trade-off between the expected return and its riskiness, as measured by the standard deviation of the return.

Question 117

The utility-maximizing investment portfolio is at the point where…

Answer 117

indifference curve U2 is tangent to the budget line.

Question 118

bubble

Answer 118

An increase in the price of a good based not on the fundamentals of demand or value, but instead on a belief that the price will keep going up.

Question 119

Recall that the basic theory of consumer demand is based on three assumptions:

Answer 119

(1) consumers have clear preferences for some goods over others;
(2) consumers face budget constraints; and
(3) given their preferences, limited incomes, and the prices of different goods, consumers choose to buy combinations of goods that maximize their satisfaction.

Question 120

reference point

Answer 120

The point from which an individual makes a consumption decision.

Question 121

endowment effect

Answer 121

Tendency of individuals to value an item more when they own it than when they do not.

Question 122

● loss aversion

Answer 122

Tendency for individuals to prefer avoiding losses over acquiring gains.

Question 123

framing

Answer 123

Tendency to rely on the context in which a choice is described when making a decision.

Question 124

anchoring

Answer 124

Tendency to rely heavily on one or two pieces of information when making a decision.

Question 125

law of small numbers

Answer 125

Tendency to overstate the probability that a certain event will occur when faced with relatively little information.

Question 126

factors of production

Answer 126

Inputs into the production process

Question 127

production function

Answer 127

Function showing the highest output that a firm can produce for every specified combination of inputs.

Question 128

short run

Answer 128

Period of time in which quantities of one or more production factors cannot be changed.

Question 129

fixed input

Answer 129

Production factor that cannot be varied.

Question 130

long run

Answer 130

Amount of time needed to make all production inputs variable.

Question 131

average product

Answer 131

Output per unit of a particular input.

Question 132

marginal product

Answer 132

Additional output produced as an input is increased by one unit.

Question 133

Average product of labor =

Answer 133

Output/labor input = q/L

Question 134

Marginal product of labor =

Answer 134

Change in output/change in labor input = Δq/ΔL

Question 135

law of diminishing marginal returns

Answer 135

Principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease.

Question 136

law of diminishing marginal returns

Answer 136

Principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease.

Question 137

labor productivity

Answer 137

Average product of labor for an entire industry or for the economy as a whole.

Question 138

stock of capital

Answer 138

Total amount of capital available for use in production

Question 139

technological change

Answer 139

Development of new technologies allowing factors of production to be used more effectively.

Question 140

isoquants

Answer 140

Curve showing all possible combinations of inputs that yield the same output.

Question 141

isoquant map

Answer 141

Graph combining a number of isoquants, used to describe a production function

Question 142

A set of isoquants, or isoquant map, describes the…

Answer 142

firm’s production function.

Question 143

Input Flexibility

Answer 143

Isoquants show the flexibility that firms have when making production decisions: They can usually obtain a particular output by substituting one input for another. It is important for managers to understand the nature of this flexibility.

Question 144

marginal rate of technical substitution (MRTS)

Answer 144

Amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant.

Question 145

MRTS =

Answer 145

−Change in capital input/change in labor input = − ∆𝐾Τ∆𝐿 (for a fixed level of q)

Question 146

the case of perfect substitutes and the fixed proportions production function, sometimes called

Answer 146

a Leonitief production function.

Question 147

fixed-proportions production function

Answer 147

Production function with L-shaped isoquants, so that only one combination of labor and capital can be used to produce each level of output.

Question 148

The fixed-proportions production function describes situations in which

Answer 148

methods of production are limited.

Question 149

When the isoquants are straight lines, the MRTS is

Answer 149

constant.

Question 150

When the isoquants are Lshaped,

Answer 150

only one combination of labor and capital can be used to produce a given output

Question 151

returns to scale

Answer 151

Rate at which output increases as inputs are increased proportionately

Question 152

increasing returns to scale

Answer 152

Situation in which output more than doubles when all inputs are doubled.

Question 153

constant returns to scale

Answer 153

Situation in which output doubles when all inputs are doubled.

Question 154

decreasing returns to scale

Answer 154

Situation in which output less than doubles when all inputs are doubled.

Question 155

accounting cost

Answer 155

Actual expenses plus depreciation charges for capital equipment.

Question 156

economic cost

Answer 156

Cost to a firm of utilizing economic resources in production

Question 157

opportunity cost

Answer 157

Cost associated with opportunities forgone when a firm’s resources are not put to their best alternative use.

Question 158

Economic cost =

Answer 158

Opportunity cost

Question 159

sunk cost

Answer 159

Expenditure that has been made and cannot be recovered.

Question 160

total cost (TC or C)

Answer 160

Total economic cost of production, consisting of fixed and variable costs.

Question 161

fixed cost (FC)

Answer 161

Cost that does not vary with the level of output and that can be eliminated only by shutting down.

Question 162

variable cost (VC)

Answer 162

Cost that varies as output varies.

Question 163

marginal cost (MC)

Answer 163

Increase in cost resulting from the production of one extra unit of output.

Question 164

MC =

Answer 164

∆VC/∆𝑞 = ∆TC/∆q

Question 165

average total cost (ATC)

Answer 165

Firm’s total cost divided by its level of output.

Question 166

average fixed cost (AFC

Answer 166

Fixed cost divided by the level of output.

Question 167

average variable cost (AVC)

Answer 167

Variable cost divided by the level of output.

Question 168

user cost of capital

Answer 168

Annual cost of owning and using a capital asset, equal to economic depreciation plus forgone interest.

Question 169

User Cost of Capital =

Answer 169

Economic Depreciation + (InterestRate)(Value of Capital)

Question 170

We can also express the user cost of capital as a rate per dollar of capital:

Answer 170

𝑟 = Depreciation rate + Interest rate

Question 171

rental rate

Answer 171

Cost per year of renting one unit of capital.

Question 172

isocost line

Answer 172

Graph showing all possible combinations of labor and capital that can be purchased for a given total cost.

Question 173

Isocost curves describe the

Answer 173

combination of inputs to production that cost the same amount to the firm.

Question 174

When the price of labor increases, the isocost curves become:

Answer 174

steeper.

Question 175

expansion path

Answer 175

Curve passing through points of tangency between a firm’s isocost lines and its isoquants.

Question 176

To move from the expansion path to the cost curve, we follow three steps:

Answer 176

1. Choose an output level represented by an isoquant. Then find the point of tangency of that isoquant with an isocost line.
2. From the chosen isocost line, determine the minimum cost of producing the output level that has been selected.
3. Graph the output-cost combination.

Question 177

long-run average cost curve (LAC)

Answer 177

Curve relating average cost of production to output when all inputs, including capital, are variable.

Question 178

short-run average cost curve (SAC)

Answer 178

Curve relating average cost of production to output when level of capital is fixed.

Question 179

● long-run marginal cost curve (LMC)

Answer 179

Curve showing the change in longrun total cost as output is increased incrementally by 1 unit.

Question 180

economies of scale

Answer 180

Situation in which output can be doubled for less than a doubling of cost.

Question 181

diseconomies of scale

Answer 181

Situation in which a doubling of output requires more than a doubling of cost.

Question 182

Increasing Returns to Scale:

Answer 182

Output more than doubles when the quantities of all inputs are doubled.

Question 183

Economies of Scale:

Answer 183

A doubling of output requires less than a doubling of cost.

Question 184

economies of scope

Answer 184

Situation in which joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product.

Question 185

The product transformation curve describes the

Answer 185

different combinations of two outputs that can be produced with a fixed amount of production inputs.

Question 186

price taker

Answer 186

Firm that has no influence over market price and thus takes the price as given.

Question 187

When the products of all of the firms in a market are perfectly substitutable with one another—that is, when they are

Answer 187

homogeneous

Question 188

homogeneous—

Answer 188

—no firm can raise the price of its product above the price of other firms without losing most or all of its business.

Question 189

when products are heterogeneous,

Answer 189

each firm has the opportunity to raise its price above that of its competitors without losing all of its sales.

Question 190

free entry (or exit)

Answer 190

Condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry

Question 191

cooperative

Answer 191

Association of businesses or people jointly owned and operated by members for mutual benefit.

Question 192

condominium

Answer 192

A housing unit that is individually owned but provides access to common facilities that are paid for and controlled jointly by an association of owners.

Question 193

profit

Answer 193

Difference between total revenue and total cost

Question 194

marginal revenue

Answer 194

Change in revenue resulting from a one-unit increase in output.

Question 195

A perfectly competitive firm should choose its output so that marginal cost equals price:

Answer 195

MC(q) = MR = P

Question 196

A competitive firm should shut down if

Answer 196

price is below AVC.

Question 197

The short-run industry supply curve is the summation of

Answer 197

the supply curves of the individual firms.

Question 198

producer surplus

Answer 198

Sum over all units produced by a firm of differences between the market price of a good and the marginal cost of production.

Question 199

The producer surplus for a firm is measured by the yellow area below the market price and above

Answer 199

the marginal cost curve

Question 200

Producer surplus =

Answer 200

PS = R − VC

Question 201

Profit =

Answer 201

π = R − VC − FC

Question 202

The producer surplus for a market is the area

Answer 202

below the market price and above the market supply curve

Question 203

The firm maximizes its profit by choosing the output at which price equals

Answer 203

long-run marginal cost LMC

Question 204

The long-run output of a profit-maximizing competitive firm is the point at which

Answer 204

long-run marginal cost equals the price.

Question 205

zero economic profit

Answer 205

A firm is earning a normal return on its investment— i.e., it is doing as well as it could by investing its money elsewhere.

Question 206

In a market with entry and exit, a firm enters when

Answer 206

it can earn a positive longrun profit and exits when it faces the prospect of a long-run loss.

Question 207

long-run competitive equilibrium

Answer 207

All firms in an industry are maximizing profit, no firm has an incentive to enter or exit, and price is such that quantity supplied equals quantity demanded.

Question 208

When a firm earns zero economic profit,

Answer 208

it has no incentive to exit the industry. Likewise, other firms have no special incentive to enter.

Question 209

A long-run competitive equilibrium occurs when three conditions hold:

Answer 209

1. All firms in the industry are maximizing profit.
2. No firm has an incentive either to enter or exit the industry because all firms are earning zero economic profit.
3. The price of the product is such that the quantity supplied by the industry is equal to the quantity demanded by consumers.

Question 210

economic rent

Answer 210

Amount that firms are willing to pay for an input less the minimum amount necessary to obtain it.

Question 211

welfare effects

Answer 211

Gains and losses to consumers and producers.

Question 212

deadweight loss

Answer 212

Net loss of total (consumer plus producer) surplus.

Question 213

economic efficiency

Answer 213

Maximization of aggregate consumer and producer surplus.

Question 214

market failure

Answer 214

Situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers.

Question 215

There are two important instances in which market failure can occur:

Answer 215

1. Externalities

2. Lack of Information

Question 216

externality

Answer 216

Action taken by either a producer or a consumer which affects other producers or consumers but is not accounted for by the market price.

Question 217

price support

Answer 217

Price set by government above free-market level and maintained by governmental purchases of excess supply.

Question 218

import quota

Answer 218

Limit on the quantity of a good that can be imported.

Question 219

tariff

Answer 219

Tax on an imported good.

Question 220

Specific tax

Answer 220

Tax of a certain amount of money per unit sold.

Question 221

subsidy

Answer 221

Payment reducing the buyer’s price below the seller’s price

Question 222

What happens to the level of utility moving downward along the demand curve?

Answer 222

As the price of a good falls, the budget line pivots outward, and the consumer is able to move to a higher indifference curve. Therefore the level of utility increases.

Question 223

Producer surplus is

Answer 223

the difference between total revenue and total variable cost