Midterm 1

Question 1

Opportunity Cost

Answer 1

the value of all that must be sacrificed to do the activity

Question 2

Reservation Price

Answer 2

the price at which a person would be indifferent between doing (x) and not doing (x)

Question 3

Marginal Cost

Answer 3

the increase in total cost that results from carrying out one additional unit of an activity

Question 4

Marginal Benefit

Answer 4

the increase in total benefit that results from carrying out one additional unit of an activity

Question 5

Average Cost

Answer 5

the average cost of undertaking (n) units of an activity is the total cost of the activity dvided by (n)

Question 6

Average Benefit

Answer 6

the average benefit of undertaking (n) units of an activity is the total benefit of the activity divided by (n)

Question 7

External Cost

Answer 7

a cost that falls on people who are nto directly involved in the activity

Question 8

Normative Question

Answer 8

a qestion about what policies or institutional arrangments lead to the best outcomes

Question 9

Positive Question

Answer 9

a question about the consequences of specific policies or institutional arrangements

Question 10

Real Price

Answer 10

a products price relative to the prices of other goods and services

Question 11

Law of Demand

Answer 11

the empirical observation that when the price of a product falls, people demand larger quantities of it

Question 12

Law of Supply

Answer 12

the empirical observation that whenthe price of a product rises, firms offer more of it for sale

Question 13

Excess Supply

Answer 13

surplus; the amount by which quantity supplied exceeds quantity demanded

Question 14

Excess Demand

Answer 14

shortage; the a mount by which quantity demanded exceeds quantity supplied

Question 15

Price Ceiling

Answer 15

the level above which the price of a good is not permitted by law to rise

Question 16

Price Supports

Answer 16

price floors; a minimum price for a good, established by law, and supported by government’s offer to buy the good at that price

Question 17

Rationing Function of Price

Answer 17

the process whereby price directs existing supplies of a product to the users who value it most highly

Question 18

Allocative Function of Price

Answer 18

the process whereby price acts as a signal that guides resources away from the production of goods whose prices lie below cost toward the production of goods whose prices exceed cost

Question 19

Bundle

Answer 19

a particular combination of two or more goods

Question 20

Affordable Set

Answer 20

bundles on or below the budget constraint; bundles for which the required expenditure at given prices is less than or equal to the income available

Question 21

Composite Good

Answer 21

in a choice between a good X and numerous other goods, the amount of money the consumer spends on those other goods

Question 22

Preference Ordering

Answer 22

a ranking of all possible consumption bundles in order of preference

Question 23

Indifference Curve

Answer 23

a set of bundles among which the consumer is indifferent

Question 24

Indifference Map

Answer 24

a representative Sample of the set of a consumer’s indifference curves, used as a graphical summary of her preference ordering

Question 25

Marginal Rate of Substitution (MRS)

Answer 25

at any point on an indifference curve, the rate at which the consumer is willing to exchange the good measured along the vertical axis for the good measured along the horizontal axis; equal to the absolute value of the slope of the indifference curve

Question 26

Best Affordable Bundle

Answer 26

the most preferred bundle of those that are affordable

Question 27

Corner Solution

Answer 27

in a choice between two goods, a case in which the consumer does not consume one of the goods

Question 28

General Equilibrium Analysis

Answer 28

the study of how conditions in each market in a set of related markets affect equilibrium outcomes in other markets in that set

Question 29

Pareto Superior

Answer 29

an allocation that at least one in dividual prefers and others like at least as well

Question 30

Pareto Optimal

Answer 30

the term used to describ situation in whic it is impossible to make one person better off without making at least some others worse off

Question 31

Contract Curve

Answer 31

a curve along which all final, voluntary contracts must lie

Question 32

Price-Consumption Curve (PCC)

Answer 32

holding income and the price of Y constant, the PCC for a good X is the set of optimal bundles traced on an indifference map as the price of X varies

Question 33

Income-Consumption Curve (ICC)

Answer 33

holding the prices of X and Y constant, the ICC for a good X is the set of optimal bundles traced on an indifference map as income varies

Question 34

Engel Curve

Answer 34

a curve that plots the relationship between the quantity of X consumed and income

Question 35

Substitution Effect

Answer 35

that component of the total effect of a price change that results from the associated change in the relative attractiveness of other goods

Question 36

Income Effect

Answer 36

that component of the total effect of a price change that results from the associated change in real purchasing power

Question 37

Giffen Good

Answer 37

one for which the quantity demanded rises as its price rises

Question 38

Price Elasticity of Demand

Answer 38

the percentage change in the quantity of a good demanded that results from a 1 percent change in price