Midterm 2 Flashcards
For a normal good, an increase in price will cause the substitution effect to be _____ value and the income effect to be a _____ value
Negative; Negative
The income effect and substitution effects are in opposite directions absolute value of the income effect is greater than the absolute value of the substitution. What term is this?
Giffen Good
For a normal good, a reduction in price will cause the substitution effect to be _____ value and the income effect to be a _____ value
Positive; Positive
A good where price decreases lead to decreases in the consumption and price increases lead to increases in the consumption of the good. What term is this?
Giffen Good
A budget line that compensates for a new price by changing the level of income such that the original level of utility can still be achieved by the consumer under the new set of prices. What term is this?
Compensated Budget Line
What is the formula for the substitution effect?
Compensated X - Original X
What is the formula for the income effect?
New X - Compensated X
How to calculate total effect?
Sum of income and substitution effects
or
New X - Old X
What happens when the direction of substitution and income effects are the same? (Ex: positive, positive; etc.)
It is a normal good
What is the formula for Average Total Cost? (ATC)
The total cost divided by the output
What is Marginal Cost? (MC)
The amount that an additional unit adds to total cost
What is Labor? Variable?
the number or workers or the number of hours worked by people; “L”
What is Capital? Variable?
machines, equipment, buildings and tools used in the production process; “K”
What is human capital?
knowledge and experience of workers
What is Production Function? Functional Form?
a function showing the highest output that a firm can produce for every specified combination of inputs; “q = f(L,K)”
What is the Law of Marginally Diminishing Returns?
Principle that as the use of an input increases, with other inputs fixed, the resulting additions to output will eventually decrease
What is the Cobb-Douglas Production Function? Use “a” as a constant.
q = a(L^c)(K^d)
What is short run?
period of time where one input is considered to be fixed.
What is long run?
period of time where all inputs can be changed
What is Marginal Product of Labor? Variable?
the change in output that is the result of increasing the amount of labor used by 1 unit; MPL
What is the Marginal Product of Labor Function?
the change in output for a change in labor while holding other inputs constant. The partial derivative of the production function with respect to Labor
What is the Average Product of Labor Function?
total product divided by the amount of labor
What is Returns to Scale?
the change in total output when changing both labor and capital in equal proportions
What is Constant Returns to Scale?
output changes by the same proportion that labor and capital is changed; c+d = 1
What is Increasing Returns to Scale?
output changes more than proportion that labor and capital is changed; c+d > 1
What is Decreasing Returns to Scale?
output changes less than proportion that labor and capital is changed; c+d < 1
What is Isoquant?
A curve showing all the possible combinations of inputs that yield a given amount of output
True or false; Higher levels of output require more of both inputs and move isoquants up and to the right.
True
What is Marginal Rate of Technical Substitution? Variable?
The amount by which one input can be reduced when one extra unit of another input is used; MRTS
Fill in blank. The absolute value of the _______ of the isoquant tells you the MRTS
slope
True or false. The isoquant gets flatter at higher levels of labor.
True
What is the Fixed-Proportions Production Function?
A production function with L-Shaped isoquants. MRTS is either infinite or zero
What is the Perfect Substitutes Production Function?
production function where the MRTS is constant at all points. Isoquants are linear.
What is individual demand curve?
A curve that relates the price of Good X to the quantity of Good X that a consumer will buy holding all other factors constant
What does lowercase ‘q’ refer to?
an individual’s quantity demanded
What does uppercase ‘Q’ refer to?
market quantity demanded
What is horizontal summation?
a process which adds the quantities demanded by individuals (q) for a given price to get the market quantity(Q) for that price
True or false; The number of kinks is one less than the number of unique choke prices
true
What is consumer surplus?
the price that a customer is willing to pay for a good minus what the consumer actually pays for it
