Part 2

Question 1

The price elasticity of demand for a good

Answer 1

a measure of the responsiveness of the quantity demanded of that good to changes in his price. Formally, the price elasticity of demand for a good is defined as the percentage change in the quantity demanded that results from a 1% change in its price.

Question 2

The demand for a good is said to be elastic with respect to price if __. It’s inelastic if__. Demand is said to be unit elastic if__.

Answer 2

the absolute value of its price is greater than one.

the absolute value of its price is less than one.

the absolute value of this price elasticity is equal to 1.

Question 3

Perfectly elastic demand, ppc is __

Prefectly inelastic demand, ppc is ___

Answer 3

Horisontal

Lodrätt

Question 4

The dollar amount that consumers spend on a product (PxQ) is equal to dollar amount that sellers receive.

Answer 4

Total expenditures = total revenue

Question 5

Income elasticity =

Answer 5

percentage change in quantity demanded/percentage change in income

Question 6

Price elasticity of supply

Answer 6

the percentage change in quantity supplied that occurs in response to a 1% change in price

Question 7

Reservation price

Answer 7

the highest price we’d be willing to pay to pursue it

Question 8

The concept of utility

Answer 8

Measuring wants. Utility represents the satisfaction people derive from their consumption activities.

Question 9

Marginal utility

Answer 9

the additional utility gain from consuming an additional unit of a good

Question 10

Law of diminishing marginal utility

Answer 10

The tendency for the additional utility gain from consuming an additional unit of a good to diminish as consumption increases beyond some point.

Question 11

Utility maximization model

Answer 11

The assumption is that people try to allocate their incomes so as to maximize their satisfactions a goal that is referred to as utility maximization. Finding the optimal combination of goods to yield the highest total utility.

Question 12

the rational spending rule

Answer 12

spending should be allocated across goods so that the marginal utility per dollar is the same for each.

MUC / PC = MUV / PV

Question 13

Real price

Answer 13

the dollar price of a good relative to the average dollar price of all other goods

Question 14

Nominal price

Answer 14

the absolute price of a good in dollar terms

Question 15

Marginal rate of substitution (MRS)

Answer 15

An important property of a consumer’s preference is the rate at which she is willing to change one good for another. This property is presented at any point on indifference curve by the MRS, which is defined as the absolute value of the slope of the indifference curve at that point.

Question 16

Perfectly competitive market

Answer 16

a market in which no individual supplier has significant influence on the market price of the product

Question 17

Price taker

Answer 17

a firm that has no influence over the price at which it sells its product

Question 18

four conditions and characteristics of a perfectly competitive market

Answer 18

1. all firms sell the same standardized product
2. The market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged.
3. Productive resources are mobile.
4. buyers and sellers are well informed.

Question 19

Law of diminishing return

Answer 19

a property of the relationship between the amount of good of service produced and amount of variable factor required to produce it the law says that when some factors of production are fixed in increased production of the good eventually requires the ever larger increases in the variable factor.

Question 20

Determinants of supply revisited

Answer 20

Technology, input prices, the number of suppliers, expectations and changes in prices of other products.

Question 21

Accounting profit

Answer 21

= total revenue - explicit costs

Question 22

Economic profit

Answer 22

= Total revenue – Explicit costs – Implicit costs

Question 23

The market price’s two important functions

Answer 23

Rationing function of price - changes in prices distribute scarce goods to those consumers who value them most highly.

Allocative function of price - changes in price direct resources away from overcrowded markets and towards markets that are underserved. (In other words markets in which price cannot cover the cost of production and enters those who which price exceeds the cost of production.)

Question 24

Barrier to enter

Answer 24

any force that prevents firm from entering a new market.

Question 25

Economic rent

Answer 25

that part of the payment for a factor of production that exceeds the owner’s reservation price, the price below which the owner would not supply the factor.

= owners total revenue - reservation price (sum of explicit and implicit cost)

Question 26

Efficient

Answer 26

a situation is efficient if no change is possible that will help some people without harming others.