test 2

Question 1

rational behavior (for consumer)

Answer 1

maximize utility subject to budget constraint
rational economic agents are constantly evaluating the benefits and costs of their actions
“constrained optimization problem” - consumers attempting to reach an outcome, however, they are limited by what is affordable
consumer behavior is analyzed by cardinal utility or ordinal utility theory

Question 2

tastes and preferences

Answer 2

establishes consumers utility
cardinal utility - how customers evaluate the benefits received from various goods and services
ordinal utility - based on preference rankings (when consumer decides between two goods to determine which is better)
no numerical value
compares one market combination with another

Question 3

budget constraint

Answer 3

expenditures on goods and services = total income
determines the affordable consumption options that are available in a given period
based on market prices and consumer income
(Px x X) + (Py x Y) = M

Question 4

who developed cardinal utility theory

Answer 4

early neoclassical economists
marshall, jevons, walras

Question 5

utility (cardinal utility)

Answer 5

is quantifiable
total utility measured in utils
the ability of products to satisfy customer wants or needs (measure of satisfaction)

Question 6

TU and MU functions

Answer 6

TU - total utility (cardinal utility) - measurable level of wellbeing, satisfaction, or benefits provided from consuming goods and services (for single good or multiple), measured in numerical units (util)
MU - marginal utility - rate of change in consumer utility (satisfaction) caused by adjusting the consumption level of a product
MU = change (TUx)/change X
MU is one of the first applications of marginal analysis - economic agents make decisions based on marginal outcomes

Question 7

law of diminishing marginal utility

Answer 7

the more consumers have of a product, the less incremental, added benefit (marginal utility) they receive by consuming an additional unit
utility increases at a decreasing rate

Question 8

utility maximizing outcome for two products
cardinal utility

Answer 8

tells us how rational consumers would choose their goods
(Px x X) + (Py x Y) = M = amount of money able to spend
outcome can be used to confirm law of demand
utility maximization is MUx/Px = MUy/Py
available income is spent AND marginal utility per dollar ratio is equal

Question 9

what happens during disequilibrium outcome

Answer 9

consumers will adjust their purchases by consuming more of one good to account for less of the other
a predictable adjustment in consumption to reach their maximum outcome

Question 10

cardinal utility approach and the law of demand

Answer 10

law of demand applies to a rational, utility-maximizing consumer in the cardinal utility approach

Question 11

how did ordinal utility theory become

Answer 11

early 20th century
hicks, allen, fischer
foundation of modern consumer behavior theory

Question 12

ordinal utility - what do consumers do

Answer 12

maximize total utility
same as cardinal utility

Question 13

how is utility measured in ordinal utility theory

Answer 13

qualitative because tastes and preferences are based on general rankings
consumers can subjectively tell whether a good provides more satisfaction than another option

Question 14

how are consumer tastes and preferences illustrated (ordinal utility)

Answer 14

combinations are illustrated with indifference curves and preference maps
preference rankings - a consumer establishes a preference order of bundles

Question 15

how is budget constraint for goods illustrated

Answer 15

graphically with budget line and equation
y= M/Py - (Px/Py)x
M=consumer income

Question 16

when does consumer equilibrium occur (ordinal utility)

Answer 16

at the market basket where the budget line is tangent to the highest attainable I curve
the budget line and indifference maps are combined
the combination is affordable and on the highest attainable indifference curve
consumer will move to new equilibrium outcome if: a change in market prices of the goods, a change in consumer income, a change in tastes or preferences

Question 17

result of disequilibrium outcome (ordinal utility)

Answer 17

consumer makes a predictable adjustment in consumption

Question 18

what do I curves and budget lines show

Answer 18

outcomes for normal and inferior goods as consumer income changes
I curves - show combinations of two products that provide a customer with the same overall level of satisfaction
budget lines - based on budget constraint

Question 19

how does law of demand combine with ordinal utility

Answer 19

LOD applies to a utility maximizing consumer because a consumer reaches a new equilibrium outcome when there is a change in price

Question 20

production function of firm theory

Answer 20

summarizes the relationship between the quantity of inputs (factors of production) employed by a firm and the level of output (q) produced
production inputs - labor (L), raw materials (RM), capital (K)

Question 21

fixed vs variable inputs

Answer 21

fixed - ex. size of production facility, amount of land available
variable - ex. labor, energy, raw materials

Question 22

long run vs short run

Answer 22

long run - allows firm to consider production and cost outcomes when all inputs can be varied in employment
short run - must have at least 1 fixed factor, fixed and variable factors are employed, has one fixed input and alters variable input to change output

Question 23

short run productivity measures

Answer 23

productivity - the relationship between a firms output and the inputs required to produce the level of output
applied to individual variable factors of production
labor productivity is widely used (expressed by comparing total output with the units of labor services required to produce output)

Question 24

total product (TP)

Answer 24

short run productivity
output per period (q) given the employment of the variable input
TP(variable factor) = q

Question 25

marginal product (MP)

Answer 25

short run productivity
the rate of change in total product attributable to changing the employment of the variable input
MP(variable factor) = change q/change (variable factor)

Question 26

average product (AP)

Answer 26

short run productivity
output per unit of the variable factor
AP(variable factor) = q/(variable factor)

Question 27

law of diminishing returns (marginal product)

Answer 27

as a firm increases its employment of a variable input, the additional output will eventually decline
output increases at a decreasing rate - as each additional unit of output produced requires a higher number of added inputs, the firm faces diminishing returns

Question 28

total cost (TC)

Answer 28

short run cost function
TC = total fixed costs + total variable costs

Question 29

total fixed cost (TFC)

Answer 29

short run cost function
fixed costs do not change with the level of output produced
TFC = capital costs (Pk) * capital (K)

Question 30

total variable cost (TVC)

Answer 30

short run cost function
based on how much output is produced by the firm
TVC = wages (w) * labor (L)

Question 31

average total cost (ATC)

Answer 31

per unit
ATC = total cost (TC)/output (q)

Question 32

average fixed cost (AFC)

Answer 32

per unit
AFC = total fixed cost (TFC)/output (q)

Question 33

average variable cost (AVC)

Answer 33

per unit
AVC = total variable cost (TVC)/output (q)

Question 34

MC

Answer 34

per unit
marginal cost - the rate of change in the firms total cost due to a change in output
MC = change in total cost(TC)/change in output (q) = dTC/dq

Question 35

cost minimizing factor employment to produce a target output

Answer 35

minimize TC = LTC = (Pk x K) + (w x L)
firms can choose from multiple input combinations to produce the desired output

Question 36

increasing returns to scale

Answer 36

IRS - the firms output changes by a larger proportion
when greater technical efficiency is obtained as the firm moves from small to large scale operations
higher output

Question 37

decreasing returns to scale

Answer 37

DRS - the firms output changes my a smaller proportion

Question 38

constant returns to scale

Answer 38

CRS - the firms output changes by the same proportion
net gains and losses cancel each other out

Question 39

economies of scale (EOS)

Answer 39

long run average cost
reductions in long run average cost as output expands
rate of change in output is proportionately grater than the rate of change in the long run total cost

Question 40

constant returns to scale (CRS)

Answer 40

long run average cost
long run average cost is constant as output changes

Question 41

diseconomies of scale (DOS)

Answer 41

long run average cost
increases in long run average cost as output expands
the rate of change in output is proportionately less than the rate of change in long run total cost