Test 2

Question 1

linear demand curve

Answer 1

constant slope

elasticity varies

Question 2

log linear demand curve

Answer 2

constant elasticity

slope varies

Question 3

inelastic and total revenue

Answer 3

price increases, total revenue increases

Question 4

elastic and total revenue

Answer 4

price increase, total revenue decreases

Question 5

perfectly elastic chart

Answer 5

lots of substitutes

straight horizontal demand line

Question 6

perfectly inelastic chart

Answer 6

not responsive to price change

straight vertical demand line

Question 7

consumer preference order

Answer 7

completeness: can’t say “ i don’t know”
more is better
marginal rate of substitution: slope of indifference curve
transitivity

Question 8

diminishing marginal rate of substitution

Answer 8

as you move down along the indifference curve, the amount of y you give up for x diminishes

Question 9

market rate of subsititution

Answer 9

slope of budget line

Question 10

consumer equilibrium

Answer 10

marginal rate of substitution and market rate of substitution are equal

Question 11

3 different production functions

Answer 11

linear
leontief
cobb-douglas

Question 12

marginal rate of technical substitution

Answer 12

slope of isoquant line

Question 13

isoquant

Answer 13

combination of different levels of K and L to get same output

Question 14

isocost

Answer 14

combinations of inputs that will cost the same amount

Question 15

diseconomies of scales

Answer 15

LRAC increases as output increases

Question 16

economies of scope

Answer 16

the cost of producing two types of output together is less than the total cost of producing each type seperately

Question 17

cost complementary

Answer 17

marginal cost of one good decreases when the production of another good increases
EX: donuts and donut holes

Question 18

transaction costs

Answer 18

searching costs
negotiation costs
specialized investment: site specificity, physical assets, human capital

Question 19

spot exchange

Answer 19

one time transaction
no protection against opportunism or hold ups
pros: firm gets to specialize
con: no protection

Question 20

contract

Answer 20

specific terms defined
reduces possibility of opportunism
pro: firm gets to specialize
con: costly to write, hard to cover all contingencies

Question 21

vertical integration

Answer 21

firm produces its own inputs
no longer specializes
pro: no loner relies on other firms
con: must make all inputs and deal with costs associated

Question 22

principal agent problem

Answer 22

solution: profit sharing
revenue sharing
piece rates
time clocks and spot checks

Question 23

Site specificity

Answer 23

EX: electric power plants locate close to coal mine

firms build close to one another to minimize transportation costs

Question 24

physical assets specificity

Answer 24

EX: specialized motor for lawn mower

equipment is specialized for a particular buyer and can not be adapted

Question 25

dedicated assets

Answer 25

EX: computer manufacturer established new assembly line to produce for large government buyer
if investment is profitable it is dedicated

Question 26

human capital

Answer 26

workers learn specific skills, if skills are not transferable to other employees

Question 27

profit sharing

Answer 27

compensation dependent upon profitability of firm

Question 28

revenue sharing

Answer 28

compensation dependent upon revenues of firm, like tips and sales commission
EX: waiters
con: do not provide incentive to minimize costs

Question 29

piece rates

Answer 29

based on the output
EX: typist is paid by the page he produces
con: quality control

Question 30

time clocks and spot checks

Answer 30

time clocks: employee arrives on time, do not monitor effort
spot checks: verifies workers are present and their effort
pro: minimize cost of monitors

Question 31

factors affecting own price elasticity

Answer 31

available subs: the more substitutes, the more elastic
time:the longer the time, the more elastic
expenditure share: the smaller the share of the budget a good has, the more inelastic