Week 1

Question 1

Shut-down price

Answer 1

intersect Marginal Cost and Average Variable Cost

Question 2

Break even price

Answer 2

intersect Marginal Cost and Average Total Cost

Marginal cost: change in TC/ change in quantity

Question 3

Maximum profit price

Answer 3

Marginal revenue should be equal to marginal cost

Question 4

Best affordable consumption point

Answer 4

intersect of the indifference curve and indifference curve

Question 5

Budget line

Answer 5

Y=p1q1+p2q2

Question 6

Seven factors thee quantity demanded is depending on + which ones will shift the demand curve

Answer 6

1. price of a product
2. prices of related products
3. income
4. preferences
5. population (number of consumers)
6. expected future prices
7. expected future income

change in factors 2 to 7 will make the demand curve shift as a whole

Question 7

Normal goods and price decrease

Answer 7

both income effect and substitution effect result in rising purchases

Question 8

Inferior goods and decrease in price

Answer 8

income effect will be negative but the substitution effect will still be positive

Question 9

Substitution effect

Answer 9

people buy more of a product because the price has fallen compared to the prices of other products
-> shift along the existing indifference curve, slope budget line has changed

Question 10

income effect

Answer 10

people buy more of a product because of the increase in real income as a result of the average fall in prices
-> moving to a higher indifference curve

Question 11

The reason for downward sloping demand curve

Answer 11

Principle of decreasing Marginal Benefit or Law of
decreasing Marginal Utility. The more you consume the
lower is the Marginal Benefit, and the less people want
to pay for the last unit:

Question 12

Price elasticity of demand

Answer 12

Measures the effect of price changes on the quantity demanded

Ep= (change in q/ q average)/ (change in p/ p average)

Question 13

Price elasticities of demand

Answer 13

perfectly elastic demand: Ep infinite
Elastic demand: Ep> 1
Unit-elastic demand: Ep=1
Inelastic demand: 0

Question 14

Income elasticity of demand

Answer 14

Eincome = (change in q/q) / (change in y/y)

Question 15

Income elasticities of demand

Answer 15

Luxuries: Eincome is larger than 1
Necessities: Eincome is positive but near 0
Inferior products: Eincome is less than 0

Question 16

Total Revenue formula

addendum: in perfect competition

Answer 16

TR= p*q
In case of perfect competition
Average revenue AR=Price
Marginal revenue MR=Price

Question 17

Marginal return of labour formula

Answer 17

change in q/ change in labour

Question 18

Factors that cause demand curve shift (demand shocks)

Answer 18

1. change in price related products (complementary or substituting products)
2. change in expected future price
3. change in expected future income
4. preference
5. income
6. population (number of consumers)

Question 19

Factors influencing the elasticity of demand

Answer 19

1. closeness of substitutes: the closer the substitutes for a good, the more elastic the demand for it, as consumers find it easier to switch
2. proportion of income spent on good: the greater the proportion of income spent on a good, the more inelastic the demand for it
3. necessity vs luxury: the more necessary a good, the lower the elasticity of demand

Question 20

Supply curve shows the relationship of

Answer 20

quantity supplied of a good and its price

Question 21

Demand curve shows the relationship of

Answer 21

the quantity demanded and its price

Question 22

Factors that shift the supply curve (supply shocks)

Answer 22

1. price of fops
2. price of related products
3. supply of related goods
4. expected future prices
5. number of suppliers
6. technology

Question 23

Marginal cost formula and explanation

Answer 23

change in TC/ change in quantity

the change in tc resulting from a one-unit increase in output, the cost of producing one more unit of a good

Question 24

Profit maximization rule

Answer 24

MR = MC
MP= MR-MC -> MP= 0
As long as MR> MC, revenues per additional unit of output are higher than the costs so TP increases