Exam 3 Questions - Principles of Economics | ECON 2005, Exams of Microeconomics

Download Exam 3 Questions - Principles of Economics | ECON 2005 and more Exams Microeconomics in PDF only on Docsity! Economics Exam 3 1) Elasticity- a general concept used to quantify the response in one variable when another variable changes. a Fe 2 V Se <a Ce “ price of elasticity of demand: the ratio of the percentage of change in quantity demanded to percentage of change in price; measures the responsiveness of demands to changes in price. Midpoint formula: change in quantity demanded (Q2 - QI (Ql+ Q2)/2 change in price (P2 PI) (Pl+P2)/2 . @lastic demand: a demand relationship in which the percentage change in quantity demanded is larger in absolute value than the percentage change in price (a demand with an absolute value greater than 1) . inelastic demand: demand that responds somewhat, but not a great deal, to changes in price. Inelastic demand always has a numerical value between zero and —L. Unitary elastic demand: a demand relationship in which the percentage change in quantity of a product demanded is the same as the percentage change in price in absolute value (a demand elasticity of -1) Determinates of elasticity: availability of substicutes- if every stand sells fresh corn of roughly the same quality, Ma’s Corn will find it very difficult to charge a price much higher than the competition charges, b/c a nearly perfect substitute is down the road. The demand is elastic: an increase in price will lead to a rapid decline in the quantity demanded of Ma’s corn. The importance of being unimportant when an item represents a relatively small part ot our total budget, we tend to pay little attention to its price. Picking up gum once in a while, you might not notice the .10 cent price increase, so it is said to be inelastic. 2) Budget constraints: the limits imposed on household choices by income, wealth, and product prices. a. b. ¢, ad Opportunity set- the set of options that is defined and limited by a budget constraint. A change in the price of a single goad changes the constraints within which households choose, and this may change the entire allocation of income, . To figure out how much you can afford: Income/price of x. The budget constraint is defined by income, wealth, and prices, Within those limits, households are free to choose, and the households, ultimate choice depends on its own likes and dislikes. 3) Utility: the satisfaction, or reward, a product yields relative to its alternatives. The basis of choice Marginal utility (MU)- the additional satisfaction gained by the consumption or use of one more unit of something Total utility- the total amount of satisfaction obtained from consumption of a good or service . Law of diminishing marginal utility- the more of any one good consumed in a given period, the less satisfaction (utility) generated by consuming each additional (marginal) unit of the same good. Utility-maximizing rule: MUx - MUy Px Py the concept of diminishing marginal utility offers us one reason why people spread their incomes over a variety of goods and services instead of spending them all on one or two items. It also leads us to conclude that demand curves slope downward. 4) Production Theory a. me S & giro’ normal rate of return- a rate of return on capital that is just sufficient to keep owners and investors satisfied, For relatively risk-tree firms, it should be nearly the same as the interest rate on risk-free government bonds. Economic profit- Total revenue-out of pocket costs-opportunity costs-profit Cpe 2TJ2—- out wes - £ priycest Accounting profit- profit- total revenue — total cost Opportunity cost of capital- rate of return on a scinivel visk re investment: normal rate of return = 10% so .10*40,000- 4,000 The law of diminishing marginal returns- when additional units of a variable input are added to fixed inputs after a certain pint, the marginal product of the variable input declines. 5) Cost Curves a. mean Short run- the period of time for which two conditions hold: the firm is operating under a fixed scaled (fixed factor) of production, and firms can neither enter nor exit an industry. Ex: payment on debt, rent, employees on contract. Long run- that period of time for which there are no fixed factors of production. Firms can increase or decrease scale of operation, and new firms can enter and existing firms can exit the industry. Fixed Cost (FC)- (overhead) does not vary with output Variable Cost (VC)-costs that do flucuate with output Total Cost (IC)- the total of all costs: FC+VC Average Fixed Cgst(AFC)- total fixed cost divided by the number of units of output: TFC/g(units. AVC falls as output rises. Average Variable Cost(AVC)- total variable cost divided by the # of units of output: TVC/¢ o Average Total Cost(ATC)- total cost divided by the # of units of output: Tclg’ 4