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Exam 2
Microeconomics
| Question | Answer |
|---|---|
| Which of the following decisions are complicated by the value of money changing over time? | Buying a $100 stock |
| The interest rate: | - is opportunity cost to a bank of lending money - is the price of borrowing money for a specified period of time - is expressed as a percentage per dollar borrowed and per unit of time |
| The value of a loan of $2,000 after a year 2 percent interest is: | 2,040 |
| The process of accumulation that occurs when interest is paid on previously earned interest is called: | compounding |
| Present value is: | how much a certain amount of money that will be obtained in the future is worth today |
| Risk is: | when the costs or benefits of an event or choice are uncertain |
| Expected value is: | the average probability of all possible outcomes of a future event occurring, weighted by each possible outcome individually |
| Risk pooling: | - doesn't reduce the risk of catastrophes happening - reallocates the costs of catastrophes when they occur - allows individuals the peace of mind that they will never have to pay the full expense of a catastrophe if it hits them |
| In the context of insurance, moral hazard refers to: | the tendency for people to behave in a riskier way after they have acquired insurance. |
| Total revenue is: | price multiplied by quantity of each item sold. |
| Fixed costs are: | costs that don't depend on the quantity of output produced. |
| Variable costs are | costs that depend on the quantity of output produced |
| Implicit costs are costs that: | represent forgone opportunities. |
| The larger the implicit costs of a business: | the smaller economic profit will be. |
| A production function represents: | the relationship between the quantity of input and quantity of outputs |
| The marginal product of any input into the production process: | is the increase in output that is generated by an additional unit of input |
| When the slope of the total production curve begins to flatten: | - the marginal product must be decreasing - diminishing marginal product must be beginning - additional input adds less to total production than the inputs added before |
| Diminishing marginal product: | causes the variable cost curve to become steeper |
| Average total cost: | - is the sum of average fixed costs and average variable costs - is total cost divided by total output - is minimized when it equals marginal cost |
| Economies of scale refers to returns that occur when: | an increase in the quantity of output decrease average total cost in the long run |
| Utility | is a measure of the amount of satisfaction a person derives from something. |
| revealed preference | is that people’s preferences can be determined by observing their choices and behavior. |
| Utility function | is a formula for calculating the total utility that a particular person derives from consuming a combination of goods and services. |
| bundle | is a unique combination of goods and services that a person could choose to consume. |
| Marginal utility | is the change in total utility from consuming an additional unit of a good or service. |
| diminishing marginal utility | is that the additional utility gained from consuming successive units of a good or service tends to be smaller than the utility gained from the previous unit or service. |
| budget constraint | provides all possible combinations of goods and services a consumer can buy for a given income. |
| income effect | occurs as consumption changes from increased effective wealth due to a lower price. |
| substitution effect | is the change in consumption that results from a change in the relative price of goods. |
| Altruism | is a motive for action in which a person’s utility increases simply because someone else’s utility increases. |
| Reciprocity | is responding to another’s action with a similar action. |
| Behavioral economics | studies why individuals appear to act irrationally by studying insights from psychology. |
| time inconsistency | When individuals change their minds about what they want simply because of the timing of the decision, they exhibit __________ |
| commitment device | can be used to help fulfill a plan for future behavior that would otherwise be difficult. |
| complete information | when they are fully informed about the choices that they and other relevant economic actors face. |
| information asymmetry | When one person knows more than the other during an agreement, _________________occurs |
| Adverse selection | Occurs prior to completing an agreement when buyers and sellers have different information about the quality of a good or the riskiness of a situation. |
| Moral hazard | The tendency for people to behave in a riskier way or to renege on contracts when they do not face the full consequences of their actions after an agreement has been made. |
| How is moral hazard combatted in the principal-agent problem? | - Monitoring work effort. - Profit-sharing component to wages. - Flat-fee for a set of tasks. |
| Screening: | reveals private information. |
| Signaling: | Taking action to reveal one’s own private information. Reputation: If interactions occur multiple times, parties can use their past history to indicate that the other party has full information. |
| Statistical discrimination: | Generalizing based on observable characteristics to fill in missing information. |
| How is adverse selection combatted in the used car market? | - Carfax provides a printout of a car’s history, including items such as: - How many owners it had. - Car dealer maintenance records. - Where the car was registered. |
| principal | One example is the principal-agent problem, when a person called a |
| agent | entrusts someone else, called |
| How can anything meaningful be said about the utility people experience? | Observe what people actually do. |
| interest rate | tells how much today’s money is worth in the future. |
| compounding | When analyzing the value of money over a time period longer than one year_____________ the interest payments is necessary. |
| Present value | translates future costs or benefits into the equivalent amount of value today. |
| Risk | is a special class of uncertainty in which the costs or benefits of an event or choice are uncertain, but calculable. |
| expected value | The _______________ of a choice, EV, is equal to the sum of each possible event, S, weighted by its probability of occurring, P. |
| risk-averse | Although individuals have varying tastes for taking on risks, people are generally ___________ with their financial decisions. |
| Risk-seeking | Someone who does have a high tolerance for risk is __________ |
| Risk pooling | Insurance companies pool individuals together, called ___________ |
| diversification | Insurance companies use risk ______________ in which risks are shared across many different assets or people. |
| adverse selection and moral hazard | There are two big inherent problems with insurance: |
| Total revenue | ____________ is the amount that a firm receives from the sale of goods and services and is calculated as the quantity sold multiplied by the price paid for each unit: Total revenue = Quantity x Price = (Q1xP1) + (Q2xP2) + … + (QnxPn) |
| Total cost | ____________ is the amount that a firm pays for inputs used to produce goods or services. |
| Fixed cost | are costs that do not depend on the quantity of output produced. |
| Variable costs | __________ are those that depend on the quantity of output produced. |
| explicit costs | that require a firm to spend money |
| implicit costs | __________ implicit costs that represent opportunities that could have generated revenue if the firm had invested its resources in another way. |
| accounting profits: | When companies report their profits, they provide _____________ Accounting profit = Total revenue – Explicit costs Accounting profits may be a misleading indicator of how well a business is really doing. |
| economic profit | To account for implicit costs, __________ further subtracts implicit costs: Economic profit = Accounting profit – Implicit costs |
| production function | A________ is the relationship between the quantity of inputs and the resulting quantity of outputs. |
| marginal product. | The increase in output that is generated by an additional unit of input is the _______________ |
| diminishing marginal product | The principle of _____________ states that the marginal product of an input decreases as the quantity of the input increases. |
| economies of scale | If increasing the scale of production to obtain higher output lowers the minimum of the average total cost, then __________ occur. |
| diseconomies of scale | If increasing the scale of production to obtain higher output raises the minimum of the average total cost, then_______ occur |
| Constant returns to scale | __________ occur when the minimum of the average total cost does not depend on the quantity of output. |
| efficient scale | When the average total cost is at its minimum, an _______ is achieved. |
| The characteristics of a competitive market are: | - Full information exists. - Buyers and sellers are price takers. - The good or service is standardized. - Firms freely enter and exit the market. |
| price takers | Competitive markets have so much competition that no one has the ability to affect market prices. Thus, all are ____________. |
| market power | If a buyer or seller has the ability to noticeably affect market prices, that person/firm has __________. |
| When deciding the quantity to produce, a firm additionally must decide whether to: | - Produce. - Shut-down in the short-run. - Exit the market in the long-run. |
| When a firm shuts down production, it avoids incurring variable costs. | - Fixed costs remain and are sunk in the short-run. - Because fixed costs are sunk, they are irrelevant in deciding whether to shut down in the short-run. |
| If positive economic profits exist: | - P > ATC. - New firms enter to gain profits. - The market supply curve shifts outward until P = ATC. - Economic profits go to zero for all firms. |
| If negative economic profits exist: | - P < ATC. - Some firms exit the market. - The market supply curve shifts inward until P = ATC. - Economic profits go to zero for all firms. |
| Perfectly competitive markets are defined by: | - There is a large number of buyers and sellers. - No one buyer or seller can affect the market price. - There is a standardized good or service. - No barriers to entry exist. |
| In the long-run: | - Firms earn zero economic profits. - Firms operate at their efficient scale. - Supply is perfectly elastic. |
| Firms are able to enter and exit the market. | - If economic profits are positive, firms enter the market and the supply shifts outward until profits are zero. - If economic profits are negative, firms exit the market and the supply shifts outward until profits are zero. |
| monopoly | refers to a firm that is the only producer of a good or service with no close substitutes. |
| natural monopoly | refers to a market where a single firm can produce the entire market quantity demanded at a lower cost than multiple firms. |
| Price discrimination | is the practice of charging customers different prices for the same good. |
| Benefits | - Provide broader services. - Set prices lower than unregulated monopolies. |
| Costs | - Political pressure. - Loss of profit incentive potentially leading to inefficiencies. |
| Monopolists produce at a lower quantity than the efficient level. | - Total surplus is not maximized. - Producer surplus (monopolist profit) increases. - Consumer surplus decreases. |
| In a perfectly competitive market price takers exist because: | there are many buyers and many sellers |
| For firms that sell one product in a perfectly competitive market, average revenue: | - is calculated by total revenue divided by total output - is equal to marginal revenue - is equal to the market price |
| If a firm in a perfectly competitive market faces a market price of $5, and it decides to produce 400 units, the firm's total revenue will be: | $2,000 |
| Firms in perfectly competitive markets who wish to maximize profits should produce where: | Marginal revenue and marginal cost are equal |
| This table shows the total costs for various levels of output for a firm operating in a perfectly competitive market. Price/Quantity/TC $50 0 $10.00 $50 1 $20.00 $50 2 $27.50 $50 3 $77.50 $50 4 $147.50 $50 5 $250.00 | is maximized at 3 units of output |
| Given the shutdown rule, what does the firm's short-run supply curve look like? | It is the section of the MC curve that lies above the AVC curve |
| If a firm in a perfectly competitive market faces the cost curves in the graph shown; which of the following is true? | The firm will make positive profits when price is higher than $15, if it chooses to produce to produce at its profit-maximizing level of output. |
| In the long run, firm will enter a perfectly competitive market if the existing firms are making: | a profit |
| When firms enter a market, the supply increases and: | price falls and profits decrease. |
| If the demand increases in a perfectly competitive market, what will likely occur? | - firms will temporarily make a profit due to a higher price - firms will enter the market in hopes of capturing some profits - the short-run supply curve will shift to the right, causing price to eventually fall. |
Created by:
MomMaher