Microeconomics Exam #2/89
Questions with A+ Rated Answers
Determinants of Price Elasticity of Demand - -Availability of substitutes,
Luxury or Necessity, The share of total budget, time dimension
-Availability of substitutes - -greater the number of substitutes, the more
ELASTIC the demand, when all firms in a market produce products which are
perfect substitutes for each other, the demand is perfectly elastic
-Luxury or Necessity - -A product is a luxury will have more elastic demand
than a product deemed necessity. Luxury is a product that consumers can
easily do without compared to necessity
-The share of the total budget - -the larger the proportion of a budget the
good constitutes, the more elastic the demand
-Time dimension - -the more time the consumer is given to adjust to the
price change, the more elastic the demand
-Total Revenue= - -=Price*Quantity=P*Q
The price of a good being sold multiplied by the number of units sold
-Relationship between price elasticity and total revenue - -both calculations
use price and quantity, they are directly proportional. All varies on price.
-Total Revenue decreases... - --Elastic (Ed>1) and Price increases
-Inelastic (Ed<1) and Price decreases
-Total Revenue increases... - --Elastic (Ed>1) and Price decreases
-Inelastic (Ed<1) and Price increases
-No change in total revenue... - --Unit Elastic (Ed=1)
-Utility - -the satisfaction associated with the consumption of goods and
services
-Marginal utility - -the change in total utility divided by the change in
quantity consumed
-Marginal Cost (MC)= - -=∇TC/∇Q=∇TVC/∇Q
The additional cost incurred when an action is taken; the additional cost of
production one more unit of output (is reflected in supply; upward slope)
, -Marginal Benefit (MB) - -The additional benefit created when an action is
taken; a measure of the value of each additional unit to the consumer in
terms of how much money each addition unit is worth to the consumer, or
the maximum amount the consumer would pay for each additional unit
-Law of diminishing marginal utility - -The observation that as consumption
of one good increases relative to other goods, the additional satisfaction
gained form consuming yet another unit of that good eventually declines
-Law of diminishing marginal returns - -Economic theory of production
suggesting that marginal cost increases as output increases in the short run
-Efficiency - -The outcome of voluntary exchange in free markets, assuming
no market failures, and consistent with the best use of scarce resources
(MB=MC)
-Deadweight Loss - -The reduction in total surplus that occurs when output
is not at the intersection of competitive market supply and demand curves
the difference between the maximum total consumer and producer surplus
and the total consumer and producer surplus that results from a given
situation
-Consumer Surplus - -the maximum amount the consumer is willing to pay
for a product minus the amount the consumer actually has to pay (the
market price). Top triangle that is below MB and above equilibrium price,
(CS=1/2 B*H)
-Marginal Benefit (MB) - -the additional benefit gained from consuming one
more unit of a good or service (it is reflected in the demand curves and has a
downward slope)
-Producer Surplus (PS) - -The actual amount a producer receives for a
product (the market price minus the minimum amount the producer is willing
to accept in exchange for the product (marginal cost). Bottom triangle that is
below equilibrium price and above MC
-Inefficiency - -occurs when MB does not equal MC and it happens when
there are price ceilings/floors, taxes, tariffs, quota, monopoly, public goods,
or externalities
-Ad velorem tax - -a tax levied on a product as a percentage of the
product's price
-Exhaustible resources - -natural resources that can be used only once and
cannot be replaced once they are used, such as coal and oil
Questions with A+ Rated Answers
Determinants of Price Elasticity of Demand - -Availability of substitutes,
Luxury or Necessity, The share of total budget, time dimension
-Availability of substitutes - -greater the number of substitutes, the more
ELASTIC the demand, when all firms in a market produce products which are
perfect substitutes for each other, the demand is perfectly elastic
-Luxury or Necessity - -A product is a luxury will have more elastic demand
than a product deemed necessity. Luxury is a product that consumers can
easily do without compared to necessity
-The share of the total budget - -the larger the proportion of a budget the
good constitutes, the more elastic the demand
-Time dimension - -the more time the consumer is given to adjust to the
price change, the more elastic the demand
-Total Revenue= - -=Price*Quantity=P*Q
The price of a good being sold multiplied by the number of units sold
-Relationship between price elasticity and total revenue - -both calculations
use price and quantity, they are directly proportional. All varies on price.
-Total Revenue decreases... - --Elastic (Ed>1) and Price increases
-Inelastic (Ed<1) and Price decreases
-Total Revenue increases... - --Elastic (Ed>1) and Price decreases
-Inelastic (Ed<1) and Price increases
-No change in total revenue... - --Unit Elastic (Ed=1)
-Utility - -the satisfaction associated with the consumption of goods and
services
-Marginal utility - -the change in total utility divided by the change in
quantity consumed
-Marginal Cost (MC)= - -=∇TC/∇Q=∇TVC/∇Q
The additional cost incurred when an action is taken; the additional cost of
production one more unit of output (is reflected in supply; upward slope)
, -Marginal Benefit (MB) - -The additional benefit created when an action is
taken; a measure of the value of each additional unit to the consumer in
terms of how much money each addition unit is worth to the consumer, or
the maximum amount the consumer would pay for each additional unit
-Law of diminishing marginal utility - -The observation that as consumption
of one good increases relative to other goods, the additional satisfaction
gained form consuming yet another unit of that good eventually declines
-Law of diminishing marginal returns - -Economic theory of production
suggesting that marginal cost increases as output increases in the short run
-Efficiency - -The outcome of voluntary exchange in free markets, assuming
no market failures, and consistent with the best use of scarce resources
(MB=MC)
-Deadweight Loss - -The reduction in total surplus that occurs when output
is not at the intersection of competitive market supply and demand curves
the difference between the maximum total consumer and producer surplus
and the total consumer and producer surplus that results from a given
situation
-Consumer Surplus - -the maximum amount the consumer is willing to pay
for a product minus the amount the consumer actually has to pay (the
market price). Top triangle that is below MB and above equilibrium price,
(CS=1/2 B*H)
-Marginal Benefit (MB) - -the additional benefit gained from consuming one
more unit of a good or service (it is reflected in the demand curves and has a
downward slope)
-Producer Surplus (PS) - -The actual amount a producer receives for a
product (the market price minus the minimum amount the producer is willing
to accept in exchange for the product (marginal cost). Bottom triangle that is
below equilibrium price and above MC
-Inefficiency - -occurs when MB does not equal MC and it happens when
there are price ceilings/floors, taxes, tariffs, quota, monopoly, public goods,
or externalities
-Ad velorem tax - -a tax levied on a product as a percentage of the
product's price
-Exhaustible resources - -natural resources that can be used only once and
cannot be replaced once they are used, such as coal and oil
