ECON 251 Exam 2 Purdue Latest Version 100% Pass

ECON 251 Exam 2 Purdue Latest Version 100% Pass Budget Lines Line describing the limits to consumtion possibilities Budget line equation Income= (price of good x)(quantity of good x) + (price of good y)(quantity of good y) Utility Unit of happiness Marginal utility Additional utility of one more unit Marginal utility equation (Change in utility)/(change in quantity) Consumer equilibrium Maximizes utility Consumer equilibrium equation (Mu of x)/(P of x= (Mu of y)/(P of y) (big chart w q, u, mu, etc) Which is more valuable of water or diamonds? Total utility of water is greater than total utility of diamonds BUT marginal utility of water is greater than marginal utility of diamonds Indifference curve Curve of a combination of goods amount which a consumer is indifferent (tangent to budget line) Marginal Rate of Substitution Rate at which a consumer is willing to give up good x for an additional unity of y (|slope|) Marginal Rate of Substitution equation Relative price of a good at the best alt point Substitution effect Focuses on the change in slope from changes in relative prices Income effect Focuses on the decrease in purchasing power from higher prices that encourages the customer to purchase less of a normal good Inferior good higher amount of income reduces quantity demanded BUT the decrease in price actually INCREASES the quantity on the x-axis consumption SUBS EFFECT INCOME EFFECT Giffen good Higher amount of income reduces quantity demanded BUT the decrease in price actually DECREASES consumption of the good on the x-axis SUBS EFFECT INCOME EFFECT Economic profit equation Revenues - opp cost Short run Any period of time when at least one input is fixed Long run Any period of time where all inputs are variable Marginal Product of Labor Additional output produced by one more unit of labor Marginal Product of Labor equation (Change in Q)/(Change in L) Law of Diminishing Return Marginal Product of Labor eventually falls as labor increases Average Product of Labor equation Q/L Variable cost equation Wage*labor Total Cost equation FC+VC Average Fixed Cost Equation FC/Q Average variable cost equation VC/Q OR wage*APL Average Total Cost Equation TC/Q OR AFC+AVC Marginal Cost Equation (Change in TC/Change in Q) OR (Change in VC/Change in Q) OR wage/MPL Total Revenue Equation P*Q Marginal Revenue Equation (Change in TC) / (change in quantity) Profit equation TR-TC OR q(p-ATC) TRVC Stay in business PAVC Stay in business TRVC Shut down PAVC shut down TR=VC Shut down point (indifference) P=AVC Shut down point (indifference) Long Run Average Cost Curve Lots of ATC curves economies of scale the property whereby long-run average total cost falls as the quantity of output increases Diseconomies of scale the property whereby long-run average total cost falls as the quantity of output increases Concentration ratio Top 4 percents of firms added up HHI sum of squared market shares (first 50) HHI1500 unconcentrated 1500HHI2500 Moderately concentrated 2500HHI Concentrated Perfect Competition 3 Traits Lots of firms Products identical (perfectly elastic) No barriers to entry Monopoly three traits One firm No close substitutes Barriers to entry Monopolistic Competition three traits Lots of firms Differentiated products No barriers to entry Perfect competition long run profit is Equal to zero Monopoly long run profit is Able to be positive Monopolistic Competition long run profit it Equal to zero Perfect Competition maximizing profit MR (same as P*)= MC Monopoly maximize profit MR=MC Monopolistic Competition maximizing profit MR=MC Perfect Competition production efficiency Minimum of LRAC Monopoly production efficiency NO Monopolistic Competition Production Efficiency NO Perfect Competition allocative efficiency MB=MC Monopoly allocative efficiency NO Monopolistic Competition allocative efficiency NO Rent Seeking Behavior Act of obtaining special treatment to create or maintain monopoly profit Rent Any payment to resource above the opportunity cost Perfect Competition CS/PS Normal just like last exam Monopoly CS/PS CS is smaller triangle on top, PS is the rest minus the triangle to the left of where D and MC curve are equal Regulation of Natural Monopolies 1) MC pricing: change price equal to MC (profit is less than 0) 2) Avg cost pricing: charge price equal to Avg cost (profit is greater than 0) Perfect Price Discrimination Charge price based on willingness to pay TR DOES NOT EQUAL P*Q IT EQUALS ALL DIFF PRICES ADDED UP MR=Price Charge different prices for different quantities Buy one get one half iff Charge different prices to different groups Student discount