ECO 3101 Final Study Guide Questions
and Answers 2024-2025
1st fundamental theorem of welfare -- Correct Answer --if everyone trades in the competitive
marketplace, all mutually beneficial trades will be completed and the resulting equilibrium
allocations of resources will be pareto efficient
2 types of market failure -- Correct Answer --1: externalities
2: lack of information
2nd fundamental theorm of welfare -- Correct Answer --if individual preferences are convex,
then every pareto efficient allocation ( every point on the contact curve) is a competitive
equilibrium for some initial allocations of goods
3 Basic Assumptions about preferences -- Correct Answer --Completeness, Transitivity,
More is better than less
3 conditions -- Correct Answer --1: all firms in industry are maximizing profits
2: no firm has an incentive either to enter or exit the industry because all firms are earning 0
economic profit
3: the price of the product is such that the quantities demanded by the customers is equal to
quantity supplied by industry
accounting cost -- Correct Answer --actual expenses plus depreciation charges for capital
equipment
Average Fixed Cost (AFC) -- Correct Answer --firms fixed cost divided by its level of output
average product -- Correct Answer --output per unit of a particular unit
, Average Total Cost (ATC) -- Correct Answer --firms total cost divided by its level of output
Average Variable Cost (AVC) -- Correct Answer --firms variable cost divided by its level of
output
budget constraints -- Correct Answer --constraints that consumers face as a result of limited
income
budget line -- Correct Answer --all combinations of goods for which the total amount of
money spent is equal to income
cardinal utility function -- Correct Answer --utility function describing by how much one
market basket is preferred to another
constant returns of scale -- Correct Answer --situations in which outputs are doubled when all
inputs are doubled
consumer surplus -- Correct Answer --difference between what a consumer is willing to pay
for a good and the amount paid
contract curve -- Correct Answer --curve showing all efficient allocations of goods between
two consumers, or of two inputs between two production functions
cooperative -- Correct Answer --association of businesses or people jointly owned and
operated by members for mutual benefits
cost constraints -- Correct Answer --prices of labor, capital, other inputs
cost function -- Correct Answer --function relating cost of production to level of output and
other variables that the firm can control
deadweight loss -- Correct Answer --net loss of total (consumer plus producer) surplus
and Answers 2024-2025
1st fundamental theorem of welfare -- Correct Answer --if everyone trades in the competitive
marketplace, all mutually beneficial trades will be completed and the resulting equilibrium
allocations of resources will be pareto efficient
2 types of market failure -- Correct Answer --1: externalities
2: lack of information
2nd fundamental theorm of welfare -- Correct Answer --if individual preferences are convex,
then every pareto efficient allocation ( every point on the contact curve) is a competitive
equilibrium for some initial allocations of goods
3 Basic Assumptions about preferences -- Correct Answer --Completeness, Transitivity,
More is better than less
3 conditions -- Correct Answer --1: all firms in industry are maximizing profits
2: no firm has an incentive either to enter or exit the industry because all firms are earning 0
economic profit
3: the price of the product is such that the quantities demanded by the customers is equal to
quantity supplied by industry
accounting cost -- Correct Answer --actual expenses plus depreciation charges for capital
equipment
Average Fixed Cost (AFC) -- Correct Answer --firms fixed cost divided by its level of output
average product -- Correct Answer --output per unit of a particular unit
, Average Total Cost (ATC) -- Correct Answer --firms total cost divided by its level of output
Average Variable Cost (AVC) -- Correct Answer --firms variable cost divided by its level of
output
budget constraints -- Correct Answer --constraints that consumers face as a result of limited
income
budget line -- Correct Answer --all combinations of goods for which the total amount of
money spent is equal to income
cardinal utility function -- Correct Answer --utility function describing by how much one
market basket is preferred to another
constant returns of scale -- Correct Answer --situations in which outputs are doubled when all
inputs are doubled
consumer surplus -- Correct Answer --difference between what a consumer is willing to pay
for a good and the amount paid
contract curve -- Correct Answer --curve showing all efficient allocations of goods between
two consumers, or of two inputs between two production functions
cooperative -- Correct Answer --association of businesses or people jointly owned and
operated by members for mutual benefits
cost constraints -- Correct Answer --prices of labor, capital, other inputs
cost function -- Correct Answer --function relating cost of production to level of output and
other variables that the firm can control
deadweight loss -- Correct Answer --net loss of total (consumer plus producer) surplus
