Microeconomics Exam #2
Determinants of Price Elasticity of Demand - Answer-Availability of substitutes, Luxury or Necessity, The
share of total budget, time dimension
Availability of substitutes - Answer-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 - Answer-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 - Answer-the larger the proportion of a budget the good constitutes, the
more elastic the demand
Time dimension - Answer-the more time the consumer is given to adjust to the price change, the more
elastic the demand
Total Revenue= - Answer-=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 - Answer-both calculations use price and
quantity, they are directly proportional. All varies on price.
Total Revenue decreases... - Answer--Elastic (Ed>1) and Price increases
, -Inelastic (Ed<1) and Price decreases
Total Revenue increases... - Answer--Elastic (Ed>1) and Price decreases
-Inelastic (Ed<1) and Price increases
No change in total revenue... - Answer--Unit Elastic (Ed=1)
Utility - Answer-the satisfaction associated with the consumption of goods and services
Marginal utility - Answer-the change in total utility divided by the change in quantity consumed
Marginal Cost (MC)= - Answer-=∇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) - Answer-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 - Answer-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 - Answer-Economic theory of production suggesting that marginal
cost increases as output increases in the short run
Efficiency - Answer-The outcome of voluntary exchange in free markets, assuming no market failures,
and consistent with the best use of scarce resources (MB=MC)
Determinants of Price Elasticity of Demand - Answer-Availability of substitutes, Luxury or Necessity, The
share of total budget, time dimension
Availability of substitutes - Answer-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 - Answer-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 - Answer-the larger the proportion of a budget the good constitutes, the
more elastic the demand
Time dimension - Answer-the more time the consumer is given to adjust to the price change, the more
elastic the demand
Total Revenue= - Answer-=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 - Answer-both calculations use price and
quantity, they are directly proportional. All varies on price.
Total Revenue decreases... - Answer--Elastic (Ed>1) and Price increases
, -Inelastic (Ed<1) and Price decreases
Total Revenue increases... - Answer--Elastic (Ed>1) and Price decreases
-Inelastic (Ed<1) and Price increases
No change in total revenue... - Answer--Unit Elastic (Ed=1)
Utility - Answer-the satisfaction associated with the consumption of goods and services
Marginal utility - Answer-the change in total utility divided by the change in quantity consumed
Marginal Cost (MC)= - Answer-=∇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) - Answer-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 - Answer-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 - Answer-Economic theory of production suggesting that marginal
cost increases as output increases in the short run
Efficiency - Answer-The outcome of voluntary exchange in free markets, assuming no market failures,
and consistent with the best use of scarce resources (MB=MC)
