Econ 2106 Final Exam

in the short run:

firm supplies as long as P > AVC; firm shuts down if P < AVC

in the long run:

firm supplies as long as P > ATC; firm will exit if P < ATC

Economic Profit =

Revenue - explicit costs - implicit costs

Accounting Profit =

Revenue - explicit costs

VC =

TC - FC

ATC =

TC / Q

AFC =

FC / Q

AVC =

VC / Q

FC =

TC - VC

TC =

FC + VC

positive statements are statements of _____

fact

normative statements are statements of _____

opinion

top left of demand curve is

elastic

bottom right of demand curve is

inelastic

at the point between the two on the demand curve, elasticity of demand is

unit elastic

If the price elasticity of demand is greater than 1 then the good is

elastic

If the price elasticity of demand is less than 1 then the good is

inelastic

If the price elasticity of demand is equal to 1 then the good is

unit elastic

If the price elasticity of demand is infinity then the good is

perfectly elastic

If the price elasticity of demand is 0 then the good is

perfectly inelastic

if the income elasticity of the good is negative then the good is

inferior

if the income elasticity of the good is positive then the good is

normal

if the income elasticity of the good is less than 1 then the good is a

necessity

if the income elasticity of the good is greater than 1 then the good is a

luxury

if cross price elasticity of demand is negative then the goods are

complementary

if cross price elasticity of demand is positive then the goods are

substitutes

if cross price elasticity of demand is zero then the goods are

unrelated

total revenue =

price * quantity

List the determinants of price elasticity on demand:

substitutability, luxuries vs. necessities, definition of the market, and time

List the determinants of price elasticity on supply:

ability of producers to change the amount of good produced, time

goods with many close substitutes are much more _____ than those without any

elastic

price elasticity for luxuries is _____ than that of necessities

higher

narrowly defined goods have a _____ elasticity than broadly defined goods

higher

most manufactured goods are relatively _____

elastic

price elasticity is typically more _____ in the short run and more _____ in the long run

inelastic, elastic

if price increases, consumer surplus _____

decreases

if price decreases, consumer surplus _____

increases

if price increases, producer surplus _____

increases

if price decreases, producer surplus _____

decreases

list the demand curve shifts:

price of related goods, number of buyers, income (normal and inferior goods), taste and preferences, expectations

list the supply curve shifts:

number of sellers, input prices, technology, expectations

an increase in the number of buyers will _____ demand

increase

a decrease in the number of buyers will _____ demand

decrease

if you expect price to increase in the future you will _____ demand today

increase

increase in supply =

shift to the right, decrease in price, increase in quantity

decrease in supply =

shift to the left, increase in price, decrease in quantity

increase in the number of sellers will ______ quantity

increase

decrease in the number of sellers will _____ quantity

decrease

an increase in an input price will _____ the supply

decrease

a decrease in an input price will _____ the supply

increase

if a seller expects price to increase in the future, they will _____ supply

decrease

if a seller expects price to decrease in the future, they will _____ supply

increase

private good

excludable, rival

natural monopoly or club good

excludable, non-rival

common resource

non-excludable, rival

public good

non-excludable, non-rival

it is possible to prevent a consumer who has not paid for the good from consuming it

excludable

it is not possible to prevent a consumer who has not paid for the good from consuming it

non-excludable

one consumer's consumption of a good prevents another consumer's consumption

rival

one consumer's consumption of a good has no effect on others' ability to consume that good

non-rival

MC

change in total cost / change in quantity

AFC always ____ as quantity _____

decreases, increases

most efficient point of production occurs where _____ is minimized

ATC

economies of scale

long run ATC decreases as quantity of output increases

diseconomies of scale

long run ATC increases as quantity of output increases

constant returns to scale

long run ATC does not change as quantity of output increases

MR

change in total revenue / change in quantity

characteristics of perfect competition

many buyers and sellers, each firm produces an identical product, no barriers to entry

characteristics of a monopoly

firm is sole seller of its product, product has no close substitutes, price maker, faces a downward sloping demand curve, reduces price to increase sales, barriers to entry

characteristics of monopolistic competition

price setter, downward sloping demand curve, MR curve falls below demand curve, firm operates with excess capacity, many buyers and sellers, no barriers to entry, firm can't earn economic profit in the long run, long run equilibrium occurs where ATC is ta

effects of perfect price discrimination

eliminates dead weight loss, increases the quantity sold, increases a monopolist's profits

benefits of advertising

attracts buyers, keeps customers informed, increases competition, can act as a signal of quality, brand names can assure consumers of quality and provide incentives for firms to maintain good quality

downsides of advertising

increases ATC, can manipulate people's tastes, may make products appear that they are more different than they are