ECON 202: Quiz #3 Chapters 9,10 & 11


A tax imposed by a government on imports.


Goods and services bought domestically but produced in other countries.


Goods an services produced domestically but sold in other countries.

Comparative Advantage

The ability of an individual, firm, or a country to produce a good or service at a lower opportunity cost than competitors.
All trade is based on comparative advantage.

The Concept of Comparative Advantage and the Factors Influence Comparative Advantage

All trade is based on comparative advantage; the main factors of comparative advantage are climate and natural resources, the relative abundance of various types of labor and capital, technology and know-how, and external economies.

Opportunity Cost

The highest-valued alternative that must be given up to engage in an activity.

All of the opportunity Cost of an Activity

Is both the explicit costs and the implicit costs.

Absolute Advantage

The ability to produce more of a good or service than competitors when using the same amount of resources.


A situation in which a country does not trade with other countries.

Terms of trade

The ratio at which a country can trade its exports for imports from other countries.

Free Trade

Trade between countries that is without government restrictions.


A numerical limit a government imposes on the quantity of a good that can be imported into the country.

Voluntary export restraint (VER)

An agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from the other country.

World Trade Organization (WTO)

An international organization that oversees international trade agreements.


The process of countries becoming more open to foreign trade and investment.


The use of trade barriers to shield domestic firms from foreign competition.


Selling a product for a price below its cost of production.


The enjoyment or satisfaction people receive from consuming good or services.

Marginal Utility (MU)

The change in total utility a person receives from consuming one additional unit of a good or service.

Law of Diminishing Marginal Utility

The principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time.

Review the Law of Diminishing Marginal Utility

The law of diminishing marginal utility states that at some point, a person's marginal utility from additional consumption decreases.

Budget Constraint

The limited amount of income available to consumers to spend on goods and services.

Income Effect

The change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant.

Substitution Effect

The change in the quantity demanded of a good that results from a change in price making the good more or less expense relative to other goods, holding constant the effect of the price change on consumer purchasing power.

Inferior Good

If the price of an inferior good falls, the substitution effect leads to an increase in the quantity demanded.

Network Externality

A situation in which the usefulness of a product increases with the number of consumers who use it.

Behavioral Economics

The study of situations in which people make choices that do not appear to be economically rational.

In Behavioral Economics, Consumers Make certain Common Mistakes. Name Them

The take into account monetary costs but ignore non-monetary opportunity costs; they fail to ignore suck costs; they are unrealistic about their future behavior.

Endowment Effect

The tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it.

Sunk Cost

A cost that has already been paid and cannot be recovered.

Indifference Curve

A curve that shows the combinations of consumption bundles that give the consumer the same utility.

Marginal Rate of Substitution (MRS)

The rate at which a consumer would be willing to trade off one good for another.


The processes a firm uses to turn inputs (labor, inventory, the physical story) into outputs of goods and services (sales of products).

Technology Inputs: The basic activity of a firm is to use inputs. Examples:

Workers, Machines, and Natural resources to produce outputs of goods and services.

A firm's technology depends on many factors:

Skills of its managers, the training of its workers, and the speed and efficiency of its machinery and equipment.

Technological Change

A change in the ability of a firm to produce a given level of output with a given quantity of inputs.

Positive Technological Change

A firm is able to produce more output using the same inputs or the same output using fewer inputs; a firm improves its ability to turn inputs into outputs

Negative Technological Change

A firm can hire less-skilled workers or if a hurricane damages its facilities, the quantity of output it can produce from a given quantity of inputs many decline.

Short Run

The period of time during which at least one of a firm's inputs is fixed. Example: A firm might have a long-term lease on a factory that is too costly to get out of.
In the short run, the firm's technology and the size of its physical plant -- its factory

Short Run Cost curves

Short Run Cost curves are U shaped because of diminishing returns. In the short run capital is fixed. After a certain point, increasing extra workers leads to declining productivity. Therefore, as you employ more workers the Marginal Cost increases.

Long Run

In the long run (all of a firm's costs are variable, since the long run is a sufficiently long time to alter the level of any input), no inputs are fixed, the firm can adopt new technology, and increase or decrease the size of its physical plant.

Total Cost

The cost of all the inputs a firm uses in production. Total cost = Fixed cost and Variable cost. TC = FC + VC.
Total cost increases as the level of production increases.

Variable Costs

Costs that change as output changes. Examples of variable costs are: labor cost, raw material costs, and costs of electricity and other utilities.

Fixed Costs

Costs that remain constant as output changes. Examples: Executive Cost, mortgage or rent on the business; utilities (fixed and variable), insurance, retail space and payments for online and television advertising or loan payments.

The Effect of Fixed Costs on the Cost Structure of an Organization

Fixed costs can create economies of scale, which are reductions in per-unit costs through an increase in production volume. This idea is also referred to as diminishing marginal cost.

Explicit Cost

A cost that involves spending money.
Are sometimes called accounting costs, because the rules of accounting generally requires that only explicit costs be used for purposes of keeping the company's financial records and for paying taxes.

Implicit Cost

A nonmonetary opportunity cost.

Economic Costs

Include both accounting cost (explicit costs) and implicit costs.

Production Function

The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs.

Average Total Cost

Total cost of production -(Fixed + Variable cost) divided by the quantity of output produced.
To find the cost (price) of each item produced.
Average total cost = Total Cost divide by quantity. ATC = AFC + AVC

Marginal Product of Labor

The additional output a firm produces as a result of hiring one more worker.
An increase in the marginal product can result from the division of labor and from specialization.
When the marginal product of labor is increasing, total output is increasing at

Why does the Marginal Product of Labor Rises & Falls?

The marginal product of labor rises initially because of the effects of specialization and division of labor,
and then it falls due to the effects of diminishing returns.

Law of Diminishing Returns

The principle that, at some point, adding more of a variable inputs, such as labor, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline.
A law of economics stating that, as the number of n

Review the Law of Diminishing Marginal Returns

Diminishing returns applies only to the short run, when at least one of the firm's inputs, such as the quantity of machinery it uses, is fixed.

Average Product of Labor

The total output produced by a firm divided by the quantity of workers.
The average product of labor is the average of the marginal products of labor.

Marginal Cost

The change in a firm's total cost from producing one more unit of a good or service.
Equals total cost divided by quantity. (MC = TC/Q)
will always intersect at average total cost and average variable cost at their lowest point.

Average Fixed Cost

Fixed cost divided by the quantity of output produced.

Average Variable Cost

Variable cost divided by the quantity of output produced.

Long-Run Average Cost Curve

A curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed; there are not fixed cost in the long-run, because you have time to make adjustments.

Economies of Scale

The situation when a firm's long-run average costs falls as it increases the quantity of output it produces.

Constant Returns of Scale

The situation in which a firm's long-run average costs remain unchanged as it increases output.

Minimum Efficient Scale

The level of output at which all economies of scale are exhausted.

Diseconomies of Scale

The situation in which a firm's long-run average costs rise as the firm increases output.
Dis-economies of scale apply only in the long run, when the firm is free to vary all its inputs, can adopt new technology, and can vary the amount of machinery it us

Look at Why Cost Curves Are "U" Shaped.

Cost curves are U-shaped because you'r encountering economy of scales. When you bottom out you encounter dis-economy of scales.
The family of short-run cost curves consisting of average total cost, average variable cost, and marginal cost, all of which ha

For Industries With High Fixed Costs, Volume is Extremely Important. Why?

The extent to which fixed costs replace variable costs as a part of a company's cost structure; the higher the proportion of fixed costs to variable costs, the faster income increases or decreases with changes in sales volume.

Review the Reaction of the Marginal Cost Curve to the Average Variable and Average Total Cost Curves. What is Unique About Where They Intersect?

When marginal cost is less than average variable cost or average total cost, it causes them to decrease. When it is greater, it causes them to increase.
Therefore, when they are equal, they must be at their minimum points where the marginal cost curve in

Why Are the Marginal and Average Cost Curves U Shaped?

When the marginal product of labor is rising, the marginal cost of output is falling.
When the marginal product of labor is falling, the marginal cost of production is rising.
We can conclude that the marginal cost of production falls and then rises´┐Żformi

As Volume Increases, the AVC and ATC come closer together but never touch. Why?

average variable cost starts off further away from the average cost curve and gets closer to it as quantity increases, but will never touch.
-it can never reach 0
-average variable cost can never reach average cost in the short run;

Calculating Marginal Cost and Average Cost

MC= TC/Q: (In the total cost column subtract the second number from the first number and divide it by the second number minus the first number in the quantity column ($125 - $75)/(1,325 - 625) = $0.07
50/700 = 0.07.


Goods that have been produced, but not yet sold. Inventory includes goods on store shelves and in their warehouse. Inventories are an input to a firm's output of goods sold to consumers. Having money tied up in holding inventory is costly.


Ensuring at inventories do not remain on the shelves long.


Hold too few inventories will result in a stockout; that is, sales being lost because the goods consumers want to buy are not on the shelves.

Improvement in inventory control

Meet the economic definition of positive technological change because they allow firms to produce the same output with fewer inputs.

Just-in-time Inventory Systems

In which firms accept shipments from suppliers as close as possible to the time the goods will be needed.

Supply Chain

Stretches from the manufacturers of the goods it sells to its retail stores.

Production function

The relationship between the inputs employed and the maximum output of the firm.

Economic Depreciation

Is the difference between what is paid for capital at the beginning of the year and what is received if the capital was sold at the end of the year.