Test 2 Chapters 5, 6, 7, 9, 13, 14
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Chapter 14, Firms in Competitive Markets
| Question | Answer |
|---|---|
| The profit-maximizing quantity Qmax is found (Figure 1, p294) where the _____ intersects the _____. | horizontal price line ; marginal-cost curve |
| At the profit-maximizing level of output, _____ and _____ are exactly equal. | marginal revenue ; marginal cost |
| The _____ shows the quantity supplied by the firm at any given price so it is the firm's supply curve. | marginal-cost curve |
| The marginal-cost curve shows _____ so it is the firm's supply curve. | the quantity supplied by the firm at any given price |
| The marginal-cost curve shows the quantity supplied by the firm at any given price so it is _____. | the firm's supply curve |
| What determines the quatity of a good a firm is willing to supply at any price? | the firm's marginal cost curve |
| Draw Figure 1, Profit Maximization for a Competitive Firm | see p294 |
| In Figure 1, Profit Maximization for a Competitive Firm, the X & Y axes are what? | Costs and Revenue & Quantity |
Price < Avg Var Cost
Chapter 13, The Costs of Production
| Question | Answer |
|---|---|
| Total revenue | the amt the firm receives for the sale of its output |
| Profit | total revenue minus total costs |
| Economic profit | revenue minus opportunity cost |
| Accounting profit | revenue minus explicit costs |
| the Production function | the relationship between the qty of inputs (workers) (x-axis) and the qty of output (cookies) (y-axis) |
| Marginal cost | the increase in total cost that arises from an extra unit of production |
| Diminishing marginal product | marginal product (increase in output from add'l unit of input) [eventually] declines as the qty of input increases |
| Efficient scale | the qty of output that minimizes ATC |
| Economies of scale | LR ATC falls as qty of output increases |
| Diseconomies of scale | LR ATC rises as the qty of output increases |
| Constant returns to scale | LR ATC stays the same as qty of output changes |
| Draw Figure 5, Cost Curves for a Typical Firm | see p279 |
| Marginal product | increase in output from add'l unit of input (the marginal product of a worker, or of raw mat'l or...) |
The Many Types of Cost: a Summary (table 3, p283)
| Question | Answer |
|---|---|
| Explicit costs | Costs that do require an outlay of money by the firm |
| Implicit costs | Costs that do not require an outlay of money by the firm |
| Fixed costs | Costs that do not vary with the quantity of output produced |
| Variable costs | Costs that do vary with the quantity of output produced |
| Total cost | The market value of all the inputs that a firm uses in production |
| Avg fixed costs | Fixed costs divided by the qty of output |
| Avg variable cost | Variable costs divided by the qty of output |
| Avg total cost | Total costs divided by the qty of output |
| Marginal cost | The increase in total cost that arises from an extra unit of production |
Chapter 9, Application: International Trade
one
| Question | Answer |
|---|---|
| world price | the price (of a good) prevailing in world markets (for that good) |
| tariff | a tax on imports a tax on goods produced abroad & sold domestically |
two
| Question | Answer |
|---|---|
| What are the 5 arguments for restricting trade? (phony headline) | Unfair Bargaining Chip Secures Infant Jobs |
| The Unfair-competition argument for restricting trade basically says _________? But what? | - trade is desirable only if all countries play by the same rules - the industry may be harmed, but consumers benefit at the expense of the exporting country's taxpayers |
| The protection-as-a-Bargaining-Chip argument for restricting trade basically says _________? But what? | - the threat of a trade restriction can help remove one imposed by a foreign government - the threat may not work, the country has to back down and lose face or carry out and reduce its own economic welfare |
| The national-Security argument for restricting trade basically says _________? But what? | - a particular industry is vital for national security - maintain objectivity - when the military is a consumer of an industry's output, how would the military view it? they may benefit with no risk to security |
| The Infant-industry argument for restricting trade basically says _________? But what? | - temporary restrictions are needed to 'get started' - the government has to somehow pick the winners - the future benefits to the industry must exceed the future costs to consumers |
| The Jobs argument for restricting trade basically says _________? But what? | - trade destroys domestic jobs - workers move from losing industry to one where there is a comparative advantage |
Chapter 6, Supply, Demand, and Government Policies
| Key Concept | Dr Mankiw's personal explanation |
|---|---|
| Price ceiling | a legal maximum on the price of a good or service |
| An example of a price ceiling is | rent control |
| Price floor | a legal minimum on the price of a good or service |
| An example of a price floor is | rent control |
| Tax incidence | the division (or distribution) of a tax burden (132) |
| The incidence of a tax depends on what? | the price elasticities of supply and demand |
| The burden of a tax tends to fall on the side of the market that is _____? | less elastic |
| What are two lessons we've learned about tax incidence? | (1) taxes discourage market activity (2) buyers and sellers share the burden of taxes (buyers pay more, sellers receive less) |
Chapter 5, Elasticity and its Application
| Key Concept | Dr Mankiw's personal explanation |
|---|---|
| Elasticity | a measure of the responsiveness of quantity demanded or supplied to one of its determinants |
| Price elasticity of demand | measures how much the quantity demanded responds to a change in price |
| Total revenue | the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold |
| Income elasticity of demand | measures how the qty demanded changes as consumer income changes (necessities small, luxuries large) |
| cross-price elasticity of demand | measures how the qty of one good changes as the price of another good changes (substitutes positive, complements negative) |
| Price elasticity of supply | measures how much the quantity supplied responds to a change in price |
| Rule of thumb: the ______ the demand curve that passes thru a given point, the _____ the price elasticity of demand (p93) | flatter, greater |
| The equation for Price Elasticity of Demand | % change in qty demanded / % change in price |
| The equation for Price Elasticity of Supply | % change in qty supplied / % change in price |
| Difference in Elastic and Inelastic is what? | Elastic: change in price results in substantial change in qty demanded Inelastic: change in price results in slight change in qty demanded |
| What are the four general rules that determine the price elasticity of demand? (p 90) | - availability of close substitutes - necessities vs luxuries - definition of the market - time horizon |
| The price elasticity of supply depends on what main thing? | the flexibility of sellers to change the amount of the good they produce |
| In most markets, a key determinant of the price elasticity of supply is ____? | the time period being considered |
