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Questions and Answers

How much could Pat save when producing 900 meals if the capital stock was not fixed?

  • $6000
  • $4500
  • $7225 (correct)
  • $5000

What does the formula $MRTSLK = \frac{w}{r}$ represent in production?

  • The ratio of labor to capital usage
  • The marginal rate of technical substitution between labor and capital (correct)
  • The total output to input ratio
  • The cost of labor compared to capital

If the price of labor increases from $16 to $36, how much more does Pat have to pay to produce 600 meals?

  • $600
  • $480 (correct)
  • $360
  • $240

Which type of graduate does Johnson Tools employ when producing hammers, and why?

<p>Only high school graduates because they produce hammers more cheaply (B)</p> Signup and view all the answers

What is the change in consumer surplus that Molly experiences after the tax implementation?

<p>-2.06 (B)</p> Signup and view all the answers

What is the fixed cost of each unit of capital, according to the content?

<p>$100 (A)</p> Signup and view all the answers

How much tax revenue does the government collect from Molly?

<p>2 (A)</p> Signup and view all the answers

What is the marginal product of a university graduate at Johnson Tools?

<p>Five hammers per hour (D)</p> Signup and view all the answers

What can be concluded about the relationship between tax revenue and loss in consumer wellbeing?

<p>Tax revenue is smaller than the loss in consumer wellbeing. (B)</p> Signup and view all the answers

How many units of labor does Pat need to produce 900 meals efficiently with fixed capital?

<p>30 (C)</p> Signup and view all the answers

Compensating variation is considered negative when what occurs?

<p>Price of a good declines. (B)</p> Signup and view all the answers

What would be the production function form used in the example provided?

<p>Cobb-Douglas production function (B)</p> Signup and view all the answers

If demand is perfectly elastic, what is the consumer surplus?

<p>Zero. (B)</p> Signup and view all the answers

What does consumer surplus measure?

<p>The difference between what consumers are willing to pay and what they actually pay. (D)</p> Signup and view all the answers

Which statement about compensating variation is true?

<p>It reflects the total loss to consumers generally. (B)</p> Signup and view all the answers

What is the definition of production technology?

<p>The various methods a firm can use to produce its output. (B)</p> Signup and view all the answers

How many units of y would be needed for Molly to maintain her utility if her consumption of x is reduced to 0?

<p>32 (C)</p> Signup and view all the answers

What is the nature of John's preferences for books and movies if his MRS is constant regardless of the consumption amounts?

<p>Perfect substitutes (A)</p> Signup and view all the answers

What type of preferences are described that lead to zero income effect for good x?

<p>Quasilinear preferences (C)</p> Signup and view all the answers

If the marginal utilities for goods x and y are such that MUx/px > MUy/py, what will a consumer likely do?

<p>Consume only good x (A)</p> Signup and view all the answers

What does the downward sloping line containing bundles A, B, and C indicate about the consumer's preferences?

<p>The consumer prefers bundle C to A and B (A)</p> Signup and view all the answers

How is the income-consumption curve characterized in cases of quasilinear preferences?

<p>It is a vertical line. (B)</p> Signup and view all the answers

Why will Anne and Bob not successfully trade peanuts for walnuts?

<p>Bob demands too many peanuts for his walnuts (B)</p> Signup and view all the answers

What does it mean if indifference curves can only be upward sloping if one of the goods is considered a 'bad'?

<p>It indicates a negative relationship between one good and another (B)</p> Signup and view all the answers

Given prices px=3 and py=1, how much additional good x would a consumer demand with a $30 income increase?

<p>10 units (A)</p> Signup and view all the answers

What is a key property of quasilinear preferences in terms of the shape of the indifference curves?

<p>They are vertically shifted versions of each other. (C)</p> Signup and view all the answers

What could be inferred about the utility function U(B, M) = 3B + M?

<p>The utility from consuming books is three times that of movies (C)</p> Signup and view all the answers

What does the declining marginal rate of substitution (MRS) imply about the consumer's preferences?

<p>The consumer is willing to give up less of one good for more of another (A)</p> Signup and view all the answers

If both goods x and y are normal goods, what does this imply about their demand functions?

<p>Demand for both goods increases as income increases. (C)</p> Signup and view all the answers

What calculation determines the optimal amount of good y after finding the amount of good x purchased?

<p>Dividing the remaining income by the price of y. (D)</p> Signup and view all the answers

If Molly has 36 units of x and 8 units of y, what is her utility calculated from the provided utility function?

<p>56 (D)</p> Signup and view all the answers

What happens to the demand for good x when the income of a consumer increases while maintaining quasilinear preferences?

<p>Demand for good x remains constant. (C)</p> Signup and view all the answers

What does the relationship between MP and AP indicate?

<p>If MP is above AP, AP is increasing. (C)</p> Signup and view all the answers

What characterizes the isoquants for perfect complements?

<p>They form L-shaped curves. (A)</p> Signup and view all the answers

How does a firm react to changes in input prices when utilizing perfect substitutes?

<p>It typically maintains a corner solution for production. (D)</p> Signup and view all the answers

What occurs in a production function with decreasing returns to scale?

<p>Output increases by a lesser percentage than the increase in inputs. (A)</p> Signup and view all the answers

What condition must hold for a firm to effectively allocate workers between two plants?

<p>MP1 must be greater than MP2. (C)</p> Signup and view all the answers

What happens to the marginal rate of technical substitution (MRTS) in a firm with declining MRTS?

<p>It decreases along the isoquant. (B)</p> Signup and view all the answers

What is a requirement for the optimal input combination in the long run for perfect complements?

<p>It must always be at the corner of the isoquant. (B)</p> Signup and view all the answers

What indicates a cost-minimizing input combination in the long run?

<p>MP of each input must be equal. (D)</p> Signup and view all the answers

What characterizes an inferior good in terms of income elasticity of demand?

<p>Negative income elasticity of demand (C)</p> Signup and view all the answers

Which statement is true regarding the budget line equation M = pxx + pyy?

<p>It shows how much of good x can be purchased if all income is spent on good y. (B)</p> Signup and view all the answers

When consumers aim to maximize utility, they typically want to buy what?

<p>The highest indifference curve they can afford (C)</p> Signup and view all the answers

The optimal bundle for consumption is characterized by which condition?

<p>The slope of the indifference curve equals the slope of the budget line (D)</p> Signup and view all the answers

What does the term 'Bang for the Buck' refer to in consumer choice?

<p>The amount of utility gained per dollar spent (D)</p> Signup and view all the answers

What happens to the slope of the budget line if the price of good x decreases while income remains constant?

<p>The slope becomes flatter (B)</p> Signup and view all the answers

How would you define a perfect substitute regarding the Marginal Rate of Substitution (MRS)?

<p>MRS equals the ratio of the marginal utilities of the two goods (A)</p> Signup and view all the answers

Which of the following must be true about goods at different income levels?

<p>At least one good must be normal at any particular income level. (C)</p> Signup and view all the answers

Flashcards

Inferior Good

A good whose demand decreases as income increases.

Normal Good

A good whose demand increases as income increases.

Income Elasticity of Demand

A measure of how much the quantity demanded of a good changes in response to a change in income.

Budget Line

A line that shows all the possible combinations of two goods that a consumer can buy with a given income.

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Slope of the Budget Line

The ratio of the price of one good to the price of the other good.

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Utility Maximization

The goal of consumers to choose the combination of goods that gives them the highest level of satisfaction given their income and prices.

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Marginal Rate of Substitution (MRS)

The rate at which a consumer is willing to trade one good for another while maintaining the same level of satisfaction.

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Optimal Bundle

The combination of goods that maximizes utility for a consumer given their budget constraint.

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Utility Function

A mathematical representation of a consumer's preferences, showing how much satisfaction they derive from different combinations of goods.

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Indifference Curve

A curve connecting all combinations of two goods that provide the same level of utility to a consumer.

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Perfect Substitutes

Two goods where the consumer is willing to trade one good for another at a constant rate, regardless of the amounts consumed.

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What does a declining MRS imply?

The consumer is willing to give up less and less of one good for one more unit of another good as they have more of the second good.

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Higher Indifference Curve

Represents a higher level of utility or satisfaction for a consumer.

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Trade Between Consumers

Occurs when both consumers have different MRS and can gain by exchanging goods.

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How to determine if trade will occur?

If the MRS of one consumer is higher than the MRS of the other consumer, then trade will occur.

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Consumer Surplus

The difference between the maximum price a consumer is willing to pay for a good and the actual price they pay.

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Tax Revenue

The total amount of money collected by the government through taxes.

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Compensating Variation

The amount of money a consumer would need to be given (or taken away) to be made as well off as they were before a price change.

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Perfectly Elastic Demand

Demand where quantity demanded changes infinitely for any price change.

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Output

The goods or services produced by a firm.

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Inputs

The resources used by a firm to produce its output, such as labor, materials, and capital.

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Production Technology

The different ways a firm can combine inputs to produce output.

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Taxation is a leaky bucket

The idea that the loss in consumer wellbeing from a tax is greater than the tax revenue collected.

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Quasilinear Preferences

A type of utility function where the consumer's satisfaction from one good (x) is independent of the amount consumed of the other good (y). This means the demand for good x depends only on the price ratio and not on income.

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Income Effect = Zero

With quasilinear preferences, an increase in income doesn't change the quantity demanded of good x. This is because the consumer always chooses to maximize utility by spending a fixed amount on good x, regardless of their income.

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Vertical Income-Consumption Curve

For quasilinear preferences, the income-consumption curve is a vertical line. This happens because the quantity demanded of good x remains constant across different income levels.

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MUx/px > MUy/py

The marginal utility per dollar spent on good x is greater than the marginal utility per dollar spent on good y. This implies that the consumer will allocate all their income to good x.

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Demand for good x = M/(px+py)

This demand function represents the optimal quantity of good x the consumer will buy, considering income (M), the price of x (px), and the price of y (py). The consumer will allocate the rest of their income to good y.

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Budget Constraint

The limit on the amount of goods a consumer can buy at given prices and income. It's represented by the equation M = pxx + pyy.

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Cobb-Douglas Production Function

A production function where output (Q) is determined by the quantity of labor (L) and capital (K) raised to certain powers, with constants A, α, and β representing productivity, labor's share, and capital's share, respectively.

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Marginal Rate of Technical Substitution (MRTS)

The rate at which one input (e.g., labor) can be substituted for another input (e.g., capital) while maintaining the same level of output. It's calculated as the ratio of the marginal product of labor (MPL) to the marginal product of capital (MPK).

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Cost Minimizing Input Combination

The combination of labor and capital that produces a desired output level at the lowest possible cost. It's achieved when the MRTS is equal to the ratio of input prices.

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Long Run Production

A production scenario where all inputs, including capital, are variable and can be adjusted to minimize costs for a given output level.

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Perfect Substitutes Production Function

A production function where one input can completely replace another without diminishing returns. The MRTS is constant.

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Cost-Minimizing Input Choice (Perfect Substitutes)

In a perfect substitutes production function, the firm will choose the input with the lowest cost per unit of output.

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Marginal Cost (MC) of Output

The additional cost incurred by producing one more unit of output. For perfect substitutes, MC is constant and equal to the price of the chosen input divided by its marginal product.

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Labor Cost Optimization (Perfect Substitutes)

The firm will employ only the input type that minimizes the cost per unit of output, regardless of the overall output level.

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MP & AP Relationship

If Marginal Product (MP) is greater than Average Product (AP), then AP is increasing. If MP equals AP, then AP is constant. If MP is less than AP, then AP is decreasing.

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MP for Production Decisions

To minimize costs, workers should be allocated across plants where the Marginal Product (MP) is equal in both locations. This means allocating workers to the plant with the higher MP until the MPs are equal.

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Declining MRTS

The Marginal Rate of Technical Substitution (MRTS) describes how much of one input can be substituted for another while maintaining the same output level. In this case, the MRTS decreases as you substitute more of one input for the other, leading to a curved isoquant.

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Perfect Complements

Inputs are perfect complements if they must be used in a fixed ratio. This results in an L-shaped isoquant, indicating the need for a specific combination of inputs.

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Returns to Scale

This concept describes how output changes in response to proportional increases in all inputs. Decreasing Returns to Scale means that output increases at a slower rate than the increase in inputs.

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What is the MRTS?

The Marginal Rate of Technical Substitution (MRTS) describes how much of one input can be substituted for another while maintaining the same level of output.

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How does MRTS relate to input prices in the long run?

In the long run, the optimal input combination occurs when the MRTS equals the ratio of input prices (the price of one input divided by the price of another). This means that the firm will substitute inputs until the cost of replacing one input with another is equal to the price difference.

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