ECON 11 LE2

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Questions and Answers

What does a change in the price of one commodity do to the budget line?

  • It pivots the budget line anchoring on the commodity that did not change price. (correct)
  • It shifts the budget line away from the origin.
  • It causes the budget line to become steeper without affecting the total budget.
  • It leads to a decrease in the total income available for spending.

How is marginal cost (MC) defined in the context of production?

  • The total cost incurred in producing all units of output.
  • The fixed costs associated with production excluding variable costs.
  • The average cost of producing multiple units of output.
  • The additional cost incurred in producing one extra unit of output. (correct)

What formula would you use to calculate average cost (AC)?

  • Total Cost x Quantity.
  • Fixed Cost + Variable Cost.
  • Total Cost / Quantity. (correct)
  • Fixed Cost / Variable Cost.

If a firm produces 1000 units at a total cost of $10,000, what is the marginal cost of producing the 1001st unit if the total cost rises to $10,006?

<p>$6 (B)</p>
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What happens to total costs as output increases?

<p>Total costs generally rise, mostly because of variable costs. (B)</p>
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What forms the Equal-Cost Curve or Isocost in production?

<p>The budget line for suppliers (C)</p>
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Which combination results in the maximum units that can be purchased given a total cost of $6?

<p>2 units of Land and 3 units of Labor (C)</p>
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What does the least-cost tangency represent in a production graph?

<p>The best combination of inputs for minimal costs (D)</p>
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Which scenario indicates a firm should continue production in a perfectly competitive market?

<p>If price is greater than the shutdown point (B)</p>
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How does the Law of Diminishing Marginal Product manifest in production?

<p>As an eventual decrease in marginal output with more inputs (A)</p>
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What happens to the demand for good B if the price of good A increases?

<p>The demand for good B will increase. (B)</p>
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What does the Marginal Revenue Product (MRP) equal under perfect competition?

<p>MP (C)</p>
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How does the law of diminishing marginal utility affect the consumption of good A?

<p>Consumers will stop buying good A when its marginal utility equals that of other goods. (B)</p>
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What defines the concept of income elasticity?

<p>The ratio of quantity demanded change to income change. (C)</p>
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What happens to the Labor Force Participation Rate (LFPR) when there is an increase in wage levels?

<p>It decreases because fewer hours are desired. (B)</p>
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What is the primary reason for the paradox of value, where essential commodities like water have low prices while luxury goods like diamonds are expensive?

<p>The abundance of a good decreases its relative desirability. (A)</p>
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Which of the following factors does NOT affect the Marginal Productivity of Labor?

<p>Availability of natural resources (C)</p>
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In consumer theory, what distinguishes cardinal from ordinal utility?

<p>Cardinal utility is not measurable, while ordinal utility is rankable. (C)</p>
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What is the primary consequence of a minimum wage set above the equilibrium wage?

<p>Reduction in work hours for employees (A)</p>
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Which statement best describes the concept of wage differentials?

<p>They do not exist if people and jobs are alike. (D)</p>
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Flashcards

Income effect

The change in quantity demanded that arises because a price change lowers consumers' real incomes.

Substitution effect

The change in quantity demanded due to a change in the relative price of one good compared to other goods.

Law of Diminishing Marginal Utility

This economic principle states that as consumption of a good increases, the marginal utility (satisfaction) gained from each additional unit decreases.

The Paradox of Value

This concept explains why diamonds, while not essential, are more expensive than water, even though water is vital for life.

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Income elasticity of demand

The measure of how responsive the quantity demanded of a good is to changes in income.

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Total Costs (TC)

The total cost of producing a given quantity of goods, including both fixed costs (e.g., rent) and variable costs (e.g., wages).

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Marginal Cost (MC)

The additional cost incurred when producing one more unit of output.

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Average Cost (AC)

The average cost per unit of output; calculated by dividing total cost by the quantity produced.

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Average Fixed Cost (AFC)

The average fixed cost per unit of output; calculated by dividing total fixed cost by the quantity produced.

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Isoquant

A curve that shows all the combinations of two inputs (like labor and capital) that produce the same level of output.

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Isocost

A curve showing all the combinations of two inputs (like labor and capital) that a firm can buy with a given budget.

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Least-Cost Tangency

The point where the isocost curve is tangent to the isoquant, representing the combination of inputs that minimizes the cost of producing a specific output.

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Law of Diminishing Marginal Product

The idea that as we increase the use of one input (e.g., labor) while keeping other inputs fixed (e.g., land), the additional output we get from each additional unit of the input eventually decreases.

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Shutdown Point (in Short Run)

The point below which a firm should shut down its operations in the short run. If the price is below this point, the firm cannot even cover its variable costs.

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Substitution Effect of Labor

The change in the quantity of labor supplied due to the change in the wage rate, holding other factors constant.

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Income Effect of Labor

The change in the quantity of labor supplied due to a change in purchasing power, holding other factors constant.

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Labor Force Participation Rate

The fraction of the working-age population that is either employed or actively seeking employment.

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Employment Rate

The percentage of the labor force that is currently employed.

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Unemployment Rate

The percentage of the labor force that is currently unemployed and actively looking for work.

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Study Notes

Marginal Analysis in a Nutshell

  • Optimal Activity Level: Maximize an activity until marginal benefit equals marginal cost (zero marginal net yield).
  • Relative Activity Levels: Allocate resources to activities with similar marginal benefits. Choose the option with the highest marginal net yield.

Totals, Averages, and Marginals: Arithmetic Relationships

  • First Units: At the zeroth unit, total, average, and marginal values are all zero. If not zero, marginal values are still zero.
  • Total and Marginal Relationship: Total is the sum of all preceding marginal values.
  • Relationship between Average and Marginal: Average rises when marginal is above average and vice versa. Average stays constant when marginal equals average.

Geometry of Marginal Analysis: Total X Curves

  • Average X and Total Curve: To find the average profit at a point, draw a line from the origin to that point on the graph and calculate its slope (rise/run).
  • Marginal X and Total Curve: To find the marginal profit at a point, determine the slope of the tangent line at that point.
  • Total X and Average Curve: The total cost of any quantity (OQ) is the area under the marginal cost curve above the line OQ.

Straight-line Marginal and Average Curves

  • For average to rise, the marginal must be above average. Vice versa for average to fall. Marginal equals average when average is constant.

Total x and Marginal curve

  • The total cost of producing OQ units of any commodity is the area under the marginal cost curve above the line OQ.

General Marginal and Average Curves

  • A tangent line at a given point is used to determine the marginal.
  • Extend the tangent line to the vertical axis and calculate the midpoint.
  • A perpendicular line from the extended point to the horizontal axis passing through the midpoint is drawn.

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