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ECON 419

Terms in this set (130)

economics
the science of making decisions in the presence of scarce resources
managerial economics
the study of how to direct scarce resources in the way that most efficiently achieves a managerial goal
economic profits
the difference between total revenue and opportunity cost
opportunity cost
the explicit cost of a resource plus the implicit cost of giving up its best alternative use
Present Value(TVM)
FV/(1+i)^n
Net Present Value(TVM)
(FV1/(1+i)^1)+(FV2/(1+i)^2)+...+(FVn/(1+i)^n)-C0
Marginal benefit
the change in total benefits arising from a change in the managerial control variable Q
Marginal cost
the change in total costs arising from a change in the managerial control variable Q
So long as marginal benefits exceed marginal costs, an increase in Q adds more to total ______ than it does to total _____
benefit; cost
The slopes of the total benefits curve and the total cost curve are equal when net benefits are _____
maximized
incremental revenues
the additional revenues that stem from a yes or no decision
incremental costs
the additional costs that stem from a yes or no decision
market demand curve
the curve indicating the total quantity of a good all consumers are willing and able to purchase at each possible price, holding the prices of related goods, income, advertising and other variables constant
Law of demand
price and quantity demanded are inversely related
Change in quantity demanded
changes in the price of a good lead to a change in ________ of that good, this corresponds to a movement along a given demand curve
Change in demand
changes in variables other than the price of a good, such as income or the price of another good, lead to a change in ______ this corresponds to a shift of the entire demand curve
Normal good
a good for which an increase(decrease) in income leads to an increase(decrease) in the demand for that good
Inferior good
a good for which an increase(decrease) in income leads to a decrease(increase) in the demand for that good
substitutes
goods for which an increase(decrease) in the price of one good leads to an increase(decrease) in the demand for the other good
complements
goods for which an increase(decrease) in the price of one good leads to a decrease(increase) in the demand for the other good
demand function
a function that describes how much of a good will be purchased at alternative prices of that good and related goods, alternative income levels and alternative values of other variables affecting demand
linear demand function
a representation of the demand function in which the demand for a given good is a linear function of prices, income levels and other variables influencing demand
Demand function formula
f(Px,Py,M,H)
Linear Demand function formula
a0+axPx+ayPy+amM+ahH
Consumer surplus
the value consumers get from a good but do not have to pay for
market supply curve
a curve indicating the total quantity of a good that all producers in a competitive market would produce at each price, holding input prices, technology and other variables affecting supply constant
change in quantity supplied
changes in the price of a good lead to change in ______ of that good, this corresponds to a movement along a given supply curve
change in supply
changes in variables other than the price of a good, such as input prices or technological advances, leads to a change _________, this corresponds to a shift in the entire supply curve
supply function
a function that describes how much of a good will be produced at alternative prices of that good, alternative input prices and alternative values of other variables affecting supply
Supply function formula
f(Px,Pr,W,H)
Linear supply function
a representation of the supply function in which the supply of a given good is a linear function of prices and other variables affecting supply
Linear supply function formula
B0+BxPx+BrPr+BwW+BhH
producer surplus
the amount producers receive in excess of the amount necessary to induce them to produce the good
price ceiling
the maximum legal price that can be changed in a market
full economic price
the dollar amount paid to a firm under a price ceiling, plus the non pecuniary price
Full economic price formula
Pc+(Pf-Pc)
Price floor
the minimum legal price that can be changed in a market
Increase in Supply & Increase in Demand
Price change ambiguous, quantity increase
Decrease in Supply & Increase in Demand
Price increase, quantity change ambiguous
Increase in Supply & Decrease in Demand
Price decreases, quantity change ambiguous
Decrease in Supply & Decrease in Demand
Price change ambiguous, quantity decreases
elasticity
a measure of the responsiveness of one variable to changes to another variable
Elasticity formula
(%change in one variable)/(%change in another)
own price elasticity
a measure of responsiveness of the quantity demanded of a good to a change in the price of that good
Own price elasticity formula
(%change in quantity demanded)/(%change in price)
elastic demand
demand is elastic if the absolute value of the own price elasticity is greater than 1
inelastic demand
demand is inelastic if the absolute value of the own price elasticity is less than 1
unitary elastic demand
demand is unitary elastic if the absolute value of the own price elasticity is equal to 1
perfectly elastic demand
demand is perfectly elastic if the own price elasticity is infinite in absolute value;the demand curve is horizontal
perfectly inelastic demand
demand is perfectly inelastic if the own price elasticity is zero; the demand curve is vertical
marginal revenue
the change in total revenue due to a change in output
cross price elasticity
a measure of the responsiveness of the demand for a good to changes in the price of a related good
cross price elasticity formula
(%change in quantity demanded)/(%change in the price of a related good)
income elasticity
a measure of the responsiveness of the demand for a good to changes in consumer income
income elasticity formula
(%change in quantity demanded)/(%change in income)
log linear demand
demand is log-linear if the logarithm of demand is a linear function of the logarithms of prices, income and other variables
least squares regression
the line that minimizes the sum of squared deviations between the line and the actual data points
t-statistic
the ratio of the value of a parameter estimate to the standard error of the parameter estimate
indifference curve
a curve that defines the combinations of two goods that give a consumer the same level of satisfaction
marginal rate of substitution
the rate at which a consumer is willing to substitute one good for another good and still maintain the same level of satisfaction
budget set
the bundles of goods a consumer can afford
budget line
the bundles of goods that exhaust a consumer's income
market rate of substitution
the rate at which one good may be traded for another in the market slope of the budget line
budget set formula
PxX+PyY<=M
budget line formula
PxX+PyY=M
consumer equilibrium
the equilibrium consumption bundle is the affordable bundle that yields the greatest satisfaction to the customer
substitution effect
the movement along a given indifference curve that results from a change in the relative prices of goods, holding real income constant
income effect
the movement from one difference curve to another that results from the change in real income caused by a price change
production function
a function that defines the maximum amount of output that can be produced with a given set of inputs
fixed and variable factors of production
fixed factors are the inputs the manager cannot adjust in the short run, variable factors are the inputs a manager can adjust to alter production
total product
the maximum level of output that can be produced with a given amount of inputs
average product
a measure of the output produced per unit of input
marginal product
the change in total output attributable to the last unit of an input
increasing marginal returns
range of input usage over which marginal product increases
decreasing(diminishing) marginal returns
range of input usage over which marginal product declines
negative marginal returns
range of input usage over which marginal product is negative
value marginal product
the value of the output produced by the last unit of an input
Consumers consider wine and cheese to be substitute goods. Which of the following events would cause a fall in the price of wine and a fall in the quantity sold of cheese?
A fall in the price of grapes
Consumers consider wine and cheese to be complementary goods. Which of the following events would cause a fall in the quantity sold of wine and a fall in the price of cheese?
A rise in the price of grapes
Economies of scale exist whenever long run average costs
decrease as output is increased
Price elasticity of demand will increase in face of
an increase in the number of substitutes, an increase in the percentage of income spent on the good, an increase in the time that lapses following a change in price
Economic costs are _______ than accounting costs and economic profits are _____ accounting profits
greater; less
In a competitive market the price rises as the quantity sold falls. This outcome could have been caused by a rise in the price of a(n) ______ good
intermediate
In a competitive market, the price rises and the quantity sold rises. This outcome could have been caused by a fall in the price of a(n) ______ good
complementary
In a competitive market, the prices rises and quantity sold rises. This outcome could be explained by, ceteris paribus
a rise in the price of a good considered to be a substitute by consumers
In a competitive market, the price falls and quantity sold rises. This outcome could be explained by, ceteris paribus
improved technology in production of goods, a fall in the price of alternative goods firms in this market could produce, a fall in the price of intermediate goods used to produce this good
A competitive market is hit with two events: rise in the price of a substitute good and a fall in the price of a jointly produced good. Ceteris paribus, we would expect:
the price of this good to rise, but we cannot make a prediction regarding the change in quantity sold without further information
A competitive market is hit with two events: the price of an intermediate good used in production falls and the price of a complementary good falls. Ceteris paribus, we would expect:
the quantity sold of this good to rise, but cannot make a prediction regarding the change in price without further information
Consumers consider wine and cheese to be substitute goods. Which of the following events would cause a fall in the price of wine and a rise in the quantity sold of cheese?
A fall in the price of milk
Consumers consider wine and cheese to be complementary goods. Which of the following events would cause a fall in the quantity sold of wine and a rise in the price of cheese
A rise in the price of milk
As an industry becomes more competitive, approaching perfect competition, the Rothschild index will approach ___ and the C4 ratio will approach ___
0; 0
The "hold up" problem potentially emerges when firms acquire inputs through
spot markets
Under which of the compensation plans is a firm most likely to be producing where the marginal revenue of the last unit produced equals zero
revenue sharing
The firms which use _____ compensation of employees are the ones most likely to generate the greatest benefits from implementation of the quality control procedures
piece rate
The short run supply curve for a firm in a perfectly competitive market is
the marginal cost curve above minimum average variable cost
In order to park in most parking garages and lots on Purdue's campus during the day, from 7:00am to 5:00pm, you must purchase and display a parking sticker on your car. Outside of these hours you can park for free: no sticker is required. This is an example of:
peak load pricing
In a market characterized by monopolistic competition we would expect in the long run:
firms in the market will produce at output levels below minimum efficient scale, the lerner index will be greater than zero, price will equal average total cost
Ceteris paribus, an increase in complexity that increase the marginal cost of writing contracts with suppliers of critical inputs will
decrease the optimal duration of the contracts involved
"Buy two, get one free" is an example of _____ degree price discrimination
2nd
The substitution effect isolates the change in consumption of a good caused by a change in
relative prices
At a given basket of goods X and Y the slope of the indifference curve is steeper than the slope of the budget line. If the quantity of good X is on the horizontal axis, we can conclude that at this basket
the consumer is willing to give up more units of Y to get an additional unit of X than is necessary given current prices Px and Py
Suppose a consumer's preferences over baskets of goods X and Y are complete and transitive. Furthermore they are such that we have non-satiation ("more is better") and diminishing (absolute value of) marginal rates of substitution. In the neighborhood of current prices and income, X is a normal good and Y is an inferior good. Following a rise in the price of good Y we can conclude that:
the income and substitution effects have competing effects, leading to an indeterminate impact on the consumption of good Y
Joe consumes 48 units of food and 12 units of clothing. If he considers food an inferior good
Joe would strictly prefer receiving $10 in cash to receiving a $10 gift certificate at a clothing store
In the long run firms will produce at minimum efficient scale in markets characterized by
perfect competition
The income effect isolates the change in consumption of a good caused by a change in
real income
For a _____ production technology the cost minimizing levels of labor and capital employed to produce a given amount of output will remain the same regardless of the levels of wages and rental rates of capital
Leontief
The "causal" view of industry asserts that
Structure-->Conduct-->Performance
Reliance upon _____is generally the most desirable alternative in acquiring inputs when there are many buyers and sellers and low transaction costs
Spot exchange
Economist _____ argued that market power inevitably emerges for entrepreneurs who introduced new products consumers want to buy or who discover innovative ways to lower costs. But, he warned, any gains in market power are always in jeopardy, subject to be lost if a firm ceases to innovate. The fortunes of firms rise and fall in the waves of "creative destruction" that wash over markets
Joseph Schumpeter
The Lerner index is a quantitative measure useful in assessing industry ____. The Herfindahl-Hirschman index is a quantitative measure useful in assessing industry____. The Dansby-Willig index is a quantitative measure useful in assessing industry ____
Conduct; Structure; Performance
Regardless of industry structure, a firm will shut down its operations if:
average revenue is less than average variable costs
In a competitive market for a normal good we would expect a fall in income and a rise in the price of an intermediate good used in production to
decrease the quantity of the good sold, but we cannot make a prediction regarding the change in equilibrium price without further information
In a competitive market for a normal good we would expect a fall in the price of a jointly produced good and a rise in the price of substitute good to
increase the equilibrium price of the good but we cannot make a prediction regarding the change in the quantity sold without further information
For a Leontief production technology, the marginal rate of technical substitution
is undefined, since it is not possible to substitute labor for capital
Marginal revenue is positive in the region of the demand curve for which
Eq,p <-1
The percentage of variation in the "left hand side" variable explained by variation in the "right hand side" variables in a regression equation can be determined using the ____ statistic
R^2
Consumers consider bagels and cream cheese to be complementary goods. Which of the events below would cause a decrease in the quantity sold of bagels and a rise in the price of cream cheese
A rise in the price of milk
Accounting costs are typically____ than economic costs. Therefore accounting profits are ____than economic profits
less; greater
The price of gasoline falls as the quantity sold falls. This outcome could be explained by
falling household incomes
The price of corn falls and quantity sold falls. This outcome could be explained by
A decrease in subsidies to ethanol producers
The annuity value of a stream of future receipts is ___ the present value
greater than
Consumers consider bagels and cream cheese to be complementary goods. A fall in the price of cream cheese and a fall in the quantity of bagels sold would be the result of a ____ in the price of ____
rise; flour
Which of the following statements is not true?
An auctioneer is always indifferent between different kinds of auctions, given revenue equivalence
A surplus of or excess supply of a product in a competitive market will be created by a price ____ set ____ the equilibrium price
floor; above
We can reduce, but not eliminate the ____ problem confronting stockholders by increasing the percentage of managers' compensation tied to profits of the firm
principal-agent
In the region of a demand curve where marginal revenue is negative it is true that
abs value(Eq,p)<1
Insurance companies confront a(n) _____ problem before insurance contracts are written. After the contract is in place they confront a(n) ______ problem. Both of these problems raise expected costs of insuring clients
adverse selection; moral hazard
In a perfectly competitive market the price rises as the quantity sold falls. This movement in price and quantity could have been caused by
An increase in the price of an intermediate good used in production
The "Scorpion" Game highlights the importance of ____ in potentially improving the outcome for both players
credible promises
Winners of state lotteries are often given the choice of receiving their winnings either as one lump sum (based upon a rate of time discount used by the state, iState) or as annual payments spread out over a period of twenty or more years. In states where it is allowed, investors will sometimes approach lottery winners and offer to pay them a lump sum in exchange for the lottery winner signing over to the investor the right to receive the stream of annual payments. Under what circumstances- if iWinner and iInvestor are the rates of time discount for the winner and investor-might we expect the winner to accept an offer from the investor
iInvestor<iState<iWinner
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