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Econ Test 2

Terms in this set (40)

How can Government help in achieving economic efficiency?
Correcting market failures
How do the many layers of the Federal Govt lead to economic efficiency?
Aggregating information
What are the Government tools of monetary policy?
Controlling interest rates
What do we mean by "regulatory capture"?
The people that regulate the industry have expertise and experience in the industry
Be able to pick out an example of bureaucratic inefficiency
Katrina social security fraud
What is the basic formula for the price elasticity of demand?
% change in quantity demanded caused by % change in price
Be able to compute the Ed between two prices and quantities DON'T use the midpoint formula
ED = ((Q2-Q1)/Q1)/((P2-P1)/P1)
What happens to the Ed of a straight line demand curve as we move along the curve
Up the curve demand is elastic, Down the curve demand is inelastic
What are the numerical ranges of Ed for elastic and inelastic demand
>1 elastic <1 inelastic
What does a perfectly elastic demand curve look like
Horizontal and parallel to the horizontal axis
Know the Total Revenue test for elasticity of demand
...
What happens to TR if you increase the price of a good (example question)
...
What is the main determinant of the Elasticity of Supply
Time
What does a negative Income Elasticity of demand mean? Positive?
Negative inferior, positive normal
What does a positive Cross Elasticity of demand mean? Negative?
Price of one good goes up the demand.....
Be able to compute the Cross Elasticity if you are given the percentage changes and be able to interpret the resulting number
...
What does the word "utility" mean in economics?
Satisfaction
What does the "law of diminishing marginal utility" state?
At some point if you keep consuming, products yield less and less satisfaction
What does the law of diminishing MU tell us about the slope of a demand curve?
Explains why demand curves slope downward
What is the formula for Utility Maximization. What if the consumer is not in equilibrium, what should they do?
Mux/Px = MUy/Py
Be able to take a table of the MU of two goods and their respective prices and tell me how many units of each good the consumer would purchase at a fixed level of income.
Textbook problem 4 page 151
Be able to take the same table in 21) and compute the consumer's total utility
Textbook problem 4 151
How can we use diminishing MU to derive a demand curve?
Demand curves slope downward
What is the diamond water paradox?
Price of a product related to its marginal utility
What does the budget line show?
Given 2 goods all possible combinations of the goods that can be purchased given income and price of the goods
Can the consumer purchase bundles of goods outside of their budget line?
No
What does an indifference curve show?
All possible combinations of 2 goods that provide the same level of total utility
Be able to look at a graph of indifference curves and budget lines and pick out the point of equilibrium at max consumer utility
...
What is the best explanation of the difference between neoclassical econ and behavioral econ?
Neoclassical makes assumption that all people are rational...
Behavioral says people make systematic mistakes
What does Behavioral econ say about the placement of items in supermarkets?
They place impulse items in strategic locations
What is the behavioral econ definition of "mental accounting"?
isolating purchases
What is an example of an implicit cost?
Foregone Rent
What does an economist include in "Total Cost"?
explicit and implicit
What is the main difference between the short run and the long run to economists?
Long run fixed
Short run variable
What does the law of diminishing returns state?
Keep adding more variable input to a fixed input at some point marginal product will decline
What do the MP curve look like when a firm is maximizing output?
0
What is the relationship between the MP of labor curve and the total variable cost curve?
If MP is increasing then ... is increasing at a decreasing rate
What do we know about the relationship between the slope of the TVC curve and the TC curve?
They're the same and both equal MC
Why is the short run ATC curve U shaped?
Law of diminishing marginal return... increasing and decreasing returns
Why is the long run ATC curve U shaped?
Economies and diseconomies of scale
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