# Micro Test 2

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1. What is income elasticitiy of demand?
• percentage change in quantity demanded / percentage change in people's income
• + coefficient = normal good
• - coefficient = inferior good
2. What is cross elasticity of demand?
• percentage change in quantity demanded (good A) / percentage change in price (good B)
• + coefficient = 2 goods are substitutes
• - coefficient = 2 goods are complimentary
3. What is price elasticity of supply?
• percentage change in quantity supplies / percentage change in price
• over a shorter time period (steep inelastic) limited capacity
• over a longer period of time (flat elastic) seller can make changees to produce more
4. Use a supply-demand graph to show how an excise tax would affect the equilibrium proce of a product
• Supply and Demand curve.
• Demand curve can shift from perfectly inelastic to a more elastic curve.
• Depending on the curve depends on how much the buyer pays of the excise tax or the seller pays
5. How do agricultural price supports work?
• Consumer pays higher price support
• Creates surplus

Supply and demand curve shows surplus
6. How do agricultural target prices (direct payments) work?
• Government promises farmers a target price \$2.5
• consumer pays market price-no surplus \$1.5
• government pays difference \$1
7. Short Run
Capacity to produce is fixed
8. Long Run
Capacity to produce is flexible
9. What is production function?
Tells us the physical rellationship between number of variable inputs used and number of output produced

Example 1 worker(variable input) produces 20 cars(output), 2 worker produce 50 cars
10. Marginal product of labor(MP)
Change in output from using one more variable input

• example 0 worker 0 cars, 1 worker 20 cars MP 20
• 2 workers 50 cars mp 30
11. Describe increasing marginal returns.
• When adding more and more variable inputs into a fixed capacity at first marginal product increases
• Why? gains from teamwork(specialization)-division of labor
12. What is the law of diminishing marginal returns?
• When adding more and more variable inputs into a fixed capacity eventually the increases in production will get smaller.
• Why? crowding, approaching maximum
13. Sunk Cost
• Cost already paid and cannot be changed
• (should not be used in short-run decisions, irrelevent)
14. Opportunity Cost
Value placed on opportunities given up
15. Total Cost
Total Cost = Explicit Cost + Implicit Cost
16. Explicit Cost
Any cost that involve a dollar payment
17. Implicit Cost
Cost implied by giving up an opportunity
18. Opportunity Cost of Capital
Return that could have been earned on next best investment opportuntiy
19. Economic Profit
Total Revenue - Total Cost
20. Net Revenue
Total Revenue - Explicit Cost
21. Zero Economic Profit
• Total Revenue - Total cost = 0
• TR = TC
• Earning just enough to stay in business
22. Positive Economic Profit
• Total Revenue - Total Cost > 0
• TR > TC
• Earning more than enough to stay in business
23. Negative Economic Profit
• Total Revenue - Total Cost < 0
• TR < TC
• Not earning enought to stay in business
24. Total Fixed Cost
When production level changes come cost stay the same
25. Total Variable Cost
when production level changes some cost will change
26. Total Cost
Total variable cost + total fixed cost
27. Average total cost
average fixed cost + average variable cost / quantity
28. Average variable cost
Total variable cost / quantity
29. Average Fixed Cost
Total fixed cost / quantity
30. Marginal Cost
change in total cost from producing one more unit
31. Explain why firms at first experience decreasing marginal cost in the short-run
increasing marginal return
32. Explain why firms eventually experience increasing marginal Cost in the short-run
increasing marginal return
33. Whe does Average fixed cost continually decrease as output increaes
Total fixed cost is spread over more units so per unit fixed cost falls
34. Economies of Scale
As capacity to produce increase, average total cost decrease (long-run)
35. Cause of Economies of Scale
• Quantity discounts on parts
• certain set cost can be spread over more units
• greater specialization of management
• avoid duplicate costs
36. Constant Returns to Scale
as capacity to produce increases average total cost stay the same
37. Diseconomies of Scale
As capacity to produce increase, average toal cost increase
38. Cause of Diseconomies of Scale
• overspecialization of management
• miscommunication
• bureauratic
• overspecialization of labor
39. Perfect Competition
• industry consist of large number of small sellers, selling products that are identical
• Each firms faces a perfectly elasitc demand
• each firm has no market power
• each firm takes market price as given
40. Perfectly Competitive firm
Single firm selling in a perfect competition
41. Market Power
The degree to which a firm can influence its own price

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 Author: atcannon ID: 135747 Filename: Micro Test 2 Updated: 2012-02-23 13:04:26 Tags: Economics Folders: Description: SG#2 q26-31,SG#3 Show Answers:

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