Download ECON 102 Exam 2: Elasticity, Utility, Production, and Markets and more Exams Economics in PDF only on Docsity!
PSU ECON 102 EXAM 2 QUESTIONS AND CORRECT ANSWERS 100% CORRECT
Elasticity -in price or income ANSWER Measure of the responsiveness of buyers and sellers to changes
Price Elasticity of Demand -change ANSWER How quantity demanded responds to a price
Price Elasticity of Supply - ANSWER How quantity supplied responds to a price change Income Elasticity of Demand -in income ANSWER How quantity demanded responds to a change
Cross-Price Elasticity of Demand -price change of another good ANSWER How quantity demanded responds to a
Elastic goods - ANSWER Large response in consumption to a price change Inelastic goods - ANSWER Small response in consumption to a price change Determinants of PED -(2) Share of Budget Spent on the Good ANSWER (1) Availability of Substitutes (3) Necessities vs Luxuries(4) Time and Adjustment Process
PED formula - ANSWER [Change in Q / Average Q] / [Change in P / Average P]
(always negative) PED coefficient -> -1 [Relatively Inelastic] ANSWER = 0 [Perfectly Inelastic] = -1 [Unitary Elasticity]< -1 [Relatively Elastic] -Infinity [Perfectly Elastic] Total Revenue (TR) -products ANSWER Amount of money a seller receives from selling their TR = P x Q-Elastic (lowering price will increase revenue) -Inelastic (raising price will increase revenue) Elasticity and Taxes - ANSWER Elastic - seller bears more of tax burden (higher DWL) Inelastic - buyer bears more of tax burden (lower DWL) Government Revenue - ANSWER Elastic - Less Inelastic - More(taxes on inelastic goods are good gvmt revenue sources)
IED formula - ANSWER % change Q / % change income IED coefficient - ANSWER < 0 [Inferior good] (0,1) [Normal Necessity good]> 1 [Normal Luxury good]
-Experiment with SSN Relativity --If make similar, relative good choice seems even more fabulous ANS Difficult to compare the dissimilar things
Fairness -based on their own gains and losses ANSWER People often base outcomes on societal distributions rather than
Dictator Game - ANSWER Player 1 divides pot Rational solution - P1 takes everything Actual solution - P1 gives some Ultimatum Game - ANSWER Player 1 proposes offer Player 2 accepts or rejects (both receive nothing) offerRational solution - P2 will accept any offer greater than zero Actual outcome - P2 rejects if not given fair share Pitfalls in Decision Making - ANSWER (1) Ignoring Opportunity Costs (2) Not Ignoring Sunk Costs (already paid and cannot be recovered)(3) Being Unrealistic abiout Future Behavior
Technology -services ANSWER Process a firm uses to turn inputs into outputs of good and -To create profit, output must be worth more than inputs Implicit Costs - ANSWER Opportunity cost of doing business (forborne wages, loss of interest)
Explicit Costs - ANSWER Tangible out-of-pocket expenses (land, labour) Production Function-ANSWER Relationship between the inputs a firm uses and theoutput it creates( exp) eriences diminishing marginal product) Factors of Production - ANSWER Inputs used in producing goods and services-land, Labour, Capital
Diminishing Marginal Product - ANSWER Successive increased in inputs are associatedwith a slower rise in outputs
Accounting Profit - ANSWER Total revenue minus explicit costs Economic Profit - ANSWER Total revenue minus explicit and implicit costs (takes into account opportunity cost) Fixed Costs (FC) - ANSWER Unavoidable; fixed amount at any level of output (rent, capital, machinery) Variable Costs (VC) -(costs go up exponentially as you produce more and more) ANSWER Change with rate of output
Total Cost (TC) -services it produces ANSWER Amount a firm spends in order to produce the goods and TC = FC + VC
Marginal Revenue (MR) Equation - ANSWER Change in Total Revenue Accounting Profit Equation - ANSWER Total Revenue - "seen" costs Economic Profit Equation - ANSWER Total Revenue - ("seen" + "unseen" costs) Seen Costs - ANSWER Billable Costs Unseen Costs - ANSWER Opportunity Costs or Potential Income Given Up Total Cost TC Equation - ANSWER Fixed Costs FC + Variable Costs VC Marginal Costs MC Equation - ANSWER Change in Total Cost Profit Equation From Graph -or QuantityPrice - Average Total Cost ANSWER Price x Quantity - Average Total Cost x Quantity
factors of production - ANSWER Labor: Works and Hours Capital: Machinery, Equipment, Facilities Marginal Product -Capital is Added ANSWER Change in Total Output Produced When a Unit of Labor or
Diminishing Marginal Returns -Decrease Over Time Due to Specialization ANSWER As Input Increase, The Marginal Returns
Profit Is Maximized When. - ANSWER - Marginal Revenue MR = Marginal Cost MC
- Produce until negative marginal effects
What is Revenue. - ANSWER Income earned by a firm Fixed Costs FC - ANSWER Costs that do not change, such as rent Variable Costs VC - ANSWER Costs that do change with the level of output Total Cost TC - ANSWER Fixed + Variable Costs Average Total Costs ATC - ANSWER Total Costs / Quantity Average Variable Costs AVC - ANSWER Variable Costs / Quantity Average Cost Curves are. - ANSWER U shaped due to diminishing marginal returns andspecialization
Economies of Scale - ANSWER - When a firm increases its output and costs decreasedue to specialization
- MR is greater than MC Constant Returns to Scale - ANSWER - When a firm increases its output and costsincrease as much as revenue costs increase
Diseconomies of Scale - ANSWER - When a firm increases its output and costs increasemore than revenue does
Characteristics of Perfect Competition. - ANSWER - No barriers to entry
Second Degree Price Discrimination -Costco and Sam's Club) ANSWER Prices based on buying in bulk (Ex:
Third Degree Price Discimmination -demographics (Ex: PSU Football tickets, student vs non student tickets) ANSWER Charge different prices based on
Oligopoly -- Firms make decisions based on one another ANSWER - Small number of firms in market
- Firms can collectively control market price Nash Equilibrium -changing its strategy (when on box has 2 underlines, thats the nash eq) ANSWER Strategy set in which no player can benefit by unilaterally
Dominant Strategy -strategy for one player ANSWER Occurs when one strategy is better than another
Extensive form - ANSWER Tree Form Strategic Form - ANSWER Box Form Player 1's payoff - ANSWER Always the first payoff Player 2's payoff - ANSWER Always the second payoff Tit - For - Tat -player did in the previous period. ANSWER playing cooperatively at first, then doing whatever the other
(On Graph) When perfectly price discrimination. - ANSWER Charge everyone above
MC (on graph) Anti-Trust Policy -monopoly, which is the control of a market by one company. ANSWER A policy designed to ensure competition and prevent
Sunk Cost Fallacy -sunk cost ANSWER You make a different decision with a sunk cost than w/o a
Short Run, firms stay open if. - ANSWER Price > AVC Short run, firms close if. - ANSWER Price < AVC In long run, firms enter if. - ANSWER Price > ATC In long run, firms exit if. - ANSWER Price < ATC Industrial Organization -types of firm structures in an economy ANSWER Branch of microeconomics that studies the different (Assumes all firms are profit maximizing) Perfect Competition -(2) Homogeneous products ANSWER (1) Many buyers / Many sellers (3) No barriers to entry Many buyers / Many sellers -market share ANSWER >50 different firms each with 2% or less of -little market power (no ability to influence market price) -firms are price takers (have to take market price) Homogeneous products - ANSWER Goods are perfect substitutes for each other
