Exam 2

Question 1

Accounting profit

Answer 1

is equal to revenue minus explicit cost.

Question 2

Economic profit

Answer 2

is equal to revenue minus the opportunity cost of resources used. It is usually less than the accounting profit.

Question 3

Capital

Answer 3

is the total value of assets owned by an individual or firm—physical assets plus financial assets.

Question 4

implicit cost of capital

Answer 4

is the opportunity cost of the use of one’s own capital—the income earned if the capital had been employed in its next best alternative use.

Question 5

explicit cost

Answer 5

is a cost that requires an outlay of money.

Question 6

implicit cost

Answer 6

does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone.

Question 7

principle of “either–or” decision making,

Answer 7

when faced with an “either–or” choice between two activities, choose the one with the positive economic profit.

Question 8

Marginal analysis

Answer 8

involves comparing the benefit of doing a little bit more of some activity with the cost of doing a little bit more of that activity.

Question 9

marginal cost

Answer 9

is the additional cost incurred by producing one more unit of that good or service.

Question 10

increasing marginal cost

Answer 10

when each additional unit costs more to produce than the previous one.

Question 11

marginal cost curve

Answer 11

shows how the cost of producing one more unit depends on the quantity that has already been produced.

Question 12

constant marginal cost

Answer 12

when each additional unit costs the same to produce as the previous one.

Question 13

decreasing marginal cost

Answer 13

when each additional unit costs less to produce than the previous one.

Question 14

marginal benefit

Answer 14

is the additional benefit derived from producing one more unit of that good.

Question 15

decreasing marginal benefit

Answer 15

An activity when each additional unit of the activity yields less benefit than the previous

Question 16

marginal benefit curve

Answer 16

Shows how the benefit from producing one more unit depends on the quantity that has already been produced.

Question 17

optimal quantity

Answer 17

Is the quantity that generates the highest possible total profit.

Question 18

profit-maximizing principle of marginal analysis

Answer 18

when faced with a “how-much” profit maximizing decision pick the optimal quantity that has a marginal benefit that’s ≥ marginal cost

Question 19

sunk cost

Answer 19

A cost that has already been incurred and is nonrecoverable. A sunk cost should be ignored in decisions about future actions.

Question 20

util

Answer 20

is a hypothetical unit of utility (measures satisfaction)

Question 21

marginal utility

Answer 21

is the change in total utility generated by consuming one additional unit of that good or service.

Question 22

marginal utility curve

Answer 22

Shows how marginal utility depends on the quantity of a good or service.

Question 23

principle of diminishing marginal utility

Answer 23

for each unit consumed, you get less satisfaction from it.

Question 24

if two goods are complementary

Answer 24

The cores-price elasticity is less than zero

Question 25

the %∆ Qdemand / %∆price

Answer 25

cross-price elasticity of demand

Question 26

cross-price elasticity of demand

Answer 26

measures the effect of change in one good’s price on the quantity demand of the other good.

-Is equal %∆ in Qd of good/%∆ of other good

Question 27

The relationship between an individual’s consumption bundle and his or her utility is called a:

Answer 27

Utility function

Question 28

optimal consumption bundle

Answer 28

The combination of goods that maximizes total utility given a budget constraint is the