Crash Course Flashcards
(19 cards)
Define: i) Marginal Revenue (MR) ii) Marginal Cost (MC)
MR is the additional revenue from selling one more unit. MC is the additional cost from producing one more unit.
What causes MR to be: i) Positive ii) Zero iii) Negative
MR is positive when TR rises, zero when TR is at its peak, and negative when TR falls with extra units.
Why is the price per unit sold at the profit-maximizing level not the same as at break-even level?
Profit-maximizing price is based on MR = MC, while break-even price equals ATC. They usually differ.
State one reason for the eventual increase in the value of the Average Cost (AC).
Diseconomies of scale—like inefficiencies—can raise AC as output grows.
How are Marginal Cost (MC) and Average Total Cost (ATC) related?
MC pulls ATC down when below it and pushes it up when above; they intersect at ATC’s minimum.
Distinguish between money income and real income.
Money income is the dollar amount earned. Real income measures purchasing power adjusted for prices.
Difference between the income effect and the substitution effect
- Income effect: Change in demand due to a change in real income.
- Substitution effect: Change in demand due to a good becoming relatively cheaper.
What happens to equilibrium consumption and utility if the price of good L rises to $4 (income and other prices constant)?
The consumer buys less of good L and reallocates spending, leading to lower total utility.
Distinguish between the short-run and the long-run in production.
Short-run has at least one fixed input; long-run allows all inputs to vary.
Define: Average Product (AP) and Marginal Product (MP).
- AP is output per unit of labor.
- MP is the additional output from one more unit of labor.
How are AP and MP related?
AP rises when MP > AP and falls when MP < AP. MP cuts AP at its max.
State the Law of Diminishing Returns
As more of a variable input is added to fixed inputs, marginal output eventually decreases.
Adding more workers to fixed land increases output at first, then less and less per worker.
When do diminishing returns begin?
Diminishing returns begin when MP starts to fall.
What causes the shape of the Total Product curve?
The law of diminishing returns—output rises at a decreasing rate as more of a variable input is added to fixed inputs.
What is a monopoly? Discuss three reasons for the existence of monopolies.
A monopoly has one seller and no close substitutes. Causes: legal barriers, control of resources, economies of scale.
What is price discrimination? Why do firms price discriminate?
Price discrimination means charging different prices for the same product. Firms use it to increase revenue.
Distinguish between second and third degree price discrimination, with examples.
- Second-degree: Prices vary by quantity or version (e.g., bulk discounts).
- Third-degree: Prices vary by customer group (e.g., student or senior discounts).
Explain the long run equilibrium condition for a firm in monopolistic competition.
In long-run, firms make normal profit (P = ATC). Output is where MR = MC, not minimum ATC, causing excess capacity.
Difference between a Giffen good and an Inferior good
- Inferior good: Demand falls as income rises.
- Giffen good: A rare inferior good where demand rises when price increases.
