Exam 2

Question 1

o Law of demand

Answer 1

As the price goes up, the quantity demanded goes down

Question 2

• Consumer Surplus

Answer 2

The net economic benefit to the consumer due to a purchase (i.e. the willingness to pay of the consumer net of the actual expenditure on the good) is called consumer surplus.

It is also the difference between a consumer’s willingness to pay (demand curve) and what they actually pay

The area under the demand curve and above the price

Question 3

• Market Demand

Answer 3

is the sum of the quantities demanded by all individuals at each price.

Question 4

• production function

Answer 4

tells us the maximum possible output that can be attained by the firm for any given quantity of inputs.

Question 5

• production set

Answer 5

is a set of technically feasible combinations of inputs and outputs

Question 6

• Cardinal measure

Answer 6

given amount of inputs yields a unique and specific amount of output.

Question 7

• marginal product

Answer 7

of an input is the change in output that results from a small change in an input holding the levels of all other inputs constant.

Question 8

• average product

Answer 8

of an input is equal to the total output that is to be produced divided by the quantity of the input that is used in its production

Question 9

• law of diminishing marginal returns

Answer 9

states that marginal products (eventually) decline as the quantity used of a single input increases.

Question 10

• isoquant

Answer 10

traces out all the combinations of inputs (labor and capital) that allow that firm to produce the same quantity of output

Question 11

• marginal rate of technical substitution

Answer 11

measures the amount of an input, L, the firm would require in exchange for using a little less of another input, K, in order to just be able to produce the same output as before.

Question 12

• elasticity of substitution (s)

Answer 12

measures how the capital-labor ratio, K/L, changes relative to the change in the MRTSL,K.

Question 13

• Returns to scale

Answer 13

explains by how much output will increase when ALL inputs increase by a particular amount.

Question 14

• Cost minimization problem

Answer 14

: Finding the input combination that minimizes a firm’s total cost of producing a particular level of output.

Question 15

• Long run

Answer 15

A period of time when the quantities of all of the firm’s input can vary

Question 16

• Short run

Answer 16

A period of time when at least one of its inputs’ quantities is fixed

Question 17

• Isocost line

Answer 17

The set of combinations of labor and capital that yield the same total cost for the firm.