Midterm 2

Question 1

Price Elasticity of Demand

Answer 1

Measures the responsiveness of Quantity Demanded to a Change in Price

Question 2

Income Elasticity of Demand

Answer 2

Measure the responsiveness of Quantity Demanded to a change in Income

Question 3

Elasticity of Supply

Answer 3

Measures the responsiveness of Quantity Supplied to a change in Price

Question 4

Cross Price Elasticity

Answer 4

Measures the responsiveness of Quantity Demanded of one good to the change in Price for another good

Question 5

Sin Tax

Answer 5

Governement taxing certain goods (cigarettes & alcohol) to indirectly generate revenue to cover the Consumers’ Tax Burden

Question 6

3 Assumptions of Preferences

Answer 6

1. Completeness
2. Transitivity
3. Nonsatiation

Question 7

Completeness

Answer 7

Consumer has choice between 2 goods, so they rank them so that ONLY 1 of these is true:

i) Consumer prefers 1 over 2
ii) Consumer prefers 2 over 1
iii) Consumer is indifferent

Question 8

Tansitivity

Answer 8

Consumer prefers good X over good Y, then they must prefer good W over good Z

• Prefer pink to yellow, & prefer yellow to orange therefore you prefer pink to orange (Because pink is above yellow, which is above orange)

Question 9

Nonsatiation

Answer 9

More of a commodity is preferred to less
- Ceteris paribus

Question 10

Utility

Answer 10

Satisfaction, happiness, need for fulfillment consumers recieve from good/ service

Question 11

Marginal Utility

Answer 11

Change in Utility results from incremental change in consumption of good/ service

Question 12

Law of Diminishing Marginal Utility

Answer 12

More of a good/ service is consumed, the Smaller the Increase in Utility
- 3rd adds less than the 2nd, 4th adds less than the 3rd
- does NOT apply to $

Question 13

Consumers’ Objective

Answer 13

To Maximize their Utility subject to their income

Question 14

Consumer Equilibrium

Answer 14

Must satisfy BOTH conditions:
1) Consumer must spend ALL of their income
2) Gossen’s 2nd Law (Equimarginal in Consumption)

Question 15

Discrete VS Continous

Answer 15

Discrete: CANNOT be broken into pieces
- Can’t sell 1/4 of a car
Continous: CAN be continually divided
- Sell orange juice in 1L, 250ml, etc.

Question 16

Voluntary Programs

Answer 16

Responsibilty is on the individual
- There is NO incentive

Question 17

Impure PRIVATE Good

Answer 17

Club good

Question 18

Impure PUBLIC Good

Answer 18

Open access resources

Question 19

Consumer Surplus

Answer 19

Difference between what the consumer is willing to pay & what they have to offer

Question 20

Marginal Value

Answer 20

Value to society
- Necessary vs Luxury

Question 21

Sunk Cost Fallacy

Answer 21

Allowing past cost decision to influence current behavior

Question 22

OverConfidence

Answer 22

People assume they know more than they do
- Leads to bad decisions/ mistakes

Question 23

OverEmphasizing the Present

Answer 23

People put too much emphasis upon current consumption

Question 24

Framing Bias

Answer 24

Consumers may react to a small difference in price

Question 25

Warm Globe Bias

Answer 25

People make choices because they are trying to **influence people's perception of themselves**

Question 26

Sole Propietorship

Answer 26

Business is **owned by a single person** PROS: - easy to form & dissolve - decision making power resides with sole owner - only taxed once CONS: - **Unlimited Liability** for debts of the firm

Question 27

Unlimited Liability

Answer 27

Owner's personal assets can be seized by the firm's creditors

Question 28

Partnership

Answer 28

Business is **owned by 2+ people** PROS: - easy to form & dissolve - permits specialization - spreads risk CONS: - **Joint Unlimited Liability** - decision making is more complex

Question 29

Joint Unlimited Liability

Answer 29

**Each partner is equally liable for debt** acquired by business

Question 30

Corporation

Answer 30

Legal entity that may **conduct business in its own name just as an individual** does - **owners = shareholders** PROS: - can raise large sums of money - Limited Liabilty CONS: - subject to **Double Taxation** - subject to **Principal Agent Problem**

Question 31

Limited Liability

Answer 31

Personal assets CANNOT be seized

Question 32

Double Taxation

Answer 32

Profits of corporation are subject to **1) Corporate Taxation 2) Income Tax**

Question 33

Principal Agent Problem

Answer 33

**Managers not doing what was promised to the Shareholders** - Shareholers want to MAX firm profits - Managers want to MAX personal salary

Question 34

Primary Market for Stocks

Answer 34

Corporation issues a **new stock** - where the 1st transaction occurs

Question 35

Secondary Market for Stocks

Answer 35

**Existing stock** are bought & sold

Question 36

Variable Inputs

Answer 36

**Quantity of the input CAN be charged** within the time period

Question 37

Fixed Inputs

Answer 37

**Quantity of the input CANNOT be changed** within the time period

Question 38

Short-Run

Answer 38

**At least 1 input is Fixed**

Question 39

Long-Run

Answer 39

**ALL inputs are Variable**

Question 40

Total Product

Answer 40

**Total amount of labour** reduced during some time period

Question 41

Law of Diminishing Marginal Returns

Answer 41

As **more of an input as added to production** process, eventually the **increase in output will diminish** - All other inputs constant

Question 42

Accounting Costs

Answer 42

**Actual expenditures** & expenses for capital equipment - **ONLY includes Explicit Costs**

Question 43

Economic Costs

Answer 43

Accounting Cost + Opportunity Costs

Question 44

Fixed Costs in Short-Run

Answer 44

Costs that DO NOT change as output changes - ex: Price of car, Registration fees

Question 45

Variable Costs in Short-Run

Answer 45

Costs that DO change as output changes - ex: Gas, Maintenance

Question 46

Perfect Competition structure

Answer 46

**Lots of little firms, homogeneous products, MANY buyers & sellers, FREEDOM of entry & exit, NO influence on market**

Question 47

Monopoly structure

Answer 47

Only 1 firm

Question 48

Monopolistic Competition structure

Answer 48

Hybrid of Monopoly & Perfect Competition

Question 49

Oligopoly structure

Answer 49

**Few LARGE firms, homogeneous products, power over price, HIGH entry barriers**

Question 50

Marginal Revenue

Answer 50

**Change in Total Revenue** resulting from an incremental change in output

Question 51

Marginal Costs

Answer 51

**Change in Total Cost** resulting from an incremental **change in output** - Measures how much **cost changes as we produce 1 more of some product**

Question 52

Producers' Surplus

Answer 52

Amount **producers** are **paid** - what they are **willing to accept** - CANNOT be negative

Question 53

Change in Quantity Demanded

Answer 53

Caused by **change in product's Price** - Movement ALONG Demand Curve

Question 54

Change in Quantity Supplied

Answer 54

Caused by **change in Price** - Movement ALONG Supply Curve