Microeconomics Final Exams 2019

Microeconomics Final Exam Thursday December 12 2019 Question: 62 Supply and Demand: 8 questions Production and Costs: 5 questions Competition: 17 questions (including diagrams) Monopoly/Pricing Strategy: 9 questions Monopolistic Competition: 14 questions (including diagrams) Oligopoly: 7 questions Chapter 1 & 2: Microeconomics Definitions: • Absolute Advantage is the ability to produce more of a good or service than competitors using the same resources • Allocative Efficiency is when production is in accordance with consumer preferences • Comparative Advantage is the ability to produce a good or service at a lower opportunity cost than competitors (basis for trade) • Centrally Planned Economy- the government decides how economic resources will be allocated • Economics is the study of the choices consumers, business managers and government officials make to attain their goals • People are rational (use all available information) • People respond to economics incentives • Optimal decisions are made at the margin (marginal benefit=marginal cost) • Equity is the fair distribution of economic benefits Free Market does not control the production of goods • Macroeconomics is the study of the economy as a whole • Market Economy- decisions of households and firms interacting in markets allocate economic resources • Factors of Production are • Labor • Capital • Natural Resources • Entrepreneurial Ability • Microeconomics is the study of how households and firms make choices • Mixed Economy- similar to market economy, but the government plays a significant role • Opportunity Cost is the highest valued alternative to be given up to engage in an activity Positive Analysis- a true statement "what is" -VS- normative analysis- what is morally right "what ought to be" • Productive Efficiency is when a good or service is at the lowest possible cost Production Possibilities Frontier (PPF) is a curve showing the maximum attainable combinations of 2 goods that can be produced with available resources. It is used to illustrate the trade-offs that arise from scarcity • Property Rights are covered by the 5th and 14th Amendments Chapter 3: Supply and Demand: **Supply and demand only applies to perfectly competitive markets** Basticity: The Responsiveness of Demand and Supply PRICE ELASTICITY OF DEMAND Formula: Percentage change in quantity demanded Percentage change in price Midpoint formula: (QQ) Q+Q 2 (一) +P 2 Absolute Value of Price Elasticity Effect on Total Revenue of an Increase in Price Elastic Greater than 1 Total revenue falls Inelastic Less than 1 Total revenue rises Unit elastic Equal to 1 Total revenue unchanged CROSS-PRICE ELASTICITY OF DEMAND Formula: Percentage change in quantity demanded of one good Percentage change in price of another good Types of Products Substitutes Complements Unrelated INCOME ELASTICITY OF DEMAND Value of Cross-Price Elasticity Positive Negative Zero Formula: Percentage change in quantity demanded Percentage change in income Types of Products Normal and a necessity Normal and a luxury Inferior PRICE ELASTICITY OF SUPPLY Value of Income Elasticity Positive but less than 1 Positive and greater than 1 Negative Formula: Percentage change in quantity supplied Percentage change in price Elastic Value of Price Elasticity Inelastic Greater than 1 Unit elastic Less than 1 Chapter 10: Behavioral Economics: ** The goal of a consumer is to spend available income to maximize utility ** ** to maximize utility consumers should make sure they spend their income so that the last dollar spent on each product gives them the same marginal utility ** When the price of a good falls, the ratio of marginal utility to the price rises, resulting in more consumers buying the good** • Behavioral Economics is the study of situations in which people act in ways that are economically rational • Endowment Effect- the tendency of people to be unwilling to sell something they already own, even if they are offered a price that is greater than the price they would be willing to pay to buy the good, if they didn't already own it Income Effect is the change in the quantity demanded f a food that results from the effect of the change in price on the consumer purchasing power • Marginal Utility is the change in total utility a person receives from consuming one additional unit of a good or service Network Externality- the consumption of a product if the usefulness of the product increases with the number of consumers who use it Substitution Effect is the change in the quantity demanded for a good that results from a change in price, making the good more or less expensive relative to the price of other goods • Sunk Cost is a cost that has already been paid and cannot be recovered The Law of Diminishing Marginal Utility states that consumers receive diminishing additional satisfaction as they consume more of a food or service during a period of time • Utility is the enjoyment or satisfaction that people receive from consuming goods and services Chapter 11: Production Costs: