Vocabulary
This term refers to the idea that at a certain point in consumption, the benefit you get from consuming/using the next unit is less than the benefit you get from the current unit.
What is diminishing returns/diminishing marginal utility?
All supplier cost curves exist at this point in a perfectly competitive supply at the market clearing price in the long run.
What is MR = MC = ATC?
This point maximizes social surplus in a perfectly competitive industry. Assume no externalities.
What is quantity supplied = quantity demanded?
The demand curve for grilled cheeses is more elastic than the demand curve for tomato soup. This means that there are more ____ for grilled cheeses than there are for tomato soup.
What are substitutes?
Suppose Ellie eats mangoes and pineapples. The price of a mango is $5 and the price of a pineapple is $10. Ellie has $50 to allocate between mangoes and pineapples. Draw his budget constraint (label the slope and the intercepts).
What is [graph]?
All costs are variable in this time horizon.
What is the long term?
A perfectly competitive firm operating at this point will stay in the market in the short run.
What is P = MR = ATC = MC, P = MR = AVC = MC?
Any trades that satisfy this condition will increase social surplus.
What is marginal benefit >= marginal cost?
What is the formula for the point elasticity of demand?
What is P/Q * 1/slope (dQ/dP)?
M represents this while m represents this.
What is M represents monthly income and m represents the slope of the budget constraint?
This concept measures the benefit a consumer gets from consuming a good. This unit of measurement is completely meaningless between consumers.
What is utility?
Is it possible for a perfectly competitive industry to have long-term profits?
What is no, profits signal competitors to get in the market?
Economists usually argue for free trade on the basis that government intervention decreases social surplus. Draw a graphical representation of a market with government intervention and highlight the decreased social surplus.
What is deadweight loss (DWL)?
Say that the government was thinking about implementing a tax. Draw two different markets, implement a tax and choose in which one it would be better to implement a tax, from an efficiency standpoint. Make it obvious.
What is [graph]? The less elastic one is better from an efficiency standpoint.
Suppose that Autumn’s marginal utility from drinking milk is 5 utils per ounce and her marginal utility from eating cereal is 10 utils per ounce. If the price of milk is 50 cents per ounce and the price of cereal is 80 cents per ounce, is Autumn maximizing her utility? If so, explain how you know. If not, explain how she should change her spending to increase her utility.
What is the rational spending rule implies that at the optimal consumption bundle: (MUm/Pm)=(MUc/Pc). Thus, since 5/50<10/80, we know that Autumn is not maximizing her utility. She should decrease her consumption of milk and increase her consumption of cereal, putting her money where she gets the biggest bang for her buck.
This concept helps consumers maximize utility gained per dollar spent.
What is the rational spending rule?
Draw a perfectly competitive supplier’s cost curves. On the same graph, draw an increase in the cost of an input.
What is [graph]? AVC, ATC should have increased.
Suppose that the supply curve for wheat is given by Qs =10P - 10, and the demand curve for wheat is given by Qd =200 - 20P, where QS is the number of bushels of wheat supplied each day and QD is the number of bushels of wheat demanded each day, and P is the price of a bushel of wheat. Concerned about rising food prices, suppose that the government introduces a price ceiling of $5 per bushel on wheat. Calculate the change in surplus.
What is the change in surplus = DWL = 700 - 640 = $60?
What makes a supply curve elastic?
What is ease of market entrance/exit?
Suppose that Rav hates pastries and loves rodents and other vermin. Draw a series of indifference curves and draw the intersection of Rav’s indifference curve and budget constraint.
What is [drawing]?
This is another name for the demand curve for perfectly competitive suppliers.
What is the marginal revenue curve?
Consider a perfectly competitive supplier whose total cost TC = 2*Q + 10000. Find expressions for the fixed cost, variable cost, average total cost, average variable cost and average fixed cost.
What is FC = 10000, VC = 2*Q, ATC = 2 + 10000/Q, AVC = 2, AFC = 10000/Q?
Consider the market for pink ponies as perfectly competitive and at equilibrium. Assume that the government decides to subsidize the industry. Will this decision cause DWL? If yes, also explain what is causing the DWL?
What is yes, the decision creates DWL? This is because the government is spending money to distort the market – this causes trades to occur that society usually would not make, where the marginal cost is greater than the marginal benefit.
Suppose the government is interested in raising revenues by implementing a tax on some good. If the government wanted to maximize its potential earnings, should it implement a tax on chocolate or gasoline? Give another example of a good the government could tax to maximize potential earnings.
What is gasoline? People in this country are incredibly reliant on gasoline, so demand is probably pretty inelastic. What are taxes on concrete (neutral) or what are taxes on EpiPens (ethically dubious)?
Draw the indifference curve for fish carcasses and smog (two bads). Show the direction of increasing utility.
What is [drawing]?