MICROECONOMICS FINAL STUDY GUIDE

Explicit vs Implicit
-Explicit cost: cost that involves spending money
-Implicit cost: a non-monetary opportunity cost
Accounting vs Economic Costs:
-Accounting costs come from the total explicit costs of the company during the fiscal year
-Economic costs consider both the explicit and implicit costs to the company that occur during
the fiscal year
Accounting vs Economic Profits:
-Accounting profit= sales revenues minus the expenses of a firm over a given time period
-Economic profit= the difference between a firm’s total revenue and its total cost, including both
explicit and implicit costs
Normal Rate of Return:
-A rate of return on capital that is just sufficient to keep owners and investors satisfied
-For relatively risk-free firms, it should be nearly the same as the interest rate on risk-free
government bonds
Short Run vs Long Run
-Short run: the period of time during which at least one of a firm’s inputs is fixed
-Long run: the period of which a firm can vary all its inputs, adopt new technology, and increase
or decrease the size of its physical plant
Total Cost:
-The cost of all the inputs a firm uses in production
-Total cost= total fixed costs+total variable costs
Total Fixed Cost (TFC)
-Costs that remain constant as output changes
Total Varibale Costs (TVC)
-Costs that change as output changes
Average Total Cost (ATC)
-Total costs divifded by quantity out output
-ATC= TC/output
Total Product:
-Total output produced by the firm
Marginal Product of Labor (MPL)
-The additional output a firm produces as a result of hiring one more worker
MPL= change in q (quantity)/change in l (labor)
Law of Diminishing Marginal Returns (Short Run Concept)
-The principle that, at some point, adding more of a variable input, such as labor, to the same
amount of a fixed input, such as capital, will cause the marginal product of the variable input to
decline
Average Product
-Total product/units of labor
-AP= output/# of inputs
Relationship Between Marginal and Average Values
-When the average curve is rising, the marginal curve is above the average curve
-When the average curve is at its minimum, the average value is equal to the marginal value
-when the average curve is falling, the marginal curve is below the average curve
Image Example:

Shapes of Cost Curves: On Canvas

Long-Run Average Total Cost Curve:
-A curve showing the lowest cost at which a firm is able to produce a given quantity of output in
the long run, when no inputs are fixed

Economies of Scale Diseconomies

-Economies of scale: the situation when a firm’s long run average costs fall as it increases output
-Diseconomices of scale happen when a company or business grows so large that the costs per
unit increase

Sunk Costs
-Costs that have already been incurred as a result of past decisions
Price Takers (Perfect Compeititon)
-Sellers who take the market price in roder to sell their product

Characteristics of Price Takers (Perfect Compeititon)

-A market that meets the conditions of…
→ Many buyers and sellers, all firms selling identical products and no barriers to new firms
entering the market
Marginal Revenue (MR)
-Change in total revenue from selling one more unit of a product
-MR= change in total revenue/change in quantity
-Same as demand
Profit Maximizing Rule
-MR=MC
Shut Down Point
-The minimum point on a firm’s average variable cost curve, if the price falls below this point,
the firms shuts down production in the short run
Short Run Supply Curve
-The portion of the MC curve above the AVC curve

Long-Run Compeititve Equilibirum

-The situation in which the entry and exit of firms has resulted in the typical firm breaking even
Effect of Entry and Exit of Firms
-Through the process of entry and exit, the price level in a perfectly comepititve market will
move toward the zero profit point, where the marginal cost curve crosses the average cost (or
AC) curve at the minimum of the AC curve
Long Run Market Supply Curve
-A curve that shows the relationship between market price and the quantity supplied
-A constant cost industry (meaning that as demand increases, the cost of production for firms
stays the same
-An increasing cost industry- meaning that as demand increases, the cost of production for firms
increases
-A decreasing cost industry- meaning as demand increases the costs of production for the firms
decreases
Competitive Price Searchers (Monopolistic Competition)
-A market structure in which barriers to entry are low and many firms compete by selling similar,
but noy identical, products.
-Firms that face a downward-sloping demand curve for their product

Characteristics of Compeititve Price-Searcher Markets

-Differentiated products
-Downward-sloping demand curve
-Low entry and exit barriers
Importance of Entrepreneurs
-Job creation
-Innovation driver
-Opportunities for women/minorities
-Helps big business
-Signficiance contributor to GDP
Perfectly Competitive (Price Takers) vs Monopolisiticaly COmpetitive (Price Searchers)
-A price searcher can sell its product at various prices while a price taker can only sell its product
at the equilibrium price
Barriers to Entry
-Control of a key resource
-Government licensing and other legal barriers
-Patents
-Economies of scale
Monopoly and Characteristics
-Monopoly: A firm that is the only seller of a good or service that does not have a close subsittie
1. Single seller
2. No close substitutes
3. High barriers to entry
Oligopoly and Characteristics
-A market structure in which a small number of independent firms compete
-Characterized by…
1. Identical or differentiated products
2. Interdependence
 3. Signficant barriers to entry
4. Substanstial economies of scale
Oligopoly Price and Output
-Price: Less than the monopolistic price, but greater than the competitive price
-Actual price may fall between the two limits
1. The upper limit of monopoly price
2. The linear limit of competitive price
Collusion
-A secret cooperation or deceitful agreement in order to deceive others, although not necessarily
illegal, as a a conspiracy
-It is an agreement among firms or individuals to divide a market, set prices, limit production or
limit opportunities
Obstacles to Collusion
-Multiple firms
-Difficulty in detecting and eliminating price cuts
-Low entry barriers
-Unstable demand conditions
-Vigorous antitrust action
Defects of Markets with High Entry Barriers
-The discipline of market forces is weakened
-Allocative in inefficiency
-Government grants of monopoly power will encourage rent seeking
Policy Alternatives When Entry Barriers are High
-Control the structure of the industry to ensure the presence of rival firms
-Reduce artificial barriers that limit competition
-Supply the market with goods produced by a government firm
-Regulate the price and output of the firms in the market

Practice Problems
Q: Carrie decided to sleep in today rather than attend her economics class. According to
economic analysis, her choice was…
A: Rational if Carrie values sleep more highly than the benefit she expects to receive from
attending the class
Q: The opportunity cost of attending an economics class is the money spent on transportation
plus the cost for the books for the class
A: False
Q: In what type of economy does the government decide how economic resources will be
allocated?
A: In a centrally planned economy
Q: When an economy is operating efficiently, the production of more of one good will result in
the production of less of some other good because
A: Resources are limited (scarce) and efficiency implies that all resources are already in use
Q: A PPF will be linear instead of bowed if
A: The trade-off between the two goods is always constant
Q: When the PPF is bowed out, resources are
A: Not equally well suited to the production of both goods
Q: The owners of private property will
A: Use their property in ways that others value because the market will generally reward them
with profits (or a higher selling price) if they do so
Q: Which of the following is the correct definition of a demand schedule?
A: A table showing the relationship between the price of a product and the quantity of the
product demanded
Q: What is an inferior good?
A: A good for which demand decreases as income rises
Q: If cigars and cigarettes are substitute goods, an increase in the price of cigars would result
in…
A: An increase in the demand for cigarettes
Q: Which of the following illustrates the law of supply?
A: An increase in price causes an increase in the quantity supplied, and a decrease in price causes
a decrease in the quantity supplied
Q: Which of the following events would shift the supply of smartphones to the right?
A: A decrease in the price of inputs used to produce smartphones
*Q: If the demand for a good increases, which of the following will generally occur in a market
setting
A: The quantity supplied will increase
*Q: which of the following is not a fundamental that underlies consumer behavior?
A: Consumers always make choices with perfect information
Q: If marginal utility is negative, what must be true about total utility?
A: Total utility decreases with additional consumption
Q: What happens when network externalities are present?
A: The usefulness of a product increases with the number of consumers who use it
Q: According to behavioral economics
A: Consumers do not always behave rationally because they fail to ignore sunk costs
*Q: Economic efficiency
A: A market outcome in which the marginal benefit to consumers of the last unit produced is
equal to its marginal cost of production
*Q: When is output inefficiently low?
A: When marginal benefit is greater than marginal cost
*Q: Which of the following is the definition of consumer surplus?
A: The difference between the highest price a consumer is willing to pay and the price the
consumer actually pays
Q: What is the name of a legally determined max price that sellers may charge?
A: Price ceiling
Q: When a price floor is above the equilibrium price
A: Quantity supplied will exceed quantity demanded, so there will be a surplus
*Q: Both price floors and price ceilings, when effective (binding), lead to
A: A decrease in the quantity traded
Q: The deadweight loss resulting from levying a tax on an economic activity is
A: The loss of potential gains from trade from activities forgone because of the tax
Q: If there was an increase in a per-unit tax on guitar suppliers, what would be the effect on the
equilibrium price and quantity of guitars
A: Price increases; quantity decreases
*Q: Because the benefits derived from an activity decline as it is expanded, it is generally
A: Efficient to stop well before perfection is achieved
Q: If a negative externality in production is present in a market, then
A: The private cost of production will be different than the social cost of produciton
Q: In the absence of government intervention, goods with external costs tend to be
A: Overproduced
Q: By paying college students a subsidy equal to the external benefit from college education, the
government will cause students to internalize the externality. That is, the external benefit from a
college education will become a
A: Private benefit received by college students, and the demand curve for college educators will
shift up
Q: What does the term rivalry refer to?
A: A situation in which one person’s consumption of a good means that no one else can consume
it
Q: The distribution of income primarily determines which of the fundamental economic
questions?
A: Who will recieve the goods and services provided
Q: The basic economic problem of ___ has always existed and will continue to exist?
A: Scarcity
Q: By definition, economics is the study of
A: The choices people make to attain their goals, given scarce resources
Q: Economists assume that rational people do all of the following exdcept
A: Undertake activities that benefit others and hurt themselves
Q: The highest valued alternative that must be given up to engage in an activity is the definition
of
A: Opportunity cost
Q: Who receives the most of what is produced in a market economy?
A: THose who are willing and able to buy them
Q: Which of the following is a positive economic statement?
A: If the price of iPhone falls, a larger quantity of iPhones will be purchased
Q: Which of the following is a normative economic statement?
A: The price of gasoline is too high
Q: Microeconomics is the study of?
A: How households and firms make choices
Q: Which of the following is a macroeconomics question?
A: What determines the inflation rate?
*Q: The principle of opportunity cost is that
A: The economic cost of using a factor of production is the alternative use of that factor that is
given up
Q: The production possibilities frontier model shows that
A: If all resources are fully and efficiently utilized, more of one good can be produced only by
producing less of another good
Q: In a production possibilities frontier model, a point ___ the frontier is productively inefficient
A: Inside
Q: If opportunity costs are constant, the production possibilities frontier would be graphed as
A: A negatively sloped straight line
Q: An outward shift of a nation’s production possibilities frontier represents
A: Economic growth
Q: Comparative advantage means the ability to produce a good or service
A: At a lower opportunity cost than any other producer
Q: Adam Smith’s invisible hand refers to
A: The process by which individuals acting in their own self-interest bring about a market
outcome that benefits society as a whole
Q: Adam Smith’s invisible hand refers to
A: The process by which individuals acting in their own self-interest bring about a market
outcome that benefits society as a whole
Q: All of the following are critical functions of the government in facilitating the operation of a
market economy except
A: Ensuring an equal distribution of income to all citizens (the critical functions ARE enforcing
contracts, enforcing property rights, and protecting private property)
Q: A successful market economy requires
A: well-defined property rights and an independent court system to adjudicate disputes based on
the law
*Q: The demand by all the consumers of a given good or service is the ___ for the good or
service
A: Market demand
Q: A change in all the following variables will change the market demand for a product except
A: The price of the product (the variables that WILL change the market demand for a product are
population and demographics, tastes, and income)
Q: Suppose that when the price of raspberries increases, Lonnie increases his purchases of
papayas. To Lonnie,
A: Raspberries and papayas are substitutes
Q: One would speak of a change in the quantity of a good supplied, rather than a change in
supply, if
A: The price of the good changes
*Q: Ranchers can raise either cattle or sheep on their land. Which of the following would cause
the supply of sheep to increase?
A: A decrease in the price of cattle
Q: Which of the following is the correct way to describe equilibrium in a market?
A: At equilibrium, quantity demanded equals quantity supplied
Q: Which of the following is evidence of a surplus of bananas?
A: The price of bananas is lowered in order to increase sales
Q: Which of the following would cause the equilibrium price of white bread to decrease and the
equilibrium quantity of white bread to increase?
A: A decrease in the price of flour
Q: Economies does not study correct or incorrect behaviors but rather it assumes that economic
agents behave ___, meaning that they make the best decisions given their knowledge of the costs
and benefits
A: Rationally
Q: The idea that because of scarcity, producing more of one good or service means producing
less of another good or service refers to the economic concept of
A: Trade-off
Q: Macroeconomics is the study of
A: The economy as a whole
Q: Adam Smith’s behavioral assumption about humans was that people
A: Usually act in a rational, self-interested way
Q: Marginal utility is the
A: Extra satisfaction received from consuming one more unit of a product
Q: If a consumer receives 20 units of utility from consuming two candy bars, and 25 units of
utility from consuming three candy bars, the marginal utility of the third candy bar is
A: 5 utility units
Q: The law of diminishing marginal utility states that
A: The extra satisfaction from consuming a good decreases as more of a good is consumed, other
things constant
Q: If your total satisfaction increases when you consume another unit, your marginal utility must
be
A: Positive
Q: A network externality occurs when
A: The usefulness of a good is affected by how many others use the good
Q: A standard which came to the market first, such as the QWERTY letter layout in typewriters,
can become entrenched. What is this phenomenon called?
A: Path dependency
Q: The observation that people tend to value something more highly when they own it than when
they don’t is called the…
A: Endowment effect
Q: Which of the following is a common mistake consumers commit when they make decisions?
A: They fail to ignore sunk costs
Q: The difference between the highest price a consumer is willing to pay for a good and the price
the consumer actually pay is called
A: Consumer surplus
*Q: Consumers are willing to purchase a product up to the point where
A: The marginal benefit of consuming a product its equal to its price
Q: The area ___ the market supply curve and ___ the market price is equal to the total amount of
producer surplus in a market
A: Above; below
Q: Rent control is an example
A: Price ceiling
Q: Which of the following is not a result of government price controls?
A: Price controls benefit poor consumers but harm producers and wealthy consumers (the
following that ARE the result of government price controls are some people win and some
people lose, price controls and decrease economic efficiency, and a deadweight loss will occur)
Q: Which of the following is not a result of government price controls?
A: Price controls benefit poor consumers but harm producers and wealthy consumers (the
following that ARE the result of government price controls are some people win and some
people lose, price controls decrease economic efficiency, and a deadweight loss will occur)
Q: Which of the following is a source of market failure?
A: Incomplete property rights or inability to enforce property rights
Q: A negative externality exists if
A: The marginal social cost of producing a good or service exceeds the private cost
Q: The figure shows a market with a negative externality. The efficient output level is
A: Qa
Q: Economists argue that the level of pollution should be
A: Reduced to the point where the marginal benefit of pollution reduction is equal to the
marginal cost of pollution reduction to society
Q: The Coase Theorem states that…
A: If transactions costs are low, private bargaining will result in an efficient solution to the
problem of externalities
*Q: If policymakers use a pollution tax to control pollution, the tax per unit of pollution should
be set
A: Equal to the marginal external cost at the economically efficient level of pollution
Q: Government imposed quantitative limits on the amount of pollution firms are allowed to
produce is an example of
A: Command and control approach to pollution reduction
Q: Governments can increase the consumption of a product that creates positive externalities by
A: Subsidizing the production of the product so that the supply is increased and market price is
reduce
Q: A product is considered to be rivalrous if
A: Your consumption of the product reduces the quantity available for others to consume
Q: The “tragedy of the commons” refers to the phenomenon where
A: People overuse a common resource
Q: If marginal revenue exceeds marginal cost at the current level of output, profit will increase
when output is expanded because
A: Producing and selling an additional unit will add more to total revenue than it adds to total
cost
Q: Perfectly competitive firms should produce the quantity where
A: The difference between total revenue and total cost is as large as possible
Q: Why do single firms in perfectly competitive markets face horizontal demand curves?
A: With many firms selling an identical product, single firms have no effect on market price
Q: A market is perfectly competitive if
A: It has many buyers and many sellers, all of whom are selling identical products, with no
barriers to new firms entering the market
Q: In the short run, assume average variable cost is $50, average cost is $75, and output is 100
units. Calculate the total fixed cost to produce 100 units. Total fixed cost is $__.
A: 2500
Q: What happens when firms experience economies of scale?
A: The firm’s long run average costs fall as output increases
Q: As the level of output increases, the difference between the value of average total cost and
average variable cost
A: Decreases because average fixed cost decreases as output increases
Q: Is it possible for average total cost to be decreasing over a range of output where marginal
cost is increasing?
A: Yes. If marginal cost is less than average total cost will be decreasing
Q: Which of the following is true of the relationship between the average product of labor, the
average product of labor must be increasing
Q: When total output (output) is increasing at a decreasing rate, the marginal product of labor
A: Is positive and decreasing
Q: If the number of people in a publishing company does not go up or down with the quantity of
books it publishes, then how should we categroize the salaries and benefits paid to these
employees
A: They are part of fixed cost
Q: In the short run,
A: At least one of the firm’s inputs is fixed, while in the long run, the firm is able to vary all its
inputs, adopt new technology, or change the size of its physical plant
Q: Technology is
A: The processes a firm uses to turn inputs into outputs of goods and services
Q: When the percentage change in the quantity supplied is smaller than the percentage change in
price, supply is
A: Inelastic
Q: If the quantity demanded of a normal good is very responsive to changes in income, what is
the good considered?
A: A luxury
Q: An inferior good is distinguished by a
A: negative income elasticity of demand
Q: What is the cross-price elasticity of demand for two products that are unrelated?
A: 0
Q: A 15% increase in the price of beef reduces the quantity of beef consumed by 30%. Thus, the
demand for beef is __ and the firm’s total revenue wil ___ as a result of the price increase
A: Elastic; decrease
Q: What is true about elasticity for a good that comprises a smaller fraction of the average
consumer’s budget?
A: The price elasticity of demand for that good is smaller
Q: If the price of steak rises from $6 to $10 per pound, and the quantity demanded falls from 90
to 70 pounds, the price elasticity of demand is
A: .5
Q: What happens when the quantity demanded is very responsive to changes in price?
A: The percentage change in quantity demanded will be greater than the percentage change in
price
Q: How is the responsiveness of the quantity demanded to a change in price measured?
A: By dividing the percentage change in the quantity demanded of a product by the percentage
change in the product’s price
Q: Economic choice is the result of
A: Scarcity
Q: What do economists mean when they say a good is scarce?
A: The amount of the good that people would like exceeds the supply freely available from
nature
Q: Which one of the following states a key economic idea?
A: Incentives matter; human choice is influenced in predictable ways by changes in personal
costs and benefits
Q: The expression, “There’s no such thing as a free lunch,” implies that
A: Opportunity costs are incurred when resources are used to produce goods and services
Q: Which of the following is not one of the basic economic questions that all economies must
answer?
A: Which government agency will set the prices of the goods and services
Q: What types of economies require that we answer the questions of what, how, and for whom to
produce goods and services
A: All of the above (market economies, centrally planned economies, and mixed economies)
Q: Which of the following terms best relates to a fair distribution of economic benefits?
A: Equity
Q: Positive economics differs from normative economics in that
A: Positive economic statements are testable and normative statements are not
Q: Which of the following is a positive economic statement?
A: Scarcity necessitates that people make trade-offs
Q: As a consumer consumes more and more of a product in a particular time period, eventually
marginal utility
A: Declines
Q: Economic efficiency in a competitive market is achieved when
A: The marginal benefit equals the marginal cost from the last unit sold
Q: Which of the following displays these two characteristics: nonrivalry and nonexcludability?
A: Public goods