ECO100Y5 Chapter 6-7: CHAPTER indifference curve , producers in short run

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CHAPTER – INDIFFERENCE CURVE

SUMMARY

• The consumer is indifferent between the combi- nations

indicated by any two points on one indifference curve.

• Any point above an indifference curve is preferred to any point

along that same indifference curve; any point on the curve is

preferred to any point below it.

• The first basic assumption of indifference theory is that the

algebraic value of the MRS between two goods is always

negative.

• Diminishing MRS is the second basic assumption of

indifference theory.

• When economists say that a consumer’s tastes are given, they

do not mean that the consumer’s cur- rent consumption

pattern is given; rather, they mean that the consumer’s entire

indifference map is given.

• The budget line shows all combinations of products that are

available to the consumer given his money income and the

prices of the goods that he purchases

• The opportunity cost of food in terms of clothing is measured

by the (absolute value of the) slope of the budget line, which is

equal to the relative price ratio, pF/pC.

• The consumer’s utility is maximized at the point where an

indifference curve is tangent to the bud- get line. At that point,

the consumer’s marginal rate of substitution for the two goods

is equal to the relative prices of the two goods.

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CHAPTER -PRODUCERS IN SHORT RUN

SUMMARY

• Economists include both implicit and explicit costs in their

measurement of profits, whereas accountants include only

explicit costs. Economic profits are therefore less than

accounting profits.

• Economic profits and losses play a crucial signalling role in the

workings of a free- market system.

• The short run is the length of time over which some of the

firm’s factors of production are fixed.

• The long run is the length of time over which all of the firm’s

factors of production can be varied, but its technology is fixed.

• The very long run is the length of time over which all the

firm’s factors of production and its technology can be varied.

• The law of diminishing returns states that if increasing

amounts of a variable fac- tor are applied to a given quantity of

a fixed factor (holding the level of technology constant),

eventually a situation will be reached in which the marginal

product of the variable factor declines.

• Eventually diminishing average product of the variable factor

implies eventually increasing average variable cost.

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ECO100Y5 Full Course Notes

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Related Questions

When deciding consumption levels of more than one good, the utility-maximizing rule states that you are maximizing utility when

		the marginal utility o two goods are equal
		the marginal utility of two goods are zero
		the ratio of marginal utility to price of two goods is zero
		the ratio of marginal utility to price for the two goods are equal

10 points

QUESTION 2

My brother says the law of diminishing marginal utility is nonsense because he is way happier after his sixth beer than after his first one. Pick the best response.

		He has a point, maybe this is something behavioral economists should take a look at.
		True, but marginal utility refers only to the utility gained (or lost) by drinking that last beer, not to his total utility
		There are always exceptions, but in general this law will hold.
		True, but the law of diminishing marginal utility is really just saying that eventually he will prefer a glass of wine to another beer.

10 points

QUESTION 3

Frank spends $75 on 10 magazines and 25 newspapers. The magazines cost $5 each and the newspapers cost $2.50 each. Suppose that his marginal utility from the final magazine is 10 utils while his marginal utility from the final newspaper is also 10 utils. According to the utility-maximizing rule, Frank should:

		Reallocate spending from magazines to newspapers
		Reallocate spending from newspapers to magazines
		Be satisfied because he is already maximizing his total utility
		None of the above

10 points

QUESTION 4

Marginal utility can be:

		Positive, negative, or zero
		Decreasing but not negative
		Positive or negative, but not zero
		Positive, but not negative

10 points

QUESTION 5

In economics, a product provides utility if it:

is useful

violates the law of demand

takes more and more resources to produce successive units of it

satisfies consumer wants

Which of the following is true of an indifference curve?

		Along an indifference curve utility is fixed.
		If a consumer is rational then indifference curves may cross.
		Indifference curves further from the origin are associated with lower levels of utility than those that are closer to the origin.
		Because they are indifference curves, microeconomics students should be indifferent towards them.

budget line

marginal utility

complete property of preferences

market demand

consumption bundle

substitution effect

Giffen good

total effect

income effect

transitive property of preferences

indifference curves

utility

the marginal rate of substitution

utility function

1.	_____	The satisfaction or benefit that consumers receive from consuming goods or services.
2.	________________ _	A particular combination of specific quantities of goods or services
3.	________________ _	Consumers can rank all conceivable bundles of goods or services
4.	_____	If A is preferred to B, and B is preferred to C, then A is always preferred to C.
5.	_____	Equation showing a consumerâs perception of the total utility forthcoming from consuming each bundle of goods and services.
6.	_____	A set of consumption bundles each and every one of which provides a consumer with exactly the same level of total utility.
7.	_____	The number of units of Y that must be given up for total utility to remain the same when one more unit of X is consumed.
8.	_____	The addition to total utility attributable to consuming one more unit of a good, holding the consumption of all other goods constant.
9.	_____	The line showing all bundles of goods that can be purchased at given prices if the entire income is spent.
10.	_____	The change in the consumption of a good that would result if the consumer remained on the original indifference curve after the price of the good changes.
11.	_____	The change in consumption of goods results strictly from the change in purchasing power after the price of a good changes.
12.	________________ _	The sum of the substitution and income effects.
13.	_____	A good for which quantity demanded varies directly with price, causing an upward sloping demand curve.
14.	_____	A list of prices and the corresponding quantity consumers are willing and able to purchase at each price.

blushwildebeest943

Please circle the right answer. (two points each)

1. If the price of gasoline is $2.0, and the price elasticity of demand is 0.5, how much will a 10 % reduction in the quantity placed on the market increase the price?

a.There will be 22% increase in the price

b.There will be 5% increase in the price

c.There will be 10 % increase in price

d.There will be 20% increase in price

e. None of the above

2.The consumer's budget line

a. indicates the options from which the consumer can choose

b. identifies the optimal basket for the consumer.

c. identifies the tastes of the consumer

d. ranks the baskets of goods in the order the consumer prefers them

e. shows that the consumer prefers more better than less

3. In the long run, a profit-maximizing firm will choose to exit a market when
a. fixed costs exceed sunk costs.
b. average fixed cost is rising.
c. revenue from production is less than total costs.
d. marginal cost exceeds marginal revenue at the current level of production.

4. When a perfectly competitive firm makes a decision to shut down, it is most likely that
a. price is below the minimum of average variable cost.
b. fixed costs exceed variable costs.
c. average fixed costs are rising.
d. marginal cost is above average variable cost.

5. Which of the following will always cause the demand curve for a product to shift to the right?

a. an increase in income whether the good is a compliment or substitute

b. an increase in the price of the compliment

c. an increase in the price of a substitute

d. an increase in technology

e. a decrease in the price of the good

6. Consumers understandably like lower prices, but they should understand there is a great difference between a lower price produced by the government price ceiling and a lower price that comes about through normal market channels, one benefits the consumer, the other may not.

a. This statement is not true, Consumers are benefited when the government lowers the price and the consumers are benefited when businesses lower the price.

b. This is because when the government forces prices down, there is a shortage and reduction in total surplus. Lower prices through markets don't create shortage but they do benefit consumers.

c. this is because the government forces prices down, there is a surplus and reduction in total surplus. Lower prices through markets don't create surpluses but they do benefit consumers

d. This is because when markets force the prices down, there is a shortage and reduction in total surplus. Lower prices through government actions don't create shortages but they do benefit consumers

e. None of the above

7. How does an increase in the price of a variable input affect the AC and the MC curves?

a. MC shifts to the right and AC increases.

b. MC shifts to the left and AC increases

c. MC shifts to the right and AC does not change

d. MC does not change but AC increases

e. none of the above

8. Which of the following is a characteristic of a perfectly competitive market?
a. Firms are price setters.
b. There are few sellers in the market.
c. Firms can exit and enter the market freely.
d. All of the above are correct.

9. In a perfectly competitive market, the process of entry or exit ends when
a. firms are operating with excess capacity.
b. firms are making zero economic profit.
c. firms experience decreasing marginal revenue.
d. price is equal to marginal cost.

10. The relative price of two goods is shown by:

a. the slope of an indifference curve

b. the slope of the budget line

c. the diminishing marginal rate of substitution

d. the slope of the income-consumption curve

e. none of the above

11. When firms have an incentive to exit a competitive market, their exit will

a. drive down market prices.
b. drive down the profits of existing firms in the market.
c. decrease the number of goods supplied in the market.
d. All of the above are correct.

12. If a perfectly competitive firm currently produces where the price is greater than the marginal cost, it

a. will increase its profits by producing more.
b. will increase its profits by producing less.
c. is making positive economic profits.
d. is making negative economic profits.

13. Does a consumer well being vary along a demand curve?

a. Yes. When price increases, consumers move to a lower indifference curve.

b. Yes. When price increases, consumers move to a higher indifference curve.

c. No. When price increases, consumers stay on the same indifference curve.

d. No. When price increases, the higher price has no effect on budget constraints or indifference curves.

e. None of the above

14. If a competitive firm sets its output such that marginal revenue, marginal cost, and average total cost are equal, economic profit must be:

a. Negative

b. positive

c. Zero

d. Indeterminate from the given information

15. Which of the following is a characteristic of a perfectly competitive market?

a. Firms are price setters.

b. There are few sellers in the market.
c. Firms can exit and enter the market freely.
d. All of the above are correct.

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ECO100Y5 Chapter 6-7: CHAPTER indifference curve , producers in short run

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