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EXAM TWO
Micro
22
Economics
Undergraduate 2
10/17/2013

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Term
The Law of Diminishing Utility
Definition
after some point in consumption of a good, each extra unit of the good provides less and less satisfaction until we reach the point where the last unit consumed yields zero marginal utility
Term
Concepts of Utility
Definition
1. Utility is not the same thing as usefulness
2. Utility is subjective
3. Utility is difficult to measure
Term
Total Utility (TU)
Definition
total satisfaction derived from consumption
TU = E x Marginal Utility
Term
Marginal Utility (MU)
Definition
the satisfaction gained from the consumption of one extra unit of the good

the change in total utility divided by change in quantity

lambda
Term
At what point on a graph does the law of diminishing utility sets in?
Definition
When the slope is equal to zero
Term
How does the law of diminishing marginal utility affect the demand curve?
Definition
the demand curve slopes down because the buyer is less willing to pay the same amount for another unit if there is less satisfaction
Term
What are the assumptions of the theory of consumer behavior?
Definition
1. Consumers exhibit rational behavior in their choices
2. Each consumers has a personal set of preferences
Term
What are the choices that a consumer can make when faced with a decision on what product to buy?
Definition
1. X is preferred to Y
2. Y is preferred to X
3. Indifferent
Term
The Utility Maximizing Rule
Definition
when the consumer has two goods to choose from, they will consume the goods up to the point where the marginal utility per dollar spent on product X equals the marginal utility per dollar spent on product Y
Term
Equal Marginal Principle
Definition
a consumer is in equilibrium when the marginal utility per dollar for all goods are equal
Term
What are the two types of economic costs?
Definition
1. Implicit Costs: implied costs - opportunity costs
2. Explicit Costs: real costs - accounting costs
Term
Total Economic Cost
Definition
Implicit Costs and Explicit Costs
Term
Normal Profit
Definition
cost of production in economic costs
Term
Accounting Cost
Definition
includes only explicit costs
Term
What is the difference between short and long run costs?
Definition
All costs in the long run are variable while at least one cost is fixed in the short run
Term
Minimum efficient scale of operation
Definition
the point where economics of scale are exhausted
Term
Why can't the long run have diminishing returns to factors?
Definition
there are no fixed costs so they have returns to scale
Term
What are characteristics of pure competition?
Definition
very large number of firms
no control over price
very easy to enter the market
no non price competition
Term
What are characteristics of monopolistic competition?
Definition
many firms
differentiated products
some control over price but narrow limits
relatively easy entry
non price competition; emphasis on advertising, etc.
Term
What are characteristics of oligopoly?
Definition
few firms
standardized or differentiated product
control over price is limited by mutual interdependence
significant obstacles in entry
great deal of non price competition
Term
What are characteristics of pure monopoly?
Definition
one firm
unique products
considerable control over price
blocked entry
non price competition
Term
Allocation Efficiency
Definition
everyone who is willing and able to pay for the product can get it - no shortage
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