102%20Midterm%20Answer%20fall%2009.dot

102%20Midterm%20Answer%20fall%2009.dot - 102 Midterm...

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102 Midterm Answer(Fall 09) Question 1 If firms are producing at Q, where MR>MC, they can still gain more profit by continuing producing. Because the revenue gained from the additional unit produced is greater than the cost to produce it. If firms are producing at Q, where MR<MC, they should produce less to increase profit. Because the revenue gained from the current unit produced is less than the cost to produce it. They are actually losing money on that unit. So firms should produce at Q where MR=MC Question 2 (1) MU/P: MU/P is the “additional enjoyment per additional dollar spent” on a good. We maximize our utility by always buying the good with the highest MU/P. (2) Price floor: A price floor is the lowest legal price set by government in a market. Price floor is always above equilibrium. (3) Economies of scale: Economies of scale is the situation where by increasing its capacity (fixed costs), the firm is able to produce its good for lower average cost. (4) Unlimited liability: When an owner faces unlimited liability, any debt incurred by the firm may be recovered by the owner if the firm fails. (5) Consumer Surplus: Consumer Surplus is the difference between willingness to pay and actual price paid. Question 3
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This note was uploaded on 10/18/2010 for the course ECON 102 taught by Professor Kim during the Fall '08 term at University of Illinois, Urbana Champaign.

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102%20Midterm%20Answer%20fall%2009.dot - 102 Midterm...

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