Study Guide Test 2

Study Guide Test 2 - Chapter 19 Law of Diminishing Marginal...

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Chapter 19 Law of Diminishing Marginal Utility (LDMU) o Last dollar spent yields equal degree of MU. Last unit of each purchased should provide same MU per dollar spent. Demand curve – Maximum Price consumer is willing to pay o Falls with rate of consumption because of LDMU o steepness reflects rate of LDMU Consumer Surplus Price change: substitution and income effect Time costs are higher for those with higher wage rates Chapter 20 Residual claimants: individuals who receive excess revenue in a firm. Productive activity organized by contracting or team production o Shirking: working at less than expected rate of productivity Principal-Agent Problem: person with broken car and mechanic Types of Business Firms o Proprietorship: owned by individual possessing ownership to firm’s profits and liable for debts o Partnership: owned by two or more with same responsibilities o Corporation: owned by shareholders who possess ownership to firm’s profits but whose liability is limited to the amount of their investment in the firm. Total Cost: Sum of Implicit and Explicit costs o Implicit Costs: Opportunity costs associated with firm’s use of resources that it owns; lemonade stand example o Explicit Costs: payments by a firm to purchase the services of productive resources o Opportunity cost of equity capital: rate or return earned by investors in order for them to supply capital to the firm. Normal Profit Rate = 0 Accounting Profits omits implicit costs; higher than economic profits Short run: assets fixed (plant size) but can alter variable resources (labor) o At least one factor of production (plant size) cannot be changed o Costs: Fixed and Variable Long run: long enough to alter size of plant or for new firms to enter/exit o All resources are variable in long run Costs o Total Fixed Cost (TFC) remains unchanged when output rises or falls in short run; will not vary with output. o Average Fixed Cost (AFC): Fixed Cost / Output; As output increases, AFC declines because fixed cost is spread over more units
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o Total Variable Cost (TVC): increase as output increases o Average Variable Cost (AVC): TVC / Output o Total Cost: Explicit and Implicit costs; Cost of producing good is the sum
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Study Guide Test 2 - Chapter 19 Law of Diminishing Marginal...

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