ECO 201 Exam 3 Latest Update Questions
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Accounting Costs are ______ than Economic Costs - Answer -Smaller
Accounting Profit is _______ than Economic Profit - Answer -Larger
Accounting Profit vs. Economic Profit -- How are they different? - Answer -Accounting: Deals with
JUST the costs of land, labor, and capital. Everything seen on an income statement / balance sheet.
Economic: Accounting Cost, but factors in the Opportunity Cost of capital and time as well. In terms of
Economic Profit, Pi = R(Q) - (C(Q) + OC)
Accounting Profit vs. Economic Profit -- How are they similar? - Answer -They both deal with
Revenue (Price * Quantity) and visible costs.
Average Fixed Cost - Answer -Approaches zero over time, always.
Doesn't need to be graphed; AFC = ATC - AVC. Can be observed without graphing it.
Average Variable Cost and Marginal Cost - Answer -When MC is less than AVC, AVC falls.
When MC is greater than AVC, AVC rises.
When AVC is at minimum, AVC = MC.
Barriers to Entry - Answer -Control over a resource
Patents and copyrights
Government licenses and franchise
Cannot use a monopoly to create _______. - Answer -Another monopoly.
i.e. Microsoft tried to only enable Internet Explorer on PCs
Constant Cost Industry - Answer -There is no reason to bid up the costs of production. Lots of
resources (unemployed or moved at no cost). Cost stays the same.
Constant Economies of Scale (constant returns to scale) - Answer -if we double inputs, we exactly
double outputs
if we double outputs, we exactly double costs
per unit costs stay the same
, Diseconomies of Scale (decreasing returns to scale) - Answer -if we double inputs, we less than
double outputs
if we double outputs, we more than double costs
per unit costs rise
i.e. airplanes "overbook" by ~5 people, expecting not everyone will show up. sometimes they must order
another plane; this is more expensive.
Economies of Scale (increasing returns to scale) - Answer -if we double inputs, we more than
double outputs
if we double outputs, we less than double costs
per unit costs fall
i.e. cheaper to have a fully-booked airplane
Firms are all about _______. - Answer -Profit
Five Assumptions of Perfect Competition - Answer -1) Many Buyers: limited individual influence
over market
2) Many Sellers: see above
3) Product Homogeneity: all goods are the exact same. easiest example is like buying bananas or
gasoline.
4) Free Entry and Exit (perfect resource mobility): easy to get into the market and easy to get out.
5) Perfect Information: consumers can find lowest price
For a firm in perfect competition, demand is perfectly ________. What does this mean? - Answer -
Elastic; They sell each additional unit for the market price, P*. MR = D(i) = P*
How can Long-Run Supply stay constant? - Answer -If there are no special inputs (it's easy to join
the market), and it's a Constant Cost Industry (cost of production stays the same), then LRS will stay the
same. If demand increases, another supplier will join and bring the price back to initial equilibrium (but
with increased market output).
How does Long-Run Equilibrium happen? - Answer -Invisible Hand, no central allocation of a
"decision maker"
How does Marginal Cost relate to Marginal Revenue? - Answer -MC = MR is profit maximization
MC < MR means there is more money to be made from production
MC > MR means no more money can be made from production
How to Calculate Average [Total] Cost
(Short Run) - Answer -Average Cost = Average Fixed Cost + Average Variable Cost
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