Marginal Analysis and Consumer Choice - AP Microeconomics

1. Calculate marginal cost if $TC = 100$ and $\triangle Q = 5$.

   $MC = 20$. Change in total cost ($100$) divided by change in quantity ($5$).

2. Define marginal cost in economic terms.

   Additional cost of producing one more unit. Measures the incremental cost of expanding production.

3. State the formula for average cost.

   $AC = \frac{TC}{Q}$. Total cost divided by quantity produced.

4. State the formula for average revenue.

   $AR = \frac{TR}{Q}$. Total revenue divided by quantity sold.

5. What is the condition for consumer equilibrium?

   $\frac{MU_X}{P_X} = \frac{MU_Y}{P_Y}$. Marginal utility per dollar spent is equal across all goods.

6. What is the marginal utility per dollar spent?

   $\frac{MU}{P}$. Marginal utility divided by the price of the good.

7. If $P_X = 5$ and $MU_X = 20$, find $\frac{MU_X}{P_X}$.

   $\frac{MU_X}{P_X} = 4$. Marginal utility ($20$) divided by price ($5$) equals $4$.

8. Find the missing value: $MU = 10$, $P = 2$. Calculate $\frac{MU}{P}$.

   $\frac{MU}{P} = 5$. Simple division: $10 ÷ 2 = 5$.

9. What is an indifference map?

   A set of indifference curves. Collection showing all possible utility levels for a consumer.

10. Identify the term for $MU_X = MU_Y$.

    Equimarginal principle. Optimal allocation when marginal utilities are equalized.

11. What does the law of diminishing marginal utility state?

    Utility decreases as more units are consumed. Each additional unit provides less satisfaction than the previous.

12. What does an increase in $MU$ with consumption indicate?

    Marginal utility is not diminishing. Unusual case contradicting typical diminishing marginal utility.

13. What does a vertical budget line indicate?

    Infinite price for one good. One good has zero quantity available at any finite price.

14. In terms of utility, what does 'rational behavior' imply?

    Maximizing total utility from consumption. Consumers seek to maximize satisfaction given their constraints.

15. Identify the formula for total cost.

    $TC = FC + VC$. Fixed costs plus variable costs equals total cost.

16. What is the principle of marginal analysis?

    Comparing marginal benefits and marginal costs. Optimal decisions occur when marginal benefit equals marginal cost.

17. Define consumer surplus.

    Difference between willingness to pay and actual payment. Benefit exceeding what consumer actually pays for good.

18. What is the substitution effect?

    Change in consumption from relative price change. How quantity demanded changes when relative prices change.

19. Find the optimal consumption point on a budget line.

    Point where an indifference curve is tangent. Where budget line touches highest possible indifference curve.

20. What is the relationship between $MC$ and $AC$ when $MC < AC$?

    $AC$ is decreasing. When marginal cost is below average, it pulls average down.

21. What is the income effect?

    Change in consumption from change in real income. How quantity demanded changes when purchasing power changes.

22. Define the term 'utility'.

    Satisfaction or pleasure from consumption. Subjective measure of happiness or benefit from consuming goods.

23. How is allocative efficiency achieved?

    When $P = MC$. Price equals marginal cost ensures optimal resource allocation.

24. What happens to $MU$ as consumption increases?

    Marginal utility typically decreases. Follows the law of diminishing marginal utility.

25. What does a budget constraint represent?

    Combination of goods a consumer can afford. Limited by income and relative prices of goods.

26. Identify the formula for marginal revenue.

    $MR = \frac{\triangle TR}{\triangle Q}$. Change in total revenue divided by change in quantity.

27. What is the formula for marginal utility?

    $MU = \frac{\triangle TU}{\triangle Q}$. Change in total utility divided by change in quantity.

28. What is the slope of a budget line?

    Ratio of the prices of two goods. Reflects relative opportunity cost between two goods.

29. Define opportunity cost.

    Value of the next best alternative foregone. The economic value of what you give up when making a choice.

30. What happens to the budget line if income increases?

    Shifts outward, parallel to the original line. Higher income allows purchase of more goods at same prices.

31. What does an upward sloping indifference curve indicate?

    Violation of the non-satiation assumption. Consumer prefers less of at least one good, violating normal preferences.

32. Calculate $MC$ if $TC = 200$ and $\triangle Q = 10$.

    $MC = 20$. Change in total cost ($200$) divided by change in quantity ($10$).

33. Calculate $MU$ if $\triangle TU = 10$ and $\triangle Q = 2$.

    $MU = 5$. Change in total utility ($10$) divided by change in quantity ($2$).

34. What is the economic significance of a point inside the budget line?

    Under-utilization of budget. Consumer can afford more but chooses not to spend fully.

35. Choose the option that defines an indifference curve.

    Shows combinations of goods with equal utility. Consumer is indifferent between any points on the curve.

36. What is marginal benefit?

    Additional benefit from consuming one more unit. The utility gained from consuming an additional unit.

37. Calculate $MR$ if $\triangle TR = 30$ and $\triangle Q = 3$.

    $MR = 10$. Change in total revenue ($30$) divided by change in quantity ($3$).

38. Identify the effect of a price decrease on quantity demanded.

    Quantity demanded generally increases. Law of demand shows inverse price-quantity relationship.

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