AP Microeconomics › Quantity Equilibrium
As consumption of a particular good increases, the satisfaction gained from consuming one additional unit of the good eventually ___________.
decreases
increases
equals 0
equals 1
The law of diminishing marginal utility states that as consumption of a particular good increases, the satisfaction gained from consuming one additional unit (i.e. the marginal utility of the good) eventually decreases.
For example, consider eating chocolate bars. The increase in satisfaction resulting from eating the first chocolate bar is probably higher than the increase in satisfaction from eating the 12th chocolate bar. In other words, the marginal utility has decreased.
If good X and good Y are substitutes, an increase in the price of good X will lead to which of the following?
an increase in demand for good Y
a decrease in demand for good Y
an increase in supply for good Y
a decrease in supply for good Y
The change in price of a substitute good shifts demand.
An increase in the price of good X prompts consumers to use good Y instead of good X (i.e. substituting good X for good Y), resulting in increased demand for good Y.
To maximize profits, firms produce at the level at which _________.
marginal revenue equals marginal cost
marginal revenue equals average total cost
marginal revenue is less than marginal cost
marginal revenue equals average variable cost
The profit maximizing rule for the firm is marginal revenue equals marginal cost. Notice that the rule does not explicitly involve average total or average variable costs.
The MR=MC profit maximizing rule holds for all market structures - monopoly, oligopoly, monopolistic competition, and perfect competition.
If marginal revenue is less than marginal cost, then the firm actually loses profits with continued production.
If the market for Good X is in equilibrium, which of the following would NOT cause a decrease in demand for Good X?
The price of a substitute good increases.
The price of a substitute good decreases.
A newspaper reports that Good X is harmful to the health of consumers.
The number of buyers of Good X decreases.
Consumers expect that the price of Good X will decrease.
Of the five answer choices, only an increase in the price of a substitute good would cause the demand curve to increase. This result reflects the fact that when the price of the substitute good increases, consumers are less likely to buy that good and instead buy more of Good X.
All of the other answer choices would cause the demand curve to decrease.
For any firm, the long run refers to a period of time in which ________.
fixed costs are able to change
variable costs are able to change
sunk costs are able to change
the price elasticity of supply is able to change
The definition of the long run is a period of time in which fixed costs are able to change. For example, in the long run, a firm can move to a new plant that costs less money to operate each month.
Sunk costs are costs that cannot be recovered and therefore would not change, even in the long run.
The price elasticity of supply refers to the responsiveness of the supply curve to a change in price.