Econ Test 2

Front 1

frequency definition of probability

Back 1

replication of a certain situation over and over again in order to achieve a certain probability

Front 2

subjective definition

Back 2

the probability of an event is the degree of confidence or belief on the part of the decision-maker that the event will occur

Front 3

expected monetary value

Back 3

sum of the amount of money gained or lost if each outcome occurs multiplied by the probability that each outcome will materialize

Front 4

expected value of perfect information

Back 4

increase in expected monetary value that would result from the decision-maker's obtaining completely accurate information concerning the outcome of the relevant situation

difference between what you get from the perfect information and what you would get normally

Front 5

expected utility

Back 5

number that is attached to each and very possible outcome of a decision. these values reflect the decision-maker's preferences with respect to risk.

sum of the utility that would be achieved in each outcome x by the probability that that outcome will actually occur

Front 6

von-neumann-morgenstern utility function

Back 6

function showing the utility that a decision maker attaches to each possible outcome of a gamble: it shows the decision maker's preferences with regard to risk

Front 7

risk averters

Back 7

increases with the person's income at a decreasing rate. will always choose a situation with a more certain outcome over one with a less certain outcome if the expected monetary values of the situations are the same

Front 8

risk lovers

Back 8

utility increases with an increasing rate with income. prefer situations in which the outcome is less certain.

Front 9

risk-neutral

Back 9

utility increasing with income at a constant rate.

act to maximize expected monetary value regardless of the risk. risk does not matter.

Front 10

. actuarially fair

Back 10

prices that they charge match the likelihood of paying out on a loss.

individuals will fully insure in this case.

Front 11

risk premium

Back 11

amount that she would pay to avoid the uncertainty completely

Front 12

precautionary principle

Back 12

action should be taken in some circumstances to avoid unacceptably large risks at virtually any cost

-decision principle by which people choose to hold the risk of some event below some selected threshold

Front 13

firm

Back 13

economic unit that produces a good or service for sale

firms try to maximize profits over a long period of time and that these profits are properly discounted to bring their value into the present

Front 14

techonology

Back 14

state of the industrial and agricultural arts

Front 15

input

Back 15

anything that a firm uses in its production processes

can be divided into fixed (plant and equipment) and variable (labor, amount of product)

Front 16

short run

Back 16

period of time in which at least some of a firm's inputs are fixed

generally understood to be the length of time during which plant and equipment cannot be practically or economically adjusted

Front 17

long run

Back 17

all inputs are variable in this period of time

Front 18

production function

Back 18

relationship between the quantities of various inputs employed in a given period of time and the maximum quantity of the commodity that can thereby be produced over that same period of time

Front 19

average product

Back 19

total product divided by the amount of the input used to produce this amount of output

Front 20

marginal product

Back 20

the addition to total output that can be attributed to the addition of the last unit of the input under the assumption that the levels of all of the other inputs were fixed

Front 21

law of diminishing marginal returns

Back 21

the marginal product of any input will eventually fall as the employment of that input climbs

output will eventually climb by smaller and smaller amounts as the level of employment of one input increases one unit at a time

Assumptions:
1. empirical generalization: based on what seen in production functions across the world
2. techonology remains fixed
3. at least one input is being held constant

Front 22

isoquant

Back 22

reflects various combinations of inputs that can produce the same level of output

curves that show all of the possible, efficient, combinations of inputs that are capable of producing a certain quantity of output

play the same role in production theory that indifference curves play in demand theory. show the various combinations of 2 inputs that can be used to produce a constant output for the firm. they can never intersect

must be convex

Front 23

marginal rate of technical substitution

Back 23

the rate at which a firm could substitute 1 input for another while maintaining a constant level of output

Front 24

increasing returns to scale

Back 24

output increases faster than employment in the situation where the employment of all inputs were increased in the same proportion

increased specialization can contribute to this as well.

Front 25

decreasing returns to scale

Back 25

output could climb by a smaller proportion than employment. output would fall short of doubling employment

Front 26

constant returns to scale

Back 26

output could increase at the same rate as employment

Front 27

isocost curve

Back 27

displays all of the combinations of K and L that cost the same.

firm should pick the point on the isocost curve that also lies on the highest isoquant

Front 28

opportunity cost

Back 28

the value of the product that particular resources could have produced if they had been used in the best alternative way; also called alternative cost

these are often different in the long run and in the short run

Front 29

explicit cost

Back 29

ordinary expenses of the firm that accountants include, such as payroll costs and payments for raw materials

Front 30

implicit cost

Back 30

the alternative costs using the resources owned by the firm's owner, such as his or her time and capital

Front 31

costs important in the short run

Back 31

total fixed cost, total variable cost, and total cost

Front 32

total fixed cost

Back 32

total obligations per period of time incurred by the firm for fixed inputs

the same regardless of the firm's output

Front 33

total variable cost

Back 33

sum the costs incurred by the firm for employing the cost-minimizing combination of variable inputs associated with any level of output

increase as the firm's output rate increases because firms must employ more variable inputs if they are to sustain larger outputs

Front 34

total cost

Back 34

sum of fixed costs and total variable costs

Front 35

Average fixed cost

Back 35

total fixed cost divided by output

declines with increases in output. is a rectangular hyperbola

Front 36

average variable cost

Back 36

total variable cost divided by output

Front 37

average total cost

Back 37

total cost divided by output

has a minimum

Front 38

marginal cost

Back 38

addition to total cost resulting from the addition of the last unit of output to the mix

Front 39

long-run average cost function

Back 39

shows the minimum cost per unit of producing each output level when any desired scale of plant can be built

Front 40

expansion path

Back 40

shows how the employment of each input changes as output changes under the assumption that input prices are fixed.

connects tangency points on the isoquants