ABM 1041 Applied Microeconomics Final Study Guide, ABM 1041 Applied Microeconomics Exam 1 Study Guide
The Gini coefficient for the country of Amelia was 0.23 before a system of taxation and transfer payments to the poor was initiated. What could be the likely Gini coefficient after this program was put in place? 1.09 0.65 0.19 0.23
0.19
If a family earns $3,000 and the poverty threshold for that family is $15,000, what is the income to poverty ratio?
0.2
When an airline company raises the price of tickets for a certain flight by 10%, it experiences an 8% decline in the number of passengers on that flight. The price elasticity of demand for the tickets on this particular flight is:
0.8
If an industry is made up of five firms with market shares of 25%, 20%, 20%, 20%, and 15%, respectively, its Herfindahl-Hirschman Index is:
2050
A monopolist has four distinct groups of customers: group A has an elasticity of demand of 0.2, group B has an elasticity of demand of 0.8, group C has an elasticity of demand of 1.0, and group D has an elasticity of demand of 2.0. The group paying the highest price for the product will be group:
A
Price elasticity of supply
A measure of the responsiveness of quantity supplied to changes in price. Elastic supply has elasticity greater than 1, whereas inelastic supply has elasticity less than 1. Time is the most important determinant of the elasticity of supply.
Which action can help increase the stability of a cartel? increase product differentiation increase government protection increase the number of cartel members decrease barriers to entry into the industry
increase government protection
Assume that hamburgers and ketchup are complements. If the price of hamburgers falls, demand for ketchup:
increases As the price of hamburgers falls, people will consume more hamburgers. (Quantity demanded increases, causing movement along the demand curve.) As a result, people will also consume more of the complementary good (consumed together), ketchup. (An increase in demand shifts the curve to the right.)
The fundamental reason why supply curves slope upward is:
increasing costs
Price system
A name given to the market economy because prices provide considerable information to both buyers and sellers.
marginal utility analysis
A theoretical framework underlying consumer decision making. This approach assumes that satisfaction can be measured and that consumers maximize satisfaction when the marginal utilities per dollar are equal for all products and services.
tit-for-tat strategies
A trigger strategy that rewards cooperation and punishes defections. If your opponent lowers its price, you do the same. If your opponent returns to a cooperative strategy, you do the same.
sole proprietorship
A type of business structure composed of a single owner who supervises and manages the business and is subject to unlimited liability.
intertemporal pricing
A type of versioning in which goods are differentiated by the level of patience of consumers. Less patient consumers pay a higher price than more patient consumers.
peak-load pricing
A versioning strategy of pricing a product higher during periods of higher demand, and lower during periods of lower demand.
Which of the following is the best example of complements? A. cookies and cake B. apple juice and orange juice C. CDs and DVDs D. athletic shoes and sandals E. bread and butter
E
Specialization leads to gains for:
both the buyer and the seller involved in a transaction; Specialization and trade lead to benefits for all parties participating in a transaction. This principle stands behind trade between nations and any other free market transaction.
In November 2013, the iPad Air was launched. Lionel didn't buy one until April of the next year. Lionel is a:
casual user
_____ in an industry can be so large that demand is able to support only one firm.
Economies of scale
The price of bagels and donuts increases. In response, producers of bagels and donuts offer more for sale. This is a
change in quantity supplied
The price of cupcakes increases. In response, producers of cupcakes offer more for sale. This is a
change in quantity supplied
There is migration into a community of workers with factory production skills. In response, the local factory increases its production of machinery parts. This is a
change in supply
Bus tickets are often considered _____ goods because _____.
inferior; as income rises, demand for bus tickets falls
profit-maximizing rule
Firms maximize profit by producing output where MR = MC. No other level of output produces higher profits.
Fat's Meats is in an oligopoly market. According to the kinked demand curve model, if it lowers its prices because costs decrease, its competitors will:
lower their prices so they don't lose market share
Spraying for mosquito control in a local community is an example of a public good because it is:
nonrival and exhibits nonexcludability
The opportunity costs of attending college do NOT include: required student activity fees. the costs of textbooks or eBooks. the expenditures for food. the forgone wages that could have been earned working.
the expenditures for food
concentration ratio
The share of industry shipments or sales accounted for by the top four or eight firms.
In the study of economics, the goals of efficiency and equity are often:
in conflict with one another
The economics of uranium mining would be studied in:
microeconomics
Ted's Lawn Care has total fixed costs of $300,000, total variable costs of $200,000, and an output of 50,000 units. What is Ted's Lawn Care's average total cost?
$10 Average total cost is determined by dividing the total costs by the output. Total cost equals fixed costs plus variable costs
Advanced Printing Systems is a firm in a monopolistically competitive market. If it is selling its product at $12 at the equilibrium quantity and earning normal profit, what is its long-run average total cost?
$12 If a firm is earning normal profit in the long run, then the equilibrium price equals the firm's long-run average total cost.
Advanced Printing Systems is a firm in a monopolistically competitive market. If its marginal cost is $17 per unit in the short run, if it is maximizing profit, and if it is selling at the equilibrium quantity, what is its marginal revenue?
$17 In monopolistic competition, a firm will maximize profits in the short run when marginal revenue equals marginal cost.
A lawyer can argue a case in court for one hour and make $300. She could alternatively use that hour of time to type a legal brief in her office. What is the opportunity cost of her typing the legal brief?
$300, since that is the amount she could have made by arguing a case in court
When perfectly competitive firm X sells three units of product Z, its marginal revenue is $4.67. When it sells one hundred units, marginal revenue is $4.67. We can conclude that the price is:
$4.67
Staci's Sign Shoppe makes signs for businesses. Staci is currently producing 210 signs per week with three employees. Staci hires an additional worker and total output per week rises to 328. The marginal product of the last worker is ___________ signs.
118
Jeremy's level of satisfaction from consuming the first cookie was 25 utils. The second cookie increased the level of satisfaction by 20 utils. Jeremy's total level of satisfaction after three cookies was 60. Thus, the marginal utility for the third cookie is:
15
Equilibrium price
The price at which the quantity demanded is just equal to quantity supplied
firm
An economic institution that transforms resources (factors of production) into outputs.
trigger strategies
Action is taken contingent on your opponent's past decisions.
altruism
Actions undertaken merely out of goodwill or generosity.
Why might an airline company (assuming it is a monopoly) charge different fares to different groups of customers?
Airlines charge different fares to different groups of customers in order to maximize the revenue (and therefore profit) generated from a given flight. By imposing restrictions such as advance purchase and minimum stay, the airline can discriminate between business travelers (who have a higher willingness to pay) and nonbusiness travelers (who have a lower willingness to pay). Fares are set accordingly. This helps the company realize more revenue than would have been generated if all consumers paid the same price.
diminishing marginal returns
An additional worker adds to total output, but at a diminishing rate.
How might the market imbalances caused by an anti-price gouging law be dealt with?
Anti-price gouging laws cause an insufficient supply (shortage) in the market. (Such laws are frequently imposed in the case of natural disasters when the markets are disrupted by the disaster.) Providing incentives for firms to increase supply can reduce this shortage. Such incentives could include subsidies or tax breaks designed to offset higher costs associated with increasing supply in a disaster ravaged area. Another approach might be to segment the market by capping the price of existing supplies in the market, and allowing higher prices to be charged for new supplies.
economies of scale
As the firm expands in size, average total cost declines.
fixed costs
Costs that do not change as a firm's output expands or contracts, often called overhead. These include items such as lease payments, administrative expenses, property taxes, and insurance premiums.
variable costs
Costs that vary with output fluctuations, including expenses such as labor and material costs.
leadership games
Describes situations that occur when a small firm competes against a large firm, and where the market share captured by the small firm is not large enough to warrant a reaction by the large firm.
Which of the following statements is true? A. A government free of corruption is an example of a bad institution. B. Human creativity allows for existing products to improve. C. Wealthy countries tend to have fewer innovative individuals. D. Wealthy nations tend to have weak institutions.
B; Along with institutions, human creativity is an equally important contributing factor to the wealth of a nation.
How do barriers to entry benefit a monopoly?
Barriers to entry include control over inputs, economies of scale and government protection in the form of patents and copyrights. Each of these deters new companies from competing with the monopolist. By avoiding potential competitors (who may undercut the monopoly's prices), the monopoly can maintain its market power and earn economic profits
second-degree price discrimination
Charging different customers different prices based on the quantities of the product they purchase.
third-degree price discrimination
Charging different groups of people different prices based on varying elasticities of demand.
perfect (first-degree) price discrimination
Charging each customer the maximum price each is willing to pay, thereby expropriating all consumer surplus.
price discrimination
Charging different consumer groups different prices for the same product.
contestable markets
Markets that look monopolistic, but where entry costs are low the sheer threat of entry keeps prices low.
Suppose you find $20. If you choose to use the $20 to go to the football game, then your opportunity cost of going to the game is zero.
False
framing bias
Describes when individuals are steered into making one decision over another or are convinced they are receiving a higher value for a product than what was paid for it.
network effect
Describes how individuals and firms incorporate the external benefit generated from network goods into their decision making, which increases the value of the good further.
Efficiency
How well resources are used and allocated.
total revenue
Equal to price per unit times quantity sold.
Capital
Includes manufactured products such as tractors, welding equipment, and computers that are used to produce other goods and services. The payment for capital is interest.
Land
Includes natural resources such as mineral deposits, oil, natural gas, water, and land in the usual sense of the word. The payment for land used as a resource is rent.
antitrust law
Laws designed to maintain competition and prevent monopolies from developing.
Market failure
Occurs when a free market does not lead to a socially desirable outcome.
Misallocation of resources
Occurs when a good or service is not consumed by the person who values it the most, and typically results when a price ceiling creates an artificial shortage in the market.
Scarcity
Our unlimited wants clash with limited resources, leading to scarcity. Everyone (rich and poor) faces scarcity because, at a minimum, our time on earth is limited. Economics focuses on the allocation of scarce resources to satisfy unlimited wants as fully as possible.
average product
Output per worker, found by dividing total output by the number of workers employed to produce that output (Q/L).
Total revenue
Price 3 quantity demanded (sold). If demand is elastic and price rises, quantity demanded falls off significantly and total revenue declines, and vice versa. If demand is inelastic and price rises, quantity demanded does not decline much and total revenue rises, and vice versa.
According to research by Michael I. Norton and Dan Ariely ("Building a Better America—One Wealth Quintile at a Time," Perspectives on Psychological Science 6 (2011): 9-12), most Americans prefer some income inequality, but less than there is in the United States. This means that they would prefer a distribution more like that of:
Sweden
lock-in strategies
Techniques used by firms to raise the switching costs for their customers, making it less attractive to leave the network.
sustainable development
The ability to meet the needs of the present without compromising the ability of future generations to meet their own needs.
marginal utility
The additional satisfaction received from consuming one more unit of a given product or service.
What are the costs and benefits of a minimum wage?
The benefits of a minimum wage are that certain employees enjoy a higher wage than they would have received without the price floor. The costs are in the form of other workers who can't find jobs because the minimum wage prices them out of the market.
Equity
The fairness of various issues and policies
Equilibrium quantity
The output that results when quantity demanded is just equal to quantity supplied.
production
The process of turning inputs into outputs.
Regarding the short-run cost model, the vertical distance between the average total cost (ATC) curve and the average variable cost (AVC) curve is: a. average fixed cost (AFC) b. total cost (TC) c. marginal cost (MC) d. variable cost (VC)
a
When points are along a budget line, this means that they are all
affordable
Which of the following is equivalent to average variable cost (AVC)? a. ATC - MC b. ATC - AFC c. ATF + AFC d. ATC + MC
b
Getting a flu shot reduces the chances of spreading the illness to one's classmates and friends. Why, then, is this considered a market failure due to external benefits?
because the number of people who obtain flu shots is less than the socially optimal quantity
Supply and demand analysis is used in:
both microeconomics and macroeconomics.
All of these are barriers to entry into an industry, EXCEPT: a. government restrictions b. relatively low marginal tax rates c. economies of scale d. a patent
c
The industrial structure of cartels is an example of a(n):
cooperative game
Factories belonging to the General Electric company dumped PCBs into New York's Hudson River for almost 40 years before the government ordered them to clean up the toxic sediment. By 2010 the first phase of clean-up was completed. As the next phase begins, you would expect the marginal benefit of the abatement to:
decrease The marginal benefit of abatement decreases as the environment becomes cleaner, since the gains from an ever-cleaner environment have diminishing marginal returns.
An increase in government subsidies for an industry, which reduces production cost, causes the market equilibrium price to _____ and the market equilibrium quantity to _____.
decrease; increase
A fixed cost:
doesn't change with the level of output in the short run
A bicycle factory finds that it can lower costs if it also produces tricycles and unicycles. This is an example of:
economies of scope
Apple, Inc., has been successful in taking its expertise in designing hardware and software for computers and applying this knowledge to other products, such as smartphones. This is because of:
economies of scope When firms produce a number of products, it is often cheaper for them to produce another product whose production processes are interdependent. These economies are called economies of scope.
An increase in consumer preference for a good shifts the demand curve to the left.
false An increase in the popularity of a good is represented by a rightward movement of the demand curve, indicating that consumption will increase at each price point.
A price taker is a firm that:
has no control over the market price
Scarcity:
is faced by all individuals and societies
A deadweight loss:
is the same as welfare loss
A theory composed of a number of assumptions and facts boiled down to their basic relevant elements is called a:
model
When hiring additional workers reduces total output, the firm faces
negative marginal returns
When the market for a good is in equilibrium, there is (are):
no shortages or surpluses When supply and demand are equal, the market is in equilibrium. In graphic terms, this equilibrium is represented by the price point where the supply and demand curves intersect.
overvaluing the present relative to the future
occurs when future decisions appear too distant to be concerned about in the present, leading to irrational decisions.
A market exists when:
people exchange money for goods and services
When a business offers its customers bulk discounts, they are practicing:
second-degree price discrimination
The theory of comparative advantage says that countries:
should export those goods they can produce at a lower opportunity cost than another country.
Which of the following is a virtual network? an airline, Facebook, software, telephone
software
The cross price elasticity of demand measures
the response of quantity demanded of a good to changes in the price of another good. Consumers' decisions about which goods to purchase are not only influenced by the price of the good in question but, also, by the prices of other goods that may be able to satisfy their needs. Cross elasticity of demand measures this relationship.
Explicit costs are
those paid to some other economic entity
Normal profits are equal to:
zero economic profits
Supply curve
A graphical illustration of the law of supply, which shows the relationship between the price of a good and the quantity supplied.
Paying a salesperson more for increased sales is an example of:
an incentive
market power
A firm's ability to set prices for goods and services in a market.
Regressive tax
A tax that falls in percentage of income as income increases.
chicken games
Describes situations that occur when opposing players have an incentive to maintain a tough stance; however, if neither player refuses to back down, the worst outcome for both players occurs.
average fixed cost
Equal to total fixed cost divided by output (FC/Q).
average variable cost
Equal to total variable cost divided by output (VC/Q).
Determinants of demand
Nonprice factors that affect demand, including tastes and preferences, income, prices of related goods, number of buyers, and expectations.
dominant strategy
Occurs when a player chooses the same strategy regardless of what his or her opponent chooses.
Absolute advantage
One country can produce more of a good than another country.
economic profit
Profit in excess of normal profits. These are profits in excess of both explicit and implicit costs.
personal or family distribution of income
The distribution of income to individuals or family groups (typically quintiles, or fifths, of the population).
marginal cost
The change in total costs arising from the production of additional units of output (ΔTC/ΔQ). Because fixed costs do not change with output, marginal costs are the change in variable costs associated with additional production (ΔVC/ΔQ).
nonrivalry
The consumption of a good or service by one person does not reduce the utility of that good or service to others.
externalities
The impact on third parties of some transaction between others in which the third parties are not involved. An external cost (or negative externality) harms the third parties, whereas external benefits (positive externalities) result in gains to them.
short-run supply curve
The marginal cost curve above the minimum point on the average variable cost curve.
market failure
When markets fail to provide a socially optimal level of output, and will provide output at too high or low a price.
When points are to the left of a budget line, this means that they are all
affordable, but some income will remain unspent
In November 2013, the iPad Air was launched. Ali finally bought the iPad a year later and paid about 20% less than her friends who bought it the previous November. Ali's willingness to pay is:
lower than a core user
A perfectly competitive firm has total revenues equal to $360 when it produces forty units. What is the marginal revenue for the forty-first unit?
$9
oligopoly characteristics
- fewer firms (such as the auto industry) - mutually independent decisions - substantial barriers to market entry - potential for long-run economic profit - shared market power and considerable control over price
monopolistic competition characteristics
- many buyers and sellers - differentiated products - little to no barriers to market entry or exit - no long-run economic profit - some control over price (limited market power)
perfect competition characteristics
- many buyers and sellers - homogeneous (standardized) products - no barriers to market entry or exit - no long-run economic profit - no control over price (no market power)
monopoly characteristics
- one firm - no close substitutes for product - nearly insuperable barriers to entry - potential for long-run economic profit - substantial market power and control over price
Paolo can walk three dogs or mow two lawns in two hours. Ashanti can walk six dogs or mow three lawns in two hours. Ashanti's opportunity cost for each additional dog walked is:
0.5 lawn mowed
Which discount rate would result in society devoting the most resources to long-run environmental management? 3% 1% 2% 4%
1%
Suppose the country of Florin can produce either 400 dresses or 200 daggers. What is the opportunity cost of one dress in terms of daggers?
1/2 dagger
At market equilibrium A. producers offer the same amount of a product that consumers want. B. producers switch to substitution products. C. consumers switch to complementary products. D. consumers offer to buy stored surpluses at marked-down prices.
A
Consider the market for hamburgers. Which of the following will cause higher prices and a greater quantity of hamburgers exchanged? A. There is a doubling of the number of college students living in the area. B. Local pizza restaurants lower their prices and begin campus delivery services. C. Hamburger bun, lettuce, tomato and cheese prices decline. D. A disease wipes out half of the livestock in the United States supplying beef to restaurants.
A
The demand for gasoline is rising. Which statement describes a possible cause? A. Consumers expect prices to rise in the near future. B. Commuters are switching from driving to public transportation. C. Drivers are purchasing more fuel-efficient cars. D. Incomes are falling. E. The government subsidizes the oil refineries
A
Which of the following is most likely to be a normal good? A. tickets to a major league baseball game B. trips to the laundromat C. generic brand macaroni-and-cheese dinners D. bus rides E. used paperback books
A
corporation
A business structure that has most of the legal rights of individuals, and in addition, can issue stock to raise capital. Stockholders' liability is limited to the value of their stock.
Identify the factors that cause a change in the quantity supplied versus those that cause a shift in the supply curve.
A change in the quantity supplied is caused by a change in the price of a good; the supply curve does not shift. A shift of the supply curve ( also called a change in supply) is caused by changes in factors other than price. These supply curve shifters include changes in (1) technology, (2) the prices of production resources, (3) the prices of substitute goods, (4) expectations, (5) the number of producers, and (6) taxes and subsidies.
industry standard
A common format that is used, for example, in televisions, in digital recorders, or in software programs.
Market failure due to asymmetric information is illustrated in which situation? A company sells a product with harmful ingredients. The ingredients are listed on the label in small print. Consumers seek to buy a product because it tastes good, even though they know that it contains harmful ingredients. Consumers buy a product labeled as a foot cream, but they use it as an eye cream even though there is a warning on the label to use it only on feet. A company does not list all a product's ingredients on the label. Customers buy the product unaware that it contains harmful ingredients.
A company does not list all a product's ingredients on the label. Customers buy the product unaware that it contains harmful ingredients.
core user
A consumer who has a very high willingness to pay for a new product or service and is among the first to purchase it.
casual user
A consumer who purchases a good only after the good has matured in the market and is more sensitive to price.
switching cost
A cost imposed on consumers when they change products or subscribe to a new network.
sunk cost
A cost that has been paid and cannot be recovered; therefore, it should not enter into decision making affecting the present or future.
If specialization and trade lead to a win-win situation in which both countries gain, why is there often opposition to trade agreements and globalization?
A country may lose its competitive edge in some goods due to the other country's having a comparative advantage in the goods being traded.
network demand curve
A demand curve for a good or service that produces a network effect, causing it to slope upward at lower quantities before sloping downward once the market matures.
Lump-sum tax
A fixed amount of tax regardless of income. It is a type of regressive tax.
income
A flow measure reflecting the funds received by individuals or households over a period of time, usually a week, month, or year.
Inferior good
A good for which an increase in income results in declining demand.
Normal good
A good for which an increase in income results in rising demand.
network good
A good or service that requires the existence of a physical, virtual, or social network to exist.
Lorenz curve
A graph showing the cumulative distribution of income or wealth. Households are measured on the horizontal axis while income or wealth is measured on the vertical axis.
Demand curve
A graphical illustration of the law of demand, which shows the relationship between the price of a good and the quantity demanded.
utility
A hypothetical measure of consumer satisfaction.
budget line
A line that graphically illustrates the possible combinations of two goods that can be purchased with a given income, given the prices of both goods.
monopolistic competition
A market structure with a large number of firms producing differentiated products. This differentiation is either real or imagined by consumers and involves innovations, advertising, location, or other ways of making one firm's product different from that of its competitors.
perfect competition
A market structure with many relatively small buyers and sellers who take the price as given, a standardized product, full information to both buyers and sellers, and no barriers to entry or exit.
Laissez-faire
A market that is allowed to function without any government intervention.
oligopoly
A market with just a few firms dominating the industry, where (1) each firm recognizes that it must consider its competitors' reactions when making its own decisions (mutual interdependence), and (2) there are significant barriers to entry into the market.
Price ceiling
A maximum price established by government for a product or service. When the price ceiling is set below equilibrium, a shortage results.
Income elasticity of demand
A measure of how responsive quantity demanded is to changes in consumer income.
Cross elasticity of demand
A measure of how responsive the quantity demanded of one good is to changes in the price of another good.
Gini coefficient
A measure of income inequality defined as the area between the Lorenz curve and the equal distribution line divided by the total area below the equal distribution line.
Price elasticity of demand
A measure of the responsiveness of quantity demanded to a change in price, equal to the percentage change in quantity demanded divided by the percentage change in price.
cost-benefit analysis
A methodology for decision making that looks at the discounted value of the costs and benefits of a given project.
Price floor
A minimum price established by government for a product or service. When the price floor is set above equilibrium, a surplus results.
physical network
A network connected by a physical structure such as fiber optics, transportation routes, or satellites.
virtual network
A network connected by groups of people using the same type or brand of good.
social network
A network that combines elements of physical and virtual networks.
increasing marginal returns
A new worker hired adds more to total output than the previous worker hired, so that both average and marginal products are rising.
Prisoner's Dilemma
A noncooperative game in which players cannot communicate or collaborate in making their decisions, which results in inferior outcomes for both players. Many oligopoly decisions can be framed as a Prisoner's Dilemma.
monopoly
A one-firm industry with no close product substitutes and with substantial barriers to entry.
short run
A period of time over which at least one factor of production (resource) is fixed, or cannot be changed.
long run
A period of time sufficient for firms to adjust all factors of production, including plant capacity.
versioning
A pricing strategy that involves differentiating a good by way of packaging into multiple products for people with different demands.
Is a public beach both nonrival and nonexcludable? Explain.
A public beach is nonexcludable but it is rival in consumption. Assuming that, because the beach is a public facility, there are no entrance restrictions, the beach would be nonexcludable. Should the beach become severely congested, it would be rival (the opposite of nonrival) in consumption because use of the beach's facilities by any one person impacts the enjoyment of other beachgoers.
Positive question
A question that can be answered using available information or facts.
Normative question
A question whose answer is based on societal beliefs on what should or should not take place
constant returns to scale
A range of output where average total costs are relatively constant. The expansion of fast-food restaurant franchises and movie theaters, which are essentially replications of existing franchises and theaters, reflects this.
diseconomies of scale
A range of output where average total costs tend to increase. Firms often become so big that management becomes bureaucratic and unable to control its operations efficiently.
wealth
A stock measure of an individual's or family's assets, net of liabilities, at a given point in time.
market segmentation
A strategy of making a single good in different versions to target different consumer markets with varying prices.
bundling
A strategy of packaging several products into a single product with a single price. Bundling allows firms to capture customers of related products by making it more attractive to use the same firm's products.
network
A structure that connects various entities with one another. A network can be physical, virtual, or social.
Demand schedule
A table that shows the quantity of a good a consumer purchases at each price.
Flat tax
A tax that is a constant proportion of one's income.
Pigouvian tax
A tax that is placed on an activity generating negative externalities in order to achieve a socially efficient outcome.
Progressive tax
A tax that rises in percentage of income as income increases.
Herfindahl-Hirschman index (HHI)
A way of measuring industry concentration, equal to the sum of the squares of market shares for all firms in the industry.
Which of the following describes a cartel?
All of the firms agree upon a specific price and output for their products. A cartel is a formal agreement between firms to collude on price, output, and distribution.
cartel
An agreement between firms (or countries) in an industry to formally collude on price and output, then agree on the distribution of production.
Explain how an effective (binding) price ceiling can incur costs and benefits for an economy.
An effective price ceiling caps the price below the free market equilibrium price. This results in a shortage, an imbalance between the market's quantity demanded and quantity supplied. Consequently, some consumers will be able to buy the product at a below equilibrium price (benefits), and other willing buyers will not have access to the product because of insufficient quantity supplied at that price (costs).
network externality
An external benefit generated from the consumption of a network good.
free rider
An individual who avoids paying for a good because he or she cannot be excluded from enjoying the good once provided.
Willingness-to-pay
An individual's valuation of a good or service, equal to the most an individual is willing and able to pay.
natural monopoly
An industry exhibiting large economies of scale such that the minimum efficient scale of operations is roughly equal to market demand.
increasing cost industry
An industry that, in the long run, faces higher prices and costs as industry output expands. Industry expansion puts upward pressure on resources (inputs), causing higher costs in the long run.
decreasing cost industry
An industry that, in the long run, faces lower prices and costs as industry output expands. Some industries enjoy economies of scale as they expand in the long run, typically the result of technological advances.
constant cost industry
An industry that, in the long run, faces roughly the same prices and costs as industry output expands. Some industries can virtually clone their operations in other areas without putting undue pressure on resource prices, resulting in constant operating costs as they expand in the long run.
essential facility
An input that is needed to produce a product or to allow a person to consume a product.
kinked demand curve
An oligopoly model that assumes that if a firm raises its price, competitors will not raise theirs. However, if the firm lowers its price, its competitors will lower their price to match the reduction. This leads to a kink in the demand curve and relatively stable market prices.
Nash equilibrium
An outcome that occurs when all players choose their optimal strategy in response to all other players' potential moves. At a Nash equilibrium, no player can be better off by unilaterally deviating from the noncooperative outcome.
Explain the difference between output combinations that lie inside the PPF and those that lie outside the PPF.
An output combination that lies inside a PPF indicates that the economy is not using all of its inputs to produce goods and services. An output combination that lies outside the PPF is impossible because the economy has insufficient resources to produce at these levels.
barriers to entry
Any obstacle that makes it more difficult for a firm to enter an industry, and includes control of a key resource, prohibitive fixed costs, and government protection.
economies of scale
As a firm's output increases, its LRATC tends to decline. This results from specialization of labor and management, and potentially a better use of capital and complementary production techniques.
An economy is recovering from recession; short-run economic growth is occurring. What happens to the economy's inputs during the recovery and how is this presented on a PPF?
As an economy is recovering, previously idle or underutilized resources become active and begin contributing to economic output. Examples of this phenomenon include unemployed people returning to work, empty stores becoming utilized, and previously idle factories again producing products. This is represented on a PPF by movement from a point inside the PPF to a point closer to or on the PPF.
law of diminishing marginal utility
As we consume more of a given product, the added satisfaction we get from consuming an additional unit declines.
How can a repeated game help in resolving a prisoner's dilemma outcome?
Assume two companies (A and B) are engaged in a repeated game, and both are making decisions that result in the highest collective profit. Company A decides on an action designed to maximize its profit at the expense of company B. The next time the game is played, company B can decide to match company A's action which results in a prisoner's dilemma outcome, and denies company A the benefits of its noncooperative strategy, a tit-for-tat strategy. When company B does this, it is signaling to company A that it won't allow company A to gain at its expense. Hence, company A's best strategy when the game is played the next time is to cooperate and allow for the maximization of joint profits.
Ceteris Paribus
Assumption used in economics (and other disciplines as well), where other relevant factors or variables are held constant.
teaser strategies
Attractive up-front deals used as an incentive to entice new customers into a network.
Consider the market for printed textbooks. Which of the following will cause lower prices and a lower quantity of printed textbooks exchanged? A. There is a doubling of the number of college students living in the area. B. There is increased availability of electronic textbooks viewable on iPads and tablet computers. C. Technological improvements lower the costs of printing books. D. A fire destroys half the inventory of printing paper
B
Explain the importance of the absence of barriers to entry in perfectly competitive markets to long-run pricing in these markets.
Because perfectly competitive markets have no barriers to entry, when existing firms in the market realize positive economic profits in the short run, firms outside the industry are attracted to the profit opportunity and choose to enter the market in the long run. This entry causes an increase in the market's supply; the increase in supply reduces the market equilibrium price, eliminating the short-run profits.
What best describes the difference between public television and on-demand cable television?
Both are nonrival but public television is nonexclusive
market structure analysis
By observing a few industry characteristics such as number of firms in the industry or the level of barriers to entry, economists can use this information to predict pricing and output behavior of the firm in the industry.
economies of scope
By producing a number of products that are interdependent, firms are able to produce and market these goods at lower costs.
Consider the market for athletic apparel. Which of the following will cause lower prices and a greater quantity of athletic apparel and equipment exchanged? A. New medical studies demonstrate positive health benefits from regular exercise. B. There is a significant decrease in the price of jeans and sweaters. C. There is a reduction in the cost of cotton, synthetic fibers and other clothing inputs. D. The government places a tax on the sale of clothing.
C
A budget line represents the: A. aggregate spending by the federal government given product prices B. combinations of goods than an economy can produce utilizing all available resources C. combinations of goods an individual can purchase given product prices and available income D. opportunity costs an economy incurs as more of one good and less of another good is produced
C The budget line shows all of the combinations of two goods a consumer can afford given his or her available income.
Which of the following statements is true of incentives? A. People respond to financial incentives only. B. People respond to good incentives but ignore bad incentives. C. Rules can be established to prevent people from acting on certain incentives. D. Stealing is an outcome of a response to a good incentive.
C; People are motivated to achieve the benefits of a good incentive and avoid the negative consequence of a bad incentive.
Which of these is NOT an example of market failure? Competition leads firms to provide products at the lowest possible price. Water is polluted by a paper company located by a river. Air is polluted by a manufacturing firm. Consumers must buy water from one local water utility.
Competition leads firms to provide products at the lowest possible price.
One of the determinants of the price elasticity of demand is time. If gasoline prices increase substantially, what adjustments might consumers make over the long run that would increase their responsiveness to changes in the price of gasoline?
Consumers have very little ability to respond to a gasoline price increase in the short run. While they may be able to cut down on driving slightly, their day-to-day life, driving to work, school, and so on, will continue, with the consumption of gas remaining about the same. This means that the responsiveness of consumers to the price change is relatively low. A low responsiveness results in the price increase being greater than the reduction in quantity demanded Consequently, in the short run, the price elasticity of demand is less than one or inelastic. Over the long run, consumers can buy more fuel efficient cars, move closer to work, or start using mass transit. These actions will reduce fuel consumption and increase consumers' responsiveness to changes in the price of gasoline. Therefore, demand for gasoline may become price elastic in the long run.
Why might a business choose to emit pollution?
Controlling pollution frequently requires a firm to invest in new and possibly higher cost technology to achieve the desired pollution reductions. These higher costs might cause the firm's overall production costs to increase. With higher costs, the firm might have difficulty in matching the prices of firms that didn't make pollution control investments. Thus, the firm might not earn acceptable profits.
Consider the market for whole wheat bread. Which of the following will cause higher prices and a lower quantity of whole wheat bread exchanged? A. Scientists discover new health benefits of eating whole wheat products. B. The price of white bread declines significantly. C. Union concessions result in lower labor costs of bakers and other bakery workers. D. Flour mills increase the cost of whole wheat flour purchased by bread bakeries.
D
Which of the following is the best example of substitutes? A. money and donuts B. chips and salsa C. macaroni and cheese D. hiking boots and athletic shoes E. DVD players and DVDs
D
Which statement is not correct? A. The sum of consumer and producer surplus increases as markets become more efficient. B. A reduction in total consumer and producer surplus indicates markets have become less efficient. C. When prices are below market equilibrium, the sum of consumer and producer surplus decreases. D. When prices are above market equilibrium, the sum of consumer and producer surplus increases. E. All are correct
D
Which of the following statements is true of markets? A. Government intervention in markets should always be avoided. B. There are no disadvantages of having free markets. C. Markets discourage competition among firms. D. Free markets sometimes fail to produce best results for society, but such failure can be reduced by government intervention.
D; Because free markets are based on maximizing the benefits of a transaction for the transaction's participants, they sometimes result in outcomes that are inefficient for society. Government intervention can reduce (or eliminate) this inefficiency.
Which response is expected in the milk market if the price of chocolate chip cookies declines? Demand increases; quantity exchanged increases; and price increases. Demand increases; quantity exchanged increases; and price decreases. Demand decreases; quantity exchanged decreases; and price increases. Demand decreases; quantity exchanged decreases; and price decreases. Not enough information is given to answer the question.
Demand increases; quantity exchanged increases; and price increases.
Entrepreneurs
Entrepreneurs combine land, labor, and capital to produce goods and services. They absorb the risk of being in business, including the risk of bankruptcy and other liabilities associated with doing business. Entrepreneurs receive profits for their effort.
command and control policies
Environmental policies that set standards and issue regulations, which are then enforced by the legal and regulatory system.
market-based policies
Environmental policies that use charges, taxes, subsidies, deposit-refund systems, or tradable emission permits to achieve environmental goals.
profit
Equal to the difference between total revenue and total cost.
average total cost
Equal to total cost divided by output (TC/Q). Average total cost is also equal to AFC + AVC.
(T/F) An increase in the price of milk will cause a decrease in the demand for milk.
False
(T/F) An increase in the price of milk will cause an increase in the supply of ice cream.
False
(T/F) If your friend offers to drive you to the store so you don't have to drive your own car, then your opportunity cost of going to the store is zero
False
A decrease in the price of milk will cause an increase in the demand for milk.
False
A surplus would result from either a decrease in supply or an increase in demand.
False
One of the costs of a minimum wage is that it creates a shortage of workers.
False
(T/F) A perfectively competitive industry's market demand curve is a horizontal line.
False Although a firm in perfect competition faces a horizontal demand curve because each firm takes the equilibrium price as given, the market itself (representing the demand faced by all the producers in the market) has a downward sloping to the right of the demand curve.
If the price of a resource required to produce a good increases, the supply curve will shift to the right, indicating that producers are inclined to produce more of the good at each price point.
False As the price of production inputs increases, firms' profit opportunities per unit are decreased. Consequently, firms will produce less at each price point. This is represented by a leftward shift of the supply curve.
(T/F) Prisoner's dilemma outcomes are uncommon.
False Because prisoner's dilemma games occur in competitive (vs. cooperative) situations, and competitions are frequent in the business, political, legal, and sports worlds, among many others, these outcomes are frequent.
In an economy producing just beer and autos, producing increasing amounts of autos requires giving up decreasing amounts of beer.
False Because the resources initially transferred from beer production to auto production would be those least suited to beer production, the initial reduction in beer production would be relatively small. Further increasing auto production would require transferring resources better suited to beer production and result in a larger reduction in beer production. This is an illustration of diminishing returns to inputs.
(T/F) When a business sells an excess factory, it is incurring a sunk cost
False Because this business is recovering at least a portion of its fixed costs by selling the factory, the fixed costs associated with the factory are not a sunk cost. Sunk costs are not recoverable.
(T/F) If a business has revenue of $100,000, explicit costs of $50,000, and implicit costs of $60,000, it is earning an economic profit.
False Economic profit includes both implicit and explicit costs.
(T/F) Goods generating positive externalities are over-produced or over-consumed.
False Goods generating positive externalities are under-consumed and or under-produced because the private parties in a transaction are only interested in maximizing their own well-being and do not include the larger benefits to society in their decision making. As a result, less than a socially optimal quantity of the good is produced and consumed or produced.
(T/F) All monopolies earn profits.
False Just like any business, a monopoly can be unsuccessful in the sense that it loses money even though the firm has market power with respect to setting prices and the level of output. If the firm is the only producer of a product, but the product doesn't meet consumer needs and expectations, the firm will fail.
(T/F) Public goods are both rival and excludable
False Public goods are nonrival and nonexcludable. Nonrival means that one person's consumption of the good does not diminish another person's enjoyment of the good. Nonexcludable means that no one can be excluded from consuming the good, even if they don't pay for the good.
The price elasticity of supply measures the relationship between changes in quantity demanded of a good and changes in its quantity supplied.
False The price elasticity of supply measures the responsiveness of the quantity supplied of a good to changes in the price of the good.
(T/F) A firm in a perfectly competitive market maximizes its profits when its marginal cost equals its total revenue.
False The profit-maximizing output level for a firm in perfect competition is where the firm's marginal cost equals its marginal revenue. If the firm were to select another output level (higher or lower) it would earn less profit.
(T/F) A Nash equilibrium always yields the best outcome for all participants in a game
False There are many instances when a Nash equilibrium can result in a less than the best outcome for participants. When participants are competitive (as opposed to cooperating), a Nash equilibrium results in a less favorable, joint outcome for all the participants.
If a price floor is effective, all suppliers benefit from equilibrium prices below the free market prices
False To be effective a price floor must be placed above the free market equilibrium price and not below.
(T/F) A profit-maximizing monopolist can charge any price to consumers.
False To maximize profits, the monopolist's pricing is constrained by the price indicated by the demand curve for the level of output selected. If the monopoly were to charge a higher price than indicated by the demand curve, it would lose profit generating customers.
Price controls provide only benefits but no costs to society.
False While often price controls benefit a segment of society; this type of government intervention has a tradeoff involving costs. For example, anti-price gouging laws keep prices under control; however, supply is insufficient to meet the needs of all consumers.
Combinations of output that lie on the PPF are inefficient.
False Combinations of output that lie on the PPF require the economy to use all of its available resources at maximum productivity. This is considered an efficient output level.
A country that is normally strong in human capital has a weak educational system.
False; A strong educational system that helps develop valuable skills in the population, and exposes people to a diverse ideas is an important ingredient in fostering human creativity.
Thinking at the margin means that decision makers think about all costs associated with an action, both those that may change as a result of a decision and those that won't change.
False; Marginal thinking requires consideration of just those costs and benefits that change as a result of the decision under review.
Fat's Meats is part of the cartel that controls the kielbasa industry. Which of the following would cause instability in this cartel?
Fat's Meats could cheat and sell more kielbasa than it agreed to. Cartels are inherently unstable because of the incentive to cheat by individual firms that wish to increase their earnings.
Five Steps to Maximizing Profits in a Competitive Market
Find MR = MC. Find optimal quantity where MR = MC. Find optimal price. (Hint: It's already given!) Find the average total cost at the optimal Q. Find the profit = (P − ATC) × Q.
What is required for an economy to experience long-run growth and how would this growth be captured on a PPF?
For an economy to grow in the long-run, it must increase its capability to produce goods and services. Such an expansion can be achieved by expanding the inputs available to the economy and/or by deploying technology that enable producing more output with existing inputs. Economic growth is depicted on a PPF as a movement of the PPF curve away from the origin.
Why is game theory important to economics?
Game theory is the study of how businesses and individuals interact with one another to achieve their goals. It helps us understand and predict behavior by participants in some economic decisions. Hence, it is an important tool for economists.
sequential-move games
Games in which players make moves one at a time, allowing players to view the progression of the game and to make decisions based on previous moves.
simultaneous-move games
Games in which players' actions occur at the same time, forcing players to make decisions without knowing how the other players will act. These games are analyzed using diagrams called game tables.
Production efficiency
Goods and services are produced at their lowest resource (opportunity) cost.
Substitutes
Goods consumers substitute for one another depending on their relative prices, such as coffee and tea. Substitutes have a positive cross elasticity of demand.
Substitute goods
Goods consumers will substitute for one another. When the price of one good rises, the demand for the other good increases, and vice versa.
Complements
Goods that are typically consumed together, such as coffee and sugar. Complements have a negative cross elasticity of demand.
Complementary goods
Goods that are typically consumed together. When the price of a complementary good rises, the demand for the other good declines, and vice versa.
Luxury goods
Goods that have income elasticities greater than 1. When consumer income grows, demand for luxury goods rises more than the rise in income.
Inferior goods
Goods that have income elasticities that are negative. When consumer income grows, demand for inferior goods falls.
Normal goods
Goods that have positive income elasticities less than 1. When consumer income grows, demand for normal goods rises, but less than the rise in income.
public goods
Goods whose consumption by one person cannot diminish the benefit to others of consuming the good (i.e., nonrivalry), and once they are provided, no one person can be excluded from consuming (i.e., nonexclusion).
Law of demand
Holding all other relevant factors constant, as price increases, quantity demanded falls, and as price decreases, quantity demanded rises.
Law of supply
Holding all other relevant factors constant, as price increases, quantity supplied rises and as price declines, quantity supplied falls.
Which is NOT considered a basic economic question? How will the system accommodate change? Who will receive the goods and services? What goods and services will be produced? How will these goods and services be produced?
How will the system accommodate change?
Which situation(s) may require government intervention? I. A local business has made a profit in each of the last ten years. II. Students are having difficulty deciding whether to go the beach or to go hiking for their class trip. III. A manufacturing firm on a river is dumping production run off into the water.
III only
How does knowledge of price elasticity of demand for a firm's products help a firm make decisions regarding price increases?
If a firm is considering a price increase, it would be interested in understanding the impact of the price increase on its revenue. If a firm knows that the demand for its product is price inelastic, it can conclude that the percentage change in the quantity demanded of its product will be less than the percentage change in its price. Hence, in such cases, an increase in the price of the product will lead to an increase in the revenue of the firm.
Coase theorem
If transaction costs are minimal (near zero), a bargain struck between beneficiaries and victims of externalities will be efficient from a resource allocation perspective. As a result, a socially optimal level of production will be reached.
Some experts suggest that if there were no immigration, the United States population would not be growing. The average age in the United States is increasing. What is the likely effect of increased immigration and an aging population on society's income distribution? Immigration and the aging of the population both tend to decrease average household income. Immigration will tend to decrease household income in the short run, while the aging of the population will tend to increase it; the net effect is an increase. Immigration will tend to increase household income in the short run, while the aging of the population will tend to decrease it; the net effect is a decrease. The two trends will offset each other, leaving the distribution of income unchanged.
Immigration and the aging of the population both tend to decrease average household income.
long-run average total cost
In the long run, firms can adjust their plant sizes so that LRATC is the lowest unit cost at which any particular output can be produced in the long run.
Labor
Includes the mental and physical talents of individuals who produce products and services. The payment to labor is wages.
poverty thresholds
Income levels for various household sizes, below which people are considered to be living in poverty.
price taker
Individual firms in perfectly competitive markets determine their prices from the market because they are so small they cannot influence market price. For this reason, perfectly competitive firms are price takers and can sell all the output they produce at market-determined prices.
The United States has an absolute advantage in making short-sleeve cotton golf shirts. Why do Indonesia and Bangladesh make these shirts and export them to the United States?
Indonesia and Bangladesh have a lower opportunity cost of producing the shirts than the United States. A country would produce the good if it has a lower opportunity cost of producing the good than the other country. Indonesia and Bangladesh, while smaller, have a comparative advantage in the production of shirts, making it profitable for both countries to specialize and ship shirts to the United States.
In May 2011, Brazil announced a large discovery of oil in its deep-water fields. Estimated at 4.5 billion barrels, it was the largest discovery for Brazil in nearly three years. How is this discovery likely to affect OPEC?
It makes Brazil a stronger competitor. Brazil is not (at this writing) a member of OPEC. The discovery boosts Brazil as an oil producer and exporter, which is a challenge to OPEC's market power.
Which statement illustrates the law of demand? Lindsay offers to buy more sticks of chewing gum at $2 than at $1. Lindsay offers to buy more sticks of chewing gum at $1 than at $2. Marcus offers to sell more sticks of chewing gum at $2 than at $1. Marcus offers to sell more sticks of chewing gum at $1 than at $2.
Lindsay offers to buy more sticks of chewing gum at $1 than at $2.
Among perfectly competitive firms, profit maximizing will always operate where:
MC = MR
An unregulated natural monopolist would produce to the point at which:
MR = MC
Equilibrium
Market forces are in balance when the quantities demanded by consumers just equal the quantities supplied by producers.
price caps
Maximum price at which a regulated firm can sell its product. They are often flexible enough to allow for changing cost conditions.
Do the equilibrium price and quantity always move in the same direction when there is a change in demand or supply?
No, the equilibrium price and quantity do not always move in the same direction when there is a change in demand or supply. When demand increases or decreases, equilibrium price and quantity do move in the same direction. When supply increases, equilibrium price decreases and quantity increases. When supply decreases, equilibrium price increases while quantity decreases. When both the supply and demand curves shift, the equilibrium quantity will rise. However, the equilibrium price will depend on the relative magnitude of the supply and demand shifts.
Are all fixed costs sunk costs? Explain.
No. Fixed costs do not change in the short run as the level of output in the firm changes. Sunk costs are fixed costs that once spent cannot be recovered in whole or part. For example, college tuition (a fixed cost, since it doesn't vary no matter how much one studies) is a sunk cost; once spent, it cannot be transferred to benefit another student or (after add/drop) refunded. A physical textbook (a fixed cost, since its cost doesn't vary whether one reads it or not) is not a sunk cost: typically it can be sold on the used book market to recover at least part of the purchase price.
Determinants of supply
Nonprice factors that affect supply, including production technology, costs of resources, prices of related commodities, expectations, number of sellers, and taxes and subsidies.
Change in demand
Occurs when one or more of the determinants of demand changes, shown as a shift in the entire demand curve.
Change in supply
Occurs when one or more of the determinants of supply change, shown as a shift in the entire supply curve.
Asymmetric information
Occurs when one party to a transaction has significantly better information than another party.
asymmetric information
Occurs when one party to a transaction has significantly better information than another party.
sunk cost fallacy
Occurs when people make decisions based on how much was already spent, rather than how the decision might affect their current well-being.
Surplus
Occurs when the price is above market equilibrium, and quantity supplied exceeds quantity demanded.
Shortage
Occurs when the price is below market equilibrium, and quantity demanded exceeds quantity supplied.
Change in quantity demanded
Occurs when the price of the product changes, shown as a movement along an existing demand curve.
Change in quantity supplied
Occurs when the price of the product changes, shown as a movement along an existing supply curve.
What circumstance might lead a firm in a perfectly competitive market to realize a positive, short-run, economic profit?
Once a firm has selected its profit-maximizing output level (where marginal revenue equals marginal cost), the optimal output level for the firm is known. At this output level, the firm can determine its average total cost per unit. If the market price per unit is above the average total cost per unit (which includes all the firm's opportunity costs), the firm is earning a positive short-run economic profit.
nonexcludability
Once a good or service is provided, it is not possible to exclude others from enjoying that good or service.
Comparative advantage
One country has a lower opportunity cost of producing a good than another country.
product differentiation
One firm's product is distinguished from another's through advertising, innovation, location, and so on.
rate of return regulation
Permits product pricing that allows the firm to earn a normal return on capital invested in the firm.
trembling hand trigger
Players forgive certain instances of defection as "mistakes" before retaliation is taken
Unitary elastic supply
Price elasticity of supply is equal to 1. The percentage change in quantity supplied is equal to the percentage change in price.
Elastic supply
Price elasticity of supply is greater than 1. The percentage change in quantity supplied is greater than the percentage change in price.
Inelastic supply
Price elasticity of supply is less than 1. The percentage change in quantity supplied is less than the percentage change in price.
Consider the market for hamburgers. Which of the following will cause lower prices and a greater quantity of hamburgers exchanged? There is a doubling of the number of college students living in the area. Local pizza restaurants lower their prices and begin campus delivery services. Prices decline for hamburger buns, lettuce, tomato and cheese. A disease wipes out half of the livestock in the United States supplying beef to restaurants. None of the above
Prices decline for hamburger buns, lettuce, tomato and cheese.
Why are public goods usually provided by the government?
Private markets have difficulty earning profits from the production of many public goods. This is because these goods are both nonrival and nonexcludable. Examples are national defense, public safety, and clean air. In the absence of a profit opportunity, private industry will not produce a good, but in response to the presence of public need for such socially desirable goods, the government can (as a result of its ability to tax) step in to produce these goods.
Resources
Productive resources include land (land and natural resources), labor (mental and physical talents of people), capital (manufactured products used to produce other products), and entrepreneurial ability (the combining of the other factors to produce products and assume the risk of the business).
x-inefficiency
Protected from competitive pressures, monopolies do not have to act efficiently. Examples include spending on corporate jets, lavish travel, and other nonessential perks.
Incidence of taxation
Refers to who bears the economic burden of a tax. The economic entity bearing the burden of a particular tax will depend on the price elasticities of demand and supply.
marginal cost pricing rule
Regulators would prefer to have natural monopolists price where P = MC, but this would result in losses (long term) because ATC > MC.
average cost pricing rule
Requires a regulated monopolist to produce and sell output where price equals average total cost. This permits the regulated monopolist to earn a normal return on investment over the long term and therefore remain in business.
rent seeking
Resources expended to protect a monopoly position. These are used for such activities as lobbying, extending patents, and restricting the number of licenses permitted.
"tragedy of the commons"
Resources that are owned by the community at large (e.g., parks, ocean fish, and the atmosphere) therefore tend to be overexploited because individuals have little incentive to use them in a sustainable fashion.
If Rosco's Tacos competes with eight other fast-food restaurants in the same neighborhood, and two of those rival firms exit the market, then: the market supply curve will shift to the right. the market demand curve will shift to the left. Rosco's supply curve will shift to the right. Rosco's demand curve will shift to the right.
Rosco's demand curve will shift to the right
Production possibilities frontier (PPF)
Shows the combinations of two goods that are possible for a society to produce at full employment. Points on or inside the PPF are attainable, and those outside of the frontier are unattainable.
partnership
Similar to a sole proprietorship, but involves more than one owner who share the management of the business. Partnerships are also subject to unlimited liability.
How is the concept of cross price elasticity of demand relevant for a business owner?
Since cross price elasticity measures the responsiveness of quantity demanded of one good to changes in the price of another good, a business owner can use this knowledge to anticipate changes in the demand for his products in response to changes in the price of other goods. For example, ketchup and hamburgers are complements so cross elasticity of demand is negative. If the price of beef goes up, say due to a drought, the price of hamburgers will also go up, and people will consume less of them. As a result, people would also buy less ketchup. Hence, the ketchup producer should plan to produce less when he/she expects beef prices to rise.
Why is the marginal revenue of a firm in perfect competition equal to the market price?
Since there are many small firms in a perfectly competitive market, the quantity produced by any one firm is a very small percent of the market's overall output. This means the individual firm's output decisions have no meaningful effect on the market's overall output level or the market price. Consequently, the additional revenue (marginal revenue) gained by the firm as it increases output is equal to the market price.
What might be done with the surplus caused by a government agricultural price support program?
Some of the surplus might be used for school lunches and in other government institutions; other parts of the surplus might be destroyed. When a government price support (price floor) is set above the equilibrium price for the commodity, it causes a surplus. The surplus is frequently purchased by the government so that the excess does not enter the market depressing market prices below the desired level.
marginal product
The change in output that results from a change in labor (ΔQ/ΔL).
marginal revenue
The change in total revenue from selling an additional unit of output. Because competitive firms are price takers, P = MR for competitive firms.
Provide an example of a third party benefiting from a prisoner's dilemma outcome while the game participants are worse off relative to other possible outcomes. Also, explain the nature of the benefit.
The customers (the third parties in this instance) of competing companies engaged in a game with a prisoner's dilemma might benefit from lower prices for both companies' goods and services as the companies are likely to engage in vigorous price competition.
If bagels and doughnuts are substitute goods, then which scenario is likely to occur if the price of bagels is reduced?
The demand curve for doughnuts will shift to the left.
Producer surplus
The difference between the market price and the price at which firms are willing to supply the product. It is equal to the area below market price and above the supply curve.
income deficit
The difference between the poverty threshold and a family's income.
accounting profit
The difference between total revenue and explicit costs. These are the profits that are taxed by the government
Consumer surplus
The difference between what consumers (as individuals or the market) would be willing to pay and the market price. It is equal to the area above market price and below the demand curve.
functional distribution of income
The distribution of income for resources or factors of production (land, labor, capital, and entrepreneurial ability).
The United Nations reports data on income distribution for different countries as a ratio of the income of the richest 10% to the income of the poorest 10%. If the ratio for Japan is 4.5 and the ratio for the United States is 15.9, which of the following statements is correct? The distribution of income is more equal in Japan This is the same thing as the Gini coefficient The ratio is the slope of the Lorenz curve for each country The distribution of income is more equal in the united states
The distribution of income is more equal in Japan The United Nations reports data on income distribution for different countries as a ratio of the income of the richest 10% to the income of the poorest 10%. If the ratio for Japan is 4.5 and the ratio for the United States is 15.9, which of the following statements is correct? Please choose the correct answer from the following choices, and then select the submit answer button. The distribution of income is more equal in Japan.
Simon likes to smoke cigars on his porch during the day on weekends. But his neighbor, Frank, can't stand the smell so he avoids grilling while Simon is outside. What is the origin and who is affected by this externality?
The externality originates from a consumer and the impact is taken by a consumer.
Incentives
The factors that motivate individuals and firms to make decisions in their best interest.
Markets
The institutions that bring together buyers and sellers, so that they can interact and transact with each other.
Demand
The maximum amount of a product that buyers are willing and able to purchase over some time period at various prices, holding all other relevant factors constant (the ceteris paribus condition).
Supply
The maximum amount of a product that sellers are willing and able to provide for sale over some time period at various prices, holding all other relevant factors constant (the ceteris paribus condition).
Allocative efficiency
The mix of goods and services produced is just what the society desires.
What should be included in determining the opportunity cost of an action?
The opportunity cost of an action is the value of the next best option that is not selected as a result of the option that is selected. In assessing this value, the costs and benefits of the option should include all the benefits and costs of the action not selected, both financial and nonfinancial.
implicit costs
The opportunity costs of using resources that belong to the firm, including depreciation, depletion of business assets, and the opportunity cost of the firm's capital employed in the business.
Elastic demand
The percentage change in quantity demanded is greater than the percentage change in price. This results in the absolute value of the price elasticity of demand to be greater than 1. Goods with elastic demands are very responsive to changes in price.
Unitary elastic demand
The percentage change in quantity demanded is just equal to the percentage change in price. This results in the absolute value of the price elasticity of demand to be equal to 1.
Inelastic demand
The percentage change in quantity demanded is less than the percentage change in price. This results in the absolute value of the price elasticity of demand to be less than 1. Goods with inelastic demands are not very responsive to changes in price.
poverty rate
The percentage of the population living in poverty.
interconnection
The physical linking of a network to another network's essential facilities. Interconnection promotes competition by ensuring that no firm has exclusive access to a set of customers.
virtuous cycle
The point at which a network good reaches its tipping point, when network effects cause demand for the good to increase on its own. As more people buy or subscribe to a good or service, it generates even more external benefits and more demand.
Horizontal summation
The process of adding the number of units of the product purchased or supplied at each price to determine market demand or supply.
Production
The process of converting resources (factors of production)—land, labor, capital, and entrepreneurial ability—into goods and services.
How would a business owner use information about marginal revenue versus marginal cost and price versus average total cost?
The profit maximizing rule (marginal revenue equal to marginal cost) tells the business owner the level of output and price that will maximize the firm's profits, though not its level of profits (or losses). Price less average total cost indicates to the business owner the level of profit (or loss) per unit of output the firm is realizing.
tipping point (or critical mass)
The quantity from which network effects are strong enough to support the network.
rate of income to poverty
The ratio of family income to the poverty threshold. Families with ratios below 0.5 are considered severely poor, families with ratios between 0.5 and 1.0 are considered poor, and those families with ratios between 1.0 and 1.25 are considered near poor.
Deadweight loss
The reduction in total surplus that results from the inefficiency of a market not in equilibrium.
government failure
The result when the incentives of politicians and government bureaucrats do not align with the public interest.
normal profits
The return on capital necessary to keep investors satisfied and keep capital in the business over the long run.
behavioral economics
The study of how human psychology enters into economic behavior as a way to explain why individuals sometimes act in predictable ways counter to economic models.
game theory
The study of how individuals and firms make strategic decisions to achieve their goals when other parties or factors can influence that outcome.
Economics
The study of how individuals, firms, and society make decisions to allocate limited resources to many competing wants.
Macroeconomics
The study of the broader issues in the economy such as inflation, unemployment, and national output of goods and services.
Microeconomics
The study of the decision making by individuals, businesses, and industries.
total cost
The sum of all costs to run a business. To an economist, this includes out-of-pocket expenses and opportunity costs.
Total surplus
The sum of consumer surplus and producer surplus, and a measure of the overall net benefit gained from a market transaction.
economic costs
The sum of explicit (out-of-pocket) and implicit (opportunity) costs.
Long run
The time period long enough for firms to alter their plant capacities and for the number of firms in the industry to change. Existing firms can expand or build new plants, or firms can enter or exit the industry.
Market period
The time period so short that the output and the number of firms are fixed. Agricultural products at harvest time face market periods. Products that unexpectedly become instant hits face market periods (there is a lag between when the firm realizes it has a hit on its hands and when inventory can be replaced).
Short run
The time period when plant capacity and the number of firms in the industry cannot change. Firms can employ more people, have existing employees work overtime, or hire part-time employees to produce more, but this is done in an existing plant.
total utility
The total satisfaction that a person receives from consuming a given amount of goods and services.
What is the utility maximization rule?
The utility maximization rule states total utility is maximized when the marginal utility per dollar for the last unit of each good consumed is equal. Utility is the satisfaction or well-being a consumer enjoys from consuming a good. Marginal utility is the additional satisfaction from consuming an additional unit of a good. When the utility maximization condition is not met, consumers can improve their total utility by reallocating their spending until the condition is met.
Opportunity cost
The value of the next best alternative; what you give up to do something or purchase something.
Which statement is TRUE about specialization and exchange between two individuals? They generally benefit the richer individual at the expense of the poorer individual. They generally benefit the poorer individual as well as the richer individual. They generally benefit the poorer individual at the expense of the richer individual. They generally benefit neither the poorer individual nor the richer individual.
They generally benefit the poorer individual as well as the richer individual.
Which of the following is NOT a reason why standards for reducing pollution are popular? They are cheaper than market-based policies. They prevent competing firms from polluting. They lead each firm to have the same abatement costs. They are simple.
They lead each firm to have the same abatement costs.
sunk costs
Those costs that have been incurred and cannot be recovered.
explicit costs
Those expenses paid directly to another economic entity, including wages, lease payments, taxes, and utilities.
utility-maximizing rule
Total utility is maximized where the marginal utility per dollar is equal for all products
(T/F) A shortage would result from either a decrease in supply or an increase in demand.
True
(T/F) Allocative efficiency occurs when the mix of goods and services produced is the most desired by society.
True
(T/F) An increase in the price of milk will cause a decrease in the demand for breakfast cereal.
True
(T/F) Everyone has a comparative advantage in something, but not everyone has an absolute advantage in something.
True
(T/F) Holding other things constant means identifying other relevant factors and fixing their value at a specified or constant level.
True
(T/F) If a firm's total cost increases by $25 when it produces an additional unit of output, an economist would say that the marginal cost for that unit is $25.
True
(T/F) If markets are left unregulated by the government, then at the market equilibrium price the sum of consumer surplus and producer surplus is maximized.
True
(T/F) One of the problems of a minimum wage is that it can create a surplus of workers.
True
A decrease in the price of milk will cause an increase in the demand for breakfast cereal.
True
A decrease in the price of milk will cause an increase in the supply of ice cream.
True
A price floor set above the equilibrium price will result in quantity supplied exceeding quantity demanded.
True
Countries should specialize in producing those things in which they have a comparative advantage
True
If demand decreases for a particular good, then we can expect that the market price for that good will decrease and the quantity of the good sold in the market will decrease.
True
If supply increases for a particular good, then we can expect that the market price for that good will decrease and the quantity of the good sold in the market will increase.
True
Price elasticity of demand measures how responsive consumers are to changes in price.
True
Suppose a customer's willingness to pay for a product is $80, and the seller's willingness to sell is $65. If the negotiated price is $70, then producer surplus is $5.
True
Suppose the equilibrium price and quantity exchanged increase. The most consistent explanation for this observation is an increase in demand with no change in supply.
True
Talented people who are exceptional at everything do not have a comparative advantage in everything.
True
The following statement is an example of the law of demand: "The local record store has all their CDs on sale. I'm going to buy some right now."
True
A normal good is one for which the quantity demanded increases as income increases.
True A positive income elasticity of demand means that more of a good is demanded as income increases. Economists refer to such goods as normal goods. An inferior good refers to the situation where income elasticity of demand is negative, meaning less of a good is demanded when income increases.
(T/F) Keeping one's front yard neat and attractive can create a positive externality.
True As a result of attractive landscaping at one home, the values of neighboring properties may be higher which confers a benefit to the neighboring property owners even though the neighbors had no role in the landscaping; this is an example of a positive externality.
(T/F) Game theory can be applied in business, political science, military planning, and sports.
True Game theory has broad applications because it provides insights that enable predicting behavior of participants, particularly when the decisions of one party affect the decisions of another party.
As income increases, the demand curve for an inferior good shifts to the left.
True Inferior goods have an inverse relation to income. That is, higher income leads to lower demand for an inferior good and the reverse. The reduced demand for an inferior good as income rises is represented by the leftward shift of the demand curve, indicating a lower consumption at each price point.
An economy that finds new inputs or improves technology to use existing inputs in a more productive manner is pushing its PPF outward and can experience long-run economic growth.
True New inputs (perhaps in the form of population growth or the discovery of raw materials) or improving the use of existing inputs means an economy has a greater ability to produce goods and services, and this can lead to economic growth.
(T/F) In a perfectly competitive industry, one would expect that a natural disaster that decreases the production of a significant number of firms in the industry would cause market prices to rise.
True The impact of a natural disaster that reduces production is a shift in the market's supply curve to the left, indicating fewer producers are available to service the market's demand. This results in an increase in prices.
A price ceiling is a government-mandated maximum price at which a good can be sold.
True This form of price control is designed to insulate consumers from the price-increasing effects of market forces. These controls are rarely used and are normally reserved for external events that cause a dramatic disruption in the operation of a market, such as wars, natural disasters, or politically driven oil embargos.
(T/F) The utility maximization rule states that a consumer's total utility is maximized, given a budget and product prices, when the marginal utility per dollar of the last unit of every good consumed is equal.
True Under this rule, the last dollar spent on each good delivers the same marginal satisfaction or well-being to the consumer. No other combination of purchases will deliver higher total satisfaction/well-being.
(T/F) Market power reaches its maximum potential in a monopoly.
True When a business has market power, it means that the business has some influence over both the prices of its products and its output. Because a monopoly is protected from competition (which might undercut its prices) by barriers to entry, it has the highest level of market power.
A tradeoff analysis entails assessing the costs and benefits of different alternatives.
True; A tradeoff analysis compares the costs and benefits of different alternatives. The selected option is the one that has the higher net benefit (benefits minus costs).
What costs increase as the level of production increases?
Variable costs
Consider the demand for olive oil. What would happen to the demand for olive oil if a study confirming its beneficial health effects is published at the same time that an investigative report finds that much of the olive oil imported into the country is actually sunflower oil that has been dyed?
We would expect demand to shift in each direction, but the final position will depend on which event has the bigger impact on demand.
Describe characteristics of wealthy countries that lead to new ideas.
Wealthy countries tend to have strong educational systems and provide incentives for its citizens to work hard. These qualities along with a government free of corruption, a strong legal system, and a strong monetary system enable its citizens to create new or improved products and to benefit from inventions, now and in the future.
vicious cycle
When a network good does not reach its tipping point, and therefore does not increase in value enough to retain its customers, customers leave the network, thereby further diminishing the value of the good until all customers leave the network.
grim trigger
When one player defects, the other refuses to cooperate again (no forgiveness).
mutual interdependence
When only a few firms constitute an industry, each firm must consider the reactions of its competitors to its decisions.
shutdown point
When price in the short run falls below the minimum point on the AVC curve, the firm will minimize losses by closing its doors and stopping production. Because P < AVC, the firm's variable costs are not covered; therefore, by shutting the plant, losses are reduced to fixed costs only.
Which statement is not correct? The sum of consumer and producer surplus increases as markets become more efficient. A reduction in total consumer and producer surplus indicates markets have become less efficient. When prices are below market equilibrium, the sum of consumer and producer surplus decreases. When prices are above market equilibrium, the sum of consumer and producer surplus increases. All are correct
When prices are above market equilibrium, the sum of consumer and producer surplus increases.
What benefit does society derive by allowing some monopolies to be created?
While a monopoly creates market power that typically results in higher prices and less output, likely yielding economic profits and reduced consumer surplus, there is still some possible benefit to society from a monopoly. Monopolies can be the drivers of innovation. Inventors and other creative people are incented to invest in products and services produced by monopolists because of the possibility of realizing large economic profits (Because a monopolist is the only producer of the product or service)
How does the budget line change if the budget is reduced?
With a decrease in the budget (the maximum the consumer is willing to spend), the budget line moves to the left (closer to the origin) parallel to the original budget line. This shows that the reduction in budget or income has reduced the combinations of goods the consumer can purchase.
Suppose consumers find two brands of breakfast cereal equally tasty and nutritious. Brand A increases its price but brand B does not. What will happen in the market, and how would this be depicted on the demand curves for each brand?
With the increase in brand A's price, consumers will buy less of that product, a reduction in the quantity demanded. This will be shown on brand A's demand curve by a movement along its demand curve—the curve itself will not move. Consumers will buy more of brand B, an increase in demand. This will be depicted by a rightward shift in brand B's demand curve.
Do changes in product prices impact the budget line?
Yes, changes in product prices do change the budget line even without changes in income. For example, if the price of a good declines, the consumer can now purchase more of the good whose price has declined or possibly more of the good whose price is unchanged. A decrease in a good's price is shown by moving the budget line's intercept with the good's axis out from the origin. This shows that a greater number of choices are now available to the consumer.
In 2007, the Wall Street Journal reported on a dispute in Bend, Oregon. Susan Taylor decided to hang her laundry out to dry on a clothesline. Neighbors said it was unsightly. Susan said she was saving energy. Could the Coase theorem work in this case?
Yes, if transaction costs are minimal. The Coase theorem states that if transaction costs are minimal, a bargain struck between the beneficiaries and victims of externalities will be efficient from a resource allocation perspective.
Assume that Coca-Cola has a market share of 40% and Pepsi has a market share of 30%. If Pepsi and Coca-Cola attempt to merge, will the Federal Trade Commission challenge that attempt in court?
Yes; the industry is concentrated
Which of the answer choices lists market structures in order from the highest number of sellers to the lowest? a. perfect competition, monopolistic competition, oligopoly, monopoly b. monopoly, oligopoly, monopolistic competition, perfect competition c. monopoly, monopolistic competition, perfect competition, oligopoly d. oligopoly, perfect competition, monopoly, monopolistic competition
a
Which sequence describes the long-run adjustment process in a competitive market when firms are experiencing short-run economic losses? a. some firms exit, industry supply decreases, market price rises b. some firms exit, industry supply decreases, market price falls c. market price falls, some firms exit, industry supply falls d. market price rises, some firms exit, industry demand decreases, market price falls
a
In general terms, which item is an example of an inferior good? a city bus a T-bone steak clothing gasoline
a city bus
Which factor would NOT cause the demand curve for herbal tea to shift to the right? a decrease in the price of lemons, a complement to herbal tea a decrease in the price of herbal tea new research showing that drinking herbal tea reduces the risk of illnesses All of these will shift the demand for herbal tea to the right.
a decrease in the price of herbal tea
Which event will NOT cause the supply curve for kayaks to shift to the left?
a decrease in the price of kayak
Bayram had the opportunity to choose between two investments. The first investment was described as having a 30% chance of succeeding, while the second investment was described as having a 70% chance of failing. Bayram opted for the first investment, because he thought it sounded less risky than the second investment. The chances of succeeding and failing are the same for the two investments, however, which implies that Bayram is subject to:
a framing bias
Which game does NOT describe a Prisoner's Dilemma outcome? a game of chicken in which one player backs down while the other player does not rival department stores agreeing to accept each other's coupons and advertised specials cartel members attempting to increase profits by cheating on their production quotas competing electronics stores attempting to undercut each other's prices
a game of chicken in which one player backs down while the other player does not
Since 2006, Megabus has offered inexpensive bus service, sometimes for only $1. Megabus made an initial large investment in their bus fleet. This large investment is considered:
a high fixed cost
In January of 2010, the city of Washington, D.C., imposed a 5-cent tax on plastic bags for groceries and other purchases. This is an example of:
a market-based environmental policy
Which of the following would be considered when calculating wealth? the amount of money that a person earns from a job the amount of money that a person earns from stock dividends a person's bank safety deposit box that is filled with jewelry the amount of money that a person pays for a home mortgage
a person's bank safety deposit box that is filled with jewelry
Suppose that a major hurricane hits Florida, causing widespread damage to homes and businesses. If the legislature imposes price controls in order to keep reconstruction costs reasonable, which of these is the MOST likely result? a shortage of building materials a faster recovery from the storm a surplus of building materials rapid service at lumberyards
a shortage of building materials
Facebook is which type of network?
a social network
The local school district wants to close down a neighborhood high school because its outdated heating and cooling systems make it too expensive to operate compared to the new high school being built nearby. Parents who are against closing the neighborhood school argue that the $2 million dollars spent refurbishing the school over the last few years will be wasted if the school is shut down. This argument is an example of:
a sunk cost fallacy
Suppose that Subway and Quiznos both charge $7 for their foot-long sandwiches. Subway reduces the price of its foot-long sandwiches to $5. Quiznos waits to see the impact of its competitor's lower price before it responds. This is an example of:
a trembling hand trigger strategy
List four key principles of economics.
a. Economics is concerned with making choices with limited resources. b. While making decisions an individual should consider tradeoffs and opportunity costs. c. Specialization leads to gains for all involved. d. People respond to incentives, both good and bad. e. Rational people think at the margin. f. Markets are an efficient way to organize economic activity. g. Institutions and human creativity help explain the wealth of nations.
In many instances, competitive companies could agree with each other on key strategic items, and produce higher profits than what competition allows. Reasons this is not done include the _____, and the illegality of collusion.
absence of trust between companies. Since collusive agreements are illegal in the United States, they can't be written in a contract and are not enforceable in court. This means that such agreements (in addition to risking jail time for company executives) rely on companies trusting each other when they could benefit by departing from the agreement if the other stays with the agreement.
Suppose the country of Alphaland can produce more cars than Omegaland can produce, given the same resources. An economist would conclude that Alphaland has a(n) _____ in producing cars.
absolute advantage
Marginal utility is the:
additional satisfaction from consuming an additional unit of a product As do all "marginal" concepts in economics, marginal utility captures the additional impact of a continued action on a variable. In this case, the action is consumption of an additional unit of a good, and the variable is utility.
Which of these is both finite and nonrenewable? helium copper gold
all are finite and nonrenewable
Rational behavior requires thinking at the margin. Which example represents this type of thinking? deciding whether the overtime pay is worth working on your day off deciding whether a second burger is worth the extra $2 deciding whether to pay a fine for polluting the local harbor or installing antipollution machinery All of these examples represent thinking at the margin.
all of these
A Nash equilibrium describes an outcome in which:
all players in a game maximize their expected payoffs given the information they have. When Nash equilibrium is achieved, no player can improve his or her performance by unilaterally deviating from the noncooperative outcome.
A perfectly competitive market helps ensure that the products produced are the goods that consumers want. This demonstrates the concept of:
allocative efficiency
Parami volunteers at a homeless shelter. It takes a lot of her time, and thus she sometimes takes off time from her job to do the volunteer work. Parami's behavior can be explained by:
altruism
Which of the following is not an example of a network good? satellite radio, digital music, an article of clothing, software
an article of clothing
An example of x-inefficiency is:
an executive, at corporate expense, hiring a limousine to travel one block. whenever it is raining.
Before deciding on a pricing strategy, Worldwide Widgets consults with its market intelligence team to understand what discounts the Gargantuan Gizmo Company is offering. The model that BEST fits this industry is:
an oligopoly
In the fictitious country of Amelia, the wage earners in each quintile earn 20% of total income. What would be the shape of the Lorenz curve for Amelia?
an upward-sloping straight line Lorenz curves cumulate households of various income levels on the horizontal axis, relating this to their cumulated share of total income on the vertical axis. Amelia has equal distribution of income, which means that the Lorenz curve would be an upward-sloping straight line.
A Nash equilibrium:
assumes that each player chooses his or her best strategy.
When the Keep On Calling Cell Phone Company is at full capacity, it incurs costs of $230,000. During the December shutdown period, when no cell phones are produced, it incurs costs of $76,000. One can conclude that:
at full capacity, variable costs are $154,000
If the public utility commission allows a water company to earn a normal profit, then it is enforcing a(n):
average cost pricing rule
The cost incurred by a firm through the forgone earnings on capital invested is a(n): a. sunk cost b. implicit cost c. explicit cost d. surplus cost
b
The price of a mango is $2 and a farmer sells 2,000 mangos. However, the costs to the farmer are $400 for labor, $1,600 for rent, and $2,000 for advertising. Based on the above information, the farmer: a. makes $2000 in total revenue b. makes $4000 in total revenue c. makes $2000 in profit d. loses $2000 in profit
b
Which firm is MOST likely to operate in a perfectly competitive market? a. an electric utility company b. a maple syrup company c. an automobile company d. a cable TV company
b
A market structure describes the nature of an industry based on the: a. size of the industry and number of firms b. number and size of firms in the industry c. type of products produced by the industry d. size of firms in the industry
b With knowledge of these two characteristics, economists can understand the nature of competition in an industry. We will study four market structures: perfect competition, monopolistic competition, oligopoly, and monopoly.
In countries like the United States, the government taxes the wealthier residents and transfers some of that money to the poorer residents through programs such as welfare. This system of taxing and transfer payments causes the Lorenz curve to:
bend closer to the 45-degree line. Taxes and transfer payments cause the Lorenz curve to shift inward if the wealth is being moved from the wealthier to the less wealthy.
Opportunity cost is the value of the:
best alternative which is given up when a decision is made; In assessing the value of the alternatives in decision-making, economists consider all of the costs (both financial and other) of one action versus those of the next best alternative that can't be pursued because of a given choice.
Which statement about the relationship between a firm's demand curve under perfect competition and a monopoly is TRUE? a. Under a monopoly, the demand curve is perfectly elastic; under perfect competition, the demand curve has elastic, unit-elastic, and inelastic portions. b. The demand curves for a monopoly and perfect competition are always inelastic. c. Under perfect competition, the demand curve is perfectly elastic; under a monopoly, the demand curve has elastic, unit-elastic, and inelastic portions. d. A demand curve can be defined under perfect competition but not under a monopoly.
c
There are new reports about the adverse effects of driving on the environment. In response, consumers decrease the frequency they drive their automobiles. This is a
change in demand
The price of Blu-ray movies increases. In response, consumers purchase fewer Blu-ray movies. This is a
change in quantity demanded
The price of t-shirts increases. In response, consumers purchase fewer t-shirts. This is a
change in quantity demanded
Which good is typically considered a public good? automobiles, bottled water, clean air, french fries
clean air
An oil field lies beneath the border of Oklahoma and Texas. Both states drill wells every 100 yards, and in two weeks, the field loses all its pressure and ability to produce, leaving 80% of the oil in the ground. This consequence is an example of market failure due to:
common property resource
What best describes cod fisheries off the coast of Nova Scotia?
common property resource
The typical PPF is:
concave (bowed outward) The concave shape means that the opportunity cost of shifting resources from the production of one good to another good increases as production of the second good increases. The opportunity cost of producing a good is the forgone production of another good.
A production possibilities frontier that is a straight line is the result of:
constant opportunity costs
Suppose that a customer's willingness to pay for a product is $5, and the seller's willingness to sell is $2. If the negotiated price is $3:
consumer surplus is greater than producer surplus
The term "utility" is used by economists to measure:
consumer well-being
The demand for gasoline is rising. Which statement describes a possible cause? Consumers expect prices to rise in the near future. Commuters are switching from driving to public transportation. Drivers are purchasing more fuel-efficient cars. Incomes are falling.
consumers expect prices to rise in the near future
The demand for gasoline is rising. Which statement describes a possible cause? Incomes are falling. Commuters are switching from driving to public transportation. Consumers expect prices to rise in the near future. Drivers are purchasing more fuel-efficient cars.
consumers expect prices to rise in the near future
Price discrimination by a monopolist leads to the firm earning higher profits but it also delivers benefits to:
consumers, because prices are lowered to potential consumers who otherwise might not have been able to buy the good. Consumer surplus is reduced when a monopolist price discriminates - charges different prices to different consumers - and the reduction in consumer surplus becomes additional profit for the monopoly. Nevertheless, there is a benefit to some consumers from a monopolist's price discrimination because they are offered a lower price for the product. This enables them to participate in the market where previously they couldn't because the price was too high for them.
The National Football League (NFL) achieves market power through its ability to:
control inputs The key input the NFL controls that gives it market power is its players. The players under contract to an NFL team cannot play for another team in the NFL or a rival league. The NFL's market power can be seen in the high ticket prices and the sizable fees it commands from broadcasters to televise its games.
In November 2013, the iPad Air was launched. Margot waited in line for 8 hours at the Apple store so she could be one of the first to buy this iPad. Margot is a:
core user
Jim Delaney sold his pizza firm to an investor who then sold stock to the public. Jim now earns a salary of $5,000 a month and all the profits are distributed to the stockholders. This firm is an example of a:
corporation
Many companies choose to emit pollution instead of using cleaner production methods because of:
cost considerations Firms may be concerned their ability to be successful in the competitive marketplace will be reduced if they adopt cleaner (and likely more costly) production methods.
Which curve is NOT bowl-shaped? a. the long-run average cost curve b. the short-run average cost curve c. the average variable cost curve d. the average fixed cost curve
d
Which of the following is an implicit cost? a. overhead cost b. material cost c. labor cost d. opportunity cost
d
Which of these is NOT a condition necessary for price discrimination? a. the product cannot be resold to another customer b. the price elasticities of demand are different for each group of consumers c. the seller must have some market power d. the product must be a durable good
d
An increase in government subsidies for an industry, which reduces production cost, causes the market equilibrium price to _____ and the market equilibrium quantity to
decrease; increase When production costs decline, the industry's supply curve shifts to the right. This establishes a new equilibrium point (the intersection of supply and demand curves). The new market price will be lower, and the level of output and consumption will be higher.
The limits on international trade include all of these EXCEPT: Trade may hurt some industries and individuals within each country. increasing opportunity costs and diminishing returns. decreasing opportunity costs and increasing returns. transportation and communication costs.
decreasing opportunity costs and increasing returns
If the harmful effects of pollution from burning gasoline were taken into account by consumers, this would cause the _____ curve for gasoline to shift to the _____.
demand; left
If you work near someone who gets a flu shot during flu season, you are less likely to catch the flu. If the effects of getting a flu shot were taken into account by consumers, this would cause the _____ curve for flu shots to shift to the _____.
demand; right
Installing solar panels on your home reduces your use of electricity from pollution-producing coal power plants. If the effects of installing solar panels were taken into account by consumers, this would cause the _____ curve for solar panels to shift to the _____.
demand; right
Marginal utility analysis and indifference curve analysis are both used to
derive demand curves
The supply and demand model assists in analyzing the:
determinants of market price and quantity The supply and demand model assists in analyzing the impact of variables such as price, the prices of related goods, tastes and preferences, technology, expectations among others on marketplace price, and quantity.
Monopolistically competitive markets and perfectly competitive markets do NOT share which characteristic? many firms in the market zero economic profits in the long run differentiated products ease of entry into the market
differentiated products
The opportunity cost of producing more of a good increases because of:
diminishing returns to inputs As resources are shifted from the production of one good to another, the most productive resources in production of the new good are shifted first. With further increases in output, less productive resources are deployed. The result is that more resources will be required to support a given level of additional output while at the same time causing a greater decline in the output of the original good.
If a firm increases its inputs by 80% and its output increases by 60%, then this would be an example of:
diseconomies of scale
Corn is a perfectly competitive commodity. In the marketplace, the demand curve for corn is:
downward sloping
Investment in human capital refers to:
education, on-the-job training, and professional training activities.
The basic factors of production are land, capital, labor, and:
entrepreneurial ability Entrepreneurial ability represents the capability of a society to utilize land, labor, and capital to produce useful output.
normal profits
equal to zero economic profits; where P = ATC
Amtrak exhibits _____, and a can of Budweiser is a _____ product.
excludability; rival
Possible solutions to common property resource problems can involve establishing private property rights, using government policy to restrict access to the resource, or informal organizations that restrict each user's benefits from the resource. All of these are attempts to make the common property resource goods:
exclusive
If firms in a monopolistically competitive industry are experiencing economic losses in the short run, some firms will _____ the industry, _____ demand until each firm earns a normal profit.
exit; increasing
To achieve long-run economic growth, an economy must:
expand its capacity to produce Through finding new inputs, deploying improved technology or more productively using existing resources, an economy can increase its output capability over the long run.
An action taken by a person or business that affects the well-being of another individual or firm not involved in the transaction is called a(n):
externality An externality can either be positive (as in the case of an external benefit) or negative (as in the case of an external cost) for the uninvolved party.
Which of the following is a physical network? Facebook, fiber optic, mobile phone, search engine
fiber optic
Which of the following products is likely to be the MOST differentiated? a. garments sold to a retail customer b. fabric sold to a garment maker c. garments sold to a garment distributor d. cotton sold to a fabric maker
garments sold to a retail customer
Three barriers to entry that prevent firms from entering a market and competing in the market are control over inputs, economies of scale, and:
government protection through patents and copyrights Barriers to entry give the monopolist protection from competition enabling the firm to exercise more market power and influence over setting prices and output levels.
An effective (or binding) price ceiling is a situation in which:
government sets the maximum price for a good below its free market equilibrium price. A price ceiling is effective only if it is set below the free market equilibrium price. An effective ceiling prevents the price from rising to market equilibrium levels.
A certain brand of breakfast cereal increases its price by 20%, while other brands keep their prices unchanged. The quantity of cereal sold by the brand that increases its price declines, and the quantity sold by the other brands increases. In this case, the cross price elasticity of demand between the cereal of the brand that increases its price and the cereals produced by other brands is:
greater than 0 When consumers greet a price increase by switching to another good that has a lower or no price increase, and which delivers similar satisfaction to the consumer, they are substituting away from the good for which the price increased. In such cases, when the goods are substitutes, the cross price elasticity of demand between the pair of goods will always be positive or in other words greater than 0.
If Nintendo lowers the price of its product by $10, Sony responds by lowering the price of its own product by $10 and chooses not to cooperate again. This is an example of what type of game strategy?
grim trigger
Subway reduced the price of its foot-long sandwiches to $5. Quiznos responded by introducing the $4 Torpedo as a permanent menu item. This is an example of a:
grim trigger strategy
Which of these would NOT yield an external cost? building an airport next to a library smoking cigarettes in a restaurant partying on the front lawn until four in the morning helping an elderly person across the street
helping an elderly person across the street
At movie theaters, lower prices are charged for matinees than for evening shows of the same film. The customers attending the matinees have:
higher elasticities of demand that customers attending the evening shows
Which of these circumstances would NOT affect the supply of new automobiles? an improvement in automobile manufacturing technology higher interest rates for new car financing a subsidy for struggling automobile manufacturers a labor strike in the steel industry
higher interest rates for new car financing
In a perfectly competitive market, each firm's demand curve is:
horizontal While in perfect competition the market demand curve slopes downward and to the right, the demand curve for individual firms is horizontal, meaning each of the small firms in the industry can sell as much as it wants without reducing price because each firm is too small to influence the market's price.
The production possibilities frontier (PPF) shows:
how much an economy can produce when using all of its inputs efficiently. The PPF displays both the total output capability of an economy but also the tradeoff between producing more of one good and less of another.
The firms in a perfectly competitive market produce _____ products.
identical One of the distinguishing characteristics of a perfectly competitive market is the nearly identical products the market's competitors produce. Other important distinguishing characteristics are the presence of many small firms in the market and the absence of entry/exit barriers.
A combination of goods that lies outside the PPF is:
impossible An output level that is outside the PPF is impossible because the PPF defines combination of outputs that are possible within the available resources of the economy. There are insufficient resources in the economy to support combinations of goods that lie outside the PPF.
A(n) _____ can cause the PPF to expand.
improvement in production technology Improvements in production technology can result in the economy expanding its aggregate output, which would be depicted by the PPF moving away from the origin point.
Which statement is a key idea in economic thinking? Incentives matter. Scarcity exists for the poor but not for the rich. The value of a good can be objectively measured and is the same for everyone. All of these are key ideas in economic thinking.
incentives matter
If the price elasticity of demand for a good is inelastic and the price of the good rises, the revenue of the firm selling the good will:
increase
If a cartel member is considering cheating in order to earn profits, it should:
increase the quantity it sells at the quota price
A(n) _____ good is a good for which the amount consumed declines as a consumer's income increases.
inferior Inferior goods are those with a negative relationship between income changes and quantity demanded. As income increases, the quantity demanded of the good declines, and the income elasticity for the good is a negative number.
Farmer Ted sells winter wheat in a perfectly competitive market. The market price for a bushel of winter wheat is $9. Ted has two hundred and seventy bushels of wheat to sell. If his total variable cost is $2,000 and his total fixed cost is $500, then Ted:
is minimizing his losses
Total utility:
is the total satisfaction derived from the consumption of a given quantity of a good
Driving your car in a large city during rush hour causes externalities because:
it adds to congestion and pollution
The Coase theorem claims that, in the case of tobacco:
it does not matter who is given the property rights to the air, as long as the parties involved are allowed to bargain.
Common property resources tend to be exploited quickly because:
it is not possible to prevent someone from using the resource. When it is not possible to prevent someone from enjoying a good or service (when a good or service is a nonexcludable good), many people will consume it even if the value of consuming it is low, without considering the problems caused by over-consumption.
Which of these is an example of consumers creating a negative externality? A tanker ship leaks oil into a harbor. Air traffic from a nearby airport reduces property values. Litter is found in an area around a fast-food restaurant. A fast-food restaurant fails to provide medical benefits to employees.
litter is found in an area around a fast-food restaurant
A perfectly competitive industry is characterized by:
many small firms each producing identical products and no barriers to entry These characteristics yield the most competitive market structure. Because each firm is but a small part of the overall market, no firm can influence the market price.
People use _____ to determine how many hours to work, and businesses use _____ to determine how much of their product they are willing to supply to the market.
marginal analysis; marginal analysis
The additional cost of producing one more unit of a good is:
marginal cost
A firm's profit is maximized at the output level where
marginal cost equals marginal revenue
The price charged by a firm in a perfectly competitive market always equals its:
marginal revenue Since the price of a firm's product in a perfectly competitive market doesn't change as it sells additional units (shown by a horizontal demand curve), its marginal revenue (the additional revenue from selling additional units) is equal to the unit price the firm charges for its product.
The profit-maximizing level of output for a firm in a perfectly competitive market occurs where:
marginal revenue equals marginal cost At the output level where a firm's marginal revenue (the additional revenue from selling additional units) equals its marginal cost (the additional cost generated by producing additional units), the firm's total profits cannot be improved by producing a different number of units.
To maximize profits, the monopolist produces at a level of output in which:
marginal revenue equals marginal cost, and then the monopolist charges the highest price for that output indicated by the demand curve The profit-maximizing condition for a monopoly is the same as for perfect competition - the output level where marginal revenue equals marginal cost. The profit-maximizing price is determined by the highest price consumers are willing to pay for that output level as determined by the demand curve.
At an all-you-can eat buffet, a person will stop eating when:
marginal utility is equal to zero
Consumers maximize total utility when the _____ all goods.
marginal utility per dollar is equal for
In the mid-1970's, Sony released a "Beta" format videotape, which could only be played on Beta video players. Although this format was launched before the competing VHS format, fewer and fewer companies continued to use the Beta format and fewer and fewer consumers purchased Beta video players. It was eventually replaced almost entirely by VHS format in the late 1980's. The Beta format likely never reached:
market equilibrium Market equilibrium occurs after the tipping point at the intersection of the downward-sloping portion of the network demand curve and the marginal cost curve.
The inability of a market to generate a socially optimal quantity or price of a good is called a(n):
market failure A market failure, a price or output outcome that is non-optimal (from society's perspective), can have many causes, including inefficient market structures such as monopolies.
When quantity demanded in a market equals quantity supplied, then the:
market is in equilibrium
In a _____ economy, individuals and firms own most resources, and in a _____ economy, the government controls most resources.
market; planned
A utility-maximizing consumer will always choose to:
maximize total utility
In a 2008 case before the Supreme Court regarding older power plants and how best to protect fish and aquatic organisms, Justice David Souter remarked, "The difficulty that I have is if you are going to apply . . . a cost-benefit analysis, I'm not sure how it would work. Are a thousand plankton worth a million dollars?" Justice Souter's question points out the difficulty of:
measuring nonmarket or intangible aspects of public projects.
A firm earning a zero economic profit is _____ the financial expectations of its investors.
meeting Because a firm's opportunity costs include the returns investors forgo in order to invest in the firm, the firm's zero economic profit produces an acceptable return for investors.
A firm earning zero economic profit is:
meeting its investors' minimum expectations and covering its opportunity costs
If firms in a perfectly competitive market are earning positive economic profits in the short run, one would expect that in the long run:
new firms would enter the market and market prices would decrease Because there are no barriers to entry, the positive short-run economic profits of existing firms in perfect competition will attract new competition. This increase in supply will cause market prices to decrease to the point where all the firms earn zero economic profits.
Public goods are _____ and _____.
nonrival and nonexcludable These characteristics make it difficult for the private market to produce public goods because firms would not be able to earn profits from these goods. As a result, the government or a nonprofit is often the provider of such goods.
What best describes federal law enforcement?
nonrival and nonexclusive
What best describes public radio?
nonrival and nonexclusive
If the demand for iPhones rises as incomes increase, then the iPhone is a(n) _____ good.
normal
Suppose the Grant family earns $20,000 and that the poverty threshold for their family is $15,000. How would this family be classified according to the Census Bureau?
not poor The Grant family's income to poverty ratio is 1.33. The ratio is $20,000:$15,000 or $20,000/$15,000 or 1.33. The Census Bureau considers people who live in families with ratios below 0.5 to be "severely or desperately poor." Those with ratios between 0.5 and 1.0 are "poor," and people with ratios above 1.0 but less than 1.25 (less than 25% above the poverty threshold) are considered to be "near poor." Families with ratios over 1.25 are not considered poor.
overconfidence
occurs when strong feelings of one's abilities lead to irrational decisions
If the number of tomato growers in the market increases, the supply:
of tomatoes increases
"Nonexcludable" means that:
once a good is provided, no one can be prevented from enjoying it. This is true regardless of how the production of the good is funded. An example of a nonexcludable good is national defense. Even if someone is in prison for non-payment of taxes, they are still protected by the country's military forces
A nonrival good is one for which
one person's consumption of the good does not diminish another person's enjoyment of the good. An example of a nonrival good is satellite radio. One person listening to a satellite radio program does not diminish the possibility of someone else enjoying the same program.
When the government chooses to use resources to build tourist centers, the selected resources are no longer available to build highways. This BEST illustrates the concept of:
opportunity cost
If the government of Spain decides to spend less on the military and more on health care, the forgone spending on military items represents the:
opportunity cost of the extra health care
Products that generate external costs are generally _____ or _____.
over-produced; over-consumed Because the costs to society may be excluded from private transactions, the cost to produce the good or service is artificially low (from society's perspective), and this leads to an artificially low price for the good or service. This causes the over-consumption or over-production.
Because they are so sure of their ability to pick winners, some people hang on to a stock even in the face of overwhelming evidence that its price is going to drop. These people are subject to:
overconfidence
All of these are considered negative externalities, EXCEPT: overstock of a flu vaccine cigarette smoke noise from a neighbor's house dogs barking
overstock of a flu vaccine
Ryan stayed out late last night and is very tired. He plans to skip his 8 A.M. economics class, even though he knows his professor will cover material that will be on the final exam. Ryan is subject to:
overvaluing the present relative to the future
Which type of payment would NOT be a market transaction? payment for purchase of shares at a stock exchange payment for a soft drink at a vending machine payment made to a disaster victim payment for a used book purchased on eBay
payment made to a disaster victim
Game theory is the study of how:
people make decisions when each is acting in his or her own best interest, and have strategies that may yield different outcomes. Game theory provides a way to understand how people make decisions, and helps in predicting the behavior resulting from such decision-making.
Economics is BEST defined as the study of how: resources are apportioned to satisfy human wants. to classify resources used to produce final goods and services. technology can be used to change scarce resources into free resources. people make rational decisions.
people make rational decisions
Firms in all market structures experience some type of control over price, EXCEPT firms whose market structure is a(n):
perfect competition
A change in the quantity demanded of a good results from a change in the:
price of a good Only a change in price causes a change in quantity demanded. This is represented graphically by movement along the demand curve, not by a shift of the curve.
A firm is a ____ if its actions have no impact on the market price of a good.
price taker In the perfect competition market structure, there are many relatively small firms producing identical products and there are no barriers to entry. This means firms in this industry must take the market price as given.
A monopoly harms consumers because:
prices are higher and output is lower than if the industry was perfectively competitive. The existence of market power due to the monopolist being the only firm producing a given product and protected from competition by barriers to entry results in higher market prices and reduced levels of output. This reduces consumer surplus.
Mike constructed a beautiful backyard landscape. He also built a tall wooden fence around his yard. With the fence in place, the good that the landscape brings to the neighborhood becomes a:
private good because Mike can exclude people from enjoying the landscape.
Suppose that a firm in an oligopoly market faces a kinked demand curve. If its marginal cost decreases, the firm will:
produce the same quantity and charge the same price unless marginal cost moves out of the range of discontinuity in marginal revenue. Unless marginal cost shifts out of the range of discontinuity in marginal revenue, the profit-maximizing level of output will not change and neither will the price. It is the discontinuity that results in the price stability in oligopolies.
A combination of goods represented by a point on the PPF is considered efficient because the economy is:
producing goods using the fewest inputs possible Efficiency means the economy is getting the most output for its expenditure of inputs.
When goods are produced at the lowest possible cost, an economy is said to have achieved:
production efficiency
_____ occurs when goods and services are produced with as few resources as possible, while _____ occurs when the mix of goods and services produced is the most desired by society.
production efficiency; allocative efficiency
Which characteristic does monopolistic competition NOT have in common with perfect competition? a. each firm has an insignificantly small market share b. entry and exit are easy c. individual firms earn normal profits in the long run d. products of individual firms are different
products of individual firms are different
Assume that at a given level of output, a monopoly firm has marginal revenue of $9, its average total cost is $9, and marginal cost is $7. If this firm were to continually increase its production by one unit, then:
profits will increase
Which of the following best describes a news website that has a pay wall, where users pay a subscription fee to access articles? private good, common property resource, pure public good, public good with exclusion
public good with exclusion
What best describes satellite television?
public good with exclusion Goods that are nonrival and exclusive are public goods with exclusion. People can be excluded from enjoying the good and its consumption by one person does not reduce the utility of that good to others.
Other factors held constant, as the price of an iPad rises, the:
quantity demanded for iPads falls
When a customer chooses to accept an item of value from a business because it requires no incremental spending on the part of the customer, the customer is demonstrating the principle that:
rational people think at the margin; When thinking at the margin, decision makers are considering only the costs and benefits that result from the decision under consideration. In this case, the incremental cost is zero, while the incremental benefit is the value of the item received. A rational individual will only consider the additional or incremental cost and benefit and ignore all other costs and benefits.
Short-run economic growth is illustrated on a PPF diagram by movement from inside the PPF toward the PPF. A situation where this would be an appropriate depiction is in an economy:
recovering from a recession As an economy recovers from a recession, previously unemployed people return to work and formerly underutilized factories return to full production. Both are examples of an economy growing in the short run by increasing the productive use of existing but underutilized or idle resources. On a PPF diagram, this is depicted by moving toward the PPF.
Which is NOT a source of economic growth? increasing business investment reducing the level of international trade reducing barriers to financial aid for higher education increasing research and development
reducing the level of international trade
When monopolies waste resources attempting to prevent other firms from competing with them, it is referred to as:
rent seeking To protect their monopoly position and the resulting market power and profits, many such firms expend substantial resources to prevent new competition from entering their market. This inefficient spending is directed to lobbying, extending patents, or restricting licenses. It is called rent-seeking behavior.
Some prisoner's dilemma outcomes can be resolved when the players engage in:
repeated games In repeated games, players who seek higher unilateral outcomes at the expense of the other players can be disciplined to abide by cooperative outcomes (avoiding lower prisoner's dilemma outcomes) by retaliation in the next round of the game.
Indifference curves
represent a set of product bundles to which the consumer is indifferent
The development of solar panels for home installation has improved due to technological advances and subsidies. These factors shift the supply curve to the _____ and result in the equilibrium price of solar panel installations to _____.
right; fall
In the market for online tutoring, there is an increase in the supply of online tutors during finals week, but there is an even larger increase in the demand for online tutors. These events will cause the equilibrium price of online tutoring to _____ and the equilibrium quantity to _____.
rise; rise
The tragedy of the commons applies to goods that are:
rival and nonexcludable
Which of the following best describes a pasture used for grazing by several different villages?
rival and nonexclusive
Suppose a water utility company charges a residential customer $1.50 per 1,000 gallons for the first 30,000 gallons of water used and $1.00 per 1,000 gallons for any amounts used in excess of 30,000 gallons of water. The water utility is practicing:
second-degree price discrimination
When players in a game select a dominant strategy, they are:
selecting the best strategy regardless of the strategies their opponents choose. Identifying a dominant strategy provides a game participant with a tool to respond to any action of the participant's opponents because it provides the best outcome for the participant regardless of the strategy selected by the participant's opponents.
Market power enables businesses to:
set prices and reap profits Because achieving market power gives a firm some control over prices and the level of output, it is more likely to earn positive economic profits. Economic profits are achieved when revenues are higher than the total of explicit and implicit costs.
If the United States experiences an inflationary episode in which prices of goods and services go up faster than incomes, budget lines for U.S. consumers will:
shift inward
Assume a farmer's land is equally productive in growing corn or potatoes and is currently producing both. If the price of corn increases but the price of potatoes does not change, the farm's supply curve for potatoes will:
shift to the left, and fewer potatoes will be produced at each price level. Potatoes and corn in this example are production substitutes. When the price of corn increases, the farmer shifts land to increase production of corn (replacing potatoes) to take advantage of corn's higher price. This is represented by a shift of the potato supply curve to the left.
When price ceiling for a good is set below the free market equilibrium the result is a(n):
shortage If the price ceiling is set below the free market equilibrium price, the quantity demanded exceeds the quantity supplied. This causes a shortage, also called excess demand.
If an effective price ceiling is raised:
shortage decreases An increase in a price ceiling helps reduce the gap between quantity demanded and quantity supplied. Since an effective price ceiling creates a shortage, an increase in the price ceiling helps reduce the shortage.
Suppose that a major drought causes a 30 percent reduction in the peanut harvest. If there is no change in demand, this event would cause a _____ at the original equilibrium price, and the equilibrium price will therefore _____ and the equilibrium quantity will _____.
shortage; rise; fall
If the marginal damage caused by a certain type of pollution is $100 billion and the marginal cost of abatement is $180 billion, then:
society would be better off if emissions were increased.
Which pair MOST likely includes substitute goods? hot dogs and mustard ramen noodles and water soft drinks and lemonade pizza and soft drinks
soft drinks and lemonade
_____ are more numerous, but ____ sell more goods and services
sole proprietorships; corporations
If the cross price elasticity of demand is positive for a given pair of goods, they are _____ and if it is negative, they are _____
substitutes; complements The cross price elasticity of demand measures the relationship between changes in price for one good and changes in quantity demanded for another good. A positive cross elasticity means that as price of one good increases, the consumption of the other good increases. Consumers switch from the good whose price has increased to the other good - therefore these goods are substitutes. A negative cross elasticity means that as the price for one good increases consumption of the other good declines. In this case, consumers consume less of the good whose price has increased and also the other good. Therefore they are complements or consumed together.
Martha has a 1-year lease on the facility where she produces confections. If she shuts down her business before the year is up, she still has to pay for the entire lease. Because of this, her lease is characterized as a(n):
sunk cost
Wheat is the main input in the production of flour. If the price of wheat increases, all else equal, we would expect the:
supply of flour to decrease
Improvements in technology that reduce production costs cause the _____ curve to shift to the _____, indicating a(n) _____ in the amount _____ at each price point.
supply; right; increase; supplied By reducing production costs, technological improvements increase producer profit per unit. This profit increase persuades the producer to increase production at each price level. In graphic terms, the supply curve shifts to the right.
One of the costs associated with a minimum wage is that it creates a:
surplus of workers A minimum wage has the same effect as other price floors. It causes excess supply. In this case, the minimum wage is enticing a greater number of workers into the job market than employers are willing to hire at that price; this causes a surplus of workers, also known as unemployment.
In an oligopoly, all the firms:
take their competitors into account when they make pricing decisions
A consumer is in equilibrium when
the addition to total utility per dollar is the same for every commodity.
If the prices of the two goods the consumer buys increase:
the budget line shifts closer to the origin
When a budget line shifts to the left, this means that
the consumer's income has decreased, or the cost of the two goods has increased
When a budget line shifts to the right, this means that
the consumer's income has increased, or the cost of the two goods has decreased
In the fictitious country of Amelia, the government taxes the wealthier residents and gives that tax money to the poorer residents. What would this taxing and transfer payment look like on the Lorenz curve?
the curve would bend closer to the 45-degree line Taxes and transfer payments cause the Lorenz curve to bend closer to the 45-degree line if the wealth is being moved from the wealthier to the less wealthy.
In the mid-1970's, Sony released a "Beta" format videotape, which could only be played on Beta video players. Although this format was launched before the competing VHS format, fewer and fewer companies continued to use the Beta format and fewer and fewer consumers purchased Beta video players. It was eventually replaced almost entirely by VHS format in the late 1980's. The Beta format likely never reached this part of the network market demand curve.
the downward-sloping portion of the network market demand curve. The downward-sloping portion begins after the tipping point. The tipping point was never reached.
A combination of goods that lies inside the PPF is considered inefficient because:
the economy is capable of producing more of both goods. When the economy's resources are being underutilized, efficiency is lost and potential output is not being realized.
The demand curve for a monopolist is:
the industry demand curve
Consider that the corn industry is a perfectly competitive industry with constant returns to scale. The price per bushel is $2. If the long-run, minimum ATC is $1.50 per bushel, it should follow that (ceteris paribus):
the long-run price will be $1.50 per bushel.
Supply is defined as:
the maximum amount of a product that sellers are willing and able to provide for sale over a particular time period at various prices, holding all other relevant factors constant.
In the short run:
the number of firms is fixed
Implicit costs are:
the opportunity costs of the resources used by the firm
At any price below the equilibrium price:
the quantity demanded exceeds the quantity supplied in the market.
Indifference curves cannot be concave to the origin because:
the satisfaction consumers get from consuming additional units of a good declines
Economics is defined as:
the study of how individuals, businesses, and societies make decisions to maximize their well-being given limited resources.
After Rachene bought a magazine subscription, she does not enjoy the articles in the magazine. However, she dutifully reads the entire magazine every month because she had already paid for the subscription, and she feels the money will be wasted if she does not read it. What psychological factor associated with behavioral economics explains Rachene's behavior?
the sunk cost fallacy
Suppose you observed that the price of gasoline has increased even as car owners have increased the amount of gasoline that they buy. You surmise that
the supply of gasoline has decreased
Which of the following would be considered when calculating wealth? the amount of money that a person earns from an annuity the amount of money that a person earns from a business he owns the value of a vintage car a person owns the amount of money that a person pays for a home mortgage
the value of a vintage car a person owns
While prisoner's dilemma outcomes may produce worse results for competing companies than other alternate outcomes, such dilemmas can benefit:
third parties who do business with the competing companies. When firms are competitive, their interactions produce less attractive outcomes than available when they cooperate. However, this competition can benefit consumers - third parties. Lower prices for consumers are an example of how competition among firms may lead to a prisoner's dilemma outcome that is bad for both firms but good for the consumers.
In the mid-1970's, Sony released a "Beta" format videotape, which could only be played on Beta video players. Although this format was launched before the competing VHS format, fewer and fewer companies continued to use the Beta format and fewer and fewer consumers purchased Beta video players. It was eventually replaced almost entirely by VHS format in the late 1980's. The Beta format likely never reached the:
tipping point The tipping point is the quantity from which network effects are strong enough to support the network.
The notion that individuals and firms are compelled to retaliate or punish others for engaging in noncooperative actions, but leaving the door open for future reconciliation, is BEST referred to as a(n):
tit-for-tat strategy
If air pollution comes from multiple sources and it causes many people to suffer, then an efficient agreement among the parties is difficult to achieve because:
transaction costs are high
If Nintendo lowers the price of its product by $10, Sony waits to see whether Nintendo's price cut was a temporary mistake. This is an example of what type of game strategy?
trembling hand trigger
If an economy is operating at a point that is inside of its production possibilities frontier, then it can be assumed that its resources are:
underutilized
Price controls are sometimes used when the natural operation of free markets leads to:
undesirable outcomes Governments are motivated to intervene in markets through price controls because normal operation of free markets can produce undesirable problems
Macroeconomics is concerned with issues such as
unemployment
The Federal Trade Commission Act prohibits:
unfair competitive practices and deceptive acts
Within the constraints of product prices and income, a consumer's objective is to maximize total:
utility consumers want to gain the highest satisfaction or well-being possible from their purchases
Because of scarcity: we face tradeoffs in nearly every choice we make. choices are unlimited. resources are limitless. wants are limited.
we face tradeoffs in nearly every choice we make
Firms in perfectively competitive industries earn _____ economic profits.
zero Since a firm earning zero economic profit is covering its opportunity cost (and as a result is earning an accounting profit), such an outcome is not as bad as it sounds.