BECO Exam 2
Katherine gives piano lessons for $20 per hour. She also grows flowers, which she arranges and sells at the local farmer's market. One day she spends 5 hours planting $50 worth of seeds in her garden. Once the seeds have grown into flowers, she can sell them for $150 at the farmer's market. Katherine's accounting profits are
$100, and her economic profits are $0
Refer to Scenario 13-7. What are Wanda's total accounting profits?
$126
Refer to Scenario 13-6. Tony's accountant would calculate the total cost of his farming to equal
$130
Refer to Scenario 13-6. Tony's accounting profit equals
$170
Refer to Scenario 13-6. An economist would calculate Tony's total cost to equal
$380
cody builds mailboxes. if he charges $20 for each mailbox, his total revenue will be
500 if he sells 25 mailboxes
A positive externality occurs when: a. Jack's benefit exceeds John's benefit when they each consume the same good. b. Jack receives a benefit from John's consumption of a certain good. c. Jack's receives a loss from John's consumption of a certain good. d. Jack receives personal benefits from his own consumption of a certain good
Jack receives a benefit from John's consumption of a certain good
The term tax incidence refers to
The distribution of the tax burden between buyers and sellers
for a firm in a perfectly competitive market price =
price = MR = average revenue
market power
the ability of a firm to influence market prices
what is public policy?
the principles, often unwritten, on which social laws and rules are based
If marginal revenue is less than marginal costs,
then decrease production will lead to an increase in marginal profit
If marginal revenue is greater than marginal costs,
then increase production will lead to an increase in marginal profit
average total cost is equal to
total cost/output
the amount of money that a firm pays to buy inputs is called
total costs
which of the following can be added to profit to obtain total revenue
total costs
Profit =
total revenue - total cost
accounting profit is equal to
total revenue minus the explicit cost of producing goods and services
define variable cost
vary with the quantity produced (cost of materials, wages of workers, etc.)
average fixed cost curve is always declining because
we are dividing fixed costs by higher and higher levels of output
price controls are usually enacted
when policymakers believe that the market price of a good or service is unfair to buyers and sellers
Consider the market for watermelons. Buyers
would lobby for a price ceiling, whereas sellers would lobby for a price floor
which of the following would not be considered a negative externality? a. Smelter, Inc. creates steel and pollution. b. Your neighbor plays loud music that you dislike through stereo speakers set up on his deck. c. Your friend buys a new puppy that barks every night. d. You have an adverse reaction to a medication your doctor prescribed for you.
you adverse reaction to a medication your doctor prescribed
You receive a paycheck from your employer, and your pay stub indicates that $400 was deducted to pay the FICA tax. Which of the following statements in correct?
your employer is required by law to pay $400 to match the $400 deducted from your check
Refer to Scenario 13-6. Tony's economic profit equals
-80
Scenario 13-7 Wanda owns a lemonade stand. She produces lemonade using five inputs: water, sugar, lemons, paper cups, and labor. Her costs per glass are as follows: $0.01 for water, $0.02 for sugar, $0.03 for lemons, $0.02 for cups, and $0.10 for the opportunity cost of her labor. She can sell 300 glasses for $0.50 each. Refer to Scenario 13-7. What are Wanda's explicit costs per glass?
.08
average total cost =
ATC = TC/Q or ATC = AFC + AVC
Public policies toward externalities
Command-and-control polices and market-based policies
profit maximization
MC = MR
a price ceiling below the equilibrium price is
binding - causes a shortage. in the long run, supply and demand are more price elastic, so the shortage is larger
define fixed costs
do not vary with the quantity of output produced (cost of equipment, loan payments, land, etc.)
Suppose that a "doggie day care" firm uses only two inputs: hourly workers (labor) and a building (capital). In the short run, the firm most likely considers
labor to be variable and capital to be fixed
define marginal cost
the increase in total cost from producing one more unit MC = change in total cost / change in quantity
Suppose that the cost of producing product X by itself is $12 and the cost of producing product Y by itself is $8. The cost of producing both products X and product Y together is $23. This represents an example of:
$23 > $12 + $8 diseconomies of scope
Scenario 13-6 Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. Refer to Scenario 13-6. What is the total opportunity cost of the day that Farmer Tony spent in the field planting wheat?
$380
joy sells 200 glasses of iced tea at .50 each. her total costs are $25. her profits are
$75
Refer to Scenario 13-7. What are Wanda's total economic profits?
$96
Jane was a partner at a law firm earning $223,000 per year. She left the firm to open her own law practice. In the first year of business she generated revenues of $347,000 and incurred explicit costs of $163,000. Jane's economic profit from her first year in her own practice is
-39,000
Examples of positive externalities (beneficial externalities:
-Spillover effects of research and development used of one product to other products or other firms -training of a worker by one firm and thereby creating a more valuable worker for a future employer -being vaccinated against contagious diseases protects not only you, but people who visit the salad bar or produce section after you
sunk cost
-a cost has already been committed and cannot be recovered -sunk costs should be irrelevant to decisions; you must pay them regardless of your choice -FC is a sunk cost: the firm must pay its fixed costs whether it produces of shuts down -So, FC should not matter in the decision to shut down
a price floor is
-a legal minimum on the price at which a good can be sold -often imposed when sellers of a good are successful in their attempts to convince the government that the market outcomes in unfair without a price floor -a source of inefficiency in a market
exit
-a long run decision to leave the market -zero costs -cost of exiting the market: revenue loss = TR -benefit of exiting the market: cost savings = TC -exits if TR < TC -exits if P < ATC
shutdown
-a short-run decision not to produce anything because of market conditions -must still pay FC -cost of shutting down: revenue loss = TR -benefit of shutting down: cost savings = VC -shut down if TR < VC -shut down if P < AVC
the long run market supply curve is horizontal if
-all firms have identical costs and -costs do not change as other firms enter or exit the market
entry and exit in the long run
-in the long run, the number of firms can change due to entry and exit -if existing firms earn positive economic profit, -new firms enter, short run market supply shifts right -P falls, reducing profits and slowing entry -if existing firms incur losses, -some firms exit, short run market supply shifts left -P rises, reducing remaining firms' losses
the zero-profit condition
-long run equilibrium - the process of entry or exit is complete - remaining firms earn zero economic profit -zero economic profit occurs when P=ATC -since firms product where P=MR=MC, the zero profit condition is P=MC=ATC -in the long run P = minimum ATC
Examples of negative externalities (harmful externalities)
-manufacturing activities that cause air pollution impose health and clean-up costs on the whole society -injury or death of another person resulting from the market exchange -air pollution from a factory
Refer to Scenario 13-7. What are Wanda's implicit costs per glass?
.10
Refer to Scenario 13-7. What are Wanda's total economic costs per glass?
.18
brady industries has average variable costs of $1 and average total costs of $3 when it produces 500 unites of output. the firm's total fixed costs equal
1,000
characteristics of competitive market
1. many buyers and many sellers 2. the goods offered for sale are largely the same 3. firms can freely enter or exit the market each buyer and seller is a "price taker"
3 important properties of cost curves:
1. marginal cost eventually rises with quantity output 2. average total cost curve is u-shaped 3. marginal cost curve crosses the average total cost curve at the minimum of the average total cost -when MC < ATC, ATC falls as Q rises -when MC > ATC, ATC rises as Q rises
economies of scale
ATC falls as Q rises occur when increasing production allows greater specialization: workers more efficient when focusing on a narrow tasks (more common when Q is low). occurs when long-run average total costs are decreasing as output increases.
Diseconomies of scale
ATC rises as Q increases due to coordination problems in large organizations (management becomes stretched, can't control costs). more common when Q is high.
Constant returns to scale
ATC stags the same as Q increases
suppose that a small family farm sold its output for $100,000 in a given year. The family spent $25,000 on fuel, $40,000 on seed, fertilizer, and pesticides, and $25,000 on equipment, including maintenance. The family members could have earned $20,000 working at other occupations. What is the accounting profit for the family farm? What is the economic profit for the family farm?
Accounting profit = 100,000 - (25,000 + 40,000 + 25,000) = 10,000 Economic profit = 10,000 - 20,000 = -10,000
Bev is opening her own court-reporting business. She financed the business by withdrawing money from her personal savings account. When she closed the account, the bank representative mentioned that she would have earned $300 in interest next year. If Bev hadn't opened her own business, she would have earned a salary of $25,000. In her first year, Bev's revenues were $30,000. Which of the following statements is correct?
Bev's economic profit is $4,700
A tax on buyers of personal computer external hard dirves encourgaes
Buyers to demand a smaller quantity at every price
Suppose that in a particular market, the supply curve is highly elastic and the demand curve is highly inelastic. If a tax is imposed in this market, then the
Buyers will bear a greater burden of the tax than the sellers
If a tax is imposed on a market with inelastic demand and elastic supply, then
Buyers will bear most of the burden of the tax
A tax on buyers shifts the
D curve down by the amount of the tax
which of the following is not an example of a public policy? a. taxes b. minimum wage laws c. rent control laws d. equilibrium laws
Equilibrium laws
If the government levies a 1,000 tax per boat on sellers of boats, then the price paid by buyers of boats would
Increase by less than 1,000
Marginal product of labor (MPL) =
MPL = change in quantity / change in labor
if p > avc, a firm maximizes profit by producing the quantity where
MR = Mc. if p < avc, a firm will shut down in the short run
competitive equilibrium
P = MC
Perfect competition
P = MR
How is the burden of a tax divided?
Regardless of whether the tax is levied on the buyers or the sellers, the buyers and sellers bear some proportion of the tax burden
A tax on sellers shift the
S curve up by the amount of the tax
Dioxin emission that results from the production of paper is a good example of a negative externality because: A. there are fines for producing too much dioxin B. toxic emissions are the best example of an externality C. self-interested paper producers will not consider the full cost of the dioxin pollution they create D. self-interest paper firms are generally unaware of environmental regulations
Self-interest paper producers will not consider the full cost of the dioxin pollution they create
Which of the following is not correct? A. The wedge between the buyers' price and the sellers' price is the same, regardless of whether the tax is levied on buyers or sellers B. Taxes levied on sellers and taxes levied on buyers are not equivalent C. A tax places a wedge between the price that buyers pay and the price that sellers receive D. In the new after-tax equilibrium, buyers and sellers share the burden of the tax
Taxes levied on sellers and taxes levied on buyers are not equivalent
Who pays the luxury tax?
The market for yachts: -demand is price-elastic -in the short run, supply is inelastic -companies that build yachts pay most of the tax
Suppose buyers of vodka are required to send $1 to the government for every bottle of vodka they buy. Further, suppose this tax causes the effective price received by sellers of vodka to fall by .60 per bottle. Which of the following statements is correct?
The price paid by buyers is .40 more per bottle than it was before the tax
Define externalities
The uncompensated impact of one person's actions on the well-being of a bystander. The effects of market activity on a third party.
Private solutions to externalities
Types of private solutions: -moral codes and social sanctions -charities -contracts between market participants and the affected bystanders
A positive externality arises when a person engages in an activity that has: A. an adverse effect on a bystander who is not compensated by the person who causes the effect B. an adverse effect on a bystander who is compensated by the person who causes the effect C. a beneficial effect on a bystander who pays the person who causes the effect D. a beneficial effect on a bystander who does not pay the person who causes the effect
a beneficial effect on a bystander who does not pay the person who causes the effect
which of the following illustrates the concept of a negative externality? a. A flood wipes out a farmer's corn crop. b. A college professor plays a vigorous game of racquet ball with the racquet he recently purchased. c. A janitor eats a hamburger during his lunch break. d. A college student plays loud music on his new stereo system at 2:00 a.m.
a college student plays loud music on his new stereo system at 2:00 AM
MR = P for a competitive firm
a competitive firm can keep increasing its output without affecting the market price so, each one-unit increase in Q causes revenue to rise by P
Which of the following is NOT an example of a negative externality? a. an illness caused by secondhand cigarette smoke. b. disrupted sleep from a neighbor's loud music. c. air pollution from a manufacturing plant. d. a decrease in your property value from neglecting your lawn and garden.
a decrease in your property value from neglecting your lawn and garden
if p < atc,
a firm will exit in the long run
price ceiling
a legal maximum on the price of a good or service (rent control)
price floor
a legal minimum on the price of a good or service (minimum wage)
rent-control laws dictate
a maximum rent that landlords may charge tenants
Negative externalities occur when one person's actions a. reveal his or her preference for foreign-produced goods. b. adversely affect the well-being of a bystander who is not a party to the action. c. cause his or her employer to lose business. d. cause another person to lose money in a stock market transaction.
adversely affect the well-being of a bystander who is not a party to the action
Long run:
all inputs are variable (firms can build more factories, or sell existing ones) in the long run, ATC at any Q is cost per unit using the most efficient mix of input for that Q (factory size with the lowest ATC)
which of the following is an example of an externality? A. cigarette smoke that permeates an entire restaurant B. a flue shot that prevents a student from transmitting the virus to her roommate C. a beautiful flower garden outside the local post office
all of the above
a negative externality arises when a person engages in an activity that has: A. an adverse effect on a bystander who is compensated by the person who causes the effect B. an adverse effect on a bystander who is not compensated by the person who causes the effect C. a beneficial effect on a bystander who pays the person who causes the effect D. a beneficial effect on a bystander who does not pay the person who causes the effect
an adverse effect on a bystander who is not compensated by the person who causes the effect
fixed costs can be defined as costs that
are incurred even if nothing is produced
why does MPL diminish?
as jack adds workers, the average worker has less land to work with and will be less productive. in general, MPL diminishes as L rises, whether the fixed input is land or capital.
the firm's efficient scale is the quantity of output that minimuzes
average total cost
when marginal cost exceeds average total cost,
average total cost must be rising
which of the following is not a property of a firm's cost curves?
average total cost will cross marginal cost at the minimum of marginal cost
at low levels of production, the firm
benefits from increased size because it can take advantage of greater specialization, has the potential for economies of scale, and is unlikely to experiences acute problems with coordination
a price floor above the equilibrium price is
binding - causes a surplus
Diseconomies of scope
business that raise or increase their average costs by producing two or more products jointly Cost (Q1, Q2) > Cost (Q1) + Cost (Q2)
economies of scope
businesses that lower their average costs by producing two or more products jointly Cost (Q1, Q2) < Cost (Q1) + Cost (Q2)
When demand is more price-elastic than supply, ______________ are relatively more price sensitive, and the ___________ curve is less steep than the ____________ curve. _____________ have relatively more alternatives, so they can avoid most of the tax. _________________ are less flexible, so they have to "eat" a greater share of the price increase caused by the tax.
buyers, demand, supply, buyers, sellers
when adding another unit of labor leads to an increase in output that is smaller than the increases in output that resulted from adding previous units of labor, the firm is experiencing
diminishing marginal product
two types of input costs
explicit costs and implicit costs
When MC < ATC, ATC is
falling
Total costs =
fixed cost + variable cost
total cost can be divided into two types of costs
fixed costs and variable costs
which of the following is an example of an implicit costs?
foregone rent on office space owned and used by the firm
common examples of public policy
health policy - refers to who obtains health insurance coverage and how that insurance is managed legal policy - refers to what will be considered a crime, how that crime will be punished, and who will be responsible for handing out the punishment tax policy - refers to how citizens and businesses are taxes based on their income and profits
a difference between explicit and implicit costs is that
implicit costs do not require a direct monetary outlay by the firm, whereas explicit cots do
in the short run, entry is not possible, and an increase in demand
increases firms' profits
A tax levied on the sellers of blueberries
increases sellers' costs, reduces profits, and shift the supply curve up
Why ATC is usually u-shaped
initially, falling AFC pulls ATC down. eventually, rising AVC pulls ATC up.
implicit costs
input costs that do not require an outlay of money by the firm (the opportunity cost of the owner's time)
explicit costs
input costs that require an outlay of money by the firm (paying wages)
which of the following statements best expresses a firm's profit-maximizing decision rule?
its output. If marginal revenue is less than marginal cost, the firm should decrease its output. If marginal revenue equals marginal cost, the firm should continue producing its current level of output.
Regulation of externalities
legal measures
suppose jan started up a small lemonade stand business last month. variable costs for jan's lemonade stand now include the cost of
lemons and sugar, paper cups, and the wages paid to her hourly workers
What are price controls?
limits that affect the price in a market. policymakers enact price control when they believe that the market price of a good or service is unfair to buyers and sellers.
diseconomies of scale occur when a firm's
long-run average total costs are increasing as output increases
constant returns to scale occur when a firm's
long-run average total costs do not vary as output increases
Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $300. In order to maximize profits, Laura should
make fewer than 20 wedding cakes per month
define marginal product
marginal product of any input is the increase in output arising from an additional unit of that input, holding all other inputs constant
at the profit-maximizing level of output
marginal revenue equals marginal cost
Max sells maps. The map industry is competitive. Max hires a business consultant to analyze his company's financial records. The consultant recommends that Max increase his production. The consultant must have concluded that Max's
marginal revenue exceeds his marginal cost
economists assume that the typical person who starts her own business does so with the intention of
maximizing profits
with free entry and exit, profit = 0 in the long run, and P =
minimum atc
minimum wage laws dictate
minimum wage that firms may pay workers
Economic measures
most practiced measure is a tax. taxes can be added to cover the externailty cost. The optimal setting for a tax is the value of the marginal externality damage created by consumption of an additional item from a market exchange. (Tax on each unit of gas to cover the air pollution, wear and tear on existing public roads, needs for expanding roads to support more drivers, and policing of roads)
a price below above the equilibrium price is
not binding - has no effect on the market outcome
a price ceiling above the equilibrium price is
not binding - has no effect on the market outcome
if a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then
one-unit decrease in output will increase the firm's profit
the minimum wage, if it is binding, lowers the incomes of
only those workers who become unemployed
the marginal product of labor can be defined as the change in
output divided by the change in labor
in competitive market free of government regulation,
price adjusts until quantity demanded equals quantity supplied
For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $10 and a marginal cost of $7. It follows that the
production of the 100th unit of output increases the firm's profit by $3
Market-based policies
provide incentives so that private decision-makers will choose to solve the problem on their own (corrective taxes and subsidies, tradable pollution permits)
a production function is a relationship between input and
quantity of output
a total cost-curve shows the relationship between the
quantity of output produced and the total cost of production
Why is MPL important?
rational people think at the margin. when farmer jack hires an extra worker, his costs rise by the wage he pays the worker and his output rises by MPL. comparing them helps jack decide whether he should hire the worker.
Command-and-control policies
regulate behavior directly (limits on quantity of pollution emitted and/or requires that firms adopt a particular technology to reduce emissions)
Explicit costs
require an outlay of money by the firm
comparing marginal revenue and marginal cost
reveals the contribution of the last unit of product to total profit, and is helpful in making profit-maximizing production decisions
When MC > ATC, ATC is
rising
Legal measures
sanctions or laws that forbid market activity, restrict the volume of activity, or restrict those who are allowed to participate as buyers and sellers
which of the following is the most likely explanation for the imposition of a price floor on the market for corn? a. Buyers of corn, recognizing that the price floor is good for them, have pressured policymakers into imposing the price floor. b. Policymakers have studied the effects of the price floor carefully, and they recognize that the price floor is advantageous for society as a whole. c. Sellers of corn, recognizing that the price floor is good for them, have pressured policymakers into imposing the price floor. d. Buyers and sellers of corn have agreed that the price floor is good for both of them and have therefore pressured policy makers into imposing the price floor.
sellers of corn, recognizing that the price floor is good for them, have pressured policymakers into imposing the price floor
When supply is more price-elastic than demand, ____________ are relatively more responsive to changes in price, and the ______________ curve is less steep than the ______________ curve. _________________ have relatively fewer alternatives, so that have to __________ most of the price increase caused by the imposition of the tax.
sellers, supply, demand, buyers, "eat"
define production function
shows the relationship between the quantity of inputs used to product a good and the quantity of output of that good
Short run:
some inputs are fixed (factories, land). the costs of these inputs are FC.
examples of public policy
specific laws, actions taken by the government, government funding priorities, government regulations, societal attitudes, cultural ideals, and accepted rules, gun control, death penalty, mental health, immigration, education, minimum wage, drug policy, abortion, arts, civil rights, entitlement programs, right to work
total revenue
the amount a firm generates by selling its goods and services. total revenue is defined as the price of the item times the number or items sold. TR = P x Q
Define total revenue
the amount a firm receives from the sale of its output
quantity
the amount or number of an item produced or sold
marginal revenue
the change in total revenue from an additional unit sold MR = change in total revenue / change in quantity
price
the cost of an item or product
define accounting profit
the difference between total revenue and explicit costs accounting profit = TR - explicit costs
define economic profit
the difference between total revenue and total costs (explicit and implicit) economic profit = TR - explicit costs - implicit costs
which of these assumption is often realistic for a firm in the short run?
the firm can vary the number of workers it employs but no the size of the factory
If a sawmill creates too much noise for local residents, a. noise restrictions will force residents to move out of the area. b. the government should avoid intervening because the market will allocate resources efficiently. c. the government can raise economic well-being through noise-control regulations. d. a sense of social responsibility will cause owners of the mill to reduce noise levels.
the government can raise economic well-being through noise-control regulations
Marginal cost
the increase in total cost that arises from an extra unit of production MC = change in TC / change in quantity
Thirsty Thelma owns and operates a small lemonade stand. When Thelma is producing a low quantity of lemonade she has few workers and her equipment is not being fully utilized. Because she can easily put her idle resources to use,
the marginal cost of one more glass of lemonade is smaller than if output were high
Define diminishing marginal product
the marginal product of an input declines as the quantity of the input increase (all other things equal)
Define total costs
the market value of the inputs a firm uses in production
Total cost
the payments made for the various factors of production TC = fixed costs + variable costs
Suppose that large-scale pork production has the potential to create ground water pollution. Why might this type of pollution be considered an externality? a. The economic impact of a large-scale pork production facility is localized in a small geographic area. b. The pollution has the potential for creating a health risk for water users in the region surrounding the pork production facility. c. Consumers will not reap the benefits of lower production cost from large-scale pork production. d. The groundwater pollution reduces the cost of large-scale pork production.
the pollution has the potential for creating a health risk for water users in the region surrounding the pork production facility
