ECO 201 Final Exam SG

Table 1 contains a production schedule for West Sixth Brewery's Smithtown Brown beer by barrels produced. What is the marginal cost of increasing production from 2 barrels to 3 barrels?

$15 (Marginal cost is determined by finding the difference between the variable costs of two quantities. Variable cost at 2 barrels is $30 and variable cost at 3 barrels is $45, the difference is $15, which is the marginal cost)

Figure 1 shows the perfectly competitive market a certain firm faces. What is the profit for this firm?

$18 (Profit is calculated as the difference between price and average total cost, multiplied by the quantity sold. So profit is (5-3)*9 = 18)

Scenario 3: Irving and his wife Gertrude decide to take their life savings of $20,000 to buy a small retail shop. They plan to make and sell tie-dyed, University of Kentucky T-shirts. They hire a professional tie-dyer for $6.00 an hour who makes 20 t-shirts per hour. The following are needed to produce the shirts: dye, costing $1 per shirt, plain white t-shirts costing $1 each and an industrial washing machine for $1000. What is the marginal cost of producing one additional T-shirt?

$2.30 (The marginal or additional cost of making one more t-shirt is $1 for the shirt + $1 for dye + 30 cents in labor cost. = $2.30)

Scenario 1: Use the following information to answer this question. Kim decides to quit her old job that paid $1,000 a month to open a flower shop in downtown Lexington. Suppose she opens her shop in a building she owns, which she could be renting out to someone else for $1,000 a month. In addition, A to Z Rental required her to sign a one year lease on the coolers needed for her shop and the rent is $200 a month. Hiring three assistants costs her $1,800 a month. Finally, the flowers, vases and other material needed for making flower arrangements average $5,000 a month. Kim's short run fixed costs are:

$2220

Goodfellas has fixed costs of $1000 for their location downtown. Table 1 contains the schedule for their variable costs. What is the average total cost if they produce 400 pizzas?

$4.63 (Average total cost is total variable cost plus total fixed cost divided by quantity produced, so we have (850+1000)/400 = $4.63)

Suppose that a firm produces 200,000 units a year and sells them all for $10 each. The explicit costs of production are $1,500,000 and the implicit costs of production are $300,000. The firm has an accounting profit of:

$500,000 and an economic profit of $200,000.

For Local Taco, total cost is $1,800 when output equals 100 tacos, and total cost is $1,000 when output is zero tacos. What are average variable costs when output equals 100 tacos?

$8

If you know that with 10 units of output, average fixed cost is $12.50 and average variable cost is $82.50, then total cost at this output level is:

$950

A binding rent control policy results in all of the following EXCEPT A. improvements in the quality of rental housing B. a black market for rental housing C. a reduction in the future production of rental housing D. higher search costs for those looking for rental housing

(A)

An airline ticket from Seattle to Miami costs $525. A bus ticket is $325. Traveling by plane will take 5 hours, compared with 25 hours by bus. Thus, the plane costs $200 more but saves 20 hours of time. (Hint: Note how we are "thinking at the margin" here by looking at the changes.) Other things constant, an individual will gain by choosing air travel if, and only if, each hour of her time is valued at more than A. $10 per hour B. $13 per hour C. $20 per hour D. $105 per hour

(A)

Suppose the actions of the producers of a good impose an EXTERNAL COST which results in the actual market price of $25 and market output of 1,000 units. How does this outcome compare to the efficient, ideal equilibrium? A. The efficient price would higher than $25 while the efficient output would be less than 1,000 units. B. The efficient price would be higher than $25 while the efficient output would be greater than 1,000 units. C. The efficient price would be lower than $25 while the efficient output would be less than 1,000 units. D. The efficient price would be lower than $25 while the efficient output would be greater than 1,000 units.

(A)

The number of cattle slaughtered every year for meat far exceeds the number of elephants slaughtered every year for their ivory. Despite this, cows can be found everywhere while elephants are on the verge of extinction in some countries. Which of the following best explains this difference? A. Cows can be privately owned while in many countries elephants cannot. B. The demand for ivory far exceeds the demand for beef. C. Animals slaughtered for their meat are generally better conserved by humans than animals slaughtered for nonfood uses. D. People tend to protest more every year to prevent cow extinction than they do for elephant extinction.

(A)

The supply of product X is elastic if the price of X rises by A. 5% and quantity supplied rises by 7%. B. 8% and the quantity supplied rises by 8%. C. 10% and the quantity supplied remains the same. D. 7% and the quantity supplied rises by 5%.

(A)

Suppose that you manage a distillery that produces a high end "designer" beer and a low end "discount" beer. You find that the consumer demand for your "designer" beer is relatively more inelastic to changes in price than the consumer demand for your low end beer. In fact │ED│= .4 for the designer beer and │ED│= 1.2 for the discount beer. If your goal is to increase total revenue from beer sales, which of the following would be your best strategy? A. Increase the price of your high end beer and decrease the price of your low end beer. B. Increase the price of your high end beer and increase the price of your low end beer. C. Decrease the price of your high end beer and increase the price of your low end beer. D. Decrease the price of your high end beer and decrease the price of your low end beer.

(A) - Increase the price of your high end beer (for which consumers respond inelasticity) and decrease the price of your low end beer (for which consumers respond elastically.)

A firm that must select its profit-maximizing output based on a market-determined price is called a A. price-searcher firm. B. price-taker firm. C. price-setter firm. D. price-immune firm

(B)

A neighborhood group initiates a "neighborhood watch" program. Ella doesn't take part in the program, but she enjoys the greater security the program provides. Ella is a A. smart consumer. B. free rider. C. busy person. D. poor citizen.

(B)

A pure market economy is unlikely to provide a sufficient amount of a public good like national defense because A. the consumers are poorly informed as to the value of national defense. B. it is generally impossible to withhold national defense from a nonpaying customer so some people will be free riders. C. national defense does not yield a benefit to individuals. D. private firms will be less skilled than public firms when producing a public good such as national defense

(B)

Firms form for all of the following reasons except: A. to realize economies of scale. B. to prevent shirking. C. to allow specialization and team production. D. to minimize transaction costs.

(B)

If a monopoly were to emerge in an industry due to the consolidation of several smaller firms, what would be the most likely result? A. prices would fall and output would fall B. prices would increase and output would fall C. prices would increase and output would increase D. prices would fall and output would increase

(B)

If the quantity demanded is greater than the quantity supplied, the pricing system (through the invisible hand) will respond by: A. lowering the product price and therefore the profits of the firms responsible for not producing enough. B. raising the product price, therefore decreasing the quantity demanded. C. lowering product price, but increasing producer profits. D. raising product price, therefore increasing the quantity demanded.

(B)

(Demand) Good are more ELASTIC when...

- Have more substitutes - Luxuries - Goods in the long run - Narrow market (Hershey's)

A firm that shuts down temporarily has to pay

Its fixed costs but not its variable costs

Suppose that the market for soybeans is perfectly competitive. A study is published that concludes that consumption of soybeans actually contributes to certain types of cancers. This, of course, leads to: A. a permanent increase in demand—the short run profits of a soybean farmer will increase and the soybean farmer will increase soybean production in the short run and, in the long run, market output will be higher. B. a permanent decrease in demand—the short run profits of a soybean farmer will decrease and the soybean farmer will decrease soybean production in the short run and, in the long run, market output will be lower. C. a permanent increase in demand—the short run profits of a soybean farmer will decrease and the soybean farmer will increase soybean production in the short run and, in the long run, market output will be higher. D. a permanent decrease in demand—the short run profits of a soybean farmer will increase and the soybean farmer will decrease soybean production in the short run and, in the long run, market output will be lower.

(B)

Suppose you purchase the Lexington Herald-Leader and as the new owner, you discover that your employees take smoking breaks every 15 minutes and are more likely to be discussing U.K. basketball than running the presses. Which of the following actions is most likely to be effective in reducing the shirking? A. Make yourself residual claimant of any profits the company earns. B. Offer a yearend bonus to employees based on the firm's performance that year. C. Hire additional employees to operate the presses. D. Fire the supervisors to cut costs.

(B)

Which of the following is a public good? A. house. B. traffic sign C. both of the above. D. none of the above

(B)

Economist have been studying the impact of the recession by looking at how a drop in average income levels has affected the demand for various products. When calculating the income elasticity of demand (YD) for delivered pizza they find that YD = -.32. This implies that consumers treat delivered pizza as A. a normal, necessity good. B. an inferior good. C. a normal, luxury good. D. an elastically demanded good.

(B) - This implies that consumers treat delivered pizza as an inferior good since income elasticity is a negative number. When income levels go down, people demand more delivered pizza.

At a firm's current output level of 200 units per week, it has 10 employees at a weekly wage of $500 each. Raw materials, which are ordered and delivered daily, cost $1,000 per week. The weekly cost of the firm's capital (building and equipment) is $1,250. Which of the following statements is correct? A. total variable cost is $5,000; total fixed cost is $2,250; total cost is $7,250 B. total variable cost is $6,000; total fixed cost is $1,250; total cost is $7,250 C. total variable cost is $1,250; total fixed cost is $6,000; total cost is $7,250 D. total variable cost is $2,250; total fixed cost is $500; total cost is $2,750 E. total variable cost is $1,500; total fixed cost is $1,250; total cost is $2,750

(B) - Total Variable Costs = labor costs + raw material costs or 10 workers X $500 + $1,000 = $6,000, Total Fixes Costs = building and equipment or $1,250 Total Costs = Total Variable Costs + Total Fixed Costs = $6,000+$1,250 = $7.250

Suppose that the government imposes a $100 excise tax on motorcycles. In response to this tax the market price of motorcycles rises by $75. Based on this information, we can conclude that consumers bear _____% of the $4 economic burden of the tax and that the demand curve is relatively more _______than the supply curve. A. 75%, elastic B. 75%, inelastic C. 25%, elastic D. 25%, inelastic

(B) - We can conclude that consumers bear 75% of the economic burden of the tax and that the demand curve is relatively more inelastic than the supply curve. The amount of the tax the consumers pay is reflected in the amount of the increase in the market price so consumers pay $75 of the $100 tax (75%) and producers must bear the burden of the remaining $25 or 25% of the tax burden. If consumers bear a larger share of the tax than producers than consumers must be relatively more inelastic than producers.

All possible combinations of two goods that could be produced with a fixed amount of resources can be depicted best by: A. a supply curve B. an average total cost curve C. the production possibility frontier D. the cross-price elasticity of supply

(C)

If Q = 10, AFC=$5. If Q=20, AVC=$20. The total cost of producing twenty units of output is: A. $400 B. $250 C. $450 D. $300

(C)

If a firm is making zero economic profit, it A. will be forced to shut down and leave the market. B. will also generally be making zero accounting profit. C. is doing as well as typical firms in other markets. D. will not survive in the long run.

(C)

In perfect competition, no individual producer can significantly affect the market price because A. The market is regulated by the government B. Each producer is ignorant of the market price C. Each producer provides a very small portion of the total market supply D. Strictly enforced collusion prevents any producer from acting independently E. Each firm's product is so different that there is no market price

(C)

Short run production decisions are: A. constrained because all inputs are variable. B. constrained because all inputs are fixed. C. constrained because some inputs are fixed while others are variable. D. unconstrained.

(C)

The U.S. economy is an example of A. a pure market economy B. a pure command economy C. a mixed economy D. none of the above

(C)

The deadweight loss that results from the imposition of a tax represents: A. consumer surplus that is transferred away from consumers and to the government in the form of tax revenue. B. producer surplus that is transferred away from producers and to the government in the form of tax revenue. C. a loss in consumer and producer surplus since no one receives the surplus and it is not transferred to government. D. a loss in government revenue.

(C)

The law of diminishing marginal returns (also called the law of diminishing marginal productivity) states that A. in the long-run the additional output produced from adding additional inputs must always decrease. B. in the long-run the additional output produced from adding additional inputs must not change. C. in the short-run the additional output produced from adding additional inputs must eventually decrease. D. in the short-run the additional output produced from adding additional inputs must always decrease.

(C)

Opportunity Cost

- Highest valued benefit forgone due to choosing an alternative - There can only be ONE - Ex: Studying for your economics final and giving up studying for your math final

What happens to the equilibrium price and quantity of pottery pots, if i.) the price of clay (an input in pot production) rises at the same time ii) that people's income increases. Assume that pottery pots are a normal good. A. The equilibrium price increases and the equilibrium quantity increases B. The equilibrium price increases and the equilibrium quantity falls C. The equilibrium price increases and the equilibrium quantity is indeterminate D. The equilibrium price is indeterminate and the equilibrium quantity increases

(C)

Which of the following is NOT a possible reason that Economies of Scale might occur? A. The use of mass production techniques. B. Quantity discounts on factors of production. C. Organizational complexity, coordination problems, and bureaucratic inefficiencies. D. Increased opportunities for specialization and division of labor.

(C)

Which of the following is a positive economic statement? A. Congress should increase the legal minimum wage to decrease excessive profits. B. An increase in the legal minimum wage is a good idea. C. An increase in the legal minimum wage would cause the level of unemployment to decline. D. The minimum wage should be increased so that the poor will have a better life.

(C)

The difference between production possibilities curves that are bowed out and those that are straight lines is that A. bowed-out production possibilities curves apply to economies that face tradeoffs, whereas straight-line production possibilities curves apply to economies that do not face tradeoffs. B. bowed-out production possibilities curves apply to economies in which resources are not specialized, whereas straight-line production possibilities curves apply to economies in which resources are specialized. C. bowed-out production possibilities curves illustrate increasing opportunity cost, whereas straight-line production possibilities curves illustrate constant opportunity cost. D.straight-line production possibilities curves illustrate real-world conditions, whereas bowed-out production possibilities curves illustrate more simplistic assumptions.

(C) - The difference between production possibilities curves that are bowed out and those that are straight lines is that PPFs curved out from the origin exhibit increasing opportunity costs while linear PPFs exhibit constant opportunity costs so - bowed-out production possibilities curves illustrate increasing opportunity cost, whereas straight-line production possibilities curves illustrate constant opportunity cost.

The marginal cost of consuming each cup of coffee is $1.50, while the marginal benefit derived is $4 for the first cup, and decreases by $1 for each cup consumed thereafter. A rational decision maker will consume: A. 1 cup of coffee B. 2 cups of coffee C. 3 cups of coffee D. 4 cups of coffee

(C) - You will continue to consume coffee as long as the marginal benefit exceeds the marginal costs. For the first cup ($4>1.5), for the second cup ($3>$1.50), for the third cup ($2>1.5). However for the fourth cup ($1 < 1.5) so the fourth cup will not be consumed since the marginal benefit of the fourth cup is less than the marginal cost of the fourth cup.

You manage a company that has recently opened a production facility in a southern Chinese province. Suppose a new virus has appeared in China, that when caught, leaves an individual sick for several weeks. A new vaccine has been developed that will protect people in China from the virus. Assuming China's health care system and vaccine allocation is command-oriented rather than market-oriented, you can expect that. A. Price will allocate this vaccine in such a way that everyone will get the vaccine that needs it. B. A central planner will allocate the vaccine in such a way that everyone who is willing and able to pay for the vaccine will get it. C. A central planner will attempt to allocate the vaccine in such a way that everyone will get the vaccine who needs it. D. Price will allocate this vaccine in such a way that everyone who is willing and able to pay for the vaccine will get it.

(C) - a central planner will attempt to allocate the vaccine in such a way that everyone will get the vaccine who needs it.

A perfectly competitive firm faces a ________ demand curve while a monopolist faces a _______ demand curve. A. perfectly inelastic; downward sloping B. downward sloping; perfectly elastic C. downward sloping; perfectly inelastic D. perfectly elastic; downward sloping

(D)

If the supply of coffee falls due to bad weather conditions in coffee-exporting countries, then the A. Equilibrium price and equilibrium quantity will rise B. Equilibrium price and equilibrium quantity will fall C. Equilibrium price will fall and equilibrium quantity will rise D. Equilibrium price will rise and equilibrium quantity will fall

(D)

In the principal/agent relationship between the manager at McDonalds and a cashier at McDonalds, A. the cashier and manager are both considered agents B. the cashier and the manager are both considered principals C. the cashier is the principal and the manager is the agent D. the cashier is the agent and the manager is the principal

(D)

The above graph shows the planning curve for our classes' firm. If we are currently at point A, we are experiencing: A. decreasing marginal returns, (diminishing marginal product) B. decreasing returns to scale, (diseconomies of scale) C. increasing marginal returns, (increasing marginal product) D. increasing returns to scale, (economies of scale)

(D)

The profit-maximizing rule states that a producer should select their output level where: A. marginal revenue is equal to average total cost B. marginal cost is equal to total revenue C. marginal revenue is equal to total cost D. marginal revenue is equal to marginal cost

(D)

When a negative externality is present, then from society's point of view, the private market provides A. just the right amount of the product. B. none of the product. C. too little of the product. D. too much of the product.

(D)

When economic efficiency occurs in a market, it implies that A. P = MC at the last unit exchanged. B. the willingness of consumers to pay is equal to the producer's opportunity cost for the last unit exchanged. C. all activities that generate more benefits than costs were undertaken in that market. D. All of the above.

(D)

Which does NOT help to determine the elasticity of demand? A. The amount of time consumers have to respond to a price change. B. How much of a necessity the item is considered to be C. The number of substitutes the product has. D. The length of time it takes producers to make the product.

(D)

Which of the following is NOT an assumption of the perfectly competitive (price taker) market structure model? A. homogeneous goods B. large number of firms C. large number of buyers D. large economic profits

(D)

You go to the Farmer's Market on Saturdays because you want tomatoes that are fresher than those you get at Meijer. Farmers sell their vegetables at the Market because they have surplus they would like to get rid of to make some extra money. You act in your own self interest, the farmers act in their self interest, yet you're both made better off by going to the Farmer's Market. In economic terms, what best describes this situation? A. coordination by the invisible foot. B. coordination through city government rationing. C. coordination by the invisible handshake. D. coordination by the invisible hand.

(D)

You need to register for one more class for next spring. Your 3 options are Economics 202, Accounting 201, and Economics 391. If you decide to take Economics 202 then your opportunity cost is: A. Economics 391 B. Accounting 201 C. both Economics 391 and Accounting 201 D. Economics 391 or Accounting 201, whichever class was your second best option.

(D)

Which would most likely result in a decrease in the demand for paint? A. An increase in the price of paint B. Increased home construction C. An increase in the population D. A reduction in the price of wallpaper, a substitute for paint

(D) - A decrease in the price of a substitute will cause a decrease in demand for the other

Ben lives in Bergovia, where everyone is guaranteed the same amount of food regardless of how much they work. Jerry lives in Krogestan, where no one is guaranteed a minimum level of food. What you earn is what you eat. Which property would you expect to see when observing these countries? A. Bergovia is defined by private property rights. B. Bergovia is a capitalist society. C. In Krogestan the government decides what to produce. D. The invisible hand is the allocating mechanism in Krogestan.

(D) - The invisible hand is the allocating mechanism in Krogestan since allocations seem to be market-based and not command based.

Before considering any public project, the government should (i) compare the total cost and total benefits of the (ii) conduct a cost-benefit (iii) infer that citizens who vote for a project are willing to pay equally for

(i) and (ii) only (The government can do many things if the public are willing to pay for them)

Price Floor

- A legal minimum on the price at which a good can be sold - NOT Binding - Continue to change equilibrium price - Binding - Creates a surplus

Circular Flow Model

- A model that shows the flow of goods and services and the interaction among households, businesses, and banks - Inside Arrows = The resources - Outside Arrows = The money

Normative Statements

- A statement of opinion, cannot be proven or disproven - Opinions

Positive Statements

- A statement that can be tested, can be proven or disproven - Facts

Invisible Hand

- Adam Smith - The unseen forces that move the free market economy - Ex: A person buying a coffee, makes them and the economy better off

Command Economy

- An economy in which production, investment, prices, and incomes are determined centrally by a government - Central Planner

Market Economy

- An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services - The Invisible Hand

In a competitive market with free entry and exit

- At the end of the process of entry and exit, all firms make zero economic profit - At the end of the process of entry and exit, price is equal to average total cost - In the long run, firms operate at the efficient scale

If a firms P=$4, then which of the following is true?

- Average Revenue =$4 - Marginal Revenue =$4

Economic Decision Rule

- Benefits > Costs - Q: If a value of a cup of coffee is $5 and costs $3, do i buy it? - Q: If a value of a trip to New York is $500 and it costs $600, do I take the trip to New York?

Characteristics of perfectly competitive industries

- Consumer have complete knowledge about prices charged by each firm - Many buyers and sellers - Unrestricted entry and exit - Firms sell very similar products

Reasons to Shift Right (Determinants of Demand)

- Decrease in price of complementary good, increase in price of substitute good - Increase in income (for normal goods) - High expected future prices - Population increases

Positive Externalities

- Ex: Education, Christmas lights, Vaccines - Market under-produces positive externalities = Market Failure

Negative Externalities

- Ex: Smoking, Pollution, Traffic at 5pm - Market over-produces negative externalities = Market Failure

(Supply) Good are more ELASTIC when...

- Factors are easy to acquire - More time - Goods that can be stored over time - Available infrastructure

(Supply) Goods are more INELASTIC when...

- Factors are more difficult to acquire - Less time - Perishable goods - Not available infrastructure

Average total cost first ______ as output increases and then ________ as output increases further.

- Falls - Rises

Examples of public goods include

- Fireworks displays - National defense - The discovery of fundamental knowledge.

Examples of common resources include

- Grazing land - Clean air - Congested roads

(Demand) Goods are more INELASTIC when...

- Have less substitutes - Necessities - Goods in the short run - Broad market (chocolate bars)

Examples of a firm's profit maximizing decision rule

- If marginal revenue is greater than marginal cost, the firm should increase 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.

Reasons to Shift Left (Determinants of Demand)

- Increase in price of complementary good, decrease in price of substitute good - Increase in income (for inferior goods) - Low expected future prices - Population decreases - Change in consumer taxes

Diminishing marginal productivity...

- Occurs when the marginal product curve begins to slope downward. - Occurs when adding one more unit of the variable input reduces total product.

Monopoly Market Characterisitcs

- One seller - No substitutes (heterogenous product) - Barriers to entry (no free entry and exit) - Many buyers - Firms are price makers and price searchers (they set the price)

Shut Down Rule (Short Run)

- P<AVC (Only time the AVC curve is used)

Invisible Foot

- Political and legal forces that influence market outcomes - Ex: Government setting a legal minimum wage

Reasons to Shift Right (Determinants of Supply)

- Price of inputs decrease - Technology increases - Increase in number of firms selling good

Reasons to Shift Left (Determinants of Supply)

- Price of inputs increase - Technology decreases - Decrease in number of firms selling good - Tax - Natural Disaster

Governments can remedy this problem using _________________________ and ______________________ to limit the use of common resources.

- Regulation - Corrective taxes

Invisible Handshake

- Social and historical forces and cultural norms that influence market outcomes - Ex: Not smoking cigarettes because your parents would disapprove

A typical firm's production function gets __________ as the quantity of an input increases , displaying the property of _________________________________

- Steeper - Diminishing Marginal Product

A firm's total-cost curve gets _______ as the quantity produced _______

- Steeper - Rises

Profit Maximizing Condition

- This is the price the firms choose - MR = MC

Comparative Advantage

- Whoever has the lowest opportunity cost of producing a good - Trade - Specialization

Necessity

0 < Yd < 1

Partnership

2 or more owners

Suppose that the market equilibrium price in a perfectly competitive market is $20. Given the information about a firm in this industry found in the table above, what should the firm's output level be?

5 units of output. A profit maximizing, perfectly competitive firm will produce on output level where marginal revenue is equal to marginal cost. Since the price is equal to marginal revenue in this market structure, P = MR = $20. We need to find marginal costs from the table above. This firm will produce five units of output because this is the quantity where MR=MC=$20 or $73 - $53)

Marginal cost is

The increase in total cost resulting from a unit increase in output.

Proprietorship

A business owned by one person

You manage a company that recently opened a production facility in a southern Chinese province. Suppose a new virus has appeared in China that, when caught, leaves an individual sick for several weeks. A new vaccine has been developed that will protect people in China from the virus. Assuming China's health care system and vaccine allocation is command-orientated rather than market orientated, you can expect that...

A central planner will attempt to allocate the vaccine in a such a way that everyone will get the vaccine who needs it

Sunk Cost

A cost that has already been committed and cannot be recovered (Decisions should NEVER rely on sunk costs)

A lighthouse is an example of

A good that may either be a private or public good

An example of a free rider is...

A group project

Price Ceiling

A legal maximum on the price at which a good can be sold - NOT Binding - Continue to change equilibrium price - Binding - Creates a shortage

Tragedy of the Commons

A parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

Free Rider

A person who receives the benefit of a good but avoids paying for it

In an agency relationship between a bank manager and a bank teller, the manager is

A principal and the teller is an agent. (The principal (manager) has hired the agent (teller) to do a job. The principal-agent problem is when the teller does not do the job in the way that the manager wishes it to be done. If the teller does not do the job as he is told to or if he goofs off, we say that he is "shirking.")

Cost-Benefit Analysis

A study that compares the costs and benefits to society of providing a public good

Marginal Cost

The increase in total cost that arises from an extra unit of production

The marginal cost (MC) curve intersects the:

ATC and AVC curves at their minimum points

Mixed Economy

All economies are mixed economies

Long Run

All inputs are variable

Rhino horn is highly valued in many Asian countries. As a result, many countries in Africa are seeing declining Rhino populations and dangerous skirmishes between poachers and law enforcement. Which of the following, as an economist, would you recommend to policymakers as the best policy to save the rhino population?

Allow farmers to own and raise rhinos (If the government makes the rhinos private goods, farmers will have incentives to keep and raise them (conserve). This is similar to what has been down with cows)

Total Revenue

Also known as total sales, refers to the total income that your company generated from all sales of goods or services. - Price x Quantity

Constant Opportunity Cost (PPF)

An opportunity cost that remains the same as consumers shift purchases from one product to another along a straight-line budget line.

When both buyers and sellers DON'T have perfect information this is called ________________

Asymmetric Information - a type of market failure, trading parties may not be a position to make a rational choice

The Tragedy of the Commons will be evident when a growing number of sheep grazing on the town commons leads to a destruction of the grazing resource. To correct for this problem, the town could

Auction off a limited number of sheep-grazing permits.

A firm is producing 100 units of output at a total cost of $800. The firm's average variable cost is $5 per unit. The firm's

Average Fixed Cost is $3 TVC = 100 x 5 = $500 TC = $800 AFC = $800 - $500/100 (output) = $3

The marginal-cost curve always crosses the ___ curve at the minimum of average total cost.

Average Total Cost

Average fixed cost plus average variable cost equals

Average total cost

Suppose the Kentucky state government in Frankfort has enacted policies to influence the amount of good x that is supplied. These policies are most likely to improve the allocation of resources if good x is

Basic research (When researchers at the University of Kentucky make breakthroughs, these ideas are shared around the world)

Cozumels begins experiencing diminishing marginal returns

Between the 3rd and 4th Burrito-As-Big-As-Your-Head. (Because this is where marginal cost begins to rise)

Absolute Advantage

Whoever can produce more of a good with the same amount of resources

Alan, Betty, and Craig live in Hazard County and Dean, Ed, and Francesca live in Graves County. Alan values a new hiking trail at $200, Betty values a new hiking trail at $150 , Craig values a new hiking trail at $175, Dean values a new hiking trail at $150, Ed values a new hiking trail at $275, and Francesca values a new hiking trail at $100. A new hiking trail costs $400. According to cost-benefit analysis, where will a hiking trail be built?

Both Hazard and Graves

Economic profit accounts for

Both explicit and implicit costs.

A competitive firm's price of the good equals

Both the firm's average revenue and its marginal revenue.

The difference between production possibilities curves that are bowed out and those that are straight lines is that...

Bowed out production possibilities curves illustrate increasing opportunity cost, whereas straight-line production possibilities curves illustrate constant opportunity cost

Which of the following is an example of the free-rider problem?

Bruce owns Buster, a large dog who barks whenever anyone walks near his house. Betty lives next to Bruce, and Buster's barking can be heard whenever anyone walks near her house, too. Thus, Betty receives free protection from burglars because of Buster's barking. (Betty does not have to pay for the benefits she receives.)

Complements

Xd < 0

No relationship

Xd = 0

Subsititutes

Xd > 0

Inferior Good

Yd < 0

"Cable television signals" is a

Club good

The best way for Government to solve the "free rider" problem is to:

Collect taxes to provide services because of the non excludable nature of public goods

"Fish in the ocean" is a

Common resource

A good that is rival in consumption and not excludable is called a

Common resource

Nicholasville Road at 5PM is an example of a

Common resource/mixed good (This is because a congested non toll road, is non-excludable and rival in consumption)

Fixed Costs

Costs that do not vary with the quantity of output produced Ex: Buildings and Rent

Variable Costs

Costs that vary with the quantity of output produced Ex: Hourly wages, price of flour

Implicit Costs

Input costs that do not require an outlay of money by the firm Ex: Wages the firm owner gives up by working at the firm rather than taking another job

Explicit Costs

Input costs that require an outlay of money by the firm Ex: Wages a firm pays its workers

A good is rival if one person's use of it___________ the quantity others can use of it

Decreases

Suppose that Fayette County is considering adding a guard rail to a dangerous curve by the Kentucky river. The guard rail will cost $70,000. The average damage done to vehicles that slide off the road at the curve is $10,000. It is expected that the guard rail will prevent 5 vehicles from sliding off the road during its usable life. What should the county do?

Do not install the guard rail because the costs exceed the benefits. ( 5 x 10,000 = 50,000)

Which of the following is an example of a Tragedy of the Commons?

Dumping used grease down your sink (Clean water is a common resource, and it is difficult to monitor what people put down the drain, so when you dump grease or other materials down the drain you are using more of the common resource than if you had to pay to put grease and other materials down the drain, making less clean water for everyone else)

Suppose that in a competitive market the equilibrium price to see Jim Gaffigan at Singletary Center is $2.50. What is marginal revenue for the last ticket sold in this market?

Exactly $2.50 (The marginal revenue for each good sold by a firm in a competitive market is always equal to the price that good was sold at)

A good is ____________ if it is possible to prevent someone from using it.

Excludable

Accounting profit considers only _______ costs

Explicit

True or False - You currently manage a company that produces soccer balls and you market your product globally. You plan to expand production and export to one additional country over the next few months. You are considering country A and country B. These countries are of similar size and you expect the size of the demand for your product to be about the same in each country. However, you have been informed that the government of country A will impose a tariff on your soccer balls and the government of country B will impose a quota on the number of soccer balls you export to their country. You estimate that while both policies will reduce the number of soccer balls you sell in those countries, you will sell the same number of balls in each country. If you must select one country in which you think your company will make the biggest profit, you would be more likely to chose country A than country B.

False - As a foreign producer, you would prefer the country that uses a quota to a tariff in that with a tariff, you sell fewer unit at a higher price but must give some revenue to the government. With a quota you sell fewer units at a higher price, but get to keep all of the revenue you earn

True or False - Suppose that asymmetric information exists in a market and the product in this market has the potential for harmful side effects for consumers. From Society's viewpoint, the market output level is lower than the socially optimal output level.

False - From Society's viewpoint, the market output level is HIGHER than the socially optimal output level.

True or False - The practice of scalping generally moves the price in a market away from the true market equilibrium price.

False - It moves the price in a market toward the true market equilibrium price

True or False - The minimum wage is binding when placed below the true market equilibrium wage rate.

False - The minimum wage is binding when placed ABOVE the true market equilibrium wage rate.

True or False - A hard freeze in Florida that destroys 50% of the orange crop would cause the orange juice supply curve to shift to the RIGHT

False - This natural disaster will cause a reduction in supply which shifts the supply curve to the left

In the long run when the firm can recover both fixed and variable costs

It will choose to exit if the price is less than average total cost

Luxury Good

Yd > 1

Figure 1 shows the perfectly competitive market a certain firm faces. What do you expect to happen in the long run?

Firms will enter and all firms will make zero profit (Because this is a perfectly competitive market, there will be zero economic profit in the long run. When there is positive profit firms will enter the market and when there is negative profit firms will exit the market, so that in the long run, there is zero economic profit)

Fixed or Variable: Event Rental Space

Fixed

Fixed or Variable: Invitations

Fixed

Fixed or Variable: Photographer Fees

Fixed

Short Run

Fixed and Variable Inputs

Average Fixed Cost

Fixed cost divided by the quantity of output

Private Goods

Goods that are both excludable and rival in consumption Ex: Clothing, Icecream cones

Club Goods

Goods that are excludable but not rival in consumption Ex: Cable and Disney +

Public Goods

Goods that are neither excludable nor rival in consumption Ex: National Defense and Public High School Education

Common Resources

Goods that are rival in consumption but not excludable - Ex: Fish environment - Tragedy of the Commons

Inferior Goods

Goods that consumers demand LESS of when their incomes RISE

Normal Goods

Goods that consumers demand MORE of when their incomes RISE

Consider a good for which the number of people who benefit from the good is large and the exclusion of any one of those people is impossible. In this case, the market for this good will likely

Have a free rider problem

In a competitive market, the actions of any single buyer or seller will

Have a minor impact on the market price

Which of the following is NOT a reason that a firm may experience economies of scale? - High fixed costs - Quantity discounts - Learning by doing - High variable costs

High variable costs (High variable costs may lead to diseconomies of scale if it is increasing with an increase in output. The other choices are all reasons why a firm may experience economies of scale)

The entry of new firms into a competitive market will

Increase market supply and decrease market price.

Suppose you manage a distillery that produces a high end "designer" beer and a low end "discount" beer. You find that the consumer demand for your "designer" beer is relatively more inelastic to changes in price than the consumer demand of your "low income" beer. In fact |Ed| = .4 for the designer beer and |Ed| = 1.2 for the discount beer. If your goal is to increase total revenue from beer sales, which of the following would be your best strategy?

Increase the price of your high end beer and decrease the price of your low end beer

Don Franklin recently bought the Hyundai dealership in Lexington, which of the following is not a variable cost he will face when running his business? - Hiring salespeople - Making payments on the facility - Purchasing complementary beverages for service customers - Purchasing inventory

Making payments on the facility (Each of the other options are variable costs because he can adjust them in the short run as the market fluctuates. Facility payments (rent) is a fixed cost because he cannot change the amount of his payments in the short run. Only in the long run can he adjust his payments on the facility)

The principal-agent problem describes a situation where:

Managers follow their own inclinations, which often differ from the aims of shareholders

The firm's supply curve is its

Marginal cost curve, at all points above the minimum average variable cost curve.

A change in price is a _________

Movement

A change in quantity demanded or supplied is a ___________ along the curve

Movement

If average product is decreasing, then marginal product...

Must be less than average product.

Which would be an implicit cost for a firm? The cost:

Of wages foregone by the owner of the firm.

If there is a permanent increase (shift) in market demand, what will happen in a competitive market in the long run?

Overall market quantity increases, price stays the same

Corporation

Owned by multiple shareholders

Loss

P < ATC

Break Even

P = ATC

Profit

P > ATC

A good is excludable if

People can be prevented from using it

A market functions smoothly if both buyers and sellers have

Perfect information and behave rationally

Inefficient PPF

Point C, what is inside of the curve

Unattainable PPF

Point E, above the curve

Efficient PPF

Points B, D, C

Markets work best for ___________ goods, which are both excludable and rival in consumption.

Private - Markets do not work as well for other types of goods.

What is a "hot dog sold at a stand owned by the city government"

Private good

Governments can improve the allocation of resources by

Providing public goods and deciding the quantity of each good using cost-benefit analysis.

What is "basic research on lifestyle and cholesterol levels"

Public good

For a typical firm, marginal cost rises with the ________________________

Quantity of output

In the short run, an increase in demand

Raises prices and leads to profits, and a decrease in demand lowers prices and leads to losses

A good is ______________________ if one person's use of the good reduces others' ability to use the same unit of the good.

Rival in consumption

A common resource is

Rival in consumption and not excludable

A change in demand or supply is a ________

Shift

Which of the following is a "long run" production decision?

Should we open a new branch office of our business in another city?

Scenario 1: Converse has been fairly successful selling denim colored UK sportswear. Lydia, wanting to get in on the profit, has also entered this market. After producing her profit maximizing level of output she finds that her average total cost per unit is $40, her average variable cost per unit is $30, and her selling price (forced upon her by the market), is $35. In the short run my grandmother should:

Stay in business even though she is suffering a loss. (According to the shut down rule, Lydia should stay in business in the short run evening though she is suffering a loss because she is covering part of her fixed costs of production)

Tax Incidence

The actual division of the burden of a tax between buyers and sellers in a market - Consumer bears change in price ($13 - $10 = $3)

Marginal Product

The change in total product when an additional unit is added

Marginal Revenue

The change in total revenue from an additional unit sold

Which of the following best represents a long run adjustment: - The hiring of four additional cashiers by a supermarket. - The construction by an automobile manufacturer of a new plant to produce small cars. - The extra dose of fertilizer used by a farmer on his wheat crop. - A cutback on purchases of coke and iron ore by a steel manufacturer.

The construction by an automobile manufacturer of a new plant to produce small cars.

In the short run when a firm cannot recover its fixed costs

The firm will choose to shut down temporarily if the price of the good is less than average variable cost

Which of the following is a disadvantage of government provision of a public good?

The government lacks information about what people are willing to pay for the good. (Prices are information, and without prices, there is no information about consumer willingness to pay)

Marginal Product

The increase in output that arises from an additional unit of input

Marginal Cost is

The increase in total cost resulting from a one-unit increase in output.

Total Cost

The market value of the inputs a firm uses in production - Fixed cost plus variable costs

If firms can freely enter and exit the market, then in the long run

The number of firms adjusts to drive the market back to the zero-profit equilibrium.

Excludability

The property of a good whereby a person can be prevented from using it

Rivalry in Consumption

The property of a good whereby one person's use diminishes other people's use

Economies of Scale

The property whereby long-run average total cost falls as the quantity of output increases

Diseconomies of Scale

The property whereby long-run average total cost rises as the quantity of output increases

Constant Returns to Scale

The property whereby long-run average total cost stays the same as the quantity of output changes

Diminishing Marginal Product

The property whereby the marginal product of an input declines as the quantity of the input increases

Efficient Scale

The quantity of output that minimizes average total cost

Production Function

The relationship between the quantity of inputs used to make a good and the quantity of output of that good

Total Product

The total output that is produced from the fixed and variable inputs

A short-run production function assumes that...

The usage of at least one input is fixed

During the summer many businesses in Lexington stay open even though they are largely empty. Why is this?

Their variable costs are covered if they stay open (If a firm can cover their variable costs, it is profitable to stay open in the short run. This is an application of the shut down rule. If they cover variable costs, any additional revenue helps them cover some of their fixed costs. Sometimes profit maximization implies loss minimization. The business is suffering a loss, but the loss would be even greater if they shut down. Only in the long run if they cannot cover their total costs will they shut down)

Which of the following is not a club good? - Fire protection - Cable TV - Uncongested toll roads - Tornado siren

Tornado siren (Tornado sirens are not excludable and non-rival in consumption so they are a public good)

Average total cost is _____________ per unit of output

Total cost

Average Total Cost

Total cost divided by the quantity of output

When marginal product is rising we know that

Total product is increasing at an increasing rate.

Average Product

Total product/number of inputs

Average Revenue

Total revenue divided by the quantity sold

Profit

Total revenue minus total cost

Economic Profit

Total revenue minus total cost, including both explicit and implicit costs

Accounting Profit

Total revenue minus total explicit cost

True or False - Aziz decides to enroll in an organic chemistry course. By the end of the semester he ends up failing the course. Despite this negative outcome, an economist would still say that Aziz was "rational" when making his decision to enroll in the course.

True

True or False - Bob would have to be paid $100 to be willing to shave his head. Ann would have to be paid $1,000 to be willing to shave her head. George would have to be paid $200 to be willing to shave his head. If I pay $200 to any of the three students willing to shave their heads, the total amount of producer surplus that will result is $100.

True

True or False - Labor services provided by the firm's owner without reimbursement to the owner are a good example of an implicit cost of business for a firm.

True

True or False - The current, federally mandated minimum wage is $7.25 per hour.

True

True or False - If Coke and Pepsi are substitutes in consumption, then when the price of Coke rises, the demand curve for Pepsi will shift to the right

True (As Coke becomes more expensive some consumers will substitute toward Pepsi)

True or False - Ricardo's PPF for the production of birdhouses (B) and doghouses (D) is represented by the equation B = 8 - 2D. This equation implies that, for Ricardo, the opportunity cost of one doghouse is two birdhouses

True (The slope of the equation tells us that when dog house production increases by 1, bird house production falls by 2)

True or False - The demand for Hershey's chocolate bars will be more elastic than the demand for chocolate candy

True - The more narrow the product classification, the greater the elasticity because the more narrowly defined product will have a broader range of possible substitutes

Because people are not charged for their use of common resources, they tend to

Use them excessively

Fixed or Variable: Food and Drink

Variable

Fixed or Variable: Print material and swag for attendees

Variable

Average Variable Cost

Variable cost divided by the quantity of output

It is commonly argued that national defense is a public good. Nevertheless, the weapons used by the U.S. military are produced by private firms. We can conclude that

Weapons are rival in consumption and excludable, but national defense is not rival in consumption and not excludable.

Increasing Opportunity Costs (PPF)

When each additional unit of one good produced requires the sacrifice of increasing amounts of the other good

Competitive Market

Where there are numerous producers that compete with one another in hopes to provide goods and services we, as consumers, want and need. In other words, not one single producer can dictate the market. Also, like producers, not one consumer can dictate the market either.

Since there are firms constantly entering and leaving in the LONG RUN, there is _______ economic profit

Zero

Inelastic

|Ed| < 1

Unit Elastic

|Ed| = 1

Elastic

|Ed| > 1