Econ Test 3 & 4
external cost
A cost imposed on bystanders.
nonrival goods
A good for which one person's use doesn't subtract from another's.
too few
When quantity is restricted to 2000 units, the deadweight loss is created because ___ resources are used to supply this product.
free-rider problem
When someone can enjoy the benefits of a good without bearing the costs.
nonexcludable
When someone cannot be easily excluded from using something.
d) deadweight loss.
When the economic surplus in a market is less than it would be if the market were efficient, the market is experiencing: a) an inverse externality. b) a situation in which marginal benefit equals marginal cost. c) asymmetry problems. d) deadweight loss.
c) economists call this a market failure.
When the forces of supply and demand lead to an inefficient outcome a) the economic surplus is maximized. b) economists call this a deadweight loss. c) economists call this a market failure. d) it is a signal that the government needs to take ownership of that market including all the resources involved.
c) the economic surplus.
The marginal benefit minus the marginal cost equals: a) the consumer surplus. b) the efficiency balance. c) the economic surplus. d) the consumer surplus minus the producer surplus.
c) the law of diminishing returns.
The marginal cost curve often decreases at first and then starts to increase. This is explained by a) increasing ATC. b) economies of scale. c) the law of diminishing returns.
1000
The maximum value of surplus that this market can generate is $__. how to: ((8-3)=$5) x 400 units x 1/2
world price
The price that a product sells for in the global market.
Government provision
Where positive externalities are extremely large, the government may decide to provide the product for free to everyone.
average variable cost
variable cost divided by the quantity of output
decrease quantity
If MC> MR:
optimal quantity
If MR=MC:
increase quantity
If MR>MC:
deadweight loss
The lost surplus form inefficient allocation of resources
AVC is rising
When marginal cost is above AVC?
AVC is falling
When marginal cost is below AVC?
Accounting profit
total revenue- total accounting costs
Profit
total revenue- total cost Maximize profit when MR=MC
Economic profit
total revenue-total opportunity cost
external benefit
A benefit accruing to bystanders.
d) nonrival
A good is characterized as _____ when one person's use of the good does not reduce another person's ability to use the same unit of the good. a) free b) shareable c) nonexcludable d) nonrival
common resources
A good that is rival and also nonexcludable.
d) tax on imported products.
A tariff is a: a) limit on the quantity of a good that can be exported. b) limit on the quantity of a good that can be imported. c) tax on exported products. d) tax on imported products.
costs in the long run
All costs are variable Diminishing marginal returns for labor and capital
long run
All factors are variable
marginal social benefit
All marginal benefits, no matter who gets them = Marginal private benefit + marginal external benefit.
voluntary exchange
Buyers and sellers exchange money for goods only if they both want to.
efficient quantity
CS+PS
Marketable permits
Cap and trade Patients
perfect competition
Identical product Many competitors No barriers to entry No control over price (price-taker)
sum of all MC for all producers
If no production externalities: Marginal Private Cost MPC=
ATC
TC/Q or AFC+AVC
insight three
The right tool depends on what you're uncertain about.
c) a tax of 5% of the value of each Honda scooter imported from Japan
Which is an example of a tariff? a) a regulation specifying that each imported Honda scooter must meet certain emission exhaust guidelines b) a limit on the total number of Honda scooters imported from Japan c) a tax of 5% of the value of each Honda scooter imported from Japan d) a tax of $250 on each Honda scooter produced in the United States
MC> MB
Which of the following describes the reason that deadweight loss is created when quantity is set at 600 gallons?
d) an online course
Which of the following goods would be nonrival? a) toothpaste b) gasoline c) a candy bar d) an online course
distributional consequences
Who gets what.
rational rule for entry
You should enter a market if you expect to earn a positive economic profit, which occurs when the price exceeds your average cost.
production technologies
alternative methods of combining inputs to produce output
collusion
an agreement to limit competition; typically, an agreement by rivals to not compete with each other, but to all charge high prices instead
Private bargaining
can internalize the external effects, resulting in efficient solutions Requires clear property rights Coase theorem
variable costs
change with output
fixed costs
do not change with output
fixed cost
expenditure that must be made before production starts and that does not change regardless of the level of production
allocative efficiency
marginal benefit = marginal cost
group pricing
price discrimination by charging different prices to different groups of people
coordination game
when all players have a common interest in coordinating their choices
gains from trade
how can we measure the impact of international trade on the domestic economy
a) $200,000.
(Figure: Market for Pants) According to the figure, if there is international trade in this market, and the world price of a pair of pants is $30, the value of the domestic producer surplus is: a) $200,000. b) $800,000. c) $400,000. d) $1,600,000.
a) X + Y + Z.
(Figure: The Market for Apple Computers in the United States) Use Figure: The Market for Apple Computers in the United States. Assume that PA is the domestic equilibrium price without trade and PW is the world price. Producer surplus with international trade would be area: a) X + Y + Z. b) W + X + Y. c) X + Y. d) Y.
tariff
A tax on imported goods
economic efficiency
An outcome is more economically efficient if it yields more economic surplus.
consumer's demand
Ineffective private market: MSB=MPB+MEB Marginal benefit (MB)=
shutdown point
MR=AVC
Constant Opportunity Cost
PPF is a straight line Used when resources are homogeneous
reason backward
Start by analyzing the last period of the game. Use this to figure what will happen in the second-to-last period, and keep reasoning backward until you can see all the consequences that follow from today's decision.
economic surplus
The total benefits minus total costs flowing from a decision.
accounting profit
The total revenue a business receives, less its explicit financial costs; Accounting profit = Total revenue − Explicit financial costs.
import
To buy goods or services from foreign sellers.
imports
consumer gain
Negative consumption externality
decreased social benefit from consumption ex: Second-hand smoke
public goods
nonrival and nonexcludable
domestic consumers
who pays the tariff?: statutory burden
externalities
why does the public sector provide non-public goods
free-rider problem
why does the public sector provide public goods?
Marginal cost
ΔTC/ΔTP= ΔTC/ΔOutput
absolute advantage
(productivity) the ability to produce a good using fewer inputs than another producer
a) no player has an incentive to unilaterally change strategies.
A Nash equilibrium occurs when a) no player has an incentive to unilaterally change strategies. b) each player has an incentive to unilaterally change strategies. c) both players can cooperate to increase their payoffs. d) no player can earn a higher payoff from any other strategy.
efficient allocation
Allocating goods to create the largest economic surplus, which requires that each good goes to the person who'll get the highest marginal benefit from it.
positive analysis
Describes what is happening, explaining why, or predicting what will happen.
consumer's demand
If no consumption externalities: Market demand = sum of consumer's MB Marginal benefit (MB)=
DWL underproduction
MB> MC of transactions
marginal revenue
The addition to total revenue you get from selling one more unit.
efficient quantity
The quantity that produces the largest possible economic surplus.
payoff table
a table that lists your choices in each row, the other player's choices in each column, and so shows all possible outcomes, listing the payoffs in each cell
Nash Equilibrium
an equilibrium in which the choice that each player makes is a best response to the choices other players are making
Quotas
an move the market to the efficient equilibrium Quantity is reduced and price increases to the efficient point A ______ is an inefficient private market can eliminate deadweight loss
moving to an efficient outcome (policies to increase quantity)
private bargaining corrective taxes and subsides marketable permits government t=regulations (requirements and quotas) government provision
exports
producer gain
average profit
profit divided by the quantity of output produced; profit margin
price, average cost
profit= (________) x (quantity)-(___________) x (quantity)
private goods
rival and excludable
bundling
selling different goods together as a package
price discrimination
selling the same good at different prices
average total cost
total cost divided by the quantity of output
Total cost
total fixed + variable cost
profit
total revenue-total costs
quantity discount
when the per-unit price is lower when you buy a larger quantity
multiple equilibria
when there is more than one equilibrium
finitely repeated game
when you face the same strategic interaction a fixed number of times
indefinitely repeated game
when you face the same strategic interaction an unknown number of times
repeated game
when you face the same strategic interaction with the same rivals and the same payoffs in successive periods
anti-coordination game
when your best response is to take a different (but complementary) action to the other player
market organization
where consumers and suppliers come together to buy/sell a product
domestic consumers (for a small country)
who pays the tariff?: economic burden
a) $1,250,000.
(Figure: Market for Pants) According to the figure, if there is international trade in this market, and the world price of a pair of pants is $40, the value of the consumer surplus is: a) $1,250,000. b) $800,000. c) $2,500,000. d) $1,600,000.
a) a decrease; an increase
(Figure: Market for Pants) Suppose that the world price of a pair of pants is $40. According to the figure, international trade will lead to _____ in the domestic producer surplus and _____ in the domestic consumer surplus. a) a decrease; an increase b) a decrease; a decrease c) an increase; a decrease d) an increase; an increase
increases by $2.5 million.
(Figure: The Market for Apple AirPods) Use Figure: The Market for Apple AirPods. Suppose a country opens up to free trade. If the world price of Apple AirPods is $120, producer surplus: a) decreases by $1.5 million. b) increases by $2.5 million. c) increases by $750,000. d) decreases by $2.5 million.
b) W.
(Figure: The Market for Apple Computers in the United States) Use Figure: The Market for Apple Computers in the United States. Assume that PA is the domestic equilibrium price without trade and PW is the world price. Consumer surplus with international trade is area: a) W + X + Y. b) W. c) Y. d) W + X.
d) W + X.
(Figure: The Market for Apple Computers in the United States) Use Figure: The Market for Apple Computers in the United States. Assume that PA is the domestic equilibrium price without trade and PW is the world price. Consumer surplus without international trade would be area: a) W + X + Y. b) W. c) Y. d) W + X.
d) Y.
(Figure: The Market for Apple Computers in the United States) Use Figure: The Market for Apple Computers in the United States. Assume that PA is the domestic equilibrium price without trade and PW is the world price. Producer surplus without international trade would be area: a) X + Y + Z. b) W + X + Y. c) X + Y. d) Y.
a) someone can enjoy the benefits of the good without bearing the costs.
A good has a free-rider problem when: a) someone can enjoy the benefits of the good without bearing the costs. b) it can be transported at no cost to the consumer, with sellers bearing all transportation costs. c) any seller provides it for free as a special promotion. id) t has no negative externalities but only positive externalities.
club good
A good that is excludable, but nonrival in consumption.
b) normative; positive; normative
A government leader determines that the 5% unemployment rate is too high. She asks her staff to research policy options to reduce the rate and a few weeks later is given four options. Each option would reduce the rate by a different amount and at a different cost. The leader studies the options and chooses the one she feels is best for the country. In order, what types of analysis were used in this three-stage chain of events? a) positive; positive; normative b) normative; positive; normative c) positive; normative; positive d) normative, positive; positive
d) Although enjoying the exhibits might be nonrival, the experience is excludable because admittance could easily be limited to those who pay.
A government uses taxes to build and maintain a museum, and citizens can visit the museum without paying an admission fee. Which of the following considerations implies that visiting a museum is NOT a public good? a) Visiting a museum is both nonexcludable and nonrival, which means it is not a public good. b) Although admittance is nonexcludable, it is rival because other museums are vying for consumers to visit them instead. c) Visiting a museum is both excludable and rival, which means it is not a public good. d) Although enjoying the exhibits might be nonrival, the experience is excludable because admittance could easily be limited to those who pay.
natural monopoly
A market in which it is cheapest for a single business to service the market.
monopolistic competition
A market with many small businesses competing, each selling differentiated products.
oligopoly
A market with only a handful of large sellers.
d) the economic surplus at the efficient quantity minus the economic surplus at the actual quantity.
A market's deadweight loss is calculated as: a) the economic loss that a firm has when it is not producing its profit-maximizing output. b) the price at equilibrium minus the price at actual quantity. c) the loss to consumers when a product malfunctions or fails to meet expectations. d) the economic surplus at the efficient quantity minus the economic surplus at the actual quantity.
prune the tree method
A method for solving game trees: Start by looking forward to the final period and highlighting out your rival's best responses, then prune the options the rival would never choose—the "dead leaves"—off your game tree.
d) many firms with no control over the market price producing identical products.
A perfectly competitive industry is characterized by a) many firms with control over the market price producing differentiated products. b) a single firm with limited control over the market price producing a product with many close substitutes. c) a single firm with control over the market price producing a product with no close substitutes. d) many firms with no control over the market price producing identical products.
b) lowest; a comparative advantage in the production of that good
A person that has the _____ opportunity cost of producing a particular good is said to have _____. a) lowest; an absolute advantage in the production of that good b) lowest; a comparative advantage in the production of that good c) highest; a production possibility frontier d) highest; increasing opportunity costs in the production of that good
d) reducing; the price is above its marginal cost
A price-discriminating company can attract more customers by _____ price, as long as _____. a) raising; new customers are convinced to pay the price b) raising; the price is above marginal benefit and below marginal cost c) reducing; the price is above marginal benefit and below marginal cost d) reducing; the price is above its marginal cost
cap and trade
A quantity regulation implemented by allocating a fixed number of permits, which can then be traded.
one-shot game
A strategic interaction that occurs only once
d) increases; increases
A tariff _____ the price received by domestic producers and _____ the price paid by domestic consumers. a) decreases; increases b) increases; decreases c) decreases; decreases d) increases; increases
incentives
A tax can movie the market to the efficient equilibrium Quantity is reduced and price increases to the efficient point In an inefficient private market this can eliminate deadweight loss
tariff
A tax on imported products.
collusion
An agreement to limit competition; typically, an agreement by rivals to not compete with each other, but to all charge high prices instead.
switching costs
An impediment that makes it costly for customers to switch to buying from another business.
firm's demand curve
An individual firm's demand curve, summarizes the quantity that buyers demand from an individual firm as it changes its price.
equity
An outcome yields greater equity if it results in a fairer distribution of economic benefits.
d)positive
Analysis that describes what would happen if various actions were taken is _____ analysis. a)valuation b)normative c)partitioning d)positive
b) fall.
As output rises, average fixed costs: a) rise. b) fall. c) fall and then rise. d) remain constant.
equal to, less, more
At the equilibrium quantity, marginal benefit is equal to ________ marginal cost. Consuming less ____________ means that some mutually beneficial exchanges do not take place, and producing more ___________ means that some goods go unsold.
a) quantity discount.
Bayside Shoe Shop offers a BOGO (buy one, get one) special where customers can buy one pair at full price and get another pair at half-price. This form of price discrimination is referred to as a) quantity discount. b) fluctuating prices. c) bad service. d) group pricing.
b) overproduce.
By contrast with a market that produces the socially optimal output, a market with negative externalities will: a) underproduce. b) overproduce. c) produce the correct output. d) produce no output.
b) $0
Chin purchases five protein bars at a price of $3 each. The marginal benefit he receives from each bar is $5 for the first bar, $4.50 for the second bar, $4 for the third bar, $3.50 for the fourth bar, and $3 for the fifth bar. The marginal cost of producing the bars is $2 each. What is Chin's consumer surplus on the fifth bar? a) $.50 b) $0 c) $1 d) $2
c) $5
Chin purchases five protein bars at a price of $3 each. The marginal benefit he receives from each bar is $5 for the first bar, $4.50 for the second bar, $4 for the third bar, $3.50 for the fourth bar, and $3 for the fifth bar. The marginal cost of producing the bars is $2.50 each. What is Chin's total consumer surplus from the five bars that he purchased? a) $0 b) $2.50 c) $5 d) $.50
Incentives (tax and subsidies)
Cigarette taz School vouchers Subsidized housing
non rival goods
Consumption or use by one person DOES NOT decrease the consumption available for others
rival goods
Consumption or use by one person decreases the consumption available for others Ex: cookie
average cost
Cost per unit, calculated as your firm's total costs (including fixed and variable costs) divided by the quantity produced.
b) high; low
Countries benefit from trade by importing goods in which their opportunity costs are relatively _____ and exporting goods in which their opportunity costs are relatively _____. a) high; high b) high; low c) low; low d) low; high
c) comparative advantage; export
Countries that engage in trade will tend to specialize in goods in which they have a(n) _____ and will _____ those goods. a) comparative advantage; import b) absolute advantage; export c) comparative advantage; export d) economic profit; import
number of competitors
Determined by both supply and demand conditions Supply conditions Economies of scale Demand conditions Preferences Number of consumers
insight one
Don't intervene if you don't need to.
Non-public goods
Education Healthcare Health insurance Flood insurance Bridges, roads, and ports Public housing National parks
consumer's demand
Effective private market: MSB=MPB+0 Marginal benefit (MB)=
0
Effective private market: MSB=MPB+0 Marginal external benefit (MEB)=
MPB+MEB
Effective private market: MSB=MPB+0 Marginal social benefit (MSB)=
producer's supply
Efficient private market: MSC=MPC+0 Marginal cost MC
0
Efficient private market: MSC=MPC+0 Marginal external cost MEC=
product differentiation
Efforts by sellers to make their products differ from those of their competitors.
Establish clear property rights
Enables private bargaining (coase theorem)
rational rule for exit
Exit the market if you expect to earn a negative economic profit, which occurs if the price is less than your average costs.
economic profit
Explicit and implicit costs Cash and non-cash outlay Normal rate of return Opportunity cost
accounting profits
Explicit costs Cash outlay
c)their own costs and benefits; the effects of their actions on others
Externalities tend to occur because decision makers consider _____ and do NOT consider _____. a) their own income as limitless; their income as limited b) the welfare of others; their own welfare c)their own costs and benefits; the effects of their actions on others d) their own needs as most important; the fact that others also have needs
specialization
Focusing on specific tasks.
free rider problem
For a group, the problem of people not joining because they can benefit from the group's activities without joining.
a) $0
If 18 units are sold at a price of $20, what is the producer surplus on the last jar sold? a) $0 b) $15 c) $270 d) $135
b) export lumber.
If a country's domestic price of lumber is below the world price of lumber, the country will likely: a) import lumber. b) export lumber. c) have an absolute advantage in lumber production. d) have a surplus of lumber.
market supply
If no production externalities: Marginal social cost MSC=
sum of supplier's MC
If no production externalities: marginal social cost
Grim Trigger Strategy
If the other players have cooperated in all previous rounds, you will cooperate. But if any player has defected in the past, you will defect.
check mark method
If you put a check mark next to each players' best response, then an outcome with a check mark from each player is a Nash equilibrium
a) above the price and below the demand curve.
In a market graph, consumer surplus is the area: a) above the price and below the demand curve. b) below the demand curve. c) between the demand curve and the supply curve. d) above the price.
a) be underproduced.
In a market system, public goods would: a) be underproduced. b) have no costs. c) lack demand. d) be overproduced.
a) Germany has a comparative advantage in raising wheat.
In a single year, Germany can raise 100 tons of wheat or produce 1,000 boxes of daisies. In the same growing season, France can raise 50 tons of wheat or produce 750 boxes of daisies. From this information, we know that: a) Germany has a comparative advantage in raising wheat. b) Germany has a comparative advantage in raising daisies. c) France has a comparative advantage in raising wheat. d) France has an absolute advantage in raising wheat.
c) stay the same in France
In a single year, Germany can raise 100 tons of wheat or produce 1,000 boxes of daisies. In the same growing season, France can raise 50 tons of wheat or produce 750 boxes of daisies. When the two countries begin trading wheat for daisies, the total surplus from wheat consumption and production can be expected to: a) fall in Germany. b) rise in Germany. c) stay the same in France. d) either rise or fall in France.
ECONOMIC PROFIT
In economics, "profit" ALWAYS refers to _____________ because we are interested in the OPPORTUNITY COST of scarce resources
d) the marginal social benefit exceeds the marginal social cost.
In order to maximize economic efficiency society should produce another unit of a good if: a) gains to the producer exceed losses to the producer. b) the total social benefit exceeds the total social cost. c) the marginal private benefit exceeds the marginal private cost. d) the marginal social benefit exceeds the marginal social cost.
MPB+MEB
Ineffective private market: MSB=MPB+MEB Marginal social benefit (MSB)=
DWL of overproduction
MC> MB of transactions
c) the change in total costs from producing one more unit of output.
Marginal cost is defined as a) total cost divided by total output. b) total variable cost divided by total output. c) the change in total costs from producing one more unit of output. d) the change in fixed cost from producing one more unit of output.
an externality.
Marjean walks to work every day along a busy road. As she does so, she breathes in the fumes of many cars, often arriving at work coughing. The economic term for the impact of the cars on Marjean is: a) an externality. b) a nonmarket repercussion. c) exploitative supply. d) an alternative action.
perfect competition
Markets in which 1) all firms in an industry sell an identical good; and 2) there are many buyers and sellers, each of whom is small relative to the size of the market.
Government provision Regulation (requirements and quotas) Incentives (tax and subsidies) Marketable permits Patients Establish clear property rights
Moving to an efficient outcome (most to least government interference)
public goods
National defense Local security Legal system Street lamps Lighthouse
tragedy of the commons
Negative consumptions externality for common resources Ex: overfishing
short run
Not all factors are variable
barriers to entry
Obstacles that make it difficult for new firms to enter a market.
barriers to market entry
Obstacles that make it difficult for new suppliers to begin providing a product or service Large start-up costs Patents Licenses and certifications Quotas
a) the existence of at least one fixed input.
One thing that distinguishes the short run and the long run is a) the existence of at least one fixed input. b) opportunity costs. c) the number of months considered. d) the existence of marginal costs.
b) at a price below the value of the benefit they receive from the item.
People gain consumer surplus when they purchase an item: a) at an equitable price. b) at a price below the value of the benefit they receive from the item. c) with a marginal benefit below the price of the item. d) at a price above marginal revenue but lower than the cost of production.
b) each customer a price equal to his or her maximum willingness to pay.
Perfect price discrimination is characterized by charging a) different prices to customers based on when they purchase the good or service. b) each customer a price equal to his or her maximum willingness to pay. c) customers a different price, depending on their income. d) customers a different price, depending on their gender. e) prices that are different from competitors' prices.
c) $6.
Portia produces and sells headbands. Her marginal cost for one headband is $6, and her average cost is $4. She gains producer surplus only when she sells headbands at a price above: a) $5. b) $4. c) $6. d) $10.
a) the product cannot be resold.
Price discrimination can be successful only if a) the product cannot be resold. b) there are many sellers. c) the company lacks market power. d) the market is highly competitive.
d) a more efficient output
Price discrimination leads to _____ than a one-price system. a) a lower average price b) a lower average cost c) fewer buyers d) a more efficient output
profit margin
Profits per unit sold; Profit margin = Average revenue − Average cost.
Government provision
Public schools
average revenue
Revenue per unit, calculated as total revenue divided by the quantity supplied. Average revenue is equal to the price, if you charge everyone the same price.
Rent seeking behavior
Seeking economic rents (economic profit or surplus) without engaging in productive activity) Additional source of DWL
rational rule for sellers
Sell one more item if the marginal revenue is greater than (or equal to) marginal cost.
d) reservation price
Selling alternative versions of a product at different prices is a way to identify the _____ of customers and charge them different prices. a) marginal cost b) size of the population c) observable differences d) reservation price
a) normative
Statements about what option should be chosen are _____ statements. a)normative b)assessment c)valuation d)positive
Anca
Suppose there is one ticket left for tonight's performance of Hamilton on Broadway. The ticket costs $700. Sean is a community college student and has been saving his tips from his waiting job for months to see the show. He is willing to pay $705 for the ticket. Anca has seen Hamilton five times already but wants to see it again before heading to Europe for a month. She is willing to pay $1,250 for the ticket. ___________buying the ticket leads to a more economically efficient outcome?
False
T/F: Market failure can occur only in the presence of external costs.
true
T/F: Market failure can occur only in the presence of external costs.
true
T/F: Market failure occurs when a free market provides a suboptimal quantity of goods and services.
false
T/F: Market failure occurs when external benefits but not when external costs are present.
false
T/F: Market failure occurs when external costs but not when external benefits are present
true
T/F: Market failure occurs when external costs or benefits are present.
monopoly
TR=P*Q Price is not constant Price and quantity move together
positive, third parties, little
Technological advancements are considered a _________ externality because __________ receive the majority of the benefits. Too ______ of this type of externality is usually provided.
gains from trade
The benefits that come from reallocating resources, goods, and services to better uses.
market power
The extent to which a seller can charge a higher price without losing many sales to competing businesses.
a) 6; $6
The graph shows the marginal social cost, demand, and supply curves in the jigsaw puzzle market. If market forces prevail, this market will produce and sell _____ units of output at a price of _____. a) 6; $6 b) 6; $8 c) 8; $4 d) 4; $8
b) 4; $8
The graph shows the marginal social cost, demand, and supply curves in the jigsaw puzzle market. What are the socially optimal quantity and price in this market? a) 8; $4 b) 4; $8 c) 6; $6 d) 6; $10
d) 8
The graph shows the marginal social cost, supply, and demand curves in the hand sanitizer market. At what quantity could the government set a quota to control this externality? a) 12 b) 2 c) 4 d) 8
short run
The horizon over which the production capacity, and the number and type of competitors you face, cannot change.
long run
The horizon over which you, or your rivals, may expand or contract production capacity, and new rivals may enter the market or existing firms may exit.
c) during which all inputs can be varied.
The long run is best defined as a time period a) that is longer than one year. b) during which at least one input cannot be changed. c) during which all inputs can be varied. d) during which consumer income change.
a) price minus marginal cost.
The producer surplus on a unit sold equals: a) price minus marginal cost. b) marginal benefit minus price. c) (price minus marginal cost) multiplied by (1/2 quantity sold). d) 1/2 (price times quantity minus marginal cost).
second-mover advantage
The strategic advantage that can follow from taking an action that adapts to your rival's choice
tragedy for the commons
The tendency to overconsume a common resource.
economic profit
The total revenue a firm receives, less both explicit financial costs and the entrepreneur's implicit opportunity costs; Economic profit = Total revenue − Explicit financial costs − Entrepreneur's implicit opportunity costs.
d) tendency to overconsume common resources.
The tragedy of the commons is the: a) destruction of rival, excludable goods. b) tendency to underconsume common resources. c) destruction of nonrival, nonexcludable goods. d) tendency to overconsume common resources.
b) forgone wages and forgone interest.
The two main types of implicit opportunity costs are: a) bills paid and forgone wages. b) forgone wages and forgone interest. c) earned wages and earned interest. d) bills paid and revenue forgone.
product types
Undifferentiated product Differentiated product No close substitutes
Regulation (requirements and quotas)
Vaccination required to attend school Ban on smoking indoors Drinking age limits
marginal costs
What does the production of one more unit add to cost? MC=ΔTC/ΔOutput
marginal revenue
What does the sale of one more unit add to revenue? For competitive firms, MR=ΔTR/ΔOutput=price
a) Markets
What institution allows people to gain access to others who have different comparative advantages without meeting them or communicating directly with them? a) Markets b) Families c) Government d) Community gatherings
c) Markets reallocate resources, goods, and services to better uses.
What is the function of markets? a) Markets sell goods to make use of inputs. b) Markets create demand to earn profits. c) Markets reallocate resources, goods, and services to better uses. d) Markets produce output to cover costs.
d) private goods
What type of good is rival and excludable? a) public goods b) club goods c) common resources d) private goods
MC=AVC
When AVC is at the minimum?
d) 100%; 100%
When a small country imposes a tariff on an imported good, domestic consumers bear __________ of the statutory burden and ______________ of the economic burden of the tariff. a) 100%; 0% b) 0%; 100% c) 50%; 50% d) 100%; 100%
b) some sellers will exit the market, reducing average seller losses.
When firms in a market with free entry and exit experience economic losses, then: a) new sellers will enter the market, reducing average seller losses. b) some sellers will exit the market, reducing average seller losses. c) some sellers will exit the market, raising average seller losses. d) new sellers will enter the market, raising average seller losses.
d) area between the demand and supply curves between quantities of 5 and 9.
When the market produces and sells nine teddy bears, the deadweight loss is represented by the: a) rectangle between prices of $6.50 and $2 and quantities of 5 and 9. b) area between the demand and supply curves to the left of a quantity of 5. c) rectangle between prices $6.50 and $2 and quantities of zero to 5. d) area between the demand and supply curves between quantities of 5 and 9.
b) new sellers will enter the market.
When the typical seller in a market has economic profits, then: a) some sellers will exit the market. b) new sellers will enter the market. c) the number of sellers will remain steady. d) the market will disappear.
free entry
When there are no factors making it particularly difficult or costly for a business to enter or exit an industry.
monopoly
When there is only one seller in the market.
imperfect competition
When you face at least some competitors and/or you sell products that differ at least a little from your competitors. Monopolistic competition and oligopoly are examples.
strategic interaction
When your best choice depends on what others choose, and their best choice depends on what you choose
b) If the government raises taxes, people will have less income available for purchases and saving.
Which of the following is a positive economic statement? a) The government ought to balance its budget and eliminate the deficit. b) If the government raises taxes, people will have less income available for purchases and saving. c) A 10% inflation rate is too high and should be reduced. d) That company with a 50% profit rate made too much profit at the expense of consumers.
d) Most passengers traveling on an airplane pay different prices for their tickets.
Which of the following is an example of a company practicing price discrimination? a) The average price of a haircut is $20 in Dayton and $30 in Cincinnati. b) A restaurant charges different prices for fountain drinks based on their size. c) Johann's bakery charges $2 for a cookie, and Bella's bakery charges $3 for an identical cookie. d) Most passengers traveling on an airplane pay different prices for their tickets.
a) A tax on suppliers of $4 per unit.
Which of the following policies would improve efficiency in this market? a) A tax on suppliers of $4 per unit. b) None. The private market is the most efficient option. c) A subsidy for consumers of $4 per unit. d) A tax on suppliers of $2 per unit.
c)We should protect the environment.
Which of the following statements is based on normative analysis? a)When the burner beneath a pot of water on the stove is turned on, the water will heat up. b)Mario is 24 years old. c)We should protect the environment. d)The temperature in the office room is 22 degrees centigrade.
d) A firm with economic profits will also have accounting profits.
Which of the following statements is true? a) A firm with economic losses will also have accounting losses. b) A firm with accounting profits will also have economic profits. c) A firm with accounting losses can also have economic profits. d) A firm with economic profits will also have accounting profits.
b) a siren tornado warning system
Which of the following would be both nonrival and nonexcludable? a) a road b) a siren tornado warning system c) an immunization d) a museum
d) the cost-benefit principle
Which principle helps buyers and sellers make decisions about whether to trade? a) the law of diminishing returns b) the equity principle c) the law of surplus d) the cost-benefit principle
MPC+MEC
With production externalities: Marginal social cost MSC=
focal point
a cue from outside a game that helps you coordinate on a specific equilibrium
excludable good
a good for which it is easy to prevent consumption by those who do not pay Ex: bottled water
strategic plan
a list of instructions that describes exactly how to respond in any possible situation
good
a product or service that is valued by our society so we want to devote our scarves resources to it.
perfect price discrimination
charging each customer their reservation price
non excludable good
consumption or use CAN NOT be prevented or blocked Ex: river, lakes, oceans
variable cost
cost of production that increases with the quantity produced
Positive production externality
decreased social cost of production ex: Technological innovation
insight six
ensure there's an incentive to innovate
constant returns to scale
expanding all inputs proportionately does not change the average cost of production
Marketable permits
firms can buy/sell/trade permits to emit certain amounts of pollutants
shutdown
if MR< AVC
operate
if MR≥ATC
average, positive
if market price exceeds______ cost, profit will be ______
look forward
in games that play out over time, you should look forward to anticipate the likely consequences of your choices
Positive consumption externality
increased social benefit of consumption ex: The flu shot
Negative production externality
increased social cost of production ex: Pollution
Corrective taxes and subsidies
induce private decision makers to take account of the social costs that arise from a negative externality Places a price on the right to pollute Reduce pollution at a lower cost to society Raise revenue for the government Enhance economic efficiency
hurdle method
offer lower prices only to those buyers who are willing to overcome some hurdles or obstacles
game tree
shoes how a game plays over time, with the first move forming the trunk, and then each subsequent choice branching out, so the final leaves show all possible outcomes
long-run average cost (LRAC) curve
shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology
Government regulation
the act of controlling business behavior through a set of rules or laws
marginal cost
the additional cost of producing one more unit
short-run average cost (SRAC) curve
the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs
best response
the choice that yields the highest payoff given the other player's choice
diseconomies of scale
the long-run average cost of producing each individual unit increases as total output increases
reservation price
the maximum price a customer will pay for a product. it is equal to their marginal benefit
first-mover advantage
the strategic gain from an anticipatory action that can force a rival to respond less aggressively
total cost
the sum of fixed and variable costs of production
opportunity cost principle
the true cost of producing an additional unit of a good or service is the value of other goods or services that must be given up to obtain it
internal markets
Markets within a company to buy and sell scarce resources.
efficient outcome
The efficient outcome yields the largest possible economic surplus.
marginal private benefit
The extra benefit enjoyed by the buyer from one extra unit.
marginal private cost
The extra cost paid by the seller from one extra unit.
trade costs
The extra costs incurred as a result of buying or selling internationally, rather than domestically.
marginal external benefit
The extra external benefit accruing to bystanders from one extra unit.
marginal external cost
The extra external cost imposed on bystanders from one extra unit.
globalization
The increasing economic, political, and cultural integration of different countries.
socially optimal
The outcome that is most efficient for society as a whole, including the interests of buyers, sellers, and bystanders.
prediction market
Markets whose payoffs are linked to whether an uncertain event occurs.
comparative advantage
(opportunity cost) the ability to produce a good at a lower opportunity cost than another producer what is the next best use of the resources
rival good
A good for which your use of it comes at someone else's expense.
import quota
A limit on the quantity of a good that can be imported.
public good
A nonrival good that is nonexcludable and hence subject to the free-rider problem.
externality
A side effect of an activity that affects bystanders whose interests aren't taken into account.
allocative efficiency
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
corrective subsidy
A subsidy designed to induce people to take account of the positive externalities they cause.
corrective tax
A tax designed to induce people to take account of the negative externalities they cause.
marginal social cost
All marginal costs, no matter who pays them = Marginal private cost plus marginal external cost.
positive externalities
An activity whose side effects benefit bystanders.
negative externality
An activity whose side effects harm bystanders.
insight two
Complementing market forces is better than hindering them.
deadweight loss
How far economic surplus falls below the efficient outcome; economic surplus at efficient quantity-actual economic surplus
Coase Theorem
If bargaining is costless and property rights are clearly established and enforced, then externality problems can be solved by private bargains.
2000, decrease
If the government imposes a price ceiling of $10 on this product, the market will supply _units and the total surplus will ___.
600; decrease
If the government imposes a price floor of $4.50 on a gallon of milk, the market will supply _units and total surplus will ___. how to: at $4.50, suppliers are willing to make 600 units, but here the MC> MB, therefore decreasing our total surplus
5000
If the quantity is limited to 2000 units in this market, the deadweight loss created is $____ how to: 10(1000)(1/2)
250
If the quantity supplied in this market is 600 gallons, the deadweight loss created is $____. how to: everywhere past 400 units is a point where the MC> MB, (1/2)(250)(200)
assumptions of market efficiency
Maximization of profit/utility; (Ex: reputation, longevity, reduce cost) Full information; Open markets free of barriers; Economic actions limited to economic agents; Price value for everything; Agents are rational;
failures of market efficiencies
Objective besides profit/utility maximization Incomplete information (Ex: seller knows more information about a product than a consumer) Market barriers Externalities Non-priced goods/services Irrational agents
the building blocks of economics
Opportunity cost Supply (marginal cost) Demand (marginal benefit) Market equilibrium Elasticity Government policy Efficiency (economic surplus) Market organization Market failure
increasing opportunity costs
PPF is a curved line Used when some resources are better suited to each task Specialized workers Specialized equipment
normative analysis
Prescribes what should happen, which involves value judgments.
rational rule for market
Produce more of a good if its marginal benefit is greater than (or equal to) the marginal c
Rational Rule for Society
Produce more of an item if its marginal social benefit is greater than (or equal to) the marginal social cost.
efficient production
Producing a given quantity of output at the lowest possible cost, which requires producing each good at the lowest marginal cost.
consumer surplus
The economic surplus you get from buying something; marginal benefit-price
producer surplus
The economic surplus you get from selling something; price-marginal cost
domestic demand curve
Shows the quantity of a good that all domestic consumers added together plan to buy, at each price.
domestic supply curve
Shows the quantity of a good that all domestic suppliers added together plan to sell, at each price.
$22500
The TOTAL value of consumer surplus for the 3000 units in this market is $___ CS: MB-payment how to: 15(3000)(1/2)
comparative advantage
The ability to do a task at a lower opportunity cost.
absolute advantage
The ability to do a task using fewer inputs.
4
There is no deadweight loss in this market when the price is $___ per gallon.
export
To sell goods or services to foreign buyers.
government failure
When government policies lead to worse outcomes.
knowledge problem
When knowledge needed to make a good decision is not available to the decision maker.
market failure
When the forces of supply and demand lead to an inefficient outcome.
insight four
consider costs and benefits of regulations or public goods
underproduction
marginal benefit of consumption > the marginal cost of production
overproduction
marginal cost of production > the marginal benefit of consumption
assumptions of market efficiency
maximization of profit/utility, full information, open markets free of barriers, economic actions limited to economic agents, price value for everything, agents are rational
failures of market efficiency
objective beside profit/utility maximization, incomplete information, market barriers, externalities, non-priced goods/services, irrational agents
building blocks of economics
opportunity cost, supply (marginal cost), demand (marginal benefit), market equilibrium, elasticity, government policy, efficiency (economic surplus), market organization, and market failure
insight five
target outcomes, not specific processes
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
producer surplus
the amount a seller is paid for a good minus the seller's cost of providing it
deadweight loss
the fall in total surplus that results from a market distortion, such as a tax
deadweight loss
the lost surplus from inefficient allocation of resources
underproduction
too few resources are allocated to a market
underproduction
too few resources are allocated to a market Marginal benefit of consumption > the marginal cost of production
overproduction
too many resources are allocated to a market
overproduction
too many resources are allocated to a market Marginal cost of production > the marginal benefit of consumption