ECON200 final exam

price discrimination

the practice of charging customers different prices for the same product

discrimination

making choices by using generalizations based on people's observable characteristics like race, gender, and age

rival in consumption (rival)

the characteristic of a good for which one person's consumption prevents or decreases others' ability to consume it

social insurance

government programs under which people pay into a common pool and are eligible to draw on benefits under certain circumstances (prevent people from falling into transient poverty)

consumer surplus

the net benefit that a consumer receives from purchasing a good or service, measured by the difference between willingness to pay and the actual price

opportunity cost

the value to you of what you have to give up in order to get something. A firm's opportunity costs include explicit and implicit costs.

economic profit

total revenue minus all opportunity costs, explicit and implicit

game theory

the study of how people behave strategically under different circumstances

sunk cost

A cost that has already been incurred and cannot be refunded or recovered. It makes no sense to consider sunk costs when weighing the trade-off between opportunity costs and benefits, but people do it all the time.

dominant strategy

A strategy that is best for a player to follow no matter what strategy the other players choose

Based on the table below, calculate consumer surplus for each consumer when the price is $17. Buyer Willingness to pay for one unit A$6B$27C$13D$21E$33F$35G$12H$13I$22

A$0tB$10C$0D$4E$16F$18G$0H$0I$5 [opposite for calculating producer surplus]

noncooperative equilibrium

As we can see from the prisoners' dilemma, an equilibrium outcome to a game is not necessarily a good one for the participants. This negative-negative outcome is called a noncooperative equilibrium because the participants act independently, pursuing only their individual interests.

blanket standards

Blanket standards (on all imports) on imports usually address issues affecting consumers, rather than workers in the countries where production takes place. In the United States, for instance, imported food products must meet certain standards to protect the health of U.S. consumers.

Some specific "design principles" make informal, community-based solutions to common-resource problems more effective. These principles include

Clear distinctions between who is and is not allowed to access the resource. The participation of resource users in setting the rules for use. The ability of users to monitor one another.

**In which of the following government policies is moral hazard not a concern?

Government raises taxes to pay for social services

Repeated play can also change the outcome in sequential games by reducing the first-mover advantage.

In these situations, the more-patient player—the one who places more value on money in the future relative to money in the present—has an advantage. The player who is willing to hold out longer has more bargaining power, and so receives a better payoff.

price control

a regulation that sets a maximum or minimum legal price for a particular good. The direct effect of a price control is to hold the price of a good up or down when the market shifts, thus preventing the market from reaching a new equilibrium. [includes price ceilings and floors]

nash equilibrium

It is an outcome in which all players choose the best strategy they can, given the choices of all other players. A Nash equilibrium is significant because when it is reached, no one has an incentive to break the equilibrium by changing his strategy. In a prisoner's dilemma, this means that the players are stuck in a less that ideal outcome.

people can hold two inconsistent sets of preferences:

One set holds what we would like to want in the future—to study enough for exams, to lose weight, to build up a healthy savings account. One set holds what we will actually want in the future, when the future comes—to play games, to eat dessert, to go shopping.

nonmonetary opportunity cost

People are especially prone to undervaluing opportunity costs when they are nonmonetary, such as time. In sitting through a terrible movie all the way to the end, people fall prey to the sunk-cost fallacy and also fail to recognize the opportunity cost of their time. They mistakenly put value on a nonretrievable monetary cost (the price of the ticket); they also fail to consider the value of their nonmonetary opportunity cost (time).

positive vs normative analysis

Positive analysis is about facts: Does the policy actually accomplish the original goal? Normative analysis is a matter of values and opinions: Do you think the policy is a good idea?

willingness to sell

the minimum price a seller will accept in exchange for a good or service

implicit cost of ownership

The implicit cost of ownership is another nonmonetary opportunity cost that is often overlooked. The term refers to a cognitive bias, documented by behavioral economists, that leads people to value things more once they possess them (ex - bike $200).

Suppose an environmental impact study shows that the coral reef near Port Douglas, Australia, can sustain 20 scuba diving tours per week. Using a quota of 20 dive tours per week will have the following advantage over a tax: The tax will only allow wealthy divers to receive the benefit of diving near the reef. The quota will better ensure that the sustainable amount of dives will occur. The quota will ensure that those divers who receive the greatest benefit will be the ones diving near the reef. The quota is more efficient than a tax.

The quota will better ensure that the sustainable amount of dives will occur. Because the critical amount of tours that the reef can sustain is known, a quota will ensure that the sustainable amount occurs. Using a tax is more efficient as it allocates the privilege of diving to those divers whose marginal benefit exceed the marginal cost of the tax. However, knowing the correct level to set the tax in order to ensure that the critical quantity is not exceeded can take some tinkering and is subject to change (for example, due to increased incomes and an increase in demand). Quotas are sometimes used when getting the quantity right is very important.

Identify whether each of the following goods is usually excludable or nonexcludable. a. AM/FM radio: b. A round of golf on a course: c. Street art: d. A museum exhibition: e. Toll roads:

When a good is excludable, it is possible for sellers to prevent its use by those who have not paid for it. a. AM/FM radio: Nonexcludable, because one does not have to pay to listen to AM or FM radio. b. A round of golf on a course: Excludable, because one must pay to play golf. c. Street art: Nonexcludable, because it is free to look at the art. d. A museum exhibition: Excludable, because one must pay to enter the museum. e. Toll roads: Excludable, because one must pay to use the road.

Identify whether each of the following goods is rival or nonrival. a. Cable TV: Nonrival Correct. b. A pair of jeans: Rival Correct. c. Street signs: Nonrival Correct. d. Attending a baseball game: Rival Correct.

When a good is rival in consumption (or just rival), one person's consumption prevents or decreases others' ability to consume it. a. Cable TV: Nonrival, because the quality of the show does not diminish as more people watch. b. A pair of jeans: Rival, because only one person can use the jeans at a time. c. Street signs: Nonrival, because the street sign is still visible even if others are looking at it. d. Attending a baseball game: Rival, because the game becomes more crowded as more people attend.

excludable

a characteristic of a good or service that allows owners to prevent its use by people who have not paid for it

behavioral economics n

a field of economics that draws on insights from psychology to expand models of individual decision making

monopoly

a firm that is the only producer of a good or service with no close substitutes

efficient scale

a firm's efficient scale is the quantity that minimizes ATC in the long run.

Prisoner's Dilemma

a game of strategy in which people make rational choices that lead to a less-than-ideal result for all.

prisoners' dilemma

a game of strategy in which two people make rational choices that lead to a less-than-ideal result for both

repeated game

a game that is played more than once

public goods

a good that is neither excludable or rival

common resources

a good that is not excludable but is rival

import quota

a limit on the amount of a particular good that can be imported

natural monopoly

a market in which a single firm can produce, at a lower cost than multiple firms, the entire quantity of output demanded

monopolistic competiotion

a market with many firms that sell goods and services that are similar, but slightly different

oligopoly

a market with only a few firms, which sell a similar good or service

elasticity

a measure of how much consumers and producers will respond to a change in market conditions

income elasticity of demand

a measure of how much the demand for a good changes in response to a change in consumers' incomes Income elasticity of demand = % change in quantity demanded/% change in income If the good is a necessity, income elasticity of demand will be positive and less than 1. If the good is a luxury, income elasticity will be positive and greater than 1. inferior goods --> negative

protectionism

a preference for policies that limit trade

prisoners' dilemma (oligopoly)

a situation in which two people (or two firms) make rational choices that lead to a less-than-ideal result for both.

time inconsistency

a situation in which we change our minds about what we want simply because of the timing of the decision

game

a situation involving at least two people that requires those involved to think strategically

tit-for-tat strategy

a strategy in which a player in a repeated game takes the same action that his or her opponent did in the preceding round

dominant strategy

a strategy that is the best one for a player to follow no matter what strategy other players choose

Suppose that you are an economic-policy advisor. Environmental groups are pressuring you to implement the highest-possible carbon tax while industry groups are pressuring you to implement no carbon tax at all. Both argue that their position makes more sense economically. In fact, the most efficient tax level is: a tax equal to the external cost. no tax at all. a tax equal to the social cost. the highest possible tax.

a tax equal to the external cost. Note that the social cost includes the private cost already paid by the industry groups.

pigovian tax

a tax meant to counterbalance a negative externality

traiff

a tax on imported goods

During a holiday party at work, you pay $2 to buy a raffle ticket for a 160-gigabyte iPod. You win the drawing. Based on a little research online, you discover that the going rate for a hardly used 160-gigabyte iPod is $200. a. What was the opportunity cost of acquiring the iPod? b. What is the opportunity cost of choosing to keep the iPod?

a. $2 b. $200

Jamie is saving for a trip to Europe. She has an existing savings account that earns 2 percent annual interest and has a current balance of $4,500. Jamie doesn't want to use her current savings for vacation, so she decides to borrow the $1,500 she needs for travel expenses. She will repay the loan in exactly one year. The annual interest rate is 5 percent. a. If Jamie were to withdraw the $1,500 from her savings account to finance the trip, how much interest would she forgo? b. If Jamie borrows the $1,500, how much will she pay in interest? c. How much does the trip cost her if she borrows rather than dip into her savings?

a. $30 b. $75 c. Principle plus net interest = $1,500 + $75 - $30 = $1,545.

There are three major ferry lines operating on the East River, each generating 100 units of pollution per year. The ferry lines face the costs of reducing pollution that are shown in the table below. Ferry line. Cost of reducing pollution by 1 unit A. $1,500 B. $2,500 C. $1,800 a. The government has decided it wants to reduce pollution levels by 50 percent and requires each ferry line to cut its pollution in half. Determine the cost of pollution reduction for each ferry line. Ferry line. Cost of pollution reduction The total cost of pollution reduction is: .b. Suppose the government decides to give each ferry line 50 tradable permits. Each permit allows a ferry line to produce one unit of pollution. Ferry line ______ will buy _____ permits from ferry line ________ c. Under this system of tradable permits, the total cost of pollution reduction is:

a. Each ferry line must reduce pollution by 50 units. For ferry line A, this will cost $1,500(50) = $75,000. For ferry line B, this will cost $2,500(50) = $125,000. For ferry line C, this will cost $1,800(50) = $90,000.The total cost of the pollution reduction is therefore $290,000. b. Ferry line B will buy 50 permits from ferry line A.The ferry lines face different costs in pollution reduction, so there is room for trade. Ferry line B faces the highest costs to reduce pollution, so this ferry line values the permits the most. It is willing to pay up to $2,500 for each permit. Ferry line B will buy 50 permits from ferry line A. Ferry line B will buy from ferry line A instead of ferry line C because ferry line A values the permits least (its costs of reducing pollution are the lowest), and it will sell at a lower price than would ferry line C. Also, ferry line A sells to ferry line B instead of to ferry line C because ferry line B values the permits the most, and it will offer a price higher than ferry line C would offer. c. Ferry line A will reduce pollution by 100 units (because it now has zero permits) at a cost of $1,500(100) = $150,000.Ferry line B will face no abatement costs because it has 100 permits. Ferry line C will reduce pollution by 50 units at a cost of $1,800(50) = $90,000. The total cost of pollution reduction under this system is $240,000.

Answer the following questions based on the tables below. Buyer Willingness to pay for one unit A. $35 B. $33 C. $27 D. $22 E. $21 F. $13 G. $13 H. $12 I. $6 SellerWillingness to sell one unitA$4B$9C$12D$14E$15F$21G$23H$30I$51 a. The quantity demanded at a price of $10 is The quantity supplied at a price of $10 is b. The quantity demanded at a price of $25 is The quantity supplied at a price $25 is

a. Quantity demanded is 8 units. All consumers except for consumer I are willing to pay at least $10. Quantity supplied is 2 units. Only suppliers A and B are willing to sell at a price of $10. b. Quantity demanded is 3 units. Only consumers A, B, and C are willing to pay $25. Quantity supplied is 7 units. Suppliers A, B, D, E, F, H, and I (all but C and G) are willing to sell at a price of $25.

Suppose that when the average family income rises from $30,000 per year to $40,000 per year, the average family's purchases of toilet paper rise from 100 rolls to 105 rolls per year.Instructions: a. The income-elasticity of demand for toilet paper is b. Toilet paper is a c. The demand for toilet paper is

a. [(105 − 100)/102.5]/[(40,000 − 30,000)/35,000] = 0.17. b. Toilet paper is a normal good because the income elasticity is positive. c. Toilet paper is an income-inelastic good because the income elasticity is greater than zero but less than one.

commitment strategy

an agreement to submit to a penalty in the future for defecting from a given strategy. Changing the payoffs by agreeing to future penalties can allow players to reach a mutually beneficial equilibrium that would otherwise be difficult to maintain.

autarky

an economy that is self-contained and does not engage in trade with outsiders

nash equilibrium

an equilibrium reached when all players choose the best strategy they can, given the choices of all other players. It is a situation, wherein, given the consequences, the player has no regrets about his or her decision.

private benefits

benefits that accrue directly to the decision maker

rules

define the actions that are allowed in a game.

perfectly elastic demand

demand for which any increase in price will cause quantity demanded to drop to zero; represented by a perfectly horizontal line

exports

goods and services that are produced domestically and consumed in other countries.

private goods

goods that are both excludable and rival

If a firm has constant returns to scale: the firm is not at the efficient scale. increasing output will not change total costs. profits are maximized. increasing output will not change average costs.

increasing output will not change average costs.

trade liberation

policies and actions that reduce trade restrictions

competition

positive word describing noncooperative equilibrium

economies of scale

returns that occur when an increase in the quantity of output decreases average total cost

The gains from trade refer to the increase in: resources in both countries that result from specialization and trade. surplus in both countries that results from specialization and trade. savings in both countries that result from specialization and trade. income in both countries that results from specialization and trade.

surplus in both countries that results from specialization and trade.

revealed preference

that is, no matter what you had thought you wanted to do, your actions reveal that what you actually wanted to do

market power

the ability to noticeably affect market prices

total cost

the amount that a firm pays for all of the inputs that go into producing goods and services

product differentiation

the creation of products that are similar to competitors' products but more attractive in some ways [through advertising and branding]

tragedy of the commons

the depletion of a common resource due to individually rational but collectively inefficient overconsumption

tax wedge

the difference between the price paid by buyers and the price received by sellers in the presence of a tax

profit

the difference between total revenue and total cost

network externality

the effect that an additional user of a good or participant in an activity has on the value of that good or activity for others

social benefits

the entire benefits of a decision, including both private benefits and external benefits

social cost

the entire cost of a decision, including both private costs and any external costs

marginal product

the increase in output that is generated by an additional unit of input

average product

the number of pizzas produced per worker, on average. Average product is calculated by dividing total production by the number of workers. When a new employee's marginal product is greater than the existing average product, the average increases. As soon as a new worker's marginal product is less than the existing average, the average number of pizzas per worker starts to fall.

backward induction

the process of analyzing a problem in reverse, starting with the last choice, then the second-to-last choice, and so on, to determine the optimal strategy

production function

the relationship between quantity of inputs and the resulting quantity of outputs

tax incidence

the relative tax burden borne by buyers and sellers Essentially, the side of the market that is more price elastic will be more able to adjust to price changes and will shoulder less of the tax burden.

price elasticity of demand

the size of the change in the quantity demanded of a good or service when its price changes Price elasticity of demand = % change in Q demanded / % change in P

When adverse selection occurs there are: more transactions than would have been occurred if both sides had the same information. fewer transactions than would have been occurred if both sides had the same information. the same transactions that would occur when both sides had the same information. no transactions.

fewer transactions than would have been occurred if both sides had the same information.

normal goods

goods for which demand increases as income increases

profit

Profit=(Price(or average revenue)−ATC)×Q

If price elasticity of supply is 1.3 and price increases by 3 percent, quantity supplied will ________ by _________.

If price elasticity of supply is 1.3 and price increases by 3 percent, quantity supplied will increase by > 3 percent.

sequential games

One person or company has to make a decision before the other. These are called sequential games because the players move sequentially rather than simultaneously.

___________ value is how much a certain amount of money that will be obtained in the future is worth today.

Present

Suppose you know that an investment will earn a positive return in the future. Which of the following statements explains why it is still important to know the present value of the investment? Present value helps you understand if the future benefits are worth the current cost. Present value helps you determine the riskiness of the investment. Present value helps you understand if the future benefits are worth the future cost. Present value helps you understand if the present benefits are worth the future cost.

Present value helps you understand if the future benefits are worth the current cost.

Future value of sum = FV = PV × (1 + r)^n

Present value of sum = PV = FV/(1 + r)^n

adverse selection

a state that occurs when when buyers and sellers have different information about the quality of a good or the riskiness of a situation, and this asymmetric information results in failure to complete transactions that would have been possible if both sides had the same information.

demand schedule

a table that shows the quantities of a particular good or service that consumers will purchase (demand) at various prices

free-rider problem

a problem that occurs when the nonexcludability of a public good leads to undersupply

tradable allowance

a production or consumption quota that can be bought and sold

conditional cash-transfer

a program in which financial support is given only to people who engage in certain actions

in-kind transfers

a program that provides specific goods or services, rather than cash, directly to needy recipients

subsidy

a requirement that the government pay an extra amount to producers or consumers of a good

embargo

a restriction or prohibition of trade in order to put political pressure on a country

gini coefficient

a single-number measure of income inequality; ranges from 0 to 1, with higher numbers meaning greater inequality gini coefficient = A/(A+B) Specifically, the Gini coefficient is equal to the area between the Lorenz curve and the line of perfect equality (area A in Figure 21-4) divided by the total area under the line of perfect equality (area A plus area B in the figure). This calculation gives us a single number to describe income inequality.

surplus (excess supply)

a situation in which the quantity of a good that is supplied is higher than the quantity demanded

If you deposit $500 in a savings account that offers 3 percent annual interest, compounded annually, and you don't withdraw any money, how much money should you expect to have in the account at the end of three years?

$500 x (1.03) x (1.03) x (1.03) = $500 x (1.03)3 = $546.36. [FV]

quintile

20 percent of the population - a way for economists to summarize the income distribution in a more precise way

information asymmetry

A condition in which one participant in a transaction knows more than the other participant. (if both parties' incentives are aligned, then info asymmetry doesn't matter).

Not all experiences of poverty are the same. The most fundamental distinction is between chronic and transient poverty. The difference between the two is essentially the difference between always being poor and being poor for a short time:

Chronic poverty is usually defined as spending three or more years in poverty. Transient poverty is usually measured as a spell of poverty that lasts at least two consecutive months within a year.

The nonprice determinants of demand can be divided into five major categories:

Consumer preferences. The prices of related goods. Income of the consumers. Expectations of future prices. The number of buyers in the market.

factor distribution of income

Economists refer to the pattern of income that people derive from different factors of production as the factor distribution of income. In other words, the factor distribution of income shows how much Page 406income people get from labor compared to land and capital.

In general, many shifts in the labor demand curve can be traced to three determinants: supply of other factors of production, technology, and output prices.

Factors that shift labor demand Effects on marginal product and labor demand Technology When technology changes are labor-augmenting: The MPL increases and labor demand also increases (shifts right). When technology changes are labor-saving: The MPL decreases and labor demand also decreases (shifts left). Supply of other factorsIf the supply of other factors causes the MPL to increase, labor demand increases (shifts right). If the supply of other factors causes the MPL to decrease, labor demand decreases (shifts left). Output prices If output prices decrease, the value of the marginal product of labor (VMPL) decreases and labor demand also decreases (shifts left). If output prices increase, the value of the marginal product of labor (VMPL) increases and labor demand also increases (shifts right).

Economists also attribute a large part of the increase in inequality within countries like the United States to something called skill-biased technical change.

Over the last 50 years, the benefits of economic growth have increasingly been going to highly skilled workers with a lot of education. Then, add this technical change to increased trade between countries (which allows more manual and rote jobs to be done overseas in low-wage countries) and what do you get? People in rich countries are specializing more and more in high-tech, high-skill, high-education work, and they reap huge benefits. Those who are not in a position to take advantage of high-tech, high-skill, high-education work lose out, relatively speaking.

screening

Taking action to reveal private information about someone else

Economists have two terms to describe the competing incentives that influence a worker's response to a change in the wage:

The price effect describes the increase in labor supply in response to the higher wage that can be earned for each hour of work. The income effect describes the decrease in labor supply due to the greater demand for leisure caused by a higher income.

A course description posted during the registration period notes that homework is graded complete or incomplete rather than being corrected by the instructor. Which of the following describes the adverse-selection problem in this situation? The description will disproportionately attract high performing students with a genuine love of learning. The description is likely to give potential students the false belief that the assignments will be easy when they may still receive low grades on their assignments. The description will disproportionately attract students who don't typically perform well on graded assignments. While informative, the description still fails to give prospective students complete information on type of homework given.

The description will disproportionately attract students who don't typically perform well on graded assignments.

You are driving home from work, and get stuck in a traffic jam. You are considering turning off from your usual route home and taking a longer route that might have less traffic. However, you know that there is some chance that the traffic on your usual, shorter route will clear up. Based on the table below, calculate the expected value (in minutes until you arrive home) of each option.

The expected value of Route 1 is 39 minutes. The expected value of Route 2 is 30 minutes. You should take Route 2. Route 1: EV = 0.30(10) + 0.20(30) + 0.50(60) EV = 3 + 6 + 30 EV = 39 minutes Route 2: EV = 0.50(20) + 0.50(40) + 0(80) EV = 10 + 20 + 0 EV = 30 minutes

marginal product

The increase in output that is generated by an additional unit of input

Suppose you are selling a piece of furniture to a friend who can't afford to pay you upfront but offers to pay you in monthly installments until it is paid off. Which of the following is not information that you need to calculate the present value of this offer? The risk aversion of your friend The interest rate you could earn elsewhere The time period until the furniture is paid off The future value of the payment installments

The risk aversion of your friend The formula for present value is given as PV = FV / (1 + r)n. To calculate present value you need the future value, the time period, and the interest rate to assess your friend's offer.

moral hazard

The tendency for people to behave in a riskier way or to renege on contracts when they do not face the full consequences of their actions

complete information

When people are fully informed about the choices that they and other relevant economic actors face

law of demand

a fundamental characteristic of demand which states that, all else equal (ceteris paribus), quantity demanded rises as price falls

law of supply

a fundamental characteristic of supply which states that, all else equal, quantity supplied rises as price rises

standardized good

a good for which any two units have the same features and are interchangeable

demand curve

a graph that shows the quantities of a particular good or service that consumers will demand at various prices

risk

exists when the costs or benefits of an event or choice are uncertain. Everything in life involves some uncertainty.

Suppose the economy is suffering and many people are afraid they will be laid off from their jobs. Workers would like to protect against this risk with insurance. Which of the following are problems that prevent insurance companies from offering layoff insurance? a. Moral hazard: People tend to behave in a riskier way when they have insurance. b. Adverse selection: Lower risk people will not buy insurance. c. Risk aversion: People who try to avoid risk also avoid thinking about risks, and therefore they are unwilling to consider ways to reduce risk (such as insurance). d. Diversification: There is competition from other insurance providers.

a and b are checked c and d are unchecked

In college admissions, which of the following are examples of statistical discrimination? a. A college has minimum required scores on standardized tests. b. A college is an all-women's school. c. A college uses high school GPA to rank students for scholarship offers. d. A college requires three letters of recommendation.

a and c are checked b and d are unchecked

price taker

a buyer or seller who cannot affect the market price. In a perfectly competitive market, firms are price takers as a consequence of many sellers selling standardized goods.

lorenz curve

a graphic representation of income distribution that maps percentage of the population against cumulative percentage of income earned by those people The best way to understand the Lorenz curve is to see that if every person earned the exact same amount, the curve would be a straight, diagonal line with a slope of 1, as shown in panel A of Figure 21-3. That is, 20 percent of the population would earn 20 percent of the income, and 73 percent of the population would earn 73 percent of the income, and so on. However, if income is unequally distributed, the Lorenz curve will be bowed out in a U-shape: The poorest 1 percent of people will earn less than 1 percent of income, and the richest 1 percent will earn more than 1 percent of the income, as shown in panel B.

Say whether each of the following situations involves screening or signaling. a. Auto shops and motels advertise that they are AAA-approved: b. Employers check interviewees' Facebook or LinkedIn profiles before hiring one of them: c. Applicants must pass an exam before becoming eligible for a civil-service position: d. People wear expensive clothing with large brand names or logos:

a. signaling b. screening c. screening d. signaling

**Some people have argued that mandatory health insurance could reduce health care costs, stating that it would address the problem of

adverse selection

In a market for car insurance, which of the following are examples of statistical discrimination? a. Premiums are adjusted based on the zip code of the insured. b. Premiums are adjusted based on the color of the car. c. Premiums are adjusted based on the driving record of the insured. d. Premiums are adjusted based on the model of the car.

all boxes are checked

market economy

an economy in which private individuals, rather than a centralized planning authority, make the decisions

market

buyers and sellers who trade a particular good or service, not to a physical location

capital

manufactured goods that are used to produce new goods.

risk pooling

organizing people into a group to collectively absorb the risk faced by each individual Pooling doesn't reduce the risk of catastrophes happening; it just reallocates the costs when they do.

At any price above or below the equilibrium price: sellers face an incentive to raise or lower prices. there is an equilibrium. consumers do not want to buy. producers do not want to sell.

sellers face an incentive to raise or lower prices.

income mobility

the ability to improve one's economic circumstances over time In absolute terms, we can look at whether a person's income is higher than her parents'. In relative terms, we can look at whether a person's income places her higher up in the income distribution than her parents.

quantity supplied

the amount of a particular good or service that producers will offer for sale at a given price during a specified period

human capital

the set of skills, knowledge, experience, and talent that determine the productivity of workers Human capital also allows us to understand that what we call the labor market is actually a collection of many different, interconnected labor markets for workers with similar skills. The more similar the skills required to do any two jobs, the more workers and employers can substitute one skill set for the other, and the more connected the two labor markets will be. For example, many farm laborers in California may have the human capital required to work in the hotel industry instead. When labor is substitutable between two markets, we should expect the two markets to pay the same or similar equilibrium wage.

equilibrium

the situation in a market when the quantity supplied equals the quantity demanded; where the supply and demand curves intersect

fixed costs

costs that do not depend on the quantity of output produced

private costs

costs that fall directly on an economic decision maker

implicit costs

costs that represent forgone opportunities

explicit costs

costs that require a firm to spend money

in the long run in a perfectly competitive market:

1. firms earn zero economic profit 2. firms operate at an efficient scale 3. supply is perfectly elastic

You just bought a ticket to the hottest new musical, and you paid $110 for your ticket. When you check online, you discover that tickets are being resold for $1100 each. You tell your economics professor about this, and she responds with the following advice: You should only keep your ticket if you value seeing the musical at___

$1100

Suppose you run up a debt of $300 on a credit card that charges an annual rate of 12 percent, compounded annually. How much will you owe at the end of two years? Assume no additional charges or payments are made.

$300 x (1.12) x (1.12) = $300 x (1.12)2 = $376.32 [FV]

Your savings account currently has a balance of $32,300. You opened the savings account two years ago and have not added to the initial amount you deposited. If your savings have been earning an annual interest rate of 2 percent, compounded annually, what was the amount of your original deposit?

$32,300 / [(1.02) x (1.02)] = $32,300 / (1.02)2 = $31,045.75 [PV]

barriers to entry contradict the free entry and exit feature that characterizes perfectly competitive markets and they are:

1. scarce resources 2. economies of scale (instances when, as a firm produces more output, its average total cost goes down. In some industries, the required infrastructure is costly and creates a barrier to entry. In these cases, economies of scale Page 332are so powerful that competition between two or more firms simply doesn't make much sense. Replicating the required infrastructure would raise fixed cost too much to be viable.) 3. government intervention (legal prohibition, intellectual property rights - granting patents and copyrights). 4. aggressive business tactics (on the part of the market leading firms).

Unlike a firm in a competitive market, a monopolist's marginal revenue is not equal to price. In a competitive market, a firm can sell as much as it wants without changing the market price. The additional revenue brought in by one unit is always simply the price of that unit. Thus, in a competitive market, marginal revenue is equal to price. In a market dominated by a monopoly, however, the monopoly's choice to produce an additional unit drives down the market price and thus drives down marginal revenue. Because of this effect, producing an additional unit of output has two separate effects on a monopolist's total revenue:

1. Quantity effect: The increase in total revenue due to the money brought in by the sale of additional units. 2. Price effect: The decrease in total revenue that occurs because the increase in quantity requires a lower price.

The figure below shows three monthly market supply curves for sweaters at a local craft market. For each of the following events, determine whether the indicated event will cause supply to increase to S2 or decrease to S3, or whether there will be a movement along the supply curve, S1. For each of the following events, indicate where the new point will be after the event occurs. a. The price of wool increases: b. Demand for sweaters decreases: c. A particularly cold winter is expected to begin next month: d. Demand for sweaters increases:

A change in the price of a good will cause a movement along the supply curve. A change in a nonprice determinant will cause a shift of the supply curve. a. Point C: This is a change in a nonprice determinant. The supply curve will shift to the left because input prices have increased. b. Point E: A decrease in the demand for sweaters will decrease the price of sweaters, causing a movement down along the supply curve. c. Point D: A cold winter will increase the demand for sweaters causing a shortage at the initial point A. The shortage will cause prices to rise and firms to respond by producing more sweaters. This will be a movement upward along the supply curve. d. Point D: An increase in the demand for sweaters will increase the price of sweaters, causing a movement up along the supply curve.

One method of dealing with a negative externality would be to set quotas on the consumption of the good. Suppose that there are only two consumers of a good with a negative externality, Nicole and Andrew. Their willingness-to-pay schedules are given below. Quantity. Nicole's wtp Andrew's wtp 1. 50. 25 2. 40. 20 3. 30. 15 420105105 Suppose that the government wishes to limit consumption of this good to 6 units, and thus sets a consumption quota of 3 units on each consumer. If the price of the good is $15, each consumer will purchase the three units allowed. Total consumer surplus will be: The resulting distribution of resources will be ____________ Consumer surplus (and thus social surplus) at the same output: is maximized at the current equal distribution of goods. would increase if fewer units were consumed. would increase if Nicole received more units and Andrew received fewer units. would increase if Nicole received fewer units and Andrew received more units.

A quota will only be as efficient as an (equivalent) Pigouvian tax if each consumer's willingness to pay is identical. Otherwise, the quota forces all consumers to have the same limit. Market efficiency could be improved by allowing high-value consumers to purchase relatively more goods while lower-value consumers purchase relatively fewer goods. This would happen with a tax, but it does not happen with a quota. In this case, total consumer surplus is found by finding willingness to pay less price for each unit. (50 - 15) + (40 - 15) + (30 - 15) + (25 - 15) + (20 - 15) + (15 - 15) = $90 The resulting allocation of goods will be inefficient. Consumer surplus would increase if the goods were redistributed. For example, if one unit were taken away from Andrew, his consumer surplus falls by (15 - 15) = $0. Allowing Nicole to purchase that unit increases her surplus by (20 - 15) = $5. Thus, total consumer surplus increases by $5.

Average fixed cost (AFC)

Average fixed cost (AFC) = Fixed cost/Quantity

Average revenue

Average revenue = Total revenue/Quantity sold = P×Q/Q = P

Average total cost (ATC)

Average total cost (ATC) = Total cost/Quantity

Average variable cost (AVC)

Average variable cost (AVC) = Variable cost/Quantity

Public-opinion polls in a small city have revealed that citizens want more resources spent on public safety, an annual fireworks display, and more community swimming pools. Which of these three citizen requests could be privatized by assigning property rights? Community swimming pools. Public safety. An annual fireworks display.

Community swimming pools. Swimming pools could be privatized by assigning property rights because they are excludable and it is possible to charge entrance fees.

Nonprice determinants of labor supply

Factors that shift labor supply Effect on labor supply Population When there are more potential workers (as a result of demographic changes and/or immigration), labor supply increases (shifts right). Culture When cultural attitudes view work favorably, labor supply increases (shifts right). When cultural attitudes view work unfavorably, labor supply decreases (shifts left). Other opportunities When the next-best opportunity available to workers offers better benefits, the labor supply will move toward that better opportunity, whether that increases or decreases supply. Examples: Better wages in retail or service jobs might lead workers to supply less labor to farms, decreasing the labor supply for farms but increasing the labor supply for retail and service jobs. A decrease in the cost of higher education might lead workers to go back to school, decreasing the labor supply.

The government has decided to add a $10 subsidy in the market for Humbugs. The pre-subsidy price of Humbugs was $50, and neither supply nor demand is perfectly elastic nor perfectly inelastic. Which of the following is true? The price of Humbugs will fall by less than $10. The price of Humbugs will fall to $40. The full benefit from the subsidy will go to the sellers of Humbugs. The full benefit from the subsidy will go to buyers of Humbugs. The equilibrium quantity of Humbugs will decrease due to the lower price. Who receives the greatest benefit from the subsidy depends on: the relative elasticity of the supply and demand curves. whether supply is elastic or inelastic. whether demand is elastic or inelastic. whether the subsidy is given to buyers or sellers. what the government requires firms to charge.

If the subsidy is given to sellers, the supply curve will shift rightward, but since neither supply nor demand is perfectly elastic nor perfectly inelastic, the price will not fall by the full $10. Consumers will receive some of the benefits of the subsidy in the form of lower prices and increased purchases, and producers will receive some of the benefits in the form of increased sales and revenues (because of the higher post-subsidy price to firms). The incidence of the subsidy is determined by the relative elasticity of the supply and demand curves. The group with the relatively more inelastic curve will receive relatively less of the benefits.

import standards

Import standards on specific countries are less common. Such standards typically address production issues in the country of origin, such as labor or environmental conditions. When used, they are integrated into individual trade agreements with those countries.

Indicate whether each of the following changes will increase or decrease the equilibrium price and quantity, or whether the effect cannot be predicted. a. Demand increases; supply remains constant. b. Supply increases; demand remains constant. c. Demand decreases; supply remains constant. d. Supply decreases; demand remains constant. e. Demand increases; supply increases. f. Demand decreases; supply decreases. g. Demand increases; supply decreases. h. Demand decreases; supply increases.

In the first four parts, only one curve is shifting, so the impact on equilibrium price and quantity can be predicted. In the last four parts, two changes are occurring at the same time, so the impact on either equilibrium price or quantity cannot be predicted. Consider a simultaneous increase in demand and increase in supply. The increase in demand will increase equilibrium price and quantity. The increase in supply will decrease equilibrium price and increase equilibrium quantity. Both changes lead to an increase in equilibrium quantity, so this can be predicted. The two changes have opposite impacts on equilibrium price, so this cannot be predicted. a. The equilibrium price increases, and the equilibrium quantity increases. b. The equilibrium price decreases, and the equilibrium quantity increases. c. The equilibrium price decreases, and the equilibrium quantity decreases. d. The equilibrium price increases, and the equilibrium quantity decreases. e. The equilibrium price cannot be predicted, and the equilibrium quantity increases. f. The equilibrium price cannot be predicted, and the equilibrium quantity decreases. g. The equilibrium price increases, and the equilibrium quantity cannot be predicted. h. The equilibrium price decreases, and the equilibrium quantity cannot be predicted.

If Indonesia has a comparative advantage in making textiles (relative to the United States), which of the following must be true? Indonesia's opportunity cost of producing textiles is lower than the opportunity cost in the U.S. The absolute cost of producing textiles in Indonesia is lower than the absolute cost of producing textiles in the U.S. Indonesian textile workers are more productive than U.S. textile workers. The nominal price of textiles is lower in Indonesia than in the U.S. If Indonesia produces textiles and trades them to the United States (which has a comparative advantage in automobiles), which of the following best describes the outcome? Both countries will gain from trade. Neither country will gain from trade. Only the U.S. will gain from trade. Only Indonesia will gain from trade.

Indonesia's opportunity cost of producing textiles is lower than the opportunity cost in the U.S. Both countries will gain from trade. Voluntary trade benefits all nations; thus both the U.S. and Indonesia will gain from trade.

Suppose that the government imposes a $10 tax on sellers of Humbugs. The pre-tax price of Humbugs was $50. If, at the original equilibrium price, the elasticity of demand was -2 and the elasticity of supply was 1.5, which of the following is true? Buyers will pay relatively more of the tax than sellers. The full amount of the tax will be paid by buyers. The equilibrium quantity of Humbugs will not change. Sellers will pay relatively more of the tax than buyers. The full amount of the tax will be paid by the sellers. Now suppose that the elasticity of demand was 0, and the elasticity of supply was 1.5. Which of the following is true? a. Sellers will pay all of the tax. b. Buyers will pay all of the tax. c. The price of Humbugs will rise to $60. d. The price of Humbugs will rise by less than $10. e. The quantity of Humbugs demanded will not change.

Sellers will pay relatively more of the tax than buyers. b, c, and e are checked

capital

Sometimes the word capital can mean physical capital, such as machinery. At other times it can mean financial capital, as in "She needs some start-up capital for her new business." Then, of course, there's human capital, which we discussed earlier.

Your neighbor never mows her lawn. You don't have any legal right to force her to mow, but the mess in her front yard is making your neighborhood unsightly and reducing the value of your house. This is especially problematic, because you are planning on selling your house this summer. The reduction in the value of your house is $5,000, and the value of her time to mow the lawn once a week is $1,000. Suppose you offer her a deal in which you pay her $3,000 to mow. How does this deal affect surplus? The deal increases your neighbor's surplus but decreases yours. The deal increases only your surplus. The deal increases both your surplus and your neighbor's. The deal increases only your neighbor's surplus. The deal increases your surplus but decreases your neighbor's. The deal does not affect surplus.

The deal increases both your surplus and your neighbor's.

economic development

The goal is not only the immediate effect of the policy on poverty but also the growth it will produce for the entire economy. Common examples include public investments in education, job training, and infrastructure.

diminishing marginal product

a principle stating that the marginal product of an input decreases as the quantity of the input increases

Suppose that legally, people own the right to clean air. That is, it is illegal for factories to emit toxic gases into the atmosphere. (Or, in other words, the right to clean air has been assigned to citizens rather than factories.) Thus, legally, factories would need to either abate pollution or pay people for the damage to the air. Either case would be expected to internalize the cost of pollution and reach an optimal level of output. Which of the following is the most likely reason that private markets may not reach this optimal solution? There is no incentive to have clean air. The assignment of property rights is not fair. The assignment of property rights is not efficient. Transaction costs may be too high.

Transaction costs may be too high.

behaving strategically

When the trade-offs you face are determined by the choices someone else will make, behaving rationally involves behaving strategically. Behaving strategically means acting to achieve a goal by anticipating the interplay between your own and others' decisions.

Whichever method a government chooses to supply a public good, these common issues arise: a. Who will pay for the public good? b. Who will supply the resources needed to produce the public good? c. What resources are used to produce the public good? d. What is the right amount of the public good to supply?

a and d are checked

competitive market

a market in which fully informed, price-taking buyers and sellers easily trade a standardized good or service

cross-price elasticity of demand

a measure of how the demand for one good changes when the price of a different good changes Cross-price elasticity of demand between A and B = % change in quantity of A demanded/% change in price of B negative --> goods are compliments positive ---> goods are substitutes

absolute poverty line

a measure that defines poverty as income below a certain amount, fixed at a given point in time (usually set based on the cost of certain essential goods)

relative poverty line

a measure that defines poverty in terms of the income of the rest of the population

commitment device

a mechanism that allows people to voluntarily restrict their choices in order to make it easier to stick to plans

collusion

a more negative word for cooperation in this business context

cartel

a number of firms who collude to make collective production decisions about quantities or prices. (the key is to remember games will be repeated many times....) interests in long term profits disuade individual firms from chasing short term profits.

principal-agent problem

a person called a principal entrusts someone else, called the agent, with a task.

another common response to monopolies (other than controlling the price with a price ceiling), is to split an industry "vertically" and introduce competition into parts of it

a vertical split divides the original firm into companies that operate at different points in the production process (horizontal split would divide monopolies into multiple companies that compete to sell the same product).

surplus

a way of measuring who benefits from a transaction and by how much

Suppose an economic boom causes incomes to increase. Assume that smartphones are a normal good. This will cause the: a. demand for smart phones to increase, and both the price of smart phones and the quantity of smart phones traded would rise. b. supply of smart phones to decrease; the price of smart phones would increase and the quantity of smart phones traded would fall. c. supply of smart phones to increase; the price of smart phones would decrease and the quantity of smart phones traded would rise. d. demand for smart phones to decrease, and both the price of smart phones and the quantity of smart phones traded would fall.

a. demand for smart phones to increase, and both the price of smart phones and the quantity of smart phones traded would rise. If incomes increase, there will be an increase in demand for smart phones. Demand will shift to the right along an upward sloping supply curve. If no other shifts occurred, both the price of smart phones and the quantity of smart phones traded would rise.

Imagine that the owner of a bagel shop visits it only once a day. According to company policy, employees are supposed to pay for all the bagels they eat. Moral hazard is likely to be a problem in this situation and to prevent it the owner could: a. keep track of the bagel supply versus receipts. b. install surveillance equipment. c. spend more time in the shop. d. provide each employee with a free bagel every morning. e. stop by the shop at noon every day.

a, b, and c are checked d and e are unchecked

In a perfectly competitive market, MR = a. Price. b. Average revenue. c. Total revenue. d. Δ in total revenue/ Δ in quantity.

a, b, and d are checked

The factors that affect the price elasticity of supply include: a. time needed to adjust to changes in price b. degree of necessity c. the flexibility of the production process d. relative need and relative cost e. the availability of inputs

a, c, and e are checked

There is a town with exactly 1,000 residents. In the town, 75% of the residents make healthy choices and 25% of the residents consistently make unhealthy choices, but the health insurance company in town cannot tell who is healthy and who is unhealthy. A healthy person has an average of $600 in medical expenses each year and is willing to pay $800 for insurance. An unhealthy person has an average of $1,600 in medical expenses each year and is willing to pay $2,000 for insurance. The health insurance provider can offer insurance at only one price. a. In equilibrium, the price of insurance will be at least b. In equilibrium, who will buy insurance?

a. $1,600 b. Unhealthy residents The health insurance provider can offer only one price. If it tries to cover the costs of both the unhealthy and the healthy individuals, its costs on average will be (0.75 × 600) + (0.25 × 1,600) = $850. Because healthy individuals are only willing to pay up to $800, healthy individuals would not purchase this insurance. Only unhealthy individuals would purchase insurance. In this case, the insurance provider needs to cover the costs of the unhealthy individuals, which are $1,600. Thus, insurance will cost at least $1,600.

Last year, Jarod left a job that pays $60,000 to run his own bike-repair shop. Jarod's shop charges $65 for a repair, and last year the shop performed 3,000 repairs. Jarod's production costs for the year included rent, wages, and equipment. Jarod spent $50,000 on rent and $100,000 on wages for his employees. Jarod keeps whatever profit the shop earns but does not pay himself an official wage. Jarod used $20,000 of his savings to buy a machine for the business. His savings were earning an annual interest rate of 5 percent. a. What is Jarod's annual accounting profit? b. What is Jarod's annual economic profit?

a. Accounting profit = Total revenue - Explicit costs Accounting profit = ($65 × 3,000) - ($50,000 + $100,000) Accounting profit = $195,000 - $150,000 Accounting profit = $45,000 b. Economic profit = Total revenue - (Explicit costs + Implicit costs) Economic profit = ($65 × 3,000) - ($50,000 + $100,000 + Forgone interest on savings + Forgone wages) Economic profit = ($65 × 3,000) - [$50,000 + $100,000 + (0.05 × $20,000) + $60,000] Economic profit = $195,000 - $211,000 Economic profit (loss) = −$16,000

perfectly inelastic demand

demand for which quantity demanded remains the same regardless of price; represented by a perfectly vertical line

unit-elastic

demand that has an absolute value of elasticity exactly equal to 1 that is, if a percentage change in price causes the same percentage change in the quantity demanded

You are considering buying one of two types of health insurance, both with the same premium. You guess that in the next year there is a 1 percent chance of serious illness that will cost you $67,500 in health care, a 9 percent chance of a moderate illness that will cost you $2,500, and a 90 percent chance of regular health care needs that will cost you $500. One type of health insurance is emergency-only coverage; it will cover your expenses for serious illness but not moderate illness or regular care. The other type covers moderate illness and regular expenses, but its payout is capped, so it will not cover the cost of a serious illness. a. What is the expected value of payouts from the emergency-only insurance? .b. What is the expected value of payouts from the capped-coverage insurance? .c. Which option is a more risk-averse person likely to choose?

a. EV = 0.01(67,500) = $675. b. EV = 0.09(2,500) + 0.90(500) = $675. c. The emergency-only coverage is the more risk-averse option. Even though there is only a 1 percent chance of this outcome, if the serious illness did occur, it would be the most financially damaging.

Suppose you own a beach house on a coast that has a small chance of encountering a hurricane each year. There is a 1% chance that there will be a hurricane this year that would completely destroy your $350,000 home. (Assume that this home is the only store of wealth that you have.) An insurance company has offered you insurance that would reimburse you the entire value of your home in the event of a hurricane. The premium for this insurance is $4,000. a. What is the expected value of your wealth if you do not purchase insurance? b. What is the expected value of your wealth if you purchase the insurance at a $4,000 premium? c. Which option would a risk-averse person choose? d. Which option would a risk-loving person choose? e. What would the premium have to be to make a risk-neutral person indifferent between buying the insurance and not buying the insurance? f. If the insurance company offered the premium you found in part (e), what would a risk-averse person do?

a. EV =[0.01×0]+[0.99×350,000] = $346,500EV =[0.01×0]+[0.99×350,000] = $346,500 b. EV = [0.01 × (−$350,000 − $4,000 + $350,000)] + [0.99 × ($350,000 − $4,000)] = $346,000 c. The expected value of your wealth with insurance is less than the expected value of your wealth without insurance. However, having insurance is much less risky. We can't say for sure whether a risk-averse person will buy insurance, but we know it is a possibility. d. A risk-loving person is going to chose the riskier option, especially when that option has a higher expected value. e. A risk-neutral person will be indifferent between buying insurance and not buying it when the expected values of the two options are equal. This will happen when the premium charged is exactly equal to the expected loss = 0.01 × 350,000 = $3,500. f. If the premium is $3,500, the expected value of your wealth with insurance is exactly equal to the expected value of your wealth without insurance. A risk-averse person would choose the less risky option and would thus buy insurance.

In each of the following examples, name the factor that affects demand and describe its impact on your demand for a new cell phone. a. You hear a rumor that a new and improved model of the phone you want is coming out next year. consumer preferences income price of a related good expectations Your demand will b. Your grandparents give you $500. expectations consumer preferences income price of a related good Your demand will c. A cellular network announces a holiday sale on a data package that includes the purchase of a new smartphone. expectations income consumer preferences price of a related good Your demand will d. A friend tells you how great his new phone is and suggests that you get one, too. income expectations price of a related good consumer preferences Your demand will

a. Expectations. Your current demand will decrease in the present as you postpone purchasing under the expectation that a new model will be released next year. b. Income. Your purchasing power has increased due to the money given to you by your grandparents. Your demand will increase. c. Price of a Related Good. When the price of a data package (a complementary good) goes down due to the sale, demand for smartphones increases. d. Consumer Preferences. Your friend influences your interest in purchasing a cell phone. Your friend's enjoyment of his phone and suggestion that you also purchase a phone increases your demand.

Identify which way the labor supply curve would shift under the following scenarios. a. A country experiences a huge influx of immigrants who are skilled in the textile industry: b. Wages increase in an industry that requires similar job skills: c. Changes in technology increase the marginal productivity of labor:

a. Immigration increases labor supply. The labor supply curve would shift to the right. b. Better opportunities in a related job market would shift the labor supply curve to the left in the industry with lower wages and to the right in the industry where wages increased. c. An increase in the marginal productivity of labor will cause an increase in demand for labor. Wages will rise and there will be a movement along the labor supply curve.

Which of the following has a more elastic demand in the short run? a. Pomegranate juice or drinking water: b. Cereal or Rice Krispies cereal: c. Speedboats or gourmet chocolate:

a. The demand for pomegranate juice would be more elastic than the demand for drinking water (a necessity). b. There are more substitutes for a particular type of cereal like Rice Krispies than there are for cereal itself. c. Even though both goods could be considered luxuries, a speedboat represents a larger portion of a household budget than gourmet chocolate, so the demand for speedboats would be more sensitive (more elastic) to price changes.

Consider the following scenarios. a. Scenario one has two options available. Option A: There is a 50% chance of winning $1,000 and a 50% chance of winning $0. Option B: There is a 100% chance of receiving $500. A risk-averse person will choose ___________ b. Scenario two has two different options available. Option C: There is a 40% chance of winning $90 and a 60% chance of winning $110. Option D: There is a 100% chance of winning $90. A risk-averse person will choose ___________ . c. Scenario three has two more options available. Option E: There is a 50% chance of winning $0 and a 50% chance of winning $100. Option F: There is a 50% chance of winning $20 and a 50% chance of winning $60. A risk-averse person might choose ___________

a. Though the two options have the same expected value, option B has no risk, so a risk-averse person will choose option B. b. Though option C involves risk, it will not yield a lower payoff than option D. A risk-averse person has no reason to choose option D. Option C is at least as good or better. c. Thought option E is riskier, it has a higher expected value. It's unclear what a risk-averse person will prefer.

Keri owns a landscaping business. For each of Keri's inputs given in the list below, indicate whether the associated cost is fixed or variable, explicit or implicit, and whether the cost affects accounting profit only, economic profit only, or both. a. landscapers b. plants from home garden c. truck rental d. owned lawn mowers

a. landscapers - Variable cost, Explicit cost, Both b. Plants from home garden- Variable cost, Implicit cost, Economic profit c. Truck rental - Fixed cost, Explicit cost, Both d. Owned lawn mowers - Fixed cost, Implicit cost, Economic profit

When people do not face the full consequences of their actions, they may act in riskier ways than they would otherwise. a. This situation is called: moral hazard. adverse selection. market failure. imperfect competition. b. An example of this problem is: buyers cannot determine the value of a stock before purchase. people in poor health are more likely to buy insurance. drivers with insurance may drive less carefully. only low-quality cars will be available on the market.

a. moral hazard b. drivers with insurance may drive less carefully.

Jane uses an online dating service. For each of the following activities say whether Jane is screening or signaling. a. Jane views profiles of only non-smokers: b. Jane describes her volunteer activities in her profile: c. Jane lists museums and foreign films among her interests: d. Jane looks for matches who live within 25 miles of her address:

a. screening b. signaling c. signaling d. screening

consumption externality

an externality that occurs when a good or service is being consumed

production externality

an externality that occurs when a good or service is being produced

world trade organization (WTO)

an international organization designed to monitor and enforce trade agreements, while also promoting free trade

Welfare losses in monopolistically competitive industries: are small relative to the benefits of variety. can be corrected without reducing the amount of variety offered. can easily be corrected through regulation. are of great concern to governments.

are small relative to the benefits of variety. In general, governments are not very concerned about welfare losses in monopolistically competitive industries. They are likely to be small relative to the benefits from variety, and they could not be decreased without reducing the amount of variety available to consumers.

cognitive biases

are systematic patterns in how we behave that lead to consistently erroneous (wrong) decisions.

strategies

are the plans of action that players follow to achieve their goals.

payoffs

are the rewards that come from particular actions.

Many people are concerned about the rising price of gasoline. Suppose that government officials are thinking of capping the price of gasoline below its current price. Which of the following outcomes do you predict will result from this policy? a. Drivers will purchase more gasoline. b. Quantity demanded for gasoline will increase. c. Long lines will develop at gas stations. d. Oil companies will work to increase their pumping capacity.

b and c are checked

You have just played rock, paper, scissors with your friend. Which of the following outcomes is a Nash equilibrium? a. You played scissors and your friend played paper. You won. b. There is no Nash equilibrium. c. You played scissors and your friend played scissors. You tied. d. You played scissors and your friend played rock. You lost.

b is checked There are no Nash equilibria in this game. One player will always regret his choice.

Todd wants to climb Mount Fuji. In order to do that, he knows that he must have enough money to travel to Japan. Before that, he needs to physically be able to climb the mountain. So today, he joins a gym and starts exercising. Todd's strategic plan is an example of: backward induction. a tit-for-tat strategy. a sequential strategy. a dominant strategy.

backward induction.

first mover advantage

benefit enjoyed by the player who chooses first and as a result gets a higher payoff than those who follow

external benefits

benefits that accrue without compensation to someone other than the person who caused it

Which (if any) of the following scenarios is the result of a natural monopoly? a. Patent holders of genetically modified seeds are permitted to sue farmers who save seeds from one planting season to the next. b. Doctors in the United States are prohibited from practicing without a medical license. c. There is one train operator with service from Baltimore to Philadelphia. d. Coal is used as the primary energy in a country with abundant coal deposits.

c is the only one checked There is one train operator with service from Baltimore to Philadelphia: Railroads have large fixed costs. Economies of scale suggest that it does not make sense to lay multiple track routes to the same destination.

The arguments for intervention fall into three categories:

changing the distribution of surplus, encouraging or discouraging consumption of certain goods, and correcting market failures.

Johnston Forest in Rhode Island has a cave that houses thousands of fruit bats. Bat droppings are highly acidic and have ruined the paint on many Rhode Island cars. The flying radius of the Johnston Forest bats encompasses two towns, Johnston and Foster. The residents of Johnston collectively value bat removal at $400,000. Foster residents collectively value bat removal at $500,000. Pest control experts estimate that the cost of bat removal would be $450,000. Which of the following scenarios would lead to removal of the bats? Foster pays Johnston $50,000 to contribute to bat removal. Foster and Johnston evenly split the cost of bat removal. Johnston contributes nothing toward bat removal.

check all three

external costs

costs imposed without compensation on someone other than the person who caused them

variable costs

costs that depend on the quantity of output produced

elastic

demand that has an absolute value of elasticity greater than 1 With elastic demand, a given percentage change in the price of a good will cause an even larger percentage change in the quantity demanded.

inelastic

demand that has an absolute value of elasticity less than 1 With inelastic demand, a given percentage change in price will cause a smaller percentage change in the quantity demanded.

welfare state

describes the idea that government has a responsibility to promote the economic well-being of its citizens.

statistical discrimination

distinguishing between choices by generalizing based on observable characteristics in order to fill in missing information

fungible

easily exchangeable or substitutable

A state facing a budget shortfall decides to tax soft drinks. You are a budget analyst for the state. You would expect to collect more tax revenue in the: first year because people will stock up on soda. second year because elasticity is smaller over a longer time frame. In the second year more trades will occur than occurred in the first year. first year because elasticity is larger over a longer time frame. In the second year fewer trades will occur than occurred in the first year. second year because people will adjust and begin to consume more drinks in the second year.

first year because elasticity is larger over a longer time frame. In the second year fewer trades will occur than occurred in the first year.

The steepness of the demand curve is determined in part by the degree of substitutability between products. If buyers see products as good substitutes, demand will be _______ If buyers see products as poor substitutes, demand will be ________

flatter steeper From the buyer's perspective, if there are many substitutes for a good or service, their demand curve will be relatively flat (or elastic). On the other hand, if there are few substitutes for a good or service, their demand curve will be relatively steep (or inelastic). The demand curve will be vertical if there are no substitutes and will be horizontal if there are, many perfect substitutes.

imports

goods and services that are produced in other countries and consumed domestically.

inferior goods

goods for which demand decreases as income increases

complements

goods that are consumed together, so that purchasing one will make consumers more likely to purchase the other

substitutes

goods that serve a similar enough purpose that a consumer might purchase one in place of the other

risk-seeking

having a high willingness to take on situations with risk; when faced with two options with equal expected value, the one with higher risk is preferred

risk-averse

having a low willingness to take on situations with risk; when faced with two options with equal expected value, the one with lower risk is preferred

present value

how much a certain amount of money that will be obtained in the future is worth today

smaller-than-efficient scale.

in a monopolistically competitive market, firms produce at the point where ATC is tangent to the demand curve. At this point, they could decrease ATC by producing more, but choose not to because doing so would decrease profits. This results in firms producing at a smaller-than-efficient scale.

Social norms can solve the tragedy of the commons by: making the good excludable. increasing cost or reducing benefits of consumption. correcting informational asymmetries. internalizing the externality.

increasing cost or reducing benefits of consumption. The tragedy of the commons occurs when individuals make decisions that are individually rational but collectively inefficient. Thus, the common resource is overconsumed, which leads to a worse result for all. One way to solve this is through social norms that discourage consumption (or encourage positive actions). These social norms essentially increase the cost or decrease the benefits of consumption, and thus the overconsumption problem is reduced.

purchasing power parity (PPP) index

index that describes the overall difference in prices of goods between countries

value of the marginal product

the increase in revenue generated by the last unit of an input; calculated as the output generated by an additional unit of input times the price of the output. Value of marginal product (VMP)=Marginal product×Price of output

Reputation may solve some problems with information asymmetries because: it increases the opportunity cost of less desirable actions. it eliminates the problem of information asymmetries. it eliminates adverse selection. it screens for better employees.

it increases the opportunity cost of less desirable actions. Building a good reputation is costly and time-consuming. Since a good reputation is valuable, agents will be less likely to take actions that will harm that reputation.

In an economic sense, a country is small if: it can buy only a limited number of imports. its geographic size is less than a particular number. it is not important in global political negotiations. it is a price taker in world markets. Suppose that a country is producing coats at a price of $100 per coat prior to opening trade. The world price of coats is $80, and thus the country will become a net importer of coats. If this country has a large economy, which of the following is true? The world price of coats will rise to more than $100. The world price of coats will fall to less than $80. A big economy cannot gain from trade. The country will gain less from trade than if it were a small economy.

it is a price taker in world markets. The country will gain less from trade than if it were a small economy. In this situation, since the economy is large, the increased demand for coats in the world market will cause the world price to rise. Thus, the economy will not gain as much as if the world price had not changed (that is, if it were a small economy). The price will rise above $80, but will not rise above the original domestic price of $100, so the country will still gain from trade.

If a firm has economies of scale, increasing the quantity produced will lead to: higher long run average costs. higher profits. lower long run average costs. lower short run average costs. The efficient scale of production is when: long run average total cost is minimized. long run profit is maximized. short run average total cost is minimized. long run total cost is minimized.

lower long run average costs. long run average total cost is minimized.

Tradable allowances are like taxes in that they both: impose a quota on output. maximize surplus. are not efficient. None of these statements is true.

maximize surplus.

mid-point method

method that measures percentage change in quantity demanded (or quantity supplied) relative to a point midway between two points on a curve; used to estimate elasticity % change in Q demanded = Q2−Q1/Average of Q = Q2−Q1/(Q2+Q1/2) % change in P = P2−P1/Average of P = P2−P1/(P2+P1/2)

If income increases by 10 percent and the quantity demanded of a good then increases by 5 percent, the good is: inferior and a necessity. normal and a luxury. normal and a necessity. inferior and a luxury.

normal and a necessity. If income increases by 10 percent and the quantity demanded of a good then increases by 5 percent, the good is normal (income elasticity is positive) and income-inelastic (income elasticity of 5/10 is less than one).

ultimatum game

one player makes an offer and the other player has the simple choice of whether to accept or reject

You would like to save more money. Which of the following strategies will help you overcome time-inconsistency? a. Deciding how much you need to save. b. Setting up a savings account. c. Putting reminders in your calender to make deposits. d. Enrolling in an automatic-transfer program that will move a specified amount of money from your checking account to your savings account each month.

only d is checked

For all its similarities to a monopolist in the short run, the monopolistically competitive firm faces one huge problem that the monopolist does not in the long run: products are differentiated. other firms cannot enter the market. demand is downward sloping. other firms can enter the market.

other firms can enter the market. The major difference between monopoly and monopolistic competition is that firms can enter the market in monopolistic competition. If positive economic profits are being earned in a monopolistically competitive market, additional firms will enter the market. In the long run, firms in a monopolistically competitive market face the same situation as firms in a perfectly competitive market: profits are driven to zero.

In much of the United States and Canada, logging takes place in both privately owned and government-owned forests. a. Privately owned forests are: private, rival, and nonexcludable. public, rival, and excludable. private, nonrival, and excludable. private, rival, and excludable. b. Suppose that anyone is legally allowed to enter a government-owned forest and start logging. These forests are: public free riders. common resources. rival and private. private resources. c. The rate of logging in a government-owned forest would be _______ than the efficient level.

private, rival, and excludable. common resources. faster

quota rents

profits earned by foreign firms or governments under a quota

factors of production

the ingredients that go into making a good or service (labor, land, and capital)

willingness to pay (reservation price)

the maximum price that a buyer would be willing to pay for a good or service

poverty rate

the percentage of the population that falls below the absolute poverty line

Due to arduous certification requirements, Nature's Crunch is currently the only certified organic produce grower in a region that produces lots of non-organic produce alternatives. From a profit-maximizing perspective, would it be better for Nature's Crunch to lobby the government to relax organic certification requirements or to require grocery stores to clearly label its produce as organic?

require grocery stores to clearly label its produce as organic Nature's Crunch would not want the government to relax organic certification requirements because doing so would create competition. As the only certified organic grower, Nature's Crunch has a regional monopoly on selling organic produce. Nature's Crunch would be better off lobbying the government to require that certified organic produce be clearly labeled in grocery stores so that consumers can easily identify it.

diseconomies of scale

returns that occur when an increase in the quantity of output increases average total cost

constant returns to scale

returns that occur when average total cost does not depend on the quantity of output

market failures

situations in which the assumption of efficient, competitive markets fails to hold

The free-rider problem leads to a market failure: Markets typically undersupply public goods. Fortunately, this undersupply problem can be solved in a variety of ways:

social norms, government provision, and private property rights

But remember that absolute advantage does not determine who produces what. Comparative advantage

the ability to produce a good or service at a lower opportunity cost than others can. The fact that companies in Bangladesh sell clothing to the United States doesn't necessarily tell us that Bangladesh is more productive at making clothes, but it definitely tells us that Bangladesh's opportunity cost of making a shirt is lower than that of the United States.

absolute advantage

the ability to produce more of a good than others with a given amount of resources—for instance, to produce more T-shirts with the same number of workers.

marginal cost (MC)

the additional cost incurred by a firm when it produces one additional unit of output Marginal cost=Change in total cost/Change in quantity

quantity demanded

the amount of a particular good that buyers will purchase at a given price during a specified period

total revenue

the amount that a firm receives from the sale of goods and services; calculated as the quantity sold multiplied by the price paid for each unit

total revenue

the amount that a firm receives from the sale of goods and services; calculated as the quantity sold multiplied by the price paid for each unit An increase in price affects total revenue in two ways: 1. It causes a quantity effect, or a decrease in total revenue that results from selling fewer units of the good. 2. It causes a price effect, or an increase in total revenue that results from receiving a higher price for each unit sold.

expected value

the average of each possible outcome of a future event, weighted by its probability of occurring. Expected value=EV=(P1×S1)+(P2×S2)+...+(Pn×Sn)

means-tested

the characteristic of a program that defines eligibility for benefits based on recipients income

transaction costs

the costs incurred by buyer and seller in agreeing to and executing a sale of goods or services

economic rent

the gains that workers and owners of capital receive from supplying their labor or machinery in factor markets the area above the supply curve but below the equilibrium rental price is economic rent. It represents the rental price of a factor of production minus the cost of supplying it

The design of the U.S. federal income tax system is progressive

the government charges lower tax rates to those with lower incomes.

coase theorem

the idea that even in the presence of an externality, individuals can reach an efficient equilibrium through private trades, assuming zero transaction costs

credit constraint

the inability to get a loan even though a person expects to be able to repay the loan plus interest.

interest rate

the price of money, typically expressed as a percentage per dollar per unit of time; for savers, it is the price received for letting a bank use money for a specified period of time; for borrowers, it is the price of using money for a specified period of time The interest rate tells us how much more the money is worth to the bank today than in the future.

purchase price

the price paid to gain permanent ownership of a factor of production

rental price

the price paid to use a factor of production for a certain period or task

risk diversification

the process by which risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual.

compounding

the process of accumulation that results from the additional interest paid on previously earned interest

human capital

the set of skills, knowledge, experience, and talent that determine people's productivity as workers. Workers have different amounts and types of human capital that allow them to be more or less productive at different tasks and therefore earn more or less money. You acquire human capital by getting a good education, being healthy, and gaining experience in jobs. You also benefit from watching and learning from your peers, your neighbors, and others around you. You probably know (or know of) well-educated and successful professionals who came from humble backgrounds. But evidence shows that children in poor communities typically have reduced opportunities to acquire human capital, for many reasons. Think about all of the ways your skills and abilities are influenced by the environment in which you grew up. How good were the schools in your neighborhood? Did you have regular check-ups with a doctor? Was a family member able to help you with your homework? Were you actively encouraged to go to college? Can you afford to take unpaid internships to learn new skills rather than working during the summer?

Individual preferences about whether to have money now, or receive it at some future date, are related to: the period you will have to wait. your relationship with a banker. the value of whatever you could otherwise have done with the money in the meantime. the types of finance classes you have taken.

the value of whatever you could otherwise have done with the money in the meantime.

accounting profit

total revenue minus explicit costs

signaling

when people take action, on purpose or not, to reveal their own private information