exam
Refer to Demand and Total Cost of Production. The profit from selling two units would be
$39
ESSAY: Explain output and price determination in monopolistic competition -profit max rule
...
How do you derive the short-run total cost function algebraically?
1. Fix a specific value of K and then use the production function to find L in terms of Q. 2. Substitute this expression into the equation TC=wL+rK.
State two solutions to the positional arms race.
1. Limiting the workweek. 2. Workplace safety regulation.
State the 5 solutions to reduce moral hazard in a firm situation.
1. The worker receives a fixed wage. 2. Set minimal production; fire the worker if this is not reached. 3. Risk redistribution; the firm employs workers who bear all the risk. 4. Franchise; the worker receives the total production revenue in exchange for a fixed rent. 5. Sharecropping system; the worker receives a certain share of the revenue.
Why are most collusive oligopolies short-lived?
1. they're strictly illegal under Canadian anti-combine laws 2. there is a great temptation for firms to cheat on the agreement
Suppose that as the price of Y falls from $2.00 to $1.90, the quantity of Y demanded increases from 110 to 118. Then the absolute value of the price elasticity (midpoint method) is:
1.37.
The following table is for a purely competitive market for resources. Refer to the above table. How many more workers will the firm hire when the wage rate is $15 instead of $30?
2 Workers
Laffer Curve
A curve on a graph demonstrating that tax revenue is a curve that when taxes rise, tax revenues rise but once they pass a certain level, the tax revenue begins to fall again
Define the total product curve.
A curve showing the amount of output as a function of the amount of variable input (equivalent to the short-run production function).
Define the Engel curve.
A curve that plots the relationship between the quantity of X consumed and income.
If producers must obtain higher prices than before to produce a given level of output, then the following has occurred:
A decrease in supply.
Define the income-compensated demand curve.
A demand curve that tells how much consumers would buy at each price if they were fully compensated for the income effects of price changes. It plots only the substitution effect.
Compensating Differential
A difference in wages that arise to offset the nonmonetary characteristics of different jobs
Derived Demand
A firm's demand for a factor of production is derived from its decision to supply a good in another market
Define the perfectly discriminating monopolist.
A monopolist who uses first-degree price discrimination to eradicate consumer surplus.
State the 3 aspects of the principal-agent problem.
Adverse selection, moral hazard, and signalling.
Poverty Line
An absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty
Define a firm.
An entity which produces and sells goods and services in a marketplace.
Which of the following statements is true about price ceilings? A. Price ceilings cause goods to be rationed. B.Price ceilings cause goods to be rationed by some other means than legally determined market prices. C. Ration coupons are the only way to ration goods when price ceilings are in place. D. All of the other statements are correct.
B. Price ceilings cause goods to be rationed by some other means than legally determined market prices.
Entrepreneurs differ from other innovators because they:
Bear personal financial risk
Under perfect competition in the long run:
Both allocative efficiency and productive efficiency are achieved.
The elasticity of demand for a service tells us each of the following except. A) how big a price decrease would be necessary to induce a 10% increase in quantity demanded. B) how much of an increase in total revenue would be generated by a 5% cut in price. C) how much total profit would be affected by a 1% price increase. D) how big a percent decrease in quantity demanded would result from a 1% increase in price.
C) how much total profit would be affected by a 1% price increase.
Scarcity can be eliminated if:
Can never be eliminated.
Flashy expensive ad
Can signal that a product is really good without saying anything about that product.
(Ch. 9)A purely competitive firm:
Cannot earn economic profit in the long run.
Change in supply
Change in •inputs •technology •sellers expectations •# of sellers
What could be a solution to the tragedy of the commons?
Charging a fee equal to the difference between average product and the opportunity cost.
Define price discrimination.
Charging different prices to different buyers.
Cooperative game
Collusion by two firms in order to improve their profit maximizations.
Define signalling.
Communication that conveys information.
Price discrimination pricing rule
Companies applying price discrimination charge prices according to the elasticity of demand by different consumer groups: inelastic demand = charged higher price elastic demand = charged lower price
State the optimal decision rule in terms of wages.
Continue searching until you find an offer at least as high as the acceptance wage.
Repeated games
Cooperation occurs as long as others continue to cooperate. (tit-for-tat)
Define variable cost.
Cost that varies with the level of output in the short run.
State the 2 principles of signalling.
Costly-to-fake principle, full-disclosure principle.
Variable costs
Costs that do change along with output (wages, payments for energy and raw materials, insurance on merchandise)
Fixed Costs
Costs that do not vary with the quantity of output produced
The classic example of a private, unregulated monopoly is:
De Beers
Slope/Rate of Change DeltaQ/Delta P
DeltaQ/Delta P or Q1-Q0/P1-P0
What do MPB and MPC represent in a perfectly competitive market?
Demand and supply.
Which of the following statements is correct?
Demand for factors of production is derived demand.
Positive Statements
Descriptive statements that make a claim about how the world is
Joint profit maximization
Determination of price based on the marginal revenue derived from the market demand schedule and marginal cost schedule of the firms in the industry.
How do you find the mixed-strategy Nash equilibrium?
Determine the players' expected utility of each action, in terms of the probabilities of the other players' actions, and then set these expected utilities equal to one another and thus calculate the probabilities.
On Graph A which worker the Marathon Company should not hire?
E
The MR=MC rule can be restated for a purely competitive seller as P=MC because:
Each additional unit of output adds exactly its price to total revenue.
Mutual interdependence means that:
Each firm must consider the possible reactions of rivals when establishing price policy
Noncooperative game
Each firm sets its own price without consulting other firms.
Small Market Share (large number of firms in monopolistic competition)
Each firm supplies a small part of the total industry. Has only limited power to influence the price of it's product, but can deviate from the average amount by a relatively small amount
Which one of the following is the most accurate definition of economics?
Economics is the study of how society chooses to allocate scarce resources.
If MSB of a new product equals MSC
Efficiency is achieved for the new product.
Multilateral Agreement
Everybody lowers tariffs on everybody
Two key differences between monopolistic competition and perfect competition
Excess capacity, markup
What is the consequence of a price ceiling?
Excess demand.
What is the consequence of a price floor?
Excess supply.
The electricians union is a good example of:
Exclusive unionism
Expectations
Expectations about the future price of a good or your future income affect how much of a good you buy today
ESSAY: Difference between explitcit costs vs. implicit costs
Explicit costs are the same as accounting costs. They include payments for the use of external resources (owned by third parties) such as wages, interest payments, and payments for energy and raw materials. Implicit costs are imputed payments for the use of internal resources (resources owned by the firm). Implicit costs are not part of accounting costs but they are part of economic costs. They include "payments" for raw materials, buildings, labor, etc. Normal profit is considered an implicit cost.
A monopoly firm always devotes some of its profits to research.
F
All players have dominant strategies.
F
Although monopoly has lower output than competition, the level of output is efficient.
F
Most economic activity in the United States is carried out by monopolies.
F
A firm that introduces a new and differentiated product
Faces a demand that is less elastic and is able to increase its price and make an economic profit.
A utility maximizing person gets marginal utility of 20 from consuming their last piece of bread and of 10 from consuming their last glass of milk. If a piece of bread costs 5 cents, then a glass of milk must cost 20 cents
False
Fixed costs have no effect on a firm's profit
False
If marginal cost rises when output is increased, then the average cost of production is also rising
False
If the total benefits received from drug enforcement exceed its total costs, then the government should expand its drug enforcement activity
False
The short run is any period of time less than one year, while the long run refers to a period of time one year or more in length.
False
Total cost and marginal cost can both be plotted on the same graph since both include a measure of quantity
False
When a consumer spends all of the income, it must be true that they are maximizing utility
False
What distinguishes the short run from the long run in pure competition?
Firms can enter the market in the long run, but not in the short run.
Rule of thumb models: cost markup practice
Firms follow routine rules (rules of thumb)
Advertising Decrease Demand
If advertising enables a firm to survive, the number of firms in the market might increase, causing this to happen. Also making demand for any one product more elastic.
Efficient Allocation of Production General Principle 2
In any efficient allocation, producers with the lowest cost produce
Why do oligopolies exist?
In oligopoly markets, economies of large-scale production make operation on a small scale extremely unprofitable. Recognition of this fact discourages new firms from entering the market and is the primary reason why oligopolies exist.
A firm in monopolistic competition must market its product
In order to do so, it must advertise and package its product in a way that convinces buyers that they are getting the higher quality for which they are paying a higher price.
How is short-run equilibrium determined?
In the short run, a monopolistically competitive firm achieves profit maximization at the intersection of the marginal revenue and marginal cost curves. A monopolistically competitive firm is making short-run economic profits when the equilibrium price is greater than average total cost at the equilibrium output. When equilibrium price is below average total cost at the equilibrium output, the firm is minimizing its economic losses.
Economic costs
Include the opportunity cost of all resources, external and internal (imputed rent, imputed interest, imputed salaries). IMPLICIT COSTS
Define the full-disclosure principle.
Individuals must disclose even unfavourable qualities about themselves, lest their silence be taken to mean that they have something even worse to hide.
Natural monopolies
Industries regulated by subsequent legislation including transportation, pubilc utilities, and communications
Explicit Costs
Input costs that require an outlay of money by the firm
Total cost of advertising
Is a fixed cost
In the short run, a purely competitive seller will shut down if product price:
Is less than AVC.
The efficient degree of product variety
Is the one for which the marginal social benefit of product variety equals its marginal social cost.
How does elasticity change along a demand curve?
It becomes less elastic as we move downwards.
What is the geometric interpretation of expected utility?
It is a point on the chord joining the winning and losing endpoints.
What does the production function look like if it satisfies the law of diminishing returns?
It is concave, i.e. its second derivative is negative.
What is the graphical representation of marginal product?
It is equal to the slope of the total product curve at that point.
How is the marginal rate of substitution represented graphically?
It is the absolute value of the slope of the indifference curve at a certain point.
What is the significance of Harold Hotelling's model of spatial competition?
It provides insight on whether firms will locate in a way that is efficient.
Explain the hot-dog vendor location problem.
It would be pareto-optimal for one vendor to locate at A and the other at B. However, in practice, they will both locate at C. This is because, if they locate at A and B, they will each have an incentive to move closer to the other in order to gain extra customers, so they will eventually both settle at C. This is worse for the consumers that live at either end of the strip, as they have to travel further.
Bigness, or large firms, may benefit consumers in which of the following ways?
Larger firms may take advantage of economies of scale and be able to produce at lower prices.
If the marginal revenue product (MRP) of labor is less than the wage rate:
Less labor should be employed
Inelastic
Less than 1 P⬆️ TR⬆️
What does the utility function of a risk neutral person look like?
Linear.
Equals Price
Marginal revenue for perfect price discrimination, and market demand curve becomes the monopoly's marginal revenue curve.
A profit maximizing firm should hire an input as long the:
Marginal revenue product of the input is at least as much as the cost of hiring the input
What does the demand curve reflect?
Marginal utility of consumption.
In long run equilibrium, purely competitive markets:
Maximize the sum of the consumer surplus and producer surplus.
Income Elasticity of Demand
Measures how the quantity demanded changes as consumer income changes. Calculated by: (Percentage change in quantity demanded)/(Percentage change in income)
Cross-Price Elasticity of Demand
Measures how the quantity demanded of one good responds to a change in the price of another good. Calculated by: (Percentage change in quantity demanded of good 1)/(Percentage change in the price of good 2)
In which market structure do firms produce products that are slightly differentiated in the eyes of the buyers?
Monopolistic Competition
On whom should the burden of adjustment to externalities be placed?
On those who can accomplish it at least cost.
Unilateral Free Trade
One country lowers tariffs on another regardless of what the other does
change in price
P1-P0
How do you derive the long-run total cost curve?
Plot the relevant quantity-cost pairs from the long-run expansion path.
What is the XED for substitutes?
Positive.
Define risk seeking.
Preferences described by a utility function with increasing marginal utility of wealth.
Normative Statements
Prescriptive claims about how the world ought to be
Total revenue =
Price * Quantity
Which of the following firms is most likely to be in a monopolistic competitive market?
Price Chopper
If a firm is confronted with economic losses in the short run, it will decide whether or not to produce by comparing:
Price and minimum average variable cost.
State the graphical interpretation of PED.
Price divided by quantity, multiplied by the reciprocal of the slope of the demand curve.
On a per unit basis economic profit can be determined as the difference between:
Product price and average total cost.
Surplus
Qs > Qd To remove, seller will decrease price until it reaches P*
Define normative questions.
Questions that do not have a definitive answer.
Define positive questions.
Questions that have a definitive answer.
Capture Theory
Regulation serves the self-interest of the producer who captures the regulator and maximizes economic profit.
What prevents economic growth leading to happiness?
Relative deprivation.
What are private goods?
Rivalrous and excludable, e.g. food, clothes, congested toll roads.
Which of the following statements is most accurate?
Some information can be hidden in an oligopoly market.
Use your basic knowledge and your understanding of market structures to answer this question. Which of the following companies most closely approximates a monopolistic competitor? Subway Sandwiches. Pittsburgh Plate Glass. Ford Motor Company. Microsoft.
Subway Sandwiches
Average total cost
TC divided by quantity of output
What condition is necessary in order for an economy to be efficient in terms of its product mix?
The MRS for every consumer must be equal to the MRT.
How are a firm's short-run and long-run average cost curves related?
The SRAC curve is tangent to and lies above the LRAC curve.
Define rationality.
The ability to pick the best decision given knowledge of the consequences and costs of each one.
Absolute Advantage
The ability to produce a good using fewer inputs than another producer
Markup
The amount by which price exceeds marginal cost.
Define compensating variation.
The amount of money a consumer would need to compensate for a price change.
Quantity Demanded
The amount of the good that buyers are willing and able to purchase
Total Revenue
The amount paid by buyers and received by sellers of the good. The total revenue is always calculated by P*Q (The price of the good times the quantity of goods sold)
Consumer Surplus
The amount that a buyer is willing to pay for a good minus the amount that the buyer actually pays for it
Consumer Surplus
The area between the demand curve and the price consumer pays up to the quantity of the equilibrium
Producer Surplus
The area between the price a producer receives and the supply curve up to the quantity of the equilibrium
Refer to Goods X and Y. When the price of good X rises, what happens to the budget line
The budget line becomes steeper, with no change in the vertical intercept
Price Discrimination
The business practice of selling the same good at different prices to different customers
Define economic profit.
The difference between total revenue and total cost, where total cost includes all costs, both explicit and implicit, associated with resources used by the firm.
Define methodological individualism.
The extent to which an individual maximises self-interest.
Deadweight Loss
The fall in total surplus that results from a market distortion, such as a tax
When marginal cost and marginal revenue of product development are equal
The firm is undertaking the profit-maximizing amount of product development
To be able to price discriminate
The firm must sell a product that cannot be resold; and it must be possible to identify and separate different buyer types
If P > AVC
The firm should stay in business
If a purely competitive firm is producing where price exceeds marginal cost, then:
The firm will fail to maximize profit and resources will be underallocated to the product.
Define customer discrimination.
The firm's customers do not wish to deal with minority employees.
Define Cournot duopoly.
The firms compete on the basis of quantity, making an optimal quantity decision assuming that the other firm also optimises its quantity decision.
Government Regulation
The government gives a single firm the exclusive right to produce some good or service
Define the market demand curve.
The horizontal summation of the individual demand curves.
Marginal Product
The increase in output that arises from an additional unit of input
Marginal Social Benefit of an innovation
The increase in price that consumers are willing to pay for it.
Marginal Product of Labour
The increase in the amount of output from an additional unit of labour
Marginal Cost
The increase in total cost that arises from an extra unit of production
What are the real costs of monopolistic competition?
The inefficiencies of monopolistic competition are a by-product of product differentiation and must be weighed against the social benefits of increased product variety.
Factors of Production
The inputs used to produce goods and services
Define the short run.
The longest period of time during which at least one of the inputs used in a production process cannot be varied.
Define the deadweight loss.
The loss of consumer and producer surplus relative to the efficient outcome.
On Graph B what does the triangle FAB represent?
The loss to society at large.
Tax Incidence
The manner in which the burden of a tax is shared among participants in a market
At a high level of product development
The marginal cost of a better product exceeds the marginal revenue
Marginal cost of product development
The marginal dollar spent on developing a new or improved product.
Monopoly
The opposite of a perfectly competitive market, this market occurs when there is only one seller to choose from
Define price elasticity of supply.
The percentage change in quantity supplied that occurs in response to a 1% change in product price.
Quality
The physical attributes that make it different from the products of other firms.
Optimum
The point at which the indifference curve and the budget constraint touch
What does the completeness property of preference ordering mean?
The preference ordering enables the consumer to rank all possible combinations of goods and services.
Equilibrium Price
The price at the equilibrium (intersection point) of the supply and demand curve
Define reservation price.
The price at which a person would be indifferent about doing an activity.
Market Clearing
The price at which the quantity supplied is equal to the quantity demanded
Define scarcity.
The problem of having unlimited human wants/desires and a limited supply of resources/commodities.
Define the allocative function of price.
The process whereby price acts as a signal that guides resources away from the production of goods whose prices lie below cost toward the production of goods whose prices lie above cost.
In Europe during the 14th century, the Black Plague killed 24 million people or close to 37 percent of the population. How would this affect the production possibilities curves for the countries of Europe at that time?
The production possibilities curves for these countries would have shifted inward.
Rivalry in Consumption
The property of a good whereby one person's use diminishes other people's use
Define rivalry.
The property of a good whereby one person's use diminishes other people's use.
Equilibrium Quantity
The quantity at the equilibrium (intersection point) of the supply and demand curve
Efficient Scale
The quantity at which average total cost is a minimum
Law of Demand
The quantity of a demanded good rises and falls with the price
Efficient Scale
The quantity of output that minimizes average total cost
Life Cycle
The regular pattern of income variation over a person's life
How could the state use exclusive contracting for a natural monopoly?
The regulator could specify in detail the service it wants provided, and then call for private companies to submit bids to supply the service, giving the contract to the lowest bidder. This has the advantage that firms have an incentive to bid the true value of operating in the market. However, many services are complex enough that setting out in detail what is expected of the private provider is impossible, so judging who will provide the best value for money is complicated.
Production Function
The relationship between the quantity of inputs used to make a good and the quantity of output of that good
Marginal Seller
The seller who would leave the market first if the price were any lower
Define Homo economicus.
The stereotypical decision-maker in the self-interest model.
Macroeconomics
The study of economy wide phenomena
Industrial Organization
The study of how firms' decisions about prices and quantities depend on the market conditions they face
Microeconomics
The study of how households and firms make decisions and how they interact in specific markets
Welfare Economics
The study of how the allocation of resources affects economic well being
Market Demand
The sum of all the individual demands for a particular good or service
Total Surplus
The sum of consumer and producer surplus
Define Adam Smith's concept of the invisible hand.
The unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically.
Define opportunity costs.
The value of all that must be sacrificed in order to do an activity.
Cost
The value of everything a seller must give up to produce a good
Marginal Reservation Price
The value of the next one in
Production Possibilities Frontier
The various combinations of output that the economy can possibly produce given the available factors of production and the available production technology that firms use to turn these factors into output
Under standard assumptions, which of the following is not a property of indifference curves?
Their slope is equal, in magnitude, to the relative price of the goods
State the two key features of monopolistic competition.
There are many producers, but products are not perfect substitutes.
State the monopolist's shutdown condition.
There exists no quantity for which the demand curve lies above the average variable cost curve, meaning that average revenue is less than average variable cost at every level of output.
In a purely competitive industry:
There may be economic profits in the short run, but not in the long run.
What condition is necessary for the tit-for-tat strategy to be successful?
There needs to not be a known, fixed number of future reactions, or both will defect in the last round.
What is the result of negative externalities?
There will be overproduction of these goods, because price does not include external costs so it is too low.
What is the result of positive externalities?
There will be underproduction of these goods, because price does not include external benefits so it is too high.
What do the income effect, the substitution effect, and diminishing marginal utility have in common?
They all help explain the downsloping demand curve.
Define average product.
Total output divided by the quantity of the variable input.
Define accounting profit.
Total revenue less all explicit costs incurred.
Accounting Profit
Total revenue minus total explicit cost
A purely competitive firm should produce in the short run if its total revenue is sufficient to cover its:
Total variable costs.
In-Kind Transfers
Transfers to the poor given in the form of goods and services rather than cash
Firms could be both sellers and buyers.
True
If the Spring Company was a competitive firm then the wage would be and the level of employment would be at .
WC, LC
Define employer discrimination.
Wage differentials that arise from an arbitrary preference by the employer for one group of worker over another.
Which of the following statements is correct?
Wages of unionized labor are generally higher than those of non-unionized labor.
What outcome is consistent with a purely competitive market in long run equilibrium?
We would expect all of these to occur in the long run in a purely competitive market.
When does a firm in perfect competition supply no output?
When P<AVC.
Positive network externality
When a consumer's quantity demanded for a good increases because a greater number of consumers purchase the same good.
Negative network externality
When a consumer's quantity demanded for a good increases because fewer consumers are purchasing the same good.
Unilateral Trade
When a country removes trade restrictions on its own
Define the short-run production function.
When at least one input of the production function (typically capital) is fixed.
Define first-degree price discrimination.
When consumers are charged individual prices that capture all consumer surplus.
When will a price reduction increase total expenditure and why?
When demand is elastic, because the volume effect dominates the value effect.
New firms enter the industry
When existing firms make an economic profit.
Collude
When firms acts together to restrict competition.
Autarky
When no trade is facilitated in a market
When is the corner solution on the horizontal axis?
When the indifference curves are steeper than the budget constraint.
Number of Buyers
When the number of buyers is increased in a particular market, the quantity demanded of that good rises
Law of Supply
When the price of a good rises, the amount supplied rises. When the price of a good falls, the amount supplied falls
Number of Sellers
When there are less sellers in the market, the supply falls because they are no longer supplying product
Define a repeated game.
When two players play several rounds of a game and memorise the outcomes of previous rounds.
Capital Gain
When you sell something for more than what you paid for it, the profit you make is called capital gain
When should you accept a gamble?
When your expected utility from doing so is higher than your expected utility from not doing so.
When a consumer shifts purchases from product X to product Y, the marginal utility of:
X falls and the marginal utility of Y rises.
Can monopoly profits persist in the long run?
Yes, but this is not always the case.
Is rationality compatible with altruism?
Yes, in the sense of consistency of choices.
Are competitive markets efficient?
Yes, they are both Pareto-efficient and allocatively efficient.
Compensating Differential
a difference in wages that arises to offset the non-monetary characteristics of different jobs
Based on Graph X we can tell that Widget Inc. sells:
a differentiated product.
monopoly
a firm that is the sole seller of a product without any close substitutes
In a market system:
a firm's employees and suppliers are largely shielded from risk.
inferior good
a good for which an increase in income reduces the quantity demanded
Giffen goods
a good for which an increase in the price raises the quantity produced
Substitute Good
a good that can replace another; the increase in the price of one good leads to an increase in demand of the other (ice cream and frozen yogurt)
Private Good
a good that is both rival and excludable
cartel
a group of firms acting in unison
price ceiling
a maximum price sellers are allowed to change for a good or service
utility
a measure of happiness or satisfaction
income elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income
price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
cross-price elasticity of demand
a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first and divided by the percentage change in the price of the second good
price elasticity of supply
a measure of how much the quantity supplied of a good responds to change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price
elasticity
a measure of responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
Nash Equilibrium
a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen
Equilibrium
a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
marginal change
a small incremental adjustment to a plan of action
The market allocates goods to individuals according to the individuals' a. desire and ability to pay for the good. b. political influence. c. ability to pay for the good. d. desire for the good.
a. desire and ability to pay for the good.
Monopolies arise because of a. patents b. economies of scale c. possession of a license d. (a) and (c) e. (a), (b), and (c)
a. patents b. economies of scale c. possession of a license
Efficiency Wages
above-equilibrium wages paid by firms to increase worker productivity
Modern antitrust policy began in response to the
abuses of market power in the oil industry by Standard Oil
Supply
amount producers are willing and able to sell at a given price
poverty line
an absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty
The set of income-quantity pairs showing the amount of a good the consumer buys at various levels of income is called
an engel curve
Shortage
an increase in demand but there is not enough supply
Refer to the diagram, in which S1 and D1 represent the original supply and demand curves and S2 and D2 the new curves. In this market:
an increase in demand has been more than offset by an increase in supply.
High up front costs act a barrier to entry and limit opportunity in
an oligopoly.
In a purely competitive labor market, the labor supply curve for the individual firm is a
an upward sloping curve since, as a wage maker, in order to hire additional workers the firm has to raise the wage.
The MR = MC rule:
applies both to pure monopoly and pure competition.
Law of Supply
as the price rises, the supply rises. as the price falls, the supply falls.
Price = __________ = ___________
average revenue; marginal revenue
If the product price is below the ____________ but still above the ____________, the firm is better off staying in business.
average total cost; average variable cost
It is true that the distribution process carried out by the price system a. accomplishes the task more efficiently than central planners would. b. All of these responses are true. c. is superior to other rationing mechanisms because it is able to pay attention to individual consumer preferences. d. favors the rich.
b. All of these responses are true.
If the four-firm concentration ratio in an industry increases, the industry a. must have become less competitive, although not necessarily a monopoly. b. may or may not have become less competitive. c. must have become more competitive. d. must have become a monopoly.
b. may or may not have become less competitive.
A successful cartel may end up charging the ____ price and obtaining ____ profits. a. monopolistic competition; zero economic b. monopoly; monopoly c. oligopoly; monopoly d. monopoly; zero economic
b. monopoly; monopoly
Since a monopoly faces a downward-sloping demand curve, a. then, as Adam Smith wrote, "the price of monopoly is upon every occasion the highest which can be got." b. the monopolist is a price maker. c. marginal revenue increases as output increases. d. price always exceeds average revenue.
b. the monopolist is a price maker.
A monopolist maximizes profit at the point where a. MC = AC b. MC = MR c. MC < P d. MR = P e. (b) and (c)
b. MC = MR c. MC < P
In economics, zero profit means that a. the firm breaks down b. the firm makes just normal profit c. the firm must close down d. the firm must raise the price of the commodity e. all of the above
b. the firm just makes normal profits
The MRP curve is the resource demand curve for:
both the purely competitive and imperfectly competitive seller.
When the price of a good is below its equilibrium level under perfect competition, a. some consumers are earning larger consumer's surpluses than they would in equilibrium. b. consumers would benefit from an expansion of output. c. All of the responses are correct. d. the market is not operating at maximum efficiency.
c. All of the responses are correct.
In a planned economy, the concept of efficiency is a. not important at all. b. less important than in a market economy. c. as important as in a market economy. d. more important than in a market economy.
c. as important as in a market economy.
In an oligopoly market, the firms would earn the highest profit if they a. chose to produce an output equal to the perfectly competitive output level. b. chose to ignore the actions of rival firms. c. chose to produce the output equal to the monopoly output level. d. chose to ignore the implications of game theory.
c. chose to produce the output equal to the monopoly output level.
As the demand for a product falls, it is not uncommon for the industry to become a monopoly. This is most likely due to a. legal restrictions being imposed. b. an increase in the number of barriers. c. the surviving firm operating on the declining part of its average cost curve. d. patent protection causing high prices
c. the surviving firm operating on the declining part of its average cost curve.
shifts of demand curve
change in price or related goods or services income taste expectations number of consumers
Determinants of Supply
change in resource prices, technology, sellers, taxes and subsidies, other goods, producer expectations
To construct an ordinary demand curve for good X
change the price of good X in the consumer choice diagram and observe the change in the quantity of good X among the optimum market baskets
Consumer surplus _____
changes along a downward sloping demand curve
Shifts along the Supply Curve
changes in input prices related good or service technology expectations number of producers
If a monopolist engages in price discrimination, it will:
charge a higher price where individual demand is inelastic and a lower price where individual demand is elastic.
Example of a substitute:
coke and pepsi
the ability to produce a good at a lower opportunity cost than another producer is called:
comparative advantage
The regulatory mechanism of the market system is:
competition
A monopolistically competitive firm in the long run will a. have a demand curve above its AC. b. have a demand curve below its AC. c. operate where excessive profit can be achieved. d. have a demand curve tangent to its AC.
d. have a demand curve tangent to its AC.
The Justice Department and the Federal Trade Commission are likely to oppose mergers a. which will help one of the merging firms out of financial difficulties. b. that seem likely to increase efficiency. c. that create a larger firm with economies of scale in a contestable market. d. which threaten to reduce competition
d. which threaten to reduce competition
The fall in total surplus that results from a market distortion, such as a tax is called:
dead weight loss
Average fixed cost:
declines continually as output increases.
Less income and wealth, a demand for normal goods ___________.
decrease
Diminishing marginal utility explains why:
demand curves are downsloping.
when income falls
demand for a normal good decreases
when income rises
demand for a normal good increases
when income rises
demand for an inferior good decreases
When income falls
demand for an inferior good increases
when tastes changes against a good
demand for the good decreases
The firms in an oligopoly market produce
differentiated products.
when variable inputs are added to fixed inputs, output goes up but eventually the marginal physical product will...
diminish
The total revenue test for elasticity:
does not apply to supply because price and total revenue always move together.
If a competitive industry is neither expanding nor contracting, we would expect:
economic profits to be zero.
The firms average total cost continues to decrease as the scale of its operation increases,........ exists
economies of scale
Es<1
elastic supply
The Clayton Act prohibits "all contracts, combinations and conspiracies in restraint of trade."
f
Costs that are independent of the firm's level of output are called
fixed costs
wa baow
full
imports
goods produced abroad and sold domestically
The long-run trend of real wages:
has been upward
perfectly elastic
has elasticity coefficient equal to infinity
A decline in the price of resource A will:
increase the demand for complementary resource B.
More income and wealth, a demand for normal goods_________.
increases
Suppose a firm doubles its employment of all inputs in the long run. If this action more than doubles the amount of output produced, then this firm is experiencing
increasing returns to scale
Es<1
inelastic supply
Luxury Goods
more elastic
What will cause a demand curve to change on a graph?
non-price determinates
the price of gasoline has more than doubled in the past couple years which graph applies to this story?
not enough information
A firm can sell as much as it wants at a constant price. Demand is thus:
perfectly elastic.
wasted resources
price ceilings typically lead to inefficiency in the form of _______ people expend money effort, and time to cope with the shortages caused by the price ceiling
Resources are efficiently allocated when production occurs where:
price is equal to marginal cost.
If the several oligopolistic firms that comprise an industry behave collusively, the resulting price and output will most likely resemble those of:
pure monopoly.
All available quantity and all different price points that are available.
quantity demanded
Production costs to an economist:
reflect opportunity costs.
a relatively horizontal (but not completely flat) demand curve is:
relatively elastic
Refer to the diagram. Line (2) reflects a situation where resource prices:
remain constant as industry output expands.
According to the Austro-American economist Joseph Schumpeter
risk taking and the potential for economic profits are essential features of a capitalist economy.
Elastic Demand
sensitive to price change; large change in quantity
According to the concept of the "invisible hand," if Susie opens and operates a profitable childcare center, then:
she has served society's interests by providing a desired good or service.
Comparing a market basket A to other market baskets, we can say that for a typical consumer, A is preferred to baskets to the
southwest but less preferred to baskets to the northeast
For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions. Refer to Goods X and Y. If the marginal rate of good X in terms of good Y is large, then the indifference curve will be
steep
In answering the question, assume a graph in which dollars are measured on the vertical axis and output on the horizontal axis. Refer to the information. For a purely competitive firm, marginal revenue graphs as a:
straight line, parallel to the horizontal axis.
The profit-maximizing and the least-cost combination of inputs are:
such that the maximization of profits always entails the least-cost combination of inputs.
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
absolute advantage
the ability to produce a good using fewer inputs than another producer
human capital
the accumulation of investments in people such as education and on-the-job training
Human Capital
the accumulation of investments in people, such as education and on-the-job training
Marginal benefit is defined as
the additional benefit gained from the last unit of an activity
Marginal cost is defined as
the additional cost attributable to the last unit produced
producer surplus
the amount a seller is paid for a good minus the seller's cost of providing it
Price Discrimination
the business practice of selling the same good at different prices to different customers
substitution effect
the change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution
transaction costs
the costs that parties incur during the process of agreeing to a following through on a bargain
Transaction Costs
the costs that parties incur in the process of agreeing to and following through on a bargain
in a market economy, resources are allocated by:
the decentralized decisions of many firms and households as they interact in markets for goods and services
The interest rate is determined by
the demand and supply of the loanable funds.
when the price is expected to fall in the future
the demand for the good decreases today
The demand for airline pilots results from the demand for air travel. This fact is an example of:
the derived demand for labor.
The issue of the relationship between total revenues and sales depends on __________________.
the elasticity of demand
If the marginal rate of technical substitution of labor for capital (MRTSLK) exceeds the relative price of labor in terms of capital (PL/PK), then
the firm needs to use less capital and more labor to reach its expansion path
If a purely competitive firm is producing where price exceeds marginal cost, then:
the firm will fail to maximize profit and resources will be underallocated to the product.
If someone produced too much of a good, this would suggest that:
the good was produced past the point where its marginal cost exceeded its marginal benefit.
externality
the impact of one person's actions on the well-being of a bystander
Marginal Product of Labor
the increase in the amount of output from an additional unit of labor
Value of the Marginal Product
the marginal product of an input time the price of the output
Facing choices between beer and pizza, the number of pizzas a consumer would be willing to trade for just one beer is called
the marginal value of beer in terms of pizza
total cost
the market value of the inputs a firm uses in production
willingness to pay
the maximum amount that a buyer will pay for a good
Refer to the diagram. This production possibilities curve is constructed so that:
the opportunity costs of both bread and tractors increase as more of each is produced.
Excludable
the property of a good whereby a person can be prevented from using it
excludability
the property of a good whereby a person can be prevented from using it
rivalry in consumption
the property of a good whereby a person can diminish the use of something for another person
equality
the property of distributing economic prosperity uniformly among the members of society
efficiency
the property of society getting the most it can from its scarce resources
economies of scale
the property whereby long-run ATC falls as the quantity of output increases
diseconomies of scale
the property whereby long-run ATC rises as the quantity of output increases
constant returns to scale
the property whereby long-run ATC stays the same as the quantity of output changes
productivity
the quantity of goods and services produced from each unit of labor input
marginal rate of substitution
the rate at which a consumer is willing to trade one good for another
life cylce
the regular pattern of income variation over a person's life
A dilemma of regulation is that:
the regulated price that achieves allocative efficiency is also likely to result in losses.
According to the British economist David Ricardo
the rent on the most marginal land is zero while the prime land does make positive economic rent.
For a typical firm demand for labor is
the same as the marginal revenue product.
On a ppf graph, what direction does taste and preferences move?
the same direction
A budget line is constructed to show
the set of all baskets that the consumer can afford, given prices and his or her income
Refer to the graph. A decrease in fixed costs is shown by:
the shift of the short-run average total cost curve from ATC2 to ATC1.
Macroeconomics
the study of economy wide phenomena and theory as opposed to how households and firms interact
game theory
the study of how people behave in strategic situations
esonomics
the study of how society manages its scarce resources
adverse selection
the tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party
moral hazard
the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior
total revenue
the total amount of money a firm receives by selling goods or services TR= PXQ(P)
Wealth
the total value of what a household owns minus what it owes
Inferior Good
the type of good that decreases in demand as income rises and vice versa
How is a shortage fixed?
there would be a upward pressure price until equilibrium have been reached
Variable Cost
these are costs that do change based on the quantity of output
Marginal Revenue
this is the change in total revenue that arise from an additional unit of input
all other things being equal, an increase in demand always leads to an increase in equilibrium price. if prices are not allowed to rise to the new equilibrium, there will be shortages...
true
perfect substitutes
two goods for which an increase in income raises the quantity demanded
Compared to a competitive firm a monopoly
under produces and over prices.
E=1
unit elastic
|Ed|=1
unit elastic; if you change price by 1 % the change in Qd is equal to 1%; change in price have no effect on total revenue
Ex,y = 0 CPD
unrelated goods
A monopsony is a
wage maker.
A product market is in equilibrium:
where the demand and supply curves intersect.
In the short run, a purely competitive firm that seeks to maximize profit will produce:
where total revenue exceeds total cost by the maximum amount.
The kinked-demand curve model of oligopoly is useful in explaining:
why oligopolistic prices might change only infrequently.
Economies and diseconomies of scale explain:
why the firm's long-run average total cost curve is U-shaped.
If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue:
will also be $5.
If a nondiscriminating imperfectly competitive firm is selling its 100th unit of output for $35, its marginal revenue:
will be less than $35.
If the demand for cars increases leading to car prices going up, that
will increase the demand for autoworkers.
Based on the demand curve on Graph X, the Widget Inc.:
will loose market share if it raises its price above Pa.
A pure monopolist's short-run profit-maximizing or loss-minimizing position is such that price:
will vertically intersect demand where MR = MC.
The productivity and real wages of workers in the industrially advanced economies have risen historically partly because:
workers have been able to use larger quantities of capital equipment
agent
a person who is performing an act for another person, called the principal
Change in Technology
(Supply) Technology advance, supply increases Technology decreases, supply decreases
Suppose we now add a productive sector to our exchange economy:
- There are two firms, each of which employs two inputs (capital and labour) to produce either of two products (food or clothing). - Suppose firm C produces clothing and firm F produces food. - Suppose that the total quantities of the two inputs are fixed at K=50 and L=100.
Refer to the diagram. The total utility yielded by 4 units of X is:
17.
Free Rider
A person who receives the benefit of a good but avoids paying for it
Change in Demand
Change in •income •price of related goods •tastes •buyers expectations •# of buyers
What does the utility function of a risk seeking person look like?
Convex.
Constant returns to scale
Doubling of all inputs results in doubling of output
average fixed cost
FC divided by the quantity of output
What is firm 1's production decision?
Firm 1 is the Stackelberg leader; it has to produce strategically, knowing that firm 2 will react to the quantity it decides to produce (it is a Cournot duopolist).
Perfectly Efficient Rationing
Highest value consumers get the widgets
Define moral hazard.
Incentives to take greater risk because the cost of that risk is borne by others.
How is the short-run supply curve found?
It is the rising portion of the short-run MC curve that lies above the minimum value of the AVC curve.
What is the graphical representation of average product?
It is the slope of the line joining the origin to the corresponding point on the total product curve.
How is distance used to interpret monopolistic competition?
It provides a concrete way of thinking about lack of complete substitutability, because a restaurant across town is not a perfect substitute for the restaurant at the nearest corner, especially when you are hungry.
Predatory Pricing
Lowering prices quickly in order to drive out a company from the market to regain a monopoly
Perfectly Inefficient Rationing
Lowest value consumers that want widget get it. Consumer surplus becomes much lower
Use the following diagram to answer the next question: Refer to the diagram. This nondiscriminating monopolist will produce: M units at price A and make a profit N units at price B and earn zero profits M units at price C and incur a loss Q units at price J and earn zero profits
M units at price A and make a profit
Profit maximization rule
MC = MR = P
The short run supply curve of a purely competitive producer is based primarily on its:
MC curve
A unique feature of an oligopolistic industry is:
Mutual Interdependence
What is the XED for complements?
Negative.
If a purely competitive firm is producing at the MR=MC output level and earning an economic profit, then:
New firms will enter this market.
Discriminating among groups of buyers
People differ in the value they place on a good. When a correlation is present, firms can profit by doing this among the different groups of buyers.
Price-taker
Price is determined (in a competitive industry) by the market (demand and supply); the firm has no influence on the price of the commodity, and must go along with competition
The strength of the demand for a resource depends on the:
Productivity of the resource
midpoint method for elasticity formula
Q2-Q1/(Q1+Q2)/2/P2-P1/(P1+P2)/2
Define the market Engel curve.
Schedules that relate the quantity demanded to the average income level in the market.
Externalities
Side effects that cause welfare in a market to depend on more than just the value to the buyers or the cost to the sellers
Which industry would be the best example of an oligopoly?
Steel
average revenue
TR divided by quantity sold
profit
TR-TC
accounting profit
TR-TC, explicit cost only
economic profit
TR-TC, including implicit and explicit costs
Price Taker
Take the world price of a product as given
Which terms would be most closely associated with the "new and better goods and services and new and better ways of producing and distributing them"?
Technological Advance
What is the link between LAC curves and industry concentration?
The later the upturn in the LAC curve, the more concentrated the industry.
What level of output do firms choose to maximise economic profit?
The level of output for which the difference between total revenue and total cost is largest.
Define the minimum efficient scale.
The level of production required for LAC to reach its minimum level.
Budget Constraint
The limit on the consumption bundles that a consumer can afford
Define price elasticity of demand.
The percentage change in the quantity demanded of a good that results from a 1% change in price.
Collusion
The practice of fixing a higher price
Define excludability.
The property of a good whereby a person can be prevented from using it.
Define an isoquant.
The set of all input combinations that yield a given level of output.
Define the production possibilities frontier (PPF).
The set of all possible output combinations that can be produced with a given endowment of factor inputs.
Define the long run.
The shortest period of time required to alter the amounts of all inputs used in a production process.
What is the geometrical interpretation of marginal cost?
The slope of the total cost curve (or variable cost curve) at a given level of output.
Assume a purely competitive firm is maximizing profit at some output at which long run average total cost is at a minimum. Then:
There is no tendency for the firm's industry to expand or contract.
Long Run Profit for Monopolistic Competition
There is none of this.
The price system takes into account consumer preferences in the distribution of goods and services.
True
Some products are sold based on fad or fashion.
True, i.e iPhone, Jordans, Nikes
Bilateral Trade
Two countries lower tariffs on each other
Perfect Complements
Two goods with right-angle indifference curves
Perfect Substitutes
Two goods with straight-line curves
Average Variable Cost
Variable cost divided by the quantity of output
Comparative Advantage Wealth of Nations Supply Side Economics
What economic principle was developed by David Ricardo?
Opportunity Cost
Whatever must be given up to obtain some item
The labor demand curve of an imperfectly competitive seller is downsloping:
because of both diminishing returns and the necessity to lower price to sell more output.
ex. season changes and people no longer want ice cream
causes of change in demand
ex. increase in consumer wages
causes of quantity demanded
A monopolist controls: a. the price of the commodity b. the quantity of the commodity c. both the price and the quantity d. either the price or the quantity e. the market shares
d. either the price or the quantity
E>1
elastic
when suppliers charge unfair prices, gov9t can intervene to bring prices back to their fair levels...
false
E<1
inelastic
a good will tend to be more elastic if
it is a necessity
A typical oligopoly can
make economic profits in the long run.
Any point on the production possibilities curve illustrates:
maximum production combinations.
The Department of Justice generally
opposes mergers that reduce or eliminate competition.
Market basket B is to the northwest of basket A but lies on the same indifference curve for a consumer. Market basket C also lies to the northwest of A but is above the indifference curve. This consume
prefers C to A
If a firm is confronted with economic losses in the short run, it will decide whether or not to produce by comparing:
price and minimum average variable cost.
Choke price
price at which quantity demanded falls to zero
Revenue
price per unit times the number of units sold
fahn
rice
Which of the following statements is true? Other things equal, the demand for labor will be less elastic the:
smaller the ratio of labor costs to total costs.
Any point inside the production possibilities curve indicates:
that more output could be produced with the available resources.
An outward, parallel shift in the budget line indicates that
the consumer's income has risen
Capital market
the input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods
What does cost depend on for suppliers?
the inputs to produce the product, the quantities the firm uses and the input prices
Factors of Production
the inputs used to produce goods and service
Capital
the inputs used to produce goods and services
The movement from line A to line A' represents a change in:
the intercept only.
The price or cost of money is
the interest rate
Income
the sum of all a household's wages, salaries, profits, interest payments, rents and other forms of earning
Market demand
the sum of all quantities of a good or service demanded per period by all the households buying in the market for that good or service
In a competitive market economy, firms select the least-cost production technique because:
to do so will maximize the firms' profits.
to develop economics models, economists make assumptions. the purpose of this is:
to simplify reality so the models help us see the important aspects
Surplus
too much product is being produced and buyers are not buying at that increased price
A monopoly has
total control over price.
Curve (3) in the diagram is a purely competitive firm's:
total revenue curve
Determinants of Inelasticty
•few substitutes •necessities •short time horizon •broad market •small portion of the budget
Determinists of Elasticity
•many substitutes •luxuries •longtime horizon •narrow market •large portion of the budget
If the marginal product per hour of a labourer is known to be uniformly distributed between €10/hr and €30/hr, what will the wage offered be?
€20/hr, which is equal to the expected value of productivity.
get fuon
marriage
Change in # of Buyers
(Demand) # of buyers⬆️ Demand ⬆️
Define the costly-to-fake principle.
For a signal to an adversary to be credible, it must be costly to fake.
Define diminishing marginal utility of wealth.
For a utility function defined on wealth, one in which the marginal utility declines as wealth increases.
State the law of diminishing returns.
If other inputs are fixed, the increase in output from an increase in the variable input must eventually decline.
Increase in the productivity of labor result partly from
Improvements in technology
Refer to Budget Lines. Which of the following changes is consistent with the situation shown in the diagram?
The absolute price of good X rose, and the absolute price of good Y fell
Product differentiation
The accentuation of unique product qualities, real or perceived, to develop a specific product identity.
Define marginal benefit.
The benefit of an additional unit of activity.
Define marginal consumer surplus.
The difference between a consumer's marginal utility (reservation price) and the price paid for each good bought.
Diminishing Marginal Product
The property whereby the marginal product of an input declines as the quantity of the input increases
Define expected value.
The sum of all possible outcomes, weighted by their respective probability of occurring.
Laissez-faire is a policy that espouses central planning.
false
Tax
A wedge between the price the consumer pays and the price the producer gets
The Price Effect
Raising production will increase the total amount sold, which will lower the price of units and lower the profit on all other units sold
Market concentration indicators
Ratios that give the percentage of the market controlled by the top three, ten, one hundred, or two hundred firms in the market
Discrimination
The offering of different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristics
Strike
The organized withdrawal of labour from a firm by a union
Average product of labor
The output per labor input unit. Ratio of total output to the labor input APL = total output / labor input
Marginal Rate of Substitution
The rate at which a consumer is willing to trade one good for another
Define general equilibrium analysis.
The study of how conditions in each market in a set of related markets affect equilibrium outcomes in other markets in that set.
How do you generate an Engel curve algebraically?
Use the same methods as for finding optimal bundles until you obtain X in terms of M.
A monopoly is
a price maker.
tax incidence
the manner in which the burden of a tax is shared among participants in a market
Economies of Scale
the property by which average total cost decreases as the quantity of output increases
The table below shows the rate of return and R&D spending for a hypothetical firm.Refer to the above table. Assume the interest-rate cost of funds is 8 percent. What is the optimal amount of R&D expenditures?
$30 million
Difference between economic profit and accounting profit
-economic profit is smaller than accounting profit -zero profit does not imply that the firm breaks even, they still make normal profit
ESSAY: Role of marketing and advertising
...
Size of elasticity and total revenues: 1. with a demand elasticity greater than one, lower prices raise total revnues 2. with a demand elasticity equal to one, total revenue levels off 3. with a demand elasticity less than one, total revnue starts to decline
...
How do you generate a demand curve algebraically?
Use the same methods as for finding optimal bundles until you obtain X in terms of P.
Tit-for-tat strategy
Used in repeated games, where one player follows the other player's move in the previous round; leads to greater cooperation.
average variable cost
VC divided by quantity of output
How do we find a corner solution on an indifference map?
Where the indifference curve crosses the budget constraint at an axis-intercept, so only one good is consumed.
How do we find an interior solution on an indifference map?
Where the indifference curve is tangent to the budget constraint, so MRS is equal to the ratio of prices.
Cost-Benefit Analysis
a study that compares the costs and benefits to society of providing a public good
cost-benefit analysis
a study that compares the costs and benefits to society of providing a public good
Labour-Saving Technological Change
A change in technology that reduces the demand for labour
Define allocative efficiency.
A condition in which all possible gains from exchange are realised.
Sunk Cost
A cost that has already been committed and cannot be recovered
Inferior Good
A good that has an increase in demand when income levels fall
Elastic
A good who's quantity demanded changes when the price changes
Inelastic
A good who's quantity demanded does not change much when the price changes
Earned Income Tax Credit
A government program that supplements the incomes of low-wage workers
Supply Curve
A graph of the relationship between the price of a good and the quantity supplied
Demand Curve
A graph relating the price of a good and the quantity demanded of the good
Total production curve
A graphic representation of the relationship between labor input and total output
Market
A group of buyers and sellers of a particular good or service
Cartel
A group of firms acting in unison
In monopolistic competition, buyers pay
A higher price than in perfect competition and also pay more than marginal cost
Monopolistic Competition is a market structure in which
A large number of firms compete, each firm produces a differentiated product, firms compete on product quality, price, and marketing, firms are free to enter and exit the industry
Perfect competition
A large number of firms produce at the lowest possible cost, make zero economic profit and are efficient.
Price Ceiling
A legal maximum on the price at which a good can be sold
Price Floor
A legal minimum on the price at which a good can be sold
price floor
A legal minimum on the price at which a good can be sold
Exit
A long-run decision to leave the market
Perfectly Competitive Market
A market in which the goods offered are all the same and no one buyer or seller has an effect on the market
Competitive Market
A market in which there are so many buyers and so many sellers that each has a negligible effect on the market
Monopoly
A market of one seller or a group of sellers controlling an entire market (attained through entry restrictions)
Define a monopoly.
A market structure in which a single seller of a product with no close substitutes serves the entire market.
Oligopoly
A market structure in which only a few sellers offer similar or identical products
Monopolistic Competition
A market structure with many firms selling differentiated products.
Oligopoly
A market structure with only a few sellers offering similar or identical products. Barriers to entry are often very high, and consequently, there may be long-run economic profits.
Competitive Market
A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
Utility
A measure of happiness or satisfaction
Elasticity
A measure of how much buyers and sellers respond to changes in market conditions
Define consumer surplus.
A monetary measure of the extent to which a consumer benefits from participating in a transaction.
State the optimality condition for a monopolist.
A monopolist maximises profit by choosing the level of output where marginal cost is equal to marginal revenue. The marginal revenue curve must intersect the marginal cost curve from below. If it intersects it from above, then this point is called a local minimum point.
Define the self-interest standard.
A person is rational if their motives are congruent with their narrow material interests.
Define the present-aim standard.
A person is rational if they are efficient in the pursuit of whatever aims they happen to hold in the moment of action.
Permanent Income
A person's normal income
Bandwagon effect
A postive network externality where a consumer's demand for a product increases because other consumers own it.
Not Binding Price Ceiling
A price ceiling doesn't affect the amount bought or sold of a product because the equilibrium is below the price ceiling
Binding Constraint Price Ceiling
A price ceiling that is lower than the equilibrium and therefore creates a shortage of supply
Binding Constraint Price Floor
A price floor that is above the equilibrium price and therefore creates a surplus in the market
Not Binding Price Floor
A price floor that is below the equilibrium price and therefore has no effect on the market
One feature of pure monopoly is that the monopolist is:
A price maker
Define production.
A process that transforms inputs (factors of production) into outputs.
Differentiated Product
A product that is a close substitute but not a perfect substitute for the products of the other firms.
Define decreasing returns to scale.
A proportional increase in every input yields a less than proportional increase in output.
Define increasing returns to scale.
A proportional increase in every input yields a more than proportional increase in output.
Define constant returns to scale.
A proportional increase in every input yields an equal proportional increase in output.
Define preference ordering.
A ranking of all possible consumption bundles in order of preferences.
Define a Pareto improvement.
A reallocation that increases the wellbeing of at least one person without making anyone else worse off.
A major characteristic of monopolistic competition is:
A relatively large number of firms selling the product
Property Right
A right obtained by the inventors of a product to be the exclusive owners of said product
Define a pecuniary diseconomy.
A rise in production cost that occurs when an expansion of industry output causes a rise in the prices of inputs.
Refer to Goods X and Y. Which of the following can cause a parallel, outward shift in the budget line?
A rise in the consumer's income.
Define an indifference curve.
A set of bundles, all of which are equally attractive as one another.
Define an isocost line.
A set of input bundles, each of which costs the same amount.
Decrease in Demand
A shift in the demand curve to the left
Increase in Demand
A shift in the demand curve to the right
Shutdown
A short-term decision not to produce anything during a specific period of time because of current market conditions
Monopoly
A single firm restricts output, produces at a higher cost and price than in perfect competition and is inefficient
Nash Equilibrium
A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen
Define Nash equilibrium.
A solution to a game in which no player would be better off by switching strategies, given the strategy chosen by the other player.
Define the free-rider problem.
A source of inefficiency resulting from individuals consuming a public good without paying for it.
Dominant Strategy
A strategy that is best for a player in a game regardless of the strategies chosen by the other players
Define a dominant strategy.
A strategy that produces better results no matter what strategy the other person follows.
Cost-Benefit Analysis
A study that compares the costs and benefits to society of providing a public good
Corrective Tax (Pigovian Taxes)
A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality
Price-maker
As the only firm in the market, the monopolist can set the commodity price
An Edgeworth exchange box:
At any point within the Edgeworth exchange box, the individual quantities of food and clothing sum to the total amounts available.
Which of the following statements is most accurate?
At its optimum level of output and price Widget Inc. makes economic profits equal to PfPaAF.
Problem with Marginal Cost Pricing Rule
At the efficient output, average total cost exceeds marginal cost so a firm that uses marginal cost pricing incurs an economic loss.
Assume that in a monopolistically competitive industry, firms are earning economic profit. This situation will:
Attract other firms to enter the industry because the barriers to entry are low
Other things equal, if the fixed costs of a firm were to increase by $100,000 per year, which of the following would happen?
Average fixed costs and average total costs would rise.
A firm will earn economic profits whenever:
Average revenue exceeds average total costs
Advertising increases
Average total cost, but leaves marginal cost unchanged. Demand becomes more elastic and the profit-maximizing quantity increases and markup shrinks.
Refer to the above graphs. The long-run equilibrium for a monopolistically competitive firm is represented by graph:
B
Refer to the diagram for a pure monopolist. Suppose a regulatory commission is created to determine a legal price for the monopoly. If the commission seeks to provide the monopolist with a "fair return," it will set price at:
P1. Where demand intersects ATC
What is true for a purely competitive firm in long run equilibrium?
P=MC=minimum ATC.
In the short run a purely competitive firm will always make an economic profit if:
P>ATC.
Refer to the budget line shown in the diagram. The absolute value of the slope of the budget line is:
PC/PD.
An exclusive right granted by government for twenty years to an inventor of a product is a:
Patent
An exclusive right to sell any new and useful process, machine, or product for a fixed period of time is a:
Patent
What would the price be if Graph B depicted a competitive situation?
Pb
Excludability
The property of a good whereby a person can be prevented from using it
Economies of Scale
The property whereby long-run average total cost falls as the quantity of output increases
Diseconomies of Scale
The property whereby long-run average total cost rises as the quantity of output increases
Constant Returns to Scale
The property whereby long-run average total cost stays the same as the quantity output changes
Define the optimal quantity of a continuously variable activity.
The quantity for which its marginal benefit is equal to its marginal cost.
Production Function
The relationship between quantity of inputs used to make a good and the quantity of output of that good
Define a production function.
The relationship that describes how inputs like capital and labour are transformed into output.
Define the economic incidence of tax.
The respective share of the tax borne by buyers and sellers through the tax's effect on the price of the good.
Define equivalent variation.
The amount of money a consumer would pay to avoid a price change.
Income Effect
The change in consumption that results when a price change moves the consumer to a higher or lower indifference curve
Maximin Criterion
The claim that the government should aim to maximize the well-being of the worst-off person in society
Factors that determine a company's revenues
The commodity price and the output that the firm sells to the market
How do compensating variation and consumer surplus compare for normal goods?
The compensating variation is larger.
How do compensating variation and consumer surplus compare for inferior goods?
The compensating variation is smaller.
Define the income effect.
The component of the total effect of a price change that results from the associated change in real purchasing power.
Define the substitution effect.
The component of the total effect of a price change that results from the associated change in the relative attractiveness of other goods.
Marginal revenue
The contribution of an additional unit of sales to total revenue MR = change in total revenue / change in quantity
Marginal product of labor
The contribution of each additional labor unit to the total output. The radio of the change in total output to the change in labor input. MPL = change in total output / change in labor input
Marginal cost
The contribution of each additional output unit to the total cost MC = change in total cost / change in total output
Define the revised sequence, by John Kenneth Galbraith.
The corporation decides which products are cheapest and most convenient to produce, and then uses advertising and other promotional devices to create demand for them.
Define marginal cost.
The cost of an additional unit of activity.
Average total cost
The cost per unit of output. Ratio of total costs to total output ATC = TC/Q
Switching costs
The costs involved in changing from one product to another brand or in changing suppliers.
Transaction Costs
The costs that parties incur in the process of agreeing to and following through on a bargain
Market Failure
The inability of some unregulated markets to allocate resources efficiently
How do the ordinary and income-compensated demand curves compare for inferior goods?
The income-compensated demand curve is less steep.
How do the ordinary and income-compensated demand curves compare for normal goods?
The income-compensated demand curve is steeper.
Marginal resource cost is:
The increase in a firm's total cost caused by hiring one additional unit of an input.
Marginal Revenue of Product Development
The marginal dollar that the new or improved product earns for the firm.
Value of the Marginal Product
The marginal product of an input times the price of the output
At a low level of product development
The marginal revenue from a better product exceeds the marginal cost
If a rational consumer is in equilibrium, which of the following conditions will hold true?
The marginal utility of the last dollar spent on each good purchased will be the same.
What does the marginal rate of substitution of a numeraire good represent?
The marginal utility of the other good.
State the efficiency theorem.
The market equilibrium is efficient because it maximises total surplus.
Total Cost
The market value of the inputs a firm uses in production
This arises from product differentiation
The markup that drives a gap between price and marginal cost in monopolistic competition.
Willingness to Pay
The maximum amount that a buyer will pay for a good
Total product of labor
The maximum output that can be attained through different labor input levels. Ex: at low levels of labor input, the production increases fast, but eventually declines as labor input increases too much, meaning additional workers are less and less productive
Define the acceptance price.
The maximum price for which a buyer will purchase a product rather than continue searching.
Normal profit
The minimum return required to commit capital to a particular type of business. The opportunity cost of capital
Define the acceptance wage.
The minimum wage a firm should offer a prospective employee so that they accept it rather than continue searching.
State the long-run optimality condition for a monopolist.
The monopolist should produce the quantity for which long-run marginal cost is equal to marginal revenue.
To maximise efficiency, who should bear all the risk in a principal-agent problem?
The most informed agent.
Why do firms collude?
The mutual interdependence of oligopolists tempts them to collude in order to reduce uncertainty and increase potential for monopoly profits.
Why would governments take over ownership and management of monopolies?
They are not bound to earn at least a normal profit, so they can set a price equal to marginal cost, and absorb the resulting economic losses out of general tax revenues.
Entry and Exit of Monopolistic Competition
This has no barriers to prevent new firms from entering in the long run.
Suppose a monopolist could segment its market into two distinct submarkets and prevent resale between them. Its profits would increase if it charged a higher price to the group whose: demand is more elastic demand is more inelastic demand is greater cost is lower
demand is more inelastic
On Graph C compared to a competitive firm with the same facts the Spring Company
hires fewer workers and pays a lower wage.
If an activity is worth pursuing at all, then it should be pursued up to the point where
marginal cost equals marginal benefit
the change in output from using one additional unit of input is called
marginal physical product
"Income receivers should be paid in accordance with the value of output each produces." This statement is consistent with the:
marginal productivity theory of income distribution.
A firm will find it profitable to hire workers up to the point at which their:
marginal resource cost is equal to their MRP.
when the price of a complement in production falls
supply of the original good decreases
when consumer's attempt to maximize the utility from a purchase they compare the...... and ...... of the good in question
marginal utility, price
What helps answer the main questions in economics?
market and prices
when the number of consumers falls
market demand for the good decreases
when the number of consumers rises
market demand for the good increases
when the number of produces falls
market supply of the good decreases
when the price of a substation in production rises
supply of the original good decreases
when the price of a substitute in production falls
supply of the original good increases
From 1992 to 2012, many industries have increased in concentration.
t
What is the negative result of surplus?
wasted resources (above equilibrium)
opportunity cost
whatever must be given up to obtain some item
In the short run, the price charged by a monopolistically competitive firm attempting to maximize profits:
may be either equal to ATC, less than ATC, or more than ATC.
Concentration ratios:
may understate the degree of competition because they ignore imported products.
Elasticity of Demand
measures buyers' responsiveness to price changes
total surplus
measures the gains from trade in a market
the study of how households and firms make decisions and how they interact in specific markets is called:
microeconomics
price floor
minimum price buyers are required to pay for a good or service
Which of the following is not a factor of production?
money
The restaurant, legal assistance, and clothing industries are each illustrations of:
monopolistic competition
A positive statement is one that is:
objective and is based on facts.
When should a firm increase its production
when its marginal revenue exceeds its marginal cost
information asymmetry
when some people are better informed than others, and the imbalance in information affects the choices they make and how they deal with one another
Equilibrium
when the buyers and sellers come together (interaction) -no excess quantity is left (no shortage or excess)
producer surplus
when the price of good rises, increases through two channels; the gains of those who would have supplied the good at the original price and the gains of those who are induced to supply the good by the higher price a fall in the price of a good similarly leads to a fall in producer surplus
Surplus
when the quantity supplied exceeds the quantity demanded
income effect
the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve
marginal revenue
the change in total revenue from an additional unit sold
Private Cost
the costs directly incurred by sellers
deadweight loss
the fall in total surplus that results from a market distortion, such as a tax
If a regulatory commission imposes upon a nondiscriminating natural monopoly a price that is equal to marginal cost and below average total cost at the resulting output, then:
the firm must be subsidized or it will go bankrupt.
The supply curve of a one-of-a-kind original painting is:
perfectly inelastic
horizontal
perfectly inelastic demand
|Ed|=0
perfectly inelastic demand; if price increases people will still demand it; price has no effwect on quantity demand
vertical
perfectly inelastic supply
Es=0
perfectly inelastic supply price has no effect on quantity supplied (vertical curve)
If quantity demanded is completely unresponsive to price changes, demand is:
perfectly inelastic.
The supply of known Monet paintings is:
perfectly inelastic.
chicken and turkey are substitutes. The cross elasticity of demand will be
positive
When total product is increasing at an increasing rate, marginal product is:
positive and increasing.
The statement, "Violent crime has decreased in the last five years," is:
positive because it is testable.
inefficiently low quality
price ceilings often lead to inefficiency in that the goodd being offered are of ______ sellers offer low quality goods at a low price even enough buyers would prefer a higher quality at a higher price
Ineffecient allocation to consumers
price ceilings often lead to inefficiency in the form of _______________ some people whocwant the good badly and are willing to pay a high price don't get it and some who care relatively little about the good and are only willing to pay a low price to get it
Individual consumer surplus
the net gain to an individual buyer from the purchase of a good. it is equal to the difference between the buyers willingness to pay and the price paid
Discrimination
the offering of different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristics
price elasticity of demand
the percentage change in quantity demanded relative to a percentage change in price % change in Qd/%change in P
The allocative inefficiency of nondiscriminating monopoly arises from the fact that: price exceeds marginal cost output falls short of the output at which average cost is minimized output exceeds that at which average cost is minimized price exceeds minimum average cost
price exceeds marginal cost
Time
primary determinant of elasticity of supply
Refer to the diagram. A price of $20 in this market will result in a:
shortage of 100 units
Coase Theorem
the proposition that if private parties can bargain without cost over all the allocation of resources, they can solve the problem of externalities on their own
On Graph A at its optimum level of employment the Marathon Company should continue to hire workers
until the last worker's MRP is equal to MFC.
When input prices are fixed, decreasing returns to scale implies that the long-run average cost curve is
upward sloping
The supply of land is
upward sloping to the right.
Which of the following is most likely to be an inferior good?
used clothing
An oligopoly
uses the scarce resources of the economy efficiently.
External Cost
value of the negative impact on bystanders
In the long-run, all economic resources are ________.
variable
The incentive problem under communist central planning refers to the idea that:
workers, managers, and entrepreneurs could not personally gain by responding to shortages or surpluses or by introducing new and improved products.
Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm:
should continue producing in the short run but leave the industry in the long run if the situation persists.
Define sunk costs.
Costs that are beyond recovery at the time a decision is made.
private goods
goods that are both excludable and rival in consumption
Public Good
goods that are neither excludable nor rival in consumption
public goods
goods that are neither excludable nor rival in consumption
Substitutes
goods that can serve as replacements for one another
The MR = MC rule applies:
in both the short run and the long run.
In the long run a typical monopolistic competitive firm
is inefficient.
Craft Unions:
only organize workers who have a particular skill
whatever must be given up to obtain something is called:
opportunity cost
The supply curve of antique reproductions is:
relatively elastic.
in terms of elasticity of demand, necessities are:
relatively inelastic
Gigantic State University raises tuition for the purpose of increasing its revenue so that more faculty can be hired. GSU is assuming that the demand for education at GSU is:
relatively inelastic.
a tea
sally
Creative destruction is least beneficial to:
workers in the "destroyed" industries.
Law of Supply
All else equal, the quantity supplied of a good increases when the price of the good increases
The Production Process
A single firm can produce output at a lower cost than can a larger number of producers
The marginal revenue curve for a monopolist is always below the demand curve.
T
Change in tastes
(Demand) Rise in taste rise in Demand
Monopoly
A firm that is the sole seller of a product without close substitutes
growth rate
A1-A0/A0
Gains from exchange:
At point T, both parties are on a higher indifference curve than at their initial endowment R, so both will want to trade to move to this point.
Most common measures of market concentration
At the aggregate level: domestic sales, domestic employment, domestic payroll, and value added in manufacture
Refer to the diagram. At output level Q total fixed cost is:
BCDE.
Surplus
Benefit an agent gets from participating in a market
For a purely competitive seller, price equals: A. average revenue. B. marginal revenue. C. total revenue divided by output. D. all of these.
D. all of these.
Increasing returns to scale
Doubling of all inputs results in more than doubling of output
What shape is the marginal benefit curve?
Downward-sloping and convex.
Average Fixed Cost
Fixed cost divided by the quantity of output
ESSAY: Difference between fixed vs. variable costs
Fixed costs do not change along with output (rent, insurance on buildings, interest payments, salaries of top management). Variable costs do change along with output (wages, payments for energy and raw materials, insurance on merchandise). Both are short-run costs
What does the continuity property of preference ordering mean?
For any two bundles X and Y, where the consumer prefers X to Y, then any bundle sufficiently close to X is also preferred to Y.
Define the income-consumption curve.
Holding the prices of X and Y constant, the income-consumption curve (ICC) for a good X is the set of optimal bundles on an indifference map as income varies.
Advertising can lower ATC
If it increases the quantity sold by a large enough amount.
The MR=MC rule applies:
In both the short run and the long run.
Entrepreneurs in purely competitive industries:
Innovate to lower operating costs and generate short-run economic profits.
Long-run profit maximization rule
LMC = LAC = P
State the three words commonly used to describe the tit-for-tat strategy.
Nice, tough, forgiving.
On Graph B at its optimum level of output and price what area shows the total revenue of Quipsi Co?
OPaAQf
How could the government use vigorous enforcement of antitrust laws in monopoly?
Regulators can prohibit firms holding a dominant position on a determined market from abusing that position.
Long run competitive equilibrium:
Results in zero economic profits.
An example of monopolistically competitive industry would be
Retail Clothing
Average revenue
Revenue per unit of output. Ratio of total revnues to the total output AR = total revenue / output
Average revenue
Revenue per unit sold in the market AR = total revenue / total quantity
Give an example of a game of incomplete information.
Selecting job applicants.
Surplus
Sellers are unable to sell all they want at the going price
If P = AVC
Shut down point
Tastes
The preferences that consumers have about buying one product over another
When do non-linear budget constraints occur?
When there are quantity discounts.
If the automobile industry has become highly concentrated and cartelized. To maintain profits, firms may a. prevent entry. b. become price takers. c. lower prices to raise revenues. d. allow newcomers to favorably enter the market.
a. prevent entry.
Private Value
the direct value to buyers
Economists use the term normal good to refer to goods that
you consume more of when your income rises
Why is the quantity demanded of salt highly insensitive to price?
1. For many people, there are no attractive substitutes for salt. 2. Salt is so cheap that its price simply isn't worth worrying about.
Which conditions are necessary for third-degree price discrimination?
1. It must be possible to distinguish categories of consumers with varying elasticities of demand. 2. It must be impossible for buyers to trade among themselves.
State two further solutions to externalities.
1. Neighbours buy the polluting firm to internalise the externality. 2. Pollution rights.
How could the state regulate private monopolies?
1. Price could be set equal to marginal cost, however this would result in the firm making an economic loss, and so the firms would have to be subsidised by the government. 2. Price could be set equal to average cost, which gives us the next best thing. However, this is difficult, because firms are likely to overstate their costs.
Input Prices
A change in the price of any of the factors that are used to create the finished product
Which of the following will not shift the demand curve for labor?
A change in the wage rate.
Cartel
A collection of firms that agree on sales, pricing, and other decisions.
On Graph A what type of a firm is the Marathon Company?
A competitive firm
Define X-inefficiency.
A condition in which a firm fails to obtain maximum output from a given combination of inputs, which can be a risk with state-ownership.
Indifference Curve
A curve that shows consumption bundles that give the consumer the same level of satisfaction
Define a reaction function.
A curve that shows the profit-maximising level of output for one oligopolist for each amount supplied by another.
Define the short-run supply curve.
A curve that tells us how much output the firm wants to produce at various prices.
What characterises a natural monopoly?
A declining long-run average cost curve.
Refer to Goods X and Y. Which of the following would cause the vertical intercept to move upwards?
A decrease in the price of good Y
The characteristic most closely associated with oligopoly is
A few large producers
Define strategic entry deterrence.
A firm changes potential rivals' expectations about how it will respond when its market position is threatened.
Why do firms advertise?
A firm hopes it can alter the elasticity of the demand for its product, making it more inelastic and causing an increase in demand that will enhance profits.
To maximize profit
A firm in monopolistic competition produces the output at which marginal revenue equals marginal cost, then charges the price that buyers are willing to pay for this quantity, determined by the demand curve.
Discriminating Among Units of a Good
A firm that price discriminates by charging a buyer one price for a single item and a lower price for a second or third item can capture some of the consumer surplus
Define a social dilemma.
A game in which individual and collective interests do not coincide, leading to a Pareto inefficient outcome because both players have a dominant strategy to defect, due to an issue of commitment.
Define a sequential game.
A game in which one player moves first, and the other is then able to choose his strategy with full knowledge of the first player's choice.
Define a zero-sum game.
A game in which the sum of payoffs does not depend on the chosen strategies.
Define a coordination game.
A game in which the two players' shared goal is to coordinate on the same strategy, so there are two Nash equilibria.
Define a fair gamble.
A game with an expected value of zero.
Normal Good
A good for which an increase in income raises the quantity demanded
Inferior Good
A good for which an increase in income reduces the quantity demanded
Giffen Good
A good for which an increase in the price raises the quantity demanded
Define an inferior good.
A good for which quantity demanded falls as income rises.
Define a normal good.
A good for which quantity demanded rises as income rises.
Define a Giffen good.
A good for which quantity demanded rises as price rises.
Normal Good
A good in which the demand for the good falls as income levels fall
Monopoly Resources
A key resource required for production is owned by a single firm
What happens in general equilibrium when the government imposes a tax on one good?
Consumers still have a common value of MRS in equilibrium, and producers a common value of MRTS. However, consumers and producers face a different price ratio, so the MRS can never be equal to the MRTS in equilibrium. Producers would rather produce less of the taxed good, but at this point, the MRT is higher than at the original point on the PPF, which is where consumers want to be. Hence there is a disequilibrium, leading to an inefficient product mix.
State the optimal decision rule in terms of prices.
Continue searching until you find an offer at least as low as the acceptance price.
Define fixed cost.
Cost that does not vary with the level of output in the short run.
A horizontal supply curve A) is relatively elastic but not perfectly elastic. B) is perfectly elastic. C) is unit elastic. D) is relatively inelastic but not perfectly elastic. E) is perfectly inelastic.
C) is unit elastic.
Refer to the diagrams. The case of complementary goods is represented by figure:
C.
How do compensating variation and equivalent variation compare for normal goods?
Compensating variation is higher.
Fixed costs
Costs that do not change along with output (rent, insurance on buildings, interest payments, salaries of top management)
Variable Costs
Costs that vary with the quantity of output produced
Describe the mechanism that corrects excess demand.
Competition between consumers --> increase in price --> incentives for producers to react --> increase in quantity supplied --> equilibrium reached.
Describe the mechanism that corrects excess supply.
Competition between producers --> fall in price --> incentives for producers to react --> fall in quantity supplied --> equilibrium reached.
What is the outcome of the Bertrand model?
Competition will continue until price is equal to marginal cost, because there can be no stable equilibrium in which each firm undersells the other.
Define decreasing cost industries.
Competitive industries in which falling input prices lead to downward-sloping supply curves.
Define increasing cost industries.
Competitive industries in which rising input prices lead to upward-sloping supply curves.
Perfect price discrimination pushes
Consumer surplus to zero, but increases the monopoly's producer surplus to equal the total surplus in perfect competition.
Refer to the above graphs. A short-run equilibrium that would produce losses for a monopolistically competitive firm would be represented by graph:
D
Which of the diagrams illustrates the effect of an increase in automobile worker wages on the market for automobiles?
D only.
Which of the following elasticities is the most inelastic? A) 1 B) 100 C) 4 D) .09
D) .09
Statement I: At best, advertising changes the level of demand but not the elasticity of demand. Statement II: Most advertising has virtually no effect on demand. A) Statement I is true and statement II is false. B) Statement II is true and statement I is false. C) Both statements are true. D) Both statements are false.
D) Both statements are false.
When demand is perfectly inelastic and price is raised from $2 to $4, total revenue will A) decline. B) stay the same. C) rise. D) double.
D) double
When other firms enter the market, demand
For the original company decreases. The demand curve and marginal revenue curve shift leftward and these shifts cause the profit maximizing quantity to fall.
Of the following firms which one is most likely to use product advertising the most?
Ford Motor Company
Which of the following answers is most accurate?
From 1947 to 1974 the share of total income received by the lowest quintile increased from 5% to 5.7%. During the same time period the share of total income received by the highest quintile decreased from 43% to 40.6%.
Which of the following answers is most accurate?
From 1974 to 2010 the share of total income received by the lowest quintile of the American families decreased from 5.5% to 3.8%. During the same time period the share of total income received by the highest quintile of the American families increased from 40.6% to 47.8%.
Imports
Goods and services that are produced abroad and sold domestically
Define perfect substitutes in terms of the substitution/income effect.
Goods for which the income effect is zero.
Define perfect complements in terms of the substitution/income effect.
Goods for which the substitution effect is zero.
Club Goods
Goods that are excludable but not rival in consumption
Public Goods
Goods that are neither excludable nor rival in consumption
Common Resources
Goods that are rival in consumption but not excludable
Substitutes
Goods that are similar enough to each other so that they can be interchanged such as ice cream and frozen yogurt
Social Insurance
Government policy aimed at protecting people against the risk of adverse events
Welfare
Government programs that supplement the incomes of the needy
Market-Based Policies
Government provides incentives so that private decision makers will choose to solve the problem on their own
Command-and-Control Policies
Government regulates the behavior of inventors directly
How can taxes be used to eliminate externalities?
Governments can tax the amount of the difference between private and social benefits/costs at the optimal output level.
Elastic
Greater than 1 P⬆️ TR⬇️
Excess Capacity
Happens when a firm produces less than its efficient scale.
The demand curve faced by a monopolistically competitive firm is:
Highly elastic
Define the price-consumption curve.
Holding income and price of Y constant, the price-consumption curve (PCC) for a good X is the set of optimal bundles traced on an indifference map as the price of X varies.
The next question(s) are based on the following table showing the expected rate of return, R&D spending, and interest-rate cost-of-funds for a hypothetical firm.Refer to the above data. In a supply and demand graph, the interest-cost of funds curve would be a(n):
Horizontal line at 7 percent
The Markets of Goods and Services
Households are buyers and firms are sellers. Households buy the output of goods and services that firms produce
The Markets for the Factors of Production
Households are sellers and firms are buyers. Households provide inputs that firms use to produce goods and services
Define strategic interactions.
How economic agents make decisions when they have to take into account the decisions that are made by others.
What are the properties of the non-linear variable cost function?
1. At low output, it is concave, because there are increasing returns to scale. 2. At higher output, it is convex, because there are decreasing returns to scale.
Two ways the adverse effects of monopoly power can be corrected
1. Can be corrected through marginal cost pricing (forcing monopolies to produce at the point where marginal cost is equal to price) 2. Can be corrected by stimulating competition by breaking down monopolies into smaller companies
What are the two things a firm can do in the long run but not in the short run?
1. Change fixed inputs. 2. Leave the industry.
Limits the power of monopolies
1. Consumers income is limited (if a price if set too high, too few consumers can afford the commodity) 2. Consumers can turn to commodity substitutes
State the five sources of monopoly.
1. Exclusive control over important inputs. 2. Economies of scale. 3. Patents. 4. Network economies. 5. Government licenses or franchises.
State the 3 methods of testing rationality.
1. Falsifying the theory of a purely selfish choice. 2. Reconciling altruism and utility. 3. Verifying consistency of choices.
How do you derive the substitution and income effects of a price change?
1. Find the optimal bundle at the original price and calculate its utility. (This step gives X0). 2. Minimise the budget constraint at the new price subject to utility remaining constant. (This step gives X1). 3. Find the optimal bundle at the new price. (This step gives X2). 4. The total effect is the difference between X2 and X0, the substitution effect is the difference between X1 an X0, and the income effect is the difference between X2 and X1.
State the four conditions for perfect competition.
1. Firms sell a standardised product (i.e. goods are perfect substitutes). 2. Firms are price-takers. 3. There is free entry and exit (because of perfectly mobile factors of production in the long run). 4. Firms and consumers have perfect information (i.e. firms are aware of profits in other markets).
How is monopoly different to perfect competition?
1. For a monopolist to sell a larger amount of output, it must cut its price. 2. Total revenue is no longer proportional to output sold.
Price leadership model
One firm or a group of firms being the leader, and the remainder being followers. The leader does not always have to be the largest in the market. The firm leader plays a role similar to that of the market in perfect competition, in the sense that it sets the price that the followers take as given, choosing the output that maximizes its own profits. However, in order for the leader to leave room for the followers, the price must be set above the average cost of the followers, allowing a portion of the market to their account, otherwise, the followers will be driven out of the market and the leader will become a monopoly
State the 3 foundations of individual rationality.
Optimisation, consistency, strategic behaviour.
What does the more-is-better property of preference ordering mean?
Other things equal, more of a good is preferred to less.
One major barrier to entry under pure monopoly arises from:
Ownership of essential resources
Use the following diagram to answer the next question. Refer to the diagram. A regulatory commission that wished to establish a socially optimum output level for this firm would set price at: P2 and the firm would break even P3 and the firm would earn a profit P1 but the firm would incur a loss P2 but the firm would incur a loss
P1 but the firm would incur a loss
Refer to the diagram. This firm will earn only a normal profit if product price is:
P3.
The data below relates to a pure monopolist and the product it produces. What is the profit-maximizing output and price for this monopolist?
P=$14; Q=4
What will NOT hold true for a competitive firm in long run equilibrium?
P=AFC (price equals average fixed costs)
In the short run, a purely competitive firm will earn a normal profit when:
P=ATC.
When a purely competitive firm is in long run equilibrium:
P=MC (price equals marginal cost)
On Graph X the selling price at the optimum level of output is
Pa
Which is a barrier to entry?
Patents
State the formula for YED.
Percentage change in quantity divided by percentage change in income.
State the formula for PED.
Percentage change in quantity divided by percentage change in price.
State the formula for XED.
Percentage change in quantity of X divided by percentage change in price of Z.
What shape is the indifference curve for complements?
Perpendicular.
Give an example of a Giffen good.
Potatoes during the Irish potato famine.
Define risk neutral.
Preferences described by a utility function with constant marginal utility of wealth.
Define risk averse.
Preferences described by a utility function with diminishing marginal utility of wealth.
Refer to the above graph. The profit-maximizing monopolist in it will set its price at:
Price J
ESSAY: Price and output determination in perfect competiton: -short term and profit max rule -long-term and profit max rule -shut down point
Price in perfect competition is determined by the market (demand and supply). Each firm has no choice but to go along with that price. Short-term profit max rule: firms must set marginal cost equal to marginal revenue. Profit is maximized at the output level where marginal cost is equal to price. MC = MR = P A competitive firm maximizes profits at the output level where marginal cost is equal to marginal revenue provided that marginal cost is increasing. ------- The long-term profit max rule: LMC = LAC = P ------- Shut down point: If P > AVC, the firm should stay in business If P = AVC, the shut down point If P < AVC, the firm should drop out
Answer the question(s) below on the basis of the following demand and cost data for a pure monopolist.Refer to the above table. The monopolist will realize a:
Profit of $6.50
Brand Names
Provide information to consumers about the quality of a product and is an incentive to the producer to achieve a high and consistent quality standard.
State the profit maximisation rule in perfect competition.
Provided P>AVC, the firm should produce a level of output for which marginal revenue is equal to marginal cost on the rising portion of the marginal cost curve. In perfect competition, P=MR, so the optimal output level is where P=MC.
What is the optimum level of output for Widget Inc. on Graph X?
Qa.
What would the quantity be if Graph B depicted a competitive situation?
Qc
What is the optimum quantity on Graph B for Quipsi Co?
Qf
On Graph B at its optimum production Quipsi Co will produce level of output and price at :
Qf, Pa
Shortage
Qs < Qd To remove, seller will increase price until it reaches P*
Refer to the above graph. The profit-maximizing monopolist in it will set its output at:
Quantity V
Supply and Demand
Refers to the behavior of people as they interact with one another in competitive markets
ESSAY: Explain the law of diminishing productivity of labor
Refers to the relationship between change in one input and changes in total output. In general, in any production process there is an employment level beyond which successive units of labor added to the fixed factors of production contribute less and less to the total output. As a result of overcrowing, adding additional workers are less and less productive. The law only applies in the short-run.
Refer to the diagrams, which pertain to a purely competitive firm producing output q and the industry in which it operates. Which of the following is corrective the price lies below the average total cost curve?
The diagrams portray short-run equilibrium but not long-run equilibrium.
Define producer surplus.
The difference between suppliers' marginal costs and prices.
What share of the tax is paid by the seller?
The difference between the equilibrium price and the price received by the seller, divided by the tax.
Are the differences between monopolistic competition and perfect competition exaggerated?
The difference between the long-run price level and the price that could prevail under perfect competition varies directly with the strength of product differentiation.
Define marginal producer surplus.
The difference between the price a producer would be willing to sell at and the price they receive for each good bought.
What share of the tax is paid by the buyer?
The difference between the price paid by the buyer and the equilibrium price, divided by the tax.
What does a utility function show?
The different combinations of goods that generate a constant level of utility.
Total cost
The dollar value of all economic resources required to produce successive quantities of a commodity (includes fixed costs and variable costs)
Total revenue
The dollar value of all output the firm sells in the market (the product of the commodity price and output sold)
Define the sub-game perfect Nash equilibrium.
The equilibrium obtained from backward induction in a sequential game.
Define the expected wage gain.
The expected gain of sampling another offer is the probability that the new offer exceeds the current offer, multiplied by the expected wage increase if it does.
Define the expected price gain.
The expected gain of sampling another offer is the probability that the new price is lower than the current price multiplied by the expected difference in price if it is.
Define expected utility.
The expected value of utility over all possible outcomes.
Define marginal utility.
The extent to which an economic agent's utility increases when their consumption increases by one unit.
The lowest point on a purely competitive firm's short run supply cure corresponds to:
The minimum point on its AVC curve.
Define cross-price elasticity of demand.
The percentage change in the quantity demanded of one good in response to a 1% change in price of another good.
Poverty Rate
The percentage of the population whose family income falls below an absolute level called the poverty line
What are the differences between a perfectly discriminating monopolist and a normal monopolist?
The perfect discriminator produces a higher level of output and leaves no consumer surplus.
Define the tragedy of the commons.
The phenomenon that a common resource is used more intensively than it would be if it were privately owned.
Define the breakeven point in competitive markets.
The point at which price is equal to the minimum of average total cost, i.e. the lowest price at which the firm will not suffer negative profits in the short run.
Equilibrium
The point on a supply and demand curve at which the supply and demand curves intersect
A firm should increase the amount of R&D expenditures to:
The point where the expected return equals the cost of funds
Social interest theory
The political and regulatory process relentlessly seeks out inefficiency and introduces regulation that eliminates deadweight loss and allocates resources efficiently
Liberalism
The political philosophy according to which the government should choose policies deemed just, as evaluated by an impartial observer behind a "veil of ignorance"
Utilitarianism
The political philosophy according to which the government should choose policies to maximize the total utility of everyone in society
Libertarianism
The political philosophy according to which the government should punish crimes and enforce voluntary agreements but not redistribute income
Define the reservation price for insurance.
The price at which the expected utility from buying a policy is equal to the expected utility of not buying a policy.
World Price
The price of a good that prevails in the world market for that good
Law of Supply and Demand
The price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance
Relative Price
The price of one good compared to the price of another good
If the price of one Monopolistic Competition product rises
The price of the other competitors remains constant, the company sells fewer shoes and the producers sell more, but it doesn't disappear unless the price rises by a large amount.
Define adverse selection.
The process by which the 'undesirable' members of a population of buyers or sellers are more likely to participate in a voluntary exchange.
Arbitrage
The process of buying a good in one market at a low price and selling it in another market at a higher price to profit from the price difference
Degregulation
The process of removing regulation of prices, quantities, entry and other aspects of economic activity in a firm or industry
Define the rationing function of price.
The process whereby price directs existing supplies of a product to the users who value it most highly.
Efficiency
The property of a resource allocation of maximizing the total surplus received by all members of society
Equality
The property of distributing economic prosperity uniformly among the members of society
Define decreasing marginal utility.
The property that the increase in utility that comes from increasing your consumption of a good becomes smaller and smaller.
Coase Theorem
The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
Define the marginal rate of substitution.
The rate at which a consumer is willing to exchange one good for another, without a loss in total satisfaction.
Define the marginal rate of technical substitution.
The rate at which one input can be exchanged for another without altering the total level of output.
Define the marginal rate of transformation (MRT).
The rate at which one output can be exchanged for another at a point along the production possibilities frontier, equal to the slope of the PPF.
ESSAY: Returns to scale
The ratio between changes in output and a proportional change in all inputs. There are three types of returns to scale. Increasing returns to scale: doubling of all inputs results in more than doubling of outputs. Constant returns to scale: doubing of all inputs results in doubling of outputs. Decreasing returns to scale: doubling of all inputs results in less than doubling of outputs. The concept applies when all inputs are changed by the same proportion.
State Gossen's second law.
The ratio of marginal utilities of X and Y is equal to their price ratio is equal to the marginal rate of substitution.
What is the geometrical representation of marginal revenue?
The slope of the total revenue curve.
Game Theory
The study of how people behave in strategic situations
Define the certainty equivalent value of a gamble.
The sum of money for which an individual would be indifferent between receiving that sum or taking the gamble.
Define total surplus.
The sum of producer and consumer surplus.
Market Supply
The sum of the supplies of all sellers
State Walras law.
The sum of the values of excess demands across all markets is equal to zero. If all markets but one are in equilibrium, then the last market must also be in equilibrium.
Externality
The uncompensated impact of one person's actions on the well-being of a bystander
How efficient is the price-discriminating monopolist?
There is a far smaller efficiency loss than for the single-price monopolist, so total surplus is maximised, however it may be considered less fair, because consumer surplus is extracted.
Deadweight loss in perfect price discrimination
There is none of this created and this achieves efficiency.
Would a risk neutral person accept a fair gamble?
They are indifferent.
State the 5 properties of indifference curves.
They are ubiquitous, they are downward-sloping, they cannot cross, they are convex, and the MRS is decreasing.
Midpoint Method
This method calculates the percentage change between two points on a supply or demand curve
Average Total Cost
Total cost divided by the quantity of output
Marginal product is a. the increase in total output b. the increase in total cost c. the change in total output over the change in employment d. the change in average product e. all of the above
c. the change in total output over the change in employment
The law of diminishing returns states that as more and more workers are added to a given number of machines, there is an employment level beyond which a. production increases b. production decreases c. the marginal product decreases d. the marginal product increases e. the marginal revenue increases
c. the marginal product decreases
If the wage rate is $10 per hour and the rental rate is $5 per hour, then the vertical intercept of the isocost line
can not be determined without more information.
The price of a potato is $1.00 and the price of a tomato is 50 cents. It follows that the slop of the budget line is
cannot be determined from the information given
An economics textbook is an example of:
capital
rent control is an example of price ____
ceiling
Determinants of Demand
change in consumer tastes, number of buyers, or income
A change in any other factor affecting demand will changes the entire relationship between price and quantity.
change in demand
marginal cost is the
change in total cost associated with an additional unit of output
Ex,y<0 CPD
complements negative; quantity demanded of one good falls when the price of another rises
the price consumers are willing to pay for a product minus the price they actually pay is called:
consumer surplus
Households
consuming units in an economy *---->* decisions are based on their tastes and preferences and are constrained by their limited incomes and prices
What is a non-price determinate for supply?
cost of production
What determinate will move a supply curve?
cost of production *-technological advances* *-change in wages*
fixed costs
costs that do not vary with the quantity of output produced
variable costs
costs that vary with the quantity of output produced
how a price floor causes inefficiency
creates deadweight loss by reducing the quantity transacted to below the efficient level leads to an efficient allocation of sales among sellers leads to a waste of resources leads to sellers providing an inefficiently high quality level
The advent of DVDs has virtually demolished the market for videocassettes. This is an example of:
creative destruction
If a firm's marginal cost exceeds its marginal revenue, then
cutting back production will increase the firm's profit
The technique called input-output analysis relies heavily on a. a model that incorporates the interdependence of the economies industries. b. large amounts of production data. c. a mathematical framework that includes details for each product. d. All of these responses are correct.
d. All of these responses are correct.
Oligopolist A cuts price in an attempt to enlarge his share of the market. His competitors fail to retaliate with price cuts. In this case, in Figure 13-3, oligopolist A will move from point A to which point? a. C b. D c. E d. B
d. B
A home appliances supplier offers substantial discounts to customers if they buy several of the firm's products. When bought together, these items cost considerably less than the sum of the prices of the items if they were bought separately. Which pricing arrangement is being discussed here? a. Tacit collusion b. Price dealing c. Skimming d. Bundling
d. Bundling
In order for the price system to have satisfied the exacting requirements for efficiency, a. the average cost of producing each good must be equal to its MU. b. the maximum possible of total economic profit must be produced. c. every consumer's MU will be equal to marginal physical product. d. MU must equal MC for each and every commodity.
d. MU must equal MC for each and every commodity.
Policies that preclude the deliberate creation of monopoly and undesirable practices are called a. antimonopoly policies. b. socialism. c. anticompetitive policies. d. antitrust policies.
d. antitrust policies.
Compared to perfect competition, a monopoly in the long run a. produces the minimum average cost. b. All of these responses are correct. c. produces a larger output. d. charges a higher price.
d. charges a higher price.
In a free market, a given unit of an input will be used by the firm that a. earns the largest total profit. b. sells its output for the highest price. c. has the lowest marginal cost of producing another unit of output. d. earns the largest addition to total profit from the use of that unit of input.
d. earns the largest addition to total profit from the use of that unit of input.
A competitive firm maximizes profit at the level of output where a. average cost equals total cost b. marginal cost equals marginal revenue c. average cost is minimized d. marginal cost equals marginal revenue and marginal cost is increasing e. cannot tell
d. marginal cost equals marginal revenue and marginal cost is increasing
More income and wealth, a demand for inferior goods_________.
decrease
A graph illustrating how much of a given product a household would be willing to buy at different prices.
demand curve
The state legislature has cut Gigantic State University's appropriations. GSU's Board of Regents decides to increase tuition and fees to compensate for the loss of revenue. The board is assuming that the:
demand for education at GSU is inelastic.
when tastes change in favor of a good
demand for the good increases
when the price is expected to rise in the future
demand for the good increases today
When the price of a substitute falls
demand for the original good decreases
when the price of a complement rises
demand for the original good decreases
When the price of a substitute rises
demand for the original good increases
when the price of a complement falls
demand for the original good increases
If the price of hand calculators falls from $10 to $9 and, as a result, the quantity demanded increases from 100 to 125, then:
demand is elastic
ex. price of factors of production go down
difference in quantity supplied and change in supply
The automobile, household appliance, and automobile tire industries are all illustrations of:
differentiated oligopoly
"Successive units that are worth less to the consumer, the person will not be willing to pay as much for them." This is known as?
diminishing marginal utility
Buying more of good and services and with each successful good it gives less and less of a satisfaction.
diminishing marginal utility
The price elasticity of a monopolistically competitive firm's demand curve varies:
directly with the number of competitors but inversely with the degree of product differentiation.
Critics of unions argue that unions diminish efficiency and productivity by:
doing all of these: engaging in featherbedding, precipitating strikes, and causing a misallocation of labor
Demand curve for labor is generally
downward sloping to the right; it has a negative slope.
On Graph C whether or not the workers get the wage that the union is demanding depends on all of the following variables EXCEPT
e amount bribe that the union will pay the firm's negotiators.
Economists argue that advertising does not necessarily a. improve economic efficiency b. result in lower prices for consumers c. result in a better product quality d. (a) and (b) e. all of the above
e. all of the above
The MR = MC rule can be restated for a purely competitive seller as P = MC because:
each additional unit of output adds exactly its price to total revenue.
total revenue minus total opportunity costs (explicit and implicit) is called
economic profit
According to the Austro-American economist Joseph Schumpeter
economic profits are the reward for innovating.
Breaking down monopolies into smaller firms may be impractical because the cost advantage associated with ______________ will be lost and small firms may end up with losses
economies of scale
If a firm doubles its output in the long run and its unit costs of production decline, we can conclude that:
economies of scale are being realized.
On Graph X at its optimum level of output the Widget Inc. is:
efficient
With an increase in income, a consumer can increase the quantity consumed of
either or both
|Ed|>1
elastic; if you change price by 1 % change in Qd is greater than 1%; a rice in price reduces total revenue
Private property:
encourages owners to maintain or improve their property so as to preserve or enhance value.
total producer surplus
equal to the area above the market supply curve but below the price
The condition that exists when quantity supplied and quantity demanded are equal.
equilibrium
quota rent
extra profit producers make when supply is artificially limited by an import quota
Firms violating antitrust laws are likely to be sued by the federal government, but not by rival firms.
f
If a firm is a natural monopoly, society will benefit if it is broken into several small companies.
f
If production is occurring where marginal cost exceeds price, the purely competitive firm will:
fail to maximize profit and resources will be overallocated to the product.
In deriving the marginal product of labor, we consider the increase in output of an additional worker using additional capital
false
all other things being equal, if there is a significant reduction in supply. it is possible to keep prices at teir original level without causing shortages through anti-gouging legislation...
false
increases in price are always caused by and increase in demand
false
An organization that transforms resources into product and are the primary producing units in a market economy.
firms
Who produce goods and services?
firms
many buyers and sellers identical products everyone's a price-taker P=MC free entry into market
five requirements of perfect competition
A significant difference between a monopolistically competitive firm and a purely competitive firm is that the:
former sells similar, although not identical, products.
The issuance of a patent to a firm
gives the firm monopoly rights.
exports
goods produced domestically and sold abroad
Complements
goods that "go together"
Club Goods
goods that are excludable but not rival in consumption
club goods
goods that are excludable but not rival in consumption
Common Resources
goods that are rival in consumption but not excludable
common resources
goods that are rival in consumption but not excludable
Industrial Policy
government intervention in the economy that aims to promote technology-enhancing industries
an oncoming hurricane is announced on the evening news. the next moring, many customers go to the stores to buy plywood, but lumber yard owners had already doubled the price of plywood. although not very happy, customers still buy the plywood. which graph best describes this situation?
graph a
gasoline has doubled in price over the past couple years. which graph best depicts the markets for bicycles, scooters, and other alternative modes of transportation?
graph a
the people in the village are happy. thier incomes have risen and the shops in town are filled with new, imported goods...
graph a
when consumers expect the price of a product to be higher in the future, what graph illustrates their reaction today?
graph a
housing prices have begun to drop. new home construction has stopped and fewer run-down houses are being repaired:
graph b
solar panels, windmills, and biodiesel generators are cheaper and almost as efficient for office buildings to produce the electricity that they need for themselves. which graph depicets the market for existing utility companies?
graph b
the people in the village remember the good old days, when tourists came to visit and the place seemed to be alive day and night. now, there is very little to do, although land and locally produced foods are inexpensive.
graph b
the people in the village are unhappy. the shops are mostly empty and the few items available are very expensive...
graph d
The less elastic a monopolistic competitor's long-run demand curve, the:
greater its excess capacity
The larger the positive cross elasticity coefficient of demand between products X and Y, the:
greater their substitutability.
perfectly inelastic
has elasticity coefficient equal to zero
Assume a purely competitive increasing-cost industry is initially in long-run equilibrium and that an increase in consumer demand occurs. After all economic adjustments have been completed, product price will be:
higher and total output will be larger than originally.
according to the Laffer Curve, lower tax rates might lead to:
higher government revenues
Proportion of Income
higher proportion of income=more elastic
An increasing-cost industry is the result of:
higher resource prices that occur as the industry expands.
Which one is NOT a characteristic of monopolistic competition? a. relatively large number of sellers b. restricted entry c. homogenous products d. imperfect information e. all of the above
homogenous products
Where do firms buy their resources from?
households
Who help with the production of goods and services?
households
economics study:
how society manages its scarce resources
"Consumer sovereignty" refers to the:
idea that the decisions of producers must ultimately conform to consumer demands.
The Coase Theorem
if private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own
Price Floor
imposed price control on how low a price can be charges for a product
Interindustry competition means that:
in some markets the producers of a particular product might face competition from products produced by other industries.
If a firm can adjust its employment of all inputs, then it is
in the long run
To economists, the main difference between the short run and the long run is that:
in the long run all resources are variable, while in the short run at least one resource is fixed.
When the price of a good rises, the resulting change in quantity demanded due solely to the decline in your income's purchasing power is called the
income effect
EI <0
income elasticity of demand is less than zero always negative quantity demanded falls when income rises
The payroll tax is currently levied on
incomes up to $250,000. Beyond that labor income is not subject to payroll tax.
If labor productivity increases that will cause the MRP to
increase
Less income and wealth, a demand for inferior goods ___________.
increase
Refer to the diagram. If price is reduced from P1 to P2, total revenue will:
increase by C - A.
Suppose capital and labor are used in fixed proportions so that each machine requires only one worker. If a decline in the price of capital occurs, then the demand for labor will:
increase solely because of the output effect.
Suppose that a university decides to spend $1 million to upgrade personal computers and scientific equipment for faculty rather than spend $1 million to expand parking for students. This example illustrates:
opportunity costs.
The conclusion that oligopoly is inefficient relative to the competitive ideal must be qualified because:
over time oligopolistic industries may promote more rapid product development and greater improvement of production techniques than if they were purely competitive.
If the birth rate in a country increases,
over time this will lead to an increase in overall supply of labor.
Which of the following statements is most accurate?
paroll taxes are regressive because they are levied on income of labor and not on property income.
On Graph C at its optimum level of employment the Spring Company
pays a wage that is less than the MRP of the last worker hired.
rational people
people who systematically and purposefully do the best they can to achieve their objectives
price elasticity is defined as
percent change in quantity demanded divided by percent change is price
|Ed|=infinity
perfectly elastic demand; any rise in price causes quantity demand to fall to 0 any fall in price leads to an infinite quantity demanded
Es=infinity
perfectly elastic supply; any fall in price causes quantity supplied to fall to 0 any rise in price elicits an infinite quantity supplied
Assume that society places a higher value on the last unit of X produced than the value of the resources used to produce that unit. With no spillovers, this information means that:
price is greater than marginal cost.
The pricing strategy in an oligopoly market is known as
price leadership and price following.
Refer to the budget line shown in the diagram. If the consumer's money income is $20, the:
price of C is $4 and the price of D is $2.
For a monopolistically competitive firm in long-run equilibrium:
price will equal average total cost.
Social Cost
private cost + external cost
In long run equilibrium, both competitive firms and a monopolistic firms that maximize profits: earn zero economic profits set price equal to marginal revenue produce at minimum average total cost produce the output at which marginal revenue equals marginal cost
produce the output at which marginal revenue equals marginal cost
Productive Efficiency
producing goods in the least costly way; using the right mix of resources
Allocative Efficiency
producing the right mix of goods
The fact that a purely competitive firm's total revenue curve is linear and upsloping to the right implies that:
product price is constant at all levels of output.
The various combinations of goods and services that can be produced, when an economy uses its available resources and technology efficiently, is called:
production possibilities.
Suppose for a regulated monopoly that price equals minimum ATC but price exceeds MC. This means that:
productive efficiency is being achieved, but not allocative efficiency.
The amount of a product that a household would buy in a given period if it could buy all it wanted at the current market price.
quantity demanded
Noncash gifts:
reduce recipient utility relative to a cash gift because noncash gifts often fail to match recipient preferences.
A Monopsonist:
reduces the number of workers it employs so that it can pay each worker a lower wage rate
how a price ceiling causes inefficiency
reduces the quantity of apartments rented below the efficient level typically leads to inefficient allocation of apartments among would be renters leads to wasted time and effort as people search for apartments leads landlords to maintain apartments inefficiently low quality or condition
The law of diminishing returns describes the:
relationship between resource inputs and product outputs in the short run.
If price and total revenue vary in opposite directions, demand is:
relatively elastic.
The demand for a necessity whose cost is a small portion of one's total income is:
relatively price inelastic.
Because of the shape of land's supply curve
rent is not an incentive.
What do firms need to produce goods and services?
resources
An effective price floor on wheat will:
result in a surplus of wheat
As increasing amounts of a good are produced, the marginal cost of production tends to
rise
If the long-run supply curve of a purely competitive industry slopes upward, this implies that the prices of relevant resources:
rise as the industry expands.
Monopoly total revenues ___ at the beginning and after attaining a maximum, they _____.
rise; decline
Elastic demand = _______ revenues Unitary demand = _______ revenues Inelastic demand = _______ revenues
rising total revenues flat total revenues declining revenues
A product has utility if it:
satisfies consumer wants.
the law of diminishing marginal utility
says that marginal utility eventually declines from consuming more of a good
Refer to the diagram. A decrease in demand is depicted by a:
shift from D2 to D1.
Which of the following is true about the production possibilities curve when a technological progress occurs? The curve:
shifts outward to the right.
Other things equal, an increase in a consumer's money income:
shifts the individual's budget line rightward because she can now purchase more of both products.
If the price of product L increases, the demand curve for close-substitute product J will:
shirt to the right
a time period in which at least one input is fixed is called the
short run
A single-price monopoly is economically inefficient because, at the profit-maximizing output:
society values additional units of the monopolized product more highly than it does the alternative products those resources could otherwise produce.
A leftward shift of a product supply curve might be caused by:
some firms leaving an industry.
incentive
something that induces a person to act
When the price of a good rises, the resulting change in relative price causes the consumer to reduce his quantity demanded of that good, even when the consumer is income-compensated so that he remains indifferent about the price change. This observation is known as the
substitution
Since their introduction, prices of Blu-ray players have fallen and the quantity purchased has increased. This statement:
suggests that the supply of Blu-ray players has increased
Total utility may be determined by:
summing the marginal utilities of each unit consumed.
What is the difference between a demand curve and a supply curve?
supply has an upward curve while demand has a downward curve
When the best technology used to produce the good is no longer available
supply of the good decreases
when the price of an input rises
supply of the good decreases
when the price is expected to rise in the future
supply of the good decreases today
when the price of an input falls
supply of the good increases
When the price is expected to fall in the future
supply of the good increases today
The government used the Herfindahl-Hirschman index to determine if a proposed merger will lead to excessive concentration.
t
If the income elasticity of a good is negative, then
the Engel curve for this good must be downward sloping
When LCD televisions first came on the market, they sold for at least $1,000, and some for much more. Now many units can be purchased for under $400. These facts imply that:
the LCD television industry is a decreasing-cost industry.
On Graph A the shape of the supply of labor implies that
the Marathon Company can hire as many workers as it desires at the same wage.
The federal payroll taxes consist of
the Social Security tax and the Medicare tax.
market power
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
property rights
the ability of an individual to own and exercise control over scarce resources
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
Quantity supplied
the amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period
On Graph B if the price is Pa and output is Qf what does the area PbPaAS represent?
the amount of consumer surplus that is lost by the consumers but is part of the firm's total revenue
total revenue
the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold
Suppose that good X is on the horizontal axis and all other goods (measured in dollars) are on the vertical axis in the consumer-choice diagram. If the consumer gains $10 in income, then
the budget line shifts up by 10 dollars, with no change in the slope
price discrimination
the business practice of selling the same good at different prices to different customers
Market clearing price (equilibrium)
the buys and sellers are equally happy and there is no shortages, excess products and surplus
If the output of product X is such that marginal benefit equals marginal cost:
the correct amount of resources is being allocated to X's production.
tax wedge
the difference between what the buyer pays and what the seller receives after a tax has been imposed
Economic Profit
the economic profit is found by taking total cost (implicit and explicit) and subtracting from the total revenue (TR-TC=EP)
A firm is currently producing 200 units of output using 60 hours of labor and 80 hours of capital. The marginal product of labor is 12 units of output per hour, and the marginal product of capital is 15 units of output per hour. If the wage rate is $6 per hour and the rental rate is $3 per hour, then
the firm should use more capital and less labor
The amount of market power of a firm has is measured by
the firm's ability to change the price for its product.
An upward-sloping Engel curve indicates that
the good is normal
marginal cost
the increase in TC that arises from an extra unit of production
marginal product
the increase in output in output that arises from an additional unit of input
Labor market
the input/factor in which households supply work for wages to firms that demand labor
Land market
the input/factor market in which households supply land or other real property in exchange for rent
Average Fixed Cost
the is found by taking the total fixed cost and dividing by the quantity of output
The marginal rate of technical substitution of labor for capital (MRTSLK) tends to be higher
the larger the quantity of capital already employed
budget constraint
the limit on the consumption bundles that a consumer can afford
scarcity
the limited nature of society's resources
Refer to Goods X and Y. The relative price of good X in terms of good Y is always equal to
the magnitude of the slope of the budget line
As more of an activity is undertaken, it is reasonable to assume that
the marginal benefits will decline
The kinked-demand curve model helps to explain price rigidity because:
there is a gap in the marginal revenue curve within which changes in marginal cost will not affect output or price.
A monopoly exists if
there is one firm in the market
In a purely competitive industry:
there may be economic profits in the short run but not in the long run.
How is surplus fixed?
there will be a downward pressure on prices to make buyers buy the product and decrease the amount of product that's being wasted
Economists argue that monopolies should be regulated because a. they allocate resources efficiently b. they allocate resources inefficiently c. they have too much power d. they charge customers a too high price
they allocate resources efficiently
Marginal Cost
this is the measure of how much the cost will change as a result of an additional unit of input
Refer to the diagram, which pertains to a purely competitive firm. Curve A represents:
total revenue only.
At each point on an indifference curve:
total utility is the same.
Where will a demand curve move if it have decreased?
towards the left
Where will a demand curve move if it have increased?
towards the right
Which of the following most closely relates to the idea of opportunity costs? A. trade-offs. B. economic growth. C. technological change. D. capitalism.
trade-offs.
If the marginal value of 1 bottle of shampoo is 4 soap bars, then
trading away 1 bottle of shampoo for 4 bars of soap will not affect the consumer's level of satisfaction
in-kind transfer
transfers to the poor given in the form of goods and services rather than cash
Price increases always reduce economic efficiency.
true
property rights and the operation of prices as economic signals
two key factors that enable a market to be efficient but under conditions in which property rights are incomplete or prices give inaccurate economic signals markets can fail
market failure
under certain conditions and the market is ineffecient the three principal causes of market failure are market power, externalities and a good which by its nature makes it unsuitable for a market to allocate efficiently
costs that change with the amount of output produced are called....costs
variable
toy
vegtable
For a pure monopolist, marginal revenue is less than price because:
when a monopolist lowers price to sell more output, the lower price applies to all units sold.
surplus
when the quantity supplied exceeds the quantity demanded. they occur when the price is above its equilibrium level
Define positional externalities.
If A and B are competing for a prize that only one of them can attain, anything that helps A will necessarily harm B, leading to positional arms races.
Define a negative externality.
If an activity imposes costs on others that are not captured in the private cost.
State the law of large numbers.
If an event happens independently with probability p in each of N instances, the proportion of cases in which the event occurs approaches p as N grows larger.
Efficient Quantity General Principle 3
In any efficient allocation, the quantity is where the marginal valuation of the last unit consumed equals the marginal cost of the last unit produced
The law of diminishing returns
In any production process, there is an employment level beyond which successive units of labor added to the fixed factors of production contribute less and less to the total output
How relevant is the utility function in analysis of happiness?
It shows ordinality (ranking of choices), but it does not show cardinality (i.e. it cannot be quantified), so you cannot compare two people's utilities.
Refer to Goods X and Y. How would a budget line be affected if income and both prices all simultaneously doubled?
It would not be affected
Define risk pooling.
Joining other people in an agreement under which everyone accepts the gamble, then pools the resulting gains and losses and shares them equally.
An example of derived demand is the demand for:
Labor used to produce autos
The marginal revenue product of an input in a competitive market decreases as a firm increases the quantity of an input used because of the:
Law of diminishing returns
Define property rights.
Laws that describe how people can lawfully acquire different types of property, and that impose bounds on the use of property.
Which of the following will cause the creation of a monopoly?
Legal barriers and/or economic barriers to entry
Marginal Revenue in Monopolistic Competition
Less than price so product innovation is probably not pushed to its efficient level.
What shape is the indifference curve for substitutes?
Linear.
Refer to the diagram. The firm's supply curve is the segment of the:
MC curve above its intersection with the AVC curve.
The short-run supply curve of a purely competitive producer is based primarily on its:
MC curve.
The MRP is calculated in the following manner [x = multiplication]
MP x P
The optimum quantity of workers a firm will hire is that quantity when the
MRP to be equal to the MFC (MRC).
Which of the following describes the equilibrium condition in a purely competitive labor market?
MRP= Wage Rate
What is the formula for MRTS?
MRTS is the ratio of marginal products of labour and capital.
In the short run, a firm in monopolistic competition
Makes its output and price decisions just like a monoply firm does.
The graph depicts a monopolistically competitive firm. Refer to the above graph. This monopolistically competitive firm is:
Making economic profit in the short run
Define optimisation.
Making the best decision given the knowledge you have.
What are the three basic characteristics of monopolistic competition?
Many sellers, product differentiation, and free entry.
Many people believe that monopolies charge any price they want to without affecting sales. Instead, the output level for a profit-maximizing monopoly is determined by:
Marginal cost = marginal revenue
Which of the following is correct as it relates to cost curves?
Marginal cost intersects average total cost at the latter's minimum point.
What does the supply curve reflect?
Marginal cost of production.
A competitive firm in the short run can determine the profit-maximizing (or loss-minimizing) output by equating:
Marginal revenue and marginal cost.
If a purely competitive firm is producing at the P=MC output and realizing an economic profit, at that output:
Marginal revenue exceeds ATC.
If a purely competitive firm is producing at some level less than the profit-maximizing output, then:
Marginal revenue exceeds marginal cost.
What is the implication of the Coase theorem in terms of property rights?
Market efficiency will result if there are clearly defined property rights and negotiation is costless.
What are the consequences of a tax?
Market equilibrium quantity falls, the price paid by the buyer rises, and the price received by the seller falls.
Oligopoly
Market of a few sellers selling homogeneous products. Entry to the market is restricted (high barriers)
State the consumer's optimisation problem.
Maximising utility with respect to X and Y, subject to the budget constraint.
The Price Elasticity of Supply
Measures how much the quantity supplied responds to changes in the price. Calculated by: (Percentage change in quantity supplied)/(Percentage change in price)
Synergy
Merging companies to lower costs through more efficient joint production
Which of the following industries is not an example of an oligopoly market?
Milk industry.
Economic Profit = Producer Surplus
Minus Total fixed costs
What does the convexity property of preference ordering mean?
Mixtures of goods are preferable to extremes.
Define game theory.
Modelling the strategic interaction between different economic agents.
In which market will the firms use advertising in order to establish name loyalty?
Monopolistic Competitive
To enjoy economic profits, monopolistic competition
Must continually seek ways of keeping one step ahead of imitators
Technology
New technologies that lower the price of making the finished product bring the supply higher because the same amount of money can be spent to make a larger amount of product
Can perfectly competitive firms make positive economic profit in the long run?
No - they always make normal profit.
Ignore Other Firms (large number of firms in monopolistic competition)
No one firm can dictate market conditions and so no one firm's actions directly affect the actions of the other firms
Would public goods be produced in a free market?
No, because preferences are heterogeneous.
Is collusion sustainable? Why?
No, because there is always an incentive for firms to deviate.
Would a risk averse person accept a fair gamble?
No.
What are club goods?
Non-rivalrous and excludable, e.g. cable TV, uncongested toll roads.
What are public goods?
Non-rivalrous and non-excludable, e.g. knowledge, uncongested non-toll roads, street lamps.
On Graph B at its optimum level of output and price what area shows total cost of Quipsi Co.?
OPkKQf.
Perfect Price Discrimination
Occurs if a firm can sell each unit of output for the highest price someone is willing to pay for it.
Excess capacity
Occurs when the firm produces below the level where average total cost is minimized.
Change in Quantity Demanded
Occurs when the price of the good itself currently changes. P⬆️Qd⬇️
change in quantity supplied
Occurs when the price of the good itself, currently changes
If Odetta's marginal value of freedom fries is $8 per pound, then
Odetta will be indifferent if she trades 1 pound of freedom fries for $8 worth of all other goods.
As firms leave the industry the demand for the products
Of the remaining firms increases and their demand curves shift rightward.
A purely competitive firm is precluded from making economic profit in the long run because:
Of unimpeded entry to the industry.
Occupational licensing:
Often restricts occupational entry and raises the incomes of licensees
Total Revenue
The amount a firm receives for the sale of its output
The market system's answer to the fundamental question "How will the goods and services be produced?" is essentially:
"In ways that minimize the cost per unit of output."
Refer to Demand and Total Cost of Production. The marginal cost of producing the third unit is
$10 per unit
Answer the question on the basis of the accompanying table that shows average total costs (ATC) for a manufacturing firm whose total fixed costs are $10:
$124.
Suppose a factory produces 1,000 radios a year. AVC=$10 and AFC=$5. The factory's total cost is equal to
$15,000...bc $5+$10=$15, $15*1000=$15,000
Refer to Cost of Production. The short-run average cost of producing 60 units of output per week is
$5 per unit
The graph depicts a monopolistically competitive firm. Refer to the above graph. At the profit-maximizing level of short-run output, this monopolistically competitive firm will be making a profit of:
$525
The graph depicts a monopolistically competitive firm. Refer to the above graph. In the short run, this monopolistically competitive firm will set price at:
$65 and produce 35 units of output
The next question(s) are based on the following table showing the expected rate of return, R&D spending, and interest-rate cost-of-funds for a hypothetical firm.Refer to the above data. The optimal amount of R&D would be:
$65 million
income elasticity of demand
% change in. quantity demanded/%change in income or Qd1-Qd0/P1-P0 X P0/Q0
cross-price elasticity of demand
%change in quantity demanded of one good/ % change in price of another good or Q1x-Q01/P1y-P0y X P0y/Q0x
price elasticity of supply
%change in quantity supplied/Price change in price or Qs1-Qs0/Ps1-Ps0 X P0/Q0
Refer to the diagrams. With the industry structures represented by diagram:
(A) there will be only a normal profit in the long run, while in (B) an economic profit can persist.
Change in Buyers Expectation
(Demand) If a buyer expects the price of a good to rise in the future, they will buy more now
Change in price of related goods
(Demand) Substitutes: Increase of price in a sub, increase in demand for the other Complements: Increase of price in a comp, decrease in demand for the other
Change in income
(Demand) Normal goods: Income rises, demand rises Income falls, Demand falls Inferior goods: Income rises, Demand falls
midpoint method for arc elasticity formula
(P1+P0)/2/(Q1+Q0)/2
Price Elasticity of Demand Equation
(Q2-Q1)/[(Q2+Q1)/2] ------------------ (P2-P1)/[(P2+P1)/2]
Change in # of sellers
(Supply) # of sellers⬆️ supply⬆️
Change in Input
(Supply) Input price ⬆️ supply⬇️
An inefficient product mix:
- By producing 2 fewer units of food, we can produce 2 additional units of clothing. If we give 1.5 of these to Ann and the remaining 0.5 to Bill, both parties will be better off.
if the price of a good increases 20% and the quantity demanded of the good decreases by 12%, the price elasticity of demand equals Formula: 0.12/0.2=0.6
0.6
Producer Surplus
The amount a seller is paid minus the cost of production
Why is the quantity demanded of housing highly sensitive to price?
1. There are many different options. 2. The choice among them depends strongly on income and relative prices.
State the common properties of total product curves.
1. They pass through the origin. 2. They are convex at first, because of division of tasks and specialisation of labour. 3. Beyond some point, they become concave, because of the law of diminishing returns.
Increase in Supply
Any change that raises the quantity supplied at every price and shifts the supply curve to the right
willingness to pay
a good is the maximum price at which he or she would buy that good
Industry Y is dominated by five large firms that hold market shares of 20, 20, 25, 25, and 10. The Herfindahl index for this industry is:
2150
Suppose that an indifference curve for Jack is drawn measuring quantities of pencils along the horizontal axis and quantities of pens along the vertical axis. If the marginal value of an additional pencil is 3 pens for Jack, the slope of his indifference curve in this range is
3
The following table is for a purely competitive market for resources. Refer to the above table. At a wage rate of $23, the firm will choose to employ:
3 Workers
Refer to the diagram in which the downsloping lines are budget lines and I1, I2, and I3 comprise an indifference map. The combinations of products M and N indicated by points 1, 3, and 5 are such that:
3 implies a higher level of utility than does 1 or 5.
Refer to Demand and Total Cost of Production. According to the equimarginal principle, how many units should the firm produce in order to maximize its profit?
3 units
Refer to the above data. In maximizing its profit, this firm will employ:
3 units of labor
From the following answers select the correct numbers to fill the blanks in the following sentence. In 2010 the lowest quintile of the American families received % of total income and the highest quintile received % of total income.
3.8, 47.8
Refer to the data. Suppose that firms in this industry split up such that there were 100 firms, each with a one percent market share. The four-firm concentration ratio and the Herfindahl index respectively would be: Firm-Market Share A-20% B-20% C-20% D-20% E-10% F-10%
4 percent and 100.
Refer to the Graph Y. Based on this graph about what percentage of the total income is received by the lowest (poorest) quintile?
4%
Answer the next question(s) based on the demand and cost schedules for a monopolistic competitor given in the table below.Refer to the above table. What output will the profit-maximizing monopolistic competitor produce?
5
The following table is for a purely competitive market for resources. Refer to the above table. At a wage rate of $11, the firm will choose to employ:
5 Workers
From the following answers select the correct numbers to fill the blanks in the following sentence. In 1947 the lowest quintile of American families received % of total income while the highest quintile received % of total income.
5, 43
Refer to the data. The four-firm concentration ratio for the industry is: Firm-Market Share A-20% B-20% C-20% D-20% E-10% F-10%
80 percent.
From the following answers select the answer with the correct numbers to complete the following sentence. In 2007 the richest quintile (top 20%) of the American families owned % of the total financial wealth in the United States while the bottom 4 quintiles combined (bottom 80%) owned % of the total wealth.
93, 7
Refer to the above graphs. A short-run equilibrium that would produce profits for a monopolistically competitive firm would be represented by graph:
A
Negative Income Tax
A tax system that collects revenue from high-income households and gives subsidies to low-income households
Head Tax
A tax that everyone will pay. The tax is the same and does not matter on how much your income is, which results in lower income people paying a higher share of their taxes
Production
A technical and social process that transforms inputs into outputs
Define a numeraire good.
A type of composite good for which the marginal utility is equal to 1.
Define the principal-agent problem.
A way in which to model a conflict in interest between two parties in an agreement; when a principal employs an agent to do a job for them but cannot know for sure how much effort the agent is putting into the job.
Subsidy
A wedge between the price a producer receives and the price a consumer pays
Union
A worker association that bargains with employers over wages and working conditions
State the 5 properties of preference ordering.
Completeness, transitivity, more-is-better, continuity, convexity.
What does the utility function of a risk averse person look like?
Concave.
Further gains from exchange:
Any point in the shaded region lies on a higher indifference curve for both parties than the ones that pass through T.
If a 9% price increase led to a 4% decline total revenue, then A) demand is elastic. B) demand is inelastic. C) demand is unit elastic. D) there is not enough information to determined if demand is elastic, inelastic, or unit elastic.
A) demand is elastic.
If a service has many substitutes its elasticity of demand will tend to be ____, and over time its elasticity of demand will tend to get _____. A) high; higher B) low; lower C) high; lower D) low; higher
A) high; higher
Define returns to scale.
An inherently long-run concept that tells us what happens to output when all inputs are increased by exactly the same proportion.
As we go from the market period to the short run, the supply of a product tends to become ______ elastic; as we go from the short run to the long run; the supply of a product tends to become _____ elastic. A) more; more B) less; less C) less; more D) more; less
A) more; more
Which of the following probably has a negative income elasticity. A) very high mileage, very old used cars. B) a luxury cruise. C) diamonds. D) concert tickets.
A) very high mileage, very old used cars.
Define a fixed input.
An input that cannot vary in the short run.
For a given level of total fixed cost
Anything that increases producer surplus also increases economic profit.
Barriers to entering an industry:
Are the basis for monopoly
Which of the following statements applies to a purely competitive producer? A. It will not advertise its product. B. In long-run equilibrium it will earn an economic profit. C. Its product will have a brand name. D. Its product is slightly different from those of its competitors.
A. It will not advertise its product.
if marginal cost (MC) is less that average total cost (ATC) then
ATC is decreasing
what is the formula for average total cost
ATC=AFC+AVC
Efficiency Wages
Above-equilibrium wages paid by firms to increase worker productivity
The endowment and prices determine the budget constraint:
Ann and Bill have initial endowment E. At the price ratio , they can exchange 1 unit of clothing for 1 unit of food, and move anywhere along the line HH'.
When the technology used to produce the good improves
supply of the good increases
if the price of oil increases strongly and steadily, what is expected to occur to the elasticity of supply and demand in the long run?
Both supply and demand will become more elastic
Which of the following outcomes is consistent with a purely competitive market in long-run equilibrium?
Consumer and producer surplus will be maximized.
What would NOT be expected to occur in a purely competitive market in long run equilibrium?
Consumer and producer surplus will be minimized.
Which of the following answers is most accurate?
From 1960 to the early 1970's the poverty rate in the United States increased sharply.
When a firm is maximizing profit it will necessarily be:
Maximizing the difference between total revenue and total cost.
State the determinants of demand.
Consumer income, tastes, prices of related goods, expectations about future income, expectations about price levels, population size.
Price Elasticity of Demand
Measures how much quantity demanded changes in a response to a change in the price of a good
Refer to Goods X and Y. Suppose the consumer is spending all of his income buying some of both goods. If the marginal value of X is greater than the relative price of X, how can the consumer improve his level of satisfaction?
By purchasing more of good X and less of good Y
In the short run, a purely competitive firm will always make an economic profit if:
P > ATC.
Which of the following is an example of creative destruction? A.An economic recession forces firms out of business. B. Automobile production causes the wagon industry to shut down. C. Apple earns more economic profits than other manufacturers of MP3 players. D. Starbucks shuts down stores to create greater demand for its remaining outlets.
B. Automobile production causes the wagon industry to shut down.
Which of the diagrams correctly portrays a nondiscriminating pure monopolist's demand (D) and marginal revenue (MR) curves?
B. Where MR lies beneath demand
What is an example of a technological breakthrough that came out of a government or university laboratory?
The Internet
Comparative Advantage
The ability to produce a good at a lower opportunity cost than another producer
What is the primary force encouraging the entry of new firms into a purely competitive industry?
Economic profits earned by firms already in the industry.
Which is a barrier to entry in an industry?
Economies of scale
Exports
Goods and services that are produced domestically and sold abroad
Private Goods
Goods that are both excludable and rival in consumption
Which of the following firms is most likely to be a monopoly?
Kansas City Power & Light.
On Graph B the Spring Company will hire workers and will offer wage.
LA, WB
Does economic growth lead to happiness?
No - happiness is constant or even decreasing as GDP increases.
What activities are the Anti Trust Laws intended to prohibit?
Price fixing
The goal of product differentiation and advertising in monopolistic competition is to make:
Price less of a factor and product differences more of a factor in consumer purchases.
What is NOT a valid generalization concerning the relationship between price and costs for a purely competitive seller in the short run?
Price must be at least equal to average total cost.
Exit Increases
Prices and eventually eliminates economic loss
Enttry causes
Prices to lower and eventually eliminates economic profit.
Social Marginal Benefit
Private Marginal Benefit + External Benefit
Social Marginal Cost
Private Marginal Cost + External Cost
Define social benefit.
Private benefit plus any external benefit.
Define social cost.
Private cost plus any external cost.
What type of advertising do monopolies use most frequently?
Public relations advertising.
Regulation
Rules administered by a government agency to influence prices, quantities, entry and other aspects of economic activity in a firm or industry.
The demand curve confronting a non discriminating pure monopolist is:
The same as the industry's demand curve
Supply-Side Economics
This was a plan by Ronald Reagan that believed that Laffer was right about taxes being too high and that when taxes decreased, tax revenue would increase. Tax revenue would increase because when taxes were cut, it would encourage people to increase the quantity of labour they supplied
Is advertising good or bad from society's perspective?
To some, advertising manipulates consumer tastes and creates "needs" for trivial products.
Which of the following goods will least likely suffer a decline in demand during a recession?
Toothpaste
Average Revenue
Total revenue divided by the quantity sold
.......utility is the addition to total utility from consuming an additional unit of the good
marginal
Supply curve
a graph that illustrates how much of a product a firm will sell at different prices
Poverty means
a lack of means to provide for the basic goods and services that people in a given society see as usual and necessary
On Graph C the Spring Company is
a monopsony.
tragedy of the commons
a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole
Refer to the diagram. A price of $60 in this market will result in:
a surplus of 100 units
Demand schedule
a table showing how much of a given product a household would be willing to buy at different prices
Supply schedule
a table that's showing how much of a product firms will sell at alternative prices
Which of the following is true for a profit-maximizing competitive firm in the long run but not a monopolist? a. MC = P. b. Q > 0. c. MC = MR. d. AR = P.
a. MC = P.
If a monopoly firm reduced the price of its product, which of following must have been true? a. MR < MC b. MR > MC c. MC > AR d. MR > AR
b. MR > MC
A monopolist produces an output level consistent with a. e < 1 b. e > 1 c. e = 1 d. none of the above
b. e > 1
The marginal rate of substitution:
declines as one moves southeast along an indifference curve.
Positive Statement
describes the world as it is as opposed to how it ought to be
individual producer surplus
difference between the price and cost
The copper, aluminum, cement, and industrial alcohol industries are examples of:
homogeneous oligopoly
The owners of resources and they sell their resources in exchange for goods and services.
households
Total utility:
increases at a diminishing rate, reaches a maximum, and then declines.
A pure monopolist should never produce in the:
inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price.
Refer to the diagram for a monopolistically competitive producer. The firm is:
realizing a normal profit in the long run.
The labor demand curve of a purely competitive seller:
slopes downward because of diminishing marginal productivity.
Refer to the Graph Y. The curve on this graph is known as
the Lorenz curve.
When Homer has 5 doughnuts, his marginal value is 15¢ per doughnut. We can conclude that Homer
would refuse to pay more than 15¢ for a sixth doughnut
How do you calculate marginal product?
Differentiate the total product function.
How do you derive marginal revenue?
Differentiate the total revenue function.
How do you calculate marginal utility?
Differentiate the utility function.
Decreasing returns to scale
Doubling of all inputs results in less than doubling of output
State the Hedonic treadmill theory.
Due to interpersonal comparisons, satisfaction depends on the difference between one's income and the average income of others, so if everyone becomes richer, nothing happens in relative terms.
Examples of inferior goods:
*~second-hand goods* *~spam* *~roman noodles*
It shows the demand schedule facing Nina, a monopolist selling baskets.Refer to the above table. What is the change in total revenue if she raises the price from $10 to $12?
+$120
Answer the next question(s) based on the demand and cost schedules for a monopolistic competitor given in the table below.Refer to the above table. What will be the economic profit or loss for this monopolistic competitor at the profit-maximizing level of output?
+$20
Diminishing Marginal Utility
As a person's income rises, the extra well-being derived from an additional dollar of income falls
Monopoly as a market structure leads to a. prices that equal minimum long-run average cost. b. prices equal to average cost. c. persistent economic profits. d. quick response to economic change.
c. persistent economic profits.
The monopoly producer a. sets MU equal to P. b. has MC > MU. c. sets MR = MC. d. sets MR = P.
c. sets MR = MC.
The point of view of a buyer which reflects the relationship between price and quantity demanded.
law of demand
In the diminishing returns range of production function each additional worker hired will contribute
less output than the previous worker.
If the marginal revenue product of the last worker hired by a competitive firm is $85 then the wage of workers hired will be
less than $85
Refer to the table. Over the $10-$8 price range, the elasticity coefficient of supply is:
less than 1.
deadweight loss
loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity
Types of competition in industries: Automobile industry: Supercomputer industry: Mobile phone market: Coffee market: Fast food market:
Automobile industry = differentiated oligopoly Supercomputer industry = differentiated oligopoly Mobile phone market = oligopoly Coffee market = oligopoly Fast food market = monopolistic
Nash equilibrium
Firms that are interacting with one another each chooses its best strategy given the strategies of the other firms.
The reason that innovation promotes competition is because:
Firms use it to make competitors' products obsolete in the market.
Collusion Impossible
Firms would like to conspire to fix a higher price, but they can't
What does the transitivity property of preference ordering mean?
For any three bundles X, Y and Z, if the consumer prefers X to Y and Y to Z, then he always prefers X to Z.
Price Maker
In a monopoly, the company sets the price
What does the slope of the budget constraint represent?
In absolute value, the opportunity cost of an additional unit of the good on the x-axis.
Efficient Allocation of Consumption General Principle 1
In any efficient allocation, consumers with highest willingness to pay consume
Implicit Costs
Input costs that do not require an outlay of money by the firm
The first discovery of a product or process through the use of imagination, ingenious thinking, and experimentation is:
Invention
The first working prototype of a microcomputer chip would be an example of:
Invention
Technological advance is a three-step process of:
Invention, innovation, and diffusion
Because monopolistic competition faces downward-sloping demand curve
It can set both its price and its output just like a monopoly can
If advertising is a signal
It doesn't need any specific product information. It just needs to be expensive and hard to miss.
What happens to the demand curve when a tax is levied on the buyer?
It shifts inwards by T.
What happens to the supply curve when a tax is levied on the seller?
It shifts inwards by T.
Three basic decisions must be made by all economies. What are they?
What will be produced, how goods will be produced, and for whom goods will be produced.
Expectations
When a firm expects the price of their product to rise in the future, they might lower the supply today in order to supply more when the price is higher. The opposite also holds true
Product Differentiation
When a firm makes a product that is slightly different from the products of competing firms.
Mutual interdependence
When a firm shapes its policy with an eye to the policies of competing firms.
Define a price ceiling.
When a maximum price is set below the equilibrium price.
Define a price floor.
When a minimum price is set above the equilibrium price.
Define third-degree price discrimination.
When a monopolist charges different prices to two completely distinct markets in which they sell their output.
Define a maximin strategy.
When a player chooses the strategy that minimises the lowest possible value of their own payoff.
Define strategic uncertainty.
When a player does not have a dominant strategy of their own, they need to second-guess what others will do.
Market Power
When a single buyer or seller (or small group) is able to influence prices in a market
There's no incentive for new firms to enter
When all the firms in the industry are making zero economic profit.
When will a price reduction reduce total expenditure and why?
When demand is inelastic, because the value effect dominates the volume effect.
Define second-degree price discrimination.
When different quantities of the good sell for different prices.
Define mixed strategy.
When each player assigns a probability of playing each pure strategy, so it is a mix of pure strategies.
State Engel's law.
When income increases, the share of income spent on necessities decreases, and the share of income spent on luxuries increases.
Resources are used efficiently
When marginal social benefit equals marginal social cost.
Multilateral Trade
When multiple countries agree to remove trade restrictions at the same time
When do monopoly profits not persist in the long run?
When the factors that gave rise to the firm's monopoly position come under attack, for example because competing firms develop substitutes for important inputs that were previously under the control of the monopolist.
When do monopoly profits persist in the long run?
When the firm has a declining long-run average cost curve, or where a firm's monopoly comes from having a government licence.
When is the corner solution on the vertical axis?
When the indifference curves are less steep than the budget constraint.
Network externality
When the number of other people purchasing the good influences quantity demanded.
State the Coase theorem.
When the parties affected by externalities can negotiate costlessly with one another, an efficient outcome results no matter how the law assigns responsibility for damages.
When are indifference curves circular?
When the preferences have a satiation point (e.g. food in a restaurant).
Define the hurdle model of price discrimination.
When the seller sets up a hurdle of some sort, and makes a discount price available to those buyers who elect to jump over it. The logic is that those buyers who are most sensitive to price will be more likely than others to jump the hurdle.
When are indifference curves concave?
When there is consumption of only one out of the two goods (e.g. addiction goods).
For common resources, what is the actual allocation?
Where the opportunity cost is equal to the average product.
For common resources, what is the socially optimum allocation?
Where the opportunity cost is equal to the marginal product.
Which of the following is not correct?
Where total product is at a maximum, average product is also at a maximum.
In the short run a purely competitive firm that seeks to maximize profit will produce:
Where total revenue exceeds total cost by the maximum amount.
Define the legal incidence of tax.
Whether the buyer or seller is responsible for paying the tax to the government.
Free Rider
a person who receives the benefit of a good but avoids paying for it
free rider
a person who receives the benefit of a good but avoids paying for it
permanent income
a person's normal income
the optimal combination of goods to purchase and consume is illustrated graphically by
a point of tangency between the highest difference curve and the budget constraint
The federal income tax is an example of
a progressive tax.
wedge
a quantity control or quote drives a ____ between the demand price and the supply price of a good; that is, the price paid by buyers ends up being higher than that received by sellers
The payroll tax is an example of
a regressive tax.
A factor of production is the same as:
a resource
market failure
a situation in which a market left on its own fails to allocate resources efficiently
dominant strategy
a strategy that is best for a player in a game regardless of the strategies chosen by the other players
Corrective Tax
a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality
corrective tax
a tax designed to induce private decision makers to take into consideration the social costs that arise from a negative externality
negative income tax
a tax system that collects revenue from high-income households and gives subsidies to low-income households
natural monopoly
a type of monopoly that arises because a single firm can supply a good or service to an entire market at a lower cost than could two or more firms
For a firm to be a monopoly it must produce
a unique product.
Circular Flow Model
a visual model of the economy that shows how dollars flow through markets among households and firms
On Graph C the Spring Company is
a wage maker.
The Marathon Company is
a wage taker.
If the firm on Graph B is operating at Qf and selling its output at Pa there will be:
a welfare loss equal to the area FAB.
Union
a worker association that bargains with employers over wages, benefits, and working conditions
Which of the following would not lead to higher concentration in an industry? a. A large number of firms have entered the market. b. Some firms have become technologically superior. c. Innovation increases plant size of some firms and lowered their average costs. d. Larger firms gain control of important resources, squeezing out smaller firms.
a. A large number of firms have entered the market.
Society might argue that there are cases in which it is appropriate to resist price increases in situations where scarcity is serious. Included would be the case of a. All of the responses are correct. b. taxes imposed on products capriciously and inappropriately. c. unrestrained monopoly that would otherwise succeed in extracting funds from the public. d. rising prices falling so heavily on the poor that rationing becomes preferable.
a. All of the responses are correct.
Suppose that a firm in monopolistically competitive market is producing 30 units of output. At this level of production, the firm charges $50 per unit. Its marginal cost is $24 and marginal revenue is $24, and average cost is $20 per unit. Given this information, in the long run you would expect a. firms to enter the market. b. price to increase. c. firms to exit the market. d. firms to maintain their current output and price.
a. firms to enter the market.
Inefficient allocation of resources occurs when a. it is possible to make some people better off without making others worse off. b. society is operating at a point high on the production possibilities frontier. c. no one can be made better off without having someone else give up something. d. society is operating at a point low on the production possibilities frontier.
a. it is possible to make some people better off without making others worse off.
If a firm decides to ignore the reactions of its rivals to its policies, the appropriate model to analyze its behavior is a. monopoly. b. perfect competition. c. game theory. d. cartels.
a. monopoly.
The product supplied by a monopoly firm has a. no close substitutes. b. two or three close substitutes. c. a large number of substitutes. d. a few substitutes.
a. no close substitutes.
The four-firm concentration ratio for an industry is a. the share of industry output sold by the four largest firms in the industry. b. the percentage of total industry profits claimed by the four largest firms. c. the share of industry output sold by the fourth largest firm in the industry. d. the number of firms in the industry, divided by four.
a. the share of industry output sold by the four largest firms in the industry.
In perfect competition the firm a. has no control over the market b. is a price maker c. is very small as compared to the market d. (a) and (c)
a. has no control over the market c. is very small as compared to the market
A surplus of a product will arise when price is:
above equilibrium, with the result that quantity supplied exceeds quantity demanded.
when doing research, economists:
all of the above
one benefit of international trade is:
all of the above can be benefits
Internalizing the Externality
altering incentives so that people take account of the external effects of their actions
internalizing the externality
altering incentives so that people take into account the external effects of their actions
Suppose the price of a good rises. When will the resulting substitution effect reduce the quantity demanded of the good
always
EI >0
always positive; normal good; income inelastic; less than 1: quantity demanded rises when income rises but rapidly as income
signalling
an action taken by an informed party to reveal private information to an uninformed party
collusion
an agreement among firms in a market about quantities to produce or prices to change
At a monopolist's current output, ATC = $10, P = $11, MC = $8 and MR = $7. This firm is realizing: an economic profit that could be increased by producing more output an economic profit that could be increased by producing less output an economic loss that could be reduced by producing more output an economic loss than could be reduced by producing less output
an economic profit that could be increased by producing less output
market economy
an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
When the percentage change in price is greater than the resulting percentage change in quantity demanded:
an increase in price will increase total revenue.
If two resources are highly substitutable for one another:
an increase in the price of one will increase the demand for the other.
Refer to the diagram. Line (1) reflects the long-run supply curve for:
an increasing-cost industry.
Suppose losses cause industry X to contract and, as a result, the prices of relevant inputs decline. Industry X is:
an increasing-cost industry.
When deriving an Engel curve, if the optimum point for good X lies to the left as income increases, good X is
an inferior good
Economists would describe the U.S. automobile industry as:
an oligopoly
Game theory as an explanation of price determination describes
an oligopoly market.
If a market is dominated by a few giant firms it is
an oligopoly.
Because of higher gasoline prices, firms using gasoline intensively in the production or distribution of their goods have experienced:
an upward shift in their MC, AVC, and ATC curves.
An indifference curve shows the baskets of goods which
are all equally desirable, providing the consumer with some fixed level of satisfaction
price controls
are legal restrictions on how high or low a market price may go they can take two floors a price ceiling and a price floor
Use the following diagram to answer the next question: Refer to the diagram. If this firm produces its profit-maximizing output, its potential profit is: zero area AFHC area AFGB area BGHC
area AFGB
The basic difference between the short run and the long run is that:
at least one resource is fixed in the short run, while all resources are variable in the long run.
Regulating a natural monopoly: as the market size may be too small compared to the firms capacity, price is below ___________. The firm must be ________.
average cost; subsidized
____ occur(s) when an X percent increase in input use raises output by more than X percent, so that the more the firm produces, the lower its per-unit costs become. a. Economies of scope b. Scale economies c. Perfect competition d. Product differentiation
b. Scale economies
At any given airport, the airlines hold long-term leases for passenger loading gates. New gates cannot be added without approval of the airlines. Frequent flier programs are also common in the industry. It is, therefore, more difficult for a new airline to enter a given airport (market). Such factors: (i) are called barriers to entry. (ii) tend to decrease the contestability of the air travel market. a. i not ii b. i and ii c. neither i nor ii d. ii not i
b. i and ii
In using the composite-good convention in an indifference curve diagram, economists
lump together all goods but one into a single good measured in a single unit, like dollars
EI>1
luxury good, income elastic; always positive; quantity demanded rises when income rises and more rapidly than income
A monopolistic competitive market has
many small, medium or large firms in it.
As long as the marginal revenue exceeds __________, successive output units add to total profits
marginal revenue MC = MR
If a purely competitive firm is producing at the P = MC output and realizing an economic profit, at that output:
marginal revenue exceeds ATC.
If a purely competitive firm is producing at some level less than the profit-maximizing output, then:
marginal revenue exceeds marginal cost.
QUESTION 2 Use the following diagram to answer the next question. Refer to the diagram. At output q2: marginal revenue exceeds marginal cost by the greatest amount demand is inelastic profit is maximized marginal revenue is zero
marginal revenue is zero
Assuming a competitive resource market, a firm is hiring resources in the profit-maximizing amounts when the:
marginal revenue product of each resource is equal to its price.
In the long run, a pure monopolist will maximize profits by producing that output at which marginal cost is equal to:
marginal revenue.
Refer to the diagram. The quantitative difference between areas A and C for reducing the price from P1 to P2 measures:
marginal revenue.
To maximize utility, a consumer should allocate money income so that the:
marginal utility obtained from the last dollar spent on each product is the same.
when the number of producers rises
market supply of the good increases
Economists generally assume that the firm's goal is to
maximize its profit
In long-run equilibrium, purely competitive markets:
maximize the sum of consumer surplus and producer surplus.
a (hypothetical) benevolent social planner whose goal is to allocate resources witht the greatest efficiency should:
maximize total surplus
All points on the firm's expansion path
minimize the firm's cost of producing some level of output
Product variety is likely to be greater in:
monopolistic competition than in pure competition.
The firm that is the only buyer of a particular resource is called a (an)
monopsony
Substitutability
more substitutes=more elastic
change in quantity demanded
movement along the demand curve Q1-Q0
For a firm selling its product in a purely competitive market, the marginal revenue product of labor can be found by:
multiplying marginal product by product price.
We would expect the cross elasticity of demand between dress shirts and ties to be:
negative, indicating complementary goods.
Mary says, "You would have to pay me $50 to attend that pro wrestling event." For Mary, the marginal utility of the event is:
negative.
Refer to the payoff matrix. Bob's Burgers and Sam's Sandwiches are competing restaurants in a small town. Both are considering adding pizza to their line of products. If this is a one-time simultaneous game:
neither firm has a dominant strategy.
Refer to the diagram. At output level Q1:
neither productive nor allocative efficiency is achieved.
When the production possibilities curve is bowed out, resources are:
not equally suited to the production of both types of goods.
The invisible hand refers to the:
notion that, under competition, decisions motivated by self-interest promote the social interest.
Equilibrium
occurs where the demand curve and supply curve intersect
supply price
of a given quantity is the price at which producers will supply that quantity
Innovations that lower production costs or create new products:
often generate short-run economic profits that do not last into the long run.
Product advertising is used the most by
oligopolies.
With an increase in income, we can predict that a consumer will choose a new market basket
on a higher indifference curve that is tangent to the new budget line
The amount of a good that must be given up to produce another good is the concept of:
opportunity cost.
Looking at Graphs A and B what is the MRP of the last worker hired by the Marathon Company?
$150
On Graph A what is the wage of each of the workers at the Marathon Company?
$150
Answer the next question on the basis of the following table showing the demand schedule facing a nondiscriminating monopolist. Refer to the data. The marginal revenue of the fourth unit of output is: $10 $8 $4 $2
$2
Answer the question(s) below on the basis of the following demand and cost data for a pure monopolist.Refer to the above table. Equilibrium price of the monopolist will be:
$2.25
Refer to the above data. At the profit maximizing level of employment, this firm's, total labor cost will be:
$24
Refer to Cost of Production. The long-run total cost of producing 60 units of output per week is
$270
It shows the demand schedule facing Nina, a monopolist selling baskets. Refer to the above table. What is the change in total revenue if she lowers the price from $20 to $18?
$30
Refer to the above data. At the profit maximizing level of employment, this firm's, total revenue will be:
$30
Answer the next question(s) based on the demand and cost schedules for a monopolistic competitor given in the table belowRefer to the above table. At the profit-maximizing level of output, marginal revenue will be:
$4 and marginal cost will be $4.
Refer to Marginal Cost of Production. Suppose the firm has $20 in fixed costs. Its total cost of producing 4 units of output is
$42
The next question(s) are based on the following table showing the expected rate of return, R&D spending, and interest-rate cost-of-funds for a hypothetical firm. Refer the above data. If interest-rate cost-of-funds rose to 11 percent, the optimal amount of R&D spending would be:
$45 million
Change in Sellers expectations
(Supply) If a seller expects the price of his good to rise in the future, he will supply less now
Examples of normal goods:
*~books* *~education* *~clothing*
Who are the fundamental decision-making participants of the market?
*~households* *~firms*
What factors are known as non-price determinates?
*~income* *~wealth* *~price of another product* *~taste and preferences* *~expectation of future income, wealth and prices*
Examples of complement goods:
*~oreos and milk* *~peanut butter and jelly*
What factors influences demand?
*~price* *~income* *~wealth* *~price of another product* *~taste and preferences* *~expectation of future income, wealth and prices*
General equilibrium:
- A simple exchange economy is in equilibrium when excess demand for both products is exactly equal to zero. At the price ratio , Ann wants to buy the same units of food that Bill wants to sell, and she wants to sell the same units of clothing that he wants to buy. - Hence, the price ratio will keep changing until general equilibrium is reached. When there is disequilibrium, the price of the good for which there is excess demand will rise, until this excess demand is eliminated.
Describe the dictator game experiment of rationality.
- An individual must share an initial endowment with an unknown stranger he will never meet and who will never know who he is. - Except for altruistic reasons, he should never share at all (according to the rational choice model). - On average, he does (around 20%) - could be due to Hawthorne effect (the feeling of being observed alters his behaviour). - This implies that he is not rational, showing that altruism can be a determinant of utility for some.
Describe the ultimatum game experiment of rationality.
- An individual must share an initial endowment with an unknown stranger, and the stranger may accept or refuse the offer. - If the stranger refuses, nobody gets anything, so the stranger should never refuse, meaning the other should offer him the least amount possible. - On average, player 1 offers 40%, while player 2 rejects 50% of offers below 20%. - This implies that player 1 may be rational in anticipating the reaction of player 2, but that the reaction of player 2 is irrational; we should incorporate the idea of dignity and fairness into the utility function, as the psychological impact is shown to be worth more than the financial gain. - Gender biases also come into play; player 1 gives more when he knows that player 2 is a man, whilst player 2 refuses more often when player 1 is a woman.
An Edgeworth production box:
- At any point within the Edgeworth production box, the separate input allocations to the two firms add up to the total amounts available. - The contract curve is the locus of tangencies between isoquants. - The MRTS between K and L must be the same for both firms at every point along the contract curve.
A Pareto-optimal allocation:
- At the allocation M, no further mutually beneficial exchange is possible. The marginal rate of substitution of food for clothing is the same for both parties. - A Pareto-superior allocation is an allocation that at least one individual prefers, and the others like at least as well.
A disequilibrium relative price ratio:
- At the price ratio 1, both Ann and Bill want to sell 20 units of food and buy 20 more units of clothing. But in general equilibrium, the amount sold by one party must equal the amount bought by the other. - Both the food and clothing markets are out of equilibrium here.
Generating the PPF:
- Each point on the contract curve in the Edgeworth production box gives rise to specific quantities of food and clothing production. - The food-clothing pairs that lie along the contract curve are plotted in the bottom panel, and their locus is called the PPF. - Movements to the northeast along the contract curve correspond to movements downward along the production possibilities frontier.
Initial endowments constrain final outcomes:
- Starting from F, traders will move to a point on the contract curve between U and V, because neither moves to a lower indifference curve. - They will land closer to the V the better Ann's bargaining skills are relative to Bill's.
The contract curve:
- The locus of mutual tangencies in the Edgeworth exchange box is called the contract curve. - Any point that does not lie on the contract curve cannot be the final outcome of a voluntary exchange because both parties will always prefer a move from that point in the direction of the contract curve.
An example of a simple exchange economy:
- There are only two consumers, Ann and Bill, and two goods, food and clothing. - Food and clothing are not produced in this economy; they arrive in fixed quantities in each time period. - Allocation - an assignment of the total amounts of goods between Ann and Bill. - Initial endowments - the amounts of the two goods with which Ann and Bill begin each time period.
Refer to Demand and Total Cost of Production. The marginal revenue received from selling the fifth unit is
-$10 per unit
Difference between economic costs and accounting costs
-economic costs are bigger than accounting costs -economic costs = implicit costs + explicit costs
Factors that explain low productivity levels
-employment of labor beyond limitations -low investment in physical capital -outdated technology -bad management Only expansion of all economic resources can overcome diminishing returns
Perfect competition
-large number of small firms selling identical products -unrestricted entry -perfect information
Objectives of firms in a competitive market
-maintaining and expanding market shares -establishing a public image -maximizing profit
Characteristics of economic costs
-more broad than accounting costs -include both payments to third parties -"payments" for company-owned resources -normal profit
Relationship between marginal cost and marginal product
-move in opposite directions MP = concave down MC = concave up (like a bowl)
Examples of fixed costs
-rent -insurance on buildings -interest payments on borrowed capital -fire insurance
Examples of variable costs
-salary payments -energy, utilities -raw materials -insurance on merchandise and employees
ESSAY: Compare imperfect competition with perfect competition and monopoly
...
ESSAY: Different models of oligopoly -Kinked demand -Price leadership -Cost markup
...
In what sense is the long-run equilibrium in competitive markets attractive from the perspective of society as a whole?
1. Price is equal to marginal cost, which means that the equilibrium is allocatively efficient in the sense that the last unit of output consumed is worth exactly the same to the buyer as the resources required to produce it. 2. Price is equal to the minimum point on the long-run average cost curve, which means that there is no less costly way of producing the product, so there is Pareto efficiency. 3. All producers can earn only a normal rate of profit, which is the opportunity cost of the resources they have invested in their firms, so the public pays nothing more than what it costs the firms to serve them.
How do you construct the individual consumer's demand curve from a PPC?
1. Record the relevant price-quantity combinations from the PCC. 2. Plot these price-quantity pairs, with the price of X on the y-axis and the quantity of X on the x-axis.
State the 5 types of public policy toward natural monopoly.
1. State ownership and management. 2. State regulation of private monopolies. 3. Exclusive contracting for natural monopoly. 4. Vigorous enforcement of antitrust laws. 5. A laissez-faire policy.
Conditions for price discrimination
1. The seller must be in a position to screen out different types of consumers (consumers with different demand elasticities: classifying them by age, sex, income, professional status) 2. The seller must find ways to separate one group from another
How do you graph the substitution and income effects for normal goods (Hicks decomposition)?
1. To get the substitution effect, slide the new budget B1 outward parallel to itself until it becomes tangent to the original indifference curve, I0; the movement from A to C gives rise to the substitution effect. 2. The movement from C to D gives rise to the income effect.
Name the three main causes of inefficiencies.
1. Uncertainty and imperfect information. 2. Monopoly. 3. Externalities.
How do you derive the long-run total cost function algebraically?
1. Use that the ratio of the marginal products of labour and capital is equal to the ratio of wages and rent to establish a relationship between L and K. 2. Substitute this into the production function to find L and K in terms of Q. 3. Substitute these expressions into the equation LTC=wL+rK.
Describe the relationship between the marginal and average product curves.
1. When MP is above AP, AP must be rising. 2. When MP is below AP, AP must be falling. 3. MP and AP intersect at the maximum value of AP.
Kinked demand model assumptions
1. the supply side of the market consists of a small number of large sellers of an approximately equal size 2. each seller has a good knowledge of how the other sellers would respond if it were to take the initiative to change the commodity price or output Asymmetric price behavior among sellers. One seller raises his price and the others would not follow, the sellers market share would diminish. If the seller lowered his price and others would follow, matching his price, his market share would remain unchanged
Mikki decides to work five hours the night before her economics exam. She earns an extra $75, but her exam score is 10 points lower than it would have been had she stayed home and studied. Her opportunity cost is the:
10 points she lost on her exam.
From the following answers select the correct numbers for the blanks in the following sentence. The payroll tax was % of all federal tax revenue in 1950. By 1979 it was % and by 2007 it was % of all federal tax revenue.
10%, 30%, and 40%.
Sherman Anti-trust act
1890- declared every contract, trust, or conspiracy which restrained interstate trade, foreign trade, or commerce as illegal
The time period for the duration of patents that begins at the time of application is:
20 years
Refer to the short-run data. The profit-maximizing output for this firm is:
320 units.
Refer to the Graph Y. Based on this graph about what percentage of the total income is received by the highest (richest) quintile?
50
ESSAY: Price and output determination in monopoly -profit max rule -compare and contrast with perfect competition -price-output tradeoff -why monopolies should be regulated
A monopolist is a price-maker and can influence the commodity price. Profit max rule: For each output level, we must compare the marginal cost to the marginal revenue. As long as marginal revenue exceeds marginal cost, successive output units add to total profits. MC = MR ------- Unlike in perfect competition, where marginal cost is equal to price in monopoly, price is above marginal cost. Compared to perfect competition, a monopoly is an inefficient market. Monopolies produce at output levels below that of competitive firms at higher prices. As a result, too little of resources are allocated to commodities produced in monopoly industries compared to commodities produced in competitive industries. -------- Under the competitive rule, the monopolists profit is maximized at a larger output and a lower price. -------- Monopolies have too much power and don't give consumers enough choices. -------
Natural Monopoly
A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
Complements
A pair of goods that are often used together so that when the price of one falls, the demand of both increase
Tragedy of the Commons
A parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole
Prisoners' Dilemma
A particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
Perfect Price Discrimination
A situation in which the monopolist knows exactly each customer's willingness to pay and can charge each customer a different price
Define Pareto efficiency.
A situation in which there is no possible Pareto improvement.
Define two-part pricing.
A strategy used by sellers to capture consumer surplus, by charging different prices to different groups.
Payoff matrix
A summary of the possible outcomes from the various strategies.
Demand Schedule
A table showing the relationship between the price of a good and the quantity demanded
Supply Schedule
A table that shows the relationship between the price of a good and the quantity supplied
Define a Pigovian tax.
A tax applied to market activities that generate negative externalities, to reduce the quantity produced by the market.
Tariff
A tax on goods produced abroad and sold domestically
Define backward induction.
A way to find a Nash equilibrium in a sequential game, by looking at the last choice that has to be made in the game and then working backwards.
Statement I: The elasticity of demand for a good measures the change in quantity demanded in response to a change in price. Statement II: If the price of a service is decreased by 2% and quantity demanded rises by 2%, demand is elastic. A) Statement I is true and statement II is false. B) Statement II is true and statement I is false. C) Both statements are true. D) Both statements are false.
A) Statement I is true and statement II is false.
Marketing takes two forms
Advertising and packaging
Define total cost.
All costs of production; the sum of variable cost and fixed cost.
Law of Demand
All else equal, the quantity demanded of a good decreases when the price of a good increases
Internalizing the Externality
Altering incentives so that people take account of the external effect of their actions
Why would governments use a laissez-faire approach toward natural monopoly?
Although it does not solve the efficiency and fairness problems, the government may decide that these objections are not serious enough to warrant intervention.
In perfect competition price
Always equals marginal cost and there is no markup.
Two ways of price discriminating
Among groups of buyers, among units of a good
Marginal resource cost refers to the:
Amount by which a firm's total resource cost increases as the result of hiring one more unit of resource
The Signaling Theory
An action is taken not for its intrinsic benefit but because the willingness to take the action conveys private information to someone observing it
Signal
An action taken by an informed person, or firm, to send a message to uninfromed people.
Collusion
An agreement among firms in a market about quantities to produce or prices to charge
Pareto Efficiency
An allocation is feasible and there is no way to make someone better off without making someone worse off
Kinked demand model
An attempt to explain the observed price rigidity in a number of oligopolistic markets even in the face of considerable cost variations: recognizing mutual interdependence, firms arrive, through any appropriate or inappropriate business practice, at a commodity price they have no incentive to adjust upward or downward
State the first welfare theorem.
An equilibrium in perfect competition is always Pareto-efficient.
State the theorem of the invisible hand.
An equilibrium produced by competitive markets will exhaust all possible gains from exchange. Equilibrium in competitive markets is Pareto-optimal. This is the first theorem of welfare economics.
State the law of one price.
An identical product should sell for the same price wherever it is sold.
Purely competitive industry X has constant costs and its product is an inferior good. The industry is currently in long run equilibrium. The economy now goes into a recession and average incomes decline. The result will be:
An increase in output, but not in the price, of the product.
Define a natural monopoly.
An industry whose market output is produced at the lowest cost when production is concentrated in the hands of a single firm.
Define a variable input.
An input that can be varied in the short run.
Define the Bertrand model.
An oligopoly model in which each firm assumes that rivals will continue charging their current prices.
Define the Stackelberg model.
An oligopoly model in which one firm assumes its rival will continue producing its current output, and the other assumes its rival will produce on its Cournot reaction function.
Duopoly
An oligopoly with only two members
Decrease in Supply
Any change that lowers the quantity supplied at every price and shifts the supply curve to the left
Brand names and consistent quality
Because everyone expects a given standard of service from a certain brand, a failure to meet a customer's expectation would almost surely lose that customer to a competitor.
Why can indifference curves not cross?
Because if they were to cross, the transitivity property of preferences would create a contradiction.
Why can market Engel curves not be generated by horizontal summation?
Because income is not constant across different consumers.
People Value Variety
Because it enables each person to select what he or she likes best and provides an external benefit.
Why does the CPI overstate increases in the cost of living?
Because it fails to take substitution into account.
Downward-Sloping Demand Curve
Because of product differentiation, monopolistic competition faces this.
Why are indifference curves ubiquitous?
Because of the completeness property of preferences.
Why are indifference curves convex?
Because of the convexity property of preferences; the more a consumer has of one good, the more they must be given of that good before they will be willing to give up a unit of the other good.
Why are indifference curves downward-sloping?
Because of the more-is-better property of preferences; a bundle with more of both goods cannot be equivalent to a bundle with less of both.
Explain why the marginal benefit curve is downward-sloping.
Because of the theory of diminishing marginal returns.
The Output Effect
Because price is above marginal cost, selling one more unit at the going price will raise profit
On Graph C: Why does MFC look the way it does?
Because the firm has to pay a higher wage if it wants to hire one more worker.
Why is it so difficult for the oligopolist to determine its profit-maximizing price and output?
Because the pricing decision of one firm influences the demand curve of competing firms, and the oligopolist faces considerable uncertainty as to the location and shape of its demand and marginal revenue curves.
If for a firm P=minimum ATC=MC then:
Both allocative efficiency and productive efficiency are being achieved.
Advertising Expenditures affect the profit of firms
By increasing costs and by changing demand
Advertising Increase Demand
By informing people about the quality of its products or by persuading people to switch from the producers of other firms
How is the reaction function found?
By setting MC equal to MR and finding Q1 and Q2 as functions of one another.
Which of the following is a consequence of rent controls established to keep housing affordable for the poor? A. Less rental housing is available as prospective landlords find it unprofitable to rent at restricted prices. B. The quality of rental housing declines as landlords lack the funds and incentive to maintain properties. C. Apartment buildings are torn down in favor of office buildings, shopping malls, and other buildings where rents are not controlled. D. All of these are consequences of rent controls.
D. All of these are consequences of rent controls.
Which of the following is correct? A. When total product is rising, both average product and marginal product must also be rising. B. When marginal product is falling, total product must be falling. C. When marginal product is falling, average product must also be falling. D. Marginal product rises faster than average product and also falls faster than average product.
D. Marginal product rises faster than average product and also falls faster than average product
Which of the following goods (with their respective income elasticity coefficients in parentheses) will most likely suffer a decline in demand during a recession? A. Dinner at a nice restaurant (+1.8) B. Chicken purchased at the grocery store for preparation at home (+0.25) C. Facial tissue (+0.6) D. Plasma screen and LCD TVs (+4.2)
D. Plasma screen and LCD TVs (+4.2)
Which of the following is not a possible source of natural monopoly? A. Large-scale network effects. B. Simultaneous consumption. C. Greater use of specialized inputs. D. Rent-seeking behavior.
D. Rent-seeking behavior.
Which of the following is correct? A.There is no relationship between MP and MC. B. When AP is rising MC is falling, and when AP is falling MC is rising. C. When MP is rising MC is rising, and when MP is falling MC is falling. D. When MP is rising MC is falling, and when MP is falling MC is rising.
D. When MP is rising MC is falling, and when MP is falling MC is rising.
Define statistical discrimination.
Decision-makers associate stereotypes to a group and act accordingly. This type of discrimination is information-based.
Average cost of advertising
Decreases as output increases
Ed Point elasticity formula
Delta Q/Delta P X P/Q
Ed arc elasticity formula
Delta Q/Delta P X P1+P0/Q1+Q0
Use the following diagram of a pure monopolist to answer the next question. Refer to the diagram. Which of the following is a correct statement? Maximum profits are obtained by selling at price $a Maximum profits are obtained by producing output g The firm's per-unit profits are $c $a Demand is elastic at price $c
Demand is elastic at price $c
Shortage
Demanders are unable to buy all they want at the going price
Average productivity curve
Demonstrates how the per unit output varies along with labor input
The demand for a productive resource is said to be "derived" because the demand for the factor:
Depends on the demand for the product it is used to make
Quality includes
Design, reliability, the service provided to the buyer and the buyer's ease of access to the product.
What activity receives the largest amount from business spending on research and development?
Development
ESSAY: Difference between economic vs. accounting profit
Economic profit is the difference between total revenues and economic costs. Economic profit is always smaller than accounting profit. Zero profit does not mean the firm breaks even, they still make normal profit. Accounting profit is the difference between total revenues and accounting costs.
Under conditions of pure monopoly:
Entry is blocked
A profit-maximizing firm will:
Expand employement if marginal revenue product exceeds marginal resource cost
Oligopolists behave independently of each other.
F
The maximin criterion seeks to minimize the maximum payoffs in order to win.
F
Economists attempt to understand firm behavior by making the generalization that firms act to maximize growth
False
Higher insurance costs would cause a delivery firm to raise the price it charges
False
Output is held fixed along an isocost.
False
When labor is the only variable input in the short run, average variable cost equals the wage rate times the average product of labor.
False
Price *will* change demand curve.
False, it *will not* change demand curve
Law of demand have a positive relationship.
False, it has an inverse relationship (negative) where when the price decreases, quantity demanded increases and when the price increases the quantity demanded decreases
When a price change occurs, quantity demanded stays the same.
False, the quantity demanded will change also
The supply curve will change whenever price changes.
False, when the price change the supply curve will stay the same but the quantity supply will move along the curve
In an oligopolistic market there are:
Few Sellers
If P < AVC
Firm should drop out
Game theory
Firms attempt to maximize profits by acting in ways that minimize damage from competitors.
The cost markup model
Firms calculate prices as the sum of two components, average cost and a profit markup. Average cost is determined by technological factors, and cost markup is set as a percent of the former and adjusted according to the absolute size and the elasticity of demand for a firms product. A high demand and low elasticity will allow a high markup A low demand and high elasticity will allow a low markup In perfect competition where firms are faced with the same demand conditions, the markup will be equal to normal profit. In a monopoly and monopolistic competition the markup will exced normal profit. Also, as a product may exhibit different demand conditions in different seasons, the profit markup could vary accordingly.
A market system tends to restrict business risk to owners and investors. This results in which of the following benefits?
Firms focus attention on prudent risk management, as it is profitable to manage risk.
In long-run equilibrium
Firms neither enter nor leave the industry and the firms in the industry make zero economic profit.
Why can perfectly competitive firms not make positive economic profit in the long run?
If firms are making positive economic profit, there is an incentive for outsiders to enter the industry, which shifts the industry supply curve outwards and thus lowers price, until the point where price reaches the minimum on the long run average cost curve, and all firms have increase their capital stock to the capital stock size that gives rise to a short-run average cost curve that is tangent to the long run average cost curve at its minimum point; at this point, economic profit for each firm will be zero.
Sustaining efficient allocations:
If indifference curves are convex, any efficient allocation can be sustained through a suitable choice of initial endowments and relative prices. To sustain E, we announce a relative price ratio equal to the slope of HH', the mutual tangent to and , and give consumers an initial endowment bundle that lies anywhere on HH', such as M.
State the shutdown condition for a firm in perfect competition.
If price falls below the minimum average variable cost, the firm should shut down in the short run.
Describe the example of the decision to build the tallest building.
If the Shard does not act, a new firm can enter and build taller than it, and it cannot fight back. However, if it builds a platform, this changes the payoffs such that new firms will be deterred from competing.
State the general cost-benefit rule.
If the benefit of doing x is larger than the cost of doing x, do x.
Suppose that a country opens its borders to international trade:
If the country is small relative to the rest of the world, output prices will no longer be determined in its own internal markets, but in the much larger international markets.
State the cost-benefit rule in terms of reasoning at the margin.
If the marginal benefit of x is higher than the marginal cost of x, increase the amount of x.
How do you graph a change in price of an input on an isocost line?
If the price of one input increases, on an isocost line you should also assume that the price of the other input decreases, because of the change in relative cost.
Exit will occur (demand)
If this is so low relative to costs that firms incur economic losses.
ESSAY: Define imperfect competition and market shares
Imperfect competition: includes two types of market structures: monopolisitic competition and oligopoly. Imperfect competition is in between perfect competition and monopolies. Market shares: the portion of a market controlled by a company
Which of the following answers is most accurate?
In 1974 the share of total income of the highest quintile of the American families was 7.1 times the share of the income received by the lowest quintile. By 2010 this number had increased to 12.6
Define the composite good.
In a choice between a good X and numerous other goods, the composite good refers to the amount of money the consumer spends on those other goods. By convention, it has price 1.
How are inefficiencies of allocation measured?
In terms of surplus.
Consumer surplus is eliminated
In the case of perfect price discrimination and captured as producer surplus.
How is long-run equilibrium determined?
In the long run, equilibrium price equals average total costs. With that, economic profits are zero, so there are no incentives for firms to either enter or exit the industry.
Which of the following is true concerning purely competitive industries?
In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.
Which of the following is true concerning purely competitive industries? A. There will be economic losses in the long run because of cut-throat competition. B. Economic profits will persist in the long run if consumer demand is strong and stable. C. In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits. D. There are economic profits in the long run but not in the short run.
In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.
ESSAY: What is the distinction between short-run and long run production?
In the short-run, some economic resources remain fixed throughout different production levels, while other resources are variable (labor). In the short-run, capital, technology and land remain fixed. In the long run, all economic resources are variable, including labor.
Productivity
In theory, it is a measure of how efficiently economic resources are allocated. In practice, it is a ratio of output divided by different inputs.
Accounting costs
Include payments the firm makes to third parties for the purchase of economic resources (wages, payments for energy and raw materials, interest payments). EXPLICIT COSTS
State the graphical interpretation of YED.
Income divided by quantity, multiplied by the reciprocal of the slope of the Engel curve.
Marginal Revenue product (MRP) of labor refers to the:
Increase in total revenue resulting from the hire of one more unit of labor
If a purely competitive constant-cost industry is realizing economic profits, we can expect industry supply to:
Increase, output to increase, price to decrease, and profits to decrease.
What are common resources?
Rivalrous and non-excludable, e.g. fish in the sea, congested non-toll roads.
Tying
Selling two products in one unit so that the consumer is forced to buy both when they may only want one
Marginal Cost Pricing Rule
Setting price equal to marginal cost in a regulated monopoly.
Suppose a firs in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm:
Should continue to produce in the short run, but leave the industry in the long run if the situation persists.
Which phrase would be most characteristic of pure monopoly?
Single seller
One feature of pure monopoly is that the demand curve:
Slopes downward
Large Number of Firms in Monopolistic Competition
Small Market Share, Ignore Other Firms, Collusion Impossible
Theories about how regulation works
Social interest theory and capture theory
When firms incur economic losses
Some firms leave the industry in the long run
If at the MC=MR output, AVC exceeds price:
Some firms should shut down in the short run.
Define taste-based discrimination.
Some people want to avoid interaction with a group they dislike.
Stages of the average total costs and marginal costs curve
Stage 1: average and marginal productivity decrease Stage 2: average decreases, marginal increases Stage 3: average and marginal productivity increase
Three stages of production
Stage 1: marginal and average productivity increase Stage 2: marginal decreases, average increases Stage 3: marginal and average productivity decline
Ex,Y >0 CPD
Substitutes; quantity demanded of one good rises when the price of another rises
State the determinants of PED.
Substitution possibilities, budget share, direction of income effect, time.
It is possible that if a monopoly is broken up, the cost of production for that product could increase.
T
The kinked demand curve is an explanation of sticky prices.
T
Until recently, the drug maker Pfizer enjoyed a monopoly of the cholesterol-control drug Lipitor because of patent rights.
T
State the determinants of supply.
Technology, input prices, number of suppliers, expectations about price levels, weather.
What does social efficiency require?
That you only do an activity if its social benefit is greater than its social cost.
Which is an example of a privately-owned monopoly?
The De Beers diamond syndicate
What is the geometric representation of MRTS?
The absolute value of the slope of the isoquant at a given point.
Human Capital
The accumulation of investments in people, such as education and on-the-job training
Quantity Supplied
The amount that sellers are willing and able to sell
Marginal social cost of an innovation
The amount that the firm must pay to make the innovation.
All of the following can be true about the optimal basket consumed by a consumer, except
The basket is on the highest indifference curve
How is the best affordable bundle represented graphically?
The bundle on the budget constraint that lies on the highest attainable indifference curve.
Marginal Buyer
The buyer who would leave the market first if the price were any higher
Substitution Effect
The change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution
Define marginal revenue.
The change in revenue that occurs when the sale of output changes by one unit.
Define marginal product.
The change in total product due to a unit change in the variable input.
Marginal Revenue
The change in total revenue from an additional unit sold
Price discrimination
The charging of a different price to different consumers for the same product, or similar products produced at the same cost
The more perfectly the monopoly can price discriminate
The closer its output is to the competitive output and the more efficient is the outcome.
Which of the following is not a precondition for price discrimination?
The commodity involved must be a durable good.
Marginal revenue
The contribution of each additional output to the total revnues. Ratio of the change in total revnues to the change in total output MR = change in total revenue / change in total output
Benefits of international trade:
The fact that the international budget constraint contains the original competitive equilibrium point means that it is possible to make everyone better off than before. This is not always the case; in this example, international trade led the economy to produce more clothing and less food than it used to, increasing the demand for factors of production used in clothing production and reducing the demand for those used in food production. If food production is relatively intensive in the use of capital, the shift in product mix would drive up the price of capital and drive down the price of labour. In this case, owners of capital would benefit, but labourers would lose out.
Which is most characteristic of pure monopoly?
The firm produces a good or a service for which there are no close subsitutes
Describe the tit-for-tat strategy in repeated games.
The first time you interact with someone, you cooperate, and then in each subsequent interaction, you simply do what the other player did in the previous interaction.
Average total fixed cost
The fixed cost per unit of output. Ratio of total fixed costs to total output ATFC = TVC/Q
State the optimal taxation principle.
The government should tax goods with inelastic demand.
Define the output expansion path.
The locus of tangencies (minimum cost-input combinations) traced out by an isocost line of given slope as it shifts outward into the isoquant map for a production process.
ESSAY: Explain total cost, average total cost, marginal cost, and long-term average cost
Total cost is the dollar value of all economic resources required to produce successive quantities of a commodity. Includes fixed costs and variable costs. Average total cost is the cost per unit of output. Ratio of the total cost to the total output. Marginal cost is the contribution of each additional output unit to the total costs. Ratio of the change in total cost to the change in total output. Long-term average cost curve depends on two factors: (i) the kind of resource market the firm is faced with, (ii) the kind of returns to scale that the production process exhibits
Profit
Total revenue minus total cost
Economic Profit
Total revenue minus total cost, including both explicit and implicit costs
A firm's revenue can be calculated from its demand curve using the formula "price times quantity."
True
A point on the firm's expansion path both minimizes the cost of producing a given output level and maximizes the output obtained for a given expenditure level.
True
All points on the expansion path have the same marginal rate of technical substitution.
True
Households could be both sellers and buyers.
True
If marginal value is constant, then the consumer's indifference curves are straight lines.
True
It is in society's best interest that the MC of the last unit produced of a good is equal to its MU.
True
Politicians and citizens may often choose policies that reduce economic efficiency because they are perceived as "fairer."
True
Constant long-run cost
Under constant returns to scale, average long-run cost is independent of the size of output (cost remains the same throughout different levels of output)
Increasing long-run cost
Under decreasing returns to scale, average long-run cost increases along with output (a larger output is associated with a higher cost)
Decreasing long-run cost
Under increasing returns to scale, average long-run cost decreases along with output (a larger output is associated with a lower cost)
State the second theorem of welfare economics.
Under relatively unrestrictive conditions, any allocation on the contract curve can be sustained as a competitive equilibrium.
On Graph C if the workers at the Spring Company unionized and engaged in collective bargaining they should get a wage equal to
WA.
First Welfare Theorem
While the market maximizes the size of the pie, you might not like the way it is divided up
If a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue:
Will also be $5.
Dominant strategy
Will be optimal regardless of the opponents' actions.
Underground Economy
Working at jobs that pay "under the table" to evade taxes
Do Cobb-Douglas production functions exhibit diminishing returns to labour and capital?
Yes.
Would a risk seeking person accept a fair gamble?
Yes.
sunk cost
a cost that has already been committed and cannot be recovered
indifference curve
a curve that shows consumption bundles that give the consumer the same level of satisfaction
Profit
a difference between revenues and costs
Supply of law
a direct relationship between price and quantity (positive) *-increase in price, quantity supply increases* *-decrease in price, quantity supply decreases*
Production Possibilities Frontier
a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
price ceiling
a legal maximum on the price at which a good can be sold
price floor
a legal minimum on the price at which a good can be sold
Monopolistic Competition
a market structure in which many firms sell products that are similar but not identical
monopolistic competition
a market structure in which many firms sell products that are similar but not identical
oligopoly
a market structure in which only a few sellers offer similar or identical products
competitive market
a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
Monopsony
a market with one buyer
prinsoner's dilemma
a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain when it is mutually beneficial
principal
a person for whom another person, called the agent, is performing some act
Firms
a person or group that decides to come together to produce something
Entrepreneur
a person who organizes, manages and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business
If arrival and departure delays are frequent early in the morning and late afternoons, but there are no delays during the evening hours, we can conclude that the airport authority a. charges high landing fees at common departure and arrival times. b. is charging uniform landing fees throughout the day c. is concerned about the delay times. d. should reduce the number of flights during the busy times.
b. is charging uniform landing fees throughout the day
If an oligopolistic manufacturer believes that he faces a kinked demand curve for his product, he thinks his competitors will ______ if he lowers his price and ____ if he raises his price. a. lower their prices; raise their prices b. lower their prices; not raise their prices c. not lower their prices; raise their prices d. not lower their prices; not raise their prices
b. lower their prices; not raise their prices
In the long term, a monopolist firm produces a. at the minimum average cost b. at AC is equal to price c. at AC is equal to MR d. (a) and (b) e. none of the above
b. at AC is equal to price
The kinked demand model predicts that: a. oligopolists will soon enter a price war b. oligopolists will "stick" with the same price c. a small change in marginal costs will have no effect on price d. (b) and (c) e. (a), (b), and (c)
b. oligopolists will "stick" with the same price c. a small change in marginal costs will have no effect on price
The law of diminishing returns can be attributed to a. lazy workers b. overcrowding of resources c. machines breaking down d. machines wearing out e. none of the above
b. overcrowding of resources
In the cost markup model a. the higher the elasticity of demand, the higher the markup b. the lower the elasticity of demand, the higher the markup c. the higher the elasticity, the lower the markup d. (b) and (c) e. cannot tell
b. the lower the elasticity of demand, the higher tha markup c. the higher the elasticity, the lower the markup
At the inelastic part of the monopolist's demand curve a. total revenue is increasing b. total revenue is decreasing c. marginal revenue is negative d. marginal revenue is positive e. (b) and (c)
b. total revenue is decreasing c. marginal revenue is negative
Expection
beliefs about future income or prices will affect current purchasing decisions
The opportunity cost to a city for using local tax revenues to construct a new park is the:
best alternative foregone by building the park.
A firm's supply curve is upsloping because:
beyond some point the production costs of additional units of output will rise
Under pure competition in the long run:
both allocative efficiency and productive efficiency are achieved.
Refer to the diagram. By producing at output level Q:
both productive and allocative efficiency are achieved.
The marginal cost curve crosses
both the average cost curve and the average variable cost curve at their bottoms.
On a ppf graph, how is the market represented?
both the supply and demand curve will meet together at a certain point (equilibrium)
A typical monopolistic competitive firm
breaks even in the long run.
"Consumer sovereignty" means that:
buyers determine what will be produced based on their "dollar votes" for the goods and services offered by sellers.
Refer to Budget Lines. The only situation where we can conclude that this consumer's tastes must have changed is when we observe him
buying B last year and buying C this year
One way to maintain a monopoly position is
by limiting or eliminating the amount of information available.
Displayed below is the payoff matrix of firm A for four different strategies, A1, A2, A3, and A4, and the potential retaliatory responses of firm B (B1, B2, B3, B4).Table 12-1 B1 B2 B3 B4 A1 100 50 25 10 A2 10 60 150 200 A3 50 75 200 250 A4 30 50 100 150 If firm A uses the maximin criterion, which strategy will it choose? a. A4 b. A1 c. A3 d. A2
c. A3
Monopolists may in the long run a. grow wealthy at the expense of their consumers. b. be protected by barriers to entry. c. All of these responses are correct. d. earn positive economic profit.
c. All of these responses are correct.
Which of the following can be said about a monopoly? a. They can cause a shift in the demand curve to benefit society. b. Monopolies are always inefficient and are therefore the least desirable form of market. c. All of these responses are correct. d. They may aid in innovation.
c. All of these responses are correct.
Which statement about market power is incorrect? a. It can lead to inefficient production and the lack of innovation. b. It can lead to resource misallocation. c. Monopoly power can lead to decreases in producer surplus. d. It can lead to price increases that exploit consumers.
c. Monopoly power can lead to decreases in producer surplus.
Which of the following is an example of tacit collusion? a. Copper cartel b. Government franchise granted to a utility c. Price leadership d. OPEC
c. Price leadership
Unions typically ____ deregulation because it generally makes pricing ____ competitive. a. oppose; less b. support; more c. oppose; more d. support; less
c. oppose; more
different combinations of two goods that provide equal total utility to the consumer can be explained graphically using an
indifference curve
The invisible hand promotes society's interests because:
individuals pursuing their self-interest will try to produce goods and services that people in society want and are willing to purchase.
price floors lead to ________ sellers who are willing to sell at the lowest price are unable to make sales while sales go to sellers who are only willing to sell at a higher price
inefficient allocation of sales among sellers
a price increase will increase the total revenue a firm receives if the demand for its product is
inelastic
If a 10 percent wage increase in a particular labor market results in a 5 percent decline in employment in that market, labor demand is:
inelastic.
|Ed|<1
inelastic; if you change price by 1% the in Qd is less than 1 %;a rise in price increases total revenue
implicit costs
input costs that do not require an outlay of money by the firm
explicit costs
input costs that require an outlay of money by the firm
Inelastic Demand
insensitive to price changes; small change in quantity
On a ppf graph, what direction does complements goods move?
inversely *-p of c1 increases, d of c2 decreases* *-p of c1 decrease, d of c2 increases*
minimum wage
is a legal floor on the wage rate which is the market price of labor
black market
is a market in which goods are bought and sold illegally either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling
If there is a surplus of a product, its price:
is above the equilibrium level
quality control or quota
is an upper limit on the quantity of some good that can be bought or sold the total amount of the good that can be legally transacted is the quota limit
The vertical distance between the total cost and the total variable cost curves differs by an amount that:
is constant as output changes.
The price of product X is reduced from $100 to $90 and, as a result, the quantity demanded increases from 50 to 60 units. Therefore, demand for X in this price range:
is elastic.
In the short run, a purely competitive seller will shut down if product price:
is less than AVC.
At its optimum level of output and price on Graph B Quipsi Co
is making economic profits equal to PkPaAK
Refer to the diagram. The production of Q1 units of output at an average cost of a, which lies below the long-run actual cost curve:
is not possible, given present technology and resource prices.
consumer surplus
is often used to refer both to individual and to total consumer surplus
The set of all baskets of inputs that can be employed at a given cost defines a(n)
isocost curve
The use of money contributes to economic efficiency because:
it promotes specialization by overcoming the problems with barter.
When a shortage occur, how is that represented on a ppf graph?
it will be below equilibrium
If a purely competitive firm shuts down in the short run:
it will realize a loss equal to its total fixed costs.
On a demand curve, will it change or stay the same when price is changed?
it will remain the same and the quantity demanded will change along the demand curve
When there is a change in cost of production what will happen to the supply curve?
it will shift either to the left or to the right showing an decrease or increase of cost of production
In the short-run, all economic resources except ________ are ________.
labor; fixed
The lowest point on a purely competitive firm's short-run supply curve corresponds to:
the minimum point on its MC curve.
If the price of marshmallow exceeds the marginal value that the consumer places on marshmallows, then
the optimum contains fewer marshmallows than the consumer is currently buying
poverty rate
the percentage of the population whose family income falls below an absolute level called teh poverty line
Demand
the point of view of the buyer
Supply
the point of view of the seller
Law of supply
the positive relationship between price and quantity of a good supplied
Purchase Price
the price a person pays to own that factor indefinitely
Rental Price
the price a person pays to use that factor for a limited period of time
demand price
the price at which consumers will demand that quantity
If a nondiscriminating pure monopolist decides to sell one more unit of output, the marginal revenue associated with that unit will be:
the price at which that unit is sold less the price reductions that apply to all other units of output.
The most appropriate model to explain pricing in the hardware computer market would be a. perfect competition b. monopolistic competition c. the price leadership model d. the kinked demand model e. monopoly
the price leadership model
If there is a shortage of product X, and the price is free to change:
the price of the product will rise.
In moving along a given budget line:
the prices of both products and money income are assumed to be constant.
Rival in Consumption
the property of a good whereby one person's use diminishes other people's use
efficient
the property of distributing economic prosperity uniformly among the members of society
diminishing marginal product
the property whereby the marginal product of an input declines as the quantity of the input increases
As real wage decreases
the quantity of labor supplied will decrease until it becomes zero
efficient scale
the quantity of output that minimizes ATC
Production Function
the relationship between the quantity of inputs used to make a good and the quantity of output of that good
production function
the relationship between the quantity of inputs used to make good and the quantity of output of that good
On a ppf graph, what direction does expectations move?
the same direction *-high expectation, increase in demand* *-low expectation, decrease in demand*
On a ppf graph, what direction does substitute goods move?
the same direction *-p of s1 increases, d of s2 increases* *-p of s1 decrease, d of s2 decreases*
In a monopolistic competitive market
the scarce resources of the economy are used efficiently.
welfare economics
the study of how the allocation of resources affects economic well-being
behavioral economics
the subfield of economics that integrates the insights of psychology
Market supply
the sum of all that is supplied each period by all producers of a single product
Commodity price is determined by...
the sum of average cost and a markup
total consumer surplus
the sum of the individual consumer surpluses of all the buyers of a good in the market
Normal Good
the type of good that increases in demand as income increases and vice versa
cost
the value of everything a seller must give up to produce a good
External Benefit
the value of the positive impact on bystanders
The firm represented by the diagram would maximize its profit where:
the vertical distance between curves (3) and (4) is the greatest.
Monopolistically competitive and purely competitive industries are similar in that:
there are few, if any, barriers to entry.
In an oligopoly market
there are mostly economic barriers to entry.
