FIXED micro econ final
Equity
concerned with the distribuiton of resources across a society
herding
occurs when individuals conform to the decisions of others.
Optimization
picking the best feasible option.
tragedy of the commons
which occurs when a common resource is used too intensely.
Why do "bad cars drive out the good ones" in the market for used cars? What phenomenon does this example illustrate?
Buyers are not able to tell the difference between good cars and bad cars, and so they are not willing to pay a high price for a used car because of the significant chance it will be lemon, which makes owners of good cars unwilling to sell them. Adverse selection.
Barriers to entry
obstacles that prevent potential competitors from entering the market.
First-degree, or perfect price discrimination
consumers are charged the maximum price they are willing to pay
The value of marginal product of capital (VMPK) is the ____________. VMPK equals _________.
contribution that each additional unit of physical capital adds to a firm's revenues, all else equal. MPK×P.
price control
government laws to regulate prices instead of letting market forces determine prices A government restriction on the price a firm can charge for a good or service
Third-degree price discrimination
in which different groups of consumers are charged different prices based on their own attributes (such as age, gender, or location)
market-based regulatory approach
internalizes externalities by harnessing the power of market forces
price floor
represents a lower limit on the price of the product or service.
Unemployment benefits might create a moral hazard problem ____________
because how hard a worker is trying to find a job is private information and unemployment benefits imply weaker incentives to find a job, which leads to a longer duration of unemployment.
Externalities are called market failures because they ___________.
cause markets to produce suboptimal social outcomes.
Consider the differences, if any, between a perfectly competitive market and a monopoly market. Compared to a perfectly competitive market, consumer surplus is ________, producer surplus is ________, and deadweight loss is _______. When a firm exercises its monopoly power, social surplus is _________ when compared to a perfectly competitive market. When a firm exercises its monopoly power, the cost to society is the ____________.
cs: lower ps: higher deadweight loss: higher social: lower deadweight loss.
The figure on the right shows the typical firm in a perfectly competitive industry. Equilibrium in the market is currently yielding a price of $30. At this price, the typical firm earns a ____________ economic profit. As a consequence of the current short-run conditions in this industry, it may be expected that firms will ____________ this market. As this movement of firms occurs, economic profits for the typical firm will ____________________
negative leave approach zero
common pool resource goods
non-excludable but rival in consumption. For instance, an open-access lake is available to all fishermen, but the fish they catch cannot be caught by another fisherman and are thus rival.
Network externalities
occur when a product's value increases as more consumers begin to use it.
A dominant strategy equilibrium is ____________.
the combination of strategies where each strategy is a dominant strategy.
Imagine you are a buyer in a double oral auction with a reservation value of $13 and there is a seller asking for $8. If you accept this offer, you will gain _______ (Enter your answer as an integer.) If you are the only buyer, and you know that the lowest ask price is $3, should you accept this offer?
5 Both A and C are correct. A. Yes, accepting an offer from any other seller will reduce your surplus. B. Yes, since you will gain $10.
sales tax
A tax on a sale of merchandise or services
North American Free Trade Agreement (NAFTA)
Agreement that created a free-trade area among the United States, Canada, and Mexico.
Trade-offs
Alternatives that must be given up when one is chosen rather than another arise when some benefits must be given up in order to gain others.
quantity supplied
At a given price, the amount of the good or service that sellers are willing to supply
Is it true that a country needs to have an absolute advantage in the production of a good in order to benefit from trade in that good? Countries that do not have an absolute advantage in the production of a good _________ benefit from trade.
CAN
When a country engages in free trade, the "winners" _________ compensate the "losers." If there are no "losers" in free trade, does it matter if wages and employment fall when a country engages in free trade?
CAN Yes, the government might not be able to effectively carry out such wealth transfers.
optimum
Economists call the best feasible choice this which you can see labeled on the total cost curve.
The European Union banned certain pesticides for two years after studies found links between the use of these insecticides and a decline in the bee population. In particular, research has shown that the use of imidacloprid, clothianidin, and thiamethoxam on flowering crops have adversely affected the honeybee population in North America and Europe. Consider the private market for these pesticides shown in the graph on the right. It shows the equilibrium level of pesticides that will be produced in the private, unregulated market for these pesticides. This outcome ________________- socially efficient. In the graph, how would you account for the pesticides' effect on honeybees? 1.) Using the line drawing tool, draw either a new supply curve or demand curve to account for the pesticides' effect on honeybees. 2.) Using the point drawing tool, indicate the new equilibrium. Label your point 'E2'.
Is not
Four main factors influence government taxation and spending decisions:
Raising revenues Redistributing funds via transfer payments Financing operations Correcting market failures and externalities
gross domestic product
The sum total of the value of all the goods and services produced in a nation the market value of final goods and services produced in each country in a given period of time, or what economists
optimization using total value has three steps:
Translate all costs and benefits into common units, like dollars per month. Calculate the total net benefit of each alternative. Pick the alternative with the highest net benefit.
net importer
a country for which imports are worth more than exports over a given time period.
price-maker
a seller that sets the price of a good.
shutdown
a short-run decision to not produce anything during a specific time period. The firm should shut down if price is less than AVC
duopoly
an industry with only two competing firms
if you produce at a point on your PPC, then you are producing at a point that is
attainable and efficient.
the Economic Man of the standard model of homo economicus, unlike that studied in behavioral and social economics, is ____________.
completely selfish
differentiated products vs homogeneous products
d;goods that are similar but are not perfect substitutes. h;goods that are identical and are therefore perfect substitutes.
non-rival in consumption
good for which one person's benefit does not reduce the benefit available to others meaning that one person's consumption does not preclude consumption by others.
market
group of economic agents who are trading a good or service plus the rules and arrangements for trading
In a competitive market equilibrium, the allocation of the social surplus is such that ____________.
no individual can be made better off without making someone else worse off
How do public goods differ from common pool resources? Explain. Public goods are _______________ while common pool resource goods are _________________
non rival goods rival
An individual or a firm can internalize an externality by ___________.
paying the cost of the externality.
antitrust policy
prevent anticompetitive pricing, low quantities, and deadweight loss from emerging and dominating markets.
To reduce inequality and poverty in an economy, the government uses a ___________.
progressive tax system to fund transfer payments.
Equilibrium
situation in which no agent would benefit personally by changing his or her own behavior, given the choices of others.
Coase Theorem
that negotiation leads to the socially efficient outcome regardless of who has the legal property right (ownership of property or resources) after the Nobel Laureate economist who proposed it, Ronald Coase. The theorem's implication is powerful: private bargaining will lead to an efficient allocation of resources. This means that the person who values ownership the most will end up owning the property right
equity-efficiency trade-off
the balance between ensuring an equitable allocation of resources (equity) and increasing social surplus or total output (efficiency).
positive economics
the branch of economic analysis that describes the way the economy actually works Describing what has happened or predicting what will happen
Marginal revenue (MR)
the change in total revenue associated with producing one more unit of output. In a perfectly competitive market, MR is equal to the market price.
price elasticity of supply
the measure of how responsive quantity supplied is to price changes. It is computed as: Price elasticity of supply(εs)=Percentage change in quantity supplied/Percentage change in price. The price elasticity of supply will tend to be positive, because as price increases, firms tend to increase their quantity supplied.
welfare state
the set of insurance, regulation, and transfer programs utilized to create a safety net, reduce poverty, and redistribute income from the rich to the poor.
Game theory
the study of behavior in situations of interdependence the study of situations in which the payoffs of one agent depend not only on his or her actions, but also on the actions of others.
Macroeconomics
the study of the economy as a whole.
aggregation
the sum of all individual demand curves
Tax incidence refers to ____________. Is the entire burden of the tax always borne by those on whom it is imposed?
who bears the burden of a tax. Not necessarily, since the burden of the tax depends on price elasticity.
In economics, signaling is an action taken by an individual ___________ Which of the following is an example of signaling?
who has private information to convince others about his information. A doctor displays her Harvard Medical School diploma in her office waiting room.
In the principal-agent relationship, the agent is the one ____________.
with the hidden action.
economies of scale
factors that cause a producer's average cost per unit to fall as output rises ATC decreases as output increases.
excise taxes
taxes paid when purchasing specific goods such as alcohol, tobacco, and gasoline.
A collusive agreement between two firms is likely to break down when ____________.
the market has little long−term value.
tax revenue
the money a government gains from the collection of taxes
The diagram on the right shows the short-run demand curve (D), marginal revenue curve (MR), average total cost curve (ATC), and marginal cost curve (MC) for a firm in a monopolistically competitive market. This firm should produce ______________ units of output. (Enter your response as an integer.) This firm should charge a price of ___________ per unit. (Enter your response as an integer.) This firm will earn _________________ economic profits. In the long run, firms should ____________ this industry.
32-when marginal revenue=marginal cost 19: the price above when^ positive enter
dominant strategy.
a strategy that is best for a player in a game regardless of the strategies chosen by the other players When a player has the same best response to every possible strategy of the other player(s)
Protectionism
the idea that free trade can be harmful, and government intervention is necessary to control trade.
The free-rider problem arises when an individual ____________.
does not pay for a good because nonpayment does not prevent consumption.
statistical discrimination
occurs when employers use an observable variable (such as race or gender) to help determine whether the person will be a good employee. Thus, it occurs when expectations cause people to discriminate against a certain group.
Asymmetric information is when ____________. The two kinds of asymmetric information are ____________.
one party to a transaction has different information from the other—information that the other party cares about. hidden characteristics and hidden actions.
demand curve shifts
only when the quantity demanded changes at a given price. Leftward and rightward shifts are illustrated in panel
Suppose the government grants an individual or company the sole right to produce and sell a good or service. In this case, the government is granting a _____________ Which of the following is not likely covered by a copyright?
patent A new type of tire.
Transfer payments
payments from the government (which are not made as a payment for the provision of a good or service) to certain groups, such as the elderly or the unemployed.
Law of Demand
the quantity demanded rises when the price falls (holding all else equal).
competitive equilibrium quantity
the quantity that corresponds to the competitive equilibrium price
Normative economics
the second of the two types of economic analysis, advises individuals and society on their choices. -what people ought to do
The following table gives the federal income tax rates for a single individual. The total tax payable for an individual who earns $450,000 a year is _______________________ (Round your response to two decimal places.) The marginal tax rate is _________ percent. (Round your response to two decimal places.) The average tax rate is ___________percent. (Round your response to two decimal places.)
$135,963.75 formula: 8925(.10)+(36250-8925)(.15) and so on. what you did wrong on the test is that you forgot to do (450000-400000)(.3960) mtax: 39.60 atax: 30.21 ($135,963.75/450000)
In the United States in 2011, there were 104 fatalities per 100,000 workers in the logging industry. This is the second-highest rate after the fisheries industry. Everything else equal, would you expect workers in the logging industry to be paid higher wages than workers with similar levels of education in other industries? Explain
Yes, loggers should be paid higher wages to compensate for risk.
production possibilities curve (PPC)
A graph that shows the various combinations of output that the economy can produce given the available factors of production and the available production technology. shows the relationship between the maximum production of one good for a given level of production of another good.
efficient or socially optimal price
A price set at marginal cost
When economies open up to free trade, trading partners ____________ benefit. Why is free trade controversial?
ALWAYS Some individuals may lose.
People who need life-saving drugs cannot do without them and surely will be willing to pay very high prices for them. So why can't producers of life-saving drugs charge any price that they wish to?
A monopolist, such as one selling life-saving drugs, still faces downward-sloping demand curves
The diagram on the right shows the demand and supply for sneakers. Calculate consumer surplus, producer surplus, and social surplus in this market. consumer surplus: producer surplus: social surplus:
CONSUMER ON TOP: 1100 producer on bottom: 1650 social:2750
movement along the supply curve
If a good's own price changes and its supply curve hasn't shifted, the own price change produces a movement along the supply curve
market price
If all sellers and all buyers face the same price
inferior good
If rising income shifts the demand curve for a good to the left (holding the good's price fixed)
Law of Supply
In almost all cases, quantity supplied and price are positively related (holding all else equal)
incentive problem
how to motivate agents to participate in markets aligning the interests of the agents
labor-saving technology
It is a type of technology that substitutes for existing labor inputs, reducing the marginal product of labor.
Suppose the production of a particular good causes a negative externality. Based on market forces only, how will this impact the production levels for a factory if negative externalities are present?
It will produce the good above the socially efficient level.
Hardware stores charge higher prices for snow shovels after a big snow storm. What role do prices play in the snow shovel market?
It would incentivize distributors to ship more snow shovels into the area to meet the increased demand.
How does a natural monopoly differ from a firm that becomes a monopoly due to network effects?
Natural monopolies result from economies of scale, while network effects come from the benefits to consumers from having many people use a service.
Janet knows a lot of people who do not like Marmite®, a yeast extract that is used as a spread on toast. She says that Marmite is so unpopular that Unilever, the company that manufactures Marmite®, cannot possibly have any monopoly power. Do you agree with this analysis? Edgar says that a single firm in the wind power industry is unlikely to have a significant degree of monopoly power for an extended period of time. Since the cost of producing an additional unit of wind energy is so low, a large number of firms can enter the market and compete away economic profits. Do you agree with this analysis?
No, monopoly power is based on whether a good has any close substitutes, not whether your friends like the product. No, Edgar's argument ignores potentially large fixed costs that will act as a barrier to entry.
We can show that a profit-maximizing firm will hire the number of workers such that the wage is equal to the value of the marginal product of labor. But, as the text showed in an earlier chapter, a profit-maximizing firm will produce the quantity of output such that price equals marginal cost. Are these two rules inconsistent?
No, the decision rule regarding the optimum employment level yields the level of employment exactly necessary to produce the output level where price = marginal cost.
three main factors that shift labor supply:
Population changes Changes in worker preferences and tastes Opportunity costs
We can therefore draw two conclusions about what happens when a country opens itself to trade and becomes an exporter of goods and services:
Sellers win. Buyers lose.
Antitrust policy started with the ____________, which prohibited any agreements or actions that would put restraints on trade.
Sherman Act of 1890.
exit
a long-run decision to leave the market. We can therefore state a long-run decision rule: Exit if price is less than ATC or, likewise, if total revenue is less than total cost.
Chevron and BP are bidding against each other for new oil drilling leases in the Gulf of Mexico. The bids will be simultaneous with the high bidder as the winner. Chevron decides to hire you as a consultant to help it use game theory to make the best decision on how much to bid. What elements must be known to set up a simultaneous move game? What must you, as the consultant, construct for Chevron before you can determine if there is a dominant strategy equilibrium? After you examine the payoffs, you discern that BP's best response is to always bid low. Then bidding low would be BP's _________________________
The players, the strategies, the payoffs. Payoff matrix. dominant strategy.
Janet Yellen, the chair of the Federal Reserve, is married to the Nobel Prize-winning economist George A. Akerlof. When they hired babysitters in the 1980s, they decided to pay wages that were higher than the going wage for babysitters. If they could get a babysitter at a lower wage, what could explain why they decided to pay more?
This is an example of efficiency wages, and paying efficiency wages has been shown to attract the best talent.
Law of Diminishing Returns.
This law states that at a certain point of successive increases in inputs, marginal product begins to decrease.
demand schedule
This table reports the quantity demanded at different prices
government failures
Those who hold that the role of the government in the economy should be minimized emphasize not only these costs but also a broader set of inefficiencies associated with government interventions,
game tree
a graphical representation of the consequences of different actions in a strategic setting
free-rider problem
a person has no incentive to pay for a good because failure to pay doesn't prevent consumption. Free riders either consume more than their fair share or pay less than their fair share of the good's cost.
grim strategy
a plan by one player to price a good at marginal cost forever if the other cheats on their agreement
The prisoners' dilemma is ____________ with a ____________ equilibrium that is not the best outcome for both players.
a simultaneous move game; dominant strategy.
variable factor of production
an input that can change in the short run.
How will the invisible hand move corn prices in response to each of the following: A flood that destroys a great deal of the corn crop. This will _____________ corn prices by shifting the supply curve for corn ________________ A rise in the price of wheat (a substitute for corn). This will _____________ corn prices by shifting the demand curve for corn ____________________ A change in consumer tastes away from hot dogs toward corn dogs. This will _____________ corn prices by shifting the demand curve for corn _____________ A decrease in the number of demanders in the corn market. This will ____________ corn prices by shifting the demand curve for corn ________________
1. increase, leftward 2. incease, rightward 3. increase, rightward 4. decrease, leftward
Suppose you are a monopolist and you have two customers, A and B. Each will buy either zero or one unit of the good you produce. A is willing to pay up to $35 for your product; B is willing to pay up to $20. You produce this good at a constant average and marginal cost of $2. If you could not engage in third-degree price discrimination, what price would you charge?
20 51 (35+20 and then marginal cost for each person is 2 so -4)
Suppose a country has a progressive tax structure where the marginal income tax rate increases with income. Assume the marginal income tax rate for a rich individual is 39.6 percent and the marginal income tax rate for a poor individual is 15 percent. The cost of a $500.00 charitable contribution for the rich individual is ____________ (Round your response to two decimal places.) The cost of a $500.00 charitable contribution for the poor individual is $425425. (Round your response to two decimal places.) Thus, charitable giving is more expensive for the _________________
302: how to solve (500x.396) and then 500-198 425: same with that except with 15 % since theyre poor POOR
pure strategy
A simple strategy that uses just one option, such as hiring and firing workers, for meeting demand. -which involves always choosing a single action for a situation.
inelastic demand.
Goods with a price elasticity of demand less than 1 have
The supply curve shifts when these factors change:
Prices of inputs used to produce the good Technology used to produce the good Number and scale of sellers Sellers' beliefs about the future
Some people think it's unfair that celebrities like Kim Kardashian earn a lot more than people who add so much more value to society, like soldiers. What do you think explains this wage differential?
The economic output of celebrities like Kim Kardashian adds more economic value to firms than those services provided by soldiers.
Empiricism
The third principle of economics is an emphasis on empiricism—evidence-based analysis. In other words, analysis that uses data. Economists use data to develop theories, to test theories, to evaluate the success of different government policies, and to determine what is causing things to happen in the world.
How is a monopolistically competitive market similar to a perfectly competitive market? Which of the following common features do monopolistically competitive markets and monopolies share?
There are no restrictions on the entry of new firms. Firms face downward-sloping demand curves.
Why might game theory not always be an accurate predictor of real-world situations?
We do not always know the exact payoffs, since payoffs involve attitudes and feelings as well as monetary gains.
average variable cost (AVC)
VC/Q the total variable cost divided by total output.
payroll tax
also known as a social insurance tax, is a tax on wages that employers are required to withhold from employees' pay
fixed factor of production
an input that cannot change in the short run
natural monopoly
arises because the economies of scale of a single firm make it efficient to have only one provider of a good or service. Often such firms are the first suppliers in a given market, and the cost advantages they achieve through producing a large number of goods preclude would-be competitors from entering the market. Examples of natural monopolies include providers of clean drinking water, natural gas, and electricity.
diminishing marginal benefit
as you consume more of a good, your willingness to pay for an additional unit declines. An easy way to remember this concept is to think about donuts. My first donut in the morning is worth a lot to me, so I am willing to pay a lot for it. My fourth donut in the same sitting is worth much less to me, so I am willing to pay less for it. In general, the more donuts I eat, the less I am willing to pay for an extra donut.
Suppose a government generates its revenue using a lump-sum income tax of $20,000 per person regardless of income. Calculate the average and marginal income tax rates for individuals with each income level shown in the table below. (Round your responses to two decimal places.) Income Average Rate Marginal Rate $50,000 _______ _______ $75,000 _______ ________ $100,000 __________ ______ $125,000 ________ _________ $150,000 ______ ______ This lump-sum income tax is a ______________ tax.
average: JUST DIVIDE 20000/ the dolla amount 40.00 26.67 20.00 16.00 13.33 all marginal: 0 regressive
Suppose a country has a flat income tax of 20 percent. John has earnings of $120,000 and Maria has earnings of $40,000. John's average tax rate is _________ percent and Maria's average tax rate is _____________- percent. (Enter your responses as integers.)
both 20
coordination problem
bringing together self-interested economic agents to form markets When the interests of economic agents coincide, a coordination problem of bringing the agents together to trade arises
Adverse selection occurs in the health insurance market because ____________.
buyers have private information about their health that health insurance companies do not.
If your professor decided to give all students the highest grade in the class, your classmates' incentives to study would ________________
decrease
perfectly elastic
demand is highly responsive to price changes—the smallest increase in price causes consumers to stop consuming the good altogether
corrective subsidies, or Pigouvian subsidies
designed to induce agents who produce positive externalities to increase quantity toward the socially optimal level. In the case of positive externalities, a subsidy is used to correct the externality.
human capital
each person's stock of skills for producing output or economic value
Corporate income tax
generated from taxing profits earned by corporations.
hidden characteristics vs hidden actions
hidden characteristics, in which one party in a transaction observes some characteristics of the good or service that the other doesn't observe; second, hidden actions, in which one party in a transaction takes actions that are relevant for, but not observed by, the other party
Consider the market for college textbooks. Assume this market is monopolistically competitive. A representative firm's demand (D), marginal revenue (MR), marginal cost (MC), and average cost (AC) curves are illustrated in the figure on the right. This industry ____________.
is not in long-run equilibrium, because firms are earning profits, which will result in firms entering.
Marginal cost (MC)
is the change in total cost associated with producing one more unit of output. Marginal cost can be written as: Marginal cost=Change in total cost/Change in output.
value of marginal product of physical capital
is the contribution of an additional unit of physical capital to a firm's revenues
budget constraint
is the set of things that a person can choose to do (or buy) without breaking her budget.
One of your coworkers, Freddie, really gets on your nerves and it would dramatically increase your happiness if he was fired. Freddie also dislikes you and wishes you would be fired. You have the option of going to your boss and lying about Freddie harassing you, which you are sure will get him fired. Freddie has the same option to make up a lie about you to get you fired. Whoever gets fired will not have any credibility to have his lies believed afterward. Given these circumstances, it would be logical for you to ______________________ The person who lies first in this situation has a _________________ Now assume that your coworkers will know if either you or Freddie lie to get the other fired, and your coworkers will shun the liar and make life miserable for that person. Given these circumstances, it would be logical for you to do __________ The person who lies first in this situation suffers ______________________________
lie first to get Freddie fired. a first-mover advantage. nothing reputational damange.
David's dominant strategy is ____________, and Jordan's dominant strategy is _____________ The Nash equilibrium is ___________.
low price, low price D
Consider four market structures: perfect competition, monopolistic competition, oligopoly, and monopoly. Firms in all four market structures maximize profits by producing the quantity where ___________.
marginal revenue equals marginal cost.
price elasticity of demand
measures the percentage change in quantity demanded of a good resulting from a percentage change in the good's price.
Elasticity
measures the sensitivity of one economic variable to a change in another. In other words, it tells us how much one variable changes when another changes. More precisely, elasticity is a ratio of percentage changes in variables.
Natural market power
occurs when a firm obtains market power through barriers to entry created by the firm itself. In this category, there are two main sources of monopoly power: The monopolist owns or controls a key resource necessary for production. There are economies of scale in production over the relevant range of output.
legal market power
occurs when a firm obtains market power through barriers to entry created not by the firm itself, but by the government
Price discrimination
occurs when firms charge different consumers different prices for the same good or service.
Adverse selection
occurs when one agent in a transaction knows about a hidden characteristic of a good and decides whether to participate in the transaction on the basis of this (private) information.
Paternalism is the view that ___________. Consumer sovereignty suggests that ____________.
people do not always know what is best for them, and government should encourage them to make the right choice government should not interfere with consumer choices.
simultaneous-move game
players select their actions at the same time.
cross-price elasticity of demand a
quantity demanded for one good changes when the price of a substitute or complement good changes and is a measurement of the percentage change in quantity demanded of a good due to a percentage change in another good's price. Formally, the cross-price elasticity is written as: Cross-price elasticity=Percentage change in quantity demanded of good x/Percentage change in price of good y.
perfectly inelastic
quantity demanded is completely unaffected by price. The blue (vertical) line in panel (c) of Exhibit 5.12 is an example of perfectly inelastic demand. The phrase "gotta have it" describes such goods, which include insulin for diabetics.
Regulation
refers to actions by the federal or local government directed at influencing market outcomes, such as the quantity traded of a good or service, its price, or its quality or safety.
direct regulation (command-and-control regulation
refers to direct actions by the government to control the amount of a certain activity.
tax incidence
refers to how the burden of the tax is distributed across various agents in the economy.
A fast−food combo meal costs less than if you bought each item separately. This is an example of ___________. A local grocery store charges more for one soda than for a six−pack. This is an example of ___________.
second-degree price discrimination. second-degree price discrimination.
In the next 20 years, a sizeable proportion of the U.S. labor force is expected to include many people who are above the age of 65. As a result, the U.S. production possibilities curve would ____________.
shift inward.
Private provision of public goods
takes place when private citizens make contributions to the production or maintenance of a public good refers to any situation in which private citizens make contributions to the production or maintenance of a public good.
The government runs a budget surplus when ____________.
tax revenue exceeds its spending.
tariffs
taxes levied on goods and services transported across political boundaries. By their very nature, tariffs interfere with equilibrium prices and quantities, artificially reducing social surplus in a country.
free entry
the ability of a firm to enter an industry without encountering legal or technical barriers entry is unfettered by any special legal or technical barriers—the entry process continues until the last entrant drives the market price down to the minimum ATC.
value of marginal product of labor (VMPL)
the contribution of an additional worker to a firm's revenues P x MPL The VMPL is the contribution of an additional worker to a firm's revenues; it is equal to the marginal product of labor times the price of a cheese box.
Which of the following is not a source of a country's comparative advantage
the correct options: Climate. Relative abundance of labor and capital. Natural resources. WHAT IS NOT A SOURCE: exports
transaction costs
the costs that parties incur in the process of agreeing to and following through on a bargain associated with making an economic exchange
competitive equilibrium
the crossing point of the supply curve and the demand curve
copyright
the government grants an individual or company an exclusive right to intellectual property. For example, when Malcolm Gladwell wrote the best-selling book Blink, he copyrighted the work.1 This meant that he was given a government guarantee that no one else could print and sell the book without his permission.
patent
the government grants an individual or company the sole right to produce and sell a good or service. For example, when Schering-Plough applied to the government for a patent to produce and sell Claritin, the government granted the company the exclusive right to manufacture and sell the drug for 20 years
peer effects
the influence of the decisions of others on our own choices
world price
the international market price of a good or service, determined by world demand and supply the prevailing price of tennis shoes on the world market.
willingness to accept
the lowest price that a seller is willing to get paid to sell an extra unit of a good. For an optimizing firm, willingness to accept is the same as the marginal cost of production.
long run
the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant a period of time wherein a firm can change any input.
rental price
the price of using a good for a specific period of time.
Backward induction
the procedure of solving an extensive-form game by first considering the last mover's decision.
Globalization
the process by which businesses or other organizations develop international influence or start operating on an international scale. the shift toward more open, integrated economies that participate in foreign trade and investment
Production
the process by which the transformation of inputs (such as labor and machines) to outputs (such as goods and services) occurs. The relationship between the quantity of inputs used and the quantity of outputs produced is called the production function.
principal-agent relationship
the uninformed party can sometimes design a contract to incentivize the party with private information.
Consumer sovereignty
the view that choices made by a consumer reflect his or her true preferences, and outsiders, including the government, should not interfere with these choices.
fairness
the willingness of individuals to sacrifice their own well-being to either improve on the well-being of others or to punish those whom they perceive as behaving unkindly.
price-takers
they accept the market price and can't bargain for a better price.
Key resources
those materials that are essential for the production of a good or service.
Accounting profits
total revenue - explicit costs equal to revenues minus explicit costs. Explicit costs are the sorts of line-item expenditures that accountants carefully tally and report, like wages for workers or equipment expenditures
average tax rate
total taxes paid divided by total income faced by a household is the total tax paid divided by total income earned.
Paternalism
tthe view that consumers do not always know what is best for them, and the government should encourage or induce them to change their actions.
he two most important goals for government policy involve a trade-off between __________ and __________.
equity; efficiency
budget surplus.
a situation in which the government takes in more than it spends When the converse happens and tax revenues exceed spending
For a market to be characterized as monopolistically competitive, there must be __________. An example of a monopolistically competitive firm is the __________.
DDDD ALL OF THE ABOVE A. differentiated products. B. many sellers. C.zero economic profits in the long run. D.all of the above. fast-food industry.
There are four consumers willing to pay the following amounts for an electric car: Consumer 1: Consumer 2: Consumer 3: Consumer 4: $70,000. $30,000. $90,000. $50,000 There are four firms that can produce electric cars. Each can produce one car at the following costs: Firm A: Firm B: Firm C: Firm D: $80,000. $20,000. $40,000. $50,000 Each firm can produce at most one car. Suppose the market for electric cars is competitive. Why is the equilibrium price in this market $50,000? Which firms will produce an electric car if the price is $50,000? Which consumers will buy an electric car when the price is $50,000? consumer surplus producer surplus social surplus
DDDD ALL OF THE ABOVVEEE A. At this price, three consumers are willing to buy an electric car and three firms are willing to sell an electric car. B.At this price, the quantity demanded (three cars) equals the quantity supplied (three cars). C.At $50,000, three consumers have reservation values equal to or above $50,000 and three firms have reservation values equal to or below $50,000. D.All of the above. BCD 134 consumer: 60,000 producer: 40,000 social: 100,000
In assessing the performance of a perfectly competitive market, we can say that ____________.
DDDDD ALL OF THE ABOVE A. any departure from the equilibrium necessarily reduces social surplus. B.no individual can be made better off without making someone else worse off. C.price efficiently allocates goods and services to buyers and sellers. D.all of the above.
normal good
For a ______________, an increase in income shifts the demand curve to the right (holding the good's price fixed), causing buyers to purchase more of the good.
Which of the following is not likely to be subject to the tragedy of the commons?
National defense.
reservation value
The lowest offer a negotiator is willing to accept. It is the point at which a negotiator is indifferent between accepting a proposed offer the price at which a person is indifferent between making the trade and not doing so.
holding all else equal
The phrase "holding all else equal" implies that everything other than the price of gas is held constant or fixed, including income, rent, and highway tolls.
budget deficit
a situation in which the government spends more than it takes in When government tax revenues fall below spending,
Pecuniary externalities
exist when market transactions affect other people, but only through the market price. This defining attribute of pecuniary externalities—that they act only through prices—is critically important. It means that pecuniary externalities do not create market inefficiencies.
revenue
the amount of money it brings in from the sale of its outputs. Revenue is determined by the price of goods sold times the number of units sold: Total revenue=Price×Quantity sold.
Social surplus
the sum of consumer surplus and producer surplus, which is the area below demand and above supply over the range of output produced and consumed the sum of consumer surplus and producer surplus
market demand curve.
the sum of the individual demand curves of all potential buyers. The market demand curve plots the relationship between the total quantity demanded and the market price, holding all else equal.
A zero-sum game is when ___________. What is not an example of a real life zero sum game?
the sum of the payoffs is zero. free market transaction.
complements
when a fall in the price of one good leads to a rightward shift in the demand curve for the other good.
pure altruism vs impure altruism
whose primary motivation is to help others. and impure is when An alternative reason people might give to charity is to help themselves in an indirect way.
Compared to a perfectly competitive market, the price in a monopoly market is ____________ and quantity is __________ If a monopolist loses its monopoly power, what happens to price and surplus? If the monopolist loses its monopoly power, price __________, consumer surplus ______________, producer surplus ____________, and social surplus _______________ Social surplus increases because ____________
higher, lower price: decreases cs: increases ps: decreases social: increases deadweight loss is eliminated
The figure at right shows a production possibilities curveLOADING... (PPC) for Joe. He can spend his time making pizzas or chocolate cakes. Using the information in the figure, calculate Joe's opportunity cost of producing one pizza and his opportunity cost of producing one chocolate cake. Remember that the opportunity cost is how much of one good must be given up to produce one more unit of the other good. Joe's opportunity cost of producing one pizza is __________ chocolate cake(s). (Round your response to one decimal place.) Joe's opportunity cost of producing one chocolate cake is ___________pizza(s). (Round your response to one decimal place.) Joe's friend Samantha also makes pizzas and chocolate cakes. The figure at right shows the PPC for Samantha. Using the information in the figure, calculate Samantha's opportunity cost of producing one pizza and her opportunity cost of producing one chocolate cake. Samantha's opportunity cost of producing one pizza is __________ chocolate cake(s). (Round your response to one decimal place.) Samantha's opportunity cost of producing one chocolate cake is _____pizza(s). (Round your response to one decimal place.) Samantha's little brother Rahul is also able to make pizzas or chocolate cakes, and he is equally good at each. His opportunity cost of producing either pizza or cake is one unit of the other good. 1.) Using the line drawing tool, draw an example of what Rahul's PPC would look like. Properly label your line
.5 2 2 .5
Consider the tax burden on consumers and producers of a $1 per-unit tax to be paid by producers when demand is perfectly elastic and supply is perfectly inelastic. The burden of the tax on consumers is ________ percent. (Enter your response as an integer.) The incidence of the tax falls entirely on producers because ____________.
0 consumers are infinitely price sensitive.
Pareto efficient
if no individual can be made better off without making someone else worse off.
Second-degree price discrimination
in which consumers are charged different prices based on characteristics of their purchase, such as the quantity they purchase
Economists have pinpointed three primary reasons for elasticity differences:
Closeness of substitutes Budget share spent on the good Available time to adjust
unit elastic demand
Goods with a price elasticity of demand equal to 1For such goods, a 1 percent price change affects quantity demanded by exactly 1 percent.
elastic demand
Goods with a price elasticity of demand greater than 1
public goods
Goods, such as clean air and clean water, that everyone must share. non-excludable and non-rival in consumption.
movement along the demand curve
If a good's own price changes and its demand curve hasn't shifted, it creates a movement
Which of the following is a key difference between perfect competition and monopoly?
In perfect competition, no one firm can influence price, but with monopoly, a single seller sets the price.
input
a good or service used to produce another good or service. For instance, steel is used to construct oil platforms, to create oil drilling machinery, to build pipelines, and to construct oil tankers
How are the products sold by a monopolistically competitive firm different from the products sold in a competitive market? Unlike products sold in a competitive market, the products sold in a monopolistically competitive market are ___________.
differentiated.
Economic profits
equal to total revenue minus both explicit and implicit costs.
competitive equilibrium price
equates quantity supplied and quantity demanded.
Terms of trade is the ____________. Terms of trade are determined ____________.
exchange rate of goods for goods. on the basis of opportunity costs.
Scarcity
exists because people have unlimited wants in a world of limited resources.
Behavioral economics
explains why people optimize in some situations and fail to optimize in others. Behavioral economists model this range of behavior by combining economic and psychological theories of human decision making.
export vs import
export: good/service going out of country (produced domestically but sold abroad) import: good/service coming into country (produced abroad but sold domestically)
Suppose the act of giving is viewed as an economic good. The price of charitable donations can be measured with changes to ____________. As the price of giving increases, the quantity demanded of charitable giving ________
income tax rates. deceases
Scarce resources
insufficient time, money, or other resources for individuals to satisfy all their desires are things that people want, where the quantity that people want (if the resources were being given away for free) exceeds the quantity that is available.
Collusion
occurs when rival firms conspire among themselves to set prices or to control production quantities rather than let the free market determine them.
Corruption
refers to the misuse of public funds or the distortion of the allocation of resources for personal gain.
labor-complementary technologies
those that complement existing labor inputs, increasing the marginal product of labor.
In a competitive labor market, the profit-maximizing number of workers that a firm will hire occurs where the ____________.
value of marginal product of labor is equal to the market wage
To say that a good has network effects means that the ____________.
value of the product increases as more people use it.
Monopolistically competitive firms earn zero economic profit in the long run as do perfectly competitive firms. Does this mean that total surplus is maximized in a monopolistically competitive market?
No, because firms restrict output to raise price.
Which of the following factors best explains why wage inequality in the United States has been increasing over the last several decades?
Skill-biased technological change.
perfectly competitive market
(1) sellers all sell an identical good or service (2) any individual buyer or any individual seller isn't powerful enough on his or her own to affect the market price.
1. How does microeconomics differ from macroeconomics? 2. Which of the following is not an item studied under microeconomics?
1. Microeconomics is the study of how individuals, households, firms, and governments make choices, while macroeconomics is the study of the economy as a whole. 2.. what are items: The well−being of agents, Cigarette taxes, Individual preferences. the answer: aggregate issues
A black market is ____________. What types of goods are likely to be traded in a black market? (Check all that apply.) Which of the following is a problem that black markets pose in an economy?
1. a nonlegal market for regulated goods and services 2. prostition, drug dealing 3.Governments use resources to enforce the law
Assume the figure on the right shows the cost structure for a monopolistically competitive firm selling a particular brand of shoes. MC is the marginal cost curve and AC is the average cost curve. If this firm produces 1 thousand pairs of shoes, does it minimize average cost? How much more would they need to produce to reach minimum average cost? The firm needs to produce an additional __________thousand pairs of shoes to reach minimum average cost. (Enter your response as an integer.)
5, because 6-1= 5
Firms estimate the demand for labor by ____________.
A AND C ONLY : A.computing the marginal product of labor and multiplying it by the price of the product being produced C. examining the additional output produced when additional workers are employed.
The value of marginal product of labor (VMPL) is ____________. -Complete the following table. Assume that the selling price of the firm's output is $10 per unit. -When the firm's VMPL is plotted in a diagram with the quantity of labor measured along the horizontal axis, the resulting curve will be _________________ and constitutes the firm's _________________
A and C only A.given by the marginal product of labor times the price of the firm's output. C.the contribution of an additional worker to a firm's revenues. downward sloping, demand curve for labor fo chart: just multiply each marginal product by 10
marginal analysis
A cost-benefit calculation that focuses on the difference between one feasible alternative and the next feasible alternative, this compares the consequences—costs and benefits—of doing one step more of something.
specialization
A focus on a particular activity or area of study workers develop specific skill sets so as to increase total productivity.
Denmark has high marginal tax rates and offers its citizens generous unemployment benefits and other welfare payments. While the unemployment rate in Denmark is relatively low, the proportion of the working-age population working and looking for work is quite low. After accounting for factors like the average age of the population, what else do you think could explain this?
ALL OF THE ABOVE A. Even if Danish citizens lose wages from not working, the price of leisure is reduced by the welfare payments. B.The incentive to supply labor is reduced by the high marginal tax rates. C.Welfare payments reduce the opportunity cost of leisure and thus the willingness to supply labor. D.All of the above.
economic agent
Any group or individual that makes choices, such as consumers, firms, parents, politicians, etc.
quantity demanded
At a given price, the amount of the good or service that buyers are willing to purchase
The equilibrium rent in a town is $500 per month, and the equilibrium number of apartments is 100. The city now passes a rent control law that sets the maximum rent at $400. The diagram on the right summarizes the supply and demand for apartments in this city. TABLE 1: Before Rent Control Consumer Surplus ___________ Producer Surplus ___________ Social Surplus ___________ TABLE 2: After Rent Control Consumer Surplus ___________ Producer Surplus _________________ Social Surplus _________________ In Table 3, show the change in consumer surplus, producer surplus and social surplus resulting from the rent control law. TABLE 3: Change Consumer_________ Producer___________ Social____________ Using the results from Table 3, assess each change from the before value to after value as positive, negative, or unclear. TABLE 4: Direction of Change C: P: S:
Before: C: A+B P: C+D+F S: A+B+C+D+F After: C: A+C P: F S: A+C+F Change: C: C-B P: -(C+D) S: -(D+B) Direction: C: unclear P: negative S: negative
Tobacco companies have often argued that they advertise to attract more existing smokers and not to persuade more people to smoke. Suppose there were just two cigarette manufacturers, Jones and Smith. Each can either advertise or not advertise. If neither advertises, they each capture 50 percent of the market and each earns $50 million. If they both advertise, they again split the market evenly, but each spends $10 million on ads and so each earns just $40 million (remember, advertising is not supposed to encourage more people to smoke). If one company advertises but the other does not, then the company that advertises attracts many of its rival's customers. As a result, the company that advertises earns $60 million and the company that does not earns just $30 million. What is each firm's dominant strategy? Suppose the government proposes a ban on cigarette ads. The two companies should favor the ban.
Both firms' dominant strategy is to advertise. favor
Both competitive firms and monopolies produce at the level where marginal cost equals marginal revenue. Then, other things remaining the same, why is price lower in a competitive market than in a monopoly?
Competitive markets face perfectly elastic demand and marginal revenue, while monopolies face downward-sloping demand and marginal revenue.
The mercantilist economic doctrine was widely followed from the sixteenth to the eighteenth centuries in Europe. Mercantilists advocated the use of tariffs to restrict trade, as they believed that countries that export more than they import will increase wealth. What could be the problem with such an economic policy?
Consumers pay a price that is higher than the world price, reducing consumer surplus.
opportunity cost
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another the number of sweaters you have to give up when you buy an additional pair of jeans. Mathematically, we can express this idea as a simple formula: Opportunitycostjeans=Lossinsweaters/Gaininjeans
In which of the following ways is a monopoly beneficial to an economy?
DDD ALL OF THE ABOVE Firms that are allowed monopoly profits search out innovative technologies that they can bring to market. B.Monopoly profits give firms more reason to invest in the creation of new products through research and development. C.With natural monopolies, costs may be lower than those that would exist in competitive markets with many producers. D. All of the above.
What could explain why South Korea's gross domestic product (GDP) per capita increased so much faster since the 1970s than North Korea's GDP per capita?
DDDD ALL OF THE ABOVE A. Resource allocation in South Korea is done much more efficiently than in North Korea. B.South Korea has been better able to solve the coordination and incentive problems. C.South Korea has a market economy, while North Korea is a command economy. D.All of the above.
The table below shows the average salary for major league baseball players. As you can see, the average salary of $3,440,000 in 2012 is nearly 20 times larger than the average salary in 1970. Why might ballplayers in 2012 be more likely to choose to play an extra year?Why might ballplayers in 2012 be less likely to choose to play an extra year?
DDDDD ALL OF THE ABOVE A.The high average salary means that the opportunity cost of leisure has risen, giving players a strong incentive to play another year. B.For many players, the high average salary exceeds the value of an extra year of leisure, inducing them to play another year. C.Because the salary from playing is the price of a year of leisure, an increase in its price causes players to substitute away from leisure, which means playing another year. D.All of the above. If leisure is a normal good, the higher incomes that players enjoy will cause them to increase their consumption of leisure, and this implies choosing not to play an extra year.
How do economic profits and losses allocate resources in an economy?
DDDDD ALL OF THE ABOVEEEE A. When an industry's goods (or services) become more highly valued by society, positive economic profits emerge for firms in the industry, attracting new firms and their resources to that industry. B.Businesses always seek to improve their profits and in so doing, they move resources into the production of goods and services that society values the highest. C.When an industry's goods (or services) become less highly valued by society, firms in the industry suffer losses and thus become motivated to put their resources to more profitable uses elsewhere. D.All of the above.
The Patient Protection and Affordable Care Act (ACA) requires all employers with at least 50 full-time equivalent workers to offer health insurance to their full-time employees or pay a fine of up to $2,000 per employee. Some people have argued that ACA will lower employment. This problem looks at an important issue in this debate. Suppose the government passes a law that requires firms to offer health insurance to their workers. The cost of the insurance is equal to $2 for each hour an employee works. How will this law affect firms' demand for labor? Suppose workers consider two dollars of health insurance paid by firms to be the equivalent of $2 in wages. How will this law affect the supply curve of labor Consider an industry where the equilibrium wage is $15 per hour and 100 workers are employed. How will this law affect the equilibrium quantity of labor in this labor market? How will it affect the equilibrium wage in this industry? 1.) Using the line drawing tool, illustrate the shifts that produce the labor market's new equilibrium. Properly label your curves. According to your graph, the equilibrium wage ____________- and the equilibrium quantity _____________ Now suppose workers consider a dollar of health insurance paid by firms to be worth less than $2 in wages. How will this law affect the equilibrium quantity of labor in this labor market? How will it affect the equilibrium wage in this industry?
Demand for labor will shift down by $2. Supply of labor will shift down by $2. falls, stays the same The equilibrium wage and quantity both decline, with the wage declining less than in the previous case where workers consider the insurance to be the equivalent of $2 in wages.
opportunity cost
Economists tend to focus on the best alternative activity. This is what an optimizer is effectively giving up when she allocates an hour of her time. Recall your own best alternative to surfing the Web. That's your opportunity cost of time online.
average fixed cost (AFC)
FC/Q is the total fixed cost divided by the total output
The table on the right shows trade statistics for 2012. According to the data, which of the following countries are net exporters? (Check all that apply.) According to the data, which of the following countries are net importers? (Check all that apply.)
NET IMPORTERS: have a bigger number of imports than exports NET EXPORTS: have a bigger number of exports than imports
All used cars are lemons (low quality) or peaches (high quality). Owners know whether or not their car is a lemon, but buyers do not. That is, the quality of a car is private information. There are many more buyers than sellers. Buyers value a peach at $4,000 and a lemon at $200; owners value a peach at $3,000 and a lemon at $100. Owners can have their cars inspected for $100. If they do have their car inspected, they will receive a certificate that shows whether the car is a lemon or a peach. Which owners will get their cars inspected? How much will owners of each type of used car be able to sell their cars for Since buyers cannot distinguish between a lemon and a peach, there is asymmetric information in the used car market. According to Michael Spence's signaling model, individuals could choose costly signals in order to reveal their private information. How does this example fit in with Spence's model?
Owners of peaches will get their cars inspected and owners of lemons will not. Owners of peaches will sell their cars for $4,000 and owners of lemons will sell their cars for $200. With the certificate, sellers are sending a signal to buyers about the true quality of their car.
Priceline is a Web site that sells flights and hotel bookings based on the price that a consumer states that he or she is willing to pay. So consumers who want to book a flight or a hotel room need to tell Priceline the price that they are willing to pay, and the seller lets Priceline know whether it is willing to accept that price. Which of the following outcomes is likely using this form of pricing? In 1999, Priceline attempted to replicate this pricing strategy with groceries and gasoline. Using this pricing strategy with these two goods soon proved unprofitable. What could explain this? The marginal cost of selling an airplane seat or a hotel room is relatively ________, while the marginal cost of selling groceries and gasoline is relatively ____________
Producer surplus will rise, since some price offers by consumers will be higher than the price that Priceline would have charged, causing consumer surplus to shrink. -small -high
Which of the following equations calculates economic profits for a monopoly? The graph on the right illustrates the demand (D), marginal revenue (MR), marginal cost (MC), and average total cost (ATC) curves for a monopoly. Use these curves to show a firm's profits. 1.) Using the point drawing tool, place a point at the output and price combination that would maximize profits for this monopoly. Label your point 'A.' 2.) Using the point drawing tool, place a point on the average total cost curve at the profit-maximizing output level. Label your point 'B.' 3.) Using the rectangle drawing tool, depict the area that would represent the profit this monopoly is earning. Label your area 'Profit.'
Profits=(P−ATC)×Q.
A trust game is a sequential prisoners' dilemma. This means that it is likely that the outcome of the game is not socially efficient. Which of the following factors would likely result in a more socially efficient outcome in real life?
Reputational concerns.
What is the problem with the argument that infant industries need to be protected from foreign competition?
Starting a company in isolation may deprive it of "technological spillovers" that its competitors, all located near one another, may enjoy.
For a long time, your firm has been paying its workers a wage of $20 per hour and your employees have been happy to work 40 hours per week at this wage. Business is suddenly booming and your firm would really like your workers to agree to a 50-hour work week in order to meet this new demand for your product. You are considering two strategies. Strategy 1 You would raise the wage for all hours worked from $20 per hour to $22 per hour. Strategy 2 You would leave the wage for the first 40 hours per week at $20 but offer $30 per hour for hours worked above 40 hours (that is, you would offer time-and-a-half for overtime). Both strategies have the same cost of $1,100 if a worker chooses to work 50 hours. Which strategy is more likely to lead your employees to agree to a 50-hour work week?
Strategy 2, because the MC of not working increases significantly after 40 hours of work.
average total cost (ATC),
TC/Q which is total cost divided by total output
The demand curve shifts when these five major factors change:
Tastes and preferences Income and wealth Availability and prices of related goods Number and scale of buyers Buyers' beliefs about the future
The market for economics textbooks is in equilibrium. The government decides to relax export restrictions on paper, leading to an increase in the demand for paper. How does social surplus in the market for textbooks change? Why?
The social surplus decreases, producer surplus may increase or decrease, and consumer surplus decreases.
compensating wage differentials
The wage differences that are used to attract workers to otherwise undesirable occupations
Which of the following are properties of a monopoly? (Check all that apply.)
There is only one seller, Price-maker. There are high barriers to entry
How do third-party certifications and warranties solve the adverse selection problem in the used car market?
They signal that a good car is not a lemon.
What is the intent of a Pigouvian tax?
To induce producers of a negative externality to reduce production to the socially optimal level.
Which of the following is a factor underlying government taxation and spending decisions?
To raise revenues to pay for operations
Total cost
Total cost is the sum of variable and fixed costs. Variable costs (VCs) are those costs associated with variable factors of production. In The Cheeseman's case, these are costs associated with workers and therefore change with the level of production in the short run. In contrast to VCs, fixed cost (FC) is a cost associated with a fixed factor of production, such as structures or equipment, and therefore does not change with production in the short run.
dominant strategy equilibrium
When each strategy used is a dominant strategy A strategy combination for the players;if the relevant strategy for each player is a dominant strategy.
moral hazard
When hidden actions on the part of one agent influence another agent's payoffs
internalizing the externality
When individuals or companies take into account the full costs and benefits of their actions because of some public or private incentive, economists say that they are
excess demand
When market price is below the competitive equilibrium price, quantity demanded exceeds quantity supplied, . In Exhibit 4.12 the quantity demanded of 44 billion barrels of oil per year exceeds the quantity supplied of 30 billion barrels of oil per year. Buyers want 44 billion barrels of oil, but there are only 30 billion barrels available on the market.
excess supply
When the market price is above the competitive equilibrium price, quantity supplied exceeds quantity demanded For example, Exhibit 4.11 shows that at a market price of $70 per barrel for oil, the quantity supplied of 38 billion barrels of oil per year exceeds the quantity demanded of 29 billion barrels of oil per year.
Suppose that, at your firm, the relationship between output produced and the number of workers you hire is as in the following table. Complete the table by computing the marginal product of labor for each worker. Is the relationship between output and labor consistent with the Law of Diminishing Returns? Suppose your firm is a perfect competitor in the output market and the labor market. If the price of output is $10 and the wage rate is $30, your firm should hire _____________- worker(s). (Enter your response as an integer.) If the price of output falls to $3 and the wage remains $30, your firm should hire _____________worker(s). (Enter your response as an integer.)
Yes, the marginal product declines as successive units of labor are hired 5 (30/10 then find the marginal product number that corresponds to the chart) 2 (30/3 then ^)
firm
a business entity that produces and sells goods or services; it can consist of thousands of people, a few people, or a single person. Every firm faces the decision of how to combine inputs to create outputs.
When economists speak of a deadweight loss, they are referring to _____________ in _________________ caused by a market distortion. Consider the figure on the right that shows a market with a government-imposed price control at PC. At this price, the transacted level of the product is ______________ Since this market is prevented from attaining equilibrium, the result is a deadweight loss, which is measured by area _________
a decrease, social surplus Q1, B+D
Two manufacturing plants operate at Acme Corporation: Plant A and Plant B. If Plant A uses older technology than Plant B, it is likely to have _________________ marginal cost than Plant B. In this case, Plant A requires a market price that is _______________ Plant B in order to produce. At the market price, Plant A will produce _______________ plant B and will earn a _____________ economic profit.
a higher higher than less than lower
bilateral negotiations
a market mechanism in which a single seller and a single buyer privately negotiate with bids and asks in which a single buyer and a single seller confront each other with bids and asks—rather than yelling out the offers to the group.
monopolistic competition
a market structure in which many companies sell products that are similar but not identical
oligopoly
a market structure in which only a few sellers offer similar or identical products there are only a few suppliers of a product.
Herfindahl-Hirschman Index
a measure of market concentration to estimate the degree of competition within an industry
fair-returns price
a price equal to its ATC
Nash equilibrium
a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen - if each player chooses a strategy that is a best response to the strategies of others—that is, players are choosing strategies that are mutual best responses.
sunk costs
a special type of cost that, once they have been committed, can never be recovered (think of a 5-year building lease—The Cheeseman is by law required to pay rent over the entire 5-year period). That is, The Cheeseman can't retrieve sunk costs in the short run. One of the important things to remember about sunk costs is that once they are committed, they shouldn't affect current or future production decisions.
subisdy
a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive. A government payment that supports a business or market
supply schedule
a table that reports the quantity supplied at different prices, holding all else equal
corrective taxes or Pigouvian taxes
a tax designed to induce agents who produce negative externalities to reduce quantity toward the socially optimal level named after economist Arthur Pigou, a pioneer in describing how such taxes would work. A corrective tax is a tax designed to induce agents who produce negative externalities to reduce quantity toward the socially optimal level.
regressive tax system.
a tax whose average tax rate decreases as the taxpayer's income increases and increases as the taxpayer's income decreases , the marginal tax and average tax rates decline with income so that low-income households pay a greater percentage of income in taxes than do high-income households.
proportional tax system
a tax whose average tax rate remains constant as the taxpayer's income increases or decreases households pay the same percentage of their incomes in taxes regardless of their income level; in other words, the marginal and average tax rates do not vary with income
monopoly
an industry structure in which only one seller provides a good or service that has no close substitutes. In this way, a monopolist is not concerned with the behavior of other sellers. The price chosen by the monopolist is the one that makes the company the highest profit.
signaling
an individual with private information takes action—sends a signal—to convince someone without the information that his services or his products are high quality
externality
an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume occurs when an economic activity has either a spillover cost to or a spillover benefit for a bystander.
Economic agents (for example, consumers or firms) often do things that at first glance seem to be inconsistent with their self-interest. People tip at restaurants when they are on vacation even if they have no intention to return to the same place. Firms, sometimes, install costly pollution abatement equipment voluntarily. These deviations from Nash predictions can most likely be explained if __________.
an individual's benefits are defined not only by her own payoffs but also by the payoffs of others.
zero-sum game
because one player's loss is another's gain, the sum of the payoffs is zero
double oral auction
both bids and asks are orally stated,
Economic analysis assumes that
changes in the personal benefits and costs associated with a choice will exert a predictable influence on human behavior. *Describes what people actually do (positive economics) *Recommends what people, including society, ought to do (normative economics)
A pure strategy involves ____________. Suppose that a goalie is playing a mixed strategy between diving to the left and the right. A player decides which strategy to employ when playing a game with mixed strategies by choosing ____________. In a game with mixed strategies, does either of the players have a dominant strategy? Why or why not?
choosing one particular action for a situation randomly no, because the best choice in a mixed strategy game is to pick a random strategy.
Producer surplus
computed by taking the difference between the market price and the MC curve. Producer surplus is the area above the MC curve and below the equilibrium price line.
A difficult problem for central planners is bringing together those economic agents whose interests coincide in order to trade. This is known as the ____________ problem. Once planners have successfully brought economic agents together, a second problem of aligning the interests of the economic agents must be solved. This is known as the ___________ problem. In a market economy, the alignment of interests is accomplished through the use of ___________
coordination incentive prices
Oligopolistic firms that sell differentiated products determine their prices when prices are __________.
determined simultaneously by the firms as best responses given other firm prices.
asymmetric information
discrepancies in knowledge between buyers and sellers
The tragedy of the commons can be modeled as a prisoners' dilemma game when the __________.
dominant strategy equilibrium leads to the destruction of a common resource.
Suppose a country has 100 westerners and 100 easterners. A westerner can produce either 6 units of food or 2 units of national defense; an easterner can produce either 2 units of food or 1 unit of national defense. According to the data, _____________ have a comparative advantage in the production of defense. Suppose this country has decided it wants to produce 60 units of defense. In this case, the country will have more food to consume if the __________________ produced these 60 units of defense. You should have anticipated this answer because ____________. -Now suppose this country institutes a draft and chooses people for the military randomly. Suppose further that it drafts 20 westerners and 20 easterners (who together will produce 60 units of defense). If the country chooses to have a military draft, it will produce _________ units of food. (Enter your response as an integer.) Compare the cost in terms of foregone food production under a draft to the cost under a volunteer army where the country pays the easterners enough to persuade them to become soldiers. The cost of defense measured in terms of foregone food production is __________ with a draft than with a volunteer army.
easterners easterners the easterners have a comparative advantage in the production of defense. 640 (subtract off the 40 that were taken into the military draft, then 80x6 + 80x2 higher
Lab experiments show a different outcome for the Ultimatum Game compared to the outcome predicted by game theory because
fairness is important.
Assume there are two industries in our economy: the production of pizza and the production of calzones. Each of these products is produced in a similar way with similar ingredients and requires similar skills. If the market price of pizza in this competitive market is below the ATC curve and the price of calzones is above the ATC curve, ____________. When firms switch from making pizza to making calzones, the price of pizza will ____________ and the price of calzones will ____________
firms currently making pizza will switch to making calzones. increase, decrease
Decide whether each of the following statements is true or false for each of three different types of market: perfect competition, monopoly, and monopolistic competition. Firms equate price and marginal cost. PC: M: MC: Firms equate marginal revenue and marginal cost. Firms earn economic profits in the long run Firms produce the quantity that minimizes long-run average cost. New firms are free to enter the industry in the long run
firms equate price: PC-true M-false MC-false Firms equate marginal revenue and marginal cost. PC-TRUE M-TRUE MC-TRUE Firms earn economic profits in the long run PC-false M-true MC-false Firms produce the quantity that minimizes long-run average cost. PC-true M-false MC-false new firms are free to enter the industry in the long run PC-true M-false MC-true
Bob and Mabel are neighbors and goat owners. Adjacent to their properties is a city-owned field that is used by local apartment dwellers as a park. Bob and Mabel can make more money raising goats if they use the field as pasturage. Unfortunately, if the field is used as a pasture for their goats, it will ruin the park. If either Bob or Mabel feels bad about ruining the park that they decide not to graze their goats there, then the other person can further increase their profits since there would be less competition for pasturage. If neither Bob and Mabel use the park as pasturage for their goats, then the park will be saved and the town will grant both Bob and Mabel a substantial tax rebate. The payoffs are as follows Bob's dominant strategy is to _______________, and Mabel's dominant strategy is to ____________ The dominant strategy equilibrium leads to an outcome that ________________ best for both players, which creates a ________________ Identify the Nash equilibrium(s)
graze goats, gaze goats is not tragedy of the commons. box 1
Skill-biased technological changes
increase the productivity of skilled workers relative to that of unskilled workers.
The largest source of revenue for the federal government is ___________. The sources of revenue for state and local governments are ____________ those of the federal government. Which of the following is the largest source of revenue for state governments
individual income taxes. different from Miscellaneous taxes and fees, such as tolls on roads and public transportation tickets.
income elasticity of demand
informs us of the percentage change in quantity demanded of a good due to a percentage change in the consumer's income. The income elasticity is calculated as Income elasticity=Percentage change in quantity demanded/Percentage change in income and reveals how a change in income affects the quantity demanded of a good. The sign and magnitude of income elasticities are of particular interest to economists. Goods are usually classified into two categories: Normal goods: A good is normal if the quantity demanded is directly related to income; when income rises, consumers buy more of a normal good. Inferior goods: A good is inferior if the quantity demanded is inversely related to income; when income rises, consumers buy less of an inferior good.
mixed strategy
involves choosing between different actions randomly (according to some preassigned probabilities)
price ceiling
is a cap on the price of a market good or service
Economics
is the study of how agents choose to allocate scarce resources and how those choices affect society.
In the presence of asymmetric information, ____________.
it is possible for a market to completely shut down even if there are benefits to trade.
All else being equal, the steeper the demand curve, the ____________ the social surplus in a market. All else being equal, the flatter the supply curve, the _____________ the social surplus in a market.
larger smaller
The graph on the right illustrates a marginal cost (MC) curve and marginal revenue (MR) curve for a monopolist. If the firm produces at a quantity of 60 units, then marginal revenue would be ____________ marginal cost, and this firm would ____________. greater than;
less than;reduce output to enhance profits.
There was a sharp increase in the number of long-term unemployed following the recession that began in December 2007. Rand Ghayad did the following study to better understand long-term unemployment. He sent out 3,600 fake resumes in response to 600 job openings. He varied the length of time his fake applicants had been out of work, how often they had switched jobs, and their work experience. He found that the longer the "applicants" were out of work, the less likely they were to be offered an interview. The idea of an information cascade could be used to explain the results of this study because some employers ______
make hiring decisions based on the decisions of others.
non-excludable
meaning that once such goods are produced, it is not possible to exclude people from using them.
Suppose there are cable TV companies in your city, Astounding Cable and Broadcast Cable. They both must decide on a high advertising budget, a moderate advertising budget, or a low advertising budget. They will make their decisions simultaneously. Their payoffs are as follows: astounding's dominant strategy is __________ and Broadcast's dominant _____________ The equilibrium is __________.
medium, no dominant strategy medium/medium
The Department of Justice filed a lawsuit against Microsoft claiming it was engaging in unfair practices by ____________. Some economists believe the threat of unfair monopolies is greater today than when the Sherman Act was first enacted. They argue that modern software can gain monopoly status and establish a barrier to entry through ____________
monopolizing the market by bundling its operating system with its Internet Explorer browser. network externalities.
Suppose you decide to start a business printing T-shirts. The table below summarizes the number of machines you will need to print T-shirts for a given level of output as well as the marginal product of each additional machine. Assume the equilibrium price of T-shirts is $7. Calculate the value of the marginal product of capital (VMPK) for your T-shirt business. (Enter your responses as integers.) If the rental price of capital is $406per machine, you will employ _______ machines
multiply each marginal product by the price, 7 4 machienes
You are the County Commissioner of Hazard County. Jeb brings a complaint before you that Dwight's hog farm is creating a terrible odor. The noxious odor from Dwight's hog farm is a _______________ If this externality from Dwight's farm is left unaddressed, then Dwight will continue to ________________ in regards to the social surplus optimum. Which method is not a recommended approach supported by externality theory to deal with this problem?
negative exernality overproduce Nonprofit intervention.
information cascade
occurs when people make choices based on the decisions of others rather than on their own private information
taste-based discrimination
occurs when people's preferences cause them to discriminate against a certain group.
best response
one player's optimal strategy, taking the other player's strategy as given.
supply curve shifts
only when the quantity supplied changes at a given price.
short run
period of time when only some of a firm's inputs can be varied—
supply curve
plots the quantity supplied at different prices. In other words, a supply curve plots the supply schedule.
demand curve
plots the relationship between prices and quantity demanded (again, holding all else equal).
market supply curve
plots the relationship between the total quantity supplied and the market price, holding all else equal.
command-and-control regulation
policymakers either directly restrict the level of production or mandate the use of certain technologies.
you are the County Commissioner of Hazard County. Local business leaders are thrilled that Ms. Daisy has planted a panorama of flowers around her store front designed to look like cute kittens. Tourists have been coming from neighboring towns to see the flowers, and this tourism has been increasing business activity for many businesses. The local business leaders would like you to convince Ms. Daisy to plant more flowers so that tourism continues to increase. The business generated for other stores by Ms. Daisy's flower display is an example of a ______________ You respond to the business leaders' request by giving Ms. Daisy money to buy more flowers. Giving Ms. Daisy money to buy more flowers is an example of a __________________ When you want to encourage an activity, you should ____________, and when you want to discourage an activity, you should _____________
positive externality. Pigouvian subsidy. subsidize it tax it.
A non-market price imposition is a _______________ In the figure on the right, the imposition of price PC results in a _____________ in the market. If the imposed price PC were removed, market forces would rectify the mismatch between quantity demanded and quantity supplied by pushing the price _______________ This price adjustment would eliminate the mismatch by _______________ market participants to change their behavior.
price control, surplus, downward, incentivizing
Market power relates to the ability of sellers to affect __________, and arises because of ____________. Legal market power is created by ___________, and arises due to ____________. Natural market power is created by ___________, and arises due to ___________
prices barriers to entry the government, patents market forces; economies of scale.
Classify the following goods and services as private goods, common pool resources, club goods, or public goods. a). Health insurance is a ___________ b). Radio spectrum is a _________________ c). A video on YouTube is a _________________ d). A mosquito control program in a city is a _______________ e). A library's collection of e-books is a ____________
private good. common pool resource. public good public good club good
Britain taxed windows from 1696 until 1851. Under the 1747-1757 tax rates, you would pay no tax if your home had 0-9 windows, but if your home had 10-14 windows you would pay a tax of 6 pence per window for every window in your home. The window tax is similar to the U.S. income tax in that both are ___________. The window tax is different from the U.S. income tax in that as windows increase, ____________. Do you think from 1747-1757 the number of new homes with 9 or fewer windows increased from the pre-1747 days?
progressive taxes. Britain's window tax increases for all windows, and as income increases, the U.S. income tax rate increases on marginal income. yes, because the marginal cost of having more windows increased.
Why is it difficult for the market to deliver socially efficient quantities of goods like clean air or street lighting? These are examples of ________________ therefore, even if you ______________for the good you still ________________
public goods; do not pay ,get to enjoy it.
extensive-form game
representation of possible moves in a game in the form of a decision tree
A production possibilities curve (PPC) ___________. A linear PPC would show ____________________ and a PPC that is curved away from the origin would show ________________.
shows the relationship between the maximum production of one good for a given level of production of another good. constant opportunity costs increasing opportunity costs
In a monopolistically competitive market, a firm earning negative economic profit in the short run will ____________.
shut down only if price is less than average variable cost.
A company is about to go public with an IPO (initial public offering) and the company founders keep a significant portion of the company's stock. This is an example of ____________.
signaling.
Principle of Optimization at the Margin
states that an optimal feasible alternative has the property that moving to it makes you better off and moving away from it makes you worse off.
Social surplus is the ____________. Social surplus is maximized when the ___________.
sum of consumer surplus and producer surplus. -DDD ALL OF THE ABOVE A. highest-value buyers are making a purchase and the lowest-cost sellers are selling. B.buyers and sellers as distinct groups are doing as well as they possibly can. C.competitive market is in equilibrium.
progressive tax system
tax rates increase with taxable base incomes, so that the rich pay higher tax rates than the less well-to-do.
free exit
the ability of a firm to exit an industry without encountering legal or technical barriers a firm's exit is unfettered by any special legal or technical barriers—
absolute advantage
the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources the ability of an individual, firm, or country to produce more of a certain good than other competing producers, given the same amount of resources (in this case, production in an 8-hour day).
comparative advantage
the ability of an individual, firm, or country to produce a certain good at a lower opportunity cost than other producers
market power
the ability to set the price of the good because it has
free trade
the ability to trade without government hindrance or encouragement,
marginal product
the additional amount of output obtained from adding one more unit of input
residual demand curve
the demand that is not met by other firms.
Consumer surplus
the difference between the willingness to pay and the price paid for the good.
profits
the difference between total revenues and total costs: Profits=Total revenues−Total costs.
marginal cost
the extra cost generated by moving from one feasible alternative to the next feasible alternative.
marginal tax rate
the extra taxes paid on an additional dollar of income refers to how much of the last dollar earned the household pays in taxes.
Derived demand is the demand a firm has for ____________. Suppose the demand for economics courses at your school increases, all else constant. In this case, the school's administrators will seek to hire ________ economics instructors.
the factors of production that enable it to produce output that is sold in product markets. more
deadweight loss
the fall in total surplus that results from a market distortion, such as a tax he decrease in social surplus that results from a market distortion The deadweight loss from a price control can be seen in Exhibit 7.15. Panel (a) of Exhibit 7.15 shows the social surplus if the market is allowed to operate freely: quantity traded is Q2 at an equilibrium price of P2. Consumer surplus is Triangle A and producer surplus is Triangle B. Thus, social surplus is TriangleA+TriangleB.
first-mover advantage
the first mover earns more benefits than the second mover earns.
A first-mover advantage occurs if __________. Suppose you were playing rock-paper-scissors as an extensive from game; first you choose rock, or paper, or scissors, and then your opponent makes a choice. Is there a first-mover advantage in this game? Two firms are thinking of entering a new market. If one enters it will be successful but if a second enters both will suffer very large losses. Is there a first-mover advantage in this game?
the first mover to act in a sequential game gets a benefit from doing so. No, if you show your move first you will lose every time. yes. The firm that goes first can enter and the firm that goes second will have no incentive to enter.
How does a command-and-control policy differ from a market-based policy? With a command-and-control policy, __________________________, while with a market- based policy, the government provides incentives for private organizations to internalize the externality.
the government directly regulates the allocation of resources the government provides incentives for private organizations to internalize the externality.
Willingness to pay
the highest price that a buyer is willing to pay for an extra unit of a good.
terms of trade
the negotiated exchange rate of goods for goods. The gains to trade shrink as the trading partners become more alike.
A production function shows ____________. According to the Law of Diminishing Returns, ____________. Using the 3-point curved line tool, add a production function to the graph on the right.
the number of workers employed and the corresponding output levels that will be produced. the marginal productivity of an additional unit of labor eventually decreases as the quantity of labor increases.
indoctrination
the process of teaching a person or group to accept a set of beliefs uncritically. the process by which agents imbue society with their ideology or opinion.
Diseconomies of scale
the property whereby long-run average total cost rises as the quantity of output increases when ATC increases as output rises.
constant returns to scale
the property whereby long-run average total cost stays the same as the quantity of output changes When ATC does not change with the level of output
budget set
the set of all possible bundles of goods and services that a consumer can purchase with her income
Microeconomics
the study of how households and firms make decisions and how they interact in markets -the study of how individuals, households, firms, and governments make choices, and how those choices affect prices, the allocation of resources, and the well-being of other agents.
net benefit
the sum of the benefits of choosing an alternative minus the sum of the costs of choosing that alternative.
physcial capital
tools and equipment used in the production of something
Efficiency wages are ____________. Efficiency wages are used to ____________. An example of the use of efficiency wages is when ____________.
wages above the lowest pay that workers would accept. increase motivation and productivity, thus minimizing moral hazard. Henry Ford increased the daily minimum wage for Ford employees to $5.00.
Efficiency wages
wages above the lowest pay workers will accept; employers use the higher wage to increase productivity (people work harder to avoid losing their high-paying jobs)
positively related
we mean that the variables move in the same direction—when one variable goes up, the other goes up, too.
Cost-benefit analysis
we want to compare a set of feasible alternatives and pick the best one. We call this process cost-benefit analysis. Cost-benefit analysis
cost of production
what a firm must pay for its inputs (total cost = variable cost + fixed cost)
substitutes
when a rise in the price of one leads to a rightward shift in the demand curve for the other.
A Nash equilibrium is ___________. How is a Nash equilibrium different from a dominant strategy equilibrium? Identify the key assumption(s) made about a Nash equilibrium. (Check all that apply.)
when players choose strategies that are best responses to the strategy of others. For a given game, there can only be one dominant strategy equilibrium but multiple Nash equilibriums. All players understand that other players understand the game. All players understand the game and the payoffs associated with each strategy.
negatively related
which means that they move in opposite directions. In other words, when one goes up, the other goes down, and vice versa. I
The Friend or Foe game works as follows. Given a trust fund of money, two players must decide how the money is to be divided. The division of winnings depends on the players' choices—whether they choose Friend or Foe. If both players choose Friend, then the money is divided equally. If one player chooses Friend and the other Foe, the person who chose Foe receives the entire amount, leaving the other player with nothing. If both players choose Foe, then each walk away with nothing. The payoffs from a $60 trust fund are illustrated in the figure on the right for you and your friend, Dao. The Nash equilibrium is for ____________.
you and Dao pick foe
The graph on the right represents the demand, marginal revenue, and marginal cost curves for a monopoly. What price should this monopolist charge to maximize profits? Using the graph on the right, indicate the profit-maximizing price and quantity. 1.) Using the point drawing tool, place a point at the profit-maximizing price and quantity combination. Which of the following statements are true regarding the profit-maximizing price charged by a monopolist?
$4.00 It is greater than MC. It is greater than MR. It occurs along the elastic part of the demand curve. It occurs at the quantity where MR = MC
In recent years, some online firms have offered different consumers different prices for the same good. These firms use the consumer's IP address to find what city they are in and then charge a higher price to people in wealthier cities. This type of pricing behavior is ____________. Consider the standard monopoly graph on the right that illustrates a monopoly's demand, marginal revenue, and marginal cost curves. If this monopoly is able to engage in perfect price discrimination, what area would be considered producer surplus? Using the triangle drawing tool, illustrate the area that would represent producer surplus if this monopoly was able to engage in perfect price discrimination. Label your area 'PS.' Compared to a monopoly that does not price discriminate, a monopolist who engages in perfect price discrimination will produce ___________ output and have _______ deadweight loss.
third-degree price discrimination more, no
A report by the Wall Street Journal found there were several online retailers that offered customers different prices based on their browsing history and other characteristics. This is an example of ____________. How can such strategies help retailers?
third-degree price discrimination. DDDD ALL OF THE ABOVE A.Retailers can charge a price closer to each consumer's willingness to pay, thus increasing profits. B.By charging different prices to different groups, producer surplus will likely increase. C.By segmenting the market into groups, retailers can maximize profits by acting like a monopolist. D.All of the above.