HCM 402 final short answer

What are five things that will shift a supply curve to the right?

(any five of)• A decrease in the price of a substitute in production.• An decrease in input prices which make production less expensive.• A change in technology.• An expected decrease in future price.• An increase in the number of producers.• Deregulation.• A reduction in taxes or an increase in subsidies.• Weather.

Briefly explain how a natural monopoly arises.

A natural monopoly arises when economies of scale persist over a large enough range of output that if one firm supplies the entire market, no second firm can enter without facing a cost disadvantage.

What is the difference between a change in demand and a change in quantity demanded?

A change in quantity demanded is caused by a change in the price of the product and is represented as a movement along a stationary demand curve. A change in demand is caused by a change in tastes, income, price of a related good, number of consumers or expectations and is illustrated as a horizontal shift of the entire demand curve.

Briefly compare and contrast a corporate merger and a corporate acquisition.

A corporate merger involves two private firms joining together. An acquisition refers to one firm buying another firm. In either case, two formerly independent firms become one firm.

Briefly discuss a four-firm concentration ratio, including an explanation of what it is used for and how it is calculated.

A four-firm concentration ratio is one way of measuring the extent of competition in a market. It is calculated by adding the market shares, which is the percentage of total sales, of the four largest firms in the market.

Briefly discuss the Herfindahl-Hirschman Index (HHI ), including an explanation of what it is used for and how it is calculated.

A is a way of measuring the extent of competition in a market. It is calculated by taking the market shares of all firms in the market, squaring them, and then summing the total.

Briefly explain what is meant by a "thin market" and a "thick market." Include a brief description of how a "thin market" comes about.

A market with few buyers and few sellers is sometimes referred to as "thin"; by contrast, a market with many buyers and sellers is called a "thick" market. When imperfect information is severe and buyers and sellers are discouraged from participating, markets may become extremely thin as a relatively small number of buyer and sellers attempt to communicate enough information that they can agree on a price.

Briefly discuss the way in which a monopolist can seek out the profit-maximizing quantity of output.

A monopolist can seek out the profit-maximizing quantity of output in two ways: it can choose the quantity where total revenue exceeds total cost by the highest amount, or it can choose the quantity where marginal revenue is equal to marginal cost.

Briefly explain whether a monopolistically competitive firm is allocatively efficient or not and why.

A monopolistically competitive firm is not allocatively efficient, because it does not produce where P = MC, but instead produces where P > MC.

Briefly contrast the level that a monopolistically competitive firm will tend to produce at and the price it will charge with that of a perfectly competitive firm.

A monopolistically competitive firm will tend to produce a lower quantity at a higher cost and to charge a higher price than a perfectly competitive firm.

Briefly explain the nature of a perfectly competitive firm. Briefly discuss the effects of new entrants into a perfectly competitive market on existing firms that have profits in the short run.

A perfectly competitive firm is a price taker, which means that it must accept the prices at which its sell goods and the prices at which it purchases inputs as determined in the market. Firms in a highly competitive market may earn profits in the short run, but the entry of new firms or the expansion of existing firms means that such profits will not persist in the long run.

Briefly explain what quantity a profit-maximizing monopolistic competitor will seek, as well as why or why not this type of competitive firm is productively efficient.

A profit-maximizing monopolistic competitor will seek out the quantity where marginal revenue is equal to marginal cost. A monopolistically competitive firm is not productively efficient, because it does not produce at the minimum of its average cost curve.

Identify all of the characteristics of a public good.

A public good has two key characteristics: it is also nonexcludable and nonrivalrous.

Briefly explain what is meant by: 1) account profit; 2) economic profit; and 3) zero economic profit. Please provide an example for an accounting profit vs. economic profit.

Accounting profit is measured by taking total revenues and subtracting expenditures. Economic profit is measured after taking total revenue, subtracting all expenditures, and also subtracting the opportunity cost of financial capital. Thus, zero economic profit actually means a normal accounting rate of profit. You have a business in downtown Birmingham. Your business is not a location-bound business, meaning that you can move anywhere. YOu own the building that you run your business. The accounting cost of the building to your business is zero since you own the building. However, the economic cost is pretty high since the opportunity cost of renting the building out to someone else and moving to another location for your own business is better for your business economically/financially. Let say you could rent your building for $1.2 million and rent a similar building for your business for only $500K. Instead of staying in the downtown area, you can move your business to another location, rent your building for $1.2 million and keep $700K difference as revenue in your book. Therefore, the economic cost of your building is $700K that you are giving up by staying in the downtown area while the accounting cost is zero.

Briefly explain what the term "agglomeration economies" refers to and briefly describe what the fundamental reason for the development of this particular type of economy relates to. Provide two examples of factors associated with agglomeration economies and identify what these factors help to explain. Identify two factors that would lead to diseconomies and briefly explain how the future of many of the world's cities will be likely be determined.

Agglomeration economies refer to the economies created by the concentration of large populations in a large city. The fundamental reason for agglomeration economies relates to the idea of economies of scale in a broad sense. Examples of the factors associated with agglomeration economies include: cities provide a large group of nearby customers, so that businesses can produce at an efficient economy of scale; they also provide a large group of workers and suppliers, so that business can hire easily and purchase whatever specialized inputs they need; many of the attractions of cities, like sports stadiums and museums, can only operate if they can draw on a large nearby population base, and cities are also big enough to offer a wide variety of products, which is what many shoppers are looking for. These agglomeration factors help to explain why every economy, as it develops, has an increasing portion of its population living in urban areas. At some point, agglomeration economies must turn into diseconomies due to negative factors that include: traffic congestion may reach a point where the gains from being geographically nearby are counterbalanced by how long it takes to travel. High densities of people, cars and factories can mean more garbage and air and water pollution. Facilities like parks or museums may become overcrowded. There may be economies of scale for negative activities like crime, because high densities of people and businesses, combined with the greater impersonality of cities, make it easier for illegal activities as well as legal ones. The future of cities, both in the United States and in other countries around the world, will be determined by their ability to benefit from the economies of agglomeration and to minimize or counterbalance the corresponding diseconomies.

Briefly discuss the shortcomings of environmental command-and-control regulations.

Although environmental command-and-control regulations have helped to protect the environment, they have three shortcomings: they provide no incentive to go beyond the limits they set; they offer limited flexibility in where and how pollution will be reduced; and they oftenhave politically motivated loopholes.

Briefly explain what is meant by the term "externality" and how it occurs.

An externality, which is sometimes also called a spillover, can have a negative or a positive impact on the third party. An externality occurs when an exchange between a buyer and seller has an impact on a third party who is not part of the exchange.

Wheat and oats are both used to make cereal and both are grown on the prairies. What would happen to the supply and demand of oats if the price of wheat were to rise?

An increase in the price of wheat would reduce the quantity demanded of wheat, and decrease the quantity suppliedof wheat. Since wheat and oats are substitutes on the demand side, the increase in the price of wheat increases the demand for oats. Wheat and oats are also substitutes on the supply side, so the increase in the price of wheat reduces the supply of oats.

Briefly describe what an occupational license is and provide two examples of occupations where they are used.

An occupational license is a form of license issued by government agencies as a means of certifying that a worker has completed a certain type of education or passed a certain test. Examples include massage therapists, pharmacists, electricians, plumbers, doctors, nurses, lawyers, financial planners, accountants, and teachers.

Briefly describe what an oligopoly is, as well as the circumstances that could allow oligopolists to earn their highest profits.

An oligopoly is a situation where a few firms sell most or all of the goods in a market. Oligopolists would earn their highest profits if they can band together as a cartel and act like a monopolist by reducing output and raising price.

Briefly discuss the purpose of antitrust laws, including a brief description of how they work. Include a brief explanation of what is meant by the term "regulatory capture".

Antitrust laws seek to ensure active competition in markets, sometimes by preventing large firms from forming through mergers and acquisitions, sometimes by regulating business practices that might restrict competition, and sometimes by breaking up large firms into smaller competitors. Regulatory capture occurs when the industries being regulated end up having a strong influence over what regulations exist.

Briefly explain the likely results of increasing the extent of environmental regulation.

As the extent of environment regulation increases, additional expenditures on environmental protection will probably have increasing marginal costs and decreasing marginal benefits. This pattern suggests that the flexibility and cost savings of market-oriented environmental policies will become more important.

Briefly explain what is meant by the term "barriers to entry" and provide example of each.

Barriers to entry prevent or discourage business competitors from entering the market. These barriers include legal restrictions on competition, control of a physical resource, technological superiority, economies of scale that lead to natural monopoly, and practices to intimidate the competition like predatory pricing.

Briefly explain how command-and-control regulation works.

Command-and-control regulation sets specific limits for pollution emissions and/or specific pollution-control technologies that must be used.

The formal study of economics began when Adam Smith (1723-1790) published his famous book The Wealth of Nations in 1776. In the first chapter of The Wealth of Nations, Smith introduces the idea of the division of labor. Define "division of labor" and illustrate with an example.

Division of labor means the way in which the work required to produce a good or service is divided into a number of tasks that are performed by different workers.To illustrate the division of labor, Adam Smith used the example of how the tasks of making a pin were divided in a pin factory. He counted the multiple tasks involved with making a pin, including the steps involved in drawing out a piece of wire, cutting it to the right length, straightening it, putting a head on one end and a point on the other, and packaging pins for sale. In observing pin factories, Smith counted 18 distinct tasks that were often done by different people. Students can use a restaurant example or a modern factory example as well.

Provide examples of market-oriented environmental policies.

Examples of market-oriented environmental policies include pollution charges; marketable permits; and better defined property rights.

Briefly describe the spectrum of competitive situations faced by firms in markets.

Firms face different competitive situations. At one extreme there is perfect competition, which involves many firms all trying to sell identical products. At the other extreme there is monopoly, which involves only one firm selling a product, and this firm faces no competition. Monopolistic competition and oligopoly fall between the extremes of perfect competition and monopoly. Monopolistic competition is a situation with many firms selling similar, but not identical, products. An oligopoly refers to a situation with few firms that sell identical or similar products.

Briefly explain what is meant by the term "fixed costs" and provide three examples of same. What determines a firm's level of fixed costs?

Fixed costs are expenditures that must be made before production starts and that do not change regardless of the level of production, at least not in the short run of weeks and months. Fixed costs can take many forms: for example, machinery or equipment, physical space for a retail or manufacturing business, research and development costs to develop new technology, even an expense like advertising to popularize a brand name. The level of fixed costs varies according to the specific line of business.

Briefly explain how the zero profit point and the shutdown point for a firm operating in a perfectly competitive market are each determined

For a firm operating in a perfectly competitive market, the point where the marginal cost curve crosses the average cost curve, at the minimum of the average cost curve, is called the zero profit point. The point where that firm's marginal cost curve crosses the average variable cost curve is called the shutdown point.

What are normal goods and inferior goods? Discuss within the context of income elasticity of demand.

For most products, most of the time, the income elasticity of demand is positive: that is, a rise in income will cause an increase in the quantity demanded. This pattern is common enough that these goods are referred to as normal goods. However, for a few goods, an increase in income means that one might purchase less of the good; for example, a person with a higher income might buy fewer hamburgers, because they are buying more steak instead, or a person with a higher income might buy less cheap wine and more imported beer. When the income elasticity of demand is negative, the good is called an inferior good.

Explain why U.S. minimum wage laws have historically had only a small impact on employment.

From text: Let's suppose that the minimum wage set lies just slightly below the equilibrium wage level. Wages could fluctuate according to market forces above this price floor, but they would not be allowed to move beneath the floor. In this situation, the price floor minimum wage is said to be nonbinding —that is, the price floor isn't determining the market outcome. Even if the minimum wage moves just a little higher, it will still have no effect on the quantity of employment in the economy, as long as it remains below the equilibrium wage. Even if the minimum wage is increased by enough so that it rises slightly above the equilibrium wage and becomes binding, only a small excess supply gap between the quantity demanded and quantity supplied of low-skill labor.

Contrast the role of fixed costs and variable costs in economic decisions about future production and pricing.

Generally, fixed costs are sunk costs because they are in the past and cannot be altered. For this reason, fixed costs should play no role in economic decisions about future production or pricing. Variable costs typically show diminishing marginal returns, so that the marginal cost of producing higher levels of output rises. Variable costs can change over time and should continue to play a role in economic decisions about future production or pricing.

List the variety of policy tools available to government for increasing the rate of return for new technology and encouraging its development.

Government has a variety of policy tools for increasing the rate of return for new technology and encouraging its development: direct government funding of R&D; tax incentives for R&D; protection of intellectual property; letting companies work jointly on R&D; and helping to finance the spread of available technology.

Briefly explain the relationship between market price and a firm's profitability in perfectly competitive market.

If the market price faced by a perfectly competitive firm is above average cost at the profit-maximizing quantity of output, then the firm is making profits. If the market price is below average cost at the profit-maximizing quantity of output, then the firm is making losses. If the market price is at average cost, at the profit-maximizing level of output, then the firm is making zero profits.

Imagine a consumer shopping for a used car is worried about getting stuck with a lemon, finds two that appear very similar. One car costs just about what the individual expects this make and model to cost, while the other costs only half as much. Briefly explain the problem confronting this consumer? Give an example of another market where similar problems arise.

If this person had perfect information to reveal that the two cars are equal in quality, it would be a simple choice of buying the cheaper car. But consumers operate in a world of imperfect information, and so they must worry that the far cheaper car is so much less expensive because it is a lemon that the seller is trying to unload. With this concern in mind, the consumer might figure that the safer choice is to buy the used car that is selling for the expected price, even though it looks identical and costs more than the alternative. Alternatively, the individual might decide that the half-price car has a low enough price to be worth the risk that it is a lemon. In either case, the presence of imperfect information complicates the consumer's decision and may even discourage buying at all.Similar problems with imperfect information arise in labor and financial capital markets.

Briefly explain what would happen if parties imposing a negative externality on others had to take the board social cost into account.

If those parties imposing a negative externality on others had to take the broader social cost of their behavior into account, they would have an incentive to reduce the production of whatever is causing the negative externality.

Recent decades have seen a trend toward globalization, which means that buying and selling in markets have crossed national borders to an increasing extent. As a result, firms and workers from different countries are increasingly interconnected. Globalization has occurred for a number of reasons. List three reasons and briefly describe their effect contributing toward globalization.

Improvements in shipping and air cargo have driven down transportation costs. Innovations in computing and telecommunications have made it easier and cheaper to manage long-distance economic connections of production and sales. Many valuable products and services in the modern economy can take the form of information. These products and many others can be transported over telephones and computer networks at ever-lower costs. Finally, international agreements and treaties between countries have encouraged greater trade.

Briefly discuss how differentiated products in a monopolistic competitive framework can arise.

In a monopolistic competitive framework, differentiated products can arise from characteristics of the good or service, location from which the product is sold, intangible aspects of the product, and perceptions of the product.

Briefly describe the short-run perspective of a firm's total costs. Provide a brief explanation of what a production technology refers to and explain how production technology relates to a firm's long-run perspective.

In a short-run perspective, a firm's total costs can be divided into fixed costs, which a firm must incur before producing any output, and variable costs, which the firm incurs in the act of producing. A production technology refers to a specific combination of labor, physical capital and technology that makes up a particular method of production. In the long run, firms can choose their production technology, and so all costs become variable costs. In making this choice, firms will try to substitute relatively inexpensive inputs for relatively expensive inputs where possible, so as to produce at the lowest possible long-run average cost.

Briefly explain regulation in the case of a natural monopoly. Provide 3 common examples of regulation. Briefly discuss the benefits of privatization set out in the text and explain what is required for privatization of a nationalized asset in order for privatization to work well.

In case of a natural monopoly, market competition will not work well, and so rather than allowing an unregulated monopoly to raise price and reduce output, the government may wish to regulate price and/or output. Common examples of regulation are public utilities, theregulated firms that often provide electricity and water service. Privatization can increase the level of market competition and efficiency through the selling of previously nationalized assets to private owners. However, if privatization is to work well, it must provide incentives for a firm to be operated more efficiently, not just replace government ownership with an unregulated private monopoly.

Briefly discuss how greater consumption of a good affects utility.

In general, greater consumption of a good brings higher total utility. However, the additional utility received from each unit of greater consumption tends to decline in a pattern of diminishing marginal utility.

Briefly contrast perfect competition and monopoly to explain a monopoly may or may not display productive efficiency.

In perfect competition, the process of entry and exit means that eventually the market price is driven down to the price at the minimum of the average cost curve. However, a monopoly does not need to worry about entry, nor does it need to produce at the bottom of the average cost curve. As a result, a monopoly will not display productive efficiency.

Identify and briefly discuss the ways to conceive how advertising works in the framework of monopolistic competition.

In the framework of monopolistic competition there are two ways to conceive of how advertising works: either advertising causes a firm's perceived demand curve to become more inelastic (that is, it causes the perceived demand curve to become steeper); or advertising causes demand for the firm's product to increase (that is, it causes the firm's perceived demand curve to shift to the right). In either case, a successful advertising campaign may allow a firm to sell either a greater quantity or to charge a higher price, or both, and thus increase its profits.

Briefly contrast how firms in a perfectly competitive market will respond to long-run profits and losses. Include an explanation of each response affects the price level.

In the long run, firms will respond to profits through a process of entry, whereexisting firms expand output and new firms enter the market. Conversely, firms will react to losses in the long run through a process of exit, in which existing firms reduce output or cease production altogether. Through the process of entry in response to profits and exit in response to losses, the price level in a perfectly competitive market will move toward the zero-profit point where the marginal cost curve crosses the average cost curve, at the minimum of the average cost curve.

Identify and briefly explain three methods that insurance companies use to off-set the moral hazard associated with their industry.

Insurance companies use the following methods to off-set the moral hazard that arises when people have insurance against a certain event, they are less likely to guard against that event occurring: 1) they require insurance policyholders to pay an set amount called a "deductible" out of their own pocket before the insurance coverage pays anything. 2) they require insurance policyholders to pay a small amount for each service, called a "copayment", before insurance covers the rest. 3) they use a form of coinsurance that requires insurance policyholders to pay a percentage of a loss, and the insurance company pays the remaining cost.

Briefly discuss marginal costs, including an explanation of how they are calculated; any condition that is typical to them, and what makes knowing them useful.

Marginal costs are calculated by taking the change in total cost or the change in variable cost, and dividing it by the change in output for each possible change in output. Marginal costs are typically rising. A firm can compare marginal cost to the additional revenue it gains from selling another unit to find out whether its marginal unit is adding to profit.

Identify and briefly explain what market-orinted environmental policies make use of in order to reduce pollution.

Market-oriented environmental policies use taxes, markets, and property rights so that those who impose negative externalities must face the social cost.

Briefly explain why markets often have a difficult time producing public goods.

Markets often have a difficult time producing public goods because free riders will attempt to use the public good without making a contribution to paying for it.

Markets tend toward equilibrium and, as a result, will tend to eliminate shortages and surpluses. Why?

Markets tend toward equilibrium because when a shortage exists, consumers who are unhappy about not being able to purchase the products or services they want will tend to bid the prices higher, moving the market toward equilibrium. If a surplus exists, suppliers are unhappy about not being able to sell the quantity of goods or services they wish, and will tend to lower prices in order to persuade consumers to purchase more goods and services

Briefly explain why monopolists are neither productively nor allocatively efficient and briefly describe what results from these circumstances.

Monopolists are not productively efficient, because they do not produce at the minimum of the average cost curve. Monopolists are not allocatively efficient, because they do not produce at the quantity where P = MC. As a result, monopolists produce less, at a higher average cost, and charge a higher price than would a combination of firms in a perfectly competitive industry.

"nonexcludable"

Nonexcludable means that it is costly or impossible for one user to exclude others from using the good.

Briefly explain what is meant by the term "nonrivalrous".

Nonrivalrous means that when one person uses the good, it does not prevent others from using it.

With alternative policies like income subsidies and directed construction subsidies readily available, why do governments enact price floors and price ceilings?

One reason is that in public policy debates over price controls, people often don't take into account the unintended but predictable tradeoffs. Another reason is that government sometimes views laws about price floors and ceilings as having zero cost, while giving subsidies to demanders or suppliers requires a government to collect taxes and spend money.

When most people want to know the cost of an item or a service, they look for a price tag. When economists want to determine cost, they go one step further. They use the idea of opportunity cost. Explain the concept of opportunity cost and illustrate with an example.

Opportunity cost is whatever must be given up to obtain something that is desired. After the terrorist plane hijackings on September 11, 2001, many steps were proposed to improve air travel safety. For example, the federal government could provide armed "sky marshals" who would travel inconspicuously with the rest of the passengers. The cost of having a sky marshal on every flight would be roughly $3 billion per year. Retrofitting all U.S. planes with reinforced cockpit doors to make it harder for terrorists to take over the plane would have a price tag of $450 million. Buying more sophisticated security equipment for airports, like three-dimensional baggage scanners and cameras linked to face recognition software, could cost another $2 billion.But the single biggest cost of greater airline security doesn't involve spending money. It's the opportunity cost of additional waiting time at the airport.

Briefly explain whether a patent should be used to provide an incentive for investors? If your answer is positive, explain whether there should be any limits or conditions relating to same.

Patents should provide an incentive for inventors, but they should be limited to genuinely new inventions and not extend forever.

Briefly compare and contrast the incentives found in perfect competition with those found in imperfect competition.

Perfect competition has powerful incentives for efficiency, flexibility, and responsiveness. But the profits to be derived from imperfect competition encourage variety and innovation, whether in the form of monopolistic competition, monopoly, or oligopoly.

Define Productive Efficiency and Allocative Efficiency.

Productive efficiency means that, given the available inputs and technology, it is impossible to produce more of one good without decreasing the quantity that is produced of another good. Allocative efficiency means that the particular mix of goods being produced—that is, the specific choice along the production possibilities frontier—represents the allocation that society most desires

Define social surplus and deadweight loss.

Social surplus is the sum of consumer surplus and producer surplus.Total surplus is larger at the equilibrium quantity and price than it will be at any other quantity and price. Deadweight loss is loss in total surplus that occurs when the economy produces at an inefficient quantity.

List at least five examples of some intangible aspects that differentiate products.

Some intangible aspects may be 1) promises like a guarantee of satisfaction; 2) promise of money back refund; 3) a reputation for high quality; 4) services like free delivery, 5) offering a loan to purchase the product; 6) lower service fees; or, 7) extended warranty on parts or service

As the text suggests, the demand and supply model predicts that the new computer and communications technologies will raise the pay of high-skill labor but reduce the pay of low-skill labor. Explain how this works using the four-step process.

Step 1: What did the market look like before the change? In this case there are two markets: low-skill labor and high-skill labor. In each market, the original demand curve for labor is D0, the original supply curve for labor is S0, and the original equilibrium is E0, where the equilibrium wage is w0 and the equilibrium quantity is q0. Step 2: Does the new technology affect the supply of labor or the demand for labor? The new technology affects demand for labor. Step 3: How will the new technology alter demand for the two types of labor? As the technology substitute for low-skill labor becomes cheaper, demand for low-skill labor will shift to the left, as shown by the shift from D0 to D1 in the market for low-skill labor. As the technology complement for high-skill labor becomes cheaper, demand for high-skill labor will shift to the right, as shown by the shift from D0 to D1 in the market for high-skilled labor. Step 4: Compare the new equilibrium to the original equilibrium. The new equilibrium for low-skill labor at E1 has a lower wage and quantity than the original equilibrium E0 in the market for low-skill labor. The new equilibrium for high-skilled labor at E1 has a higher wage and quantity than the original equilibrium.

Define the term "sunk costs" and illustrate with an example.

Sunk costs, which are costs that were incurred in the past and cannot be recovered. Consider the case of Edgar who pays $8 to see a movie, but after watching the film for 30 minutes he knows that it's truly terrible. Should he stay and watch the rest of the movie because he paid $8, or should he leave? The money he spent is a sunk cost and unless the theater manager is feeling kindly, Edgar won't get a refund. But staying in the movie still means paying an opportunity cost in time. Thus, Edgar's choice is whether to spend the next 90 minutes suffering through a cinematic disaster or to do something— anything—else. The lesson of sunk costs is to forget about the money that's irretrievably gone and instead to focus on the marginal costs and benefits of future options.

Define consumer surplus, producer surplus, and social surplus.

The amount that individuals would have been willing to pay minus the amount that they actually paid is called consumer surplus. Producer surplus is the amount that a seller is paid for a good minus the seller's actual cost. Social surplus is the sum of consumer surplus and producer surplus.

Suppose that a 20% increase in the price of gasoline causes a 5% decrease in the consumption of gasoline and a 30% drop in the sales of SUVs. What can you say about elasticities?

The elasticity of demand for gasoline is 0.25 (inelastic) and the cross-price elasticity of SUVs with respect to the price of gasoline is -1.5. Gasoline and SUVs are complements.

Briefly describe how the free rider problem can be overcome.

The free rider problem can be overcome through measures to assure that users of the public good pay for it.

Define wage elasticity of labor supply and differentiate the elasticity between teenage workers and that of middle-aged adult workers in the workforce.

The income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income. Income elasticity of demand = % change in quantity demanded/% change in income The wage elasticity of labor supply for teenage workers is generally thought to be fairly elastic: that is a certain percentage change in wages will lead to a larger percentage change in the quantity of hours worked. Conversely, the wage elasticity of labor supply for adult workers in their 30s and 40s is thought to be fairly inelastic. When wages move up or down by a certain percentage amount, the quantity of hours that adults in their prime earning years are willing to supply changes but by a lesser percentage amount.

Explain the Law of Diminishing Returns and illustrate with a relevant example.

The law of diminishing returns holds that as additional increments of resources are added to a certain purpose, the marginal benefit from those additional increments will decline. Example: When government spends a certain amount more on reducing crime, for example, the original gains in reducing crime could be relatively large. But additional increases typically cause relatively smaller reductions in crime, and paying for enough police and security to reduce crime to nothing at all would be tremendously expensive.

Briefly describe how a monopolist will select the profit-maximizing level of output and price.

The monopolist will select the profit-maximizing level of output where MR = MC, and then charge the price for that quantity of output as determined by the market demand curve.

Define the elasticity of labor supply.

The percentage change in hours worked divided by the percentage change in wages

Briefly explain the purpose of a lender requiring a pledge of collateral from a borrower in exchange for a loan.

The purpose of having a lender require a borrower to pledge collateral in exchange for a loan is to provide the lender with something valuable that already belongs to the borrower, often property or equipment, which that lender would have a right to seize and sell if the loan is not repaid.

Define cross-price elasticity of demand and discuss within the context of complementary goods and substitute goods.

The term "cross-price" refers to the idea that the price of one good is affecting the quantity demanded of a different good. Specifically, the cross-price elasticity of demand is the percentage change in the quantity of good A that is demanded as a result of a percentage change in the price of good B. Cross-price elasticity of demand = % change in quantity demanded of good A/% change in price of good B If good A is a substitute for good B, like coffee and tea, then a higher price for B will mean a greater quantity consumed of good A. But if good A is a complement for good B, like coffee and sugar, then a higher price for good B will mean a lower quantity consumed of good A.

Briefly explain what is meant by the term "variable costs" and provide three examples of same.

Variable costs are a firm's costs that are incurred in the act of producing and will increase with the quantity produced. Labor is treated as a variable cost, as are the costs of physical inputs, like the metal and plastic involved in manufacturing a car or the cloth for making shirts and trousers.

Explain the nature of individual and business decisions which drive the demand and supply of financial capital. Specifically, what kinds of factors will shift demand and supply of financial capital?

Those who supply financial capital face two broad decisions: how much to save, and how to divide up their savings among different forms of financial investments. In thinking about how much to save, people must decide what they will need in the future to address expected or unexpected events. If Investment A becomes more risky, or the return diminishes, then savers will shift their funds to Investment B—and the supply curve of financial capital for Investment A will shift back to the left while the supply curve of capital for Investment B shifts to the right. Those who demand financial capital want the money now and are willing to repay in the future. For example, individuals might borrow money to purchase a long-term possession such as a condominium, a house or a car. A business might seek financial investment so that it has the funds to build a factory or invest in a research and development project that won't pay off for five years, ten years or even more

Briefly discuss what happens in the long run with respect to monopolist's total revenue

Total revenue for a monopolist will start low, rise, and then decline. The marginal revenue for a monopolist from selling additional units will decline. Each additional unit sold by a monopolist will push down the overall market price, and as more units are sold, this lower price applies to more and more units.

Contrast fee-for-service health care and a health maintain organization.

Under fee-for-service healthcare, medical care providers are paid according to the services they provide. Health maintenance organizations provide health care and is paid a fixed amount per person enrolled in the plan, regardless of how many services are provided.

Various factors cause a demand curve to shift. List four different factors.

Various factorsmay cause a demand curve to shift:changes in income,changes in population, changes in taste, changes in expectations of future prices.

What does the budget constraint framework suggest when income rises?

When income rises, households will demand a higher quantity of normal goods, but a lower quantity of inferior goods.

In the context of both positive externalities and public goods, briefly explain why private firms or individuals might fail to make expenditures or investments that would produce broad social benefits.

With regard to both positive externalities and public goods, private firms or individuals acting may fail to make an expenditure or investment that would produce broad social benefits, because the private benefits of such expenditure will be substantially less than the social benefits.

Define zero elasticity and describe the resultant demand curve.

Zero elasticity refers to the highly inelastic case in which a percentage change in price, no matter how large, results in zero change in quantity. Zero elasticity refers to curves that are vertical.

Identify and briefly describe two examples of government run insurance programs.

• Unemployment insurance: Workers in every state have a small amount deducted from their paychecks for unemployment insurance, which goes into a fund that is used to pay benefits to workers for a period of time, usually six months, after they lose their jobs. • Pension insurance: Employers that offer pensions to their retired employees are required by law to pay a small fraction of what they are setting aside for pensions to the Pension Benefit Guarantee Corporation, which is used to pay at least some pension benefits to workers if a company goes bankrupt and cannot pay the pensions it has promised. • Deposit insurance: Banks are required by law to pay a small fraction of their deposits to the Federal Deposit Insurance Corporation, which goes into a fund that is used to repay depositors their money if the bank should go bankrupt. • Workman's compensation insurance: Employers are required by law to pay a small percentage of the salaries that they pay into funds, typically run at the state level, that are used to compensate workers who suffer an injury on the job. • Retirement insurance: All workers pay a percentage of their income into Social Security and into Medicare, which then provides income and health care benefits to the elderly. * Social Security and Medicare are not literally "insurance" in the sense that those currently contributing to the fund are not eligible for benefits. But they are function like insurance in the sense that regular payments are made into the programs today in exchange for benefits to be received in the case of a later event—either becoming old or becoming sick when old. Such programs are sometimes called "social insurance."