Microeconomics Exam 2
In the textbook, it is estimated that sugar quotas cost the U.S. economy about:
$1.32 billion per year. $1.10 billion in wasted resources and $0.22 billion in lost gains from trade.
Between 1918 and 1920, _____ population died of flu.
2.5 percent to 5 percent of the world's That's a lot of people. Pandemics like this are one reason a domestic vaccine industry is probably worth protecting to some degree against foreign competition.
A Valentine's Day rose travels from the fields of Kenya to a flower market in Aalsmeer, Holland, to a buyer in the United States within:
3 days. Nobody will pay for a wilting rose.
Which results in an external cost?
A factory emitting air pollution while producing paper Pollution is a classic example of a negative externality. An external cost is paid by people other than the consumer or the producer trading in the market.
The price of avocadoes is very high. What signal does this high price send?
A high price lets producers know that consumers want more avocadoes. Prices are a signal wrapped up in an incentive.
The price of the new computer game BattleMania is very high relative to other games in the market. What signal does this high price send?
A high price lets producers know that consumers want more games like BattleMania. Prices are a signal wrapped up in an incentive.
The price of mini-vans has increased substantially over the last 10 years. What signal does this high price send?
A high price lets producers know that consumers want more mini-vans. Prices are a signal wrapped up in an incentive.
What signal does a high price send?
A high price lets producers know that consumers want more of something. Prices are a signal wrapped up in an incentive.
What is rent control?
A price ceiling on rental housing. Rent control is a price ceiling on rental housing.
_____ states that if transaction costs are low and property rights are clearly defined, private bargains will ensure that the market equilibrium is efficient even when there are externalities.
Coase theorem This theorem states that if transaction costs are low and property rights are clearly defined, private bargains will ensure that the market equilibrium is efficient even when there are externalities.
Which is an important result of the SO2 trading program?
Firms that generate electricity from relatively dirty sources buy pollution allowances. An important result is that firms that generate electricity from relatively dirty sources buy pollution allowances.
Why might Kris, an entrepreneur, face a contraction or bankruptcy in today's market?
He may fail to compete with his competitors' better products. Entrepreneurs who fail to compete with lower costs and better products take losses and their businesses contract or even go bankrupt.
Which of the following describes a way in which housing vouchers are superior to rent controls for providing affordable housing to the poor?
Housing vouchers increase the amount of available housing rather than decrease it. Housing vouchers increase the amount of available housing because they increase the demand for housing.
Which is NOT a basic question that every profit-maximizing firm must ask?
How much should be spent on advertising? This is not one of the basic questions.
Suppose an individual sells shares in the outcome of a venture in a prediction market. The shares pay $10 if the outcome is a "success" and nothing if the outcome is a "failure." If the going price for one share of this outcome is $2.25:
Investors believe there is a 22.5 percent chance of "success." $2.25 ÷ $10 = 0.225 or 22.5%
Suppose an individual sells shares in the outcome of a venture in a prediction market. The shares pay $10 if the outcome is a "success" and nothing if the outcome is a "failure." If the going price for one share of this outcome is $7.50:
Investors believe there is a 75 percent chance of success
Which of the following is true if the wheat futures price is $6.25/bushel and the spot or current price of wheat is $4.15/bushel?
It is a sign that smart people with their own money on the line think that supply disruptions may soon occur. If the futures price is much higher than the spot or current price, that is a sign that smart people with their own money on the line think that supply disruptions may soon occur.
Joel is a single father living in poverty in the San Diego area, and he prefers to receive a housing voucher. Which of the following describes how Joel can use his housing voucher?
It is like money that can be used exclusively for housing. Housing vouchers increase the demand for housing without affecting the demand for other goods.
The market equilibrium price for two-bedroom apartments in Birmingham is $1,400. What will happen to the apartment market in Birmingham if the city government decides to set the price for two-bedroom apartments at $1,100 in an attempt to make apartment living more affordable for local families?
Landlords' revenues will fall and fewer families will live in apartments. The families that get the apartments may be better off, but there will be unmet demand.
The market equilibrium price for two-bedroom apartments in Kansas City is $1,200. What will happen to the apartment market in Kansas City if the city government decides to set the price for two-bedroom apartments at $900 in an attempt to make apartment living more affordable for local families?
Landlords' revenues will fall and fewer families will live in apartments. The families that get the apartments may be better off, but there will be unmet demand.
The market equilibrium price for two-bedroom apartments in Nashville is $1,200. What will happen to the apartment market in Nashville if the city government decides to set the price for two-bedroom apartments at $800 in an attempt to make apartment living more affordable for local families?
Landlords' revenues will fall and fewer families will live in apartments. The families that get the apartments may be better off, but there will be unmet demand.
What will happen to the rental market in Birmingham if the city government decides to set the price for two-bedroom apartments below the market equilibrium price in an attempt to make apartment living more affordable for local families?
Landlords' revenues will fall and fewer families will live in apartments. The families that get the apartments may be better off, but there will be unmet demand.
What will happen to the rental market in Nashville if the city government decides to set the price for two-bedroom apartments below the market equilibrium price in an attempt to make apartment living more affordable for local families? blooms: applying
Landlords' revenues will fall and fewer families will live in apartments. The families that get the apartments may be better off, but there will be unmet demand.
Which is NOT true of wage subsidies?
No one has to pay for subsidies Subsidies benefit their recipients, but they are not a free lunch: someone has to pay for them.
Keiko works in the cotton industry, which has seen many suppliers enter the market. What will she see happen to price and profits as these firms enter?
Price falls and profits decline. Price will fall and profits will decline as firms enter the market.
Jan works in the steel industry, which has seen many firms exit. What will happen to price and profits as these firms exit?
Price rises and profits increase. Prices rise as supply falls, and profits increase as price increases.
The success of prediction markets illustrates what important fact about how markets work?
Prices are signals that convey valuable information. Prediction markets work by allowing prices to develop and to capture the information that is otherwise scattered.
What happens to profits as firms exit a market, supply decreases, and the price increases?
Profits increase. Profits increase as price increases.
Joel works in the cotton industry. He notices that many suppliers are entering the market. What can he expect to happen to profits as price declines?
Profits will decline. Profits are reduced as price declines.
Margaret works in an industry in which many firms are entering. What can she expect to happen to profits as price declines?
Profits will decline. Profits are reduced as price declines.
Salih works in the steel industry. He notices that many suppliers are entering the market. What can he expect to happen to profit as price declines?
Profits will decline. Profits are reduced as price declines.
Rebecca works in the steel industry, which has seen many firms exit. What will she see happen to prices as supply decreases and price increases?
Profits will increase. Profits increase as price increases.
_____ is the economic policy of restraining trade though quotas, tariffs, or other regulations that burden foreign producers but not domestic producers.
Protectionism Protectionism is meant to benefit domestic producers.
Which is an example of an external benefit?
Rebecca lives next door to a bakery, and she enjoys the smell of fresh bread each morning
Which of the following is true of price signals?
They allow entrepreneurs to examine what areas of the economy consumers want expanded. Prices are a signal wrapped up in an incentive.
Which statement is true of great ideas?
They are adopted by others. They are soon adopted by others.
What is true of rent controls?
They create shortages.
Which statement is true of great ideas?
They diffuse through the economy. They do diffuse through the economy.
Which of the following is NOT true of price signals?
They tell the government what goods and services require price ceilings after a natural disaster. Price controls prevent prices from sending signals.
One problem with the key industry argument in favor of trade restrictions is that: `
`subsidies would actually work better than trade restrictions to encourage spillovers. Another problem is that key industries are hard to identify.
external benefit
a benefit received by people other than the consumers or producers trading in the market
external cost
a cost borne by people other than the consumer or the producer trading in the market
private cost
a cost paid by the consumer or the producer (as opposed to external cost)
implicit cost
a cost that does not require an outlay of money
explicit cost
a cost that requires a money outlay
Industry clusters often arise when an industry is:
a decreasing-cost industry. Industry clusters, such as the carpet industry in Dalton, Georgia, are the result of decreasing costs.
monopoly
a firm with market power
Janet is a buyer in a market where people act in their own interests and actions are cooperative and voluntary. What type of market is this?
a free market
When using supply and demand to analyze trade, one can assume that the domestic market being small relative to the world market leads to:
a horizontal world supply curve. This assumption could be lifted, but the impact on the results of the model would be minimal.
price ceiling
a maximum price allowed by law
A price ceiling is:
a maximum price permitted by law. A price ceiling set below market price causes a shortage.
price floor
a minimum price allowed by law
rent control
a price ceiling on rental housing
trade quota
a restriction on the quantity of goods that can be imported: imports greater than the quota amount are forbidden or heavily taxed
natural monopoly
a situation when a single firm can supply the entire market at a lower cost than two or more firms
prediction market
a speculative market designed so that prices can be interpreted as probabilities and used to make predictions
futures
a standardized contract to buy or sell specified quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future
Pigouvian subsidy
a subsidy on a good with external benefits
When a government market intervention causes the price received by sellers to exceed the price paid by buyers, the difference between them is called:
a subsidy wedge. Subsidies raise seller prices and reduce buyer prices.
Pigouvian tax
a tax on a good with external costs
tariff
a tax on imports
When federal politicians in the United States leave office for the private sector, _____ of them become lobbyists—evidence that the blat economy is larger today than it was in the 1970s.
about half Blat is alive and well in the United State
Hedrick Smith observed shortages of each of the following goods in the former Soviet Union EXCEPT:
accordions. Some items were overstocked, depending on when and where you looked, but this was not the norm.
Sometimes the government can help domestic firms _____ when they sell to international buyers. This is an example of strategic trade protectionism.
act like a cartel By restricting output, these firms can raise prices and revenue.
Which of the following is NOT the result of a price ceiling?
additional gains from trade Price ceilings cause gains from trade to be lost.
internalizing an externality
adjusting incentives so that decision makers take into account all the benefits and costs of their actions, private and social
Assume the price elasticity of demand for a firm's product is perfectly elastic. How many units will the firm sell if it charges the market price for its product?
all of the units it wants to sell The firms will sell as many units as it wants at market price.
Low transaction costs and well-defined property rights:
allow for private solutions to externality problems. These private solutions to externality problems can correct the market inefficiencies.
constant cost industry
an industry in which costs of production do not change with greater industry output; shown with a flat supply curve
decreasing cost industry
an industry in which the costs of production decrease with an increase in industry output; shown with a downward sloping supply curve
increasing cost industry
an industry in which the costs of production increase with greater output; shown with an upward-sloped supply curve
In a dynamic economy, resources:
are always moving toward an increase in the value of production. Entrepreneurs seek profits.
Given an upward-sloping supply curve and a downward-sloping demand curve, if the government imposes a $1 tax on 12-packs of mechanical pencils:
both buyers and sellers will bear the burden of the tax . The burden of the tax will be distributed based on the relative elasticities of supply and demand.
When demand is more elastic than supply:
buyers pay less of a tax than do sellers. If supply is inelastic, sellers will stay in the market after the tax and bear it. Buyers with elastic demand would rather leave the market than bear the tax.
A price floor:
can lead to wasteful increases in quality. If the price is prevented from falling, something has to happen to clear the market and attract new buyers.
Consider two industries: Industry A's profits are high, and industry B's profits are low. If the price of output in these two industries is the same, when capital moves from industry B to industry A:
capital is moving from a high-cost industry to a low-cost industry. It must be the high costs in industry B that causes profits to be low.
A government subsidy:
causes a deadweight loss in the market. A subsidy leads to inefficient increases in trade.
Taxes on goods are known as:
commodity taxes Well-known commodity taxes include those on fuel, liquor, and cigarettes.
social surplus
consumer surplus plus producer surplus plus everyone else's surplus
The Iowa Electronic Markets:
correctly predicted Obama's 2008 victory, as well as his approximate vote share. The Iowa Electronic Markets consistently outperform other institutions, such as polls.
Externalities are _____ that fall on bystanders.
costs or benefits Externalities are external costs or external benefits that fall on bystanders.
fixed costs
costs that do not vary with output
variable costs
costs that vary with output
Rent controls:
create wasteful lines. Rent controls do create wasteful lines.
Raising the minimum wage will:
decrease employment among low-skill workers. Price floors cause surpluses.
Speculation does NOT:
decrease total gains from trade. In fact, it can increase gains from trade by eliminating low-value uses and replacing them with high-value uses.
Which is an industry in which industry costs decrease with greater output?
decreasing cost industry A decreasing cost industry is an industry in which industry costs decrease with an increase in output.
Arranging resources to satisfy wants is:
difficult because resources are limited. This is why economists call it the great economic problem.
Price controls may be used effectively to discipline monopolies. This argument in favor of price controls _____ price controls on goods like gasoline and apartments.
does not support placing Gasoline and apartments are not goods sold by monopolies.
A local cable company experiences declining long-run total average costs when it increases the number of houses for which it provides cable. What is the source of this market power?
economies of scale Economies of scale imply that as quantity increases, long-run total average costs decline.
Axel's Waste Control currently experiences declining long-run total average costs when it increases production. The source of this market power is:
economies of scale. Economies of scale imply that as quantity increases, long-run total average costs decline.
GBT Pharmaceuticals is lobbying for increased patent protection. The firm argues that patents are important to drug development because they:
encourage new drug development. In the United States, researching, developing, and successfully testing the average new drug costs nearly $1 billion. Firms must be compensated for these expenses if people expect them to invest in the discovery process.
A price floor does NOT:
encourage the most efficient allocation of resources. Misallocation of resources can occur when prices do not send the right signals.
Monopolies or oligopolies may impede the competitive process because:
entry into profitable markets will be impeded. Monopolies and oligopolies may lead to a misallocation of resources.
What will a firm want to do if the price falls below its average cost?
exit in the long run If P < AC, then (P − AC) × Q < 0.
externalities
external costs or external benefits
Which of these might cause the Invisible Hand Properties discussed in the textbook to fail to come about?
externalities Externalities cause prices to send the wrong signals.
Which would cause the Invisible Hand Properties to fail?
externalities Externalities cause prices to send the wrong signals.
barriers to entry
factors that increase the cost to new firms of entering an industry
If the demand for cigarettes is less elastic than the supply of cigarettes, then the burden of a cigarette tax will:
fall mainly on buyers. If demand is inelastic, buyers will stay in the market after the tax and bear it. Sellers with elastic supply would rather leave the market than bear the tax.
If the demand for oranges is more elastic than the supply of oranges, then the burden of a tax on oranges will:
fall mainly on suppliers. If supply is inelastic, sellers will stay in the market after the tax and bear it. Buyers with elastic supply would rather leave the market than bear the tax.
The total costs of production in an industry can be reduced without changing total output as long as:
firms have different marginal costs. Moving production from a firm with high marginal cost to a firm with low marginal cost will reduce total costs of production.
Protectionism is the economic policy of restraining trade though quotas, tariffs, or other regulations that heavily burden _____ producers.
foreign Protectionism is meant to benefit domestic producers.
Commodity taxes are taxes on:
goods. Well-known commodity taxes include those on fuel, liquor, and cigarettes.
Many monopolies are _____-created and born of corruption.
government
The _____ is to arrange people's limited resources to satisfy as many of their infinite wants as possible.
great economic problem This is the problem that markets help solve.
Imports beyond a trade quota are:
heavily taxed or forbidden. This is how a quota restricts trade.
Rising oil costs caused a shift in the location of rose production because:
high heating costs made it more affordable to grow roses in warm climates and ship them to cooler climates. So now instead of being grown in the United States, most flowers sold in the United States are grown in Kenya.
If affordable housing is a concern, the most helpful policy would be:
housing vouchers, because they do not cause housing shortages. In fact, housing vouchers will increase the availability of affordable housing.
A trade quota restricts the quantity of goods that can be:
imported. Protectionism is meant to benefit domestic producers.
A tariff is a tax on:
imports. Tariffs are generally used to protect domestic producers.
A government subsidy does NOT:
increase market efficiency. Subsidies cause deadweight loss.
ABC Electronics produces a unique good that is technologically superior to similar products on the market. The source of this market power is:
innovation. Innovation is a source of market power.
A tariff:
is a protectionist policy
Strategic trade protectionism is different from the other arguments in favor of trade restrictions discussed in the textbook because it:
is an argument in favor of limiting exports, not imports. Strategic trade protectionism doesn't protect industries against competition; it helps exporters raise prices.
marginal cost, MC
is the change in total cost from producing an additional unit
If private bargains are to solve problems of externalities, property rights must be clearly defined so that:
it is clear who should pay whom. Otherwise, it will be impossible for bargaining to begin.
When zero profits occur in the market:
it must be the case that P = AC. If P = AC, then (P − AC) × Q = 0.
If the public better understood the economics of price controls:
it would probably not advocate price controls on goods like gasoline and apartments. These price controls do not help the poor, and they do not discipline monopolies.
One problem with the key industry argument in favor of trade restrictions is that:
key industries are difficult to identify in advance. Another problem is that subsidies would actually work better than trade restrictions to encourage spillovers.
The Kenyan women who work in the fields growing roses:
know very little about the Western celebration of Valentine's Day. This doesn't stop them from cooperating with many other people to bring flowers to U.S. markets.
When a firm earns zero economic profits:
labor and capital are being paid what they could earn in another industry. This is part of the definition of normal profits.
When profit-seeking entrepreneurs decide to enter, exit, or remain in a competitive market:
labor and capital move across industries into their highest-value uses. High profits are a signal of a valuable potential use of labor and capital.
If the market equilibrium price for two-bedroom apartments is $750 and the city government sets a price ceiling at $600:
landlords' revenues will fall and fewer families will live in apartments. The families that get the apartments may be better off, but there will be unmet demand.
Which of the following groups is a contemporary manifestation of the phenomenon of blat in the United States?
lobbyists Blat is alive and well in the United States.
What is the time after all exit or entry has occurred?
long run This is the time after all exit or entry has occurred.
Which is a market that meets the following three conditions? i. The product being sold is similar across different firms. ii. There are many buyers and sellers. iii. Each buyer and seller represents a small portion of the total market.
lumber This market meets the conditions.
WasteCo Services has the power to raise price above marginal cost without fear that other businesses will enter the market. WasteCo Services has:
market power
ABC Cable has the power to raise price above marginal cost without fear that other businesses will enter the market. ABC Cable has:
market power. Market power is the power to raise price above marginal cost without fear that other firms will enter the market.
Which industry mentioned in the textbook has been protected in the name of national security?
mohair The textbooks mentions that mohair, steel, and computer chips have all been protected in the name of national security.
A _____ monopoly comes from an economy of scale.
natural It's natural because nobody would want to compete with this firm—additional firms would drive up average costs.
Mattie shopped around for the best price she could get for her first apartment. While looking for the best deal with a utilities provider, however, Mattie had no choice but to go with Your Town Utilities. Not being an economist, Mattie felt blatantly cheated. Your Town Utilities is a:
natural monopoly, and so can provide its service at a lower cost than multiple firms could. Natural monopolies are created by economies of scale.
In the short run _____.
new firms do not enter the market This why firms can earn above-normal profits in the short run only.
An import quota is:
numerical limit on imports. Import quotas benefit domestic producers by placing a burden on foreign producers.
One factor that allows Saudi Arabia to successfully use strategic trade protectionism to increase oil revenues is that:
oil is the only significant export of Saudi Arabia. This means that other countries cannot retaliate with restrictions on other imports from Saudi Arabia.
Youssef Boutros-Ghali, Egypt's former minister of trade, found it suspicious that:
only when third-world labor became competitive did industrial countries suddenly become concerned about the welfare of the workers. It's common for protectionists to lobby under the guise of some other motive.
Every year Sally vaccinates her dog against rabies. Who receives the external benefits of Sally's decision to vaccinate her dog?
other dogs at the dog park that Sally and her dog visit These dogs are external to the market transaction.
The existence of speculation reveals that:
participants in markets think about the future, as well as about the present. So current prices also reflect expectations about the future.
ABC Pharmaceuticals currently has a government-enforced right to be a sole producer of a particular antibiotic. The source of this market power is:
patents. Patents are a type of government-enforced monopoly.
In order to obtain goods in the face of the widespread shortages caused by permanent and universal price controls in the former Soviet Union, people relied on blat. Blat is:
personal connections that could be used to obtain favors. When prices are not able to clear markets, other means of allocating goods will be used.
A _____ is a maximum price permitted by law.
price ceiling
Gains from trade will be maximized when:
price ceilings are set above the market equilibrium price. In this case, the price ceiling would not impact the market permanently, so there would be no lost gains from trade.
total revenue
price times quantity sold: TR = P x Q
For the competitive process to work, it is important that:
prices accurately signal costs and benefits. This is one of the conditions for competitive markets to work well.
If there are externalities, the competitive process may not work well because:
prices will not accurately signal costs and benefits. This is because the market fails to take into account external benefits or costs.
Friedrich Hayek said that properties like the minimization of the total costs of production were:
products of human action but not of human design. Even though no individual producer desires to do so, pursuit of profit causes the minimization of the total costs of production.
If the demand for cigarettes is perfectly inelastic, a $1 per unit tax on packs of cigarettes will:
raise the price of cigarettes by $1. In this case, buyers will bear the entire burden of the tax.
Given an upward-sloping supply curve and a downward-sloping demand curve, a $1 per unit tax on packs of cigarettes will:
raise the price of cigarettes by less than $1. Buyers will pay more, and sellers (after the $1 tax is taken out) will receive less. The burden is split between the two.
Decreasing costs in an industry are:
rare and temporary. Once an industry cluster grows to a certain point, costs will have to begin to rise with output.
When speculators buy up oil today because they expect supply disruptions to raise the price of oil in the future, they:
reduce the use of oil in lower-value uses today. The increase in demand today drives up the price, which reserves the oil for higher-value future uses.
As firms enter a market, supply increases and the price declines, which:
reduces profits. Profits are reduced as price declines.
What is a price ceiling on rental housing called?
rent control Rent control is a price ceiling on rental housing.
Which of the following is an example of a price ceiling?
rent control Rent controls, like all price ceilings, cause shortages.
A price ceiling on rental housing is a:
rent control. Rent control is a price ceiling on rental housing.
Which government program or policy is intended to help the poor, but often helps millionaires?
rent controls This is because rent controls are tied to the apartment, not the individual.
If the market equilibrium price for two-bedroom apartments is $750 and the city government sets a price ceiling at $600:
resources will be misallocated. Rent controls do misallocate resources.
Price controls:
result in many goods being allocated through bribery and personal connections. If price can't be used to clear the market, other means will be.
If the United States tried to use strategic trade protectionism to raise revenues for airplane manufacturers, countries that import U.S.-produced planes world:
retaliate and place tariffs or quotas on other U.S.-produced goods. This is the primary reason strategic trade protectionism would not work for the United States.
If the market equilibrium price for two-bedroom apartments is $750 and the city government sets a price ceiling at $600:
search costs will increase.
When demand is less elastic than supply
sellers pay less of a tax than do buyers. If demand is inelastic, buyers will stay in the market after the tax and bear it. Sellers with elastic supply would rather leave the market than bear the tax
Kirsten opened a charming book store in a shopping plaza. Business in other shops in the plaza has increased because of the customers Kristen's bookshop has attracted. Given the external benefits her bookshop generates, if Kristen is selling her books at the market equilibrium price for books:
she would eliminate a deadweight loss in the market for her books if she sold books at the efficient equilibrium price and quantity. In the presence of externalities, the market equilibrium is not efficient. Efficient price and quantity are higher than market price and quantity.
The _____ is the time before exit or entry can occur.
short run This is the period before exit or entry can occur.
If the market equilibrium price for two-bedroom apartments is $750 and the city government sets a price ceiling at $600:
shortages will be created. Rent controls do create shortages.
What is consumer surplus plus producer surplus plus everyone else's surplus?
social surplus This includes the welfare of bystanders as well as the welfare of those in the market.
A subsidy can increase social welfare if:
something of special importance is increased. In this case, the increases in trade may not be inefficient after all.
A prediction market is a _____ designed so that prices can be interpreted as probabilities and used to make predictions.
speculative market The purpose of a prediction market is to make predictions.
Nobel Prize winner Edmund Phelps is a strong advocate of:
subsidizing firms that hire low-wage workers. This will increase employment among low-wage workers.
To construct an industry supply curve, one should:
sum the quantities supplied by all of the firms for each price.
Which of the following is NOT a result of a price ceiling?
surpluses Surpluses result from price floors.
The elimination principle says that above-normal profits are _____.
temporary The elimination principle says that above-normal profits are temporary.
The elimination principle says that above-normal profits are:
temporary. The elimination principle says that above-normal profits are temporary.
If the futures price is much higher than the spot or current price:
that is a sign that smart people with their own money on the line think that supply disruptions may soon occur. If the futures price is much higher than the spot or current price, that is a sign that smart people with their own money on the line think that supply disruptions may soon occur.
Protectionism tends to create a society:
that pits one interest group against another.
One of the costs of a monopoly is:
that some gains from trade are not realized, creating deadweight loss. By restricting output and raising price, monopolists steal some consumer surplus. But the reduced consumption causes a deadweight loss.
The main difference between the Earned Income Tax Credit (EITC) and economist Edmund Phelps's proposed wage subsidies is that:
the EITC is targeted only at families with children. This reduces the scope and possible impact of wage subsidies.
If an industry is competitive:
the actions of an individual buyer or an individual seller will not affect the market. This is because there are so many buyers and sellers that each makes up just a small part of the market.
economies of scale
the advantages of large-scale production that reduce average cost as quantity increases
speculation
the attempt to profit from future price changes
marginal cost δTC/δQ
the change in total cost from producing an additional unit
marginal revenue δTR/δQ
the change in total revenue from selling an additional unit
marginal revenue, MR
the change in total revenue from selling an additional unit. MR = δTR/δQ For a firm in a competitive industry MR = Price
zero profits or normal profits
the condition when P = AC; at this price the firm is covering all of its costs including enough to pay labor and capital their ordinary opportunity costs
total cost
the cost of producing a given quantity of output
average cost
the cost per unit; the total cost of producing a given quantity divided by that quantity, AC = TC/Q
social cost
the cost to everyone; the private cost plus the external cost
transaction costs
the costs necessary to reach an agreement
Which is NOT an example of a sunk cost?
the costs of buying the wrong printer ink cartridges at Staples If you buy the wrong printer ink cartridges, you can just return them.
What is the spot price?
the current price Comparing the futures price to the spot price can help you interpret the expectations of speculators.
protectionism
the economic policy of restraining trade through quotas, tariffs, or other regulations that burden foreign producers but not domestic producers
Suppose that honey and sugar are complements in consumption, but good sugar is an input to certain cereals. All else equal, if the supply of honey increases:
the equilibrium price of certain cereals will increase, but the equilibrium quantity of certain cereals will decrease. The price of honey will fall, the price of sugar will rise, and the supply of certain cereals will fall.
Suppose that honey and sugar are complements in consumption, but sugar is an input to certain cereals. All else equal, if the demand for honey decreases:
the equilibrium price of certain cereals will increase, but the equilibrium quantity of certain cereals will decrease. The price of honey will fall, the price of sugar will rise, and the supply of certain cereals will fall.
Suppose that goods A and B are substitutes in consumption, but good B is an input to good C. All else equal, if the supply of good A increases:
the equilibrium price of good C will decrease, but the equilibrium quantity of good C will increase. The price of A will fall, the price of B will fall, and the supply of C will rise.
Suppose that goods A and B are substitutes in consumption, but good B is an input to good C. All else equal, if the supply of good A decreases:
the equilibrium price of good C will increase, but the equilibrium quantity of good C will decrease. The price of A will rise, the price of B will rise, and the supply of C will fall.
If a firm is earning zero profit:
the firm is paying capital and labor enough to compensate them for their ordinary opportunity costs. Normal profits mean that capital and labor are being compensated for their opportunity costs.
What price will a profit-maximizing firm charge if the market demand curve is horizontal?
the market price The firm will charge the market price because price elasticity of demand is perfectly elastic.
What price will a profit-maximizing firm charge if the price elasticity of demand for the firm's product is perfectly elastic?
the market price The firm will charge the market price.
Assume the price elasticity of demand for a firm's product is perfectly elastic. The price this profit-maximizing firm will charge is:
the market price. The firm will charge the market price.
short run
the period before entry occurs
What is market power?
the power to raise price above marginal cost without fear that other firms will enter the market Market power is the power to raise price above marginal cost without fear that other firms will enter the market.
market power
the power to raise prices above marginal cost without fear that other firms will enter the market
efficient equilibrium
the price and quantity that maximizes social surplus
Markets solve the information problem by collapsing all the relevant information in the world about the uses of oil into a single number, which is:
the price of oil.
If a local wiring company tries to take advantage of its market power by raising the price of wiring:
the price of products that use wiring will increase. Monopolies are especially harmful when the goods that are monopolized are used to produce other goods.
A subsidy wedge is the difference between:
the price received by the sellers and the price paid by buyers. Subsidies raise seller prices and reduce buyer prices.
Coase theorem
the principle that if transactions costs are low and property rights are clearly defined, private bargains will ensure that the market equilibrium is efficient even when there are externalities
elimination principle
the principle that in a competitive market, above normal profits are eliminated by entry and below normal profits are eliminated by exit
If the price of a monopolized good that is used to produce some other good increases, the price of:
the produced good increases. Monopolies are especially harmful when the goods that are monopolized are used to produce other goods.
When a tariff is levied on a good, two things happen: the quantity of the good consumed domestically decreases and:
the quantity of the good produced domestically increases. A tariff raises the price, which increases quantity supplied.
efficient quantity
the quantity that maximizes social surplus
Who receives more of the benefits of a subsidy?
the same side of the market that would bear more of the burden of a tax The same side of the market that bears more of the burden of a tax also gets more benefit from a subsidy.
long run
the time after all exit or entry has occurred
deadweight loss
the total of lost consumer and producer surplus when not all mutually profitable gains from trade are exploited
In a free market, the price of wood is equal to:
the value of the wood in its next highest-value use. This is revealed by the height of the demand curve.
The United States would have difficulty using strategic trade protectionism to increase revenues because:
there are many substitutes for most U.S.-produced goods. This makes the demand for U.S.-produced goods elastic.
When the Civil Aeronautics Board (CAB) kept airline ticket prices above the market price on interstate flights:
there was a wasteful increase in flight quality. If the price is prevented from falling, something has to happen to clear the market and attract new buyers.
In the former Soviet Union in 1976:
there were permanent and universal price controls. As a result, there were significant and persistent shortages of many goods.
If the government imposes a $1 tax on farmers for every 5 pounds of oranges grown:
there will be a deadweight loss in the orange market. The deadweight loss is caused by the reduction in quantity that results from the tax.
When profit-seeking entrepreneurs decide to enter, exit, or remain in a competitive market:
they eliminate profits and losses from the market. This is the essence of the elimination principle.
Firms in a competitive industry will all end up with the same marginal cost because:
they face the same price. The profit-maximizing condition for perfect competition is P = MC.
The Kenyan women who grow roses work hard to make sure roses are available on Valentine's Day because:
they get paid more if the roses bloom just in time for Valentine's Day. People respond to incentives.
When Americans buy goods produced in Mexico:
they pay for it in dollars, which ultimately will be used to buy something from the United States. People sell to buy.
Life can be very difficult for workers who lose jobs. Therefore:
things like unemployment insurance, savings, and a strong education system should be encouraged. These can reduce the negative impacts of trade on certain individuals without forgoing the benefits of trade for us all.
great economic problem
to arrange our limited resources to satisfy as many of our wants as possible
The Organization of Petroleum Exporting Countries (OPEC) limits the amount of oil it exports:
to raise prices and revenues from the sale of oil. The demand for oil is likely to be inelastic.
accounting profit
total revenue minus explicit costs
economic profit
total revenue minus total costs including implicit costs
What name is given to the costs necessary to reach an agreement?
transaction costs In order for private bargains to solve externality problems, it is necessary that these costs be low. Transaction costs are all the costs necessary to reach an agreement.
Which include the costs of identifying and bringing buyers and sellers together?
transaction costs Transaction costs are costs necessary to reach an agreement.
Which of the following words properly describes the cooperation that takes place in the market for Valentine's Day roses?
undirected Free markets are complex, undirected, and voluntary.
The immense cooperation that is necessary to provide roses to the U.S. flower markets in time for Valentine's Day is:
voluntary. This is part of what makes free markets so fascinating.
If the market equilibrium price for two-bedroom apartments is $750 and the city government sets a price ceiling at $600:
wasteful lines will be created. Rent controls do create wasteful lines.
When will firms enter a market?
whenever above-normal profits are being made Positive profits attract new entrants.
The great economic problem:
will never be solved. It is a constant process, described by Joseph Schumpeter as creative destruction.
Suppose your neighbor paints his house a color that you don't like, and his house is close enough that you can't avoid seeing it every day. Private bargaining between you and your neighbor will be MOST successful at solving this externality problem if:
you offer to pay your neighbor to repaint his house. The property rights in this case probably belong to your neighbor.
