Mirco Test 3

Scenario 13-3 Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. Refer to Scenario 13-3. Tony's economic profit equals

-80 250-130+300 includes the opportunity cost

variable cost

cost that vary with the qty of output produced ex: hourly labor

Explicit Costs

inputs that require an outlay of money by the firm (things you can write a check for) Only cost an accountant is concerned with.

Implicit Costs

costs that do not require money ex: opportunity cost, interest on money had it been left in savings economist cost (in addition to explicit cost)

fixed cost

costs that do not vary with the qty of output produced ex: rent

Average fixed cost (AFC)

fixed cost divided by the qty of outputs

Fixed cost can be considered variable in the

long run

Refer to Figure 10-13. In order to reach the social optimum, the government could

impose a tax of $8 per unit on plastics. View as the tax wedge graph. The wedge between the private cost and the social cost is $8.

Assume a certain firm regards the number of workers it employs as variable, and that it regards the size of its factory as fixed. This assumption is often realistic

in the short run, but not in the long run.

Increase in social VALUE is a

positive externality

For NEGATIVE externalities, social cost equals

private cost and external cost (value of the negative impact on bystanders)

For POSITIVE externalities social value of a good includes

private value (to buyers) and External benefit (value of the positive impact on bystander)

For a firm, the relationship between the quantity of inputs and quantity of output is called the

production function.

When the government intervenes in markets with externalities, it does so in order to

protect the interests of bystanders.

If the government were to LIMIT the release of air-pollution produced by a steel mill to 75 parts per million, the policy would be considered a

regulation

Positive externalities

result in smaller than efficient equilibrium quantity.

Demand curves are adjusted to account for

social cost

Since air pollution creates a negative externality,

social welfare will be enhanced when SOME, but not all air pollution is eliminated.

Constant return to scale

the property whereby long-run ATC stays the same as the qty of output changes **Flat portion of the long-run ATC curve

Diminishing marginal product

the property whereby the marginal product of an input declines as the qty of the input increase

efficient scale

the qty of output that minimizes Average total cost Bottom of the ATC curve

production function

the relationship between qty of inputs used to make a good and the qty of outputs of that good

Marginal cost curve

eventually rises with the qty of output

Refer to Table 13-5. What is the marginal cost of producing the first widget?

$1 Determine total costs for 0 widget. 10+0=10 total cost for 2nd widget is 1+10 (fixed cost)=11 11-10=1

Adrian's Premium Chocolates produces boxes of chocolates for its mail order catalogue business. She rents a small room for $150 a week in the downtown business district that serves as her factory. She can hire workers for $275 a week. There are no implicit costs. Refer to Table 13-6. What is the total cost associated with making 890 boxes of premium chocolates per week?

$1,250 Fixed cost is 150 and variable is 275*4 workers=1100 150+1100=1250

Refer to Figure 10-1. This graph represents the tobacco industry. WITHOUT any government intervention, the equilibrium price and quantity are

$1.60 and 42 units, respectively. (the original equilibrium)

Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are

$1.80 and 35 units, respectively. (The new "equilibrium" that includes the public cost)

Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. Refer to Scenario 13-3. Tony's accountant would most likely figure the total cost of his wheat planting to equal

$130 just cast of the seeds (opportunity cost excluded)

Refer to Table 13-5. What is the variable cost of producing five widgets?

$15.00 total cost = 25-10 fixed cost= 15

Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. Refer to Scenario 13-3. What is the OPPORTUNITY COST of the day that Farmer Tony incurred for his spring day in the field planting wheat?

$250 25 an hour *10 hours

Refer to Figure 10-8. What is the equilibrium price in this market?

$8 (refer to the "original" equilibrium)

Refer to Table 13-1. What is total output when 4 workers are hired?

160 add marginal product column up till at 4 workers 0+30+40+50+40=160

Refer to Table 13-5. The average variable cost of producing four widgets is

2.50 10/4

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will emit

20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.

Adrian's Premium Chocolates produces boxes of chocolates for its mail order catalogue business. She rents a small room for $150 a week in the downtown business district that serves as her factory. She can hire workers for $275 a week. There are no implicit costs. Refer to Table 13-6. What is the marginal product of the second worker?

300 The marginal product of the 1st worker is 330 (0+330=330) the 2nd one is 630 630-330=300

Scenario 13-3 Tony is a wheat farmer, but he also spends part of his day teaching guitar lessons. Due to the popularity of his local country western band, Farmer Tony has more students requesting lessons than he has time for if he is to also maintain his farming business. Farmer Tony charges $25 an hour for his guitar lessons. One spring day, he spends 10 hours in his fields planting $130 worth of seeds on his farm. He expects that the seeds he planted will yield $300 worth of wheat. Refer to Scenario 13-3. Tony's accounting profit equals

300-130=170 excludes opportunity costs

Refer to Table 13-2. At which number of workers does diminishing marginal product begin?

5 determine difference between output at each new worker. pick worker where the number decreases

Refer to Table 13-2. What is the marginal product of the fourth worker?

80 260-180=80

which profit is usually larger economic or accounting?

Accounting profit is larger because it does not include implicit cost

Internalizing the externality

Altering incentives so that people take account of the external effects of their actions Example: a tax

Chapter 10

Chapter 10

Chapter 13

Chapter 13

two ways in which the government can respond to externalities:

Command-and-control policies Market-based policies

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. It is likely that

Firm A will buy all of Firm B's pollution permits. Each one will cost between $100 and $200.

When an externality is present, the market equilibrium is

INefficient, and the equilibrium does NOT maximize the total benefit to society as a whole.

Private Solutions to Externalities The Coase theorem

If private parties can bargain without cost over the allocation of resources, they can solve the externalities problem on their own.

Total costs are made up of 2 types of costs

Implicit and explicit costs

Refer to Figure 10-9. Which graph represents a market with a positive externality?

Panel (c)

Example of a negative Externality

Pollution

Market-based policies

Provided incentives so that that private decision makers will choose to solve the problem in their own. aka: Corrective taxes and subsidies and Trade able pollution permits

Refer to Figure 10-9, Panel (b) and Panel (c). The overuse of antibiotics leads to the development of antibiotic-resistant diseases. Therefore, a government policy that internalized the externality would move the quantity of antibiotics used from point

Q3 to point Q2. the added tax caused an increase in price and in turn a decrease in quantity.

Command-and-control policies

Regulate behavior directly aka: regulations

Supply curves are adjusted to account for:

Social value

Total revenue

The amount a firm receives from the sale of its output Price * qty

Suppose that flower gardens create a positive externality equal to $1 per plant. What is the relationship between the equilibrium quantity and the socially optimal quantity of plants grown?

The equilibrium quantity is less than the socially optimal quantity.

ATC and MC curves

The marginal cost curve crosses the ATC curve at its minimum This point of intersection is the minimum of ATC

3 characteristics of a competitive market:

There are many buyers and sellers the goods offered by various sellers are largely the same firms can freely enter and exit the market

Profit

Total revenue - Total costs

Average total cost curve

U shaped very steep at low inputs the bottom of the curve is the qty that minimizes ATC (efficient scale)

Refer to Table 13-5. The marginal cost of producing the sixth widget is

You need to find the difference between the total cost of the 5 and 6 widget. The total cost of the 6th item is 21+10 (fixed cost)=31 then minus 31-25= 6

The shape of the ATC curve in the long run is

a flat wider U shape made up of short run ATC curves

Negative externalities lead markets to produce

a larger qty than is socially desirable Example pollution

(perfectly) competitive market

a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

Positive externalities lead markets to produce

a smaller qty than is socially desirable education

Corrective taxes

a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality aka Pigivian taxes

For negative externality the effect on the bystanders is

adverse

The average fixed cost curve

always declines with increased levels of output.

Example of a positive Externality

an educated population

The impact of one person's actions on the well-being of a bystander is called

an externality (a type of market failure)

When marginal cost exceeds average total cost,

average total cost must be rising.

For a positive externality the effect of the bystanders is

beneficial

All externalities

cause markets to fail to allocate resources efficiently

The marginal product of labor can be defined as

change in output/change in labor.

Private markets fail to account for externalities because

decision makers in the market fail to include the costs of their behavior to third parties.

When the marginal product of an input declines as the quantity of that input increases, the production function exhibits

diminishing marginal product

Total revenue minus explicit and implicit costs is called

economic profit

An ideal corrective TAX would ________ the external cost from an activity with __________ externality.

equal negative

An ideal SUBSIDY would ________ the external cost from an activity with __________ externality.

equal positive

When market participants must pay social costs, the market eq'm

matches the social optimum.

Refer to Figure 10-8. If the government wanted to subsidize this market to achieve the socially-optimal level of output, how large would the subsidy need to be?

more than $2 Needs to be more than the value of the private cost

Corrective taxes are unlike most other taxes because they

move the allocation of resources CLOSER to the social optimum

Refer to Figure 10-1. This graph represents the tobacco industry. The industry creates

negative externalities. Because the supply line that contains PUBLIC costs is ABOVE the supply curve.

Increase in social COST is a

negative externality

Which of the following represents a way that a government can help the private market to internalize an externality?

taxing goods that have negative externalities & subsidizing goods that have positive externalities

Marginal revenue (MR)

the change in total revenue from an additional unit sold change in total revenue from an additional unit being sold **For competitive firms, marginal revenue equals the price of the good

Transaction costs

the costs that parties incur in the process of agreeing to and following through in a bargain.

Marginal product

the increase in output that arises from ONE additional unit of input

Marginal cost

the increase in total cost that arises from an extra unit of production ***tells us the increase in total cost that arises from producing 1 more item***

The minimum points of the average variable cost and average total cost curves occur where

the marginal cost curve intersects those curves.

Total cost

the market value of the inputs a firm uses in production material inputs, labor costs....

diseconomies of scale

the property whereby long-run ATC cost rise as the qty of output increases **End of the long-run ATC curve Can occur because of coordination problems, managers are not managing cost properly is stretched to thin

economies of scale

the property whereby long-run ATC falls as the qty of output increases **Start of the long-run ATC curve can be due to specialization, workers get better at there job

fixed + variable cost =

total cost

Average total cost (ATC)

total cost divided by the qty of output or the sum of the average fixed cost and average variable cost ***tell us the cost of a typical unit of output if the total cost is divided evenly over all the units produced***

Refer to Figure 13-1. As the number of workers increases,

total output increases, but at a decreasing rate.

Average revenue (AR)

total revenue /qty **for all types of firms (in a competitive market), average revenue equals the price of the good.

economic profit

total revenue minus total cost, including both implicit and explicit cost Economist cost/concern

Accounting profit

total revenue minus total explicit cost accountant cost/ concern

If a firm produces nothing, which of the following costs will be zero?

variable cost

Average variable cost (AVC)

variable cost divided by the qty of output