Quiz 3

Production in the short run ______.

- is subject to diminishing marginal product - involves some fixed factors - can be increased by employing another unit of a variable input, as long as the marginal product of that input is positive

Moral Hazard

Refers to taking additional risks because you are insured, which lowers the cost to you of taking those risks

_______ take a greater proportion of the income of lower-income groups than of higher-income groups.

Regressive taxes

________ is the use of resources to get the government to grant special privileges.

Rent seeking

Common Resource

a rival good that is nonexcludable; that is, nonpayers cannot be easily excluded from consuming the good, and when one unit is consumed by one person, it means that it cannot be consumed by another. In early America, New Englanders had privately owned gardens to grow their own food, but they also had established commons for grazing livestock. Settlers had an incentive to protect their own private lands but not the publicly owned commons. As a result, the commons were soon overgrazed and no longer able to support the villagers' cattle, creating the so-called Tragedy of the Commons.

The long-run period is best described as ____________.

sufficient length to allow a firm to alter its plant capacity and all other factors of production.

The total utility derived from consuming scoops of ice cream can be found by ______.

summing the marginal utilities of each scoop consumed

The law of diminishing marginal utility implies that the more of a commodity you consume, ______.

the less you value additional units of output

If compliance standards are too stringent, ______.

the marginal social cost of pollution reduction may outweigh the marginal social benefit of pollution reduction

The fact that a gallon of gasoline commands a higher market price than a gallon of water indicates that ______.

the marginal utility of a gallon of gasoline is greater than the marginal utility of a gallon of water

In the case of a good whose production generates negative externalities, ______.

those not directly involved in the market transactions are harmed

People's concerns about fairness are illustrated in an experiment called the _____________.

ultimatum game

An ideal corrective tax ______.

forces a firm to internalize the externality

In what way can government provision of public goods solve the free-rider problem?

forcing people to pay for the provision of a public good through taxes.

___________ is the false belief that past outcomes affect future events.

gambler's fallacy

Club Goods

goods that are nonrival in consumption and excludable

vertical equity

people with different levels of income should be treated differently

The market system fails to provide the efficient output of public goods because ______.

private firms cannot restrict the benefits from those goods to consumers who are willing to pay for them

The relationship between the quantity of inputs and the quantity of outputs is called the ____________.

production function

A tax equal to the external cost on firms that emit pollutants would ______.

provide firms with the incentive to decrease the level of activity creating the pollution

The presence of negative externalities leads to a misallocation of societal resources because ______.

some costs are associated with production that the producer fails to take into consideration

Free-Rider

someone who derives benefits from something not paid for. This problem prevents the private market from supplying the efficient amounts of public goods. However, if the government perceives that the total benefits of a public good exceed the cost, it can provide the public good and pay for it with tax revenues.

The __________ concept is based on two well-known principles of behavioral economics: (1) people don't always do what they claim they want to do, and (2) incentives get people to do things.

Commitment Contract

Why can externalities be considered a property rights problem?

If the rights to clean air, water, and so on were clearly owned, those who infringe on those rights would be forced to compensate the owners. Such costs would be internalized, rather than external, to the relevant decision makers. Therefore, externalities are the result of the absence of clear and enforceable property rights in certain goods

_____________ do not require an outlay of money. Here is where the economist's and accountant's measures of costs diverge because accountants do not include these costs.

Implicit Costs

What must be true about the ratio of marginal utility to the price for each good consumed in consumer equilibrium?

In consumer equilibrium, the ratio of marginal utility to price for each good consumed must be the same; otherwise, the consumer could raise his total utility by changing his consumption pattern to increase consumption of those goods with higher marginal utility per dollar and decrease consumption of those goods with lower marginal utility per dollar.

Why are both explicit costs and implicit costs relevant in making economic decisions?

In making economic decisions, where expected marginal benefits must be weighed against expected marginal costs, all relevant costs must be included, whether they are explicit or implicit.

How do substantial warranties offered by sellers of used cars act to help protect buyers from the problem of asymmetric information and adverse selection? Why might too extensive a warranty lead to a moral hazard problem?

In the used-car market, the seller has superior information about the car's condition, placing the buyer at an information disadvantage. It also increases the chance that the car being sold is a "lemon." A substantial warranty can provide the buyer with valuable additional information about the condition of the car, reducing both asymmetric information and adverse selection problems. Too extensive a warranty (e.g., an unlimited "bumper-to-bumper" warranty) will give the buyer less incentive to take care of the car because the buyer is effectively insured against the damage that lack of care would cause.

Nobel laureate Ronald Coase observed that when the __________ for some course of action (say, environmental cleanup), potential transactions can make some people better off without making anyone worse off. This idea is known as the ____________.

benefits are greater than the costs; Coase theorem

Optimal Pollution Level

benefits from the elimination of pollution balance the marginal costs, both pecuniary and nonpecuniary, of the pollution control.

When a consumer spends her income on goods and services in such a way that her utility is maximized, she reaches ______.

consumer equilibrium

If firms were required to pay the full social costs of the production of goods, including both private and external costs, other things being equal, there would probably be a(n) ______.

decrease in production

In the case of a private solution to the externality problem, the distribution of rights ______.

determines who bears the cost of the solution but does not affect the efficient result

Adding more and more of a variable input to a fixed input will eventually lead to _________.

diminishing marginal product

___________ are based on total revenues and explicit costs and do not include implicit costs.

Accounting profits

Why are externalities also called spillover effects?

An externality exists whenever the benefits or costs of an activity impact individuals outside the market mechanism. That is, some of the effects spill over to those who have not voluntarily agreed to bear them or compensate others for them, unlike the voluntary exchange of the market.

What are the objectives of an ideal pollution control policy from the perspective of economists interested in resource allocation?

An ideal pollution control strategy from the perspective of economists interested in resource allocation would reduce pollution to the efficient level, it would do so at the lowest possible opportunity cost, and it would create incentives to motivate advances in pollution abatement technology.

______________ are those that require private enterprise to produce their outputs in a manner that reduces negative externalities below the amounts that would persist in the absence of regulation.

Command and control regulations

______________ refers to treating money differently depending on its source. For example, if you win money at a casino, you may be more likely to spend that money than you would to spend your hard-earned cash. Yet money is money.

Compartmentalizing

________ are returns that occur in an output range where LRATC does not change as output varies.

Constant returns to scale

____________ measures changes in the cost of living by comparing the cost of buying a certain bundle of goods and services over time. The quantities of each commodity remain the same from year to year but their prices change, so changes in the index reflect weighted average of changes in the prices of goods and services.

Consumer Price Index

What do economists mean by consumer equilibrium?

Consumer equilibrium means that a consumer is consuming the optimum, or utility-maximizing, combination of goods and services, for a given level of income.

____________ are the input costs that require a monetary payment—the out-of-pocket expenses that pay for labor services, raw materials, fuel, transportation, utilities, advertising, and so on. Some of the firm's (opportunity) costs of production are implicit.

Explicit Costs

_______, also called a proportional tax, is designed so that everybody will be charged the same percentage of their income.

Flat Tax

People sometimes alter their preferences when a problem is posed or presented in different language. The way in which the problem is posed is its ____________.

Framing

Sometimes, to deal with externalities, governments radically alter arrangements of ______________.

Property rights

__________ is the application of economic principles to politics. These type of economists believe that government actions are an outgrowth of individual behavior. Specifically, they assume that the behavior of individuals in politics, as in the marketplace, will be influenced by self-interest. Bureaucrats, politicians, and voters make choices that they believe will yield them expected marginal benefits that will be greater than their expected marginal costs.

Public Choice Theory

__________ will most likely generate positive externalities of consumption.

Public education

_____________ is considered relying on decisions that are felt to have worked well enough in the past.

Rule of Thumb

__________ is defined as a period too brief for some inputs to be varied.

Short Run

_______ have an intense interest in particular voting issues that may be different from that of the general public

Special interest groups

________ is when consumers switch to another similar good when the price of the preferred good increases.

Substitution effect

How could a consumer raise his total utility if the ratio of his marginal utility to the price for good A was greater than that for good B?

Such a consumer would raise his total utility by spending less on good B and more on good A because a dollar less spent on B would lower his utility less than a dollar more spent on A would increase it.

Why would means-tested transfer payments, such as food stamps, in which benefits are reduced as income rises, act like an income tax facing recipients?

When benefits are reduced as income rises, it reduces how much of their additional earnings recipients keep, just like taxes do. For instance, a 30% benefit reduction rate amounts to a 30% income tax, except it is "paid" via receiving lower benefits.

Public Good

a good that is nonrivalrous in consumption and nonexcludable. This good is not rival because everyone can consume the good simultaneously; that is, one person's use of it does not diminish another's ability to use it. This good is likewise not excludable because once the good is produced, it is prohibitively costly to exclude anyone from consuming the good.

Private Good

a good with rivalrous consumption and excludability

__________ means that the individuals receiving the benefits are those who pay for them.

benefits-received principle

In consumer equilibrium, ______.

both individuals seek the combination of goods that maximizes their satisfaction, given limited income and the ratio of the marginal utility of each good divided by its price is equal across all goods consumed are true

The Coase theorem suggests that private solutions to externality problems ______.

can lead to an optimal allocation of resources if private parties can bargain at relatively low cost

___________ is when a firm's total revenues exceed its total opportunity costs—both its explicit costs and implicit costs.

economic profits

_____________ is when someone places a higher value on something they own than on something they do not—that is, possessing a good makes it more valuable. The possessor must be paid more to give up the good than she would have paid for it in the first place.

endowment effect

Melissa spent the week at an amusement park and used all of her money on rides and popcorn. Both rides and bags of popcorn are priced at $1 each. Melissa realizes that the last bag of popcorn she consumed increased her utility by 40 utils, while the marginal utility of her last ride was only 20 utils. What should Melissa have done differently to increase her satisfaction?

increased the number of bags of popcorn she consumed and reduced the number of rides

Public goods, like national defense, are usually funded through government because ______.

it is prohibitively difficult to withhold national defense from someone unwilling to pay for it

Even though many voters may be uninformed about specific issues, others may feel a strong need to be politically informed. Such individuals may be motivated to organize a _____________. These groups may have intense feelings about and a degree of interest in particular issues that are at variance with the general public. However, as a group these individuals are more likely to influence decision makers and have a far greater impact on the outcome of a political decision than they would with their individual votes.

special interest group

In the case of externalities, appropriate government corrective policy would be ______.

subsidies in the case of external benefits and taxes in the case of external costs

Pollution reduction will be achieved for the least cost when ______.

the cost of reducing pollution by an additional unit is the same for all polluting firms

Assume that production of a good imposes external costs on others. The market equilibrium price will be ______ and the equilibrium quantity ______ for efficient resource allocation.

too low; too high

Assume that production of a good generates external benefits of consumption. The market equilibrium price of the good will be ______ and the equilibrium quantity ______ for efficient resource allocation.

too low; too low

As one eats more and more oranges, ______.

total utility rises as long as the marginal utility of the oranges is positive, but the marginal utility of each additional orange likely falls

A common resource ______.

- is rivalrous in consumption - is nonexcludable - can lead to the tragedy of the commons

Public goods ______.

- do not need to be produced by government - are subject to free-rider problems - tend to be underproduced in the marketplace

Because of bounded rationality, people ______.

- have limited information processing capabilities - may "satisfice" rather than trying to accurately calculate the best decision - may use rules of thumb as mental shortcuts to making decisions that may be non-optimal

The long run ______.

- is a period in which a firm can adjust all its inputs - can vary in length from industry to industry - is a period in which all costs are variable costs

Adverse Selection

A situation where an informed party benefits in an exchange by taking advantage of knowing more than the other party

__________ refers to a good's ability to provide less satisfaction with each successive unit consumed.

Diminishing Marginal Utility

__________ are diseconomies that occur in an output range where LRATC rises as output expands.

Diseconomies of scale

_________ is the reduction in quantity demanded of a good when its price increases because of a consumer's decreased purchasing power

Income Effect

_________ refers to situations in which there is a lack of incentive to be informed. People will generally make much more informed decisions as buyers than as voters.

Rational ignorance

_______________ is a field of economics that incorporates insights from human psychology into the models of economic behavior. Behavioral economists understand that individuals make decisions in a world of uncertainty; part of the uncertainty comes from a lack of understanding of the probabilities of outcomes. As a result, people may adopt rules of thumb.

Behavioral Economics

Why do you think buffaloes became almost completely extinct on the Great Plains but cattle did not? Why is it possible that you can buy a buffalo burger in a store or diner today?

Buffaloes almost became extinct because people did not have clear property rights for buffaloes, unlike cattle. You can buy a buffalo burger today because people now have clear property rights to buffalo.

_______ are economies that occur in an output range where long-run average total cost (LRATC) falls as output increases.

Economies of scale

_________ are those costs that do not vary with the level of output.

Fixed Costs

An __________ exists between marginal product (MP) and marginal costs (MC). When marginal product is rising, marginal costs must fall, and when marginal product falls, marginal costs must rise.

Inverse relationship

asymmetric information

Is said to exist when available information is initially distributed in favor of one party relative to another

_____________ is defined as exchanging votes to get support for legislation

Logrolling

___________ is a period in which a firm can adjust all inputs. During this period, all inputs to the firm are variable, changing as output changes.

Long Run

________ is the change in total costs resulting from a one-unit change in output.

Marginal Cost

The ________ of any single input is defined as the change in total product resulting from a one-unit change in the amount of input used.

Marginal Product

In the case of ___________________ (such as pollution), the market supplies too much. __________________ are designed to internalize negative externalities and regulation can also be used.

Negative externalities; Corrective taxes

With ____________________, the private market supplies too little of the good in question (such as education). _______________ and regulation can be used to internalize positive externalities.

Positive externalities; subsidies

How are public goods different from private goods?

Private goods are rival in consumption (two people can't both consume the same unit of a good) and exclusive (nonpayers can be prevented from consuming the good unless they pay for it). Public goods are nonrival in consumption (more than one person can consume the same good) and nonexclusive (nonpayers can't be effectively kept from consuming the good, even if they don't voluntarily pay for it).

Economists generally assume that the ultimate goal of every firm is to maximize its ___________.

Profits

_________, of which the federal income tax is one example, are designed so that those with higher incomes pay a greater proportion of their income in taxes.

Progressive taxes

Hamburgers cost $2 and hot dogs cost $1, and Juan is in consumer equilibrium. What must be true about the marginal utility of the last hamburger Juan consumes?

The marginal utility of the last hamburger consumed must be greater than that of the last hot dog.

The sum of the fixed costs and variable costs is called the firm's ___________.

Total Cost

_______________ give the holder the right to discharge a specified amount (smaller than the uncontrolled amount) of pollution into the air. Firms that can lower their emissions at the lowest costs will do so and trade their pollution rights to firms that cannot reduce their pollution levels as easily. The crucial advantage to the pollution rights approach comes from the fact that the rights are private property and can be sold.

Transferable pollution rights

_________ is a measure of the relative levels of satisfaction consumers get from consumption of goods and services.

Utility

___________ vary with the level of output. As more variable inputs such as labor and raw materials are added, output increases. This cost (expenditures for wages and raw materials) increases as output increases.

Variable Cost

If someone said "you would have to pay me to eat one more bite," what do we know about their marginal utility? What do we know about their total utility?

We know that their marginal utility for the next bite is negative—that their total utility would be reduced if they ate one more bite. However, while we know that their marginal utility is negative, that tells us nothing beyond the fact that each previous bite had a positive marginal utility—that it raised their total utility.

________ is simply that those with the greatest ability to pay taxes (richer people) should pay more than those with the least ability to pay taxes (poorer people).

ability-to-pay principle

Economists who use models that incorporate more realistic assumptions about rationality and decision making are called ______.

behavioral economists

Taxes on the emissions of polluting firms are primarily intended to ______.

encourage firms to pollute less

Sunk costs ______.

have already been incurred and cannot be recovered

The crucial difference between how economists and accountants analyze the profitability of a business has to do with whether or not ______ are included when calculating total production costs.

implicit costs

Most federal government tax revenue comes from ________.

individual income and payroll taxes

According to the Coase theorem, one way to deal with an externality problem when transaction costs are low is for the government to ______.

make certain that property rights are well defined

The increase in total utility that one receives from eating an additional piece of sushi is called ______.

marginal utility

___________ predicts candidates will choose a position in the middle of the distribution.

median voter model

A public good is both ______ in consumption and ______.

nonrivalrous; nonexclusive