EC 201 Exam 2
Producer Surplus after the government imposes the excise tax:
(actual price the producer receives - lowest price from the original supply curve)(quantity)(1/2)
opportunity cost of a task equation
(hours this task takes)/(hours required to produce alternative output)
positional externality
this occurs when an increase in one person's performance reduces the expected reward of another's in situations in which reward depends on relative performance (you taking steroids effects my chance to win)
concentrated costs vs widely-dispersed cost
cost to import competing firms vs benefits to consume lower prices
Specialization
focus on a specific tasks to be most efficient
gains from trade
some people have higher value on things then others
old jobs vs. new jobs
those with jobs in import-competing firms will fight to keep their jobs and potential beneficiaries of new jobs don't know their interest or cant effectively organize
corrective subsidy
external benefit for positive externality
corrective tax
external cost for negative externality
binding price ceiling
the maximum price is below the equilibrium price
Price (dollars) 100 150 200 250 300 Quantity of Smartphones Demanded 1,100. 1,000 900 800 700 Quantity of Smartphones Supplied 200. 400. 600. 800. 1,000 Suppose there is no international trade. What is the equilibrium price?
$250
You are deciding what to order at Starbuck. A coffee costs $4 and a cappuccino costs $5. You value a coffee at $5 and a cappuccino at $8. You only want to order one drink. After you buy your preferred drink, what is your consumer surplus?
$3
Raphael owns a company that sells wedding cakes. The marginal cost of making one cake is $30, the marginal cost of the second cake is $45, and the marginal cost of the third cake is $65. 4)If Raphael sells three cakes for $70 each, what is producer surplus?
$70
Micah can produce bicycles at a marginal cost of $125 .Jacqueline values this bicycle at $200. If Jacqueline buys a bicycle from Micah, what is the total economic surplus created?
$75
How does international trade impact americans based on their education?
- College educated wages go up - non-college educated wages go down
What happens to quantity consumed, quantity produced, consumer surplus, and producer surplus if the world price is above the autarky price(price without trade)
- quantity consumed goes down - quantity produced goes up. - consumer surplus goes down - producer surplus goes up
What happens to quantity consumed, quantity produced, consumer surplus, and producer surplus if the world price is below the autarky price(price without trade)
- quantity consumed goes up - quantity produced goes down. - consumer surplus goes up - producer surplus goes down
effect of price ceiling
- queuing: replace financial cost with time cost - secondary market: resellers charge high price anyway - bypass restrictions by bundling
Kim and Clara are working on a group homework assignment. The homework consists of a set of programming questions and a set of questions on graphing models. Kim can finish a programming question in about 20 minutes and a graphing question in about 30 minutes. Clara can finish a programming question in about 25 minutes and a graphing question in about 50 minutes. Assume that Kim and Clara produce the same quality answers. What is Clara's opportunity cost of completing a programming question?
0.5 graphing questions
Roles of Price
1) It's a signal 2) Price is an incentive 3) Price aggregates information
How are firms affected by increased globalization?
1) greater competition 2) outsourcing (some tasks overseas, some task domestic) 3) larger global market 4) interdependence increases (we thrive or fail based on other countries)
Liam works as a baker. If he spends all day making bread, he can make 6 loaves of bread. If he spends all day baking cakes, he can bake 2 cakes. What is Liam's opportunity cost of a loaf of bread?
1/3 of a cake
Price (dollars) 100 150 200 250 300 Quantity of Smartphones Demanded 1,100. 1,000 900 800 700 Quantity of Smartphones Supplied 200. 400. 600. 800. 1,000 Suppose the market is open to trade and the world price is $200. Customers will demand _______ smartphones and suppliers will supply ______ smartphones.
900; 600
price ceiling
A legal maximum on the price at which a good can be sold
price floor
A legal minimum on the price at which a good can be sold
binding price floor
A minimum legal price that is set above the existing equilibrium price. Since the market equilibrium price is lower than the price floor, the floor restricts trade and is said to be binding.
Policy Analysis
Analyzing possible government policies
Which of the following is an example of positive economics? A) A 5% increase in tuition would result in 15% fewer low-income students attending MSU. B) The state of Michigan should increase government funding for public universities. C) It is unfair for minimum-wage employees to make less money in a year than some executives make in a day.
A) A 5% increase in tuition would result in 15% fewer low-income students attending MSU.
Carly Rae Jepsen released her new album on the same night that Taylor Swift released hers. Taylor Swift's album got most of the attention - it was immediately written about in major publications, teaser clips for the music videos were shown on Thursday Night Football, and the album was streamed 185 million times on Spotify in one day. Journalists have a limited amount of time to write and fans have a limited amount of time to listen to music, so Carly Rae Jepsen's album received less fanfae than
A) A common resource problem
An article in the New York Times discussed how the weakening of the British pound relative to other currencies has made Scotch whisky "more affordable for buyers outside of Britain". (Scotch whisky is made in Scotland, which is a country that uses the British pound. In EC 202, we discuss how changes in exchange rates affect the prices of exports. For now, just assume that the world price of whisky has gone down.) How will this affect producer surplus and consumer surplus in countries that import
A) Consumer surplus rises, producer surplus falls
Which of the following is an example of a shortage? A) It is illegal to sell cigarettes for more than $8 per pack. This leads to long lines outside stores that sell cigarettes B) A tax on beer increases the price and reduces consumption C) There are not many Super Bowl tickets available, and lots of people want to go. As a result, Super Bowl tickets are very expensive. D) A subsidy on electric cars increases the demand for electric cars
A) It is illegal to sell cigarettes for more than $8 per pack. This leads to long lines outside stores
A September 2022 New York Times article discusses the potential impact of implementing road tolls in Manhattan: The plan to put tolls on drivers on Manhattan's busiest streets is intended to spare New York City's central business district from pollution and gridlock while raising money for public transit. But while some of the city's wealthiest neighborhoods would enjoy the greatest benefits, one of its poorest and most polluted — the South Bronx — could end up with dirtier air from diverted
A) Manhattan residents; South Bronx residents (The idea behind the toll is to reduce congestion and pollution in Manhattan, benefittingits residents. However, as drivers divert to avoid the tolls, other areas, such as the SouthBronx, experience increased traffic and pollution)
West Virginia is located on mountains that contain large amounts of coal. Thus, West Virginia provides the United States with a comparative advantage in coal production due to A) Relatively abundant inputs B) Specialized skills C) Mass production
A) Relatively abundant inputs
Which of the following is the best example of a nonrival good? A) Streetlights that make it safer to walk around town at night B) A private security firm that protects a bank from robbers C)The front row seat in a roller coaster D) Fish in a lake
A) Streetlights that make it safer to walk around town at night
Amy and Zoey each get a book as a gift. Amy gets a mystery novel and Zoey gets a romance novel. Suppose they are allowed to trade the novels. What will happen? Amy values the mystery novel at $4 and romance novel is $8. Zoe values the mystery novel at $6 and romance novel is $1. A) They will make the trade. Consumer surplus will increase from 5 to 14 B) They will make the trade. Consumer surplus will increase from 0 to 14 C) They will make the trade. Consumer surplus will be unchanged. D) Amy
A) They will make the trade. Consumer surplus will increase from 5 to 14
A politician argues that the United States should temporarily ban the import of battery-powered electric scooters because this is an "infant industry". According to what we learned in class, which of the following counterarguments would we expect an economist to raise: A) This temporary ban might become permanent because the electric scooter manufacturers will never become globally competitive. B) This ban will destroy American jobs in the electric-powered-scooter industry C) This ban will hurt
A) This temporary ban might become permanent because the electric scooter manufacturers will never become globally competitive.
Jason and Gary are roommates trying to divide chores. Jason has a comparative advantage at a chore if he can complete the chore
At a lower opportunity cost than Gary
Suppose that some of the 185 million people who streamed Taylor Swift's album Midnights on Spotify were not regular Spotify users. They logged on just to listen to Midnights, but once on the app, they started listening to more music by lesser-known artists. Had these people not logged on to Spotify for Midnights, they never would have heard of these artists and never would have listened to their music. For the lesser-known artists, this is an example of ________:
B) A positive externality
When Raising Cane's Chicken Fingers restaurant opened in East Lansing, a line of 400 customers wrapped around the block. Suppose you are considering waiting in that line. You've decided that your marginal benefit from getting to buy chicken fingers on opening day is $10. Which of the following statements is true? A) The private marginal benefit is greater than $10 B) External marginal cost is greater than zero because you will be making the line longer for other people C) If private marginal cos
B) External marginal cost is greater than zero because you will be making the line longer for other people
Which of the following statements regarding globalization is not true: A) The United States is one of many countries that has had an increase in international trade over the past few decades B) Globalization has increased the wages of workers in the United States without a college degree and helped to reduce income inequality C) Globalization increases the variety of goods available to consumers D) Wages are mostly determined by productivity
B) Globalization has increased the wages of workers in the United States without a college degree and helped to reduce income inequality
Jackson likes listening to loud rock music in his apartment. Quinton lives below Jackson and doesn't like the noise. According to the apartment building rules, Quinton can demand that Jackson stop playing the music. Jackson gets $100 in enjoyment from listening to loud music, and Quinton gets $50 in enjoyment from not having to hear loud music. According to the Coase theorem, which of the following is an optimal way of dealing with the situation? A) Jackson pays Quinton $150 for the right to pla
B) Jackson pays Quinton $70 for the right to play loud music If Jackson has the right to play music, Quinton would be willing to pay up to $50 to makehim stop. Conversely, if Quinton has the right to silence, Jackson would be willing to payup to $100 to play his music. The optimal solution would be for Jackson to pay anamount between $50 and $100
Which of the following is the best example of a free-rider problem? A) People line up early in the morning to get the best seats to a MSU football game, even though everyone would be better off if they just came one hour later. B) One of your classes has group projects, and everyone in the group gets the same grade on the project. You decide not to do any work on the project. C) You and your roommate use the principle of comparative advantage to divide up chores. D) You use a library card to che
B) One of your classes has group projects, and everyone in the group gets the same grade on
specialized skills
Better production techniques lower opportunity cost -Most to where you can increase skill -ex: switzerland is good at making watches
As Bitcoin mining became more popular, many people realized that high-end graphics cards were not just good for gaming - they were also well-suited to do the calculations required for Bitcoin mining. As a result, the price of high-end graphics cards went up. Which of these is a good explanation of the signal that price increase sends to suppliers of high-end graphics cards A) "The marginal cost of making graphics cards is very high" B) "Instead of buying a graphics card for your computer, just b
C) "Mining Bitcoin can be very profitable, so consumers get a lot of benefits from high-end graphics cards. You should make more of them!"
According to what we learned in class, prices in the stock market are a good example of how A) A price is a signal B) A price is an incentive C) A price aggregates information
C) A price aggregates information
Buyers bear a smaller incidence of the tax when: A) The tax is higher B) Supply is more elastic than demand C) Demand is more elastic than supply D) Demand is perfectly inelastic
C) Demand is more elastic than supply
Price (dollars) 100 150 200 250 300 Quantity of Smartphones Demanded 1,100. 1,000 900 800 700 Quantity of Smartphones Supplied 200. 400. 600. 800. 1,000 Which of the following statements is true if the market is open to trade and the world price is 200? A) Even if the market is open to trade, there will be no international trade of smartphones B) Guatemala will import 600 smartphones C) Guatemala will import 300 smartphones D) Guatemala will export 300 smartphones E) G
C) Guatemala will import 300 smartphones
After Johnny finished law school and got a job at a law firm, he stopped mowing his own lawn and started paying a lawn service to do it. According to what we learned in this unit, what is the best explanation for this? A) Johnny has a comparative advantage at mowing his lawn B) Johnny has an absolute advantage at mowing his lawn C) Johnny's opportunity cost of mowing his lawn went up, because the wage he earns from his job went up D) Johnny's opportunity cost of mowing his lawn went up, beca
C) Johnny's opportunity cost of mowing his lawn went up, because the wage he earns from his job went up
Maria takes 3 hours to mow the lawn and 1 hour to weed. Juanita takes 4 hours to mow the lawn and 2 hour to weed. Who has the comparative advantage in weeding the flower beds? A) Maia because she can mow the lawn more quickly B) Juanita because can weed the flower beds faster C) Maia because she has the lower opportunity cost of weeding D) Juanita because she has the lower opportunity cost of weeding
C) Maia because she has the lower opportunity cost of weeding
Kim and Clara are working on a group homework assignment. The homework consists of a set of programming questions and a set of questions on graphing models. Kim can finish a programming question in about 20 minutes and a graphing question in about 30 minutes. Clara can finish a programming question in about 25 minutes and a graphing question in about 50 minutes. Assume that Kim and Clara produce the same quality answers. _________ should do the programming questions and ___________ should do t
Clara; Kim
The equilibrium apartment rental rate is $1000 per month. If a price ceiling is set at $800, we expect the outcome to be ______. If a price ceiling is set at $1200, we expect the outcome to be _____. A) Equilibrium; equilibrium B) A shortage; a surplus C) Equilibrium; a shortage D) A shortage; equilibrium
D) A shortage; equilibrium
Which of the following statements regarding globalization is not true: A) Globalization has been driven by falling trade costs B) Globalization has increased the wages of college-educated workers C) The U.S. tends to import low-skill-intensive goods D) Due to globalization, the U.S. is negatively affected when there is economic growth in other countries
D) Due to globalization, the U.S. is negatively affected when there is economic growth in other countries
Suppose golden retrievers create positive externalities because they are cute and people like seeing them at the park. Which of the following is true? A) The social supply curve is to the left of the private supply curve. B) The social supply curve is to the right of the private supply curve. C) The social demand curve is to the left of the private demand curve. D) The social demand curve is to the right of the private demand curve.
D) The social demand curve is to the right of the private demand curve.
Import =
Demand-Supplied internally
A tax on buyers shifts the _______ curve to the _______:
Demand; left
Raphael owns a company that sells wedding cakes. The marginal cost of making one cake is $30, the marginal cost of the second cake is $45, and the marginal cost of the third cake is $65. If Raphael sells the cakes for $70 each, what is total economic surplus? A) $30 B) $70 C) $140 D) $210 E) It depends on how much the consumer values the cakes
E) It depends on how much the consumer values the cakes
Positive externality
Fiscal externalities network externalities thick market externalities
How does trade effect domestic price
Imports down Exports up
How does trade effect quantity supplied by Americans
Imports down Exports up
How does trade effect producer surplus for Americans
Imports down (small) Exports up (big)
How does trade effect quantity demanded by Americans
Imports up Exports down
How does trade effect economic surplus for Americans
Imports up Exports up
How does trade effect consumer surplus for Americans
Imports up (big) Exports down (small)
In class, we discussed possible reasons why small increases in the minimum wage do not seem to have significant effects on employment rates. One explanation we discussed is that the demand for labor may be...
Inelastic
Whats the problem with externalities?
People ignore external costs and benefits
negative externalities
Positional externalities Common resource problem Intergenerational externalities
relatively abundant inputs
Sell what you have a lot of, buy what you don't have much of
Whats the solution to externalities?
Substitute an incentive people ignore (external cost/benefit) with one they don't ignore (taxes and subsidies)
externalaties
The benefit or cost received by someone not directly involved in the production or consumption of a good
producer surplus equation
The difference between the actual price a producer receives and the minimum acceptable price; the triangular area above the supply curve and below the market price.
common resource problem
The more I take the less is left for you (Ex: Overfishing)
Thick Market Externalities
Thick markets have many buyers and sellers reducing search costs (search hard for a job, makes it easier for firms to find workers, leading them to create more jobs)
intergenerational externalities
Your actions negatively affect the next generation (overspending by current politicians leaves debt for next generation)
network effect
buy iphone, market increases for iphone apps, more apps are developed, benefiting me
private bargaining
can internalize the external effects, resulting in efficient solutions
total welfare equation
consumer surplus + producer surplus
nonexcludable goods
good that can't be easily prevented to consume, even if they didn't pay for it (ex. road)
nonrival goods
goods for which consumption by one person does not diminish the quantity available for others
positive externalities create ______ prices and ______ quantities
higher; higher
negative externalities create ______ prices and ______ quantities
higher; lower(overproduced)
mass production
if you produce a lot of one thing, you have comparative advantage
If the price is below autarky price...
import the good
Globalization
increase in international trade over last few decades because of... 1) reduced trade barriers 2) growth of the internet 3) faster/more reliable transport of goods
normative economics
makes prescriptions about the way the economy should work ("we should increase taxes", "we ought to...")
consumer surplus equation
marginal benefit - price (willing to pay-actually pay) everything below the demand curve and above the price
Public goods are
nonrival and nonexcludable
Autarky
price with no international trade
Social marginal cost/benefit equation
private marginal cost(or benefit) + external marginal cost (or benefit)
The main role of markets is:
reallocating resources to better uses.
invisable hand
term economists use to describe the self-regulating nature of the marketplace
comparative advantage
the ability to carry out a task at a lower opportunity cost than other task (do this)
absolute advantage
the ability to carry out a task more efficiently than other people (don't do)
private marginal benefit
the benefit to the consumer of an additional unit of a good or service
positive economics
the branch of economic analysis that describes the way the economy actually works ('if we increase taxes", 'what if...")
private marginal cost
the cost to the producer of an additional unit of a good or service
trade costs
the extra costs incurred as a result of buying or selling overseas, rather than domestically
economic surplus equation
total benefit - total cost
Subsidies
whenever a transition occurs, the government pays the buyer or seller
economic burden
who bears the burden of the tax
statutory burden
who is responsible for paying the tax to the government
efficient outcome
yields the largest possible economic surplus
Fiscal externalities
your success leads you to pay higher taxes, benefiting me