ECON 2000 Midterm 2 Kim

Rivalry in Consumption

- Property of a good whereby one person's use diminishes other people's use • Rival: fish tacos • Not rival: An MP3 file of Lady Gaga's latest single

Marginal Cost

rises as production expands, either immediately or at low levels of output if diminishing returns set in with some delay

Production Decision

selection of the short-run rate of output (with existing plants and equipment)

market outcome not efficient if

self-interested buyers/sellers neglect external costs or benefits of their actions Govt can sometimes improve market outcome

Production Function

shows the relationship between quantity of inputs used to make a good and the quantity of output of that good. -generally contains labor (L), capital (K), intermediate inputs and energy.

Private Cost

supply curve shows this cost and it directly incurs by sellers

the moment diminishing marginal returns set in

suppose a marginal cost curve starts out downward sloping then moves to be an upward slope.. that moment is called a___

ok

the profit motive also encourages businesses to produce the goods and services consumers desire, at prices they're willing to pay. (Answer=ok)

Diminishing Marginal Profit

the profit whereby the marginal product of an input declines as the quantity of the input increases

Coase Theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

Market-Based Policies

- Provide incentives so that private decision makers will choose to solve the problem on their own - Policy: Corrective taxes and subsidies - Policy: Tradable pollution permits

Market-based policies

- Provide incentives so that private decision makers will choose to solve the problem on their own - Policy: Corrective taxes and subsidies - Policy: Tradable pollution permits

The free-rider problem

- Public goods are not excludable, so people have an incentive to be free riders - Prevents the private market from supplying the goods - Market failure

Government

- Raises revenue through taxation - To perform its many functions

Relationship between MC and ATC

- When MC < ATC: average total cost is falling - When MC > ATC: average total cost is rising - The marginal-cost curve crosses the average-total-cost curve at its minimum

Free-rider problem

- When the number of beneficiaries is large - Exclusion of any one of them is impossible

Tax Incidence

- Who bears the burden of taxes - Central to evaluating tax equity - Person who bears the burden a tax • Not always the person who gets the tax bill from the government

Agreeing on what is "fair" is much harder than agreeing on what is "efficient."

- Yet, there are several principles people apply to evaluate the equity of a tax system

Corporate profits are taxed twice

-Corporate income tax when the corporation earns the profits -Individual income tax when the corporation uses its profits to pay dividends to its shareholders

True

True or False: The marginal cost curve intersects the average total cost curve at the minimum point of the average total cost curve

True

True or False: The overall burden of the federal income tax is progressive

True

True or False: The shape of the marginal cost curve tells a producer something about the marginal product of her workers

True

True or False: You live in a building that allows smoking inside. Your roommate values smoking in the apartment at $100 and you value clean air at $200. According to Coase, you can pay your roommate $101 and he will smoke outside.

True

Ture or False: The Tragedy of the Commons is a parable that helps explain why common resources are used more than desirable.

exactly at its price

Under perfect competition the person that ends up with the marginal unit is the person that values it A) at an amount above its price. B) at an amount lower than its price. C) exactly at its price. D) above its marginal cost.

positive externalities

Vaccinations convey ________ to third parties. A) positive externalities B) negative externalities C) economies of scale D) public goods

none of the above is correct

Variable cost divided by quantity produced by a.) average total cost b.) marginal cost c.) profit d.) none of the above is correct

Average Variable Cost

Variable cost divided by the quantity of output

Consumer Surplus

WTP-Price Actually Paid

internalizing the externality

an altering incentive so that ppl take account of external effects --> market eq'm=social optimum (-) externality --> taxes (+) externality --> subsidies

Externality

cause markets to be inefficient and thus, fail to maximize total surplus

Marginal Revenue

change in TR form selling one more unit = change in TR/ change in Q

Marginal cost

change in total cost/change in output

Marginal Revenue

change in total revenue for every additional quantity sold

ok

the market supply of a competitive industry is determined by -the price of factor inputs -technology -expectations -taxes and subsidies -the number of firms in the industry (Answer=ok)

Marginal Cost Pricing

the offer of goods at prices equal to their marginal cost

Short Run

the period in which the quantity (and quality) of some inputs can't be changed

Equilibrium Price

the price at which the quantity of a good demanded in a given time period equals the quantity supplied

World Price

the price of a good that prevails in the world market for that good

Free Goods

private market cannot ensure that the good is produced or consumed in the proper amounts; difficult to allocate resources since market sources are absent

Capital-Intensive

production processes that use a high ratio of capital to labor inputs

ok

profit represents the difference between total revenues and total costs (Answer=ok)

Fixed Cost

property taxes are what type of cost?

Tax on a Good

raises the price that buyers effectively pay and lowers the price that sellers effectively receive.

Economies of Scale

refer to the property whereby long-run average total cost falls as the quantity of output increases.

Diseconomies of scale

refer to the property whereby long-run average total cost rises as the quantity of output increases.

Marginal Cost

refers to the change in total costs associated with one more unit of output

Constant returns to scale

refers to the property whereby long-run average total cost stays the same as the quantity of output increases

Budget Constraint

represents the goods or activities that a consumer can choose that exactly exhausts the entire budget.

Explicit Costs

require an outlay of money ex: paying wages to workers, interest on loans

Profit Per Unit

price minus average total cost

Profit Maximization Rule

Produce at the rate of output where marginal revenue equals marginal cost

Assumption

The goal of a firm is to maximize profit

ok

The goal of firms is to maximize profit, which equals total revenue minus total cost. (Answer=ok)

Taxes alter supply and demand

- Alter equilibrium prices - Indirect effects

Equity

- Another goal of tax policy - Distributing the burden of taxes "fairly."

entrepreneurship

it is not just a matter of what resources you have but also of how well you use them

ok

*The primary objective of the producer is to find that one particular rate of output that maximizes total profits.* (answer=ok)

ok

*for perfectly competitive firms, price equals marginal revenue.* (answer=ok)

ok

*total revenue curve of a perfectly competitive firm is an upward-sloping straight line with a slope equal to Pe* (answer=ok)

George W. Bush

- 35% marginal tax rate

Donald Trump

- 35% marginal tax rate on the richest Americans, with the option of a fourth higher rate - In current framework:12%, 25%, and 35% (article upload on Moodle)

Barack Obama

- 40% marginal tax rate

Bill Clinton

- 40% marginal tax rate on the richest Americans

Sunk cost

- A cost that has already been committed and cannot be recovered - Should be ignored when making decisions • You must pay them regardless of your choice - "Don't cry over spilt milk" - In the short run, fixed costs are sunk costs • So, FC should not matter in the decision to shut down

Goods differ in whether they are excludable and whether they are rival in consumption.

- A good is excludable if it is possible to prevent someone from using it. - A good is rival in consumption if one person's use of the good reduces others' ability to use the same unit of the good. - Markets work best for private goods, which are both excludable and rival in consumption. - Markets do not work as well for other types of goods.

Tax

- A tax on a good reduces the market quantity of that good. - The burden of a tax is shared between buyers and sellers depending on the price elasticities of demand and supply. - A tax causes a deadweight loss

For competitive firms

- AR = P - MR = P

U-shaped average total cost curve

- ATC = AVC + AFC - AFC: always declines as output rises - AVC: typically rises as output increases • Because of diminishing marginal product

Taxes collected by state and local governments

- About 40% of all taxes paid - $2,225 billion ($6,975 per person) in 2014 - More than 40% of receipts are from sales taxes and property taxes

Long-run supply curve is horizontal if

- All firms have identical costs, and - And costs do not change as other firms enter or exit the market

In a market with free entry and exit, profit is driven to zero in the long run.

- All firms produce at efficient scale, P = min ATC - The number of firms adjusts to satisfy the quantity demanded at this price.

Long Run

- All inputs are variable (e.g., firms can build more factories or sell existing ones)

Public Good

- Antipoverty programs financed by taxes • Welfare system (Temporary Assistance for Needy Families program, TANF) - Provides a small income for some poor families • Food stamps (Supplemental Nutrition Assistance Program, SNAP) - Subsidize the purchase of food for those with low incomes • Government housing programs - Make shelter more affordable

Firms have different costs

- As P rises, firms with lower costs enter the market before those with higher costs. - Further increases in P make it worthwhile for higher-cost firms to enter the market, which increases market quantity supplied. - Hence, LR market supply curve slopes upward

Government revenue - increased

- As percentage of total income - As economy's income has grown • Government's revenue from taxation has grown even more

Market supply

- At each price, the market quantity supplied is the sum of quantities supplied by all firms

To Prevent Overconsumption of Common Resources

- Auction off permits allowing use of the resource • Example: spectrum auctions by the U.S. Federal Communications Commission - If the resource is land, convert to a private good • By dividing and selling parcels to individuals

Public Good

- Basic research • General knowledge • Subsidized by government • The public sector fails to pay for the right amount and the right kinds

Market fails to allocate resources efficiently

- Because property rights are not well established - Some item of value does not have an owner with the legal authority to control it

The equity of a tax system concerns whether the tax burden is distributed fairly among the population.

- Benefits principle: it is fair for people to pay taxes based on the benefits they receive from the government. - Ability-to-pay principle: it is fair for people to pay taxes based on their capability to handle the financial burden. - The distribution of tax burdens is not the same as the distribution of tax bills.

Private decisions about consumption and production

- Can lead to an inefficient allocation of resources

Government Intervention

- Can potentially raise economic well-being

Not Excludable

- Cannot prevent free riders from using - Little incentive for firms to provide - Role for government: seeing that they are provided

Common Resource

- Clean air and water • Negative externality: pollution • Regulations or corrective taxes

Common Resource

- Congested roads • Negative externality: congestion • Corrective tax: charge drivers a toll • Tax on gasoline

Should a firm exit or enter in the long run?

- Cost of exiting market = revenue loss = TR - Benefit of exiting market = cost savings = TC (remember, FC = 0 in long run)

The firm's short-run decision to shut down

- Cost of shutting down= revenue loss = TR - Benefit of shutting down=cost savings=VC

Negative Externalities

- Cost to society (of producing a good) • Larger than the cost to the good producers

The efficiency of a tax system refers to the costs it imposes on taxpayers.

- Deadweight loss: taxes alter incentives - Administrative burden of complying with the tax laws.

Increase in demand

- Demand curve shifts outward - Short run • Higher quantity • Higher price: P > ATC, positive economic profit

Decide whether something is a public good

- Determine who the beneficiaries are - Determine whether the beneficiaries can be excluded from using the good

Marginal-cost curve

- Determines the quantity of the good the firm is willing to supply at any price - Is the supply curve

The gas tax = corrective tax

- Doesn't cause deadweight losses - Makes the economy work better • Less traffic congestion • Safer roads • Cleaner environment

Rival in Consumption

- Each person's use reduces others' ability to use - Role for government: ensuring they are not overused

Positive Externalities

- Education • Benefit of education is private • Externalities: lower crime rates, better health, higher productivity and wages

Changing the basis of taxation

- Eliminate disincentive toward saving - Consumption tax • Tax the amount that people spend • Income saved - not be taxed until the saving is later spent • Not distort people's saving decisions

Common resources are rival in consumption but not excludable.

- Examples include common grazing land, clean air, and congested roads. - Because people are not charged for their use of common resources, they tend to use them excessively. - Therefore, governments use various methods, such as regulations and corrective taxes, to limit the use of common resources.

Public goods are neither rival in consumption nor excludable.

- Examples of public goods include fireworks displays, national defense, and the discovery of fundamental knowledge. - Because people are not charged for their use of the public good, they have an incentive to free ride, making private provision of the good untenable. - Therefore, governments provide public goods, basing their decision about the quantity of each good on cost-benefit analysis.

Firm's long-run decision

- Exit the market if • Total revenue < total costs (P < ATC) - Enter the market if • Total revenue > total costs (P > ATC)

The U.S. government raises revenue using various taxes

- Federal government: personal income taxes and payroll taxes for social insurance. - State and local governments: sales taxes and property taxes.

Long-run supply curve might slope upward if

- Firms have different costs - Or costs rise as firms enter the market

Excludability

- Property of a good whereby a person can be prevented from using it • Excludable: fish tacos, wireless internet access with password • Not excludable: radio signals, national defense

Common Resource

- Fish, whales, and other wildlife • Oceans: the least regulated common resource -Needs international cooperation -Difficult to enforce an agreement • Fishing and hunting licenses • Limits on fishing and hunting seasons • Limits on size of fish • Limits on quantity of animals killed

Near-empty Restaurant - stay open for lunch?

- Fixed costs: not relevant; are sunk costs in short run - Variable costs, VC: relevant • Shut down if revenue from lunch < VC • Stay open if revenue from lunch > VC

Many Decisions

- Fixed in the short run - Variable in the long run

Each firm supplies quantity where MR = MC

- For P ≥ AVC: supply curve is MC curve

Front person has the right to recline

- Front person gets a $50 benefit - Passenger sitting behind bears an $80 cost - Efficient outcome: • Passenger sitting behind can offer front person $60 to sit upright - Any amount between $50 and $80

As a nation gets richer

- Government takes a larger share of income in taxes

The government can potentially solve the problem

- Help define property rights and thereby unleash market forces

Private Solutions to Externalities

- High transaction costs - Bargaining simply breaks down - Large number of interested parties • Coordinating everyone is costly

Proportional Tax

- High-income and low-income taxpayers pay the same fraction of income

Progressive Tax

- High-income taxpayers pay a larger fraction of their income than do low-income taxpayers

Long run supply curve is perfectly elastic

- Horizontal at minimum ATC

Rules for profit maximization

- If MR > MC, firm should increase output - If MC > MR, firm should decrease output - If MR = MC, profit-maximizing level of output

Compare marginal revenue with marginal cost

- If MR > MC: increase production - If MR < MC: decrease production - Maximize profit where MR = MC

Measuring profit

- If P > ATC, • Profit = TR - TC = (P - ATC) ˣ Q - If P < ATC, • Loss = TC - TR = (ATC - P) ˣ Q = Negative profit

In the long run, the number of firms can change due to entry and exit

- If P > ATC, firms make positive profit • New firms enter the market - If P < ATC, firms make negative profit • Firms exit the market

Externalities

- If an activity yields negative externalities, such as pollution, the socially optimal quantity in a market is less than the equilibrium quantity. - If an activity yields positive externalities, such as technology spillovers, the socially optimal quantity is greater than the equilibrium quantity.

In the long run, the number of firms can change due to entry and exit:

- If existing firms earn positive economic profit: • New firms enter, SR market supply shifts right • P falls, reducing profits and slowing entry - If existing firms incur losses: • Some firms exit, SR market supply shifts left • P rises, reducing remaining firms' losses

Coase Theorem

- If private parties can bargain without cost over the allocation of resources • They can solve the problem of externalities on their own

Government can remedy the free-rider problem

- If total benefits of a public good exceeds its costs - Provide the public good - Pay for it with tax revenue - Make everyone better off - Problem: Measuring the benefit is usually difficult

Operator of a miniature-golf course during off-season

- Ignore fixed costs - Shut down if • Revenue < variable costs - Stay open if • Revenue > variable costs

Technology spillover = Positive externality

- Impact of one firm's research and production efforts on other firms' access to technological advance - Government: internalize the externality • Subsidy = value of the technology spillover

Negative Externalities

- Impact on the bystander is adverse • Air pollution from a factory • Health risk to others from second-hand smoke

Positive Externalities

- Impact on the bystander is beneficial • Restored historic buildings • Research into new technologies

The cost of financial capital as an opportunity cost

- Implicit cost - Interest income not earned on financial capital • Owned as saving • Invested in business - Not shown as cost by an accountant

A firm's costs often depend on the time horizon considered

- In particular, many costs are fixed in the short run but variable in the long run. - As a result, when the firm changes its level of production, average total cost may rise more in the short run than in the long run.

Costs rise as firms enter the market

- In some industries, the supply of a key input is limited (e.g., amount of land suitable for farming is fixed). - The entry of new firms increases demand for this input, causing its price to rise. - This increases all firms' costs. - Hence, an increase in P is required to increase the market quantity supplied, so the supply curve is upward-sloping.

Firm's cost of production

- Include all the opportunity costs of making its output of goods and services • Explicit costs • Implicit costs

Marginal Product

- Increase in output that arises from an additional unit of input - Slope of the production function

Marginal product of labor (MPL)

- Increase in output that arises from an additional unit of labor - E.g., If the owner hires one more worker, his output rises by the marginal product of labor

Marginal Cost

- Increase in total cost arising from an extra unit of production - Marginal cost = Change in total cost / Change in quantity - MC = ΔTC / ΔQ - Increase in total cost • From producing an additional unit of output

Taxes collected by federal government

- Two-thirds of taxes in the economy - Total receipts: $3.3 trillion in 2014 • $10,235 per person

Corrective Taxes (Pigovian Taxes)

- Induce private decision makers to take account of the social costs that arise from a negative externality - Places a price on the right to pollute - Reduce pollution at a lower cost to society - Enhance economic efficiency

Implicit Costs

- Input costs that do not require an outlay of money by the firm-Ignored by accountants - E.g., the opportunity cost of the owner's time

Explicit Costs

- Input costs that require an outlay of money by the firm - E.g., paying wages to workers

Whatever the initial distribution of rights

- Interested parties can reach a bargain: • Everyone is better off • Outcome is efficient

A competitive firm is a price taker

- Its revenue is proportional to the amount of output it produces. - P = MR = AR - The firm's marginal-cost curve is its supply curve

Positive economic profit in short run

- Long run - firms enter the market - Short run supply curve - shifts right - Price - decreases back to minimum ATC - Quantity - increases • Because there are more firms in the market - Efficient scale

Economies of scale

- Long-run average total cost falls as the quantity of output increases - Increasing specialization among workers

Diseconomies of Scale

- Long-run average total cost rises as the quantity of output increases - Increasing coordination problems • E.g., management becomes stretched, can't control costs. • More common when Q is high

Exit

- Long-run decision to leave the market - Firm doesn't have to pay any costs

The marginal-cost curve and the firm's supply decision

- MC curve is upward sloping - ATC curve is U-shaped - MC curve crosses the ATC curve at the minimum of ATC curve - The price line is horizontal: P = AR = MR

Typical Cost Curves

- Marginal cost eventually rises with the quantity of output - Average-total-cost curve is U-shaped - Marginal-cost curve crosses the averagetotal-cost curve at the minimum of average total cost

Graph average total cost and marginal cost

- Marginal cost rises with the quantity of output. - Average total cost first falls as output increases and then rises as output increases further. - The marginal-cost curve always crosses the average total-cost curve at the minimum of average total cost

Diminishing Marginal Product

- Marginal product of an input declines as the quantity of the input increases - Production function gets flatter as more inputs are being used - The slope of the production function decreases

Lighthouses

- Mark specific locations so that passing ships can avoid treacherous waters • Benefit: to the ship captain • Not excludable, not rival in consumption • Incentive: free ride without paying - Most are operated by the government

Perfectly Competitive market

- Market with many buyers and sellers - Trading identical products • Because of the first two: each buyer and seller is a price taker (takes the price as given) - Firms can freely enter or exit the market

Negative externalities

- Markets produce a larger quantity than is socially desirable - Government policy: tax

Positive externalities

- Markets produce a smaller quantity than is socially desirable - Government policy: subsidy

The competitive equilibrium is efficient

- Maximizes total surplus because P = MC • MC is the cost of producing the marginal unit • P is value to buyers of the marginal unit

Types of Private Solutions

- Moral codes and social sanctions - Charities - Self-interest of the relevant parties • Integrating different types of businesses - Interested parties can enter into a contract

Long-run supply curve

- More elastic than short-run supply curve

When considering changes in the tax laws, policymakers often face a trade-off between efficiency and equity.

- Much of the debate over tax policy arises because people give different weights to these two goals

Public Good

- National defense • Very expensive public good • $748 billion in 2014

Self-interested buyers and sellers

- Neglect the external costs or benefits of their actions - So the market outcome is not efficient

Negative Externalities

- Optimum quantity produced • Maximize total welfare • Smaller than market equilibrium quantity

Market in long run equilibrium

- P = minimum ATC - Zero economic profit

Not Excludable

- People cannot be prevented from using them - Available to everyone free of charge

Benefits Principle

- People should pay taxes based on the benefits they receive from government services - Tries to make public goods similar to private goods - A person who gets great benefit from a public good should pay more for it than a person who gets little benefit

Free Rider

- Person who receives the benefit of a good but avoids paying for it

Externalities arise because something of value has no price attached to it

- Positive externalities (public goods) - Negative externalities (common resources)

Total Revenue

- Price times quantity - Proportional to the amount of output

Long run equilibrium

- Process of entry and exit ends when • Firms still in market make zero economic profit (P = ATC) • Because MC = ATC: Efficient scale

Why do competitive firms stay in business if they make zero profit?

- Profit = total revenue - total cost - Total cost includes all opportunity costs - Zero-profit equilibrium • Economic profit is zero • Accounting profit is positive

Compensating Differential

This is the difference in wages that are necessary when offsetting the non monetary characteristics of different jobs

Deadweight Losses

- Reduction in economic well-being of taxpayers • In excess of the amount of revenue raised by the government - Inefficiency • People allocate resources according to the tax incentive - Not according to true costs and benefits

Command-and-Control Policies

- Regulate behavior directly - Policy: Regulation

Command-and-control policies

- Regulate behavior directly - Policy: Regulation

To Prevent Overconsumption of Common Resources

- Regulate use of the resource - Impose a corrective tax to internalize the externality • Example: Hunting & fishing licenses, entrance fees for congested national parks

Production Function

- Relationship between • Quantity of inputs used to make a good • And the quantity of output of that good - Gets flatter as production rises

Total-Cost Curve

- Relationship between quantity produced and total costs - Gets steeper as the amount produced rises • Diminishing marginal product • Producing one additional unit of output requires a lot of additional units of inputs: very costly

European Countries

- Rely more on consumption taxes than does the U.S

Changes in demand have different effects over different time horizons.

- Short run, an increase in demand raises prices and leads to profits (a decrease in demand lowers prices and leads to losses). - Long run: zero-profit equilibrium

Shutdown

- Short-run decision not to produce anything • During a specific period of time • Because of current market conditions - Firm still has to pay fixed costs

Zero economic profit: when P = ATC

- Since firms produce where P = MR = MC - The zero-profit condition is P = MC = ATC - Recall that MC intersects ATC at min ATC - Hence, in the long run, P = min ATC

Efficient Tax System

- Small deadweight losses - Small administrative burdens

Common resources are used more than desirable (From society's standpoint)

- Social and private incentives differ • The private incentives (using the land for free) outweigh the social incentives (using it carefully) - Arises because of a negative externality • People neglect this external cost, resulting in overuse of the land

Short Run

- Some inputs are fixed (e.g., factories, land) - The costs of these inputs are FC

Long-run supply curve might slope upward

- Some resource used in production may be available only in limited quantities • Increase in quantity supplied - increase in costs - increase in price - Firms may have different costs • Some firms earn profit even in the long run

Costs of taxes to taxpayers

- Tax payment itself - Deadweight losses • Taxes distort the decisions that people make - Administrative burdens • Taxpayers bear as they comply with the tax laws

Marginal Tax Rate

- Tax rate applied to each additional dollar of income - How much tax system distort incentives - Determines the deadweight loss - Rises as income rises, higher-income families pay a larger percentage of their income in taxes

Vertical Equity

- Taxpayers with a greater ability to pay taxes should pay larger amounts • Richer taxpayers should pay more than poorer taxpayers • How much more should the rich pay?

Horizontal Equity

- Taxpayers with similar abilities to pay taxes should pay the same amount - Similar taxpayers • Determine which differences are relevant for a family's ability to pay and which differences are not - U.S. income tax • Special provisions that alter a family's tax based on its specific circumstances

Costs as opportunity costs

- The cost of something is what you give up to get it

Ronald Reagan

- The high tax rates greatly distorted economic incentives to work and save - Priority: tax reform - 1981 and 1986: large cuts in tax rates - Left office in 1989; marginal tax rate • Richest Americans: 28%

Competitive firm's long-run supply curve

- The portion of its marginal-cost curve that lies above average total cost

Competitive firm's short-run supply curve

- The portion of its marginal-cost curve that lies above average variable cost

Equity and Efficiency

- The two most important goals of a tax system - Often conflict • Especially when equity is judged by the progressivity of the tax system

Externality

- The uncompensated impact of one person's actions on the well-being of a bystander - One type of market failure

What Q maximizes a firm's profit?

- Think at the margin - If Q increases by one unit, • Revenue rises by MR, cost rises by MC

Administrative Burden

- Time spent to fill out forms - Time spent throughout the year keeping records for tax purposes - Resources the government has to use to enforce the tax laws - Tax lawyers and accountants • Legal tax avoidance - Resources devoted to complying with tax laws - Can be reduced: simplify the tax laws • Politically difficult

Average Total Cost

- Total cost divided by the quantity of output - Average total cost = Total cost / Quantity - ATC = TC / Q - Cost of a typical unit of output • If total cost is divided evenly over all the units produced

Economic Profit

- Total revenue minus total cost • Total costs includes both explicit and implicit costs

Accounting Profit

- Total revenue minus total explicit cost - Usually larger than economic profit

Average Tax Rate

- Total taxes paid divided by total income - Sacrifice made by a taxpayer • Fraction of income paid in taxes

How much is a life worth?

- Traffic light • Reduces risk of fatality by 0.5 percentage points - Expected benefit = 0.005 × $10 million = $50,000 - Cost ($10,000) < Benefit ($50,000) - Approve the traffic light

EX: The Market for Aluminum Assumption is that firms only care about revenue

-The quantity produced and consumed in the market equilibrium is efficient in the sense that it maximizes the sum of producer and consumer surplus. -If the aluminum factories emit pollution (a negative externality), then the cost to society of producing aluminum is larger than the cost to aluminum producers. -For each unit of aluminum produced, the social cost includes the private costs of the producers plus the cost to those bystanders adversely affected by the pollution.

Profit-Maximizing Level of Output for Perfectly Competitive Firms

-produce up to the point where the price of its output is just equal to short-run marginal cost --the level of output at which P* = MC

Short-Run Industry Supply Curve

-the sum of the marginal cost curves (above AVC) of all the firms in an industry -if there are only three firms in the industry, it is the sum of all the products supplied by the three firms at each price

Welfare Economics Demand Curve

-value to consumers • Prices they are willing to pay

Market Supply: Assumptions

1. All existing firms and potential entrants have identical costs. 2. Each firm's costs do not change as other firms enter or exit the market. 3. The number of firms in the market is - fixed in the short run (due to fixed costs) - variable in the long run (due to free entry and exit)

Typical Cost Curves have 3 important properties:

1. Marginal cost eventually rises with the quantity of output. 2. The average-total-cost curve is U-shaped. 3. The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.

ok

the market supply curve is the sum of the marginal cost curves of all the firms (Answer=ok)

Production Function

This is the quantity of inputs used as compared to the quantity of outputs produced when making a good

Marginal Tax Rate

This rate represents the extra taxes paid on an additional dollar of income

Efficiency Scale

This scale shows the quantity which minimizes average total cost

Marginal Cost

= Change in Total Cost/ change in quantity = Change in Variable Cost/ change in quantity

Marginal Cost

= change in total cost/ change in Q =change in variable cost/ change in Q is the increase in total cost form producing one more unit

External Cost

= value of negative impact on bystanders derived from negative externality

Social Cost

=private cost + external cost product of negative externality

Government Intervention

A city's decision to limit smoking in public areas is an example of

marginal cost equals its price

A competitive firm maximizes profits by choosing the quantity at which a) average total cost is at its minimum b) marginal cost equals its price c) average total cost equals the price d) marginal cost equals average total cost

marginal, average variable

A competitive firm's short run supply curve is its _____cost curve above its _______ cost curve a) average total cost, marginal b) average variable, marginal c) marginal, average total d) marginal, average variable

Supply Curve

A curve describing the quantities of a good a producer is willing and able to sell (produce) at alternative prices in a given time period

Marginal cost is $8, and average total cost is $5

A firm is producing 1,000 units at a total cost of $5,000. If it were to increase production to 1,001 units, its total cost would rise to $5,008. What does this information tell you about the firm?

Average total cost would decrease

A firm is producing 20 units with an average total cost of $25 and marginal cost of $15. If the firm were to increase production to 21 units, which of the following must occur?

average total cost would decrease

A firm is producing 20 units with an average total cost of $25 and marginal cost of $15. If it were to increase production to 21 units, which of the following must occur? a) marginal cost would decrease b)marginal cost would increase c) average total cost would decrease d) average total cost would increase

Total revenue exceeds total cost by the greatest amount.

A firm maximizes total profit when A. Total costs exceed total revenue by the largest amount. B. Total revenues are maximized. C. Marginal costs are greater than marginal revenues. D. Total revenue exceeds total cost by the greatest amount.

marginal cost is $8, and average variable cost is $5

A firm producing 1,000 units at a total cost of $5,000. If it were to increase production to 1,001 units, its total cost would rise to $5,008. What does this information tell you about the firm? a) Marginal cost is $5, and average variable cost is $8 b) marginal cost is $8, and average variable cost is $5

ok

A firm should shut down only if the losses from continuing production exceed fixed costs (Answer=ok)

Covers all its costs, including a provision for normal profit.

A firm that makes zero economic profits A. Must eventually go bankrupt and exit the industry. B. Does not cover its variable costs and should shut down in the short run. C. Incurs an accounting loss if fixed costs are greater than variable costs. D. Covers all its costs, including a provision for normal profit.

price is greater than or equal to AVC.

A firm will choose to operate rather than shut down as long as A) price is greater than or equal to AFC. B) AFC is greater than AVC. C) price is greater than or equal to AVC. D) AVC is greater than MC.

Competitive Firm

A firm without market power, with no ability to alter the market price of the goods it produces

$6

A firm's marginal cost has a minimum of $4, its average variable cost has a minimum of $6, and its average total cost has a minimum value of $7. Then the firm will shut down in the short run once the price of its product falls below a. $7. b. $6. c. $4. d. We do not have enough information to answer this questions.

Public Good

A good or service whose consumption by one person does not exclude consumption by others

Perfect Competition

A market in which no buyer or seller has market power

Tragedy of the Commons

A parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

takes its prices as given by market conditions

A perfectly competitive firm a) chooses its price to maximize profits b) sets its price to undercut other firms selling similar products c) takes its prices as given by market conditions d) picks the price that yields the largest market share

ok

A perfectly competitive firm is one whos output is so small in relation to market volume that its output decisions have no perceptible impact on price (Answer=ok)

Price equals marginal cost.

A perfectly competitive firm will maximize profits by choosing an output level where A. Price is greater than marginal cost. B. Price equals marginal cost. C. Price equals total cost. D. Price is greater than total cost.

Free-Rider

A person who receives the benefit of a good but avoid paying for it

ok

A productive activity reaps an economic profit only if it earns more than its opportunity cost. (Answer=ok)

loss of exactly $27

A profit-maximizing firm in a competitive market is able to sell its product for $7. At its current level of output, the firm's average total cost is $10. The firm's marginal cost curve crosses its marginal revenue curve at an output level of 9 units. The firm experiences a... a. profit of more than $27. b. profit of exactly $27. c. loss of more than $27. d. loss of exactly $27.

Coase Theorem

A proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own. They can arrive at an efficient (least cost) solution That solution may have undesirable distributional outcomes

marginal benefit is greater than average cost

A rational decision maker takes an action only if the a. marginal benefit is greater than both the average cost and the marginal cost. b. average benefit is greater than the average cost c. marginal benefit is greater than average cost d. marginal benefit is less than the marginal cost

Prisoners Dilemma

A scenario "game" played between two captured criminals. This illustrates why cooperation is difficult even when it is mutually beneficial

Cost-Benefit Analysis

A study that compares the costs and benefits to society of providing a public good

Corrective Tax

A tax designed to induce private decision makers to take into account the social costs that arise from a negative externality

Demand Curve Downward

A tax on buyers shifts the __________ _________ ____________ by the exact size of the tax.

Supply Curve Upward

A tax on sellers shifts the __________ _________ __________ by the size of the tax.

Positive Externalities

A technology spillover is a type of positive externality that exists when a firm's innovation or design not only benefits the firm, but enters society's pool of technological knowledge and benefits society as a whole. -Impact of the internet, computing technology -Created knowledge spillovers to other firms

the benefits principle

A toll is a tax on the citizens who use toll roads. This policy is best viewed as a) the benefits principle b) horizontal equity c) vertical equity d) tax progressivity

Average total cost

AFC + AVC

Long Run

ATC at any Q is cost per unit using the most efficient mix of inputs for that Q (e.g., the factory size with the lowest ATC)

Social Value Curve

Above the demand curve

all trading parties, even when some are absolutely more efficient producers than others.

According to the theory of comparative advantage, specialization and free trade will benefit

Economic Profit

Accounting profit - Implicit costs

Accounting profit = $75,000 ; economic profit = $0

Adam Weed is the owner/operator of a flower shop. Last year he earned $250,000 in total revenue. His explicit costs were $175,000 paid to his employees and suppliers (assume that this amount represents the total opportunity cost of these resources). During the year he received three offers to work for other flower shops with the highest offer being $75,000 per year. Which of the following is true about Adam's accounting and economic profit? A. Accounting profit = $75,000 ; economic profit = $0 B. Accounting profit = $175,000 ; economic profit = $75,000 C. Accounting profit = $75,000 ; economic profit = negative $100,000 D. Accounting profit = $0 ; economic profit = negative $75,000

an amount less than $100 (look at pretest for notes)

Alexander lives in an apartment building and gets a $250 benefit from playing his stereo. Mary, who lives next door to Alexander and often loses sleep due to the loud music coming from Alexander's stereo, bears a $350 cost from the noise. Mary would like to offer Alexander some money to turn down the volume on his stereo. If Mary had to hire a lawyer to draw up the contract, what is the maximum amount she could pay to the lawyer to ensure that both Alexander and Mary would benefit from the agreement? a. an amount less than $100 b. an amount between $100 and $250 c. an amount between $250 and $350 d. Any amount could result in both parties benefiting from the agreement.

Without Coase Theorem Conditions

An activity that generates a positive externality will be conducted at a level below the social optimum. This is because the activity will occur up to the level where the marginal private cost equals the marginal private benefit

Cost Benefit Analysis

An analysis that compares the costs to the benefits of providing a public good

Without Coase Theorem Conditions

An economic activity which creates a negative externality will be conducted beyond the socially optimal level. This is because the activity will occur up to the point where the marginal private benefit equals the marginal private cost, and the marginal private cost is lower than the marginal social cost

False

An economic model can accurately explain how the economy is organized because it is designed to include, to the extent possible, all features of the real world. a. TRUE b. FALSE

total deadweight loss from the tax

An optimal tax is one that minimizes the a. external benefit. b. total deadweight loss from the tax. c. income taxes. d. horizontal equity.

Decisions are made at the margin

Ana is training for a triathlon, a timed race that combines swimming, biking, and running. While Ana usually practices swimming for two hours per day, she decides to continue for an additional hour because the pool is less crowded than usual today allowing her practice time to be more productive. Which basic principle of individual choice does Ana's plan illustrate? A. Resources are scarce. B. Decisions are made at the margin. C. All decisions involve opportunity costs. D. People usually exploit opportunities to make themselves better off.

$40, $20

Andy gives piano lessons. He has the opportunity cost of $50 per lesson and charges $60. He has two students Bob who's willingness to pay is $70 and Carl who's willingness to pay is $90. When the government imposes a $20 tax on piano lessons and Andy raises the price to $80, the deadweight loss is ____ and the tax revenue is ______ a) $40, $20 b) $10, $40 c) $20, $20 d) $20, $40

​No, there are other market types where firms have considerable power to control the price.

Are all markets perfectly​ competitive? A. ​No, in other types of​ markets, sellers offer identical goods and simply accept the market price. B. ​No, there are also command and control markets that are run by a central government. C. ​No, there are other market types where firms have considerable power to control the price. D. ​Yes, any economic system with a market structure is by definition perfectly competitive.

ok

As long as price exceeds MC, additional output increases total profit (Answer=ok)

ok

As long as price exceeds minimum AVC (shutdown point), the MC curve summarizes the response of a producer to price changes: it is the short-run supply curve of a perfectly competitive firm (answer=ok)

can be thought of as the total benefit Ashley enjoys by eating two bananas minus the total benefit she would have enjoyed by eating just the first banana.

Ashley eats two bananas during a particular day. The marginal benefit she enjoys from eating the second banana... a. can be thought of as the total benefit Ashley enjoys by eating two bananas minus the total benefit she would have enjoyed by eating just the first banana. b. determines Ashley's marginal cost of the first and second bananas. c. does not depend on how many bananas Ashley has already eaten. d. cannot be determined unless we know how much she paid for the bananas.

decrease their output

Assume Dell Computer Company operates in a perfectly competitive market producing 5,000 computes per day. At this output level, marginal cost exceeds this firm's price. Assuming price exceeds average variable cost, to maximize profits Dell should _____________. A. make no adjustments as they are already maximizing their profits B. stop producing since it is earning a loss C. decrease their output D. increase their output

decrease its output but continue to produce.

Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. To maximize its profit, the firm should a. increase its output. b. continue to produce 1,000 units. c. decrease its output but continue to produce. d. shut down.

are not; are not

Assume firms break even in an industry. New investors _______ attracted to the industry and current ones ______ running away from it. A) are not; are not B) are not; are C) are; are not D) are; are

average total cost of 21 pairs of boots is $23.

At Bert's Bootery, the total cost of producing twenty pairs of boots is $400. The marginal cost of producing the twenty-first pair of boots is $83. We can conclude that the A. average variable cost of 21 pairs of boots is $23. B. average total cost of 21 pairs of boots is $15.09. C. average total cost of 21 pairs of boots is $23. D. marginal cost of the 20th pair of boots is $20.

The bottom of the U-shape

At quantity that minimizes average total cost

marginal revenue equals marginal cost.

At the profit-maximizing level of output, a. marginal revenue equals average total cost. b. marginal revenue equals average variable cost. c. marginal revenue equals marginal cost. d. average revenue equals average total cost.

ok

At the rate of output where price = MC, total profits of the firm are maximized. (Answer=ok)

ok

Average total costs decline as long as the marginal cost curve lies below the average cost curve (answer=ok)

ok

Average total costs increase whenever marginal costs exceed average costs. (answer=ok)

Costs in The Long Run vs. The Short Run

Because many costs are fixed in the short run but variable in the long run, a firm's long-run cost curves differ from its short-run cost curves In the short run, some costs are fixed. In the long run, fixed costs become variable costs

Rising marginal cost curve

Because of diminishing marginal product

Why does the free rider problem induce the government to provide public goods?

Because of the cost benefit analysis: The government can make everyone better off by providing the public good and paying for it with tax revenue opposed to potentially not having these goods (ex: light houses)

Externality

Benefits received or costs imposed on others as a result of economic activity to which they are not a party. Such activity can involve production or consumption.

Marginal Cost

Change in TP/Change in Output

Marginal Revenue

Change in total revenue/change in output

• A good Coasian solution would be for each of the 1000 residents to chip in $75, so the town can offer $75,000 to the factory to stop polluting. • Any amount between $50,000 and $100,000

Collectively, the 1000 residents of Green Valley value swimming in Blue Lake at $100,000. A nearby factory pollutes the lake water, and would have to pay $50,000 for non-polluting equipment. A. Describe a Coase-like private solution.

• High transaction cost • Large number of interested parties. Coordinating everyone is costly

Collectively, the 1000 residents of Green Valley value swimming in Blue Lake at $100,000. A nearby factory pollutes the lake water, and would have to pay $50,000 for non-polluting equipment. B. Can you think of any reasons why this solution might not work in the real world?

overused in the absence of governement

Common resources are A. Efficently Provided by market forces B. underprovided in the absence of the government C. overused in the absence of governement D. A type of natural monopoly

(i) and (ii) only

Comparing marginal revenue to marginal cost (i) reveals the contribution of the last unit of production to total profit. (ii) is helpful in making profit-maximizing production decisions. (iii) tells a firm whether its fixed costs are too high. a. (i) only b. (i) and (ii) only c. (ii) and (iii) only d. (i) and (iii) only

Externalities

Competitive market outcome is efficient, maximizes total surplus without market failures

Long-Run Marginal Cost Curve

Computed on the basis of the costs reflected in the long-run ATC curve itself. It intersects it associated average cost curve at its lowest point

Negative externalities associated with driving

Congestion, accidents, pollution

average fixed cost

Consider a firm's short-run cost curves. Which one of the following types of cost declines over the whole range of output? A) total fixed cost B) marginal cost C) average fixed cost D) total variable cost E) average variable cost

give factory owners an economic incentive to reduce pollution

Corrective taxes a. encourage consumers to avoid sales taxes by shopping online. b. are frequently used to discourage imports. c. are less efficient than direct regulation. d. give factory owners an economic incentive to reduce pollution.

Efficient Final Allocation

Firms with the lowest abatement costs reduce pollution the most

Total Fixed Cost

Cost of firm's fixed factors. The quantities of fixed factors don't change as output changes, so total fixed cost is the same at all outputs. - Total fixed cost equals the vertical distance between the TVC and TC curves. - The vertical distance between TC curve and the TVC curve equals to the total fixed cost.

Externalities

Costs (or benefits) of a market activity borne by a third party; the difference between the social and private costs (benefits) of a market activity

Variable Costs

Costs of production that change when the rate of output is altered, such as labor and material costs

Fixed Costs

Costs of production that don't change when the rate of output is altered, such as the cost of basic plants and equipment

Fixed Cost

Costs that do not vary with the quantity of output produced - For Farmer Jack, FC = $1000 for his land - Other examples: cost of equipment, loan payments, rent

High Transaction Cost

Costs that parties incur in the process of agreeing to and following through on a bargain

Variable Cost

Costs that vary with the quantity of output produced - For Farmer Jack, VC = wages he pays workers - Other example: cost of materials

Identifying a firm's loss

Determine this firm's total loss, assuming AVC < $3. Identify the area on the graph that represents the firm's loss.

Identifying a firm's profit

Determine this firm's total profit. Identify the area on the graph that represents the firm's profit.

the production function gets flatter, while the total-cost curve gets steeper

Diminishing marginal product explains why, as a firm''s output increases, a) the production function and total- cost curve both get steeper b) the production function and total-cost curve both get flatter c) the production function gets steeper, while the total-cost curve gets flatter d) the production function gets flatter, while the total-cost curve gets steeper

increasing marginal costs

Diminishing marginal returns implies ____________. A. decreasing average variable costs B. decreasing average fixed costs C. increasing marginal costs D. decreasing marginal costs

ok

Diminishing returns in production cause marginal costs to increase as the rate of output is expanded (answer=ok)

Tax Incidence

Distribution of the real burden of a tax

include both a normal rate of return on investment and the opportunity cost of each factor of production.

Economic costs A) include both a normal rate of return on investment and the opportunity cost of each factor of production. B) are equal to the direct costs of hiring all factors of production. C) are the opportunity cost of each factor of production minus any interest charges paid on borrowed funds. D) are equal to total revenue minus accounting profit.

ok

Economic profit takes both explicit and implicit costs into account, whereas accounting profit considers only explicit costs. (Answer=ok)

ok

Economic profits represent something over and above "normal profits." (Answer=ok)

average costs to increase; constant returns

Engineers for The Giffen Record Company determine that a 30% increase in all compact disc inputs will cause a 40% increase in output. Assuming that input prices remain constant, you correctly deduce that such a change in inputs will cause ______________ as output increase. This is referred to as ____________ of scale. A. average costs to decrease; economies B. average costs to increase; constant returns C. marginal costs to increase; constant returns D. average costs to remain constant; diseconomies

Policymakers

Equity and efficiency

Potential competition exists.

Even if a market is not competitive, the firms in the market may behave competitively if A. Potential competition exists. B. There are economies of scale. C. A natural monopoly exists. D. The market is regulated.

Externality

Example is Environmental pollution involves a negative externality. Pollution abatement involves a positive externality.

Total Costs

Explicit costs + Implicit costs

Total costs

FC + VC

Total Cost

Farmer Jack must pay $1000 per month for the land, regardless of how much wheat he grows. The market wage for a farm worker is $2000 per month. • So Farmer Jack's costs are related to how much wheat he produces....

Law of Supply

Firms are willing to produce and sell a greater quantity of a good when the price of the good is high. *This results in a supply curve that slopes upward

maximize; minimize

Firms earning a profit will want to ______ their profits in the short run while firms suffering losses will want to ______ their losses. A) maximize; maximize B) maximize; minimize C) minimize; maximize D) minimize; minimize

Efficiency Wages

Firms pay these above-equilibrium wages in order to increase worker productivity

A U-shaped average total cost curve implies

First marginal cost below average total cost, and then marginal cost above average total cost.

Total Cost

Fixed cost + Variable cost

Average Fixed Cost

Fixed cost divided by the quantity of output

ok

Fixed costs must be paid even if all output ceases (Answer=ok)

firm's profit-maximizing level of output is less than 100 units.

For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $7 and a marginal cost of $10. It follows that the a. production of the 100th unit of output increases the firm's profit by $3. b. production of the 100th unit of output increases the firm's average total cost by $7. c. firm's profit-maximizing level of output is less than 100 units. d. production of the101st unit of output must increase the firm's profit by more than $3.

P = AR = MR

For a perfectly competitive firm, the relationship between price (P), marginal revenue (MR), and average revenue (AR) is as follows: a) P = AR, and P > MR b) P = MR, and MR > AR c) AR = MR, and P > AR d) P = AR = MR

P>MR and MR=MC

For a profit-maximizing monopoly that charges the same price to all consumers, what is the relationship between price, marginal revenue, and marginal cost?

ok

For perfectly competitive firms, profits are maximized at the rate of output where price equals marginal cost (Answer=ok)

no legal barriers prevent a firm from entering an industry.

Free entry means that a. the government pays any entry costs for individual firms. b. government-funded research lowers the costs of patents and other barriers to entry. c. a firm's marginal cost is zero. d. no legal barriers prevent a firm from entering an industry.

ok

Further grounds for intervention arise from the tendency of costs or benefits of some market activities to "spill over" onto third parties (answer=ok)

Imports

Goods produced abroad and sold domestically are called A. imports. B. exchange rates. C. exports. D. opportunity costs.

Club Goods

Goods that are excludable but not rival in consumption (e.g. cable TV)

Public Goods

Goods that are neither excludable nor rival in consumption (e.g. tornado siren)

Externalities

Government action can sometimes improve upon market outcomes

Private Solutions to Externalities

Government action is not always needed to solve the problem of externalities. Moral codes and social sanctions Charitable organizations (Bill and Melinda Gates) Contracting between parties (Coase Theorem)

Industrial policy

Government intervention in the economy that aims to promote technology enhancing industries

Regulation

Government intervention to alter the behavior of firms-for example, in prcing, output, or advertising.

Regressive Tax

High-income taxpayers pay a smaller fraction of their income than do low-income taxpayers

Tax Liability

How much each family owes; determined by income minus dependents and deducatables

Yes

If MC<MR, should we produce another unit?

No

If MC>MR, should we produce another unit?

a one-unit decrease in output will increase the firm's profit.

If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then a. a one-unit increase in output will increase the firm's profit. b. a one-unit decrease in output will increase the firm's profit. c. total revenue exceeds total cost. d. total cost exceeds total revenue.

decreasing output would increase the firm's profit.

If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then a. average revenue exceeds marginal cost. b. the firm is earning a positive profit. c. decreasing output would increase the firm's profit. d. All of the above are correct.

a one-unit increase in output will increase the firm's profit.

If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then a. a one-unit increase in output will increase the firm's profit. b. a one-unit decrease in output will increase the firm's profit. c. total revenue exceeds total cost. d. total cost exceeds total revenue.

ok

If a competitive firm wanted to maximize its total revenue, its production decision would be simple: it would always produce at capacity. Life isn't that simple, however; *the firm's goal is to maximize profits, not revenues* (answer=ok)

It faces a downward-sloping demand curve.

If a firm can raise market price by reducing its output, then A. It has no market power. B. It faces a downward-sloping demand curve. C. It is a price taker. D. It engages in marginal cost pricing.

As much as it is capable of producing.

If a perfectly competitive firm wanted to maximize its total revenues, it would produce A. The output where MC equals price. B. As much as it is capable of producing. C. The output where the ATC curve is at a minimum. D. The output where the marginal cost curve is at a minimum.

Socially Optimal Level of Production or Consumption

Occurs when marginal social benefits equal marginal social costs

Price Discrimination

Occurs when the same good is sold at different prices to different buyers

keep producing in the short run but exit the market in the long run

If a profit maximizing, competitive firm is producing a quantity at which marginal cost is between average variable cost and average total cost, it will a) keep producing in the short run but exit the market in the long run b) shut down in the short run but return to production in the long run c) shut down in the short run and exit the market in the long run d) keep producing both in the short run and in the long run

increase its output.

If a profit-maximizing firm in a competitive market discovers that, at its current level of production, price is greater than marginal cost, it should... a. shut down. b. reduce its output but continue operating. c. continue to produce at the current levels. d. increase its output.

all firms have zero economic profits and just cover their opportunity costs.

If all firms have the same costs of production, then in long-run equilibrium, a. price exceeds average total cost for all firms. b. price exceeds marginal cost for all firms. c. some firms may earn positive economic profits. d. all firms have zero economic profits and just cover their opportunity costs.

ok

If any determinant of supply changes, the supply curve shifts (answer=ok)

earns exactly a normal rate of return.

If economic profit is zero, a firm A) earns a negative rate of return. B) will leave the industry. C) earns a positive but below normal rate of return. D) earns exactly a normal rate of return.

marginal cost of production

If firms are competitive and profit maximizing, the price of a good equals the a. marginal cost of production b. fixed cost of production c. total cost of production d. average total cost of production

Decrease

If marginal cost is below average total cost, average total cost will

average total cost is minimized

If marginal cost is equal to average total cost, then

marginal product must be falling

If marginal cost is rising,

Production

If marginal revenue exceeds marginal cost, the firm should increase

Reduced

If marginal revenue is less than marginal cost, production should be

The firm is producing units that cost more to produce than the firm receives in revenue, thus reducing profits (or increasing losses).

If price is less than marginal cost, a perfectly competitive firm should decrease output because A. Marginal costs are increasing. B. Total revenues are decreasing. C.The firm is producing units that cost more to produce than the firm receives in revenue, thus reducing profits (or increasing losses). D. Marginal revenue is decreasing.

ok

If property taxes reduce profits too much, firms may move to a low-tax jurisdiction or another industry (Answer=ok)

workers bear some of the burden of the tax

If the corporate income tax induces business to reduce their capital investments then: a) the tax does not have any dead weight loss. b) corporate shareholders benefit from the tax. c) workers bear some of the burden of the tax d) the tax achieves the goal

average variable cost is increasing

If the marginal cost curve is above the average variable cost curve, then _____________. A. average variable cost is constant B. average variable cost is decreasing C. average variable cost is increasing D. marginal cost is decreasing

Total costs must be rising.

If the marginal cost curve is rising, which of the following must be true?

False

If the marginal cost of producing the tenth unit of output is $2.50, and if the average total cost of producing the tenth unit of output is $3, then at ten units of output, average total cost is rising. a. TRUE b. FALSE

above, less

If the production of a good yields a negative externality, then the social cost curve lie_____the supply curve, and the socially optimal quantity is ______then the equilibrium quantity a) above, greater b) above, less c) below, greater d) below, less

15, 25

If the tax code exempts the first $20,000 of income from taxation and then taxes 25% of all income above that level, than a person who earns $50,000 has an average tax rate of _____percent and a marginal tax rate of _____percent. a) 15, 25 b) 25, 15 c) 25, 30 d) 30, 25

Export

If the world price is higher than the domestic price, then the country will ____________ the good.

$0

If you eat at a sushi restaurant that charges $20 for its all you can eat sushi special, then the marginal cost of your 10th piece of sushi is _____________. A. $0 B. $2 C. $200 D. $2,000

imperfectly competitive markets

In __________, with fewer firms competing and limited entry by new firms, prices will not necessarily equal marginal cost. As a consequence, in a market with firms that have some market power, where firms do not behave as price-takers, we are not guaranteed an efficient mix of output.

$2 per unit

In a competitive market the price is $8. A typical firm in the market has ATC = $6, AVC = $5, and MC = $8. How much economic profit is the firm earning in the short run? a. $0 per unit b. $1 per unit c. $2 per unit d. $3 per unit

the largest possible sum of consumer and producer surplus

In a competitive market, an efficient allocation of resources is characterized by a. a price greater than the marginal cost of production b. the possibility of further mutually beneficial transactions c. the largest possible sum of consumer and producer surplus d. a value of consumer surplus equal to that of producer surplus

Price

In a free, competitive market, what is the rationing mechanism? a. seller bias b. buyer bias c. government law d. Price

total revenue equal to total cost.

In a long-run equilibrium, the marginal firm has a. price equal to minimum marginal cost. b. total revenue equal to total cost. c. accounting profit equal to zero. d. All of the above are correct.

lose all or almost all of its customers

In a perfectly competitive​ market, if one seller chooses to charge a price for its good that is slightly higher than the market​ price, then it will​ _________. A. lose all or almost all of its customers. B. see no change in its number of customers. C. see a small decrease in its number of customers. D. All of the above are equally likely.

Coase Theorem

In a system where legal damages can be collected from a person or from a negative externality, the private market system will produce at the socially optimal level, provided property rights are well-defined and costs of negotiations are low

The Equivalence of Corrective Taxes and Pollution Permits Figure

In panel (a), the EPA sets a price on pollution by levying a corrective tax, and the demand curve determines the quantity of pollution. In panel (b), the EPA limits the quantity of pollution by limiting the number of pollution permits, and the demand curve determines the price of pollution. The price and quantity of pollution are the same in the two cases.

increase in economic efficiency because of the existence of a common-resource problem.

In the 1960s, the lobstering community of Port Lincoln on Australia's southern coast set a limit on the number of traps that could be set and then sold licenses for those traps. Since then, any newcomer could enter the business only by buying a license from another lobsterman. This government intervention in the lobster market caused an a) increase in economic efficiency because of the existence of a positive externality. b) decrease in economic efficiency because of the existence of a free-rider problem. c) decrease in economic efficiency because of the existence of a common-resource problem. d) increase in economic efficiency because of the existence of a common-resource problem.

30

In the U.S. tax payers in the top 1% of the income distribution pay about___ percent of their income in federal taxes a) 5 b) 10 c) 20 d) 30

constant returns to scale because average total cost is constant as output rises

In the long run a company that produces and sells kayaks incurs total costs of $15,000 when output is 30 kayaks and $20,000 when output is 40 kayaks. The kayak company exhibits a. diseconomies of scale because total cost is rising as output rises. b. constant returns to scale because average total cost is constant as output rises. c. diseconomies of scale because average total cost is rising as output rises. d. economies of scale because average total cost is falling as output rises.

P=MC and P=ATC

In the long run equilibrium of a competitive market with identical firms, what is the relationship between price P, Marginal cost MC, and average total cost ATC? a) P> MC and P> ATC b) P> MC and P=ATC c) P=MC and P>ATC d) P=MC and P=ATC

will earn zero economic profits but positive accounting profits. (look at pretest for notes)

In the long run, assuming that the owner of a firm in a competitive industry has positive opportunity costs, she a. should exit the industry unless her economic profits are positive. b. will earn zero accounting profits but positive economic profits. c. will earn zero economic profits but positive accounting profits. d. should ignore opportunity costs because they are a type of sunk cost that disappears in the long run.

diseconomies of sale

In the long run, when marginal cost is above average total cost, the average total cost curve exhibits a. constant returns to scale. b. efficient scale. c. economies of sale. d. diseconomies of sale.

Pollution and the Social Optimum Figure

In the presence of a negative externality, such as pollution, the social cost of the good exceeds the private cost. The optimal quantity, QOPTIMUM, is therefore smaller than the equilibrium quantity, QMARKET.

Education and the Social Optimum Figure

In the presence of a positive externality, the social value of the good exceeds the private value. The optimal quantity, QOPTIMUM, is therefore larger than the equilibrium quantity, QMARKET.

all firms have costs that they must bear regardless of their output

In the short run A) existing firms do NOT face limits imposed by a fixed factor of production. B) all firms have costs that they must bear regardless of their output. C) new firms can enter an industry. D) existing firms can exit an industry.

marginal cost curve above its average variable cost curve.

In the short-run, a firm's supply curve is equal to the... a. marginal cost curve above its average variable cost curve. b. marginal cost curve above its average total cost curve. c. average variable cost curve above its marginal cost curve. d. average total cost curve above its marginal cost curve.

false, because corporations will decrease investments, wages will fall and prices for the goods produced will rise

Increasing the corporate income tax rate is a good way to raise government revenue because it affects only the corporations and not the people.' This statement is likely: a) false, because corporations will decrease investments, wages will fall and prices for the goods produced will rise b) true, because corporations are not people c) true, because corporations will increase investments to avoid paying the higher tax d) false, because corporations are people

Current Tax System

Individual income tax - Tax the amount of income people earn - Discourages people from working as hard - Discourages people from saving

Internalizing an externality

Involves altering incentives so that people take account of the external effects of their actions. -achieving the social optimal output -The government can internalize an externality by imposing a tax on the producer to reduce the equilibrium quantity to the socially desirable quantity.

Profit Maximization Rule

Produce at that rate of output where marginal revenue equals marginal cost

profit maximization rule

Produce at that rate of output where marginal revenue equals marginal cost

Average Cost

It tells the firm what the profit per unit produced is.

$15.50

Labor is the only variable input for Elliot's dog-walking service. His labor costs are $300 a day and his service walks 25 dogs per day. His labor costs increase to $315.50 a day to walk 26 dogs per day. The marginal cost of walking that 26th dog is ___________. A. $15.50 B. $19.50 C. $29.50 D. indeterminate from the information given

$0

Lashondra is the owner/operator of an interior design firm. Last year she earned $400,000 in total revenue. Her explicit costs were $200,000 (assume that this amount represents the total opportunity cost of these resources). During the year she received offers to work for other design firms. One offer would have paid her $120,000 per year and the other would have paid her $130,000 per year. Lashondra's economic profit is equal to A. -$50,000 B. $70,000 C. $0 D. $200,000

make more than 20 wedding cakes per month.

Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $200. In order to maximize profits, Laura should... a. make more than 20 wedding cakes per month. b. make fewer than 20 wedding cakes per month. c. continue to make 20 wedding cakes per month. d. We do not have enough information with which to answer the question.

Constant returns to scale

Long-run average total cost stays the same as the quantity of output changes

ok

MC curve doesn't move when property taxes are imposed (Answer=ok)

ok

MC<ATC = ↓ATC MC>ATC = ↑ATC (answer=ok)

Supply

MC<ATC=↓ATC MC>ATC=↑ATC

Demand

MC<MR=Produce another unit MC>MR=don't produce another unit

Profit-Maximizing Point

MR = MC = Price

Shut Down

MR<AVC=Shutdown AVC<MR<ATC=suffers loss but continues producing MR>ATC=firm makes profit

workers and customers bear much of the burden of the corporate income tax.

Many economists believe that a. the corporate income tax satisfies the goal of horizontal equity. b. the corporate income tax does not distort the incentives of customers. c. the corporate income tax is more efficient than the personal income tax. d. workers and customers bear much of the burden of the corporate income tax.

Marginal Social Cost

Marginal Cost + Marginal External Cost

average total cost

Marginal Cost intersects ___________ at its minimum. A. total cost B. average total cost C. average fixed cost D. B and C are both correct

Perfect Competition

Marginal Revenue (MR)=price (P), since the firm is a price taker. The perfectly competitive firm, therefore, expands production to the point where marginal cost equals price. Likewise, marginal revenue is equal to average revenue, which is the same as the demand curve

Supply Curve

Marginal cost curve is a firm's ________ curve

amount by which total cost rises when output is increased by one unit

Marginal cost tells us the a. value of all resources used in a production process. b. marginal increment to profitability when price is constant. c. amount by which total cost rises when output is increased by one unit. d. amount by which output rises when labor is increased by one unit.

Social Demand

Market demand ± Externalities

Total Cost

Market value of the inputs a firm uses in production

Entrepreneur

Michael Dell was the first individual who sold computers by mail order. The company founded by Dell is now one of the largest and most successful computer companies in the United States. Michael Dell would be classified as a(n)

the marginal cost curve eventually rises w. the quantity of output

One of the most important properties of cost curves is that a.) the average fixed cost curve must eventually rise b.) the marginal cost curve eventually rises w. the quantity of output c.) the average total cost curve first rises, then falls with increased output d.) for most producers, the average total cost curve never crosses the marginal cost curve

taxes affect the decisions that people make

One reason that deadweight losses are so difficult to avoid is that a. taxes affect the decisions that people make. b. income taxes are not paid by everyone. c. consumption taxes must be universally applied to all commodities. d. the administrative burden is hard to calculate.

income quintile

One-fifth of the population, rank-ordered by income

MB>MC

Output is lower than efficient level

ok

Output should not be increased if MC exceeds price (Answer=ok)

short-run competitive equilibrium

P=MC

long-run competitive equilibrium

P=MC-minimum ATC

Who pays the corporate income tax?

People pay all taxes • Change in corporate tax rate - President Donald Trump, 2017(proposed) - Current corporate tax rate: 35% - Proposed corporate tax rate: 20%

Who pays the corporate income tax?

People pay all taxes • Tax on a corporation - Corporation - more like a tax collector than taxpayer - Burden of the tax ultimately falls on people - Workers and customers bear much of the burden of the corporate income tax

Who pays the corporate income tax?

People pay all taxes • Tax on a corporation - Popular because it appears to be paid by rich corporations

Property Tax

Percentage of estimated value of land and structures - paid by property owners; Tax collected by state and local government

Sales Tax

Percentage of total amount spent at retail stores; Tax collected by state and local governments

There are many firms, none of which has a significant share of total output.

Perfectly competitive firms cannot individually affect market price because A. There is an infinite demand for their goods. B. Demand is perfectly inelastic for their goods. C. There are many firms, none of which has a significant share of total output. D. The government exercises control over the market power of competitive firms.

what price to charge for its output.

Perfectly competitive firms must make all of the following decisions EXCEPT A) how much output to supply. B) which production technology to use. C) how much of each input to demand. D) what price to charge for its output.

long run average cost

Positive economic profits exists for a firm in the long run if price is above a. long run average cost b. long run marginal cost c. long run total cost d. long run variable cost

no change in the short run, down in the long run

Pretzel stands in NYC are a perfectly competitive industry in long run equilibrium. One day, the city starts imposing a $100 per month tax on each stand. How does this policy affect the number of pretzels consumed in the short run and in the long run? a) down in the short run and no change in the long run b) up in the short run, no change in the long run c) no change in the short run, down in the long run

Decrease output

Price < MC

Maintain output (profits maximized)

Price = MC

Increase output

Price > MC

social value exceeds the private value at the private market solution (look at pretest for notes)

Private markets fail to reach a socially optimal equilibrium when positive externalities are present because the a. private benefit equals the social benefit at the private market solution. b. private cost exceeds the private benefit at the private market solution. c. social value exceeds the private value at the private market solution. d. private cost exceeds the social benefit at the private market solution.

average total cost of production

Profit maximizing firms in competitive industries with free entry and exit face a price equal to the lowest possible a. marginal cost of production b. fixed cost of production c. total cost of production d. average total cost of production

P - ATC

Profit per unit is equal to A. TR - TC. B. P - MR. C. P - ATC. D. TR - ATC.

Patent law

Protect the rights of inventors by giving them exclusive use of their inventions for a period of time

underprovided in the absence of the government

Public goods are A. Efficently Provided by market forces B. underprovided in the absence of the government C. overused in the absence of governement D. A type of natural monopoly

Profit-maximization

Q where MC = MR - Perfect competition: P = MR - So, in the competitive equilibrium: P = MC

Efficient Scale

Quantity of output that minimizes ATC

$50, $10 accounting: total revenue ($60) minus explicit costs ($10) = $50 economic: total revenue ($60) minus (explicit (10) + implicit ($40))= $10

Raj opens up a lemonade stand for two hours. He spends $10 for ingredients and sells $60 worth of lemonade. In the same two hours, he could have mowed his neighbor's lawn for $40. Raj has an accounting profit of _____and an economic profit of_________ a) $50, $10 b) $90, $50 c) $10, $50 d) $50, $90

Funds from the federal government

Redistributes funds from high-income states (which pay more taxes) to low-income states (which receive more benefits); Tax collected by state and local government

$1.60 and 42 units, respectively (look at pretest for notes)

Refer to Figure 10-1. This graph represents the tobacco industry. Without any government intervention, the equilibrium price and quantity are a. $1.90 and 38 units, respectively. b. $1.80 and 35 units, respectively. c. $1.60 and 42 units, respectively. d. $1.35 and 58 units, respectively.

zero economic profits in the short run (look at pretest for notes)

Refer to Figure 14-1. If the market price is $6.30, the firm will earn a. positive economic profits in the short run. b. negative economic profits in the short run but remain in business. c. negative economic profits and shut down. d. zero economic profits in the short run.

less than $6.30 but more than $4.50 (look at pretest for notes)

Refer to Figure 14-1. The firm will earn a negative economic profit but remain in business in the short run if the market price is a. above $6.30 but less than $8. b. above $6.30. c. less than $6.30 but more than $4.50. d. less than $4.50.

60,000 (200×300=60,000)

Refer to Figure 14-9. If there are 300 identical firms in this market, what level of output will be supplied to the market when price is $2.00? a. 300 b. 6,000 c. 30,000 d. 60,000

$3

Refer to Figure 7.1. A corn producer's profit is $200 and is producing 100 bushels of corn. Then he must have a cost per bushel of A) $1 B) $2 C) $3 D) $4

$500;$300

Refer to Figure 7.1. This corn producer produces 100 bushels of corn and sells each bushel at $5.The cost of producing each bushel is $2.This corn producerʹs total revenue is ________ and profit is________. A) $200;$300. B) $300;$200 C) $500;$200 D) $500;$300

180

Refer to Figure 7.1.This corn producer earns a total revenue of $900. Each bushel of corn is sold for $5. This corn producer must be selling ________ bushels of corn. A) 180 B) 450 C) 900 D) 4,500

$105 and $30 respectively (150-45=105; 75-45=30)

Refer to Table 12-1. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual unit cost of providing a weekend of skiing. How much consumer surplus accrues to Anna and Clem individually? a. $125 and $20 respectively b. $105 and $30 respectively c. $85 and $40 respectively d. $65 and $50 respectively

$12,650 (look at pretest for notes)

Refer to Table 12-6. For this tax schedule, what is the total income tax due for an individual with $49,000 in taxable income? a. $12,650 b. $14,370 c. $15,960 d. $16,220

$1.00 (look at pretest for notes)

Refer to Table 13-15. What is average fixed cost when output is 40 units? a. $1.00 b. $3.32 c. $5.00 d. $8.00

$480 (look at pretest for notes)

Refer to Table 14-6. What is the total revenue from selling 4 units? a. $120 b. $257 c. $317 d. $480

E + F

Refer to the figure. If the per-unit tax is placed on the good in the market, the deadweight loss is the area: a) B + C b) B + C + E + F c) A + B + C + D d) E + F

a tax equal to P1 - P3

Refer to the figure. Which of the following would improve economic efficiency in the market?: a) a tax equal to P1 - P3 b) a tax equal to P0 - P4 c) a subsidy equal to P1 - P3 d) a subsidy equal to P0 - P4

12 units of output

Refer to the table. The marginal product from hiring the third worker is a) 88 units of output b) 50 units of output c) 16.7 units of output d) 12 units of output

Public Policy: Regulation

Regulate behavior directly: making certain behaviors either required or forbidden - Cannot eradicate pollution

$30,000.

SCENARIO 7.1: You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year. Refer to Scenario 7.1. Your accounting profit last year was A) $10,000. B) $30,000. C) $50,000. D) $60,000.

-$10,000

SCENARIO 7.1: You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year. Refer to Scenario 7.1. Your economic profit last year was A) -$40,000. B) -$10,000. C) $10,000. D) $30,000.

$40,000.

SCENARIO 7.1: You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year. Refer to Scenario 7.1. A yearly normal rate of return for your computer software firm would be A) $20,000. B) $40,000. C) $60,000. D) $100,000.

$100,000.

SCENARIO 7.1: You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year. Refer to Scenario 7.1. During the year your economic costs were A) $40,000. B) $60,000. C) $100,000. D) $130,000.

zero (look at pretest on how to solve it)

Scenario 12-3: Suppose Roger and Regina receive great satisfaction from their consumption of cheesecake. Regina would be willing to purchase only one slice and would pay up to $8 for it. Roger would be willing to pay $11 for his first slice, $9 for his second slice, and $5 for his third slice. The current market price is $5 per slice. Refer to Scenario 12-3. Assume that the government places a $2 tax on each slice of cheesecake and that the new equilibrium price is $7. What is the deadweight loss of the tax? a. zero b. $3 c. $6 d. $8

$3 (Consumer Surplus= WTP-Price Actually Paid: 8-5=3)

Scenario 12-3: Suppose Roger and Regina receive great satisfaction from their consumption of cheesecake. Regina would be willing to purchase only one slice and would pay up to $8 for it. Roger would be willing to pay $11 for his first slice, $9 for his second slice, and $5 for his third slice. The current market price is $5 per slice. Refer to Scenario 12-3. How much consumer surplus does Regina receive from consuming her slice of cheesecake? a. $3 b. $5 c. $9 d. $12

$1,000.

Scenario 14-1 Assume a certain firm in a competitive market is producing Q = 1,000 units of output. At Q = 1,000, the firm's marginal cost equals $15 and its average total cost equals $11. The firm sells its output for $12 per unit. Refer to Scenario 14-1. At Q = 1,000, the firm's profits equal a. -$200. b. $1,000. c. $3,000. d. $4,000.

Externality

Second hand cigarette smoke is an example of a(n) ________. A) economy of scale B) externality C) public good D) government failure

because it allows specialization, which increases total output

Senator Bright, who understands economic principles, is trying to convince workers in her district that trade with other countries is beneficial. Senator Bright should argue that trade can be beneficial A. because it allows specialization, which increases total output. B. only if it allows us to obtain things that we couldn't make for ourselves. C. in only a limited number of circumstances because others are typically self-interested. D. to us if we can gain and the others involved in the trade lose.

Optimal Quantity Price External Cost = Supply Quantity

Set Social Cost = Demand (private value) where social cost = private cost (supply curve) + External cost

Marginal revenue is equal to marginal cost.

Short-run profits are maximized at the rate of output where A. Average total costs are minimized. B. Total revenue is maximized. C. Marginal revenue is zero. D. Marginal revenue is equal to marginal cost.

Total Cost Curve

Shows graphical relationship between the quantity a firm can produce and its costs determines pricing decisions

Firm's decision

Shut down if TR < VC (or P <AVC)

P = MC

Since we want to expand output when price exceeds MC and contract output if price is less than MC, the profit maximizing rate of output is easily found.

Positive Externalities

Socially optimal quantity is greater than market equilibrium quantity

fixed costs

Some costs do not vary with the quantity of output produced. Those costs are called a.) fixed costs b.) marginal costs c.) average costs d.) incurred costs

Problems with Private Solutions to Externalities

Sometimes the approach fails because transaction costs can be so high that private agreement is not possible/difficult to negotiate/hard to assign property rights

$360,000

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual explicit costs for the firm described above? A. $450,000 B. $160,000 C. $90,000 D. $360,000

Regressive Tax

This tax system allows high-income taxpayers to pay a small fraction of the low-income tax rate

experience losses but will continue to produce rubber bands

Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, in the short run the firm will a. experience losses but will continue to produce rubber bands. b. shut down. c. earn both economic and accounting profits. d. raise the price of its product.

Marginal tax rate: • From 0 to $9,075 = 10% • From $9,076 to $36,900 = 15% • From $36,901 to $89,350 = 25% Total tax paid= • 9075 * 0.1 = 907.5 • (36900 - 9076) * 0.15 = 4173.6 • (50000 - 36901) * 0.25 = 3274.75 • 907.5 + 4173.6 + 3274.75 = 8355.85 Average tax rate = total tax paid / taxable income = 8355.85 / 50000 = 0.167

Suppose an unmarried taxpayer's total taxable income is $50,000 in 2014. What is this taxpayer's average tax rate?

Both

Suppose that a country that has a high average wage level agrees to trade with a country that has a low average wage level. Which country can benefit? A. only the one with a high level of output per person. B. both C. only the one with a low level of output per person. D. neither

diseconomies of scale (look at pretest for notes)

Suppose that a firm's long-run average total costs of producing small commuter jet airplanes increases as it produces between 2,000 and 4,000 airplanes. For this range of output, the firm is experiencing a. economies of scale. b. constant returns to scale. c. diseconomies of scale. d. specialization.

$35

Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero when no workers are hired. In addition, suppose that the average total cost when 5 units of output are produced is $30, and the marginal cost of the sixth unit of output is $60. What is the average total cost when six units are produced? a. $10 b. $25 c. $30 d. $35

Progressive

Suppose that if your income is $100,000, your tax is $20,000, but if your income is $200,000 your tax is $45,000. Such a tax is:

Proportional

Suppose that if your income is $20,000, your tax is $4,000, but if your income is $40,000, your tax is $8,000. Such a tax is

Regressive

Suppose that if your income is $50,000, your tax is $5,000, but if your income is $100,000, your tax is $8,000. Such a tax is:

The $100 you paid for the jazz festival ticket should be irrelevant in you decision making, because it is a sunk cost.

Suppose that you purchased a ticket to a jazz festival for $100 a month ago. Last week someone invited you to a hockey game on the same night as the jazz festival. You would much rather go to the hockey game than the jazz festival. YOu have tried unsuccessfully to sell the jazz festival ticket. Which of the following statements regarding this situation is correct? You should base you decision on whether or not the hockey game will provide you with more than $100 in satisfaction. The $100 you paid for the jazz festival ticket should be irrelevant in you decision making, because it is a sunk cost. The $100 jazz festival ticket should be irrelevant in you decision making, because it represents the marginal cost of attending the hockey game. The $100 you paid for the jazz festival ticket is relevant to the decision, as this represents the opportunity cost of attending the hockey game.

Average total cost

TC/q

Average Revenue

TR / Q - Total revenue divided by the quantity sold

Total Revenue

TR = P × Q - Amount a firm receives for the sale of its output - Quantity of output the firm produces times the price at which it sells its output

Value-added tax (VAT)

Tax is collected in stages as the good is being produced

Corrective taxes

Taxes enacted to correct the effects of a negative externality. Ex: If the EPA decides it wants to reduce the amount of pollution coming from a specific plant. The EPA could -tell the firm to reduce its pollution by a specific amount (i.e. regulation). NAAQS or... -levy a tax of a given amount for each unit of pollution the firm emits (i.e. Pigovian tax). Gas tax, cigarette tax

Equivalent

Taxes levied on sellers and a tax levied on buyers is

Ability-to-Pay Principle

Taxes should be levied on a person according to how well that person can shoulder the burden

Average total cost curve downward.

Technological changes that increase productivity shift the A. Production function downward. B. Average total cost curve downward. C. Marginal cost curve upward. D. Marginal physical product curve downward.

Average total cost curve downward

Technological changes that increase productivity shift the A: Production function downward B: Average total cost curve downward C: Marginal cost curve upward D: Marginal physical product curve downward

The Short-Run Individual Supply Curve of the Firm

That portion of the marginal cost curve above its intersection with the average variable cost curve. The quantity produced at the intersection between marginal cost and the demand curve is equilibrium quantity. Since the firm will shut down if the demand curve is below the average variable cost curve, this portion of the marginal cost curve is not part of the supply curve of the firm

Progressive Tax

This tax system demands high-income tax payers pay a larger fraction of their income than low-income taxpayers

transaction cost make negotiating difficult

The Coase Theorem does NOT apply if a) there is a significant externality between two parties b) the court system vigorously enforces all contracts c) transaction cost make negotiating difficult d) both parties understand the externality fully

ok

The MC curve intersects the ATC curve at its lowest point (answer=ok)

$50

The Oh So Humble Bakery sells 300 muffins at a price of $1 per muffin. Its explicit costs for producing 300 muffins are $250. If the bakery is earning a normal rate of return, then implicit costs must be A) $50. B) $100. C) $250. D) $350.

indeterminate from this information.

The Oh So Humble Bakery sells 300 muffins at a price of $1 per muffin. Its explicit costs for producing 300 muffins are $250. The Oh So Humble Bakery's economic profits are A) $35. B) $50. C) $250. D) indeterminate from this information.

produce zero cakes and just pay fixed costs

The Specialty Cake Store, a monopolistically competitive firm, is producing 200 decorated cakes per day and selling each cake for $12. At that production level ATC is $20, AVC is $15, AFC is $5, and both MR and MC are $8. This firm should _________________. A. produce zero cakes and just pay fixed costs B. decrease output to the point where marginal cost equals average cost C. increase output to the point where price equals marginal cost D. continue to produce 200 cakes, as price is greater than AFC

$3,500

The Sweet Success Bakery sells 400 cakes at a price of $10 per cake. Its total economic costs for producing 400 cakes are $500. The Sweet Success Bakery's economic profits are A) $100. B) $3,500. C) $4,500. D) indeterminate from this information.

Shut down and produce zero sandwiches because price is less than AVC

The Taste Freeze Ice Cream Company is a perfectly competitive firm producing where MR = MC. The current market price of an ice cream sandwich is $5.00. Taste Freeze sells 200 ice cream sandwiches. Its AVC is $8.00 and its AFC is $3.00. What should Taste Freeze do? A) Continue to produce because price exceeds AFC B) Shut down and produce zero sandwiches because price is less than AVC C) Decrease production so that AVC will decrease D) Increase production so that AFC will decrease

individual income taxes, social insurance taxes, corporate income taxes

The U.S. federal government collects taxes in a number of ways. Rank the following sources of revenue from the largest to the smallest. a. corporate income taxes, individual income taxes, social insurance taxes b. social insurance taxes, individual income taxes, corporate income taxes c. individual income taxes, social insurance taxes, corporate income taxes d. individual income taxes, corporate income taxes, social insurance taxes

$3,500.

The Wax Works sells 400 candles at a price of $10 per candle. The Wax Works' total costs for producing 400 candles are $500. The Wax Works' economic profit is A) -$100. B) $3,500. C) $4,500. D) indeterminate from this information.

-$100

The Wax Works sells 400 candles at a price of $6 per candle. The Wax Works' total costs for producing 400 candles are $2,500. The Wax Works' economic profit is A) -$100. B) $0. C) $2,400. D) $2,500.

Declines as long as output increases

The average fixed cost (AFC) curve a) Is U-shaped as a result of diminishing returns b) Declines as long as output increases c) Is intersected at its minimum point by marginal cost d) Intersects the marginal cost curve at its minimum point

always declines with increased levels of output.

The average fixed cost curve A. declines as long as it is above marginal cost. B. always rises with increased levels of output. C. always declines with increased levels of output. D. declines as long as it is below marginal cost.

Marginal cost is less than average total cost.

The average total cost (ATC) curve will be negatively sloped so long as

Marginal cost is less than average total cost

The average total cost curve will be negatively sloped so long as A: Average variable cost is less tan average total cost B: Marginal cost is greater than average cost C: Average fixed cost is less than average total cost D: Marginal cost is less than average total cost

Cost curves and their shapes

The average total-cost curve is U-shaped. At very low levels of output average total cost is high because fixed cost is spread over only a few units. Average total cost declines as output increases. Average total cost starts rising because average variable cost rises substantially

Marginal Revenue

The change in total revenue divided by the change in quantity.

Private Cost

The costs of an economic activity directly borne by the intermediate producer or consumer (excluding externalities)

Marginal Cost Curve

The curve crosses the average total cost curve and the average variable cost curve at their minimum points

Horizontal

The demand curve confronting a perfectly competitive firm is

Market for Aluminum Figure

The demand curve reflects the value to buyers, and the supply curve reflects the costs of sellers. The equilibrium quantity, QMARKET, maximizes the total value to buyers minus the total costs of sellers. In the absence of externalities, therefore, the market equilibrium is efficient.

Public Goods

The federal government's role as the provider of national defense is justified by considerations of

Externalities

The field of environmental economics is concerned with ________. A) externalities B) public goods C) government inefficiency D) economies of scale

Government Intervention

The free-rider problem associated with public goods is one justification for

Social Cost

The full resource costs of an economic activity, including externalities

$50

The government auctions off 500 units of pollution rights. They sell for $50 per unit, raising total revenue of $25,000. This policy is equivalent to a corrective tax of _____per unit of pollution a) $10 b) $50 c) $450 d) $500

average total cost and average fixed cost

The government imposes a $1,000 per year license fee on all pizza restaurants. Which cost curves shift as a result a) average total cost and marginal cost b) average total cost and average fixed cost c) average variable cost and marginal cost d) average variable cost and average fixed cost

both public goods and common resources (look at pretest for notes)

The idea that "externalities arise because something of value has no price attached to it" is associated with a. public goods, but not with common resources. b. common resources, but not with public goods. c. both public goods and common resources. d. neither public goods nor common resources.

Benefits Principle

The idea that people should pay taxes based on the benefits they receive from government services

Marginal Product

The increase in output which arises from the addition of a single unit to a specific input, holding all other inputs constant

Marginal Cost

The increase in total cost associated with a one-unit increase in production

Marginal Cost

The increase in total cost when producing every additional unit

ok

The inducement to take on the added responsibilities of owning and operating a business if the potential for economic profit (answer=ok)

profit is maximized

The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which a. total revenue is equal to variable cost b. total revenue is equal to fixed cost c. total revenue is equal to total cost d. profit is maximized

Negative Externalities on graphs

The intersection of the demand curve and the social-cost curve determines the optimal output level. -The socially optimal output level is less than the market equilibrium quantity.

Positive Externalities on graphs

The intersection of the supply curve and the social-value curve determines the optimal output level. The optimal output level is more than the equilibrium quantity. The market produces a smaller quantity than is socially desirable. The social value of the good exceeds the private value of the good.

personal income tax

The largest source of revenue for the federal government is the a) corporate income tax b) sales tax c) social insurance tax d) personal income tax

What explains the shape of the marginal product and marginal cost curves?

The law of diminishing marginal returns explains the shape of the marginal product curve. Specialization causes the curve to initially increase, then when the resources are over utilized, the curve drops off. The law of diminishing marginal returns explains the marginal cost curve. Specialization causes the curve to decrease initially, but then it increases.

Is the short-run supply curve for a competitive firm at prices above the AVC curve.

The marginal cost curve A. Is not affected by changes in the price of variable inputs. B. Slopes downward to the right as output increases. C. Is the long-run supply curve for a competitive firm at prices below the AVC curve. D. Is the short-run supply curve for a competitive firm at prices above the AVC curve.

ATC

The marginal cost curve intersects the minimum of the curve representing A: TC B: ATC C: AFC D: MPP

who would leave the market first if the price were any lower, and the marginal buyer is the buyer who would leave the market first if the price were any higher.

The marginal seller is the seller a. for whom the marginal cost of producing one more unit of output is the lowest among all sellers, and the marginal buyer is the buyer for whom the marginal benefit of one more unit of the good is the highest among all buyers. b. who supplies the smallest quantity of the good among all sellers, and the marginal buyer is the buyer who demands the smallest quantity of the good among all buyers. c. who would leave the market first if the price were any lower, and the marginal buyer is the buyer who would leave the market first if the price were any higher. d. who has the largest producer surplus, and the marginal buyer is the buyer who has the largest consumer surplus.

Externalities

The market responds to consumer demands, not externalities. Smokers demand qM cigarettes at the equilibrium price PM. But external costs on nonsmokers imply that the social demand for cigarettes is less than (below) market demand. The socially optimal level of output is qO, less than the market output qM.

ok

The market will underproduce goods that yield extra benefits and overproduce those that generate external costs (Answer=ok)

all of the above are possible

The mayor of workerville proposes a local payroll tax to fund a new water park for the city. The mayor proposes to collect half the tax from workers and half the tax from firms. Workers will bear A. an equal share of the tax in comparison to firms B. a greater share of the tax in comparison to firms C. a smaller share of the tax in comparison to firms D. all of the above are possible

Externalities

The negative costs and positive benefits of a market activity borne by a third party.

Marginal cost pricing

The offer (supply) of goods at prices equal to their marginal cost

Normal Profit

The opportunity cost of capital; zero economic profit

Proportional Tax

This tax system uses a single fractional rate, regardless of income

P > MC

The opposite is true when price exceeds MC. If an extra unit brings in more revenue than its costs to produce, it is adding to total profit. Total profits must increase in this case. Hence a competitive firm wants to expand the rate of production whenever price exceeds MC.

ok

The output decision has to be based not only on the capacity to produce (the production function) but also on the costs of production (the cost functions) (answer=ok)

Tragedy of the Commons

The overuse of a common resource relative to its economically efficient use is called a. the free rider problem. b. the Tragedy of the Commons. c. a public good. d. cost-benefit analysis.

Case of Cigarettes

The price someone is willing to pay for a pack of cigarettes reflects the amount of satisfaction a smoker anticipates from its consumption. If that price is high enough, tobacco companies will produce the cigarettes demanded. That is how market-based price signals are supposed to work. In this case, however, the price paid isn't a satisfactory signal of the product's desirability. The smoker's pleasure is offset in part by nonsmokers' displeasure. In this case, smoke literally spills over onto other consumers, causing them discomfort, ill health, and even death. Yet their loss isn't reflected in the market price: the harm caused to nonsmokers is external to the market price of cigarettes.

Nations

The principle that "trade can make everyone better off" applies to interactions and trade between A. states within the United States. B. nations. C. families. D. All of the above are correct

Excludability

The property of a good whereby a person can be prevented from using it

Efficient Scale

The quantity that minimizes average total cost. The bottom of the U-shaped ATC curve occurs at the quantity that minimizes average total cost

Short-Run Profit Maximization Rules for Competitive Firm

The relationship between price and marginal cost dictates short-run production decisions. For competitive firms, profits are maximized at that rate of output where price = MC

The equilibrium rent on office space has just increased by $500/month. Determine the effects on accounting profit and economic profit if:

The rent on office space increases $500/month. a) You rent your office space. • Explicit costs increase $500/month. Accounting profit & economic profit each fall $500/month. b) You own your office space. • Explicit costs do not change, so accounting profit does not change. • Implicit costs increase $500/month (opp. cost of using your space instead of renting it) so economic profit falls by $500/month.

Firms choose to produce up to the point MR=MC

The revenue from the marginal unit (marginal revenue [MR]) is equal to the cost of producing the marginal unit (marginal cost [MC])

ok

The shape of the marginal cost curve provides a basic foundation for the law of supply. Because marginal costs tend to rise as output expands, an increase in output makes sense only if the price of that output rises. If the price does rise, it's profitable to increase the quantity supplied (answer=ok)

Law of diminishing returns.

The shape of the marginal cost curve reflects the

Diminishing Marginal Product of Production Function

The slope of the production function measures the marginal product of an input, such as a worker. When the marginal product declines, the production function becomes flatter.

corrective tax

The tax on cigarettes is an example of a. a consumption tax. b. a corrective tax. c. an income tax. d. a command-and-control policy.

Marginal Tax Rate

The tax rate imposed on the last (marginal) dollar of income

Market Supply

The total quantities of a good that sellers are willing and able to sell at alternative prices in a given time period, ceteris paribus

Implicit Costs

These costs do not require a cash outlay (Ex. Opportunity costs)

Explicit Costs

These costs require an outlay of money

Public Goods

These goods are NOT excludable and do NOT rival in consumption (Ex. National defense)

Value of the Marginal Product

This is represented by an input's marginal product as compared to the cost of output produced

Marginal Product of Labor

This is represented by the increase in output from the addition of a single unit of labor

Marginal Cost

To produce one more pair of jeans, we need the denim itself and a very small amount of additional labor. These are the extra or added costs of increasing output by one pair of jeans per day. To compute the dollar value of these marginal costs, we could determine the market price of denim and labor and then add them up.

benefit both Steve and Tom

Tom produces baseball gloves and baseball bats. Steve also produces baseball gloves and baseball bats, but Tom is better at producing both goods. In this case, trade could A. benefit both Steve and Tom. B. benefit Steve, but not Tom. C. benefit Tom, but not Steve. D. benefit neither Steve nor Tom.

profit

Total Revenue Minus Total Cost Is Equal To A) the rate of return. B) marginal revenue. C) profit. D) net cost.

ok

Total costs increase as output expands. But the rate of cost increase varies.* (answer=ok)

Government Debt

Total deficit/surplus over U.S. history

(price minus average cost) times quantity of output.

Total profit for a firm is calculated as a. marginal revenue minus average total cost. b. average revenue minus average total cost. c. marginal revenue minus marginal cost. d. (price minus average cost) times quantity of output.

Profit

Total revenue minus total cost

Firm in a competitive market

Tries to maximize profit

True

True or False: Average total cost and marginal cost are merely ways to express info that is already contained in a firms total cost

False

True or False: IF the marginal cost curve is rising, so is the average total cost curve

False

True or False: Implicit costs are irrelevant for decisions in the short run.

True

True or False: Sunk costs are irrelevant for decisions in the short run.

True

True or False: Taxes create market inefficiencies that can be measured as deadweight loss.

True

True or False: The costs of taxes to taxpayers include the tax payment itself, the deadweight losses, and the administrative burdens.

MC > P

We don't want to produce an additional unit of output if its MC exceeds its price. If MC exceeds price, we're spending more to produce that extra unit than we're getting back: total profits will decline if we produce it.

MC=MB

When a competitive market is in equilibrium, what is the economically efficient level of output?

Domestic Producers; Domestic Consumers

When a country allows trade and becomes an exporter of a good, ___________________________ of the good are better off and _____________________________ of the good are worse off.

Domestic Consumers; Domestic Producers

When a country allows trade and becomes an importer of a good, __________ ___________ of the good are better off and _________ ____________ of the good are worse off.

average total cost is less than long-run marginal cost.

When a firm is experiencing diseconomies of scale, long-run A. average total cost is greater than long-run marginal cost. B. marginal cost is minimized. C. average total cost is minimized. D. average total cost is less than long-run marginal cost.

average total cost is greater than long-run marginal cost.

When a firm is experiencing economies of scale, long-run A. average total cost is less than long-run marginal cost. B. average total cost is minimized. C. average total cost is greater than long-run marginal cost. D. marginal cost is minimized.

average total cost is greater than long-run marginal cost

When a firm is experiencing economies of scale, long-run a. average total cost is minimized. b. average total cost is greater than long-run marginal cost. c. average total cost is less than long-run marginal cost. d. marginal cost is minimized.

average total cost is minimized (look at pretest for notes)

When a firm is operating at an efficient scale, a. average variable cost is minimized. b. average fixed cost is minimized. c. average total cost is minimized. d. marginal cost is minimized.

Smaller

When a good is taxed, the quantity of the good sold is _______ in the new equilibrium.

Marginal Cost

When a profit-maximizing competitive firm finds itself minimizing losses because it is unable to earn a positive profit, this task is accomplished by producing the quantity at which price is equal to a. sunk cost b. average fixed cost c. average variable cost d. marginal cost

Externality

When a transaction between a buyer and seller directly affects a third party

Little because society would be willing to give up more alternative goods in order to get additional shoes.

When an athletic shoe company is producing a level of output at which price is greater than MC, from society's standpoint the company is producing too A. Much because society is giving up more to produce additional shoes than the shoes are worth. B. Much because society would be willing to give up more alternative goods in order to get additional shoes. C. Little because society is giving up more to produce additional shoes than the shoes are worth. D. Little because society would be willing to give up more alternative goods in order to get additional shoes. D. Little because society would be willing to give up more alternative goods in order to get additional shoes.

ok

When analyzing a firm's behavior, it is important to include all the opportunity costs of production. - Explicit: wages a firm pays its workers - Implicit: wages the firm owner gives up by working at the firm rather than taking another job (Answer=ok)

the opportunity costs from total revenue since these include both the implicit and explicit costs of the firm.

When calculating a firm's profit, an economist will subtract only a. explicit costs from total revenue since these are the only costs that can be measured explicitly. b. implicit costs from total revenue since these include both the costs that can be directly measured as well as the costs that can be indirectly measured. c. the opportunity costs from total revenue since these include both the implicit and explicit costs of the firm. d. the marginal cost since the cost of the next unit is the only relevant cost.

The future supply of rental housing units increases.

When cities prevent landlords from charging market rents, which of the following is not a common long-run market outcome? A. The future supply of rental housing units increases. B. The quantity of available rental housing units falls. C. The quality of rental housing units falls. D. Non-price methods of rationing emerge.

Public Policy Towards Externalities

When externalities are significant and private solutions are not found, government may attempt to solve the problem through . . . -command-and-control policies, these usually take the form of regulations ex: requirement that all students be immunized -Market based policies, government uses taxes and subsidies to align private incentives with social efficiency; Cap and Trade-Tradable pollution permits allow the voluntary transfer of the right to pollute from one firm to another. -A market for these permits will eventually develop. -A firm that can reduce pollution at a low cost may prefer to sell its permit to a firm that can reduce pollution only at a high cost

Budget Surplus

When government receipts are greater than government spending; the excess goes towards reducing outstanding debt

Budget Deficit

When government spending is greater than government receipts; financed by borrowing from the public

the short-run market supply curve shifts right

When new firms enter a perfectly competitive market, a. demand increases. b. the short-run market supply curve shifts right. c. the short-run market supply curve shifts left. d. existing firms will increase prices to keep the new firms from entering.

Upward, and supply decreases.

When payroll taxes are raised, the firm's marginal cost curve shifts A. Upward, and supply increases. B. Downward, and supply increases. C. Upward, and supply decreases. D. Downward, and supply decreases.

the marginal cost curve determines the quantity of output the firm is willing to supply at any price.

When price exceeds average variable cost in the short run, a competitive firm's marginal cost curve is regarded as its supply curve because a. the position of the marginal cost curve determines the price for which the firm should sell its product. b. among the various cost curves, the marginal cost curve is the only one that slopes upward. c. the marginal cost curve determines the quantity of output the firm is willing to supply at any price. d. the firm is aware that marginal revenue must exceed marginal cost in order for profit to be maximized.

Downward, and supply increases.

When technology improves, the firm's marginal cost curve shifts A. Upward, and supply increases. B. Downward, and supply increases. C. Upward, and supply decreases. D. Downward, and supply decreases.

increases, less

When the government levies a tax on a good equal to the external cost associated with the good's production, it _____the price paid by consumers and makes the market outcome ________ efficient a) increases, more b) increases, less c) decreases, more d) decreases, less

Negative Externality

When the impact on the bystander is adverse. They lead markers to produce a larger quantity than socially desirable ex: -Pollution -Automobile exhaust -Cigarette smoking -Barking dogs (loud pets) -Loud stereos in an apartment building -Sriracha Sauce

Positive Externality

When the impact on the bystander is beneficial; the social value of the good exceeds the private value. Lead markets to produce a smaller quantity than is socially desirable ex: -Immunizations -Restored historic buildings -Research into new technologies -Education

Substitutes

When the prices of postage stamps rise, the demand for Internet service increases, ceretis paribus. postage stamps and Internet service are therefore

Diminishing returns occurs with greater output.

When the short-run marginal cost curve is upward-sloping, A. The average total cost curve is upward-sloping. B. The average total cost curve is above the marginal cost curve. C. Diminishing returns occurs with greater output. D. There are diseconomies of scale.

Marginal Cost

When they are below average costs, average costs are falling; when they are above average costs, average costs are rising; when they equal average costs, average costs are constant

ok

Whenever economic costs exceed explicit costs, observed (acounting) profits will exceed true (economic) profits. (answer=ok)

ok

Whenever externalities are present, market prices aren't a valid measure of a good's value to society. (Answer=ok)

MC vs ATC

Whenever marginal cost is less than average total cost, average total cost is falling downward. Whenever marginal cost is greater than average total cost, average total cost is rising. The marginal-cost curve crosses the average-total-cost curve at the efficient scale, at the bottom of the U shape

private goods and club goods

Which categories of goods are excludable?

private goods and common resources

Which categories of goods are rival in consumption?

Price equals minimum ATC

Which of the following characterizes a firm that is in long-run perfectly competitive equilibrium where profits are maximized? A. Price equals minimum ATC B. Positive Economic Profit C. Price Equals Marginal Cost D. Price Exceeds Marginal Cost

Price equals minimum ATC.

Which of the following characterizes a firm that is in long-run perfectly competitive equilibrium where profits are maximized? A. Price equals minimum ATC. B. Positive economic profit. C. Price equals marginal cost. D. Price exceeds marginal cost.

An increase in property taxes.

Which of the following does NOT affect marginal costs? A. An increase in property taxes. B. A decrease in Social Security taxes. C. An increase in payroll taxes. D. An increase in state unemployment taxes.

High barriers

Which of the following is NOT a characteristic of a perfectly competitive market? A. Zero economic profit in the long run. B. Perfect information. C. Homogeneous products. D. High barriers.

The average total cost curve when it is above the marginal cost curve.

Which of the following is always downward-sloping? a. The marginal cost curve when it is below the average total cost curve. b. The marginal cost curve when it is above the average total cost curve. c. The average total cost curve when it is below the marginal cost curve. d. The average total cost curve when it is above the marginal cost curve.

Hillary's newly cut lawn makes her neighborhood more attractive

Which of the following is an example of a positive externality? a) Bob mows Hillary's lawn and is paid $100 for preforming the service b) While mowing the lawn, Bob's lawnmower spews out smoke that Hillary's neighbor Kris has to breathe c) Hillary's newly cut lawn makes her neighborhood more attractive d) Hillary's neighbors pay her if she promises to get her lawn cut on a regular basis

Markets are physical locations where trading occurs

Which of the following is not a characteristic of a​ market? A. Markets are physical locations where trading occurs B. Voluntary exchanges between economic agents C. Flexible prices D. There are rules and arrangements for trading

goods and services provided by the government

Which of the following is not a cost of taxes to taxpayers? a. the tax payment itself b. deadweight losses c. administrative burdens d. goods and services provided by the government

Average total cost will cross marginal cost at the minimum of marginal cost.

Which of the following is not a property of a firm's cost curves? A. Economies of scale will exist when average total cost falls as output rises. B. Average total cost is U-shaped. C. Marginal cost must eventually rise as a result of diminishing marginal product. D. Average total cost will cross marginal cost at the minimum of marginal cost.

Short run

a firm cannot recover its FC - Shut down temporarily if P < AVC

In the long run, firms can increase the availability of space and equipment to keep up with the increases in variable inputs.

Which of the following is the best explanation of why the law of diminishing returns does NOT apply in the long run? A. In the long run, firms can increase the availability of space and equipment to keep up with the increases in variable inputs. B. The MPP does not change in the long run. C. In the long run, firms have enough time to find the most qualified workers. D. All factors of production are fixed in the long run.

Cars that create an excessive amount of exhaust fumes. (Cars that create an excessive amount of exhaust fumes will most likely have the most external costs)

Which of the following is the government most likely to discourage because of the existence of externalities? A. All goods and services produced by monopolies. B. Cars that create an excessive amount of exhaust fumes. C. Thermal pollution from a power plant that improves fishing downstream. D. Fatty foods that lead to heart disease.

The marginal physical product of the input.

Which of the following is the slope of the production function with respect to an input? A. The marginal physical product of the input. B. The average product of the input. C. The unit cost of the input. D. The input price.

average total cost

Which of the following measures of cost is best described as "the cost of a typical unit of output if total cost is divided evenly over all the units produced?" A) average total cost B) average variable cost C) average fixed cost D) marginal cost

Marginal cost.

Which of the following represents the change in total cost that results from a one-unit increase in production? A. Marginal profit. B. Total revenue. C. Marginal cost. D. Marginal revenue

They causes deadweight losses

Which of the following statements about corrective taxes is NOT true? a) Economists prefers them to command-and-control regulation b) They raise government revenue c) They cause deadweight losses d) They reduce the quantity sold in a market

As the quantity of output increases, marginal cost eventually rises.

Which of the following statements about costs is correct? A. The total cost curve is U-shaped. B. As the quantity of output increases, marginal cost eventually rises. C. When marginal cost is less than average total cost, average total cost is rising. D. All of the above are correct.

as the quantity of output increases, marginal cost eventually rises

Which of the following statements about costs is correct? a.) when marginal cost is less than average total cost, average total cost is rising b.) the total cost curve is U-shaped c.) as the quantity of output increases, marginal cost eventually rises d.) all are correct

slow replacement of old rental cars with newer ones

Which of the following would be the most likely result of a binding price ceiling imposed on the market for rental cars? A. frequent rental programs such as "Rent nine times and the tenth rental is free" b. enhanced maintenance programs to promote high quality of the cars C. free gasoline given to ppl as an incentive to rent a car D. slow replacement of old rental cars with newer ones

sunk costs

Which of these types of costs can be ignored when an individual or a firm is making decisions? a. sunk costs b. marginal costs c. variable costs d. opportunity costs

do NOT exist in the long run.

Which statement is TRUE? Fixed costsA) do NOT exist in the long run. B) depend on the firm's level of output. C) are zero if the firm is producing nothing. D) are the difference between total costs and average variable costs.

$25

You have decided that you want to attend a costume party as Ironman. You estimate that it will cost $40 to assemble your costume. After spending $40 on the costume, you realize that the additional pieces you need will cost you $25 more. The marginal cost of completing the costume is... A. $15 B. $25 C. $40 D. $65

Explicit vs. Implicit Costs

You need $100,000 to start your business. The interest rate is 5%. Case 1: borrow $100,000 • explicit cost = $5,000 interest on loan Case 2: use $40,000 of your savings, borrow the other $60,000 • explicit cost = $3,000 (5%) interest on the loan • implicit cost = $2,000 (5%) foregone interest you could have earned on your $40,000 In both cases, total (exp + imp) costs are $5,000

$1,000, the difference in value if the building was used as a bookstore and its actual use.

You own a building that has four possible uses: a cafe, a craft store, a hardware store, and a bookstore. The value of the building in each use is $2,000; $3,000; $4,000; and $5,000, respectively. You decide to open a hardware store. The opportunity cost of using this building for a hardware store is A) $2,000, the value if the building is used as a cafe. B) $3,000, the value if the building is used as a craft store. C) $10,000, the sum of the values if the building is used for a cafe, a craft store, or a bookstore. D) $1,000, the difference in value if the building was used as a bookstore and its actual use.

Perfectly Competitive Market

Zero economic profit in the long run

Externalities

a cause of market failure, when the production or consumption of a good effects bystanders (e.g. pollution)

average fixed cost is decreasing

a firm short run marginal cost curve is decreasing when A. capacity is reached B. total fixed cost is decreasing C. marginal product is decreasing D. marginal product is increasing E. average fixed cost is decreasing

choose the level of output where the difference between total revenue and total cost is the greatest

a firm that seek to maximize profit will a) never experience losses b) choose th level of output where the difference between marginal revenue and marginal cost is the greatest c) choose the level of output where total revenue equals total cost d) choose the level of output where the difference between total revenue and total cost is the greatest

short-run average total cost is at its minimum

a firm's capacity is defined as the level of output where A. average total cost is at its maximum B. the upper limit on what can be produced is reached C. marginal cost equals average variable cost D. average fixed costs are at a minimum E. short-run average total cost is at its minimum

Profit

a firm's total revenue minus its total cost

Explicit Cost

a payment made for the use of a resource

price=marginal cost

a perfectly competitive firm produces at

the portion of its marginal cost curve that lies above its average variable cost.

a perfectly competitive firm short run supply curve is a. horizontal. b. likely to slope downward. c. determined by forces external to the firm. d. the portion of its marginal cost curve that lies above its average variable cost.

P>MC

a perfectly competitive firm should expand output when a) P>ATC b) P<ATC c) P>MC d) P<MC

An externality arises when...

a person engages in activity that influence the well being of a bystander and yet neither pays nor receives any compensation for the effect

Market Power

a single buyer or seller has substantial influence on market price (e.g. monopoly)

Cost Benefit Analysis

a study that compares the costs and benefits of providing a public good --very imprecise so efficient provision of public goods is more difficult than that of private goods

Payroll Taxes

a tax on the wages that a firm pays its workers; includes Social Security and Medicare; tax collected by federal government

Lump-Sum Tax

a tax that is the same amount for every person

Corrective Tax

a tax to induce private decision makers to take account of social cots from a negative externality "Pigouvian Taxes" ideal __________ tax =external cost [(-) externality] ideal __________ subsidy= external benefit [(+) externality] gives firms incentive to reduce pollution as long as cost is less than tax

Negative Externalities

air pollution from factory late-night stereo blasting from the dorm room next to yours health risk to others from second hand smoke talking on cell phone while driving makes roads less safe for others

corrective tax and subsidies

align private incentives with society's interests make private decision makers take into account external costs and benefits of actions makes economy more efficient at allocation of resources

Long Run

all inputs are all variable Ex: firms building more factories or selling ATC at any Q is cost per unit using most efficient mix of inputs for that Q ex: factory size with the lowest ATC

Perfect Competition

all inputs are all variable Ex: firms building more factories or selling ATC at any Q is cost per unit using most efficient mix of inputs for that Q ex: factory size with the lowest ATC

Internalizing the Externality

altering incentives so that people take into account the external effects of their actions

AFC curve

always slopes downward

Lighthouses

are closer to private goods • Coast of England, 19th century • Lighthouses were privately owned and operated • The owner of the lighthouse charged the owner of the nearby port -If the port owner did not pay, lighthouse owner turned the light off: ships avoided that port

Property Tax

are levied by local governments on land and buildings

Payroll taxes

are levied on the wages paid by the firm

the law of diminishing marginal utility

as a consumer enjoys successive units of a good, eventually marginal utility will fall

Corporate income tax

based on profit

Corporation

business set up to have its own legal existence

Comparative Advantage

comparing the world price and the domestic price prior to trade indicates whether the country has a _____________ _________ in producing the good.

Government

correct market failure - Internalizing the externality • Altering incentives so that people take account of the external effects of their actions

Government

correct market failure • Internalize the externality • Subsidy

Welfare Economics Supply Curve

cost to suppliers

Transaction Costs

costs may make it impossible to reach a mutually beneficial agreement

Sunk Costs

costs that cannot be avoided, because they have already been incurred.

Private Value

demand curve shows value, it is the value to buyers (WTP)

Taxes

distort incentives, causing ppl to allocate resources according to incentive rather than true costs and benefits causing DWL

Implicit Costs

do not require cash outlay Ex: opportunity cost of the owner's time, foregone interest earned on savings

Prices and Income

economic explanations of consumer behavior take into consideration

perfectly competitive

firms, profits are maximized where price equals marginal cost

what are the various costs, and how are they related to each other and to output?

fixed cost-costs that do not very with the quantity of output produced. variable costs-costs that vary with the quantity of output produced. marginal cost-the increase in total cost that arises from an extra unit of production

property taxes

fixed costs, increase average total cost, doesn't affect MC or output (y) -marginal cost

marginal cost curve

for any given price, a firm in a competitve market will maximize profit by selecting the level of output at which price intersects the, a. average total cost curve b.average variable cost curve c. marginal cost curve d. marginal revenue curve

Why do countries benefit from trade and specialization?

get a better price for goods they produce; buy other goods more cheaply from abroad than can be produced at home

Private Goods

goods that are both excludable and rival in consumption

Common Resources

goods that are rival in consumption but not excludable

Medicare

government health program for the elderly; federal government

Firms

greater flexibility in the long-run

ATC curve

has a U shape

Vertical Equity

idea that Taxpayers with a greater ability to pay taxes should pay larger amounts

Horizontal Equity

idea that Taxpayers with similar abilities to pay taxes should pay the same amount

diseconomies, rising

if a higher level of production allows workers to specialize in particular tasks, a firm will likely exhibit _____of scale and ____average total cost a) economies, falling b) economies, rising' c) diseconomies, falling d) diseconomies, rising

is horizontal and equal to the minimum of long run average total cost for each firm

if all existing firms and all potential firms have the same cost curves, there are no inputs in limited quantities, and the market is characterized by free entry and exit, then the long run market supply curve... a. is horizontal and equal to the minimum of long run marginal cost for each firm b. must slope downward c. must slope upward d. is horizontal and equal to the minimum of long run average total cost for each firm

Social Security

income-support program for the elderly; federal government

Negative Externalities

increase price and decrease quantity it shifts the Supply curve to the left market quantity is larger than socially desirable

Taxes

induce people to change their behavior - Deadweight losses - Less efficient allocation of resources

Implicit Costs

input costs that do not require an outlay of money by the firm

Explicit Cost

input costs that require an outlay of money by the firm

long run marginal costs

intersects its associated average cost curve at its lowest point

Social Cost Curve

is above the supply curve; Takes into account the external costs imposed on society

Marginal Cost

is defined as the change in total cost resulting from an additional unit of output

Social Value

is greater than private value

social optimal quantity

is the number of quantity when demand curve intersects with the social cost ______ goes down with negative externality ______ goes up with positive externality

Average Fixed Cost

is the total fixed cost per unit of output. -The vertical distance between the average total cost and average variable cost curves is equal to average fixed cost. - The distance shrinks as output increases because average fixed cost declines with increasing outputs.

perfect competition

market characteristics for ___: -many firms -identical products -perfect information -maximize our profit --> MC=P -low barriers -zero economic profit

Law of Demand

market demand curve for a product is always downward-sloping

Short run

market supply with a fixed number of firms (due to fixed costs)

Concentration Ratio

measures the Proportion of total output produced by the four largest producers in a specific market.

accept framing orders up until the point where the marginal cost of doing so is $65

nadia operates a frame shop and charges the perfectly competitive price of $65 for custom framing of a standard size picture. she is a price-taking producer. in order to maximize her profit, Nadia will a) seek to operate at the minimum point on her marginal cost curve b) seek to produce at the point where her average variable cost is $65 c) accept framing orders up until the point where the marginal cost of doing so is $65 d) seek to operate at the minimum point on her average variable cost curve

Why private solutions do not work?

o High transaction costs o Bargaining o Large number of parties

Coase Theorem

o Private parties can bargain without cost over allocation of resources ♣ Whoever values it more gets the product

Product Differentiation

occurs when buyers perceive differences in the products of several companies

ok

ok

fixed and variable costs

otal cost can be divided into two types, Those two types are a.) variable costs and marginal costs b.) fixed and variable costs c.) fixed and marginal costs d.) average and marginal costs

decreases

p< mc -___ output

maintains

p=mc -____ output (maximizes profit)

increases

p> MC -___ output

ok

perfectly competitive firms don't make pricing decisions (answer=ok)

the long-run industry supply for synethics is horizontal

suppose that the long-run industry supply in the production of synthetic fabrics is perfectly elastic. which of the following statements then is true? a) the long-run industry supply for synthetics is upward sloping b) the existence of profit within the industry will not draw new firms into the market c) the long-run industry supply for synethics is horizontal d) the marginal cost curve of each syntehtic- producing firm is horizontal

tradable pollution permits

system that reduces pollution at lower cost than regulation lower costing firms reduce pollution and sell unused ____, higher costing firms purchase these.

Corporate Income Tax

tax on profits; tax collected by federal government

Excise Taxes

taxes on specific goods like gasoline, cigarettes, and alcoholic beverages; taxes collected by federal government

Shutdown point

that rate of output where price equals minimum AVC

Market Power

the ability to alter the market price of a good or service

Total Revenue

the amount a firm receives for the sale of its output

Producer Surplus

the amount a seller is paid minus the cost of production, measures the benefits sellers receive from participating in a market.

Marginal Tax Rate

the amount by which taxes increase from an additional dollar of income

ok

the basic incentive for producing goods and services is the expectation of profit (answer=ok)

total cost

the compeitive firm's long run supply curve is that portion of the marginal cost curve that lies above the average a. fixed cost b. variable cost c. total cost d. revenue

marginal cost curve, but only the portion above the minimum of average variable cost

the competitve firms short run supply curive is its

Transaction Costs

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

Marginal Cost

the extra cost generated by moving from one feasible alternative to the next feasible alternative.

Marginal Cost

the extra cost of producing an additional unit

Long run

the firm can recover both FC and VC - Exit if P < ATC

average variable costs

the firm should shutdown in the short run if the price falls bellow the minimum point of a) marginal cost b) marginal revenue c) average total costs d) average variable costs

Benefits Principle

the idea that ppl should pay taxes on benefits they receive from govt -the more you use the more you pay ex: gax taxes-if you drive a lot you pay more of it

Ability-to-Pay Principle

the idea that taxes should be levied on a person according to how well that person can shoulder the burden

Marginal Profit

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

Marginal Product

the increase in output that arises from an additional unit of that input of any production process

Marginal Cost

the increase in total cost associated with a one-unit increase in production; the value of the resources needed to produce one more unit of a good

Tax Incidence

the manner in which the burden of a tax is shared among participants in a market

ok

the marginal cost curve is the short-run supply curve for a competitive firm (answer=ok)

market wage

the marginal cost of a unit of labor equals

Quality of Land Changes

the short-run production function shows how output changes when

Industrial Organization

the study of how firms' decisions about prices and quantities depend on the market conditions they face

market supply

the sum of the marginal cost curves for all firms

increasing marginal costs

the supply curve is upward-sloping, (it takes a higher price to induce greater production) because of a) increasing total costs b) increasing fixed costs c) increasing marginal costs d) the decreasing skill level of additional workers

Economic Cost

the value of all resources used to produce a good or service; opportunity cost

Implicit Cost

the value of resources used, for which no direct payment is made

Total Fixed Cost

the vertical distance between the total cost curve and the total variable cost curve is equal to A. average variable cost B. marginal cost C. average total cost D. total fixed cost E. average fixed cost

Individual income tax

total income(capital and labor)

Economic Profit

total revenue minus total cost, including both explicit and implicit costs

Accounting Profit

total revenue minus total explicit cost

Externality

type of market failure the uncompensated impact of one person's actions on the well-being of a bystander, it can be negative or positive depending on whether impact on bystander is adverse or beneficial

MC curve

typically rises, sometimes after a brief decline

Marginal Cost

value of resources needed to produce one more unit of a good

payroll taxes

variable cost, increase MC, reduce y (output) & employment

diminishing returns

what causes marginal costs to increase as Y increases

above the average total cost curve

when average total cost curve is rising the marginal cost curve will be

Tax Incident

when evaluating tax equity you must take _____ into account

above the average total cost curve

when the average total cost curve is rising the marginal cost curve will be

economies of scale must exist

when the size of a factory (and all its associated inputs) doubles and as a result output more than doubles a) the law of diminishing returns must not apply in the smaller factory b) economies of scale must exist c) the short-run ATC curve must be declining d) marginal costs must be declining

ok

where price doesn't cover average variable costs at any rate of output, production should cease (Answer=ok)

ok

where price exceeds average variable cost but not average total cost, the profit maximization rule minimizes losses (answer=ok)

the average total cost curve when it is above the marginal cost curve

which of the following is always downward-slopping? a) the marginal cost curve when it is above the average total cost curve b) the average total cost curve when it is below the marginal cost curve c) the marginal cost curve when it is below the average total cost curve d) the average total cost curve when it is above the marginal cost curve

MC curve

will always intersect both the ATC and AVC curves at their lowest points

Why MPL is Important

• 'Rational people think at the margin' • When the owner hires an extra worker - His costs rise by the wage he pays the worker - His output rises by MPL - Comparing them helps the owner decide whether he should hire the worker

ok

• A firm's costs reflect its production process. - Diminishing marginal product: production function gets flatter as Q of an input increases - Total-cost curve gets steeper as the quantity produced rises. (Answer=ok)

ok

• A road is which of the four kinds of goods? • Hint: The answer depends on whether the road is congested or not, and whether it's a toll road or not. Consider the different cases. (Answer=ok)

Coase Theorem

• According to the Coase theorem, if people can bargain without cost, then they can always reach an agreement in which resources are allocated efficiently. - In many cases, however, reaching a bargain among the many interested parties is difficult, so the Coase theorem does not apply.

Policy: Tradable Pollution Permits

• Advantage of market for pollution permits - If firms can reduce pollution at a low cost: Sell whatever permits they get - If firms can reduce pollution only at a high cost: Buy whatever permits they need - Efficient final allocation • Firms with the lowest abatement costs reduce pollution the most - Initial allocation of pollution permits doesn't matter

ok

• Average total cost is total cost divided by the quantity of output. • Marginal cost is the amount by which total cost rises if output increases by 1 unit. (Answer=ok)

A Firm in a Competitive Market

• Can keep increasing its output without affecting the market price. • So, each one-unit increase in Q causes revenue to rise by P, i.e., MR = P. • MR = P is only true for firms in competitive markets

Cost-benefit analysis

• Compare the costs and benefits to society of providing a public good • Doesn't have any price signals to observe • Government findings: rough approximations at best

How much is a life worth?

• Cost: $10,000 for a new traffic light • Benefit: increased safety - Risk of a fatal traffic accident • Drops from 1.6 to 1.1% • Obstacle - Measure costs and benefits in the same units • Put a dollar value on a human life? - Priceless = infinite dollar value

Government

• Decide what public goods to provide • In what quantities

Environmental Protection Agency

• Develop and enforce regulations • Dictates maximum level of pollution • Requires that firms adopt a particular technology to reduce emissions

Long-Run Cost Curves

• Differ from short-run cost curves • Much flatter than short-run cost curves

How the tax burden is distributed

• Distribution of income and taxes - Poorest quintile • Earned 5.3% of all income • Paid 0.6% of all taxes - Richest quintile • Earned 51.9% of all income • Paid 68.7% of all taxes - Richest 1% • Earned 14.6% of all income • Paid 24.0% of all taxes

How the tax burden is distributed

• Do the wealthy pay their fair share of taxes? • United States federal tax system - Progressive tax system • Families - ranked according to their income - Five groups of equal size, "quintiles"

Welfare Economics Equilibrium Quantity and Price

• Efficient • Maximizes the sum of producer and consumer surplus

Suppose you run Ford Motor Company

• Examples of Ford's costs: -Wages and benefits, cost of intermediate inputs (like engine parts, tires, etc.), rent, and more • Examples of decisions affected by costs: - How many workers to hire, what size factory to build, what price to charge, how many of each type of vehicle to produce

Why Marginal Cost is Important

• Farmer Jack is rational and wants to maximize his profit - To increase profit, should he produce more or less wheat? • Farmer Jack needs to "think at the margin" - If the cost of additional wheat (MC) is less than the revenue he would get from selling it, then Jack's profits rise if he produces more.

Taxes collected by state and local governments

• Fees for fishing and hunting licenses • Tolls from roads and bridges • Fares for public buses and subways

ok

• Firm's total costs = fixed costs + variable costs. - Fixed costs: do not change when the firm alters the quantity of output produced. - Variable costs: change when the firm alters the quantity of output produced. (Answer=ok)

ok

• Governments pursue various policies to remedy the inefficiencies caused by externalities. - Regulating behavior - Internalizes an externality using corrective taxes - Issue permits (similar results to imposing corrective taxes on polluters) (Answer=ok)

How much is a life worth?

• Implicit dollar value of a human life - Courts: award damages in wrongful-death suits • Total amount of money a person would have earned if he or she had lived • Ignores other opportunity costs of losing one's life - Risks that people are voluntarily willing to take and how much they must be paid for taking them • Value of human life = $10 million

How the tax burden is distributed

• Income includes - Market income (earned from work and savings) - Transfer payments from government programs • Average income - Poorest quintile: $24,600 - Richest quintile: $245,700 - Richest 1%: over $1.4 million

Personal Income Taxes

• Largest source of revenue • Based on total income (wages, interest, dividends, profits) • Marginal tax rate Taxed collected by federal government

Short-run cost curves

• Lie on or above the long-run cost curves

Public Policies toward Externalities

• Objections to the economic analysis of pollution - "We cannot give anyone the option of polluting for a fee." - late Senator Edmund Muskie • People face trade-offs - Eliminating all pollution is impossible - Clean water and clean air — opportunity cost: lower standard of living • Clean environment is a normal good - Positive income elasticity • Rich countries can afford a cleaner environment • More rigorous environmental protection • Clean air and clean water - law of demand - The lower the price of environmental protection, the more the public will want it

Negative Externality

• One person uses a common resource diminishes other people's enjoyment of it • Common resources tend to be used excessively

Social Cost

• Private costs of the producers (supply) • Plus the costs to those bystanders affectedpri adversely by the negative externality

Market-Based Policies

• Reducing pollution using pollution permits or corrective taxes - Firms pay for their pollution • Corrective taxes: pay to the government • Pollution permits: pay to buy permits - Internalize the externality of pollution

Government can solve the problem

• Regulation or taxes to reduce consumption of the common resource • Turn the common resource into a private good

Lump-sum Taxes

• Same amount of tax for every person - Most efficient tax possible • A person's decisions do not alter the amount owed • Doesn't distort incentives • Doesn't cause deadweight losses • Imposes a minimal administrative burden - No equity • Relative to income, the poor pay much more than the rich

Externality

• Self-interested buyers and sellers - Neglect the external costs or benefits of their actions - So the market outcome is not efficient

Why MPL Dimishes

• The owner's output rises by a smaller and smaller amount for each additional worker. Why? - As the owner adds workers, the average worker has less space to work with and will be less productive - In general, MPL diminishes as labor rises whether the fixed input is land or capital (equipment, machines, etc.)

How the tax burden is distributed

• Total taxes as a percentage of income - Poorest quintile: paid 1.9% of their incomes in taxes - Richest quintile: paid 23.4% - Top 1%: paid 29.0% of their incomes in taxes

How the tax burden is distributed

• Transfer payments: the opposite of taxes - Even greater progressivity - Richest quintile • Pays about 25% of income to the government, after transfers - Poorest quintile • Receive more in transfers than they pay in taxes

Policy: Tradable Pollution Permits

• Voluntary transfer of the right to pollute from one firm to another - New scarce resource: pollution permits - Market to trade permits - Firm's willingness to pay • Depend on its cost of reducing pollution

Public Goods

• We consume many goods without paying: - Parks, national defense, clean air & water - When goods have no prices, the market forces that normally allocate resources are absent - The private market may fail to provide the socially efficient quantity of such goods • 'Governments can sometimes improve market outcomes'

Marginal Cost

∆TC/∆Q

Marginal Revenue

∆TR / ∆Q - Change in total revenue from an additional unit sold

Marginal Revenue

∆TR/∆Q