Econ Micro Midterm 2
If Kevin's children run a lemonade stand for a day and sell 200 glasses of lemonade at $0.50 each, their total revenues are
. $100.
diminishing marginal product
the marginal product of an input declines as the quantity of the input increases
The greatest difficulty with cost-benefit analysis of a public project is determining
the value or benefit of the project.
Positive externality graphs point
to the left
Negative externality graphs point
to the right
accounting profit
total revenue - explicit costs
If a firm produces nothing, which of the following costs will be zero?
variable cost
Private good example
wheat (rival and excludable)
The Coase theorem suggests that private markets may not be able to solve the problem of externalities
when the number of interested parties is large and bargaining costs are high
Highway engineers want to improve a dangerous stretch of highway. They expect that it will reduce the risk of someone dying in an accident from 5.3 percent to 2.1 percent over the life of the highway. If a human life is worth $10 million, then the project is worth doing as long as it does not cost more than
$320,000.
Gwen has decided to start her own photography studio. To purchase the necessary equipment, Gwen withdrew $2,000 from her savings account, which was earning 3% interest, and borrowed an additional $4,000 from the bank at an interest rate of 7%. What is Gwen's annual opportunity cost of the financial capital that has been invested in the business?
$340
Economists normally assume that the goal of a firm is to (i) sell as much of its product as possible. (ii) set the price of the product as high as possible. (iii) maximize profit.
(iii) maximize profit.
Suppose the cost to run the ferry for each roundtrip is $1,000 per day and the 4 business owners have agreed to split the costs of the ferry trips equally. How many ferry trips would the owner of Store A prefer to have?
0
Altering incentives so that people take account of the external effects of their actions
1) is called internalizing the externality. 2) can be done by imposing a corrective tax. 3) is the role of government in markets with externalities.
For a construction company that builds houses, which of the following costs would be a fixed cost?
10000 per year premium paid to an insurance company 50000 per year salary paid to a construction foreman 30000 per year salary paid to the company's bookkeeper
Which of the following statements about a well-maintained yard best conveys the general nature of the externality?
A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood.
Pete owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial statements? (i) shoe polish (ii) rent on the shoe stand (iii) wages Pete could earn delivering newspapers (iv) interest that Pete's money was earning before he spent his savings to set up the shoe-shine business
A. (i) and (ii) only
ATC =
AFC + AVC
Average total cost (ATC) is calculated as follows:
ATC = (total cost)/(quantity of output).
TC = FC + VC When divided by Q tho
ATC = AVC + AFC
Each of the following is likely to be a successful way for the government to solve the problem of overuse of a common resource except?
Asking individuals to voluntarily reduce their use of the resource
What should the equilibrium quantity of output be in the market? How do you find this?
When private value = private cost
Maximize total surplus is when
Benefit > than cost
Negative externality
the harm, cost, or inconvenience suffered by a third party because of actions by others
What would not bee considered a private good?
Cable tv service
Suppose that Charles wants to dine at a fancy restaurant, but the only available table is in the smoking section. Charles dislikes the smell of cigarette smoke. He notices that only one person, Sam, is smoking in the smoking section. Charles values the absence of smoke at $40. Sam values the ability to smoke in the restaurant at $15. Which of the following represents an efficient solution in the absence of transaction costs?
Charles offers Sam between $15 and $40 not to smoke. Sam accepts, and both parties are better off.
Paper view broadcasts are
Club goods
Each unit of plastics that is produced results in an external ?
Cost
Difference between the social cost curve and the supply curve reflects the?
Cost of spillover effects from the concert (noise snd traffic)
The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. If the government charged a fee of $69 per unit of pollution, how many units of pollution would the firms eliminate altogether?
Count the first 7 (just as long as you do not go over 69)
Karen's cat causes Danny to sneeze. Karen values her cat's companionship at $300 per year. The cost to Danny of tissues and her allergy medication is $350 per year. Based on the Coase theorem,
Danny should pay Karen $325 to give away her cat.
All accounting costs are included in?
Economic costs
Explicit costs
Enter into the accountant's measurement of a firm's profit and enter into the economist's measurement of a firm's profit
Average Fixed Cost (AFC) formula
FC/Q
common resource goods
Fish in ocean ( rival in consumption and non excludable )
example of an implicit cost
Foregone rent on office space owned and used by firm
The Social-Cost Curve is above the Supply Curve because
It takes into account the external costs imposed on society by the concert
Which of the curves is most likely to characterize the short-run average total cost curve of the smallest factory?
Key word smallest. Look to left!
Best example of a variable cost would be?
Labor - easiest one to change
MR - MC =
Marginal profit
An example of a positive externality is
Mary not catching the flu from Sue because Sue got a flu vaccine
Annual implicit opportunity cost is found
Multiply cost by interest
A cost imposed on someone who is neither the consumer nor the producer is called a
Negative externality
Which graph represents a market with a negative externality? One where social cost and supply cost point?
One where social cost and supply cost point left
To induce firms to internalize the externality in this market, the government should impose a tax measured by
P2 - P0 Social Cost Private Cost
Total Revenue Formula
Price x Quantity
The social cost of the 2nd unit of output that is produced is found how?
Private cost + external cost
he market equilibrium quantity of output is found how? What equals what?
Private value = private cost
When the government intervenes in markets with externalities, it does so in order to
Protect the interest of bystanders
MC curve is what?
SUPPLY CURVE!!!!!!!
The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. If the government wanted to reduce pollution from 16 units to 6 units, which of the following fees per unit of pollution would achieve that goal?
Subtract 6 from 16. Count out that many boxes and find the number that fits!
Average Total Cost (ATC)
TC/Q
Average Revenue (AR)
TR/Q = P
Monte owns a dog; the dog's barking annoys Monte's neighbor, Teresa. Suppose that the benefit of owning the dog is worth $200 to Monte and that Teresa bears a cost of $400 from the barking. Assuming Monte has the legal right to keep the dog, a possible private solution to this problem is that
Teresa pays Monte $300 to give the dog to his parents who live in an isolated farm
On the graph, Q represents the quantity of plastics and P represents the price of plastics. This typically represents?
The equilibrium has been reached
If a sawmill creates too much noise for local residents,
The government can raise economic well being through noise control regulations
Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government impose a $5 per unit tax on the producers. What is the relationship between the after-tax equilibrium and the socially optimal quantity of electricity to bed produced?
They are equal
Average Variable Cost (AVC)
VC/Q
Coase Theorem
What should the outcome be? What does the contract look like?
What is the socially-optimal quantity of output in this market? How do you find this?
When external cost + private cost = private value
When a negative externality exists in a market, the cost to producers
Will bee less than the cost to society
Excludable
a characteristic of a good or service that allows owners to prevent its use by people who have not paid for it
A city street is
a common resource when it is congested, but it is a public good when it is not congested.
economic profit
a firm's total revenue minus its explicit and implicit costs
tax
a required payment to a local, state, or national government
subsidy
a sum of money granted by the government or a public body to assist an industry or business
The provision of a public good generates a
positive externality and the use of a common resource generates a negative externality.
Resources tend to be allocated inefficiently when goods
are available free of charge.
Positive externality
beneficial side effect or value that affects an uninvolved third party
marginal cost formula
change in total cost / change in quantity
The difference between the social cost curve and the supply curve reflects the
cost of spillover effects from the concert (e.g., noise and traffic).
Private markets fail to account for externalities because
decisionmakers in the market fail to include the costs of their behavior to third parties.
Neither public goods nor common resources are
excludable, but only public goods are not rival in consumption.
club good examples
fire protection, cable TV, uncongested toll roads (excludable, not rival)
Total Cost Formula
fixed cost + variable cost
Some costs do not vary with the quantity of output produced. Those costs are called
fixed costs
The long-run average total cost curve is always
flatter than the short-run average total cost curve, but not necessarily horizontal.
It is common knowledge that many U.S. national parks have become overused. One possible solution to this problem is to
increase entrance fees.
The marginal product of labor is equal to the
increase in output obtained from a one unit increase in labor.
implicit costs
input costs that do not require an outlay of money by the firm
explicit costs
input costs that require an outlay of money by the firm
When externalities are present in a market, the well-being of market participants
is directly affected, and market bystanders are indirectly affected.
If the use of a common resource is not regulated,
it will be overused.
Suppose that a "doggie day care" firm uses only two inputs: hourly workers (labor) and a building (capital). In the short run, the firm most likely considers
labor to be variable and capital to be fixed.
Economies of scale occur when
long-run average total costs fall as output increases.
public good examples
national defense, court system (not excludable not rival)
The U.S. military defends Jacob from foreign attackers. The fact that Jacob enjoys this protection does not detract from others Americans' enjoyment of it. For this reason, we say that national defense is
not rival in consumption
rival in consumption (rival)
one person's consumption prevents or decreases others' ability to consume it
Which of the following is not a public good?
patented technological knowledge
Assume that your roommate is very messy. Suppose she gets a $25 benefit from being messy but imposes a $50 cost on you. The Coase theorem would suggest that an efficient solution would be for you to
pay your roommate at least $25 but no more than $50 to clean up after herself.
corrective tax
places a price on the right to pollute
Suppose the production function shifts from TP2 to TP1. Such a shift in the total product curve is most likely due to a decrease in the firm's (shifts up to down)
productivity.
Economists assume that the goal of the firm is to maximize its total
profit
TR - TC =
profit
Positive externalities
result in smaller than efficient equilibrium quantity.
The tragedy of the commons results when a good is
rival in consumption and not excludable
Optimum price is when
social cost and demand intersect
Since air pollution creates a negative externality,
social welfare will be enhanced when some, but not all air pollution is eliminated.
Marginal Revenue (MR) formula
ΔTR/ΔQ