Economics Final
Tom quit his $65,000 a year corporate lawyer job to open up his own law practice. In Tom's first year in business his total revenue equaled $150,000. Tom's explicit cost during the year totaled $85,000. What is Tom's economic profit for his first year in business?
$0
Table 17-13 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits of the two home-improvement stores are shown in the table below. Refer to Table 17-13. If both stores follow a dominant strategy, Lopes's annual profit will grow by
$1.0 million
larry luncheart is a small street vendor. if larry makes 15 pretzels in his first hour of business and incurs a total cost of $16.50, his average total cost per pretzel is
$1.10
figure 6-22 buyers pay how much of the tax per unit
$1.50
Figure 10-1: This graph represents the tobacco industry. the socially optimal price and quantity are
$1.80 and 35 units, respectively
Figure 15-7. A profit-maximizing monopolist would earn profits of
$120
suppose the nation of Kenistonia has a taax system in which individuals pay a marginal tax of 10% on all income between $0 and $50,000 , then a marginal tax of 25% on all income above $50,000. you live in Kenistonia and last year you earned $90,000. it is now tax day- what is your total tax bill?
$15,000
Figure 15-7. In order to maximize profits, the monopolist should charge a price of
$20
When a certain monopoly sets its price at $8 it sells 64 units. When the monopoly sets its price at $10 it sells 60 units. The marginal revenue for the firm over this range is
$22
figure 21-1 if the price of a CD is $12, then the consumers income amounts to
$240
figure 8-13 suppose the government places a $5 per unit tax on this good. the amount of deadweight loss resulting from this tax is
$25
figure 8-13 suppose the government places a $5 per-unit tax on this good. the per-unit burden of the tax on sellers is
$3
figure 6-21 in the after tax equilibrium, how much revenue does the government collect from the tax on this good?
$420
If the price is $20, then consumer surplus in the market is
$45, Quiliana, Wilbur, and Mingla purchase the good
figure 14-3 if the market price is $10, what is the firm's total revenue?
$50
Consider a profit-maximizing monopoly pricing under the following conditions. The profit-maximizing price charged for goods produced is $12.The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and marginal cost is $6. The socially efficient level of production is 12 units. The demand curve and marginal cost curves are linear. What is the value of the deadweight loss created by the monopolist?
$6
figure 14-3 the firm will earn zero economic profit if the market price is
$6
suppose a tax of $4 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 2,000 units to 1,700 units. the deadweight loss of the tax is
$600
Scenario 15-9 Suppose executives at an art museum know that 100 adults are willing to pay $12 for admission to the museum on a weekday. Suppose the executives also know that 200 students are willing to pay $8 for admission on a weekday. The cost of operating the museum on a weekday is $2,000. Refer to Scenario 15-9. How much profit will the museum earn if it engages in price discrimination?
$800
price elasticity
% change in quantity demanded / % change in price - always write as a positive number
calculating profits
(P-ATC) x Q
Sonia opened a yoga studio where she teaches classes and sells yoga clothing. variable costs for Sonia's yoga studio include the cost of the (i) tank tops. (ii) wages paid to the other yoga instructors. (iii) lease on the studio space. (iv) insurance that the landlord requires Sonia to carry for the studio. a. (i) only b. (i) and (ii) only c. (iii) and (iv) only d. (i), (ii), (iii), and (iv)
(i) and (ii) only
Sonia opened a yoga studio where she teaches classes and sells yoga clothing. Fixed costs for Sonia's yoga studio include the cost of the (i) tank tops. (ii) wages paid to the other yoga instructors. (iii) lease on the studio space. (iv) insurance that the landlord requires Sonia to carry for the studio. a. (i) only b. (i) and (ii) only c. (iii) and (iv) only d. (i), (ii), (iii), and (iv)
(iii) and (iv) only
free rider
* person who receives the benefit of a good but avoids paying for it - 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
supply curve shifters
*input prices- supply is negatively related to the prices of inputs (wages, input prices of raw materials) *technology- determines how much inputs are required to produce a unit of output ( a cost saving improvement has the same effect as a fall in input prices, shifts s curve to the right) *number of sellers- increase in # of sellers = increase in the quantity supplied at each price *expectations- sellers may adjust supply when their expectations of future prices change (ex. events in the middle east lead to expectations of higher oil prices)
determinants of trade
*the equilibrium without trade -only domestic buyers and sellers -equilibrium price and quantity (determined on the domestic market) -total benefits (consumer and producer surplus)
determinants of deadweight loss
*the price elasticities of demand and supply - more elastic supply curse - larger dwl - more elastic demand curve - larger dwl * the greater the elasticity of supply and demand - the greater the dwl of a tax
the demand curve
- price affects quantity demanded - change in price= slide across the demand curve
benefits on international trade
-Consumers:increased variety of goods. -Producers : lower costs- economies of scale - increased competition -enhanced flow of ideas
shapes of costs
-MC: (sometimes) decreases, then goes back up -AVC:usually increasing bc MC is increasing -ATC: usually U-shaped
competitive firms LR supply curve
-if P is less than ATC, then firm exits the market eventually - may stay in business temporarily if P is greater than AVC
expectations about the future
-increase in income, increase in current demand - higher price, increase in current demand
increase in # of buyers =
-increases quantity demanded at each price -shift demand curve to the right (decrease in # of buyers = shift to the left)
key difference in shutdown vs. exit
-is shut down in SR, must still pay FC -if exit in LR, zero costs
taxes
-the government can make buyers or sellers pay a specific amount on each unit - government uses taxes to raise revenue for public projects
when each country specializes in the goods in which it has a comparative advantage
-total production in all countries is higher - the worlds "economic pie" is bigger -all countries can gain from trade
Average tax rate
-total taxes paid divided by total income -measures the sacrifice a taxpayer makes
Hilda's Hair Hysteria earned $3,750 in total revenue last month when it sold 125 haircuts. This month it earned $3,600 in total revenue when it sold 90 haircuts. The price elasticity of demand for Hilda's Hair Hysteria is
1.14
Taxes cause deadweight losses because
1.prevent buyers and sellers from realizing some of the gains from trade. 2.cause marginal buyers and marginal sellers to leave the market, causing the quantity sold to fall. 3. reduce the sum of producer and consumer surpluses by more than the amount of tax revenue. (all of the above)
Figure 15-7. In order to maximize profits, the monopolist should produce
12 units
The firm has total fixed costs of $9 and a constant marginal cost of $3 per unit. The firm will maximize profit with
15 units of output
suppose the price of a bag of tortilla chips decreases from $3.00 to $2.50, and as a result, the quantity demanded increases from 200 bags to 300 bags. using the midpoint method, the price elasticity of demand in the given price range is
2.20
figure 5-12 using the midpoint method, the price elasticity of demand between x and y is
2.5
figure 6-28 suppose a tax of $6 per unit is imposed on this market. what will be the new equilibrium quantity in this market?
20 units
Riva crafts and sells hard cider as a part-time job. She can bottle and sell four cases in a week. She is considering hiring her friend Atul to help her. Together, Riva and Atul can bottle and sell seven cases per week. What is Atul's marginal product?
3 cases
Table 15-19. If a monopolist faces a constant marginal cost of $5, how much output should the firm produce in order to equate marginal revenue with marginal cost?
4 units
figure 7-15 when the price rises from P1 to P2, what other area represents the increase in producer surplus
A + B
price ceiling
A legal maximum on the price at which a good can be sold (rent control law)
price floor
A legal minimum on the price at which a good can be sold (minimum wage laws)
perfectly competitive market
A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market. - buyers and sellers are so numerous that no one can affect the market price, "price-takers" - MR=P , so profit maximizing firms will set MC=P.
shortage
A situation in which quantity demanded is greater than quantity supplied
surplus
A situation in which quantity supplied is greater than quantity demanded
figure 7-4 when the price falls from P1 to P2, which area represents the increase in consumer surplus to new buyers entering the market?
ABC
economies of scale
ATC always decreasing as output increases -water company
constant returns to scale
ATC constant as output increase -farms
diseconomies of scale
ATC increasing as output increases - most firms eventually have - coffee shops
consumer and producer surplus with tax
CS= 1/2x new price x quantity PS= what u got for CS
consumer surplus
CS= WTP-P
Figure 15-11. Which area represents the deadweight loss from monopoly?
J + H
Assume Leo buys coffee beans in a competitive market. It follows that
Leo cannot influence the price of coffee beans even if he buys a large quantity
optimal quantity is where
MR crosses MC
total revenue is increasing as long as
MR is greater than 0
optimal quantity
MR=MC
Consumer's Optimum is where
MUx/MUy = Px/Py
producer surplus
PS= P-Cost cost- value of everything a seller must give up to produce a good/service
tax wedge
Pc=Pf + T or Pc- T = Pf
Demand is perfectly inelastic
Price elasticity of demand = 0 Demand curve is vertical
Demand is perfectly elastic
Price elasticity of demand = infinity Demand curve is horizontal
total revenue
Price x Quantity
macro
The study of the economy as a whole
positive externality
a benefit received by someone who had nothing to do with the activity that generated the benefit ex. research and development creates knowledge others can use
which of the following changes would not shift the supply curve for a good or service
a change in the price of a good or service
Which of the following examples illustrates an oligopoly market?
a city with two firms who are licensed to sell school uniforms for the local schools
which of the following could explain the change in the budget line from A to B?
a decrease in the price of Y
figure 4-15 which of the following would cause the supply curve to shift from A to C in the market for sail boats
a decrease in the price of fiberglass and sail cloth
which of the following is not an example of a negative externality
a decrease in your property value from neglecting your lawn
monopoly
a firm that is the only firm in the market - barriers to entry - legal: patents, copyrights, etc -natural: network externalites, economies of scale *care about MR curve-the additional revenue from selling 1 more unit * monopolist produces quantity at which MR=MC
export
a good produced domestically and shipped to another state or country
import
a good produced in another state or country but sold domestically
market
a group of buyers and sellers of a particular good or service
exit
a long-run decision to leave the market
income elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income - normal goods: income elasticity greater than 0 - inferior goods: income elasticity less than 0
cross-price elasticity of demand
a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good - substitutes: cross-price elasticity greater than 0 - complements: cross-price elasticity less than 0
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
when two goods are perfect complements, the indifference curve is
a right angle
shutdown
a short-run decision not to produce anything because of market conditions
equilibrium
a situtation in which no one benefits by changing this behavior
tariff
a tax on goods produced abroad and sold domestically
which of the goods is not excludable and not rival in consumption?
a tornado siren
figure 14-1 the firm will earn a positive economic profit in the short run if the market price is
above $6.30
collusion
all firms act together as if they were just one monopolist -problem: hard to enforce; prisoner's dilemma makes all firms want to cheat
figure 10-17 how large would a corrective tax need to be to move this market from the equilibrium outcome to the socially optimal outcome
an amount equal to the external cost
on a graph we draw a consumers budget constraint, measuring the numbers of apples on the horizontal axis and the number of light bulbs on the vertical axis. if the slope of the budget constraint is -2, then
an apple costs twice as much as a light bulb
Which of the following is not an example of price discrimination?
an ice cream parlor charges a higher price for ice cream than for sherbert
Econ Agent
any group or individual that makes choices
tastes
anything that causes a shift in tastes toward a good
gains from trade
arise from comparative advantage (differences in opportunity costs)
If Franco's Pizza Parlor knows that the marginal cost of the 500th pizza is $3.50 and that the average total cost of making 499 pizzas is $3.30, then
average total costs are rising at Q=500
Suppose you make jewelry. If the price of gold falls, then we would expect you to
be willing and able to produce more then before at each possible price
If a shortage exists in a market, then we know that the actual price is
below the equilibrium price, and quantity demanded is greater than quantity supplied
suppose that the demand for light bulbs is elastic. a tax of $2 per bulb levied on light bulbs will increase the price paid by buyers of light bulbs by
between $1 & $2
If macaroni and cheese is an inferior good, what would happen to the equilibrium price and quantity of macaroni and cheese if consumers' incomes rise?
both price and quantity would decrease
consider the market for portable air conditioners in equilibrium. a summer of unseasonably cool weather would cause
both the equilibrium price and quantity to decrease
billie spends all of her income on soccer balls and jeans, and the price of jeans is three times the price of soccer balls. in order to maximize total utility, billie should
buy both until the marginal utility of a pair of jeans is three times the marginal utility of soccer balls
willingness to pay
buyers willingness to pay for a good ( maximum amount)
A group of firms that act in unison to maximize collective profits is called a
cartel
demand curve slides when
change in price
tax revenue
change in price x quantity
supply curve slides when
changes in quantity supplied/ price
price discrimination
charging different prices to different customers for the same product - can recover some of the surplus lost by monopoly pricing ex. last min airline tickets, coupons, etc
the demand of chicken wings is more elastic than the demand for razor blades. suppose the government levies an equivalent tax on chicken chicken wings and razor blades. the deadweight loss would be larger in the market for
chicken wings than in the market for razor blades because the quantity of chicken wings would fall by more than the quantity of razor blades
most studies indicate that alcohol and marijuana tend to be
complements
the big blue sky jet company has long-run total costs of $20 million is it produces 5 jets and long-run total costs of $24 million if it produces 6 jets. the Big Blue Sky jet company is experiencing
constant returns to scale
deadweight loss is the
decline in total surplus that results from a tax
which of the following events must cause equilibrium quantity to rise?
demand and supply increase
A monopolistically competitive market is characterized by
differentiated products, but not long run profits
Which of the following is not a reason for the existence of a monopoly?
diseconomies of scale
equity
distributing the burden of taxes "fairly"
implicit costs
do not require an outlay of money by the firm
fixed costs
do not vary with the quantity of output produced
If Pd is greater than Pw
domestic country does not have comparative advantage, country imports the good
if Pc is less than Pw
domestic country has comparative advantage, country exports the good
free trade
domestic price = world price
Suppose that monopolistically competitive firms in a certain market are earning positive profits. In the transition from this initial situation to a long-run equilibrium,
each existing firm experiences a decrease in demand for its product
principle of comparative advantage
each good should be produced by the individual that has the smaller opportunity cost of producing that good
utility
economic concept of the thing which people maximize when they make choices - assumes that al decisions are made to maximize utility
the principle of economics
economists study human behavior ( choice - not money)
A tax imposed on the buyers of a good will lower the
effective price received by sellers and lower the equilibrium quantity
when considering changes in the tax laws, policymakers often face a trade-off between
efficiency and equity
The demand for grape-flavored Hubba Bubba bubble gum is likely
elastic bc there are many close substitutes for grape flavored Hubba Bubba
opponents of alcohol taxes often argue that liquor and marijuana are substitutes so that high liquor prices
encourage marijuana use, but evidence does not support this argument
Drug companies are allowed to be monopolists in the drugs they discover in order to
encourage research
percent change
end value- start value / midpoint (avg.) x 100
Suppose the number of buyers in a market increases and a technological advancement occurs also. What would we expect to happen in the market?
equilibrium quantity would increase, but impact of price would be ambiguous
club goods
excludable but not rival in consumption ex. netflix
private goods
excludable, rival in consumption ex: food
total cost
explicit + implicit & Fixed cost + Variable cost
a competitive market is in long run equilibrium. if demand decreases, we can be certain that price will
fall in the short run. all, some, or no firms will shut down, and some will exit the industry. price will then rise to reach the new long-run equilibrium
Recent forest fires in the western states are expected to cause the price of lumber to rise in the next six months. As a result, we can expect the supply of lumber to
fall now
which of the following is correct? a tax burden
falls more heavily on the side of the market that is less elastic
If textbooks and study guides are complements, then an increase in the price of textbooks will result in
fewer study guides being sold
Once tradable pollution permits have been allocated to firms,
firms that can reduce pollution only at high cost will be willing to pay the most for the pollution permits
average fixed cost
fixed cost divided by the quantity of output
If the labor supply curve is nearly vertical, a tax on labor
has little impact on the amount of work that workers are willing to do
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 low-income taxpayers
regressive tax
high-income taxpayers pay a smaller fraction of their income than low-income taxpayers
price elasticity of supply
how much the quantity supplied of a good responds to a change in the price of that good - price increase, supply increase
competitive firm's SR supply curve
if P is greater than AVC, then firm produces Q where P=MC if P is less than AVC, then firm shuts down (produces Q=0)
the Caose theorem
if private parties can bargain without cost over the allocation of resources - they can solve the problem of externalities on their own
which of the following statements best reflects a price-taking firm
if the firm were to charge more than the going price, it would sell more none of its goods
in a competitive market price is $5. the typical firm in the market has ATC= $5.50 and AVC= $4.50
in the short run firms will continue to operate, but in the long run firms will leave the market
when there is a technological advance in the pork industry, consumer surplus in that market will
increase
If the government levies a $5 tax per ticket on buyers of NFL game tickets, then the price paid by buyers of NFL game tickets would
increase by less than $5
inferior good
increase in income leads to decrease in demand; shifts to the left
Figure 4-7 the movement from Da to Db in the market for potato chips would be caused by a(n)
increase in the price of pretzels
If the demand for donuts is elastic, then a decrease in the price of donuts will
increase total revenue of donut sellers
suppose consumer income increases. if grass seed is a normal good, the equilibrium price of grass seed will
increase, and producer surplus will increase
figure 4-23 in this market for watermelons, a severe drought occurs which affects the crop. the equilibrium price
increases and equilibrium quantity decreases
when demand is inelastic
it's harder for consumers to leave the market when the tax raises PB. So, the tax only reduces Q a little, and DWL is small.
when supply is inelastic
its harder for firms to leave the market when the tax reduces Ps - so the tax only reduces Q a little, and DWL is small
Abe owns a dog; the dog's barking annoys Abe's neighbor, Jenny. Suppose that the benefit of owning the dog is worth $200 to Abe and that Jenny bears a cost of $400 from the barking. Assuming Abe has the legal right to keep the dog, a possible private solution to this problem is that
jenny pays abe $300 to give the dog to his parents
Economies of scale occur when
long-run average total costs are decreasing as output increases
if MC>MR
make less
If MC is less than MR
make more
figure 6-2 the price ceiling
makes it necessary for sellers to ration the good
optimization
making the best or most efficient use of a situation, product, or resource
competitive market
many buyers and sellers, each has a negligible effect on price
the minimum points of the average variable cost and average total cost curves occur where the
marginal cost curve intersects those curves
A perfectly competitive firm produces where
marginal cost equals price, while a monopolist produces where price exceeds marginal cost
dimishing 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
Mr. Rodgers sells colored pencils. the colored pencil industry is competitive. Mr. Rogers hires a business consultant to analyze his company's financial records. The consultant recommends that Mr. Rogers increase his production. The consultant must have concluded that Mr. Roger's
marginal revenue exceeds his marginal cost
competitive equilibrium
market comes to an agreement about what the price will be and how much will be exchanged at that price
ogliopoly
markets have a small number of firms and high barriers to entry - products may be differentiated (profits in the long run)or homogenous(no profits in the long run)
the goal of the consumer is to
maximize utility
elasticity of demand
measure of responsiveness of Qd or Qs - how much the quantity demanded of a good responds to a change in the price of that good
an example of a price floor is
minimum wage
excess demand
more consumers than producers. not enough is produced
Table 14-11. If the firm is producing 3 units of output, it should produce
more units of output because its marginal revenue is greater than its marginal cost
Assume the demand for cigarettes is relatively inelastic, and the supply of cigarettes is relatively elastic. When cigarettes are taxed, we would expect
most of the burden to fall on the buyers of cigarettes, regardless of whether buyers or sellers are required to pay the tax to the government
The reason to regulate utilities instead of using antitrust laws to promote competition is that a utility is usually a
natural monopoly
If Max experiences a decrease in his income, then we would expect Max's demand for
normal goods to decrease
if the government removes a $1 tax on sellers of gasoline and imposes the same $1 tax on buyers of gas, then the price paid by buyers will
not change, and the price received by sellers will not change
public goods
not excludable, not rival ex: national defense
the U.S. military defends jacob from foreign attackers. the fact that jacob enjoys this protection does not detract from other Americans' enjoyment from it. for this reason, we say that national defense is
not rival in consumption
Demand Curve Shifters
number of buyers, income (increase in income leads to an increase in demand- shifts to the right), prices of related goods, tastes, and expectations
Most lighthouses are operated by the government because
of the free-rider problem
a rain barrel is a container that captures and stores rainwater for garden use during dry periods. they provide an external benefit to the community through water conservation. what can the government do to equate the equilibrium quantity of rain barrels and the socially optimal quantity of rain barrels?
offer a subsidy on rain barrels that is equal to the per-unit externality
law of supply
other things being equal; when the price of a good rises, the quantity supplied of the good rises ( and vice-versa when it falls)
A good is excludable if
people can be prevented from using it
figure 4-26 which of the following movements would illustrate the effect in the market for convertible cars of an increase in the price of steel?
point c to point d
After the patent runs out on a brand name drug, generic drugs enter the market. What happens next in the market?
price decreases, and total surplus increases
demand is inelastic
price elasticity of demand < 1
Demand has unit elasticity
price elasticity of demand = 1
demand is elastic
price elasticity of demand greater than 1
Equilibrium in supply and demand
price has reached the level where quantity supplied equal quantity demanded
New cars are normal goods. What will happen to the equilibrium price of new cars if the price of gasoline rises, the price of steel falls, public transportation becomes cheaper and more comfortable, auto-workers accept lower wages, and automobile insurance becomes more expensive?
price will fall
excess supply
producers provide more than consumers demanded (=surplus)
Markets do not ensure that the air we breathe is clean because
property rights are not well established for clean air
import quota
quantitative limit on imports of a good - raises price, reduces quantity -reduces buyers welfair -increases sellers welfare -creates profit for the foreign producers of the imported goods, who can sell them at higher price
The deadweight loss that arises from a monopoly is a consequence of the fact that the monopoly
quantity is lower than the socially- optimal quantity
supply
quantity supplied - amount of a good - sellers are willing and able to sell
tariff on imports
raises domestic price above world price by the amount of the tariff
MRS
rate at which a consumer is willing to trade for another good
explicit costs
require an outlay of money (paying wages to workers)
Comparing marginal revenue to marginal cost
reveals the contribution of the last unit of production to total profit and is helpful in making profit-maximizing production decisions
common resources
rival in consumption and not excludable ex: fish in the ocean
lump-sum taxes
same $ amount for everyone
which of the following industries is least likely to exhibit the characteristic of free entry
satellite radio
burden of a tax is
shared between buyers and sellers depending on the price elasticities of demand and supply
a decrease in income will cause a consumers budget constraint to
shift inward, parallel to its initial position
effects of globalization
shift toward interdependent economies- on domestic culture
figure 4-18 at a price of $15, there would be a
shortage of 400 units
indifference curve
shows consumption bundles that give the consumer the same level of satisfaction
How to internalize the externality
social norms, government interventions - both can have same effect on markets, but who benefits can be different
micro
study of how individuals make choices
market supply
sum of the supplies of all sellers of a good or service
which of these types of costs can be ignored when an individual or a firm is making decisions?
sunk costs
vertical equity
taxpayers with a greater ability to pay taxes should pay larger amounts
comparitive advantage
the ability to produce a good at a lower opportunity cost than another producer
absolute advantage
the ability to produce a good using fewer inputs than another producer -measures the cost of a good in terms of the inputs to produce it
the Ogallala aquifer is a large underground pool of fresh water under several western states in the united states. any farmer w/ land above the aquifer can at present pump water out of it. which of the statements about the aquifer is correct?
the aquifer is a common resource which will be overused if no one owns it.
in absence of market failures
the competitive market outcome is efficient, maximizes total surplus
the more elastic is demand
the easier for buyers to leave the market when the tax increases PB, the more Q falls below the surplus-maximizing quantity, and the greater the DWL.
the more elastic is supply
the easier for firms to leave the market when the tax reduces Ps - the greater Q falls below the surplus- maximixing quantity, the greater the DWL
what does affect the incidence of a tax?
the elasticity
what would happen to the equilibrium price and quantity of lattes if coffee shops began using a machine that reduced the amount of labor necessary to produce steamed milk, which is used to make lattes, and scientists discovered that lattes cause heart attacks?
the equilibrium price would decrease and the effect on quantity would be ambiguous
marginal tax rate
the extra taxes paid on an additional dollar of income - measures the incentive effects of taxes on work effort, saving, etc.
negative externality
the harm, cost, or inconvenience suffered by a third party because of actions by others ex. air pollution from a factory, neighbors barking dog, noise pollution from construction projects
marginal product
the increase in output that arises from an additional unit of input - slope of the production function - marginal product of labor -- MPL= change in Q/ change in Labor
marginal cost
the increase in total cost that arises from an extra unit of production - marginal cost= change in total cost/ change in quantity
budget constraint
the limit on the consumption bundles that a consumer can afford
tax incidence
the manner in which the burden of a tax is shared among participants in a market
a consumer maximizes utility when she consumes at a point where
the marginal utility per dollar spent on each good is the same
midpoint method
the number halfway between the start and end values, (the average of those values)
which of the following events could cause an increase in the supply of ceiling fans?
the number of sellers of ceiling fans increase
Excludability
the property of a good whereby a person can be prevented from using it (wifi) - not excludable (radio signal, national defense)
rivalry in consumption
the property of a good whereby one person's use diminishes other people's use
deadweight loss
the reduction in social surplus resulting from a market intervention
production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
figure 6-21 suppose buyers, rather than sellers, were required to pay this tax ( in the same amount per unit as shown ) relative to the tax on sellers, the tax on buyers would result in
the same amount of tax revenue for the government
market demand/ market demand curve
the sum of all the individual demands for a particular good or service sum of the individual demand curve horizontally
externality: one type of market failure
the uncompensated impact of one person's actions on the well-being of a bystander
protectionism
the view that governments should control trade due to the harmful effects of free trade
if there is a shortage of farm labors, we would expect
the wage of farm laborers to increase
accounting profit
total revenue - explicit costs accounting profit is higher than economic profit because it ignores implicit costs
profit
total revenue minus total cost
economic profit
total revenue minus total cost, including both explicit and implicit costs
Market Efficiency
total surplus: CS+PS value to buyers- cost to sellers
figure 21-12 if the consumer moves from bundle V to bundle X, the
total utility increases
complements
two goods are complements if - an increase in price of one leads to a decrease in demand for the other - computers and software -salty snacks + beer/ margaritas
substitutes
two goods are substitutes if - an increase in the price of one leads to an increase in demand for the other - pizza and hamburgers - coke and pepsi
perfect complements
two goods with right-angle indifference curves
perfect substitutes
two goods with straight-line indifference curves
Bertrand competition
undercutting continues until P=MC
Without government intervention, public goods tend to be
underproduced and common resources tend to be over-consumed
marginal utility
utility that you get from receiving 1 more unit of something - high when you dont have much of that thing
consumer surplus is equal to the
value to buyers - amount paid by buyers
Total surplus is equal to
value to buyers - cost to sellers
average variable cost
variable cost divided by the quantity of output
variable costs
vary with the quantity produced
for which of the following goods is the income elasticity of demand likely lowest?
water
An example of a perfectly competitive market would be the market for
wheat
two countries can gain from trade
when each specializes in the good it produces at lowest cost
indifference
you are indifferent between two choices when they give you exactly the same utility
