ME EXAM 3
Diminishing Marginal Product
Marginal product declines as input increases
What does Diminishing Marginal Product state?
Marginal product declines as input quantity increases.
Willingness to pay
Maximum price someone is willing to pay for a good
Efficient Scale
Minimum point of ATC
Short-run economic losses
Negative economic profits in the short run
Profit-maximizing output
Output level that maximizes profits
Constant returns to scale at output levels
Output levels between M and N
Economies of scale at output levels
Output levels greater than N
Diseconomies of scale at output levels
Output levels less than M
Tradable pollution permit
Permit that sets the quantity of pollution
Short-run economic profits
Positive economic profits in the short run
Equilibrium price and quantity
Price and quantity at the intersection of supply and demand
Socially optimal price and quantity
Price and quantity that maximize social welfare
Market price
Price determined by supply and demand
Total Revenue
Price multiplied by quantity
What is the formula for Profit?
Profit = Revenue - Cost.
Production Function
Relationship between inputs and output
Common resources
Resources whose use by one person reduces enjoyment for others
Profit
Revenue minus cost
Economic Profit
Revenue minus explicit and implicit costs
Accounting Profit
Revenue minus explicit costs
Increase in Demand
Shifts market equilibrium and supply curve
What is the difference between Short Run and Long Run?
Short Run has fixed inputs, Long Run has variable inputs.
Shutdown
Short-run decision not to produce
Short Run
Some fixed inputs
Free-rider
Someone who benefits from a good without paying for it
Total Cost
Sum of fixed and variable costs
Long Run Supply
Supply curve in the long run
T.F A corrective tax places a price on the right to pollute.
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T.F A firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100thunit costs the firm $5. The firm can sell the 100th unit for $5. The firm should continue to produce 100 units in order to maximize its profits (or minimize its losses).
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T.F A firm operating in a perfectly competitive industry will continue to operate in the short run but earn losses if the market price is less than that firm's average total cost but greater than the firm's average variable cost.
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T.F A good that is excludable but not rival is known as a club good.
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T.F A restaurant, which operates in a perfectly competitive market, is evaluating whether it should serve breakfast on a daily basis. It would choose to do this when its revenues cover its variable costs.
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T.F According to the Coase theorem, if private parties can bargain without cost, then the private market will solve the problem of externalities.
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T.F An example of the "Tragedy of the Commons" is litter in the picnic area of a local park.
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T.F As a firm moves along its long-run average cost curve, it is adjusting the size of its factory to the quantity of production.
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T.F Diminishing marginal product exists when the production function becomes flatter as inputs increase.
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T.F If Dave and Jesse are the only two fishermen in town and neither is bothered by the other's fishing, the lake they fishin is not a common resource.
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T.F If a firm observes that the price of its product is above average variable cost, it would choose to continue to produce the good in the short run, even if that firm experiences economic losses.
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T.F Implicit costs are costs that do not require an outlay of money by the firm.
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T.F In a competitive market, firms are unable to differentiate their product from that of other producers.
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T.F In some cases, specialization allows larger factories to produce goods at a lower average cost than smaller factories.
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T.F In the long run, when price is greater than average total cost, some firms in a competitive market will choose to enter the market.
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T.F Markets may fail to allocate resources efficiently when property rights are not well established.
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T.F One solution to the "Tragedy of the Commons" is to turn the common resource into a private good.
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T.F Patent protection is one way to deal with technology spillovers.
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T.F Private goods and club goods have in common that they are excludable, but are different in that private goods are rival while club goods are not rival in consumption.
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T.F Private parties may choose not to solve an externality problem if the transaction costs are large enough.
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T.F The free-rider problem arises when the number of beneficiaries is large and exclusion of any of them is impossible.
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T.F The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities
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T.F The long-run supply curve in a competitive market is more elastic than the short-run supply curve
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T.F Variable costs usually change as the firm alters the quantity of output produced.
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T.F When a driver enters a crowded highway he increases the travel times of all other drivers on the highway. This is an example of a negative externality.
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T.F When economic profits are zero in equilibrium, the firm's revenue must be sufficient to cover all opportunity costs.
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T.F When goods are available free of charge, the market forces that normally allocate resources in our economy are absent.
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T.F You and your friends eat potato chips in your bedroom. For you and your friends, the potato chips are rival in consumption.
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T.F. Buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply.
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Corrective tax
Tax that sets the price of pollution
In the case of a technology spillover, the government can encourage firms to internalize a positive externality by
subsidizing production, which would increase supply.
A paper plant produces water pollution during the production process. If the government forces the plant to internalize the negative externality, then the
supply curve for paper would shift to the left
If education produces positive externalities and the government does not intervene in the market, we would expect
the equilibrium quantity to be lower than the optimal level
Markets fail to allocate resources efficiently when
too many buyers and sellers exist in the same market.
Which of the following is not a typical solution to the "Tragedy of the Commons?" a. taxing the use of the common resource b. turning the common resource into a club good c. turning the common resource into a private good d. regulating the use of the common resource
turning the common resource into a club good
Marginal product
Additional output produced by one additional unit of input
Marginal revenue
Additional revenue from selling one additional unit of output
Long Run
All inputs are variable
Which of the following statements is correct? a. The use of pollution permits and corrective taxes reduces the cost of environmental protection. b. Rich countries usually have cleaner environments than poor countries because a clean environment is like other normal goods in that it has a positive income elasticity. c. Clean water and clean air are goods to which the law of demand applies. d. All of the above are correct.
All of the above are correct.
Where does Marginal Cost intersect Average Total Cost?
At the minimum point of ATC.
Positive externalities
Benefits that spill over to others
T.F. In a market with positive externalities, the market equilibrium quantity maximizes the welfare of society as a whole.
F
The Tragedy of the Commons
is eliminated when property rights are assigned to individuals.
Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in makingwedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost ofmaking a wedding cake is $200. In order to maximize profits, Laura should
make more than 20 wedding cakes per month.
A cost imposed on someone who is neither the consumer nor the producer is called a
negative externality.
A traffic light at an intersection is
not rival and not excludable in consumption.
When the government intervenes in markets with externalities, it does so in order to
protect the interests of bystanders
Because the goods offered for sale in a competitive market are largely the same
sellers will have little reason to charge less than the going market price
Marginal cost
Additional cost of producing one additional unit of output
Cameron lives in an apartment building and gets a $700 benefit from playing his stereo. Renee, who lives next door toCameron and often loses sleep due to the music coming from Cameron's stereo, bears a $1,000 cost from the noise. Atwhich of the following offers from Renee could both Renee and Cameron benefit from the silencing of Cameron's stereo?
$750
Private good
A good that is excludable and rivalrous
What is an Exit?
A long-run decision to leave the market.
Perfectly competitive market
A market with many buyers and sellers, identical products, and no barriers to entry
What is a Shutdown?
A short-run decision not to produce anything.
Congestion toll
A toll imposed on a driver to account for increased travel time
What is the relationship between Average Total Cost and output?
ATC decreases as output increases.
Economies of Scale
ATC falls as output increases
Diseconomies of Scale
ATC increases as output increases
Constant Returns to Scale
ATC stays the same as output increases
What is the initial trend of Average Variable Cost?
AVC decreases, then starts increasing.
What is Accounting Profit?
Accounting Profit = Revenue - Explicit Costs.
Competitive Firm
Can increase output without affecting market price
Marginal Product of Labor
Change in output from a change in labor
What does Marginal Product of Labor measure?
Change in output from a change in labor.
Marginal Cost
Change in total cost from a change in output
What does Marginal Cost measure?
Change in total cost from a change in output.
Marginal Revenue
Change in total revenue from a change in quantity
Firm's choice in the long run
Choice of inputs, factory size, and short-run average total cost curve
Total surplus
Consumer surplus plus producer surplus
Which of the following statements is not correct? a. Tradable pollution permits have an advantage over corrective taxes if the government is uncertain as to the optimal size of the tax necessary to reduce pollution to a specific level. b. Both corrective taxes and tradable pollution permits provide market-based incentives for firms to reduce pollution. c. Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix the price of pollution. d. Both corrective taxes and tradable pollution permits reduce the cost of environmental protection and thus should increase the public's demand for a clean environment.
Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix the price of pollution
Economies of scale
Cost advantages from increasing production
Diseconomies of scale
Cost disadvantages from increasing production
Transaction costs
Costs associated with making and enforcing agreements
Constant returns to scale
Costs remain constant as production increases
Implicit Costs
Costs that do not require a cash outlay
What are Implicit Costs?
Costs that do not require a cash outlay.
Fixed Costs
Costs that do not vary with output
What are Fixed Costs?
Costs that do not vary with output.
Explicit cost
Costs that involve direct payment of money
Explicit Costs
Costs that require an outlay of money
What are Explicit Costs?
Costs that require an outlay of money.
Negative externalities
Costs that spill over to others
Variable Costs
Costs that vary with output
Average total cost functions
Curves showing average total cost at different output levels
T.F When market activity generates a negative externality, the level of output in the market equilibrium is lower than the socially optimal level.
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T.F. Concerts in arenas are not excludable because it is virtually impossible to prevent someone from seeing the show.
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Diminishing marginal product
Decrease in additional output as more input is added
What is Economic Profit?
Economic Profit = Revenue - Explicit Costs - Implicit Costs.
Long Run Average Total Cost Curve
Envelope of Short Run Total Cost Curves
T.F A firm operating in a competitive market will stay in business in the short run so long as the market price exceeds the firm's average total cost; otherwise, the firm will shut down
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T.F A technology spillover is a type of negative externality.
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T.F Corrective taxes cause deadweight losses, reducing economic efficiency.
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T.F Fixed costs are those costs that remain fixed no matter how long the time horizon is.
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T.F 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
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T.F If the marginal-cost curve is rising, then so is the average-total-cost curve
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T.F In competitive markets, firms that raise their prices are typically rewarded with larger profits.
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T.F In the short run, if a firm produces nothing, total costs are zero
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T.F Marginal costs are costs that do not vary with the quantity of output produced.
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T.F National Public Radio would be considered a club good.
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T.F Pollution is a negative externality, but it is not appropriate to view the problem of pollution as a common-resource problem
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T.F The average-fixed-cost curve is constant.
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T.F The marginal-cost curve intersects the average-fixed-cost curve at the minimum of marginal cost.
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T.F The shape of the total-cost curve is unrelated to the shape of the production function.
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T.F The supply curve of a firm in a competitive market is the average variable cost curve above the minimum of marginal cost.
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T.F When an individual firm in a competitive market decreases its production, it is likely that the market price will rise.
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T.F When economists speak of a firm's costs, they are usually excluding the opportunity costs.
F
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
Firm's profit-maximizing level of output is less than 100 units.
What happens to profit in a competitive market in the long run?
Firms earn zero profit.
Average Fixed Cost
Fixed cost per unit of output
Average fixed cost
Fixed cost per unit of output
What is Average Fixed Cost?
Fixed cost per unit of output.
Internalize externalities
Government intervention to address negative/positive externalities
Regulation
Government intervention to solve common resource problems
Which of the following statements is correct? a. Government should tax goods with either positive or negative externalities. b. Government should tax goods with negative externalities and subsidize goods with positive externalities. c. Government should subsidize goods with either positive or negative externalities. d. Government should tax goods with positive externalities and subsidize goods with negative externalities.
Government should tax goods with negative externalities and subsidize goods with positive externalities
What is the shape of the long-run market supply curve?
Horizontal line.
What can a Competitive Firm do without affecting market price?
Increase output.
What is the relationship between Long Run Average Total Cost and Short Run Total Cost Curves?
LRATC is the envelope of all SRATC curves.
Exit
Long-run decision to leave the market
Minimum efficient scale
Lowest level of output at which long-run average total cost is minimized
Short-run supply curve
Marginal cost curve above average variable cost curve
Which of the following statements is correct? a. The efficient provision of private goods is intrinsically more difficult than the efficient provision of public goods. b. The efficient provision of public goods is intrinsically more difficult than the efficient provision of private goods. c. Private markets provide quantities of public goods that exceed the socially-efficient quantities of those goods. d. Private decision makers utilize quantities of common resources that fall short of the socially-efficient quantities of those resources
The efficient provision of public goods is intrinsically more difficult than the efficient provision of private goods
Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the railroad is not liable for any damage caused to the crops. Assume that there are no transaction costs. Which of the following characterizes an efficient outcome?
The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.
What is Efficient Scale?
The minimum point of Average Total Cost.
What does the Production Function show?
The relationship between inputs and output.
University researchers create a positive externality because what they discover in their research labs can easily belearned by others who haven't contributed to the research costs. Suppose that the federal government gives grants to theseresearchers equal to the their per-unit production externality. What is the relationship between the equilibrium quantity ofuniversity research and the socially optimal quantity of university research produced?
They are equal
What is the formula for Total Cost?
Total Cost = Fixed Costs + Variable Costs.
Average Total Cost
Total cost per unit of output
Average total cost
Total cost per unit of output
What is Average Total Cost?
Total cost per unit of output.
Average Revenue
Total revenue divided by quantity
What is the shape of Average Total Cost?
U-shaped and the sum of AFC and AVC.
Average Total Cost Curve
U-shaped curve showing ATC
Average Variable Cost
Variable cost per unit of output
Average variable cost
Variable cost per unit of output
What is Average Variable Cost?
Variable cost per unit of output.
Under which of the following scenarios would a park be considered a public good? a. Visitors to the park must pay an admittance fee, but there are always plenty of empty picnic tables. b. Visitors to the park must pay an admittance fee and frequently all of the picnic tables are in use. c. Visitors can enter the park free of charge and there are always plenty of empty picnic tables. d. Visitors can enter the park free of charge, but frequently all of the picnic tables are in use.
Visitors can enter the park free of charge and there are always plenty of empty picnic tables
Under which of the following scenarios would a park be considered a club good? a. Visitors to the park must pay an admittance fee, but there are always plenty of empty picnic tables. b. Visitors to the park must pay an admittance fee and frequently all of the picnic tables are in use. c. Visitors can enter the park free of charge and there are always plenty of empty picnic tables. d. Visitors can enter the park free of charge, but frequently all of the picnic tables are in use.
Visitors to the park must pay an admittance fee, but there are always plenty of empty picnic tables.
When do Economies of Scale occur?
When ATC falls as output increases.
When do Diseconomies of Scale occur?
When ATC increases as output increases.
When do Constant Returns to Scale occur?
When ATC stays the same as output increases.
Exit the market
When a firm leaves a competitive market due to low price
Shut down
When a firm stops production in the short run due to insufficient revenue
Short-run shutdown
When a firm stops production in the short run due to losses
Long-run equilibrium
When firms earn zero economic profits
Economies of scale
When long-run average total cost falls as output increases
Diminishing marginal product
When the production function becomes flatter as inputs increase
A benevolent social planner would prefer that the output of good x be increased from its current level if, at the current level of output of good x,
social cost = private cost = private value < social value
The sign on a church in your neighborhood reads "All are welcome at Sunday Service." Because the church has limited seating and is usually full, the Sunday Service is
a common resource.
The term market failure refers to
a market that fails to allocate resources efficiently.
If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then
a one-unit decrease in output will increase the firm's profit.
Which of the following would be considered a private good? a. a ferry boat ride to an island with open seating b. a public beach c. fish in the ocean d. a swimming suit
a swimming suit
Altering incentives so that people take account of the external effects of their actions
a. is called internalizing the externality. b. can be done by imposing a corrective tax. c. is the role of government in markets with externalities.
Most economists prefer corrective taxes to regulation as a way to correct the problem of pollution because
a. the market-based solution is less costly to society. b. the market-based solution can result in a greater reduction in pollution. c. the market-based solution raises revenue for the government.
Resources tend to be allocated inefficiently when goods
are available free of charge.
A patent is used to
assign property rights
Which of the following industries is least likely to exhibit the characteristic of free entry? a. ethnic restaurants b. municipal water and sewer c. corn farming d. grocery stores
b. municipal water and sewer
Which of the following is not a characteristic of a perfectly competitive market? a. There are many buyers and sellers. b. Firms can freely enter and exit the market. c. Many firms have market power. d. Firms sell very similar products.
c. Many firms have market power.
Three business people meet for lunch at an Indian restaurant. They decide that each person will order an item off the menu, and they will share all dishes. They will split the cost of the final bill evenly among each of the people at the table.When the food is delivered to the table, each person faces incentives similar to the
consumption of a common resource good.
When new firms have an incentive to enter a competitive market, their entry will
drive down profits of existing firms in the market.
On hot summer days, electricity-generating capacity is sometimes stretched to the limit. At these times, electric companies may ask people to voluntarily cut back on their use of electricity. On these days, electricity is
excludable and rival in consumption.
Neither public goods nor common resources are
excludable, but only public goods are not rival in consumption
The failure of markets to adequately protect the environment can viewed either as a problem of
externalities or as a problem of common resources
Negative externalities lead markets to produce
greater than efficient output levels and positive externalities lead markets to produce smaller than efficientoutput levels
Imagine a 2,000-acre park with picnic benches, trees, and a pond. Suppose it is publicly owned, and people are invited to enjoy its beauty. When the weather is nice, it is difficult to find parking, and the trash cans overflow with food wrappers on summer afternoons. Otherwise, it is a great place. The park is a common resource because
if too many people use it, one person's use diminishes other peoples' use.
Private decisions about consumption of common resources and production of public goods usually lead to an
inefficient allocation of resources and external effects
