Micro Final Study Guide

France must give up the production of 75 ties to produce 25 additional dress shirts. The opportunity cost of producing three ties is _____ dress shirt(s).

1

The price of a dozen eggs falls from $3 to $2.70. In response to this price change, the quantity supplied of eggs falls from 100,000 dozen eggs to 75,000 dozen eggs. What is the price elasticity of supply for eggs, based on the midpoint method?

2.7

The United Kingdom must give up the production of 300 motorcycles to produce 15 additional convertible Jaguars with the same resources. The opportunity cost of producing 100 motorcycles is _____ convertible Jaguar(s).

5

What is the Rational Rule for Sellers, and how does it help sellers earn as much profit as possible?

According to the Rational Rule for Sellers, a seller should sell one more unit of output if the marginal revenue is at least as large as the marginal cost. Thus, if you are selling overcoats, you should sell another overcoat if doing so will raise your revenue by at least as much as your costs. Since the revenue gained will exceed the costs incurred, your profit will rise. The rule implies that you should sell units of output until your marginal revenue has fallen to the level of your marginal cost, that is, MR = MC, the condition for profit maximization.

You plan to work in the health care field. Employment levels for health service managers are expected to grow about 32.5% over the next decade, according to the Bureau of Labor Statistics (https://www.bls.gov/emp/images/growing_occupations.pngLinks to an external site.), higher than for most other professions. What might explain this expectation?

An aging population requires more health care services.

What is the difference between an efficient allocation in a market and an equitable allocation in a market?

An efficient allocation in a market occurs in a market with the maximum economic surplus. In this situation, goods are allocated to the consumers with the greatest willingness to pay, or greatest marginal benefit. An equitable allocation in a market distributes goods across consumers in a way that is considered fair. There are differing perspectives of what is fair. To some, fair means "equal." To others, it means that those who need the product the most get most of it. To others, a fair distribution is based on how much each individual contributes to production.

Chanda can change the oil in her Subaru in 30 minutes. It takes 45 minutes for Deepa to change the oil in the same car. Which statement is TRUE?

Chanda has an absolute advantage over Deepa in changing the oil.

You overhear an economist refer to the price of leisure. What does this mean? How can leisure have a price?

Economists see the decision to work as a trade-off between the utility associated with leisure and the consumption of goods and services made possible by the earnings from work, which also provide utility. Most people enjoy both consumption and leisure, but scarce hours in the day force people to choose between work (which facilitates consumption) and leisure. If a worker decides to spend an hour on leisure, they pay a "price" in the form of the opportunity cost of time, equal to the wage that could have been earned during that hour. So the price of leisure is the wage.

Which statement is TRUE? Profit-maximizing behavior occurs only in perfectly competitive markets. As long as MR < MC, a firm should increase output. If MR = MC, then the firm is at the profit-maximizing level of output. The profit-maximizing solution occurs where MR > MC.

If MR = MC, then the firm is at the profit-maximizing level of output.

Economists say that when an activity provides a positive externality to the community, the market does not produce enough of that activity. Why?

In the absence of a positive externality, consumption of a good benefits only the individuals who purchase it, where such benefits are represented by the market demand curve. If a good provides additional, or external, benefits to people who do not purchase the good, the external benefit is reflected not by the market demand curve but the marginal social benefit curve, which lies above the market demand curve. Because the market does not take account of external benefits, the market does not produce enough of the good. In other words, the marginal social benefit of the good exceeds the marginal social cost. Therefore, social welfare would be enhanced through increased output.

As the quantity sold rises for a seller in imperfect competition, what happens to the difference between price and marginal revenue?

It gets larger.

Why does Apple design the iPhone in California but assemble the iPhone in China?

The United States has a comparative advantage in iPhone design.

San Francisco decides to remove a binding price ceiling on rail fares. Which of these is likely to happen as a result?

The amount of overcrowding on trains will decline.

What are the five arguments for limiting international trade? Which one do you find most convincing? Explain your answer.

The five arguments for limiting international trade are national security, infant industry, preventing unfair competition, enforcing minimum standards, and saving jobs.

Margarite opened a successful restaurant two years ago on a block of connecting row houses. All the other businesses on the block are well-established accounting and law offices. Those businesses have complained that the garbage bins behind the restaurant attract mice, rats, and stray cats and dogs, causing them to increase their spending on exterminators. In economic terms, what is happening?

The other businesses on the block are dealing with an externality because Margarite considers only her marginal private costs as she makes decisions

Summarize the three steps for identifying who has a comparative advantage in a task.

There are three basic steps to determining who has comparative advantage. At least two persons are needed who can each perform two different tasks. First, identify how long it takes each person to complete each task. Then use the data to calculate each person's opportunity cost for performing each task. This is calculated by dividing the minutes to perform the task of focus by the minutes to perform the other task. The result is how much of the other task must be given up to perform the task of focus. The last step is to identify which person has the lowest opportunity cost for each task. The person with the lowest opportunity cost has a comparative advantage in that task.

Which of these statements is correct? -When a quota is placed on a market, the new price will be regulated by the government. -With a price regulation, the new price will be whatever buyers are willing to pay for the amount being sold. -When a tax is levied on a product, the new price that buyers pay will always be the old price plus the tax. -With a price regulation, the new price will be the regulated price, but with a quota, the new price will be whatever buyers are willing to pay for the limited quantity available.

With a price regulation, the new price will be the regulated price, but with a quota, the new price will be whatever buyers are willing to pay for the limited quantity available.

A subsidy is a:

a government payment designed to encourage particular purchases or productive activities.

Pollution may be the best example of a negative externality. A negative externality is:

an activity whose side effects harm bystanders.

Technological change _____ productivity.

boost

You have an absolute advantage in producing a product if you:

can produce the product using the fewest inputs.

The person with the LOWEST opportunity cost of producing a particular good has a(n):

comparative advantage.

Collectively, people in nations that engage in international trade are likely to:

consume more than they could consume in the absence of trade.

For the San Francisco 49ers football team, the marginal revenue product of labor curve is the team's labor _____ curve. This means that the marginal product curve has a _____ slope.

demand; negative

What are the causes of market failure?

externalities and market power. Market failure occurs when market forces fail to lead to an efficient result. There are five main causes of market failure. The problem of market power arises when markets are not perfectly competitive—when companies can exert some control over price. As companies in this situation will charge prices above marginal cost, consumers will buy smaller quantities than they otherwise would, and the market will produce less than the efficient quantity. The problem of externalities arises when the choices that buyers and sellers make have side effects on others. Because buyers and sellers do not generally consider the effects of their actions on outside parties, markets may lead businesses to produce more than the efficient quantity of a product, with negative side effects, or less than the efficient quantity of a product, with positive side effects. Information problems arise when information asymmetries between buyer and seller lead one side of the market to fear that the other side might be hiding something, leading people to buy or sell less than the efficient quantity. A fourth source of market failure is irrationality, that is, failures by buyers or sellers to follow their respective rational rules. This leads to demand decisions that don't reflect marginal benefit and supply decisions not driven by marginal cost, making efficient market outcomes unlikely. Finally, government regulations and taxes can prevent market forces from reaching efficient outcomes. Both taxes and regulations on price or quantity can cause a below-equilibrium quantity to be bought or sold.

A key difference between equity and efficiency is that equity concerns _____ and efficiency focuses on _____.

fairness; maximizing economic surplus

A regulation that specifies the maximum amount of a good or service that may be imported during a specified period is a(n):

import quota.

Goods and services purchased from abroad are _____, whereas goods and services sold abroad are _____.

imports; exports

Perdue supplies processed chicken to grocery stores and restaurants. The price of organic chicken is rising, and the price of conventional chicken has fallen slightly. Perdue shifts production to supply more organic chicken. For Perdue, the higher price acted as a(n):

incentive

The effect of international trade on American factor markets is to:

increase the wages of highly educated workers.

The _____ determine(s) the wage in a labor market.

intersection of the labor demand and labor supply curves

Saudi Arabia has a tremendous comparative advantage in oil production. Which factor is responsible for comparative advantage in this case?

large reserves of crude oil

The amount by which an additional unit of a factor, for example, labor, increases a firm's total revenue during a given period is the:

marginal revenue product.

During the coronavirus pandemic, global supply chain issues caused the supply of new cars to shift left. Which role did price play in the new car market? Price was a(n):

message to potential buyers that the marginal cost of manufacturing new cars is rising.

A market characterized by many producers producing a similar yet differentiated product would be considered:

monopolistically competitive.

Roscoe is the owner and landlord of several rent-controlled apartment buildings in Manhattan that are all being rented for a price far below non-rent-controlled apartments on the same block. He has an incentive to:

neglect maintenance of his buildings.

When Jeremiah watches a movie on Apple TV, his viewing is _____ in consumption because other people _____ able to watch the movie at the same time as Jeremiah does.

nonrival; are

Analysis based on value judgments is called _____ analysis.

normative

Equilibrium is the:

point at which there is no tendency for change.

The U.S. Senate Committee on Commerce, Science, and Transportation asks the Congressional Budget Office (CBO) to determine the budgetary implications of two highway infrastructure bills. The CBO would thus conduct _____ analysis.

positive

You're thinking about buying an electric vehicle because they generate less noise than conventional vehicles, produce no exhaust, and reduce congestion at gas pumps. Electric vehicle usage generates a _____ externality because it _____ others.

positive; generates benefits for

Wikipedia is a widely used, free online encyclopedia, funded entirely by donations, rather than by selling advertising or user data. Wikipedia is a:

public good.

Markets allocate:

resources, goods, and services.

When the substitution effect dominates, a person's labor supply curve:

slopes upward.

If a Florida orange stand operates in a perfectly competitive market, that stand's owner will be a price:

taker

The main difference between a tariff and an import quota is that a(n):

tariff generates tax revenue, whereas an import quota generates rents to license holders.

A tax on imports of foreign goods is called a(n):

tariff.

India exports shirts, which are labor-intensive, to the United States. The likely source of India's comparative advantage in shirts is:

that India is labor-abundant relative to the United States.

After a year delivering pizzas, you get a raise, and you cut back on your hours. For you:

the income effect is stronger than the substitution effect.

Which of these is NOT a demand shifter?

the price of the product

One market failure associated with market power is:

underproduction

Label each of these below as either a price ceiling or a price floor: (a) A maximum price on Canadian prescriptions drugs is a price _____. (b) A minimum price for agricultural produce is a price _____. (c) Scotland's minimum price on beer cans is a price _____.

(a) ceiling (b) floor (c) floor

Fill in the blanks below with either "shortage" or "surplus." (a) A binding price ceiling leads to a _____. (b) A binding price floor leads to a _____. (c) A minimum price set above the equilibrium price leads to a _____. (d) A maximum price set below the equilibrium price leads to a _____.

(a) shortage (b) surplus (c) surplus (d) shortage

Which of these is caused by a subsidy for buyers of a particular item? (i) a leftward shift of the demand curve (ii) an increase in quantity sold (iii) a rightward shift of the demand curve

(ii) and (iii)

Describe the two main sources of market power.

A company's market power depends on the number of competitors it faces and the degree to which its product is differentiated. If a market has many sellers, then the degree of market power is limited. No seller is large enough to influence price. When a market has few sellers, some sellers will produce a significant share of the output. In this case, if a seller reduces output, she can charge a higher price and exercise market power. Product differentiation is the other main source of market power. When sellers offer identical products, they must charge the market price or lose all their customers. Successful differentiation allows a seller to charge a higher price without losing customers because some customers will prefer the differentiated product. The extent to which a seller can differentiate her product and sell it at a higher price determines the seller's market power.