Microeconomics Final

The marginal product of the 14th worker is 8 and the firm sells its output for $4 per unit. If labor is the only variable cost, then the value of the 14th worker's marginal product is

$32. The value of the marginal product of the 14th worker is found by multiplying the marginal product of the 14th worker (8) by the output price ($4).

Serena is a single-priced, profit maximizing monopolist in the sale of her own patented perfume, whose demand and marginal cost curves are as shown. How much total surplus would result if Serena could act as a perfectly price-discriminating monopolist?

$360/day(multiply buyers reservation price at equilibrium by the equilibrium quantity)

The monopolist maximizes profit by...

...Equating marginal cost with marginal revenue(slightly lower than the market price)

Regulations or policies like price floors and ceilings...

...REDUCE economic surplus

Suppose the market consists of 3 individuals: Citizen A, Citizen B and Citizen C. If the good shown on the graphs is a private good, then at a price of $4, mark et demand is ______ units.

60 units sum of quantity demanded by each individual.

Monopoly

A market in which there are many buyers but only one seller.

Which of the following is most likely to be used efficiently?

A privately-owned natural resource

discuss why the optimal amount of an externality is almost never zero:

Curbing pollution and other negative externalities entails costs as well as benefits. The optimal amount of pollution reduction is the amount for which the marginal benefit of further reduction just equals the marginal cost. In general, this formula implies that the socially optimal level of pollution, or of any other negative externality, is greater than zero

True or False? In a perfectly competitive industry, the industry demand curve is horizontal, whereas for a monopoly it is downward-sloping

False. THE INDUSTRY DEMAND CURVE IS DOWNWARD SLOPING IN BOTH CASES. but for the INDIVIDUAL PERFECTLY COMPETITIVE FIRM'S point of view, the DEMAND CURVE is HORIZONTAL. because the individual firm is too small to affect the market price, it can sell as many units as it wishes at that price.

The city of New Orleans has 200 advertising companies, 199 of which employ designers of normal profit on $500,000 in revenue. However, the 200th company employs Janus Jobs, an unusually talented designer. This company collects $1,000,000 in revenues because of Jacob's talent. Why won't the advertising company for which Jacobs works be able to earn an economic profit?

Jacob's salary will be bid up until there is no economic value profit remains, which occurs when she earns $600,000 per year(total revenue of her output plus the cost to pay her) (100,000)

Suppose the figure below shows Luke's demand curve for check-ups along with the supply curve for check-ups. Relative to when Luke has to pay the entire marginal cost of each check-up, the loss of total economic surplus due to first-dollar medical insurance would be ______ per year.

MC 7 Q3 $100

For a fixed percent reduction in pollution emissions to be economically efficient, it would have to be the case that:

MC7 Q5 the marginal cost of pollution control is the same across all firms.

Suppose the latest Hunger Games movie first played in theaters, where it sold out during its opening week. Several months later it was available on pay-per-view TV. Two years later it i s shown on CBS, a broadcast television network. When the movie was playing in theaters, it was a ____ good; when it was available on pay-per-view TV, it was a _____ good; and when it was shown on CBS, it was a ____ good.

Private; collective; public

The table below shows how the payoffs to two political candidates depend on whether the candidates run a positive or negative campaign. The payoffs are given in terms of the percentage change in the number of votes received.

Refer to quiz 5 reflection QUESTION 2 a dominant strategy; Democratic Regardless of which strategy the Republican chooses, the Democrat does beer by choosing to run a negative campaign.

How is private ownership a way of preventing the tragedy of the commons?

The difficulty of enforcing property rights in certain situations explains a variety of inefficient outcomes such as the excessive harvest of whales in international waters and the premature harvest of timber on remote public lands. The excessive pollution of seas that are bordered by many countries also results from a lack of enforceable property rights.

In which of the following markets is the presence of asymmetric information most critical for the buyers?

The market for existing houses

Which of the following would not be included in the calculaon of accounng profit?

The salary the owner could have earned working elsewhere.

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive . The firm depicted in the graph on the right faces a demand curve that is:

The firm depicted in the graph on the right faces a demand curve that is: reference quiz 4 question 7 for diagram

Economic Profit

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

Suppose the weekly demand and supply curves for used DVDS in Lincoln, Nebraska, are shown as the diagram depicts. x axis:0-48 y axis: 0-12; equilibrium is at 6DVD/week., $10.50 demand is at 0,12 ; 18,7.5 48,0 Calculate the weekly consumer surplus.

Triangular area between the demand curve and the equilibrium price. Its area is equal to 1/2BH (B=6units, H= 1.5 units)>>consumer surplus is $4.5/week

external benefit:

a benefit of an activity received by people other than those who pursue the activity

An in-kind transfer payment is:

a benefit in the form of a good or service.

cartel:

a coalition of firms that agree to restrict output for the purpose of earning an economic profit

external cost:

a cost of an activity that falls on people other than those who pursue the activity

externality:

a external cost or benefit of an activity

tit-for-tat:

a strategy for the repeated prisoner's dilemma in which players cooperate on the first move, then mimic their partner's last move on each successive move.

payoff matrix:

a table that describes the payoffs in a game for each possible combo of strategies

A coalition of firms who agree to restrict output for the purpose of earning an economic profit is called a(n):

cartel

rationing function of price

changes in prices distribute scarce goods to those consumers who value them most highly

economic surplus(maximized by market equilibrium

consumer surplus + producer surplus

How can the effects of positional externalities be remedied.

control agreements. These collective actions may take the form of formal regulations or rules such as rules against anabolic steroids in sports, campaign spending limits, and binding arbitration agreements. Informal social norms can also curtail positional arms races.

A ______ describes the possible moves in a game in sequence and lists the payoffs to each possible combination of moves.

decision tree A decision tree diagrams the possible moves in a game in sequence and lists the payoffs that correspond to each possible combination of moves.

in games in which timing matters

decision tree is most useful

An arbitrary preference by an employer for one group of workers over another is termed:

employer discrimination.

The general rule governing the hiring of workers is to

equate marginal labor costs to marginal labor benefits.

The prisoner's dilemma is connected to real life situations such as:

excessive advertising, military arms races, and failure to reap the potential benefits of interactions requiring partners.

marginal revenue

extra revenue from the sale of one additional unit of output

If the producon of a good generates a negave externality, then at the market equilibrium quanty, the marginal cost to society of another unit of the good will be:

greater than the marginal benefit of another unit.

Suppose that this graph describes the current labor market for high school teachers REFER TO MC 6 QUESTION 15 FOR GRAPH Suppose supply of labor decreases. At the new equilibrium, wages would be ______ and ______ teachers would be hired.

higher; fewer As in markets generally, a decrease in supply leads to an increase in price (here, wage) and a decrease in quantity demanded (here, labor hours).

Suppose that there are two types of houses for sale: those with solid foundations and those with cracked foundations. In all other respects, the two types of houses are identical. Houses with solid foundations are worth $200,000, while those with cracked foundations are worth $200,000 minus the $20,000 to fix the crack, or $180,000. Sellers know which type of house they have, but buyers cannot detect whether the foundation has a crack. Suppose that 80 percent of the houses for sale have a solid foundation and 20 percent of the houses for sale have a cracked foundation. If buyers are risk-neutral and know the that 80 percent of the houses for sale have a solid foundation while 20 percent have a cracked foundation, then the owners of houses with a solid foundation will find that:

it is not worthwhile to sell their houses. Buyers will be willing to pay the expected value of a house: (0.80 × $200,000) + (0.20 × $180,000) = $196,000. Thus, the owners of houses worth $200,000 will not find it worthwhile to sell their houses.

In a competitive labor market, the equilibrium wage rate is determined by:

labor demand and labor supply.

Game theory is not useful in understanding perfect competition because in a perfectly competitive market:

no single firm influence the market price and so firms' are not interdependent.

The essential cause of the tragedy of the commons is the fact that:

one person's use of a commonly held resource imposes an external cost on others.

dominant strategy:

one that yields a higher payoff no matter what the other players in a game choose.

The primary advantage to selling pollution permits rather than using a fixed percent reduction for all firms is that:

pollution reduction is accomplished in the least costly way possible

The primary advantage to selling pollution permits rather than using a fixed percent reduction for all firms is that:

pollution reduction is accomplished in the least costly way possible.

Ann and Barbara are computer programmers in Nashville who are planning to move to Seattle. Each owns a house that has just been appraised for $100,000. But whereas Ann's house is one of hundreds of highly similar houses in a large, well-known suburban development, Barbara's is the only one that was built from her architect's design. Who will benefit more by hiring a realtor to assist in selling her house, Ann or Barbara?

refer to lab 6 FIRST Question

If either the production or consumption of a good generates an external cost, then the:

social marginal cost curve will lie to the left of the private marginal cost curve.

When an individual is judged by the characteriscs of the groups to which he or she belongs rather than on his or her own characteriscs, it is called:

stastistical discrimination.

economic rent

that part of the payment for a factor of production that exceeds the owner's reservation price

marginal cost

the cost of producing one more unit of a good

negative externalities and positive externalities:

the costs and benefits of activities that accrue to people who are not directly involved in those activities.

Superstar professional athletes can sustain their economic rents because:

they have unique talents that they can sell to the highest bidder.

Why do firms offer discounts to buyers who are willing to jump a hurdle?

Both monopolists and its potential customers can do better if the monopolist can grant discounts to price-sensitive buyers>>they sell to every buyer whose reservation price is at least as high as the marginal cost

Economic rent...

...can persist indefinitely bc replicating the services of professionals with superior performance is impossible

The IMPERFECTLY competitive firm faces a...

...downward sloping demand curve

Market forces...

...drive economic profits and losses towards zero

TotsPoses, Inc., a profit-maximizing business, is the only photography business in town that specializes in portraits of small children. George, who owns and runs TotsPoses, expects to encounter an average of eight customers per day, each with a reservation price shown in the following table. The total cost of each photo portrait is $12. d. George is very experienced in the business and knows the reservation price of each of his customers. If he is allowed to charge any price he likes to any consumer, how many portraits will he produce each day?

8 portraits (d.)

Newfoundland's fishing industry has recently declined sharply due to overfishing, even though fishing companies were supposedly bound by a quota agreement. If all fishermen had abided by the agreement, yields could have been maintained at high levels. Model this situation as a prisoner's dilemma in which the players are Company A and Company B and the strategies are to keep the quota and break the quota. Include appropriate payoffs in the matrix. Explain why overfishing is inevitable in the absence of effective enforcement of the quota agreement.

Each company's dominant strategy is thus to break the quota, which means that both will do so unless some way can be found to enforce the quota.

Two companies, Dirty Inc. and Filthy Inc., each of which has access to 5 different production processes, each of which has a different cost and produces a different amount of pollution. The daily costs of the processes and the number of tons of smoke emitted are shown in the table below. Suppose pollution is initially unregulated. If the City Council requires each firm to reduce emissions by 50 percent, then the total cost to society of this policy will be ______ per day.

MC7 Q6 $360 Both firms will have to move from process A to process C. As a result, Dirty Inc.'s cost will rise by $270 (from $110 to $380), and Filthy Inc.'s cost will rise by $90, from $400 to $490. So, the total cost to society of this policy will be $360.

Define positional externalities

Situations in which people's rewards depend on how well they perform in relation to their rivals give rise to positional externalities. In these situations, any step that improves one side's relative position necessarily worsens the other's

Positive and negative externalities effect on resource allocations

When all parties affected by externalities can negotiate with one another at no cost, the invisible hand of the market will produce an efficient allocation of resources.

Matt is offered a job driving the campus shuttle bus from 4 p.m. to 6 p.m. each Monday. His reservation wage for this job is $7 per hour. Now suppose the director offers Matt $50 per hour, but also announces that the earnings from the job will be divided equally among Matt and four other students. Will Matt accept this job?

Yes, because $50 divided by five is greater than Matt's reservation wage. Given that the $50 wage now has to be shared among 5 people, Matt?s earnings would be $10 per hour. Since this is greater than Matt?s reservation wage, his economic surplus from accepting the job would be positive.

price setter

a firm that has at least some control over the market price of its product

Market power

a firm's ability to change the price of a good without losing all it's sales

prisoners dilemma:

a game in which each player has a dominant strategy, and when each plays it, the resulting payoffs are smaller than if each had played a dominated strategy

Suppose the supply curve of portable radio rentals in Golden Gate Park is given by P = 5 + 0.1Q, where P is the daily rent per unit in dollars and Q is the volume of units rented in hundreds per day. The demand curve for portable radios is 20 - 0.2Q. (LO3) If each portable radio imposes $3 per day in noise costs on others, by how much will the equilibrium number of portable radios rented exceed the socially optimal number? How would the imposition of a tax of $3 per unit on each daily portable radio rental affect efficiency in this market?

consmers value nondefective cars at $10,000, so the only used cars for sale will be defective ones. The used car price of $2,500 is thus the value to consumers of a defective car. For a risk-neutral buyer,the reservation price for a new car will be the value of a good car times the probability of getting a good car, plus the value of a bad car times the probability of getting a bad car. To find x, we thus solve 5,000 = 10,000 -10,000x+ 2,500x5,000 = 7,500x5,000/7,500 = xx = 2/3

For a fixed percent reduction in pollution emissions to be economically efficient, it would have to be the case that:

the marginal cost of pollution control is the same across all firms

3. The dilemma in a prisoner's dilemma is that:

the players would be better off if they both played a dominated strategy.

If one state is suffering from acid rain as a result of sulfur dioxide emissions from the industries in a neighboring state , then:

the problem is the best addressed through federal regulation. The problem of pollution is difficult to solve when the various sources of pollution (in this case , states) are not subject to regulatory control by a single government.

Suppose that a government agency is trying to decide between two pollution reduction policy options. Under the permit option, 100 pollution permits would be sold, each allowing emission of one unit of pollution. Firms would be forced to shut down if they produced any units of pollution for which they did not hold a permit. Under the pollution tax option, firms would be taxed $250 for each unit of pollution emitted. The regulated firms all currently pollute reduction. Suppose the permit policy is adopted. A firm will wish to purchase its first permit if the price of that permit is less than or equal to:

the reduction in costs associated with increasing its emissions from zero to one unit

Suppose the weekly demand and supply curves for used DVDS in Lincoln, Nebraska, are shown as the diagram depicts. x axis:0-48 y axis: 0-12; equilibrium is at 6DVD/week., $10.50 demand is at 0,12 ; 18,7.5 48,0 Suppose a coalition of students from Lincoln High school succeeds in persuading the local govt. to impose a price ceiling of $7.50 on used DVDs, on the grounds that local suppliers are taking advantage of teenagers by charging exorbitant prices. Calculate the total economic surplus lost every week as result of the price ceiling

the weekly economic surplus lost as a result of the price ceiling is $8/week

When marginal revenue is zero:

total revenue is maximized. (When marginal revenue is posive, total revenue is increasing, and when marginal revenue is negave total revenue is decreasing. Thus, total revenue is maximized when marginal revenue equals zero.)

NO-CASH-ON-THE-TABLE Principle

valuable resources will reflect their economic value; and therefore, won't allow for profit as the market is in equilibrium. (No opportunities for gain remain open for individuals when a market is in equilibrium)

Suppose that all workers value 1 percent reduction in he workplace injury rate at $1,000 per year. The cost of reducing the injury rate by 1 percent is $200 per year for each worker. Firms currently pay $20,000 per year to workers, without any effort to improve safety. If new firms began to offer workers $19,500 and a 1 percent reduction in the injury rate, then:

workers would want to work at the new firms

The small city of Pleasantville is considering building a public swimming pool that costs $1, 000 . Each resident' s marginal benefit of the swimming pool is shown below . It takes a 4/5 majority to pass any tax measure , and all residents must vote. Voter>Marginal Benefit Kyle>$420 Dylan>$360 Fran>$350 Ronnie>$190 Sam>$170 The total social benefit of the swimming pool is:

$1,490 (The total benefit of the pool is found by summing the marginal benefit for each voter.)

Lane and Riley are the only two residents in a neighborhood, and they share the same driveway. They would like to have the driveway paved. The value of the paved driveway is $1,500 to Lane and $900 to Riley. Regardless of who pays for the paving both people will benefit from it. What is the most a contractor can charge to pave the driveway and still be assured of being hired by at least one of them?

$1,500(highest value of the service to the consumers)

There are 20 residents in the village of Towneburg. The size of the villagers annual fireworks display depends upon the number of shells that are fired off . Each residents demand for fireworks is shown below . The total cost of the fireworks display is $1, 000 plus $10 per shell Suppose 10 shells have been fired off . What is the marginal cost of firing off one more shell

$10 The marginal cost of each shell is $10 , regardless of how many shells have been fired off.

Suppose the figure below shows Luke's demand curve for check-ups along with the supply curve for check-ups. Relative to when Luke has to pay the entire marginal cost of each check-up, the loss of total economic surplus due to first-dollar medical insurance would be _____ per year

$100 (The loss in total economic surplus is given by the area of the triangle above the demand curve and below the supply curve between 3 and 5 check-ups, or $100= 1/2 X 2 X 100)

TotsPoses, Inc., a profit-maximizing business, is the only photography business in town that specializes in portraits of small children. George, who owns and runs TotsPoses, expects to encounter an average of eight customers per day, each with a reservation price shown in the following table. The total cost of each photo portrait is $12. b. How much consumer surplus is generated each day at this price?

$40

Curly pays $12,000 in taxes and earns $150,000. Moe pays $7,000 in taxes. If the tax system is proportional, then Moe's income is:

$87,500 (if the tax system is proportional, then both Curly and Moe will pay the same proportion of their income in taxes. Curly's tax is 8 percent of his income ($12,000/$150,000 =.08). Of Moe's tax is 8 percent of his income, then his income must be $87,500($7,000/.08=$87,500)

Suppose the weekly demand and supply curves for used DVDS in Lincoln, Nebraska, are shown as the diagram depicts. x axis:0-48 y axis: 0-12; equilibrium is at 6DVD/week., $10.50 demand is at 0,12 ; 18,7.5 48,0 The maximum weekly amount that producers and consumers in Lincoln would be willing to pay to be able to buy and sell used DVDs in any given week (total economic surplus)

(Total economic surplus generated per week) $18/week

John Jones owns and manages a cafe in Collegetown whose annual revenue is $5,000. Annual expenses are as follows: Labor>2,000 Food and Drink>500 Electricity>100 Vehicle lease> 150 Rent>500 Interest on loan for equipment>1,000. Calculate John's annual profit.

(revenue minus explicit costs) (5,000-4,250=$750)

Yes when the supply and demand curves capture costs and benefits of production, the quest for economic profit ensures...

...efficiency of resources

The PERFECTLY competitive firm faces an...

...indefinitely elastic demand

Economies of scale are the most enduring of the sources of market power of monopolies because....

...products with large fixed costs, marginal cost is lower than the average total cost>> the average total cost declines as output grows

Five Sources of power of Monopolies

1. exclusive control over production 2. economies of scale 3. patents/govt. licenses 4. franchises 5. network economies

Serena is a single-priced, profit maximizing monopolist in the sale of her own patented perfume, whose demand and marginal cost curves are as shown. Relative to the consumer surplus that would result at the socially optimal quantity and price, how much consumer surplus is lost from her selling at the monopolist's profit maximizing and price?

12. $40/day(the profit maximizing (where Marginal revenue equals marginal cost)quantity to the equilibrium quantity

TotsPoses, Inc., a profit-maximizing business, is the only photography business in town that specializes in portraits of small children. George, who owns and runs TotsPoses, expects to encounter an average of eight customers per day, each with a reservation price shown in the following table. The total cost of each photo portrait is $12. a. Complete the following table. How much should George charge if he must charge a single price to all customers? At this price, how many portraits will George produce each day? portraits. What will be his economic profit?

1>50>50>50 2>46>92>42 3>42>126>34 4>38>152>26 5>34>170>18 6>30>180>10 7>26>182>2 8>22>176>-6 $34 5 portraits $110 per day

The graph below illustrates the marginal cost, marginal private benefit, and marginal social benefit of being vaccinated against a contagious childhood disease. Private market incentives would result in ______ vaccinations per day, but the socially optimal number of vaccinations is _____ per day

220;300

Normal Profit

Accounting profit - Economic Profit

Suppose the weekly demand and supply curves for used DVDS in Lincoln, Nebraska, are shown as the diagram depicts. x axis:0-48 y axis: 0-12; equilibrium is at 6DVD/week., $10.50 demand is at 0,12 ; 18,7.5 48,0 Suppose a coalition of students from Lincoln High school succeeds in persuading the local govt. to impose a price ceiling of $7.50 on used DVDs, on the grounds that local suppliers are taking advantage of teenagers by charging exorbitant prices. Calculate the weekly shortage of used DVDs that will result from this policy.

At the price of 7.5, the quantity supplied per week is 2. The quantity demanded at this price is 18 per week, which implies a weekly shortage of 16 used DVDs (quantity demanded - the quantity supplied)

Explain why the profit-maximizing output level for a monopolist is too small from society's perspective

At the socially efficient level of output, is at the market equilibrium, where for the monopolist it is where the the marginal benefit(price) is greater than the marginal cost

Kris, Taylor and Max are the only three residents in a neighborhood. A public good that would benefit all of them has a one-time installation cost of $900 . The value of the public good to each resident is shown in the table below . Any tax plan must be approved by simple majority . Resident>Reservation Price>Income Kris>$100>$1,000 Taylor>$200>$5,000 Max>$700>$6,000 If the government proposes to pay for the public good with a proportional income tax of 8 percent, then:

Kris and Max will vote in favor of he tax, but Taylor will vote against it. With an 8 percent income tax, Kris would pay $80 , Taylor would pay $400 , and Max would pay $480. Thus, Kris and Max would vote for the tax, but Taylor would vote against it.

a dominant strategy is one that yields a higher payoff regardless of the strategy chosen by the other player.

LO1 CH9

Unskilled workers in a poor cotton-growing region must choose between working in a factory for $6,000 a year and being a tenant cotton farmer. One farmer can work a 120-acre farm, which rents for $10,000 a year. Such farms yield $20,000 worth of cotton each year. The total nonlabor cost of producing and marketing the cotton is $4,000 a year. A local politician whose motto is "working people come first" has promised that if he is elected, his administration will fund a fertilizer, irrigation, and marketing scheme that will triple cotton yields on tenant farms at no charge to tenant farmers. b. Who would reap the benefit of the scheme in the long run? How much would they gain each year?

Landowners would gain $ 40,000 per plot each year due to higher rent for land.

John Jones owns and manages a cafe in Collegetown whose annual revenue is $5,000. Annual expenses are as follows: Labor>2,000 Food and Drink>500 Electricity>100 Vehicle lease> 150 Rent>500 Interest on loan for equipment>1,000. John could earn $1,000 per year as a recycler of aluminum cans. However, he prefers to run the cafe. In fact, he would be willing to pay up to $275 per year to run the cafe rather than to recycle. Is the cafe making an economic profit? Should John stay in the cafe business? Explain.

Since the cafe is earning an economic profit, John should stay in the cafe business(5,000-4,250-725=25)

Invisible Hand Theory

Term economists use to describe self-regulating nature of the marketplace to allocate resources efficently

Suppose the weekly demand and supply curves for used DVDS in Lincoln, Nebraska, are shown as the diagram depicts. x axis:0-48 y axis: 0-12; equilibrium is at 6DVD/week., $10.50 demand is at 0,12 ; 18,7.5 48,0 Calculate the weekly producer surplus.

Triangular area between the demand curve and the equilibrium price. its area is equal to 1/2BH>> $13.50/week

True or false? Perfectly competitive firms have no control over the price they charge for their product

True. Perfectly competitive firms are price takers i.e. if they try to change a higher price they will lose all their business. Similarly, there is no reason to charge a lower price as they can sell any quantity they choose to at the current price.

When Cody went to the physician with a sore elbow, after hearing Cody's symptoms and examining the elbow manually, Cody's physician has two options: 1) prescribe an anti-inflammatory drug and advise Cody to abstain from vigorous physical activity for a period; or 2) advise Cody to undergo a magnetic resonance imaging (MRI) exam, a costly diagnostic procedure. Which of the following physicians is more likely to recommend option 2?

a physician who is compensated under a conventional health insurance plan.

credible threat:

a threat to take an action that is in the threatner's interest to carry out

Perfect hurdle

a threshold that completely segregates buyers whose reservation prices lie above it from others whose reservation prices lie below it, imposing no cost on those who jump the hurdle.

commitment device

a way of changing incentives so as to make otherwise empty threats or promises credible.

barrier to entry

any factor that makes it difficult for a new firm to enter a market

explicit costs

costs that require a firm to spend money

When the federal government borrows money , the resulting ______ in interest rates will lead private investment to ______.

increase; fall Government borrowing pushes up interest rates, leading private firms to cancel planned investment projects.

Josh pays $6,000 in taxes and earns $60,000. Maggie pays $4,000 in taxes. If the tax system is progressive, then Maggie earns:

more than $40,000 but less than $60,000 (Josh pays 10 percent of his income in tax es. If the tax system is progressive , then this implies that Maggie earns less than Josh and pays less than 10 percent of her income in tax es. Thus, Maggie must earn more than $40,000 and less than $60,000.)

A situation is efficient if it is:

not possible to find a transaction that will make at least one person beer off without harming others.

Airlines that charge higher prices for customers who purchase their tickets at the last minute are:

price discriminating by identifying passengers with higher reservation prices. (Passengers who are willing to purchase their tickets in advance typically have lower reservation prices than those who purchase their tickets at the last-minute.)

The city of New Orleans has 200 advertising companies, 199 of which employ designers of normal profit on $500,000 in revenue. However, the 200th company employs Janus Jobs, an unusually talented designer. This company collects $1,000,000 in revenues because of Jacob's talent. If the market price of cotton would be unaffected by this policy and no new jobs would be created in the cotton-growing industry, how would the project affect the incomes of tenant farmers in the short run? In the long run?

the company that employs Jacobs will collect $500,000 more in revenue than other companies, 5/6ths of her salary is economic rent(5,000=100,000(regular pay))

To derive the labor demand curve for a particular market, one should ______ for all the firms in the market:

horizontally sum the value of the marginal product of labor curves

True or False? For a natural monopoly, average cost declines as the number of units produced increases over the relevant output range.

True. this is the essential feature of a natural monopoly.

Stone, Inc., owns a clothing factory and hires workers in a competitive labor market to stitch cut denim fabric into jeans. The fabric required to make each pair of jeans costs $5. The company's weekly output of finished jeans varies with the number of workers hired, as shown in the following table: Number of workers>Jeans(pairs/week) 0>0 1>25 2>45 3>60 4>72 5>80 6>85 If the jeans sell for $35 a pair and the competitive market wage is $250 per week, how many workers should Stone hire? How many pairs of jeans will the company produce each week? Suppose the Clothing Workers Union now sets a weekly minimum acceptable wage of $230 per week. All the workers Stone hires belong to the union. How does the minimum wage affect Stone's decision about how many workers to hire? If the minimum wage set by the union had been $400 per week, how would the minimum wage affect Stone's decision about how many workers to hire? If Stone again faces a market wage of $250 per week but the price of jeans rises to $45, how many workers will the company now hire?

refer to ch 12 exercises problem 3

Carolyn owns a soda factory and hires workers in a competitive labor market to bottle the soda. Her company's weekly output of bottled soda varies with the number of workers hired, as shown in the following table: If each case sells for $10 more than the cost of the materials used in producing it and the competitive market wage is $1,000 per week, how many workers should Carolyn hire? . Suppose the Soda Bottlers Union now sets a weekly minimum acceptable wage of $1,500 per week. All the workers Carolyn hires belong to the union. How does the minimum wage affect Carolyn's decision about how many workers to hire? If each case now sells for $15 more than the cost of the material used in producing it and the

refer to lab 6 Question 2

Imagine a world in which landlords always fix problems quickly, tenants never damage property and always pay their rent in a timely fashion. In such a world, lease agreements would ______.

still exist to solve the commitment problem Even in this situation, landlords would still worry that tenants would move out the moment they discovered cheaper rent elsewhere, and tenants would worry that landlords would kick them out the moment the landlord found someone willing to pay more for the apartment. Thus, in the absence of a long-term lease, the two parties might be reluctant to enter into a rental agreement.

economies(Increasing returns to scale) of scale

a production process is said to have increasing returns to scale if, when all inputs are changed by a given proportion, output changes by more than that proportion

constant returns to scale

a production process that is said to have constant returns to scale if, when all inputs are changed by a given proportion, output changes by the same proportion

credible promise

a promise to make an action that is in the promiser's interest to keep.

nash equilibrium:

any combo of strategy choices in which each player's choice is his or her best choice, given the other player's choices.

economic loss

an economic profit that is less than zero

Alison decides to play the lottery. She has a 5% probability of winning $100 and a 95% probability of winning zero. The expected value of playing the lottery is:

$5. The expected value of this gamble is: (0.05 × $100) + (0.95 × $0) = $5.

dominant strategies and nash equilibria:

1. Put a check mark for each of B's best strategies. 2. Put an X for each of A's best strategies. 3. Compare checks and Xs: a. A row or column with two check marks or two Xs IS A DOMINANT STRATEGY b. A bow with a check mark and an X IS A NASH EQULIBRIA. Now look at the pattern of check marks and Xs. Do any rows have two Xs? Yes, so confessing is the dominant strategy for A. Do any columns have two check marks? Yes, so confessing is the dominant strategy for B. Do any boxes have both a check mark and an X? Yes, so for both A and B confessing is a Nash equilibrium.

TotsPoses, Inc., a profit-maximizing business, is the only photography business in town that specializes in portraits of small children. George, who owns and runs TotsPoses, expects to encounter an average of eight customers per day, each with a reservation price shown in the following table. The total cost of each photo portrait is $12. c. What is the socially efficient number of portraits?

8 portraits (C).

Discuss public policies that are often applied to natural monopolies

In some cases, a combo of policies will produce a better outcome than simply allowing natural monopolists to do as they please, But, in other cases, a hands-off policy may be the best available option

Prisoner's Dilemma: each player has a dominant strategy. Equilibrium occurs in such games when each player chooses his or her dominant strategy. In other games, not all players have a dominant strategy.

LO2 CH9

Moral sentiments(guilt, sympathy, and a sense of justice) often foster better outcomes than those achieved by narrowly self-interested players.

LO4 CH9

Phoebe keeps a bee farm next door to an apple orchard. She chooses her optimal number of beehives by selecting the honey output level at which her private marginal benefit from beekeeping equals her private marginal cost. Use the following graph to answer the questions below.

Refer to unit 5 lab assignment FIRST QUESTION The socially optimal number of beehives could be greater or less than the privately optimal number, depending on the magnitude of the social marginal cost relative to the private marginal cost, as well as the magnitude of the social marginal benefit relative to the private marginal benefit. If the negative externality from bee stings is small relative to the positive externality from pollination, then the socially optimal number of beehives will exceed the privately optimal number. However, if the negative externality from bee stings is large relative to the positive externality from pollination, then the socially optimal number of beehives will be smaller than the privately optimal number. The socially optimal quantity of beehives: could be greater than or less than the privately optimal quantity.

Unskilled workers in a poor cotton-growing region must choose between working in a factory for $6,000 a year and being a tenant cotton farmer. One farmer can work a 120-acre farm, which rents for $10,000 a year. Such farms yield $20,000 worth of cotton each year. The total nonlabor cost of producing and marketing the cotton is $4,000 a year. A local politician whose motto is "working people come first" has promised that if he is elected, his administration will fund a fertilizer, irrigation, and marketing scheme that will triple cotton yields on tenant farms at no charge to tenant farmers. If the market price of cotton would be unaffected by this policy and no new jobs would be created in the cotton-growing industry, how would the project affect the profits of tenant farmers in the short run? In the long run?

Short-run economic profit: $40,000 per lease. Long-run economic profit: $ 0 per lease The short-run economic profit for a cotton farmer is: Economic profit = Total revenue - Explicit costs - Implicit costs = $60,000 - $14,000 - $6,000 = $40,000 per lease. Landowners would reap the long-term benefits of the scheme. Their income would rise by $40,000 per year per 120-acre plot because rent would rise from $10,000 to $50,000.

commitment problem

a situation in which people cannot achieve their goals because of an inability to make credible threats of promises.

perfectly discriminating monopolist

a firm that charges each buyer exactly his or her reservation price

Monopolistic Competition

a market structure in which many companies sell products that are similar but not identical

Oligopoly

a market structure in which only a few sellers offer similar or identical products

cost-plus regulation

a method of regulation under which the regulated firm is permitted to charge prices that cover the opportunity cost of resources provided by the firm's owners

natural monopoly

a monopoly that results from economies of scale

According to the theory of the invisible hand, if buyers and sellers are free to pursue their own self-interest, the result oen will be:

an efficient allocaon of resources. (A monopoly is the only supplier of a unique product with no close substutes.?

A posional externality:

arises in situations in which rewards depend on relative performance.

Alex just got a new car. Because Alex obtained full-coverage car insurance, Alex will have an incentive to ______ because of ______.

drive less cautiously than if he didn't have insurance; moral hazard If Alex has car insurance, then he has less incentive to drive cautiously

The marginal benefit of additional information:

falls as more information is collected

In markets with incomplete information, middlemen tend to ______ total economic surplus by ______. A) reduce

increase; matching sellers with buyers who have high reservation prices

Suppose that there is not enough parking at an urban university. Sometimes students come to campus, spend a few minutes searching for a parking spot, and then decide that going to class isn't worth the effort of continuing to search for a parking spot, so they go home. Assume that all professors give midterm exams on the same day. You would expect the optimal amount of time spent searching for a parking spot on that day to _____ because ______.

increase; the marginal benefit of search is higher The benefit of finding a spot will be higher on that day because students have to go to class to take their midterm, so students would engage in more search

If a natural monopoly decreases the quantity of output it produces, then:

its average cost will increase. (A natural monopoly is a monopoly that arises from economies of scale. Thus, as output falls, average cost will rise.)

How can the effects of externalities be remedied :

laws and government regulations that alter the incentives facing those who generate, or are affected by, externalities. Such remedies work best when they place the burden of accommodation on the parties who can accomplish it at the lowest cost. Traffic laws, zoning laws, environmental protection laws, and free speech laws are examples

Some people have argued that the government should provide medical care to everyone. Under this system:

prices will not ration medical care so some other rationing method will be used.

According to the textbook, middlemen:

provide value through information and coordination

Refer to the figure below. If Jess chooses A, then Cory's best response is

refer to QUESTION 4 UNIT5 QUIZ to choose A. If Jess chooses A, the Cory is beer off choosing A than B.

Tragedy of the commons:

resources are owned in common, no one has an incentive to take into account the opportunity cost of using those resources. This problem is known as the tragedy of the commons.

Coase theorem:

the allocation of resources is efficient in such cases because the parties affected by externalities can compensate others for taking remedial action.

Accounting profit

the difference between a firm's total revenue and its implicit costs (TR-EC) = AP

Because of ______, the market will provide ______ the socially optimal level of information.

the free-rider problem; less

Relative to when a patient has first-dollar medical insurance, the loss in total economic surplus would be smaller if:

the patient had to pay at least some of the marginal cost of medical care

Relative to when a patient has first-dollar medical insurance, the loss in total economic surplus would be smaller if:

the patient had to pay at least some of the marginal cost of medical care. if the patient were required to pay at least some of the marginal cost, the patient would choose to consume less medical care, and the loss in total economic surplus would be smaller.

Games have three basic elements:

the players, possible actions(strategies), the payoffs received for the strategy

Hurdle method of price discrimination

the practice by which a seller offers a discount to all buyers who overcome some obstacle

Price discrimination

the practice of charging different buyers different prices essentially for the same good or service

The last me you went on a road trip, you noticed that there were several fast food outlets clustered near some freeway exits, but none at the others. Now that you are familiar with Hotelling's model, you know that the reason for this is:

firms vying for a favorable location. Firms cluster in their effort to be nearest the customers

Leo is a welfare recipient who qualifies for two means-tested cash benefit programs. If he does not earn any income, he receives $225 from each program. For each dollar he earns (which his employer is required to report to the welfare agency), his benefit from each program is reduced by 75 cents until the benefit equals zero.In the absence ofany earnings, Leo will receive ______ in cash from each program, for a total of ______ in benefits.

$225; $450 In the absence of any earnings, Leo will receive $225 from each program for a total of $450 from the two programs. References

Espresso Yourself Coffee Shop hires workers in a competitive labor market to make coffee. The ingredients required to make each cup of coffee cost 50 cents. The coffee shop's hourly output of coffee varies with the number of workers hired, as shown in the table below. Each cup of coffee sells for $2.00. Number of hrs worked> Coffee (cups/hr) 0>0 1>25 2>45 3>60 4>70 5>75 The value of marginal product of the first worker is ______ per hour.

$37.50 hiring the first worker increases output by25 cups of coffee per hour, each of which can be sold for $1.50 more than the cost of the ingredients used to make each cup, so the VMP of the first worker is $37. 50 = 25 ×$1.50. References Multiple Choice Learning Objective: 12-01 ✓

Suppose Vinnie is looking for a month-long vacation rental in San Diego. The first vacation rental Vinnie finds costs $800 per month. If he looks for another vacation rental, there's a 75 percent chance he'll find another one for $800 per month and a 25 percent chance he'll find one for $600 per month. Other than price, all of the vacation rentals are identical. Vinnie's marginal cost of searching for an additional vacation rental is $45. For Vinnie, the expected value of searching for another vacation rental is:

$5. If Vinnie searches for another vacation rental, there's a 75 percent chance he'll find another one that's the same price and a 25 percent chance he'll save $200. Thus, the expected value of search is: (0.75 × $0) + (0.25 × $200) - $45 = $5.

Consider the labor market below. Suppose the government passes a minimum wage requiring employers to pay at least $8.00 per hour. REFER TO MC 6 QUESTION 20 Prior to the imposition of the minimum wage, employer surplus is ______ per day, and after the imposition of the minimum wage, employer surplus is ______ per day.

$9,000; $1,000 Prior to the imposition of the minimum wage, employer surplus is given by the area below the demand curve above the equilibrium wage of $6.00 per hour, or ½ × 6,000 × $6 = $9,000 per day. After the imposition of the minimum wage, employer surplus is given by the area below the demand curve above the minimum wage of $8.00 per hour, or ½ × 2,000 × $1 = $1,000 per day.

Suppose the law says that Jones may not emit smoke from his factory unless he gets permission from Smith, who lives downwind. The relevant costs and benefits of filtering the smoke from Jones's production process are as shown in the following table. If Jones and Smith can negotiate with one another at no cost, will Jones emit smoke? Jones emits smoke>Jones does not emit smoke Surplus for jones>$200>$160 surplus for Smith>$400>$420

Carlos will hire the realtor, because he will sell the house for $250,000 and pay the realtor $12,500, for a net price of $237,500, which is well above Whitney's offer of $140,000. Without the realtor, total economic surplus would have been only $20,000 ($10,000 each to Whitney and Carlos). With the realtor, total surplus is $168,000; divided as follows, $107,500 to Carlos, $50,000 to the buyer, and $10,500 to the realtor (the realtor's $12,500 commission minus his or her $2,000 opportunity cost of negotiating the transaction)

When Cody went to the physician with a sore elbow, after hearing Cody's symptoms and examining the elbow manually, Cody's physician had two options: (1) prescribe an anti-inflammatory drug and advise Cody to abstain from vigorous physical activity for a period; or (2) advise Cody to undergo a magnetic resonance imaging (MRI) exam, a costly diagnostic procedure. Which of the following physicians is more likely to recommend option 2?

MC7 Q4 A physician who is compensated under a conventional health insurance plan.

Suppose you are planning to sell your house. You value your house at $150,000. If you do not hire a realtor, you will be able to sell your house to a buyer whose reservation price is $180,000. If you hire a realtor, you will be able to sell your house to a buyer whose reservation price is $200,000. Assume that the realtor's opportunity cost of negotiating the sale is $10,000. In this case, does using a realtor to sell your house increase total economic surplus?

Yes, using a realtor increases total economic surplus by $10,000. If you do not use a realtor, total economic surplus from the sale of your house will be $30,000 (= $180,000 - $150,000). If you use a realtor, total economic surplus will be $40,000 (= $200,000 $150,000 - $10,000). Thus, using a realtor increases total economic surplus by $10,000

positional arms race:

a series of mutually offsetting investments in performance enhancement that is stimulated by a positional externality.

repeated prisoner's dilemma:

a standard prisoner's dilemma that confronts the same player's repeatedly.

Dominated strategy:

any other strategy available to a player who has a dominant strategy

What are the effects of positional externalities

any step that improves one side's relative position necessarily worsens the other's.

Newfoundland's fishing industry has recently declined sharply due to overfishing, even though fishing companies were supposedly bound by a quota agreement. If all fishermen had abided by the agreement, yields could have been maintained at high levels. Provide another environmental example of a prisoner's dilemma.

if Firm A pollutes from its factory and no one else does, then it gains from not having to install pollution-control equipment (which leads to lower costs and higher profits), as well as from clean air, since my own pollution has only a negligible effect on air quality. However, if all other industrialists think this way, the air will become polluted, and all firms will be worse off than if none had polluted. Profits may also be lower if all firms pollute because the cost advantage of polluting will be shared by all firms, and competitive forces (entry) will reduce prices and profits

A village has six residents, each of whom has accumulated savings of $100. Each villager can use this money either to buy a government bond that pays 15 percent interest per year or to buy a year-old llama, send it onto the commons to graze, and sell it after 1 year. The price the villager gets for the 2-year-old llama depends on the quality of the fleece it grows while grazing on the commons. That in turn depends on the animal's access to grazing, which depends on the number of llamas sent to the commons, as shown in the following table: Number of LLamas on the commons>price per 2-year-old Llama($) 1>122 2>118 3>116 4>114 5>112 6>109 The villagers make their investment decisions one after another, and their decisions are public. The village committee votes to auction the right to graze llamas on the commons to the highest bidder. Assuming villagers can both borrow and lend at 15 percent annual interest, how much will the right sell for at auction? How will the new owner use the right, and what will be the resulting village income?

if a single villager could control access to the commons, she would send only a single llama, which she could sell after one year for $22 more than she paid for it. If the land were free, the owner would thus earn $22 per year by raising one llama per year on it, or $7 more than she would have earned had she used her $100 to buy a bond. The price of the land will be bid up until owning the land is no better than putting the same amount in the bank at 15 percent interest. That price is the amount of money, X, that would yield $7 per year if deposited at 15 percent interest:0.15X= $7, or X= $46.67. The new owner will graze one llama. Total village income will be the same as in part b.

Newfoundland's fishing industry has recently declined sharply due to overfishing, even though fishing companies were supposedly bound by a quota agreement. If all fishermen had abided by the agreement, yields could have been maintained at high levels. In many potential prisoner's dilemmas, a way out of the dilemma for a would-be cooperator is to make reliable character judgments about the trustworthiness of potential partners. Explain why this solution is not available in many situations involving degradation of the environment.

in many potential prisoner's dilemmas, a way out of the dilemma for a would-be cooperator is to make reliable character judgments about the trustworthiness of potential partners, but in situations involving environmental degradation, the players usually do not know each other and there is thus no opportunity to make character judgments. In such cases, legal enforcement is often necessary.

Assume that the graph below describes the current labor market for nurses in a mid-sized city and that the labor market is perfectly competitive.

increased employment opportunities outside of nursing. A movement from S0 to S1 represents a decrease in supply, which could have occurred because of better employment opportunities developed outside of nursing

Curly just graduated from State U and has three job offers: teaching at a prestigious private high school nine months a year with summers off, working forty hours a week at a bank in a small city, and working more than sixty hours a week for a high-powered investment firm in New York. Suppose all of the jobs currently offer exactly the same annual salary, and that most people prefer leisure to work, all else equal. In order to attract workers, the______ would have to offer a ______ salary than the others.

investment firm; higher. At the same wage, there would be a shortage of workers at the investment firm because that job has the longest work hours

The over-consumption of medical care due to first-dollar health insurance coverage is :

larger the higher the elasticity of demand for medical care

The overconsumption of medical care due to first-dollar health insurance coverage is:

larger the higher the elasticity of demand for medical care. The extent to which first-dollar health insurance leads people to consume more than the socially optimal level of medical care is larger the higher the elasticity of demand for medical care

Espresso Yourself Coffee Shop hires workers in a competitive labor market to make coffee. The ingredients required to make each cup of coffee cost 50 cents. The coffee shop's hourly output of coffee varies with the number of workers hired, as shown in the table below. Each cup of coffee sells for $2.00. Number of hrs worked> Coffee (cups/hr) 0>0 1>25 2>45 3>60 4>70 5>75 The marginal product of the third worker is ______ than the marginal product of the second worker, implying that______.

less; diminishing returns are present When the firm hires the third worker, output increases from 45 to 60 cups per hour, so the marginal product of the third worker is 15. When the firm hires the second worker, output increases from 25 to 45 cups per hour, so the marginal product of the second worker is 20. This implies that the marginal product of labor is decreasing as the firm goes from 2 to 3 workers, which is consistent with the law of diminishing returns.

A village has six residents, each of whom has accumulated savings of $100. Each villager can use this money either to buy a government bond that pays 15 percent interest per year or to buy a year-old llama, send it onto the commons to graze, and sell it after 1 year. The price the villager gets for the 2-year-old llama depends on the quality of the fleece it grows while grazing on the commons. That in turn depends on the animal's access to grazing, which depends on the number of llamas sent to the commons, as shown in the following table: Number of LLamas on the commons>price per 2-year-old Llama($) 1>122 2>118 3>116 4>114 5>112 6>109 The villagers make their investment decisions one after another, and their decisions are public. What is the socially optimal number of llamas for this village? Why is that different from the actual number? What would net village income be if the socially optimal number of llamas were sent onto the commons?

the socially optimal number of llamas on the commons is one. Villagers send three, rather than just one, because in deciding whether or not to send a llama each villager ignores the impact of his or her llama's presence on the other llamas' fleece quality. The total village income at the socially optimal number of one llama is $22 from the llama and $75 from government bonds, or $97.

Assume that this graph illustrates a perfectly competitive labor market. REFER TO MC 6 QUESTION 14 FOR GRAPH Suppose a minimum wage law required the wage to be at least $20 per hour in this market. If that happened, then:

there would be no change the equilibrium number of person-hours. Nothing would be different because the equilibrium wage is above $20.

A village has six residents, each of whom has accumulated savings of $100. Each villager can use this money either to buy a government bond that pays 15 percent interest per year or to buy a year-old llama, send it onto the commons to graze, and sell it after 1 year. The price the villager gets for the 2-year-old llama depends on the quality of the fleece it grows while grazing on the commons. That in turn depends on the animal's access to grazing, which depends on the number of llamas sent to the commons, as shown in the following table: Number of LLamas on the commons>price per 2-year-old Llama($) 1>122 2>118 3>116 4>114 5>112 6>109 The villagers make their investment decisions one after another, and their decisions are public. If each villager decides individually how to invest, how many llamas will be sent onto the commons, and what will be the resulting net village income?

three llamas will be sent onto the commons. The resulting net village income will be $48 from the llamas plus $45 from government bonds, or $93. refer to practice exercise CH10 question 8

Dan owns an autographed copy of a Brittany Spears CD that he values at $100. If he sells the CD at the garage sale he's planning to hold in a few weeks, it will be sold to a buyer with a reservation price of $175. If he sells it on eBay, it will be sold to a buyer with a reservation price of $500. eBay will charge Dan $50 to auction the CD, which just covers eBay's opportunity cost of running the auction. Relative to selling the CD at his garage sale, auctioning the CD on eBay will lead:

total economic surplus to increase by $275. If Dan sells the CD at his garage sale, then total economic surplus will be $75 (= $175 - $100). If Dan sells the CD on eBay, then total economic surplus will be $350 (= $500 - $100 - $50). Thus, if Dan sells the CD on eBay, total economic surplus will increase by $275 (= $350 - $75).

implicit costs

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur

Two companies, Dirty Inc. and Filthy Inc. each of which has access to 5 different production processes, each of which has a different cost and produces a different amount of pollution. The daily costs of the processes and the number of tons of smoke emitted are shown in the table below Processes(smoke/day)>A4tons/day>B3tons/day>C2tons/day>D1ton/day>E0tons/day Cost to dirty Inc.>$110>$200>$380>$740>$1,460 Cost to Filthy Inc.>$400>$430>$490>$580>$700 Suppose pollution is initially unregulated. If the City Council requires each firm to reduce emissions by 50 percent, then the total cost to society of this policy will be ____ per day.

Both firms will have to move from process A to C. As a result, Dirty Inc.'s cost will rise by $270 (from $110 to $380), and Filthy Inc.'s cost will rise by $90 (from $400 to $490). So the total cost to society of this policy will be $360