Econ Chapters 4-10
Negative externalities have what kind of costs for third parties?
"Too much" of the good is consumed and produced and in turn negatively affects third parties. ex) smoking cigs
The cross-price elasticity is determined by what formula?
% Change in quantity demanded of one item / % change in price of another item
What is price elasticity of supply? .
% Change in quantity supplied / % change in price
Suppose that when the price of cereal rises by 10%, the quantity demanded of cereal falls by 20%. Based on this information, what is the approximate price elasticity of demand for cereal?
-20%/10%= -2
A local bakery gives information on consumer purchasing habits for muffins and cupcakes. It says that when the price of a muffin is $1, people buy 55 cupcakes. When the price of a muffin is raised to $2, cupcake purchases increase to 65 cupcakes. The cross-price elasticity of demand using the midpoint method is _________________ .
0.25
If the percentage change in quantity demanded of Good B is 2% and the percentage change in the price of Good A is -10%, what is the cross-price elasticity of demand?
2/-10= -1/5
Where would we find a firm's efficient scale of production?
At its lowest point on its long-run ATC curve.
Why can implicit costs be difficult to measure for business owners?
Because they are opportunity costs, business owners cannot observe or manage them. Explicit costs on the other hand can be easily seen on paper with a $ value.
What would happen if a firm set its price higher above the market price in a perfectly competitive market?
Buyers would be discouraged from buying
Which inputs are often assumed to be fixed in the short run? Variable in the short run?
Capital is assumed to be fixed in the short run, and labor is variable in the short run
Free public parking spaces is an example of what kind of good?
Common resource good
Give examples of a common-resource good.
Congested roads and beaches, Alaskan king crab, fishing lakes open for everyone
Common-resource goods are nonrival, like public goods, and nonexcludable, like private goods. T or F?
False
Over time, the price elasticity of supply becomes more inelastic. True or False?
False, it becomes more elastic
What is a price taker, and in which type of market can we find them?
Firms, can be found in competitive markets
Between a five-star hotel, a doctor's visit, used clothing, and toilet paper, which of these goods would most likely have an income elasticity of demand equal to 8? Why?
Five-star hotel, because it isn't a necessity and if it is greater than 1, then it is a luxury
When can a firm lower price and still increase revenue?
If demand is elastic
What is the responsiveness of quantity consumers buy to price changes, If a business finds that demand for its good is very price elastic?
If price decreases then quantity increases. If price increases quantity decreases.
What good amongst gourmet pizza, steak, designer/fancy clothing or instant noodles is most likely to have a negative income elasticity of demand?
Instant noodles, as it is an inferior good
What is the relation between social costs, internal costs and external costs?
Internal costs are only paid by an individual participant, external costs are imposed on people not participating in the market, and social costs are the sum of internal costs and external costs of a market activity.
What are internal costs?
Internal costs are the costs of a market activity paid only by an individual participant.
When the average total cost curve is downward sloping, what must be true about the marginal cost curve?
It hasn't intersected with the MC curve yet, and is below it.
When does the tragedy of the commons occur?
It occurs when a rival and nonexcludable good becomes depleted or ruined
Government can correct for the positive externality associated with vaccines by subsidizing consumers. What will be the effect of this on the demand curve for vaccines?
It will shift to the right, as there will be more demand as it is subsidized.
Does the cost of producing a good affect the good's price elasticity of demand?
NO
Do fixed costs change as you increase total output?
No
Should a firm always produce at the level of output where marginal cost is lowest?
No bc the firm's avg total costs will be higher than the selling price resulting in a loss.
Is entertainment television a public good?
No, people still need to pay for it, so it is excludable, but non-rival, meaning that it is a club good
Can a club good be defined as rival or nonrival? Excludable or non-excludable?
Nonrival, excludable
Which characteristics best define a public good? Rival or nonrival? Excludable or nonexcludable?
Nonrival, nonexcludable
When two goods are substitutes for each other, what will the cross-price elasticity be?
Positive
What are external costs?
The costs of an activity imposed on people not participating in that market
What are externalities?
The costs or benefits of a market activity that affects a third party. Externalities are one type of market failure.
When pollution (a negative externality) is created by firms who produce good X, what are the valid ways for the government to restore the social optimum?
The government must tax the company, or put in strict pollution regulations and limitations.
How is the market price determined in a competitive market?
There are many buyers and sellers in a competitive market. The goods sold are all similar. These firms (sellers) are price TAKERS, meaning they not decide the price to sell their goods at, instead they adapt the price that is decided for the market.
The city decides to offer a subsidy to each homeowner's association that plants flowers in their common areas. In the market for flowers, what will be its effect on the demand curve?
There will be a shift in the demand curve to the right, as more people will plant flowers.
Are Shoes and Socks likely to have a negative or positive cross-price elasticity of demand? Why?
They are likely to have a negative cross price elasticity, because they are complementary
Are Pepsi and Coke likely to have a positive or negative cross-price elasticity of demand? Why?
They are likely to have a positive cross price elasticity, because they are substitutes
How do you calculate AVC, AFC (average fixed costs), ATC?
To calculate AVC, we need to divide TVC by Q. To find AFC, we need to divide TFC by Q. To find ATC, we need to divide TC by Q.
Consider a market where production of a good generates a positive externality. In the market equilibrium, what happens to the quantity of good being produced?
Too little of the good is being produced ex) a vaccine
What is the relationship between total costs, fixed costs, and variable costs?
Total cost is the sum of total fixed cost and total variable cost
For a negative externality, some costs are borne by a third party. T or F?
True
Demand is almost always more price-elastic in the long run. T or F? Why?
True. More options become available and people can make different choices
When the price increases by 20% and the quantity demanded drops by 20%, the price elasticity of demand is_______________________ elastic.
Unitary
What are good examples of variable costs in the short run?
Wages of workers
What does MC says about marginal product?
When the MC curve goes upward, the costs are going up due to diminishing marginal product.
What is the relationship between MC and specialization?
When we see the marginal cost curve go down, the costs are going down to due specialization.
When is the average total cost curve at its minimum?
Where MC and ATC intersect
What do MC, ATC, AVC tell you about economic profits? In other words, given MC, ATC, AVC, how do you determine if firms are earning economic profits?
Where the ATC crosses the MC on a chart for the firm
As we move downward along the demand curve, the price elasticity of demand _________________.
becomes more inelastic
Downloadable music that you can buy is a _______________good.
club
If the cross-price elasticity of demand is 4, Goods A and B are _________________.
complementary
When you measure the change in the quantity demanded of one good because of a change in the price of another good, you are measuring ___________________ .
cross price elasticity
For a market with a negative externality, what will happen to the market good quantity when the market participants tend to ignore external cost of their decision?
demand will go down
Price elasticity of demand measures the change in _______________ due to change in _______________.
demand, price
As price elasticity of supply becomes ___________________over time, the overall shape of the supply curve becomes___________________________. (more horizontal, more vertical, or completely vertical)
elastic, more horizontal
The challenge of public good provision and the tragedy of the commons are two problems associated with which characteristic of good?
excludability, free rival problem
_____________ costs are tangible out-of-pocket expenses.
explicit
For a business that manufactures bicycles, wages paid to employees are an example of what type of cost?
explicit costs
An___________cost is best defined as the cost of an activity imposed on third party.
external
The pollution emitted by a car is an example of a(n) _____________________cost.
external
A perfectly elastic supply curve is ___________________ . (vertical or horizontal)
horizontal
A 15% increase in the price of cookies results in a 9% decrease in the quantity of cookies sold. The revenue received by cookie suppliers will _________________ because the price elasticity of demand for cookies is____________________.
increase, inelastic
When Heavenly Cookies prices its sugar cookies at $1.00, it sells 75 cookies. It lowers the price to $0.50 and sells 200 cookies. Its total revenue _________________ because the price elasticity of demand for sugar cookies is ____________________.
increased, elastic
A local merchant raises the price of his good and finds that his total revenues increase. The demand for this good must have been ________________________.
inelastic
Pepsi vendors who raise their price at professional sporting events increase total revenue because the price elasticity of demand is ____________________. When they raise their prices at gas stations, they decrease total revenue because the price elasticity of demand is ______________________.
inelastic, elastic
Salima is a devoted Coca-Cola consumer, whereas Antonia will drink either Coca-Cola or Pepsi products. Salima's demand for Coca-Cola will be_________________________, while Antonia's demand will be relatively more ________________________.
inelastic, elastic
Suzanne drives to work each day. The amount Suzanne pays to maintain her car is an example of what type of cost?
internal
The amount an individual pays for gasoline for his or her car is an example of what type of cost?
internal costs
When a firm is required to internalize the pollution costs associated with production, what will be the subsequent causes of this?
less pollution
List three main characteristics of a competitive market:
many buyers and sellers, similar goods, free entry and exit
Change in total output divided by the change in input equals _________.
marginal product
When a firm hires another employee, and as a result, total output increases, the change in total output is known as ______________.
marginal product
Over time, the price elasticity of supply for sunglasses will become __________________. (more elastic, more inelastic, or unchanged)
more elastic
What kind of externality exists when production of a good creates an external cost?
negative externality
Common resources are ________________. (overused or underused)
overused
A vertical supply curve can be described as _________________inelastic
perfectly
When the demand curve is perfectly horizontal, the price elasticity of demand is ___________________.
perfectly elastic
"No matter the price, I will always buy five gallons of ice cream a week. I love ice cream!" This statement reflects a price elasticity of demand that is ________________.
perfectly inelastic
If a friend says, "I am never going to buy another Dua Lipa remix again!" his or her price elasticity of demand for Dua Lipa remixes is ___________________.
perfectly inelastic
What kind of externality exists whenever production of good creates an external benefit?
positive externalities
Lila shares a house with two other people. She is a concert pianist and often practices at home. One roommate enjoys listening to her practice, but the other does not. For the roommate who enjoys listening to Lila play, this is an example of ____________ ; for the other roommate, it is an example of _______________.
positive externality, negative externality
Total revenue minus total cost equals _______________ .
profit or loss
Because any passerby can enjoy the show without paying, street performances can be considered a_____________good.
public
Clean air is a ____________________ good.
public
__________________ goods can be jointly consumed by more than one person, and nonpayers are difficult to exclude.
public
When the price elasticity of demand is - 0.36, a decrease in price will _______________________________________.
reduce total revenue
If the price elasticity of supply is 1.5, we know that supply is __________________ elastic.
relatively
When the price of scooters drops by 5%, the quantity demanded changes by 15%. We know that the price elasticity of demand for scooters is_________________ elastic
relatively
If the percentage change in the quantity consumed of pizza is 6% and the percentage change in income is 2%, what is the income elasticity of demand for pizza?
relatively elastic
Suppose that the price elasticity of demand is -0.80 for aspirin. We could then say that the demand for aspirin is_________________________________.
relatively inelastic
The tragedy of the commons occurs for goods that are rival or nonrival? Excludable or nonexcludable?
rival, nonexcludable
Global warming (filling the air with CO2) is an example of what economic concept?
tragedy of the commons
A price change does not affect the firm's total revenue when the price elasticity of demand is _____________________.
unitary
Nicolette raised her quantity demanded of hockey pucks from 100 to 150 when the price fell from $6 to $4 per puck. Using the midpoint method, her price elasticity of demand is __________________________.
unitary
In a typical demand curve, the price-elastic portion of demand is found in the _______________ region and the price-inelastic portion of demand is found in the _______________ region of the graph.
upper, lower
For a market where external costs exist to work efficiently the external costs must be _____________.
zero
If the supply of a good is perfectly inelastic, then the price elasticity of supply will equal __________________.
zero
When the demand curve is vertical, the price elasticity of demand is _____________ _. (positive, negative or zero?)
zero
