econ final

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.

Free Rider

a person who receives the benefit of a good but avoids paying for it

Granting a pharmaceutical company a patent for a new medicine will lead to

a product that is priced higher than it would be without the exclusive rights.

Government can remedy the free rider problem if

total benefits of a public good exceeds its cost provide the public good pay for it with tax revenue make everyone better off

The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average

total cost.

A corrective tax places a price on the right to pollute

true

The Three Amigo's company produced and sold 500 dog beds. The average cost of production per dog bed was $50. Each dog bed can be sold for a price of $65. The Three Amigo's total costs are

$25,000.

Marcus sells 300 candy bars at $0.50 each. His total costs are $125. His profits are

$25.

Public Goods and Common Resources

- Externalities arise because something of value has no price attached to it - Private decisions about consumption and production can lead to an inefficient outcome - Public policy can potentially raise economic well-being

free rider problem

- Public goods are not excludable - Prevents the private market from from supplying the goods - Market failure

cost-benefit analysis

- compare the costs & benefits to society of providing a public good - doesn't have any price signals to observe - government findings: rough approximations

Four types of goods

- private goods - club goods - common resources - public goods

determine whether something is a public good

-> determine who beneficiaries are, then whether they can be excluded from using the good - a free rider problem

examples of public goods

-Tornado Siren -National Defense -Uncongested non-toll roads

Suppose a certain firm is able to produce 165 units of output per day when 15 workers are hired. The firm is able to produce 181 units of output per day when 16 workers are hired, holding other inputs fixed. The marginal product of the 16th worker is

16 units of output.

Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without government intervention in the vaccination market, which of the following statements is correct?

At the current output level, the marginal social benefit exceeds the marginal private benefit.

Who among the following is a free rider?

Ernie listens to National Public Radio, but does not contribute to any fundraising efforts.

A firm's total profit equals its marginal revenue minus its marginal cost.

False

Economic profit is greater than or equal to accounting profit.

False

For a firm operating in a competitive market, both marginal revenue and average revenue exceed the market price.

False

One person's use of common resources does not reduce the enjoyment other people receive from the resource.

False

The Coase theorem asserts that private economic actors can solve the problem of externalities among themselves, without government intervention, regardless of whether those actors incur significant costs in reaching and enforcing an agreement.

False

The Coase theorem suggests that taxes should be enacted to alleviate the effects of negative externalities.

False

examples of common resources

Fish in the ocean, the environment, congested non-toll roads

When a good is rival in consumption,

one person's use of the good diminishes another person's ability to use it.

The phenomenon of free riding is most closely associated with which type of good?

Public good

If T represents the size of the tax on a good and Q represents the quantity of the good that is sold, total tax revenue received by government can be expressed as

T × Q

Which of the following is an example of an implicit cost?

The owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm

Excludability

the property of a good whereby a person can be prevented from using it

Which of the following is an example of the Tragedy of the Commons?

The number of satellites increases to the point where they begin running into each other.

The privately-owned school system in Smalltown has a virtually unlimited capacity. It accepts all applicants and operates on both tuition and private donations. Although every resident places value on having an educated community, the school's revenues have suffered lately due to a large decline in private donations from the elderly population. Because the benefit that each citizen receives from having an educated community is a public good, which of the following would not be correct?

The private market is the best way to supply education.

A corrective tax places a price on the right to pollute.

True

As the price elasticities of supply and demand increase, the deadweight loss from a tax increases.

True

Declining average total cost with increased production is one of the defining characteristics of a natural monopoly.

True

Markets may fail to allocate resources efficiently when property rights are not well established.

True

One solution to the "Tragedy of the Commons" is to turn the common resource into a private good.

True

The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

True

The larger the deadweight loss from taxation, the larger the cost of government programs.

True

The three main sources of barriers to entry are monopoly resources, government regulation, and the firm's production process.

True

Which of the following is an example of public ownership of a monopoly?

U.S. Postal Service

rivalry in consumption

the property of a good whereby one person's use diminishes other people's use

Zaria and Hannah are roommates. Zaria assigns a $30 value to smoking cigarettes. Hannah values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem?

Zaria pays Hannah $16 so that Zaria can smoke.

For an individual firm operating in a competitive market, marginal revenue equals

average revenue and the price for all levels of output.

When a firm has a natural monopoly, the firm's

average total cost curve is downward sloping.

When marginal cost is less than average total cost,

average total cost is falling.

Governments can improve market outcomes for

both public goods and common resources.

A monopoly can earn positive profits because it

can maintain a price such that total revenues will exceed total costs.

Pay-per-view broadcasts are

club goods

Goods that are rival in consumption but not excludable would be considered

common resources.

When profit-maximizing firms in competitive markets are earning profits,

new firms will enter the market.

Both public goods and common resources are

nonexcludable

public goods

not excludable and not rival in consumption

The decrease in total surplus that results from a market distortion, such as a tax, is called a

deadweight loss

When a monopolist increases the amount of output that it produces and sells, average revenue

decreases, and marginal revenue decreases.

private goods

excludable and rival in consumption

club goods

excludable but not rival in consumption - one type of natural monopoly

A firm's opportunity costs of production are equal to its

explicit costs + implicit costs.

The two characteristics of a competitive market are 1) many buyers and sellers in the market and 2) the goods offered by the various sellers are highly differentiated.

false

examples of club goods

fire protection, cable TV, un-congested toll roads

examples of private goods

ice cream cones, clothing, congested toll roads

When a country is on the downward-sloping side of the Laffer curves, a cut in the tax rate will

increase tax revenue and decrease the deadweight loss.

When an externality is present, the market equilibrium is

inefficient, and the equilibrium does not maximize the total benefit to society as a whole.

In the long run,

inputs that were fixed in the short run become variable.

When a factory is operating in the short run,

it cannot adjust the quantity of fixed inputs.

Economies of scale occur when

long-run average total costs fall as output increases.

A good is excludable if

people can be prevented from using it

The provision of a public good generates a

positive externality and the use of a common resource generates a negative externality.

A key characteristic of a competitive market is that

producers sell nearly identical products.

The deadweight loss associated with a monopoly occurs because the monopolist

produces an output level less than the socially optimal level.

If there is an increase in market demand in a perfectly competitive market, then in the short run

profits will rise.

A tax on a good

raises the price that buyers pay and lowers the price that sellers receive.

Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to

remain unchanged.

common resources

rival in consumption but not excludable

Price discrimination is the business practice of

selling the same good at different prices to different customers

When negative externalities are present in a market

social costs will be greater than private costs.

One problem with government operation of monopolies is that

the government typically has little incentive to reduce costs.

The short-run supply curve for a firm in a perfectly competitive market is

the portion of its marginal cost curve that lies above its average variable cost.