Econ201)final

difference between opportunity cost and marginal cost

Marginal cost: cost incurred during the production of a unit ex/opportunity of 1 something ~ opportunity cost: cost incurred during the consumer's choice of which product to buy ex/ opportunity of # something ~

making lose but not shut down

P < ATC

Suppose the demand curves for hour-long episodes of The Kardashians and Masterpiece Theater are as shown in the following diagram. A television network is considering whether to add one or both programs to its upcoming fall lineup. The only two time slots remaining are sponsored by Colgate, which is under contract to pay the network 10 cents for each viewer who watches the program, out of which the network would have to cover its production costs of $400,000 per episode. (Viewership can be estimated accurately with telephone surveys.) Any time slot the network does not fill with The Kardashians or Masterpiece Theater will be filled by infomercials for a weight-loss program, for which the network incurs no production costs and for which it receives a fee of $500,000. Viewers will receive $5 million in economic surplus from watching each installment of the infomercial. a. How will the network fill the two remaining slots in its fall lineup? b. Is this outcome socially efficient? c. By how much would total economic surplus be higher if each episode of Masterpiece Theater were shown on PBS free of charge than if it were shown by a profit-maximizing pay-per-view network? (Hint: To find the price charged by a profit-maximizing pay-per-view network, recall that the network will choose the price at which the marginal revenue from an additional viewer is equal to the marginal cost of an additional viewer, noting that once the show has been produced, the marginal cost of an additional viewer is zero.)

The network will fill the two remaining slots with *The Kardashians and the infomercial* The outcome is not *socially efficient*

Suppose the weekly demand and supply curves for used DVDs in Lincoln, Nebraska, are as shown in the diagram. Calculate the following at the equilibrium price of $10.50: a. The weekly consumer surplus. b. The weekly producer surplus. c. 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).

$*4.50* per week $13.50* per week $*18* per week

rational person

-defined goals and tries to fulfill those goals as best they can

average variable cost (AVC)

VC/Q

price subsidies

assist low income consumers, government funding of essential goods and services

constant returns to scale

doubling all inputs doubles output

seller's reservation price

lowest price the seller would be willing to sell for

excess demand

shortage

microeconomics

studies choice and its implications for price and quantity in individual markets

macroeconomics

studies the performance of natural economies and the policies that governments use to try to improve that performance

fixed cost (FC)

sum of all payments for fixed inputs

real price

the nominal price of a good relative to the average dollar price of all other goods -real prices are adjusted for inflation

world price

the price at which a good or service is traded on international markets

law of diminishing marginal utility

the tendency for the additional utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point -marginal utility can increase at low levels of consumption

At point A on the demand curve shown below, how will a 1 percent increase in the price of the product affect total expenditure on the product? (graph 6 to 18 with p=4 q=6)

total expenditure will *fall* by about *1*%

if income is distributed equally

total output is smaller

elastic

when quantity is sensitive to a change in price

law of diminishing returns

when some factors of production are fixed, increased production of the good eventually requires ever larger increases in the variable factor

no cash on the table

when surplus is maximized

Refer to the table below. An output level of 25 units, this firm's accounting profit is ______, and its economic profit is ______.

zero -8

nonrival good

consumption by one person does not diminish its availability to others ex/national defense, swimming in the ocean

production

converts inputs into outputs technology: a recipe for production

Demand curbe

downward slope (negative) -consumer buy less at higher prices

the principle of comparative advantage

everyone does best when each person concentrates on the activities for which his or her opportunity cost is the lowest

market power

firm's ability to raise its price without losing all its sales

buyer's reservation price

highest price that buyer is willing to pay for

profit motive

produces highly valued goods and services

proportional income

referred to as a flat tax system, assesses the same tax rate on everyone regardless of income or wealth majority rule applies

pure common good

rival good that is nonexcludable

utility

satisfaction people derive from consumption individual goal is to maximize utility

Marginal cost is calculated as:

the change in total cost divided by the change in output.

Value of marginal product of labor (VMP)

the dollar value of the additional output a firm gets by employing one additional unit of labor

oligopoly

-high barriers -few firms ex/aircraft market

luxury goods/ normal good

-increase income, increase demand boats

variable factor

labor

unit elastic demand

slope=q/p =1

head tax

tax that collects the same amount from every taxpayer =regressive tax

needs and wants

needs: requires subsistence wants: depend on price

the rational spending rule

spending should be allocated across goods so that the marginal utility per dollar is the same for each good MU1 / P1 = MU2 / P2

The accompanying table shows a pizzeria's fixed cost and variable cost at different levels of output. Pizzas sell for $20 each. When the pizzeria makes 125 pizzas per day, its total revenue is _____.

$2,500

average total cost (ATC)

TC/Q

Ted can wax a car in 20 minutes or wash a car in 60 minutes. Tom can wax a car in 15 minutes or wash a car in 30 minutes. What is each man's opportunity cost of washing a car? Who has a comparative advantage in washing cars?

Ted's opportunity cost of washing one car is *3* wax jobs Tom's opportunity cost of washing one car is *2* wax jobs Tom

natural monopoly

a monopoly that results from economies of scale

human capital

accumulated education, training, work habits and other assets that affect and individual's value of marginal product (VMP)

invisible hand theory

actions of independent, self interested buyers and sellers will often result in the most efficient allocation of resources

marginal product of labor(MP)

additional output a firm gets by employing one additional unit of labor

employer discrimination

arbitrary preference by an employer for one group of workers over another

world price total economic surplus

area changes, consumer surplus increase, producer surplus decrease

people make decision ~

based on their own self interest by looking at incentives (benefit&cost)

Earned Income Tax Credit (EITC)

benefit for working people with low to moderate income

inferior goods

decrease income, increase demand bus passes

normal profit

difference between accounting profit and economic profit

consumer surplus

difference between the buyer's reservation price and the market price -above the quilibrium

earned income tax credit (EITC)

earned income tax credit is a policy under which low income workers receive credits on their federal taxes

poverty threshold

family with no income would received the federal

collective good

good or service that, to at least some degree is nonrival but excludable ex/digital downloads you have to pay for

Suppose the weekly demand and supply curves for used DVDs in Lincoln, Nebraska, are as shown in the diagram. Suppose a coalition of students from Lincoln High School succeeds in persuading the local government 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. a. Calculate the weekly shortage of used DVDs that will result from this policy. b. Calculate the total economic surplus lost every week as a result of the price ceiling.

graph left to right (2,11.5) (6,10.5) (18,7.5) *16* used DVDs $*8.00* per week

labor union

groups of workers who bargain collectively with employers for better wages and working conditions entry to the union is restricted

pure public good

high degree, both nonrival and nonexcludable provided by government

human capital theory

holds that a worker's wage is proportional to his human capital some jobs requires more

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:

horizontal at the market price.

complements

if increase price of one causes leftward shift in demand (decrease price=rightward shift) -tennis court and tennis ball -hot dog bun and sausage

government could employ the poor

if wage are the same as the private sector, some workers will prefer government jobs (increases the cost of the program)

midpoint formula

image ex/ p1=9 p2=8 q1=2 q2=4 change q=2 change p=-1 average q = 3 average p= 8.5 2/3 x 100% -1/8.5 x 100% 2/3 x -8.5 = -5.67

income effect

income decrease, overall purchasing goes down one of the determinants of demand

elasticity: price

increase elastic decrease inelastic

elasticity: time

increase elastic decrease inelastic

reservation price

individual taste and preference differ

elasticity: budget

large elastic (tesla) small inelastic (gum)

elasticity: luxury vs necessity

luxury increase/ necessity decrease elastic luxury decrease/ necessity increase inelastic

fixed factor

machines

marginal benefit

marginal revenue MB 2- MB 1 -increase in total benefit from one additional unit

seller's surplus

market price-sellers reservation price

socially optimal quantity

maximize total surplus for the economy from producing and selling good

elasticity of demand

measures how sensitive quantity demanded is to a change in price

A monopoly that results from economies of scale is called a(n):

natural monopoly.

perfect discrimination

negotiate separate deals with each customer

when to hire employ

opportunity cost < hire cost

comparative advantage

opportunity cost of performing task is lower than other opportunity cost

implicit costs

opportunity costs of the resources supplied by the firm's owners

increasing returns to scale

output increases by a greater percentage than the increase in inputs

how to get price elasticity

p/q x 1/slope 1pt ex1/ p=75 q=25 m=1 price of elasticity of demand=3 ex2/ p=4 q=6 m=1/3 p/q=4/6 1/m=3 elasticity=2 2pt ex3/ p1=9 p2=8 q1=2 q2=4 % change in q= 2/2 x 100% % change in p= -1/9 x 100% E= -9

explicit costs

payments firms make to purchase ex/resources (labor, land, etc.)

law of demand

people do less of what they want to do as the cost of doing it rises increase price leads decrease in quantity -there are exceptions

absolute advantage

perform the task in fewer hr than other

economic rent

portion of a payment to a factor of production that exceeds the owner's reservation price

positive economic principle

predict how people will behave

supply increase demand decrease

price decrease quantity indeterminate

allocative function

price directs resources away from overcrowded markets to markets that are underserved

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.

supply decrease demand increase

price increase quantity indeterminate

Temporary Assistance for Needy Families (TANF)

provides grant funds to states and territories to provide families with financial assistance and related support services.

pork barrel spending

public expenditure greater than the total value created

An increase in consumers' demand for espresso will lead to an increase in ______, while an increase in the number of firms producing espresso will lead to a(n) ______.

quantity supplied; increase in supply

crowing out

reduction in private investment caused by increases in interest rates form government borrowing

unionized firms

remains competitive attracts most productive workers

supply curves in perfect competition

slope up because marginal costs increase and higher prices bring new suppliers

inelastic demand

slope=q/p <1 - when q is less than p price increase total revenue increase more vertical because the price does not really matter ex/gasoline

A single-priced, profit-maximizing monopolist:

*Always charges a price above the marginal cost of production.*

What will happen to the equilibrium price and quantity of beef, if the price of chicken feed increases? (Assume that chicken and beef are substitutes.)

*Both will increase.*

Suppose the demand curves for hour-long episodes of Call the Midwife and The Bachelor are shown in the following diagrams. A television network is considering which two programs to add to its upcoming fall lineup. The only time slot available is sponsored by McDonald's, which is under contract to pay the network 10 cents for each viewer. The production costs of the two shows are the same and equal to $250,000 per episode. a. Given that consumers can watch each show for free simply by turning on their televisions, which show will the network choose to add to its fall lineup? Is this outcome socially efficient? b. Suppose the pay-per-view network decides to broadcast Call the Midwife. Assuming the pay-per-view network has the monopoly right to broadcast the show, how much will they charge for each episode, and how many viewers will they have?

*The Bachelor* *no*

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the accompanying table. How many hours a day should John spend cleaning windows?

2

Refer to the accompanying table. It is clear that diminishing returns sets in after ______ workers per day.

4

Two car manufacturers, Saab and Volvo, have fixed costs of $1 billion and marginal costs of $10,000 per car. If Saab produces 50,000 cars per year and Volvo produces 200,000, calculate the average production cost for each company. On the basis of these costs, which company's market share do you think will grow in relative terms?

Average production cost for Saab: $ *30,000* Average production cost for Volvo: $ *15,000* *Volvo*

competitive market

wage = VMP

The government of Islandia, a small island nation, imports heating oil at a price of $2 per gallon and makes it available to citizens at a price of $1 per gallon. Islandians' demand curve for heating oil is given by: P = 6 - Q where P is the price per gallon in dollars and Q is the quantity in millions of gallons per year. This demand curve is shown in the diagram below. How much must the government pay to import enough oil to be sold at $1 per gallon? What is the change in consumer surplus by making oil available at a price of $1 rather than $2? How much surplus is lost as a result of the government's policy?

$*5* million per year $*4.5* million per year $*0.5* million per year

Suppose Sarah owns a small company that makes wedding cakes. The accompanying table shows how Sarah's total cost varies depending on the number of wedding cakes she makes each day. Sarah's fixed cost is ______ per day.

$100

monopolistic competition

-low barrier -many firms -some ability to dictate price ex/clothing brands like nike, luis vuitton....

perfect competition

-no barriers -many firms -perfect information -price taker ex/agriculture produces when p=mc

pure private good

-non payers can easily be excluded and each unit consumed by one person means one less unit available for others -most goods we've talked about in this course

imperfectly competitive firms

-some control over price -some similarities to perfectly competitive firms

opportunity cost

-value of what must be foregone to order to undertake and activity (explicit and implicit cost) ex1/giving up 2hr of baby sitting ($12/hr) for movies($8) = $32

The accompanying figure shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist. This monopolist maximizes its profit by producing ______ units per day and charging a price of ______ per unit.

4; $18

average fixed cost

F / Q

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If the market supply curve is given by S3, then what will happen to the market supply curve in the long run?

It will shift to S2.

Is the demand for a particular brand of car, like a Chevrolet, likely to be more or less price-elastic than the demand for all cars?

It's likely to be *more* price elastic because of availability of *substitutes*

marginal cost

MC 2-MC 1 -increase in total cost from one additional unit

budget allocation

Maximize utility when the marginal utility per dollar spent is the same for all goods

shut down

P < AVC P < VC / Q P x Q < VC

break even

P = ATC

makes profit

P>ATC

The demand and supply curves for the pizza market are shown in the graph below. Calculate the daily producer surplus.

Producer surplus: $ *18,000* per day

How will an increase in the birth rate affect the equilibrium price of land? (Assume the supply of land is fixed.)

The equilibrium price of land will *increase* because *demand* for land shifts to the *right*

How would each of the following affect the U.S. market supply curve for corn? a. A new and improved crop rotation technique is discovered. b. The price of fertilizer falls. c. The government offers new tax breaks to farmers. d. A tornado sweeps through Iowa.

The supply curve would *shift to the right* The supply curve would *shift to the right* The supply curve would *shift to the right* The supply curve would *shift to the left*

quota

a legal limit on the quantity of a good that may be imported

economic profit

aka excess profits difference between a firm's total revenue and the sum of its explicit and implicit costs

total expenditure

aka total revenue p x q

long run

all inputs are variable

customer discrimination

causes buyers to pay more for goods produced by favored group for the same product attorney: some groups more credible with juries and clients than others

price discrimination

charging different buyers different prices for essentially the same good or service -separate the group -no side trades among buyers

total surplus

consumer surplus + producer surplus

losers

consumers of exported good ex/ boeing airplanes/almonds producers of imported goods ex/auto industry

winners

consumers of imported good ex/avocados producers of exported goods ex/caterpillar equipment/ apple

producer surplus

difference between the market price and the seller's reservation price (reservation price is on the supply curve)

Price discrimination means charging

different prices to different buyers for essentially the same good or service.

nonexcludable good

difficult or costly ot exclude non payers from consuming ex/over the air broadcasts, fireworks displays

An imperfectly competitive firm faces a demand curve that is ______, while a perfectly competitive firm faces a demand curve that is ______.

downward-sloping; perfectly elastic.

public good

good that is both nonrival and nonexcludable

Use the graphs provided to predict what will happen to the equilibrium price and quantity of oranges if the following events take place. a. A study finds that a daily glass of orange juice reduces the risk of heart disease. What will happen to the equilibrium price and quantity of oranges? b. The price of grapefruit falls drastically. What will happen to the equilibrium price and quantity of oranges? c. Suppose the wage paid to orange pickers rises. What will happen to the equilibrium price and quantity of oranges? d. Suppose exceptionally good weather provides a much bigger than expected orange harvest. What will happen to the equilibrium price and quantity of oranges?

graph demand: right supply: stay *Both equilibrium price and equilibrium quantity will increase.* graph demand: left supply: stay *Both equilibrium price and equilibrium quantity will decrease.* graph demand: stay supply: left *Equilibrium price will increase and equilibrium quantity will decrease* graph demand: stay supply: right *Equilibrium price will decrease and equilibrium quantity will increase.*

For the pizza seller whose marginal, average variable, and average total cost curves are shown in the graph below, what is the profit-maximizing level of output and how much profit will this producer earn if the price of pizza is $0.50 per slice?

graph MC ATC AVC When the price is $0.50 per slice, the profit-maximizing level of output is *0* slices per day At the profit-maximizing level of output, the producer's profit is: $ *-150* per day

government is the only organization with the power to compel actions

taxes military imprison

protectionism

the view that free trade is injurious and should be restricted

supply curve

upward slope (low hanging fruit principle, positive) -sellers are willing to offer at each price

five sources of market power

1. exclusive control over inputs 2. patents and copyrights 3.government licenses or franchises 4.economies of scale (natural monopolies) 5. network economies

three decision pitfalls

1. measuring costs and benefits as proportions instead of absolute amount (walk to save $10 on $25 or $20 on $2500) 2. ignoring implicit costs (getting free ticket isn't really free if you consider you alternatives) 3.failure to think at the margin (sunk cost(past)=can not be recovered)

compensating wage differentials

describe the difference in wage rates from differences in working conditions wages depend on VMP and working conditions worker have their preferences about work

in kind transfer

direct transfers of goods or services ex/good stamps, medicaid, public housing, free school lunches

Accounting profit minus implicit costs equals:

economic profit.

down ward slope in elasticity pattern

elastic-> unit elastic(mid pt)-> inelastic

elasticity of supply

ex/ p1=1 p2=2 q1=10 q2=16 change in q=6 change in p=1 midpt in q=13 midpt in p=1.5 6/13 x 1.5 = 0.69

A developing economy requires 1,000 hours of work to produce a television set and 10 hours of work to produce a bushel of corn. This economy has available a total of 1,000,000 hours of work per day. a. Use the graph below to draw the PPC for daily output of the developing economy. Give the numerical value for the slope of the PPC. b. The developing economy is considering opening trade with a much larger, industrialized economy. The industrialized economy requires 10 hours of work to produce a television set and 1 hour of work to produce a bushel of corn. Use the graph below illustrate the new consumption possibilities for the developing economy with trade, assuming that the exchange of corn and TV sets are based on the opportunity costs of the industrialized economy.

graph 1-100 The slope of the PPC is *0.01* , which is the developing economy's opportunity cost of having *one more bushel of corn* Given this information, the opportunity cost of producing one additional bushel of corn is *0.1* TV sets in the industrialized economy, while its opportunity cost of producing an additional TV is *10* bushels of corn If the developing economy opens itself up to trade, the developing economy will specialize in the production of *corn* graph 10-100

cost plus regulation

sets price at per unit explicit costs plus a mark up for implicit costs

three ways to pay

share the cost tax equally tax proportional to income

Refer to the accompanying graph. If this firm is a price taker and the price of each unit of output is $9, then this firm should:

shut down in the short run.

perfectly inelastic

slope=q/p =0 vertical

perfectly elastic

slope=q/p= infinity horizontal

elastic demand

slope=q/p>1 -when q is greater than p price increase total revenue decrease ex/burritos almost horizontal

winner take all market

small differences in human capital translate into large differences in pay

Industries in which firms have high fixed costs and low marginal costs are likely to have a:

small number of large firms.

total cost (TC)

sum of all payments for all inputs fixed cost + variable cost

variable cost (VC)

sum of all payments for variable inputs

The figure below shows the supply and demand curves for jeans in Smallville. At a price of $60 per pair, there will be an excess ______ of ______ pairs of jeans per day.

supply; 16

substitution effect

switch to substitutes when price goes up

The government of Islandia, a small island nation, imports heating oil at a price of $2 per gallon and makes it available to citizens at a price of $1 per gallon. Islandians' demand curve for heating oil is given by: P = 6 - Q where P is the price per gallon in dollars and Q is the quantity in millions of gallons per year. This demand curve is shown in the diagram below. Suppose each of the 1 million Islandian households has the same demand curve for heating oil. How much consumer surplus would each household lose if it had to pay $2 per gallon instead of $1 per gallon for heating oil, assuming there were no other changes in the household budget? With the money saved by not subsidizing oil, by how much could the Islandian government afford to cut each family's annual taxes? If the government abandoned its oil subsidy and implemented the tax cut, by how much would each family be better off? What would be the aggregate change in consumer surplus for the 1 million Islandian households if the subsidy were lifted for the benefit of a tax reduction?

$*4.50* per year $*5.00* per year $*0.50* per year There would be an aggregate *gain* of $*5* million per year, so the subsidy is *inefficient*

Suppose the accompanying figure shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. This monopolist maximizes its profit by producing ______ textbooks per week and charging a price of ______ per textbook.

100; $80

maximize profit

MR=MC

John Jones owns and manages a café in Collegetown whose annual revenue is $5,000. Annual expenses are as follows: b. Suppose John could earn $1,000 per year as a recycler of aluminum cans, but he prefers to run the café. In fact, he would be willing to pay up to $275 per year to run the café rather than to recycle. Is the café making an economic profit? should john stay in the cafe business? c. Suppose the café's revenues and expenses remain the same, but recyclers' earnings rise to $1,100 per year. Is the café making an economic profit? d. Suppose John had not had to get a $10,000 loan at an annual interest rate of 10 percent to buy equipment, but instead had invested $10,000 of his own money in equipment. e. As in part b, suppose John could earn $1,000 per year as a recycler and he has to pay $1,000 per year in interest on his loan, but, unlike part b, suppose John likes recycling just as well as running the café.

a. Calculate John's annual accounting profit. $ *750* *Yes*. the cafe is making an economic *Profit* or $*25* per year. *yes, he should stay in the cafe business* *no* the cafe is making an economic *loss* of $*75* per year Should John stay in the café business? *No, he should not stay in the café business.* Calculate John's annual accounting profit. $ *1,750* How much additional revenue would the café have to collect each year to earn a normal profit? $ *250*

Suppose that Costa Rican worker Carlos can produce either 100 pounds of coffee or 1 computer per week, and a second worker, Maria, can produce either 150 pounds of coffee or 1 computer per week. Both Carlos and Maria work 50 weeks per year. In the graph below, draw Carlos' and Maria's joint production possibility curve. b. Assume that world prices are such that 1 computer trades for 125 pounds of coffee on international markets and that Costa Rica is open to trade.

a. Carlos' opportunity cost of producing a computer is *100* a. Carlos' opportunity cost of producing a computer is *100* pounds of coffee If both workers completely specialize in the production of one good, then together they can produce either *12,500* pounds of coffee or *100* computers per year If both workers instead completely specialize according to their respective comparative advantage, then together they can produce *7,500* pounds of coffee and *50* computers per year graph 12500-(50,7500) -100 computer coffee computer coffee coffee coffee coffee coffee

State whether the following statements are true or false.

a. The economic maxim "There's no cash on the table" means that there are never any unexploited economic opportunities. *False* b. Firms in competitive environments make no accounting profit when the market is in long-run equilibrium. *False* c. Firms that can introduce cost-saving innovations can make an economic profit in the short run. *True*

A fictitious country "Alpha" requires 10 hours of work to produce a barrel of wine and 2 hours of work to produce a bushel of corn. The economy has 20 workers who can work 10 hours per day. In the graph below, draw the production possibilities curve (PPC) for daily output of Alpha. b. Alpha is considering opening up trade with a nearby country "Beta." Beta requires 20 hours of work to produce a barrel of wine and 10 hours of work to produce a bushel of corn. (Note : Assume that the exchange of wine and corn are based on the opportunity costs of Beta's economy.) Using the graph below, draw Alpha's new consumption possibilities curve (CPC) based on open trade with Beta.

a. The opportunity cost of producing a barrel of wine in Alpha is *5* bushels of corn graph 20 - 100 The opportunity cost of producing a barrel of wine in Beta is *2* bushels of corn. based on the on the provided information about alpha and beta. alpha should specialize in the production of *corn* and import *wine* from beta graph 50-100

A fictitious country "Alpha" requires 60 hours of work to produce a barrel of wine and 10 hours of work to produce a bushel of corn. The economy has 100 workers who can work 9 hours per day. In the graph below, draw the production possibilities curve (PPC) for daily output of Alpha. b. Alpha is considering opening up trade with a nearby country "Beta." Beta requires 120 hours of work to produce a barrel of wine and 15 hours of work to produce a bushel of corn. (Note : Assume that the terms of trade of wine and corn are based on the opportunity costs of Beta's economy.) Using the graph below, draw Alpha's new consumption possibilities curve based on open trade with Beta.

a. The opportunity cost of producing a barrel of wine in Alpha is *6* bushels of corn graph 15-90 The opportunity cost of producing a barrel of wine in Beta is *8* bushels of corn. Based on the on the provided information about Alpha and Beta, Alpha should specialize in the production of *wine* and import *corn* from Beta graph 15-120

marginal utility

additional utility from consuming one more

total economic surplus

consumer surplus + producer surplus

returns to scale

refers to the percentage change in output from a given percentage change in ALL inputs -long run

excess supply

surplus incentive: strategy to increase their sales by cut price slightly

negative income tax

tax credit for each person financed by tax on earned income advantages: -incentive to work is greater than with welfare -lower administrative cost disadvantages -creates an incentive not to work -the political cost is high

Superstar professional athletes can sustain their economic rents because:

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

economic surplus

total benefits-total cost -action is equal to its benefit minus its costs ex/ If we get $10 of saving from walking to town, and our costs of walking to town are $9 = $1 *highest number is the best decision*

Suppose Alex owns a business making quilts that generates $7,000 a month in revenue. Each month, Alex spends $1,500 on fabric and other sewing materials, and he pays his two employees a combined total of $4,000 per month (they each earn $2,000). Alex makes his quilts in a workshop he has set up in his basement. If Alex did not own the quilt business, he would work as a yoga instructor earning $2,300 per month, and he would use the basement as a TV room, an option he would value at $40 per month. a. What is Alex's accounting profit? b. What is Alex's economic profit? c. If the market for quilts is perfectly competitive, and other quilt producers face the same costs as Alex, then what would you expect to happen to both the number of firms making quilts and the equilibrium price of quilts in the long run. Briefly explain.

$*1,500* $*-840* *You would expect firms to exit the industry. This would lead the equilibrium quantity of quilts to fall and the equilibrium price to rise.*

Suppose Nicholas owns a business making Christmas tree ornaments. Currently, he makes 300 ornaments a month. At this level of production, each additional ornament takes him 30 minutes to make and costs him $5 in materials. Nicholas makes his ornaments in a small studio that he rents for $300 a month. Nicholas can easily increase or decrease the amount of time he spends making ornaments, and he can easily go to the store to buy additional materials to make the ornaments, but he has a year-long lease on his studio, so he has to pay his monthly rent no matter how many ornaments he produces each month. Nicholas values his time at $10 per hour. Other than his time, the cost of the materials and the rent on his studio, Nicholas has no additional production costs. a At Nicholas's current level of production, what is the marginal cost of making an additional ornament each month? b. At Nicholas's current level of production, what is the monthly average fixed cost of each ornament? c. Assuming that it is not Nicholas's interest to shut down, should he change his current monthly level of production if he can sell each ornament for $15? If so, how should his production change? d. How would Nicholas's profit-maximizing level of output each month differ if his monthly rent were $350 instead of $300? e. How would Nicholas's profit-maximizing level of output each month differ if the materials to make each ornament cost $4 instead of $5?

$*10* $*1* *He should increase the number of ornaments he makes each month.* *His profit-maximizing level of output would not change.* *His profit-maximizing level of output would be higher.*

The city of New Orleans has 200 advertising companies, 199 of which employ designers of normal ability at a salary of $100,000 a year. The companies that employ normal designers each collect $500,000 in revenue a year, which is just enough to ensure that each earns exactly a normal profit. The 200th company, however, employs Janus Jacobs, an unusually talented designer. Because of Jacobs's talent, this company collects $1,000,000 in revenue a year. a. How much will Jacobs earn? How much of her annual salary will be economic rent? b. Will the advertising company for which Jacobs works be able to earn an economic profit?

$*600,00* *83*% *no*

Refer to the accompanying figure. When this market is in equilibrium, total producer surplus in the market is ______ per day.

$250

Last year Christine worked as a consultant. She hired an administrative assistant for $15,000 per year and rented office space (utilities included) for $3,000 per month. Her total revenue for the year was $100,000. If Christine hadn't worked as a consultant, she would have worked at a real estate firm earning $40,000 a year. Last year, Christine's accounting profit was ______ and her economic profit was ______.

$49,000; $9,000

When a group of people must decide whether to buy a shared public good or service, the free-rider problem frequently occurs because:

*(e) Only one of the above statements is not a reason for the existence of the free-rider problem.*

Consider a perfectly competitive labor market in which the demand for labor is given by E = 24,000 - (2,000/3)W, and the supply of labor is given by E = -8,000 + 2,000W. In these equations, E is the number of employee-hours per day, and W is the hourly wage. a. What is the equilibrium number of employee-hours each day? In equilibrium, what was the dollar value of the additional output generated by the last employee-hour hired in the market? b. Suppose the government imposes a minimum wage of $24 per hour. What will be the resulting number of employee-hours after the imposition of this minimum wage?

*16,000* employee hours each day $*12* *8000* employee hours each day The minimum wage will *not change*workers' total earning and will *decrease* total economic surplus

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: a. 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? How many cases will be produced per week? b. 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? c. If each case now sells for $15 more than the cost of the material used in producing it and the competitve market wage is still $1,000 per week, how many workers will Carolyn hire now?

*3* workers *480* cases of soda Carolyn would *cut back* employment to *2*workers *4* workers

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: a. 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? b. 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? c. 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? d. 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?

*4* workers *72* pairs of jeans stone's decision *will not * be affected by the minimum wage the number of workers employed would be *reduced* to *3* workers *5*workers

The daily demand and supply curves for milk in the small town of Dairyville are as shown in the figure. Suppose the government imposes a price ceiling on milk of $5 per gallon. a. How many gallons of milk will be bought and sold each day after the imposition of the price ceiling? b. What will be the excess demand for milk each day after the imposition of the price ceiling? c. What will be consumer surplus after the imposition of the price ceiling? d. What will be producer surplus after the imposition of the price ceiling? e. What will be the loss in total economic surplus each day that results from the imposition of the price ceiling?

*400* gallons per day *600* gallons per day $*1,600* per day $*800* per day $*300* per day

Susan can pick 4 pounds of coffee beans in an hour or gather 2 pounds of nuts. Tom can pick 2 pounds of coffee beans in an hour or gather 4 pounds of nuts. Each works 6 hours per day. Assume that Tom and Susan specialize according to their comparative advantage to produce coffee beans and nuts. a. Suppose that Susan and Tom could buy or sell coffee beans and nuts in the world market at a price of $2 per pound for coffee beans and $2 per pound for nuts. If each person specialized completely in the good for which he or she had a comparative advantage, how much could they earn by selling all they produce (Tom's earnings plus Susan's earnings)? b. At the prices just described, what is the maximum amount of coffee beans Susan and Tom could buy each day in the world market with the income they earned? The maximum amount of nuts?

*96* per day Maximum amount of coffee that could be bought each day: *48* pounds Maximum amount of nuts that could be bought each day: *48* pounds *Yes* Graph (left middle bottom) blue: 48, (24,24), 48 red: 36, (24,24), 36

Suppose that, in an attempt to entice citizens to conserve energy, the government enacted regulations requiring that all air conditioners be more efficient in their use of electricity. After this regulation was implemented, government officials were then surprised to discover that people used even more electricity than before. Using the concept of price elasticity, which of the following statements best explains how this increase might have occurred?

*Because the regulation effectively reduced the price of cool air, consumers with sufficiently elastic demand might have bought substantially more of it.*

How will a new law mandating an increase in required levels of automobile insurance affect the equilibrium price and equilibrium quantity in the market for new automobiles?

*Equilibrium price will fall; equilibrium quantity will fall.*

Suppose the current issue of The New York Times reports an outbreak of mad cow disease in Nebraska, as well as the discovery of a new breed of chicken that gains more weight than existing breeds that consume the same amount of food. How will these developments affect the equilibrium price and quantity of chickens sold in the United States?

*Equilibrium quantity will increase, but the effect on equilibrium price is unknown.*

The price elasticity of supply for basmati rice (an aromatic strain of rice) is likely to be which of the following?

*Higher in the long run than the short run, because farmers cannot easily change their decisions about how much basmati rice to plant once the current crop has been planted.*

Martha and Sarah have the same preferences and incomes. Just as Martha arrived at the theater to see a play, she discovered that she had lost the $10 ticket she had purchased earlier. Sarah also just arrived at the theater planning to buy a ticket to see the same play when she discovered that she had lost a $10 bill from her wallet. If both Martha and Sarah are rational and both still have enough money to pay for a ticket, is one of them more likely than the other to go ahead and see the play anyway?

*Martha and Sarah would make the same decision*

Suppose that in the last few seconds you devoted to question 1 on your physics exam you earned 4 extra points, while in the last few seconds you devoted to question 2 you earned 10 extra points. You earned a total of 48 and 12 points, respectively, on the two questions, and the total time you spent on each was the same. If you could take the exam again, how—if at all—should you reallocate your time between these questions?

*Spend more time on question 2. You'll get more extra points on question 2 than you'll lose on question 1*

An Arizona student claims to have spotted a UFO over the desert outside of Tucson. How will this claim affect the supply (not the quantity supplied) of binoculars in Tucson stores?

*Supply will not change. The demand for binoculars is likely to increase, leading to an increase in price and quantity supplied (but no change in supply).*

If a monopolist could perfectly price-discriminate:

*The marginal revenue curve and the demand curve would coincide.*

What is the socially desirable price for a natural monopoly to charge? A natural monopoly that attempts to charge the socially desirable price will invariably suffer an economic loss because

*The price at which the marginal benefit to the consumer equals the marginal cost of production.* *average cost is higher than marginal cost.*

The meal plan at University A lets students eat as much as they like for a fixed fee of $500 per semester. The average student there eats 250 pounds of food per semester. University B charges $500 for a book of meal tickets that entitles the student to eat 250 pounds of food per semester. If the student eats more than 250 pounds, he or she pays $2 for each additional pound; if the student eats less, he or she gets a $2 per pound refund. If students are rational, at which university will average food consumption be higher?

*University A*

You and your friend Joe have identical tastes. At 2 p.m., you go to the Ticketmaster outlet and buy a $30 nonrefundable ticket to a basketball game to be played that night in Syracuse, 50 miles north of your home in Ithaca. Joe plans to attend the same game, but because he cannot get to the Ticketmaster outlet, he plans to buy his ticket at the game. Tickets sold at the game cost only $25 because they carry no Ticketmaster surcharge. (Many people nonetheless pay the higher price at Ticketmaster, to be sure of getting good seats.) At 4 p.m., an unexpected snowstorm begins, making the prospect of the drive to Syracuse much less attractive than before (but ensuring the availability of good seats. If both you and Joe are rational, is one of you more likely to attend the game than the other?

*You are more likely to go to game*

Sabrina, Kris, and Kelly are the only three residents of the small town of Charleston. They are considering whether to hire a police officer to patrol the town. Sabrina values the police officer at $610 per week, Kris values the police officer at $230 per week, and Kelly values the police officer at $150 per week. The competitive wage for a police officer is $900 per week. a. If the protection provided by the police officer to one resident does not diminish the protection provided to the other residents, then the police officer is a --- good b. Suppose Sabrina proposes a tax whereby all three residents split the cost of the police officer equally. Will the majority of them support this tax? Is this outcome socially efficient? c. Suppose Kris suggests a proportional tax on income to pay for the police officer. If Sabrina earns $4,000 per week, Kris earns $1,500 per week, and Kelly earns $500 per week, what proportional tax on income would just cover the cost of the police officer? Will the majority of them support the tax? d. Is a regressive tax system likely to lead to the socially optimal outcome in this case?

*a nonrival* *No, they will not support the tax.* *This outcome is not socially efficent.* A proportional tax rate: *15* *no*

State whether the following pairs of goods are complements, substitutes, or both. a. Washing machines and dryers b. Tennis rackets and tennis balls c. Birthday cake and birthday candles d. Cloth diapers and disposable diapers

*complements* *complements* *complements* *substitutes*

State whether the following statements are true or false. a. In a perfectly competitive industry, the industry demand curve is horizontal, whereas for a monopoly it is downward-sloping. b. Perfectly competitive firms have no control over the price they charge for their product. c. For a natural monopoly, average cost declines as the number of units produced increases over the relevant output range.

*false* *true* *true*

Suppose the accompanying table describes the demand for a good produced by monopolist. table 10 1 9 2 8 3 7 4 6 5 5 6 4 7

*not produce the seventh unit*

Randy and Frank are both landscapers. Randy can mow 8 lawns per day or prune 24 trees. Frank can mow 6 lawns per day or prune 12 trees. Randy and Frank each work 240 days per year. a. Determine who has the absolute advantage at each task, what their respective opportunity costs are for mowing a lawn, and who has comparative advantage in each task.

*randy* has an absolute advantage in mowing lawns. *randy* has an absolute advantage in pruning trees. The opportunity cost of mowing a lawn for Randy is *3* trees The opportunity cost of mowing a lawn for Frank is *2* trees *frank* has a comparative advantage in mowing lawns. *randy* has a comparative advantage in pruning trees. b. Assuming that only one of the tasks is performed, then together Randy and Frank can service a maximum of *3,360* lawns or *8640* trees each year c. If each landscaper fully specializes according to his comparative advantage, then the maximum number of lawns that can be mowed annually is *1,440* and the maximum number of trees that can be pruned in *5760* per year

Why do price discrimination and the existence of slightly different variants of the same product tend to go hand in hand? By introducing slightly different variants of the product, firms that price discriminate are able to

*separate buyers based on their willingness to pay.*

The town of Smallsville is considering building a museum. The interest on the money Smallsville will have to borrow to build the museum will be $1,000 per year. Each citizen's marginal benefit from the museum is shown in the following table, and this marginal benefit schedule is public information. a. Assuming each citizen voted his or her private interests, would a referendum to build the museum and raise each citizen's annual taxes by $200 pass? b. A citizen proposes that the city let a private company build the museum and charge the citizens a lump-sum fee each year to view it as much as they like. Only citizens who paid the fee would be allowed to view the museum. If the private company were allowed to set a single fee, would any company offer to build the museum? (Hint: Consider the revenue a single-price monopolist could earn relative to the annual interest payment of $1,000.) c. A second citizen proposes allowing the private company to charge different prices to different citizens and auctioning the right to build the museum to the highest bidding company. Again, only the citizens who pay the fee may view the museum. What is the highest bid a private company would make to supply the museum to Smallsville? (Hint: Consider the revenue a perfectly price discriminating monopolist could earn relative to the annual interest payment of $1,000.)

*yes* the referendum *would* pass *no* a private company *would not* be willing to build and operate the museum

cost benefit principle

- take an action if and only if the extra benefits are at least as great as the extra costs marginal benefit to cost ratio > 1 (benefit > cost) marginal benefit to cost ratio < 1 (benefit < cost) buyers: buy one more? sellers: sell one more?

monopoly

-high barrier -one firm -no close substitutes

quota and tariffs

-market effects of tariffs are the same -tariffs generate tax revenue -quotas generate revenue for the firm that hold and import license

hurdle method

-price discrimination is the practice of offering a discount to all buyers who overcome some obstacle -discounts for identifiable groups ex/students

two objections to monopolies

-restrict output, decrease total surplus -raise price, earn economic profits

outsourcing

-service work performed overseas by low wage workers -work arrangement made by an employer who hires an outside contractor to perform work that could be done by company personnel

law of supply

-short run MC curves have positive slope -long run, all inputs are variable (curves can be flat, upward sloping, or downward sloping) -perfectly competitive firm's supply curve is *marginal cost curve*

Suppose a monopolist faces the following demand curve. The marginal revenue of the 35th unit of output is:

0

Beth is a second-grader who sells lemonade on a street corner in your neighborhood. Each cup of lemonade costs Beth 20 cents to produce; she has no fixed costs. The reservation prices for the 10 people who walk by Beth's lemonade stand each day are listed in the following table. Beth knows the distribution of reservation prices (that is, she knows that one person is willing to pay $1, another $0.90, and so on), but she does not know any specific individual's reservation price. a. Calculate the marginal revenue of selling an additional cup of lemonade. (Start by figuring out the price Beth would charge if she produced only one cup of lemonade, and calculate the total revenue; then find the price Beth would charge if she sold two cups of lemonade; and so on.) b. What is Beth's profit-maximizing price? c. At that price, what are Beth's economic profit and total consumer surplus? d. What price should Beth charge if she wants to maximize total economic surplus?

1.00 1.00 1.80 0.80 2.40 0.60 2.80 0.40 3.00 0.20 3.00 0.00 2.80 -0.20 2.40 -0.40 1.80 -0.60 1.00 -0.80 $*0.60* Economic profit: $ *2.00* per day Consumer surplus: $ *1.00* per day Price to maximize total economic surplus: $ *0.20*

Refer to the accompanying table. To increase output from 99 to 132 units requires ______ extra employees per day; to increase output from 132 to 165 units requires ______ extra employees per day.

3; 4

normative economic principle

says how people should behave

Once a week, Smith purchases a six-pack of cola and puts it in his refrigerator for his two children. He invariably discovers that all six cans are gone on the first day. Jones also purchases a six-pack of cola once a week for his two children, but unlike Smith, he tells them that each may drink no more than three cans.

At both houses, the cost of drinking a cola is that it's not available to drink later, but, at Smith's house, there's always a chance your sibling will drink the cola. Thus, the cost of drinking a cola is *lower at Smith's house than at Jones's * If the children use cost-benefit analysis each time they decide whether to drink a cola and if the benefit of drinking a cola is the same at both houses, then the cola will last *longer at Jones's house than at Smith's*

A 2 percent increase in the price of milk causes a 4 percent reduction in the quantity demanded of chocolate syrup. What is the cross-price elasticity of demand for chocolate syrup with respect to the price of milk? Are the two goods complements or substitutes?

Cross-price elasticity of demand: *-2* *complements*

What are the respective price elasticities of supply at A and B on the supply curve shown in the figure below?

Elasticity of supply at point A: *2* / *3* Elasticity of supply at point B: *3* / *4*

Suppose employers and workers are risk-neutral, and Congress is about to enact the $12 per hour minimum wage. Congressional staff economists have urged legislators to consider adopting an earned-income tax credit instead. Suppose neither workers nor employers would support that proposal unless the expected value of each party's economic surplus would be at least as great as under the minimum wage. Calculate the amounts by which employer surplus and worker surplus change as a result of the minimum wage. Which of the following describes both an earned-income tax credit and a tax that would raise enough money to pay for it that would receive unanimous support from both workers and employers?

Employer surplus would be *reduced* by $*18000* per day workers surplus would be * increased* by $*14000* per day *A tax of $16,000 levied on employers used to fund an earned-income tax credit of $1.60 per hour.*

When a TV company chooses a pay-per-view scheme to pay for programming, which of the following statements is true? a. The outcome is socially efficient. b. The programs selected will maximize advertising revenue. c. The marginal cost to an additional viewer of watching the program is lower than when advertising is used to finance programming. d. The outcome is always more socially efficient than when advertising is used to finance programming. e. The variety of programs provided is likely to rise.

F F F F T

supply shifters

Government Resources Expectation Agriculture Technology Sellers rightward -decrease cost of material/labor -technology improve -weather (agriculture) -increase # of suppliers -expectation of lower price in future

Consider a society consisting only of Helen, who allocates her time between sewing dresses and baking bread. Each hour she devotes to sewing dresses yields 4 dresses and each hour she devotes to baking bread yields 8 loaves of bread. a. If Helen works a total of 8 hours per day, graph her production possibilities curve. b. Using the graph above, which of the points listed below are attainable and/or efficient?

Graph (left to bottom) 32 to 64 i. 28 dresses per day, 16 loaves per day: *Unattainable* ii. 16 dresses per day, 32 loaves per day: *Attainable and efficient* iii. 18 dresses per day, 24 loaves per day: *Attainable and inefficient*

For each long-distance call anywhere in the continental United States, a new phone service will charge users $0.60 per minute for the first 2 minutes and $0.02 per minute for additional minutes in each call. Tom's current phone service charges $0.10 per minute for all calls, and his calls are never shorter than 7 minutes

If Tom's dorm switches to the new phone service, the average length of his calls would *increase*

Suppose that the ingredients required to bring a slice of pizza to market and their respective costs are as listed in the table: 2 8 20 30 60 cents

If these proportions remain the same no matter how many slices are made, and the inputs can be purchased in any quantities at the stated prices, then the supply of slices is *perfectly elastic*, and the price elasticity of supply is *infinite*

profit

total revenue - total cost

Tom is a mushroom farmer. He invests all his spare cash in additional mushrooms, which grow on otherwise useless land behind his barn. The mushrooms double in weight during their first year, after which time they are harvested and sold at a constant price per pound. Tom's friend Dick asks Tom for a loan of $200, which he promises to repay after 1 year. How much interest will Dick have to pay Tom in order for Tom to recover his opportunity cost of making the loan?

Interest to be paid to Tom: *$200*

Jones, who is currently unemployed, is a participant in three means-tested welfare programs: food stamps, rent stamps, and day care stamps. Each program grants him $150 per week in stamps, which can be used like cash to purchase the good or service they cover. a. If benefits in each program are reduced by 40 cents for each additional dollar Jones earns in the labor market, how will Jones's economic position change if he accepts a job paying $120 per week?

Jones would be *worse off* by $*24* per week b. Using your findings in part a, the effective marginal tax rate on Jones's earnings from this job would be *over 100 percent*

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. Assume George has no fixed costs, and his cost of producing each portrait is $12. a. Suppose George is permitted to charge two prices. He knows that customers with a reservation price above $30 never bother with coupons, whereas those with a reservation price of $30 or less always use them. At what level should George set the list price of a portrait? At what level should he set the discount price? How many photo portraits will he sell at each price? b. In this case, what is George's economic profit and how much consumer surplus is generated each day?

List price of a portrait: $ *34* Number of portraits to be sold at the list price: *5* portraits Discount price of a portrait: $ *22* Number of portraits to be sold at the discounted price: *3* portraits Economic profit: $ *140* Consumer surplus: $ *52*

Acme, Inc., supplies rocket ships to the retail market and hires workers to assemble the components. A rocket ship sells for $30,000, and Acme can buy the components for each rocket ship for $25,000. Wiley and Sam are two workers for Acme. Sam can assemble 1/5 of a rocket ship per month and Wiley can assemble 1/10. If the labor market is perfectly competitive and rocket components are Acme's only other cost, how much will Sam and Wiley be paid?

Sam will be paid $ *1000* per month Wiley will be paid $*500* per month

Mountain Breeze supplies air filters to the retail market and hires workers to assemble the components. An air filter sells for $26, and Mountain Breeze can buy the components for each filter for $1. Sandra and Bobby are two workers for Mountain Breeze. Sandra can assemble 60 air filters per month and Bobby can assemble 70. If the labor market is perfectly competitive, how much will Sandra and Bobby be paid?

Sandra will be paid $ *1,500* per month Bobby will be paid $ *1,750* per month

Suppose Sansa and Arya divide their time between making daggers and shields. It takes Sansa 6 hours to make a dagger and 3 hours to make a shield, and it takes Arya 3 hours to make a dagger and 1 hour to make a shield. Sansa and Arya each work 30 hours a week. a. What is the maximum number of daggers each can make in a week? b. What is the opportunity cost to each of making a dagger? c. Who has the comparative advantage in making daggers? d. Who has the absolute advantage in making daggers?

Sansa: *5* daggers per week Arya: *10* daggers per week Sansa's opportunity cost of making a dagger: *2* shields Arya's opportunity cost of making a dagger: *3* shields Sansa Arya

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. a. 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? b. Who would reap the benefit of the scheme in the long run? How much would they gain each year?

Short-run economic profit: $ *40,000* per lease Long-run economic profit: $ *0* per lease *landowners* would gain $*40,000* per plot each year due to *higher rent for land*

Sue is offered a job reshelving books in the University of Montana library from noon until 1 p.m. each Friday. Her reservation wage for this task is $10 per hour. a. If the library director offers Sue $100 per hour, how much economic surplus will she enjoy each week as a result of accepting the job? b. Now suppose the library director announces that the earnings from the job will be divided equally among the 400 students who live in Sue's dormitory apartment. Will Sue still accept? c. The answers to parts a and b illustrate a problem inherent in all income redistribution programs. Which of the following is correct?

Sue's economic surplus is $ *90* per hour Sue *will not* accept the job *By reducing Sue's incentive to work and generate an economic surplus, the overall income available to the economy is reduced.*

demand shifters

Taste Related goods Income Buyers Expectation rightward -decrease in price of complements good -increase price of substitutes -increase in income -increase population of potential buyers -increase preference by buyers for goods -expectation of higher price in the future

Each day, Ted can wax 4 cars or wash 12 cars, and Tom can wax 3 cars or wash 6 cars. What is each man's opportunity cost of washing a car? Who has a comparative advantage in washing cars?

Ted's opportunity cost of washing one car is *0.33* wax jobs Tom's opportunity cost of washing one car is *0.50* wax jobs Ted

Indicate how you think each of the following would shift demand in the indicated market: a. The income of buyers in the market for Adirondack vacations increase. b. Buyers in the market for pizza read a study linking pepperoni consumption to heart disease. c. Buyers in the market for gas-powered cars learn of an increase in the price of electric cars (a substitute for gas-powered cars). d. Buyers in the market for electric cars learn of an increase in the price of electric cars.

The demand curve would *shift to the right* The demand curve would *shift to the left* The demand curve would *shift to the right* The demand curve would *remain unchanged*

Suppose the most you would be willing to pay to have a freshly washed car before going out on a date is $6. The smallest amount for which you would be willing to wash someone else's car is $3.50. You are going out this evening and your car is dirty. How much economic surplus would you receive from washing it?

The economic surplus would be *$2.50*

Among the following groups—senior executives, junior executives, and students—which is likely to have the most and which is likely to have the least price elastic demand for membership in the Association of Business Professionals?

The group with the most price elastic demand: *students* The group with the least price elastic demand: *senior executives*

The following table shows the marginal benefit to each voter in a small town whose town council is considering a new swimming pool with capacity for at least three citizens. The cost of the pool would be $18 per week and would not depend on the number of people who actually used it. a. If the pool must be financed by a weekly head tax levied on all voters, will the pool be approved by majority vote? Is the outcome socially efficient? b. The town council instead decides to auction a franchise off to a private monopoly to build and maintain the pool. If it cannot find such a firm willing to operate the pool, then the pool project will be scrapped. If all such monopolies are constrained by law to charge a single price to users, will the franchise be sold, and if so, how much will it sell for? c. The town council decides that, rather than auction off the franchise, it will give it away to the firm that spends the most money lobbying council members. If the winning firm can perfectly price discriminate and there are four identical firms bidding and they cannot collude, then which of the following is true?

The head tax under this proposal will be $ *6* per voter week The pool *would not* be approved by majority vote, and this outcome is *not socially efficient* The franchise *will not* be sold This outcome is *not socially efficient* *Total expenditures on lobbying may well exceed the total value of the franchise.*

Jack and Jill are the only two residents in a neighborhood, and they would like to hire a security guard. The value of a security guard is $50 per month to Jack and $150 per month to Jill. Irrespective of who pays the guard, the guard will protect the entire neighborhood. a. What is the most a guard can charge per month and still be assured of being hired by at least one of them? b. Suppose the competitive wage for a security guard is $120 per month. The local government proposes a plan whereby Jack and Jill each pays 50 percent of this monthly fee, and asks them to vote on this plan. Will the plan be voted in?

The most a guard could charge is $ *150* *no* the plan *would not* be voted in *yes* economic surplus would be *higher*

The figure below depicts the short-run market equilibrium in a perfectly competitive market and the cost curves for a representative firm in that market. Assume that all firms in this market have identical cost curves.

The number of firms in the market will rise as firms enter the market in response to positive economic profit.

Nancy and Bill are auto mechanics. Nancy takes 4 hours to replace a clutch and 2 hours to replace a set of brakes. Bill takes 6 hours to replace a clutch and 2 hours to replace a set of brakes. State whether anyone has an absolute advantage at either task and, for each task, identify who has a comparative advantage.

The opportunity cost of replacing a set of brakes for Nancy is *0.50* of a clutch replacement The opportunity cost of replacing a set of brakes for Bill is *0.33* of a clutch replacement *Bill* has a comparative advantage in brake replacement. *Nancy* has a comparative advantage in clutch replacement. *Neither* has an absolute advantage in brake replacement. *Nancy* has an absolute advantage in clutch replacement.

Jack and Jill are the only two residents in a neighborhood, and they would like to hire a security guard. The value of a security guard is $50 per month to Jack and $150 per month to Jill. The competitive wage for a security guard is $120 per month, and irrespective of who pays the guard, the guard will protect the entire neighborhood. Furthermore, suppose Jack earns $1,000 per month and Jill earns $11,000 per month. a. What proportional tax on income would just cover the cost of the security guard and be accepted by majority vote? b. Suppose instead that Jack proposes a tax scheme under which Jack and Jill would each receive the same net benefit from hiring the guard. How much would Jack and Jill pay now? Would Jill agree to this scheme? c. What is the practical problem that prevents ideas like the one in part b from working in real-life situations?

The proportional tax rate would be *1*% Jack would pay $ *10* Jill would pay $ *110* Jill *would* agree to the scheme *Each party involved has an incentive to understate his or her benefit in order to pay less of the total cost.*

Residents of your city are charged a fixed weekly fee of $6 for garbage collection. They are allowed to put out as many cans as they wish. The average household disposes of three cans of garbage per week under this plan. Now suppose that your city changes to a "tag" system. Each can of garbage to be collected must have a tag affixed to it. The tags cost $2 each and are not reusable. What effect do you think the introduction of the tag system will have on the total quantity of garbage collected in your city?

Under the "tag" system, the total quantity of garbage collected in the city will *decrease*

tariff

a tax imposed on an imported good green in graph

An economy has two workers, Anne and Bill. Per day of work, Anne can pick 100 apples or 25 bananas, and Bill can pick 50 apples or 50 bananas. Anne and Bill each work 200 days per year.

a. Anne's opportunity cost of picking one more apple is *1/4 banana* Bill's opportunity cost of picking one more apple is *1 banana* *anne* has a comparative advantage in apple picking. *anne* has an absolute advantage in apple picking. b. Assuming that only one fruit is picked in this economy, then the maximum number of each type of fruit that can be picked annually is either *30,000* apples or *15000* bananas c. If each worker fully specializes according to his or her comparative advantage, the maximum number of apples that can be picked annually is *20,000*, and the maximum number of bananas is *10000*

Suppose that a U.S. worker can produce 1,000 pairs of shoes or 10 industrial robots per year. For simplicity, assume there are no costs other than labor costs and firms earn zero profits. Initially, the U.S. economy is closed. The domestic price of shoes is $30 a pair, so that a U.S. worker can earn $30,000 annually by working in the shoe industry. The domestic price of a robot is $3,000, so that a U.S. worker can also earn $30,000 annually working in the robot industry. Now suppose that the U.S. opens trade with the rest of the world. Foreign workers can produce 500 pairs of shoes or 1 robot per year. The world price of shoes after the U.S. opens its markets is $10 a pair, and the world price of robots is $5,000. b. When the U.S. opens to trade, which good will it import and which will it export? c. Find the real income of U.S. workers before and after the opening to trade, measured in the number of pairs of shoes and robots annual worker income will buy. Compared to the situation before the opening of trade, does trading in goods produced by "cheap" foreign labor hurt U.S. workers? d. How might your conclusion in part c be modified in the short term, if it is costly for workers to change industries: If it is costly for workers to change industries, what policy response might help with this problem?

a. What do foreign workers earn annually, in dollars? $ *5,000* The United States will import *shoes* and export *robots* 1000 10 5000 10 *No, because U.S. workers can now afford to buy more.* *Workers who produced shoes before the U.S. opened to trade might find it difficult to switch to the robot industry, making them worse off because of trade.* *Assist workers who might need additional skills or other support in order to transition from one industry to another.*

government revenue

after world price, tariff price, no dead weight lost *rectangular*

principle of comparative advantage

all enjoy more goods and services when each country produces according to its comparative advantges, and then trades with other countries

economic efficiency

all goods are produced at their socially optimal level exists when no change could be made to benefit one party without harming the other aka pareto efficiency

closed economy

an economy that does not trade with the rest of the world -society's consumption possibilities are identical to its production possibilities

open economy

an economy that trades with other countries -society's consumption possibilities are greater than its production possibilities

factor of production

an input used in the production of a good or a service ex/land, labor, capital, entrepreneurship

short run

at least one firm's factors of production is fixed -firms can make losses (continue to operate, shut down) -shut down: loses all fixed costs so it should continue

buyer's surplus

buyers reservation price-market price

incentive principle

central to people's choices -benefit: actions are more likely to be taken if their benefit rise -cost: actions are less likely to be taken if their cost rise *more benefit, more action, more cost, less action*

production possibilities curve

combinations of two goods that can be produced with given resources A: attainable point (efficient point) B: unattainable point C: attainable point (inefficient point)

The demand and supply for automobiles in a certain country is given in the graph below. The world price of automobiles is $8,000. a. Assuming that the economy is closed, find the equilibrium price and quantity of automobiles. b. If the economy opens to trade, what will be the domestic quantity demanded, the domestic quantity supplied, and the quantity of imports or exports? The opening of the automobile market to trade will be favored by: c. Suppose the government imposes a tariff of $2,000 per car. Using the graph below, indicate the new world price plus the tariff, and find the effect of the tariff on the domestic quantity demanded and the domestic quantity supplied. d. As a result of the tariff, what will happen to the quantity of imports and exports, and what is the revenue raised by the tariff? The imposition of the tariff on the automobile market is favored by:

graph 17000,14000 The domestic quantity demanded will be *20,000* cars per year The domestic quantity supplied will be *14,000* cars per year The country will *import* *6000* cars per year *domestic consumers, but opposed by domestic producers.* graph all in $10000 Qs 15000 Qd 19000 Tariff 0-15000 The new quantity of *imports* will be *4000* cars per year, and the government will raise $ per year in revenue from the tariff *domestic producers, but opposed by domestic consumers.*

Twenty-five years ago, tofu was available only from small businesses operating in predominantly Asian sections of large cities. Today tofu has become popular as a high-protein health food and is widely available in supermarkets throughout the United States. At the same time, tofu production has evolved to become factory-based using modern food-processing technologies. Using the graph below, show how the tofu market has changed over the last 25 years. Given the information above, what does the demand-supply model predict about the change in the quantity of tofu sold in the United States over the last 25 years? What does it predict about the change in the price of tofu in the United States?

graph demand: right supply: right The equilibrium quantity of tofu *will be higher now than 25 years ago* The equilibrium price *could be higher, lower or the same as 25 years ago*

Suppose, while rummaging through your uncle's closet, you found the original painting of Dogs Playing Poker, a valuable piece of art. You decide to set up a display in your uncle's garage. The demand curve to see this valuable piece of art is as shown in the diagram below. What price should you charge if your goal is to maximize your revenues from tickets sold?

graph elastic unit elastic inelastic $*6* per visit

For the pizza seller whose marginal, average variable, and average total cost curves are shown in the graph below, what is the profit-maximizing level of output and how much profit will this producer earn if the price of pizza is $1.00 per slice?

graph mc atc avc At the profit-maximizing level of output, the producer's profit is: $ *-100* per day

For the pizza seller whose marginal, average variable, and average total cost curves are shown in the graph below, what is the profit-maximizing level of output and how much profit will this producer earn if the price of pizza is $2.50 per slice?

graph mc atc avc q= (550, 2.50) for all three lines At the profit-maximizing level of output, the producer's profit is: $ *550* per day

Two consumers, Smith and Jones, have the following demand curves for Podunk Public Radio broadcasts of recorded opera on Saturdays: Smith: PS = 12 - Q Jones: PJ = 12 - 2Q, where PS and PJ represent marginal willingness-to-pay values for Smith and Jones, respectively, and Q represents the number of hours of opera broadcast each Saturday. a. If Smith and Jones are the only public radio listeners in Podunk, construct the market demand curve for opera broadcasts. b. If the marginal cost of opera broadcasts is $12 per hour, what is the socially optimal number of hours of broadcast opera?

graph smith 12-12 jones 12-6 Dmkt 24,(8,6),12 The socially optimal number of hours is *4*

The supply curves for the only two firms in a competitive industry are given by: S1: P=2Q1 S2: P=2 + Q2 where Q1 is the output of firm 1 and Q2 is the output of firm 2. These two supply curves are shown in the graph below. Draw the market supply curve for this industry.

graph (bottom to top) (0,0) (1,2) (4,4) (7,6)

Consider a society consisting only of Helen, who allocates her time between sewing dresses and baking bread. Each hour she devotes to sewing dresses yields 4 dresses and each hour she devotes to baking bread yields 8 loaves of bread. Suppose that a sewing machine is introduced that enables Helen to sew 8 dresses per hour rather than only 4. a. If Helen works a total of 8 hours per day, show how this development shifts her production possibilities curve on the graph below. b. Using the graph above, indicate if the following points are attainable and/or efficient before and after the introduction of the sewing machine. c. "An increase in productivity with respect to any one good increases our options for producing and consuming all other goods." Which of the following best explains the meaning of that statement?

graph (left to bottom) blue: 64 to 64 red: 34 to 64 i. 16 dresses per day, 48 loaves per day: *unattainable* before the sewing machine and *attainable and efficient* after its introduction ii. 24 dresses per day, 16 loaves per day: *Attainable and efficient* before the sewing machine and *attainable and inefficient* after its introduction *An increase in output per hour for any one good frees up resources that can be devoted to the production of other goods.*

The schedule below shows the number of packs of bagels bought in Davis, California, each day at a variety of prices. a. Graph the daily demand curve for packs of bagels in Davis. b. Calculate the price elasticity of demand at the point on the demand curve at which the price of bagels is $4 per pack. c. If all bagel shops increased the price of bagels from $4 per pack to $5 per pack, what would happen to total revenue? d. Calculate the price elasticity of demand at a point on the demand curve where the price of bagels is $1 per pack. e. If bagel shops increased the price of bagels from $1 per pack to $2 per pack, what would happen to total revenue?

graph by given table *2.0* total revenue would *fall* from $*24,000* to $*15,000* *0.2* total revenue would *rise* from $*15,000* to $*24,000*

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

graph left to right red: (4,10) (8,20) (12,30) blue: (12,30) (8,40) (4,50) Total economic surplus lost: $ *40* Total surplus: $ *360* per day

Suppose Martha and Julia both work at a bakery making bread and muffins. In an hour, Martha can either make 10 loaves of bread or 40 muffins, while Julia can either make 12 loaves of bread or 60 muffins. Both Martha and Julia work 8 hours a day. a. Draw Martha's daily PPC. b. Draw Julia's daily PPC. c. What is the opportunity cost to each of making one loaf of bread? d. What is the opportunity cost to each of making one muffin? e. Who has the comparative advantage in making bread? f. Who has the absolute advantage in making bread? g. Suppose you are the owner of the bakery. If Julia and Martha are currently both spending all of their time making muffins, then which of them should you ask to start making bread?

graph(left to bottom) 80 to 320 96 to 480 Martha's opportunity cost of making a loaf of bread: *4* muffins Julia's opportunity cost of making a loaf of bread: *5* muffins Martha's opportunity cost of making a muffin: *0.25* loaves of bread Julia's opportunity cost of making a muffin: *0.20* loaves of bread *Martha* *Julia* *Martha because her opportunity cost of making bread is lower than Julia's*

price ceiling

maximum allowable price, set by law ex/ rent control

price ceilings

maximum allowable price, specified by law

productivity

measured by looking at the time it takes a worker to produce a good

scarcity principle

no free lunch principle -we have unlimited wants but resources are limited *scarce resources vs. free resources*

network economies

occur when the value of the product increases as the number of users increases

price elasticity of demand

percentage change in quantity demanded from a 1% change in price

rationing function

price distributes scarce goods to the consumers who value them most highly

supply decrease demand decrease

price indeterminate quantity decrease

supply increase demand increase

price indeterminate quantity increase

A price ceiling that is set below the equilibrium price will cause:

producer surplus to fall.

Paducah Slugger Company makes baseball bats out of lumber supplied to it by Acme Sporting Goods, which pays Paducah $10 for each finished bat. Paducah's only factors of production are lathe operators and a small building with a lathe. The number of bats per day it produces depends on the number of employee-hours per day, as shown in the table below. a. The wage is $15 per hour and Paducah's daily fixed cost for the lathe and building is $60. b. What would Paducah's profit-maximizing level of output be if the government imposed a tax of $10 per day on the company? (Hint: Think of this tax as equivalent to a $10 increase in fixed cost. c. What would Paducah's profit-maximizing level of output be if the government imposed a tax of $2 per bat instead of the $10 tax of part b)? (Hint: Think of this tax as a $2 per bat increase in the firm's marginal cost. d. Why do the taxes in parts b and c have such different effects?

table 0 0 60 -60 -- 50 15 75 -25 3 100 30 90 10 3 150 60 120 30 6 200 105 165 35 9 250 165 225 25 12 300 240 300 0 15 350 330 390 -40 18 What is the profit-maximizing quantity of bats? *20* bats *20* bats *15* bats *A tax of $10 per day does not affect marginal cost, while a tax of $2 per bat does*

Suppose Melody owns a business giving piano lessons. Assume that the market for piano lessons is perfectly competitive and that the equilibrium price of a piano lesson is $20. Melody's total costs vary depending on the number of piano lessons she offers each day, as shown in the table below. a. When Melody gives 3 lessons per day, what is her average variable cost? b. What is the profit-maximizing number of lessons for Melody to give each day? c. What is Melody's daily economic profit at her profit-maximizing number of lessons? d. Should Melody shut down? e. If Melody's fixed cost rises, then what will happen to her profit-maximizing number of lessons?

table 0 30 1 50 2 68 3 78 4 96 5 115 6 138 7 168 8 208 $*16* *5* lessons per day $*-15* *No. Melody should not shut down* *There would be no change*

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. Assume George has no fixed costs, and his cost of producing each portrait is $12. a. Complete the following table.

table 50 50 92 42 126 34 152 26 170 18 180 10 182 2 176 -6 How much should George charge if he must charge a single price to all customers? $ *34* At this price, how many portraits will George produce each day? *5* portraits What will be his economic profit? $ *110* per day b. How much consumer surplus is generated each day at this price? $ *40* c. What is the socially efficient number of portraits? *8* portraits 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* What will his economic profit be? $ *192* per day e. In this case, how much consumer surplus is generated each day? $ *0*

A price-taking firm makes air conditioners. The market price of one of its new air conditioners is $120. The firm's total cost information is given in the table below: How many air conditioners should the firm produce per day if its goal is to maximize its profit?

table 50 70 90 95 105 140 150 *6*air conditioners per day

Zoe is trying to decide how to divide her time between her job as a wedding photographer, which pays $24 per hour for as many hours as she chooses to work, and as a fossil collector, in which her pay depends on both the price of fossils and the number of fossils she finds. Earnings aside, Zoe is indifferent between the two tasks, and the number of fossils she can find depends on the number of hours a day she searches, as shown in the table below: a. Using this information, compute the lowest price that Zoe would accept per fossil in order to justify her spending an additional hour collecting fossils instead of working as a wedding photographer. b. Plot these points in a graph with price on the vertical axis and quantity per day on the horizontal. What is this curve called?

table 6 8 12 24 graph (4,6) (7,8) (9,12) (10,24) *a supply curve*

Calculate the price elasticity of demand (in absolute value) at points A, B, C, D, and E on the demand curve below. (graph 100 to 100 with slope=1)

table infinity 3 1 0.33 0

To earn extra money in the summer, you grow tomatoes and sell them at a local farmers' market for $0.30 per pound. By adding compost to your garden, you can increase your yield as shown in the accompanying table. If compost costs $0.50 per pound and your goal is to make as much profit as possible, how many pounds of compost should you add?

table 20 6.00 5 1.50 3 0.90 2 0.60 1 0.30 0.5 0.15 You should add *4* pounds of compost

regressive tax

taxes high income earners at a lower percentage of their income and low wage earners at a higher rate of their income. =head tax

increases in supply (perfect competition)

technology: more output input prices: decreases costs number of suppliers: more suppliers in the market expectations: lower prices in the future price of other products: lower prices for alternative products

rent seeking

term for socially unproductive efforts to gain a prize

nominal price

the absolute price of a good in terms of dollars -the price in store

When the price of a perfectly competitive firm's output rises

the firm will produce more.

average benefit

total benefit/ # of units

marginal cost (MC)

total cost / change in output extra cost: the amount by which total cost increases when production rises

average cost

total cost/ # of units

open trade tariff

total price, add to equation subtract og price times later price

accounting profit

total revenue - explicit costs

When a perfectly competitive firm sells additional units of output, ______, and when a monopolist sells additional units of output, ______.

total revenue always rises; total revenue could rise, fall, or remain unchanged

Suppose the equilibrium wage for unskilled workers in New Jersey is $7 per hour. How will the wages and employment of unskilled workers in New Jersey change if the state legislature raises the minimum wage from $5.15 per hour to $6 per hour?

wages of unskilled workers will *not change* employment of unskilled workers will *not change*

logrolling

when legislators support each other's pork barrel projects

inelastic

when quantity is not sensitive to a change in price