Economics exam 2

When output is 50, fixed costs are $1,000, and variable costs are $2,000, what is the average total cost?

$60 - Average total cost equals total cost divided by output. Total cost in this case is $3,000, and so average total cost is $3,000/50 = $60.

With the long-run average cost curve above, the minimum efficient scale of production is:

18 to 21. (lowest range on graph.) - The minimum efficient scale of production is the amount of production where average total costs are minimized.

Refer to the table shown. A firm would be least likely to hire: number of workers: Marginal Product of workers 1 5 2 7 3 8 4 10 5 11 6 7 7 5 8 3 9 0 10 -1

9 workers. - The marginal product of the ninth worker is 0, and so employing that worker adds nothing to total output; it only adds to costs.

An entrepreneur would be least likely to develop a product if expected average total cost is: $50 and expected price is $75. $60 and expected price is $65. $65 and expected price is $40. $50 and expected price is $50.

$65 and expected price is $40. - There is a per-unit loss of $25 in this case, whereas the other cases present either a gain or a break-even.

policies to deal with informational problems:

- regulate the market and see that individuals provide the correct information -license individuals in the market and require them to provide full information about the good being sold - allow markets to develop to provide information that people need and will buy.

Production relationships have social dimensions which introduce the potential for important diseconomies of scale into the production process in two ways (which contribute to the diseconomies of scale):

1. as the size of the firm increases, monitoring costs generally increase. 2. As the size of the firm increases, team spirit or morale generally decreases.

Reasons for government failure

1. government doesn't have an incentive to correct the problem 2. government doesn't have enough information to deal with the problem 3. intervention in markets is almost always more complicated than it initially seems 4. the bureaucratic nature of government intervention does not allow fine-tuning. 5. government intervention leads to more government intervention.

Firms:

1. organize factors of production and/or 2. produce goods and services and/or 3. sell produced goods and services

The number of substitutes a good has is affected by several factors. Four of the most important:

1. the time period being considered. 2. the degree to which a good is a luxury 3. the market definition 4. the importance of the good in one's budget.

Which of the following is the best example of an adverse selection problem? A. Once individuals are insured, they are less likely to take efficient precautions. B. Individuals are unlikely to pay for something if they can receive the benefits for free. C. When a firm pollutes the air, families living nearby suffer the consequences. D. Individuals who seek to purchase health insurance have better information about their health than do insurance companies.

Individuals who seek to purchase health insurance have better information about their health than do insurance companies. - The text uses the example of health insurance to illustrate the adverse selection problem. The incorrect responses illustrate moral hazard, the free rider problem, and negative externalities.

If elasticity of demand is greater than 1:

a rise in price lowers total revenue. - If elasticity of demand is greater than 1, a rise in price lowers total revenue. If elasticity of demand is less than 1, a rise in price increases total revenue.

market failure

a situation in which the invisible hand pushes in such a way that individual decisions do not lead to socially desirable outcomes.

An effluent fee is an example of:

a tax incentive policy. - An effluent fee is a tax on pollution. The more one pollutes, the more one pays. Hence, there is an incentive (motive) to reduce pollution in order to reduce the tax.

examples of price discrimination:

airline pricing, the phenomenon of selling new cars

Economists generally call the effect of an agreement on others that is not taken into account by the parties making the agreement:

an externality. - The effects on third parties not taken into account by the parties making the agreement.

if elasticity of demand is < 1

an increase in price increases total revenue

If elasticity of Demand is > 1

an increases in price decreases total revenue

if elasticity of demand = 1

an increases in price leaves total revenues unchanged

complements

are goods that are used conjuction with other goods - Ecross-price < 0

Market incentives

are plans requiring market participants to certify that they have reduced total consumption by a certain amount.

Total fixed costs:

are positive even when no output is produced. - Total fixed costs do not vary with output. They are constant.

(incentive policies) Tax incentives

are programs using a tax to create incentives (motives) for individuals to structure their activities in a way that is consistent with the desired ends.

externalities

are the effects of a decision on a third party that are not taken into account by the decision maker.

Inferior goods

are those whose consumption decreases with an increases in income - ex: canned soups and vegetables Eincome < 0

Normal goods

are those whose consumption increases with an increases in income. - ex: whole wheat, organic pasta noodles.. Necessity: 0 < Eincome > 1 Luxury: Eincome > 1

government failures

are when the government intervention actually makes the situation worse.

The Law of Diminishing Marginal Productivity

as more of a variable input is added to an existing fixed input, after some point the additional output from the additional input will fall

An optimal corrective tax levied on polluters will:

be equal to the marginal cost of their actions imposed on third parties. - An optimal policy equates marginal costs (including costs imposed on third parties) with marginal benefits. Because the amount of the tax equals the total cost of the pollution imposed on third parties, it equals the cost of the pollution to society.

A perfectly elastic supply curve would:

be horizontal. - Quantity supplied would change enormously with a small change in price. This is true only for a horizontal supply curve.

Economists' attitude toward voluntary programs causes them to:

be skeptical of the potential success of such programs - The worst that can happen is that people will not alter their behavior.

The most important part of the area's is the area of diminishing marginal productivity. Why?

because a firm is most likely to operate in that area.

Firms that price discriminate...

charge more to the individuals with inelastic (less substitutes) and less to individuals with elastic (more substitutes).

Price-discriminating behavior by a profit maximizer is:

charging higher prices to those with inelastic demand than to those with elastic demands. - The ability to charge different prices to different customers is price discrimination.

fixed curve is

constant

free rider problem

individual's unwillingness to share the cost of a public good

A market incentive plan differs from direct regulation because

individuals who reduce consumption by more than the required amount receive marketable certificates that can be sold to others.

moral hazard problem

is a problem that arises when people don't have to bear the negative consequences of their actions.

adverse selection problem

is a problem that occurs when buyers and sellers have different amounts of information about the good for sale.

A production table

is a table showing the output resulting from various combinations of factors of production or inputs.

A Firm

is an economic institution that transforms factors of production into goods and services.

If the percentage increase in the quantity supplied is greater than the percentage increase in the price, the supply:

is elastic.

If the percentage increase in the quantity supplied is smaller than the percentage increase in the price, the supply:

is inelastic.

A public good

is non exclusive and non rival. nonexclusive: no one can be excluded from its benefits non rival: consumption by one does not preclude (prevent) consumption by others

An optimal policy

is one in which the marginal cost of undertaking the policy equals the marginal benefit of that policy.

If quantity demanded changes infinitely when the price changes, the demand:

is perfectly elastic.

Average Product

is the output per worker - (to find) it equals total output divided by the number of workers or

Price elasticity of Supply

is the percentage change in quantity supplied divide by the percentage change in price. - Price elasticity of Supply tell us how quantity supplied responds to a change in price

Price elasticity of demand

is the price percentage change in quantity demanded divided by the percentage change in price. - Price elasticity of demand tells us exactly howquantity demanded responds to change in price. Demand is elastic if the percentage change in quantity if less than the percentage change in price.

Production

is the transformation of factors into goods. - individuals control the factors of production

Direct regulation

is when the government directly limits the amount of a good people are allowed to use

In general, the greater the elasticity, the:

larger the responsiveness of quantity to changes in price. - When either demand or supply is highly elastic, the quantity is very responsive to a change in price.

example of setup cost

cost of changnign tools or dies on equipment - preparing and moving materials

Marginal product eventually:

declines because some inputs are fixed. - The law of diminishing marginal productivity states that the marginal product of workers eventually will decline in the presence of fixed inputs.

The optimal quantity of pollution control occurs at the point where the:

marginal social cost equals the marginal social benefit of pollution. - The optimal amount of pollution control is where MC = MB.

A policy that requires all the people to certify that they have reduced total consumption, not necessarily their own individual consumption, by a specified amount, is a(n):

market incentive plan.

The goal of a firm is to

maximize profit

Income of elasticity of demand

measures the responsiveness of demand to changes in income. - Income of elasticity of demand = percent change in demand/percentage change in income

Cross-price elasticity of demand

measures the responsiveness of demand to changes in prices of other goods. - Ecross-price = % change in demand/% change in P of related goods

To achieve technical efficiency, managers should:

produce a level of output with the fewest possible inputs. - Technical efficiency is achieved when the same quantity of output cannot be produced with fewer inputs.

The curve is perfectly inelastic if

quantity demanded does not respond at all to changes in price. -it is vertical -Ed=0

The curve is perfectly elastic if

quantity demanded responds enormously to changes in price -horizontal line.

College students tend to eat more ramen noodles than do recent college graduates. A primary reason for this is that:

ramen noodles are an inferior good. - College students generally have lower incomes than do recent graduates. A good whose demand decreases when income increases is known as an inferior good.

Technological change:

reduces average total cost by changing production techniques. - Improved technology means that a firm can either produce the same output at a lower cost or produce more output at the same cost.

The long-run average cost curve is typically:

downward-sloping at first but then upward-sloping. - The long-run average cost curve is U-shaped because at first economies of scale reduce average cost as output rises; at some point, however, increases in output begin to produce diseconomies of scale, and so average cost increases.

the most important determinants of what is economically efficient in the long run are

economies and diseconomies of scale

Why is the long-run average total cost curve generally considered to be -shaped?

economies and diseconomies of scale account for the shape of the long-run average total cost curve; initially economies of scale drive average costs down, then diseconomies of scale drive average costs up.

If the demand for flat screen television sets is rising while at the same time the price of a flat screen TV is falling, there is evidence of:

economies of scale. - By itself, an increase in demand causes an increase in the equilibrium price. If price is falling as output expands, this suggests that economies of scale exist and supply shifts outward faster than demand, causing the price to fall.

The best example of a positive externality is:

education. - Pollution is an example of a negative externality. Roller coaster rides and alcoholic beverages are private goods.

A strategy that achieves a goal at the lowest cost in total resources without consideration of who pays those costs is:

efficient.

the more substitutes a good has, the more

elastic its supply or demand. - if a good has substitutes, a rise in price of that good will cause the customer to shift consumption to those substitute goods.

If the elasticity of demand for restaurant meals is 2.27, the demand for restaurant meals is:

elastic. - Elastic points have elasticities greater than 1.

The relationship between long-run and short-run average total costs is known as the:

envelope relationship - The envelope relationship implies that the long-run average total cost curve is an envelope curve to short-run average cost curves.

For economists, total cost is

explicit costs + implicit costs

An isocost line is a line that represents combinations of:

factors of production that cost the same amount. - The position of each isocost line reflects input prices and total costs.

An isoquant is a curve that represents combinations of:

factors of production that produce equal amounts of output. - As a firm moves along an isoquant, it is changing its input combination but keeping output constant.

Average fixed cost

fc/q (by q we mean quantity of workers)

Refer to the table shown. Diminishing marginal productivity begins when the: Number of workers: Total Output 1 4 2 10 3 18 4 28 5 35 6 41 7 45 8 48 9 50 10 49

fifth worker is hired. - The marginal product of the fifth worker is 7, which is 3 less than the marginal product of the fourth worker. (add the differences for each total output ex: 10-4=6 which is the marginal product of those two numbers, and keep going until number decreases instead of increases marginal product.)

For luxuries, income elasticity is:

greater than 1.

If the percentage increase in the quantity supplied equals the percentage increase in the price, the supply:

has unit elasticity.

An entrepreneur probably will start a business if she sees an opportunity to sell an item at a price:

higher than the average total cost of producing it. - This is how the text defines an entrepreneur. An entrepreneur produces goods and services when he or she sees an opportunity to make a profit.

example of market failure

imperfect information

diminishing absolute productivity

in which the total output, not simply the output per unit of input, decreases as input increases.

signaling

refers to an action taken by an informed party that reveals information to an uninformed party that offsets the false signal that caused the adverse selection in the first place. - selling a used car may provide a false signal to the buyer that the car is a lemon. - the false signal can be offset by a warranty.

A life insurance company is likely to require a health examination of a person applying for insurance. This helps reduce the informational problem through the process of:

screening. - Screening is an action taken by the uninformed party that induces the informed party to reveal information.

Price discrimination occurs when a firm

separates the people with less elastic demand from those with more elastic demand.

The short run is a period during which:

some inputs are variable and some inputs are fixed. - At least one input is fixed in the short run.

Average total cost

tc/q or afc+avc

For economists, total revenue is...

the amount a firm receives for selling a product or service + any increase in the value of the assets owned by the firm

minimum efficient level of production

the amount of production that spreads setup costs out sufficiently for a firm to undertake production profitably.

A market incentive plan is similar to direct regulation in that

the amount of the good consumed is reduced

the optimal level of pollution is not zero pollution, but

the amount where the marginal benefit of reducing pollution equals the marginal cost.

indivisible setup cost

the cost of an indivisible input for which a certain minimum amount of production must be undertaken before the input becomes economically feasible use. ex: in the production of steel, the cost of a blast furnace is an indivisible setup cost that requires a minimum level of production to be economically feasible (practical/likely) to use. -indivisible setup costs are important because they create many real world economies of scale.

Marginal Cost

the cost of producing one more unit of a good - (to find) is the change in total cost divided by the change in output

monitoring costs

the costs incurred by the organizer of production in seeing to it that the employees do what they're suppose to do. - monitoring costs are zero if you're producing something yourself and you get he job done the way you want it done. - monitoring costs is a major contributor to diseconomies of scale

diminishing marginal productivity

the decrease in the marginal product of a variable input, such as labor, as more and more of it is combined with a fixed input, such as equipment

Team spirit

the feelings of friendships and being part of a team that brings on to people's best efforts. -as firms become larger, monitoring costs increases and achieving team spirit is more difficult -production slows down a lot when team spirit is lost

The law of diminishing marginal productivity can also be called:

the flower plot law, because if it didn't hold true, the world's entire food supply could be grown in one plot, but since a pot can only produce so many food no matter how many seeds we add to it. - that's the law of diminishing marginal productivity in action. Eventually, the pot reaches a stage of diminishing absolute productivity, in which the total output, not simply the output per unit of input, decreases as input increases.

the more elastic the demand (supply),

the greater the effect of a supply (demand) shift on quantity and the smaller effect on price.

Marginal product

the increase in output that arises from an additional unit of input

a private good is only supplied to

the individual who bought it.

the steeper a curve is at a given point

the less elastic demand or supply

The production process can be divided into

the long run and the short run.

Increasing marginal product

the marginal product of a variable resource increases as each additional unit of that resource is employed

Implicit cost refers to:

the opportunity cost of factors of production provided by the owners of the firm.

Supply is elastic if

the percentage change in quantity is less than the percentage change in price.

(Average fixed cost) As output increases,

the same fixed cost can be spread over a wide range of output, so average fixed cost falls

Total cost is:

the sum of variable costs and fixed costs.

if MC=ATC

then ATC is at its lowest point

If MC > ATC

then ATC is rising

if MC<ATC

then atc is falling

if MC=AVC

then avc is at its low point

if MC<avc

then avc is falling

if MC>AVC

then avc is is rising

Some firms don't have a physical location and don't "produce" anything...

they simply subcontract out all production - ex: Perdue Chickens; perdue doesn't raise any chick itself, it hires farmers to do that. It provides the farm's with the chicks and specifies them how to raise them. They then hire another company to pick up the adult chickens for slaughter, puts its label on the processed chickens and ships them to supermarkets.

Fixed costs plus variable costs equal:

total costs.

Profit=

total revenue - total cost

Average variable cost

vc/q

economies of scale

when long-run average total costs decrease as input increases ex: if producing 40,000 tv's costs a firm $16m ($400 each), but producing 200,000 tv's costs the firm $40m ($200 each), between 40,000 and 200,000 units, production exhibits significant economies of scale.

Diseconomies of scale

when long-run average total costs increase as output increase. - usually, but not always, start occurring as firms get larger

Folgers and Maxwell House coffees tend to be much more price-elastic than Starbucks brand coffee. As a result, we can conclude that:

when the price of Folgers or Maxwell House coffee rises, consumers buy a lot less. - If a good is price-elastic, it means that the percent change in quantity demanded exceeds the percent change in price that causes the change (i.e., that P ED > 1). We cannot say anything about the relationship between Starbucks and other coffee prices if we do not know the cross-price elasticity.

constant returns to scale

where long-run average total costs do not change with an increase in output (flat part of the long-run curve) -occurs when production techniques can be replicated again and again to increase output; occurs before monitoring costs rise and team spirit is lost.

Which policy is likely to be the most efficient in dealing with automobile emission pollution? A. A mandatory requirement to reduce pollution B. Voluntary emission control guidelines C. Subsidizing research and development for alternative forms of transportation D. An emission tax

An emission tax - Taxes are more likely to equate marginal benefit and marginal cost.

Refer to the graph shown. With efficient production, this firm can maximize production at point: B D C A

C. - (this point is the maximum height on the curve) From the diagram it is clear that at point C the level of output is the highest. Point B is unobtainable.

Technical efficiency in production means a given level of output is produced with the minimum amount of inputs.

True

At one time sea lions were depleting the stock of steelhead trout. One idea to scare sea lions away from the Washington coast was to launch fake killer whales, which are predators of sea lions. The cost of making the first whale is $16,000 ($5,000 for materials and $11,000 for the mold). The mold can be reused to make additional whales, and so additional whales cost $5,000 ach. Based on these numbers, the total cost of making two fake killer whales would be:

$21,000. - The cost of the first whale is $16,000 because this includes the cost of making the mold, but each additional whale adds only $5,000 to costs (the molding being a fixed cost), and so the cost of making two whales is $21,000.

When output is 500, a firm's fixed costs are $10,000 and its variable costs are $15,000. The firm's total costs are therefore:

$25,000. - Total cost is the sum of fixed and variable costs.

If your cell phone bill is $40 when you use up to 300 minutes per month or $80 when you use between 300 and 400 minutes per month, the marginal cost of the 301 st minute is:

$40. - Marginal cost is the change in total cost divided by the change in output, and so marginal cost in this case is $40 divided by 1 minute.

An entrepreneur most likely would develop a product if expected average total cost is: $50 and expected price is $75. $60 and expected price is $65. $65 and expected price is $40. $50 and expected price is $60.

$50 and expected price is $75. - The per-unit profit of $25 in this case is greater in absolute and percentage terms than the per-unit profit or loss in all the other cases.

A business produces 400 items and sells them for $15 each for a total of $6,000. The total cost of producing the items is $4,500 in explicit cost and $1,000 in implicit cost. Economic profit is:

$500. - Economic profit equals revenues ($15 × 400 = $6,000) minus explicit costs ($4,500) and implicit costs ($1,000), or $500.

Refer to the table shown. If the number of workers is three, total output is: Number of Workers: Average product of workers: 1 2 2 5 3 9 4 14 5 16 6 17 7 18 8 18 9 17 10 15

27. - Total output is equal to number of workers times the average product; 3 × 9 = 27.

Refer to the table shown. If the average product is 6, the number of workers could equal: Number of workers: Total Output 1 4 2 10 3 18 4 28 5 35 6 41 7 45 8 48 9 50 10 49

3. - The average product equals output divided by the number of workers, which equals 6 when the number of workers is three or eight. Since 8 is not one of the choices, employment must be 3. ( or 18/3= 6 referred from table.)

Refer to the table shown. A firm would be most likely to hire between: Number of workers: Marginal product of workers 1 5 2 7 3 8 4 10 5 11 6 7 7 5 8 3 9 0 10 -1

5 and 8 workers. - Marginal product is positive but diminishing throughout this range. A firm is likely to hire five or more workers because below five workers, adding workers increases total output at an increasing rate. Firms are likely to exploit (utilize/make use of) increasing marginal productivity fully and stop hiring workers once marginal productivity begins to diminish

If the price elasticity of supply is 0.5, a 10 percent increase in price will cause a:

5 percent increase in quantity supplied. - According to the law of supply, an increase in price causes an increase in quantity supplied. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price (0.5 = 5%/10%).

Refer to the table shown. If seven workers are employed, total output equals: Number of workers: Marginal product of workers 1 5 2 7 3 8 4 10 5 11 6 7 7 5 8 3 9 0 10 -1

53. - Total output equals the sum of the marginal products of the first seven workers.

Refer to the table shown. The marginal product of the sixth worker is: Number of workers: Total Output 1 4 2 10 3 18 4 28 5 35 6 41 7 45 8 48 9 50 10 49

6. - Hiring the sixth worker raises total output from 35 to 41, and so the marginal product of the sixth worker is 41 - 35 = 6.

Refer to the table shown. The average product when eight workers are employed is: Number of workers: Total Output 1 4 2 10 3 18 4 28 5 35 6 41 7 45 8 48 9 50 10 49

6. - The average product equals total output divided by the number of workers or 48/8 = 6.

Which of the following methods of reducing the amount of trash society generates is most likely to be efficient? A. A mandatory recycling program B. A completely voluntary recycling program C. A "trash tax" D. Landfills and incinerators

A "trash tax" - Market-based programs such as a trash tax are more likely to equate marginal benefit and marginal cost.

Long Run

A firm chooses from all possible production techniques - -all inputs are varible -it can choose the size of the plant it wants, type of machine it wants, and location. -can vary the inputs as much as it wants.

Which of the following is an example of price discrimination? A. Some retailers hire fewer men than women to sell women's perfume on the shop floor. B. Grocery stores sell 12-ounce bottles of Coke for less than they sell liter bottles. C. When the price of land rises, landowners do not increase the quantity of land supplied. D. Peak-fare prices are higher than non-peak-fare prices.

D. Peak-fare prices are higher than non-peak-fare prices. - The fact that the supply of land is inelastic is not an example of price discrimination. Peak-fare pricing is price discrimination because it involves charging a different price to a group of consumers who are easily identifiable.

In the 1990s the number of hogs slaughtered rose to record levels. The increase in production was the result of the rise of megaproducers that operated at a lower average cost than smaller producers. What economic concept does this describe?

Economies of scale. - Economies of scale exist when average total cost is smaller at greater production levels.

Substitutes=

Ecross price > 0

What kind of costs remain the same regardless of the level of production?

Fixed. - Fixed costs are by definition constant and thus do not vary with output.

Public television periodically runs pledge drives to raise money. Only a small percentage of the people who benefit from public television are willing to pay. What do economists call the people who do not pay?

Free riders - Free riders enjoy public goods for free because they are non-excludable.

Kraft Foods Inc.'s Folgers and Maxwell House coffees tend to be much more price-elastic than Starbucks' coffees. This information about elasticities is telling us that: A. Starbucks' coffee is a luxury good, whereas the grocery brands are inferior goods. B. Starbucks and the grocery brands are close substitutes. C. Starbucks and the grocery brands are poor substitutes. D. Starbucks' customers are not as responsive to price changes as are the customers of the Kraft brands.

Starbucks' customers are not as responsive to price changes as are the customers of the Kraft brands. - A, B, and C would require income or cross-price elasticities, which are not given.

incentive polices are more efficient than direct regulation polices. True or False?

TRUE

An entrepreneur is willing to bring a supply of goods to the market if expected:

price is greater than expected average total cost. - Only in this case are expected profits positive.

Total Output

Total amount of output produce by one worker. - (to find) it is equal to number of workers times the average product

An economically efficient method of production produces a given level of output at the lowest possible cost.

True

total revenue is

price multiplied by quantity

At the planned output level, short-run average total cost equals long-run average total cost, but at all other points, short-run average total cost is higher than long-run average total cost.

True - Since some inputs are fixed in the short run but all inputs are variable in the long run, any deviation from planned output must raise average total cost more in the short run than in the long run.

The long-run average total cost curve is considered to be an envelope curve as each short-run average total cost curve touches it at only one level of output.

True - This describes the envelope relationship.

The short-run average total cost curve is generally assumed to be:

U-shaped. - Although short-run average total cost usually declines at first, the presence of diminishing marginal productivity implies that short-run average total cost eventually increases, giving the short-run average total cost curve a U shape.

If Portuguese wines are an inferior good, higher incomes will cause:

a decrease in the demand for Portuguese wines. - A good whose demand decreases when income increases is known as an inferior good. If Portuguese wines are inferior goods, as income rises, demand for the wines will decline. This is not movement along the demand curve because the price of the wine hasn't changed.

Short Run

a firm is constrained in regard to what production decisions it can make. - -some inputs are fixed - some of the flexibility that existed in the long run no longer exists. some inputs are so costly to adjust, they are treated as fixed.

If the price elasticity of demand for a good is inelastic, a price change causes:

a less than proportionate change in quantity demanded.

A system in which power plants buy and sell the right to pollute in the form of emission credits is known as:

a market incentive program. - Trading emission credits is something a market incentive program does.

James enjoys gardening in the nude because he says it puts him in touch with nature. His neighbors find his gardening routine very offensive, but James replies that they should mind their own business and not watch him. To an economist this situation illustrates the concept of:

a negative externality. - A negative externality is a spillover effect that harms third parties.

Carbon dioxide emissions are thought to contribute to global warming, and there is concern that changes in climate will be costly. Emitting carbon dioxide is an example of:

a negative externality. - If climate-changing emissions of carbon dioxide impose costs on society, it is an example of a negative externality.

Technical Efficiency

a production process uses as few inputs as possible

A good that if supplied to one person is supplied to all and whose consumption by one individual does not prevent its consumption by another individual is known as:

a public good.

If elasticity of demand is less than 1:

a rise in price increases total revenue. - If elasticity of demand is greater than 1, a rise in price lowers total revenue. If elasticity of demand is less than 1, a rise in price increases total revenue.

economically efficient

method of production is the method that produces a given level of output at the lowest possible cost

The problem that arises when people don't have to bear the negative consequence of their actions is known as:

moral hazard.

Alex is playing his music at full volume in his dorm room. The other people living on his floor find this to be nuisance, but Alex does not care. Alex's music playing is an example of a:

negative externality. - A negative externality is a spillover effect that harms third parties.

The law of diminishing marginal productivity does not apply in the long run because:

no inputs are fixed in the long run. - Because all inputs are variable in the long run, the law of diminishing marginal productivity does not apply.

Negative externalities

occur when the affects of ones actions are detrimental to third parties. ex: second-hand smoke and carbon monoxide emissions

Positive externalities

occur when the effects are beneficial to others ex: education

implicit costs

opportunity costs

A policy in which the marginal costs of undertaking the policy equal the marginal benefits of that policy is best called an:

optimal policy.

explicit costs

payments to the factors of production

In the supply process...

people offer their factors of production, such as land, labor, and capital, to the market.

The price elasticity of supply is the:

percentage change in the quantity supplied divided by the percentage change in price.

If consumers won't pay more than 59 cents for a pack of gum and at 59 cents they will buy an almost infinite amount, price elasticity of demand at 59 cents is:

perfectly elastic. - The response to an increase in price above 59 cents is enormous; thus, demand is perfectly elastic.