Extra Practice for Midterm 2

Externalities affect the economic efficiency of a market equilibrium by causing a difference between

- Private cost of production and the social cost of production - Private benefit of consumption and the social benefit of production

How can it be avoided? The tragedy of the commons can be avoided by

- clearly defining and enforcing property rights - setting a tax equal to the external cost of overusing common resources

Tariff

A government tax on imports or exports

How are implicit costs different from explicit costs?

An explicit cost is a cost that involves spending money, while an implicit cost is a nonmonetary cost.

________ is a situation in which a country does not trade with other countries. The _________ is the ratio at which a country can trade its exports for imports from other countries.

Autarky, terms of trade

In deciding between consuming more goods now or saving money, consumers should do which of the following

Choose an amount of current spending on goods and savings so that the marginal utility per dollar of both are equal.

Imports

Goods and services bought domestically but produced in other countries

What's the difference between the average cost of production (ATC) and marginal cost of production (MC)?

MC= change in total or variable cost of production / change in output

What is absolute advantage?

The ability to produce more of a good or service than competitors using the same amount of resources.

What is the definition of of marginal utility?

The change in utility from consuming an additional unit of a good or service.

LaToya is buying corn chips and soda. She has 4 bags of corn chips and 5 bottles of soda in her shopping cart. The marginal utility of the fourth bag of corn chips is 10, and the marginal utility of the fifth bottle of soda is also 10. is LaToya maximizing utility?

This cannot be determined because we do not know the price of the corn chips and soda and whether or not she fully spent her budget allocated to chips and soda.

Explain how a downward-sloping demand curve results from consumers adjusting their consumption choices to changes in price.

When the price of a good rises, the ratio of the marginal utility to price falls, leading consumers to buy less of that good.

What is an externality?

a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service

Economies of scale occur when

a firm's long-run average total costs fall as it increases the quantity of output it produces.

A common resource is

a good that is rival but not excludable

An implicit cost is

a non-monetary opportunity cost

A Pigovian tax is

a tax to bring about an efficient level of output in the presence of externalities

The law of diminishing returns states that, does it apply in the long run?

adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline; No

by trading, countries are able to consume more than they could without trade. this outcome is possible because

all of the above

Excludability is the situation that occurs when

anyone who does not pay for a good cannot consume it

The parties involved in an externality have an incentive to reach an efficient solution because

both parties become better off when an efficient solution is reached.

Which of the following is an example of a good or service having the effects of a negative externality?

cigarette smoking (NOT: fireworks, ice cream & technological research)

Among the main sources of comparative advantage are the following

climate and natural resources, relative abundance of labor and capital, technology, external economies

A country will always be an exporter of a good where it has a ______ advantage in production.

comparative

The law of diminishing marginal utility suggests that

consumers experience diminishing additional satisfaction as they consume more of a good or service

Which of the following is most likely to be a variable cost for a business firm?

cost of shipping products

Fixed Cost (FC)

cost that does not vary with the quantity produced

Variable Cost (VC)

cost that varies as output varies

The rule of equal marginal utility per dollar spent suggests that consumers maximize utility by

equalizing the marginal utility per dollar spent across goods and services.

Any cost that remains unchanged as output changes represents a firm's

fixed cost

What is free riding?

free riding is benefitting from a good without paying for it

Exports

goods produced domestically and sold abroad

If a country has a comparative advantage in the production of a good, then that country

has a lower opportunity cost in the production of that good

When there are many people involved in attempting to reach an agreement, the transaction costs are often __________ than the net benefits from reducing an externality. In such cases, a private solution to an externality problem __________ feasible.

higher; is not

The Coase Theorem states that

if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities

budget constraint

indicates the limited amount of income available to consumers to spend on goods and services

Which of the following is most likely to be a fixed cost for a farmer?

insurance premiums on property

According the the law of diminishing marginal utility, as the consumption of a particular good increases,

marginal utility decreases

Which of the following is an example of a good or service having the effects of a positive externality?

medical research and education (NOT: pollution & a big mac)

A quasi-public good is...

non-rival and excludable

A public good is...

non-rival and non-excludable

Rivalry is the situation that occurs when

one​ person's consuming a unit of a good means no one else can consume it.

Marginal utility is more useful than total utility in consumer decision making because

optimal decisions are made at the margin

Absolute advantage is the ability of an individual, a firm, or a country to

produce more of a good or service than competitors using the same amount of resources

A private good is...

rival and excludable

What is comparative advantage?

the ability to produce a good at a lower opportunity cost than another producer

Marginal Cost (MC)

the change in total costs associated with a one-unit change in output

At what level must a Pigovian tax be set to achieve efficiency?

the cost of the externality

The production function is the relationship between

the inputs employed by a firm and the maximum output it can produce with those inputs.

What do economists mean by "an economically efficient level of pollution"? The economically efficient level of pollution is that amount where

the marginal cost of pollution reduction equals the marginal benefit of pollution reduction

How is free riding related to the tendency of a public good to create market​ failure? Free riding results in

the market producing a quantity of public goods that is inefficiently low because they are nonexcludable.

law of diminishing marginal utility

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

What is the tragedy of the commons?

the tendency for a common resource to be overused

Total Cost (TC)

total fixed costs plus total variable costs

Any cost that changes as output changes represents a firm's

variable cost

What is economic efficiency?

when consumer surplus and producer surplus are maximized

Is it possible for a country to have a comparative advantage in producing a good without also having an absolute advantage? A country without an absolute advantage in producing a good

will have a comparative advantage if it has a lower opportunity cost of producing that good.