microeconomics exam 2
True or False: Positive and Negative extranality are BOTH market failures
True
Importer
lower price (down) reduce quantity supplied (down) increase in the quantity demanded (up)
What is an incentive when talking about a price?
A higher price is an incentive for suppliers to produce more and for buyers to consume less.
What is a Quota?
A limit on the maximum quantity of a good that can be sold
What is a price ceiling?
A maximum price that sellers can charge
What is consumer surplus?
The economic surplus you get from buying something
What is producer surplus?
The economic surplus you get from selling something
Which of the following is FALSE regarding public goods?
The fact that something is a public good doesn't mean it is nonrival
An import quota is:
a limit on the quantity of a good that can be imported
What is a price floor?
a minimum price that sellers can charge
What is a subsidy?
a payment made by the government to those who make a specific choice
What is a mandate?
a requirement to buy or sell a minimum amount of a good
A binding price floor leads to:
a surplus
How do rice farmers in rural Indonesian villages figure out that they need to produce more rice when the demand for it has risen in other parts of the world?
an INCREASE in the PRICE of rice gives them a SIGNAL that rice is more valuable.
Chantelle grows tomatoes and sells them at the farmer's market. Because the price of tomatoes rises, she is encouraged to grow and sell more. This is an example of price functioning as
an incentive
Giselle buys doughnuts for breakfast once a week. The price of doughnuts falls, and the lower price induces her to buy doughnuts twice a week. This is an example of price functioning as
an incentive
Exporter
higher price (up) increase quantity supplied (up) decrease in quantity demanded (down)
How do you calculate opportunity cost?
hours on A / hours on B = units of good B that I give up making A
How does a tariff work to limit trade?
it increases the trade cost of a good
A market's deadweight loss is calculated as:
the economic surplus at the efficient quantity MINUS the economic surplus at the actual quantity.
Competitive markets do NOT result in:
the largest possible economic profit for firms
what is the difference between who pays the tax and who has the incidence of the tax?
there isn't a different because they both deal with the economic burden of a tax
The efficient quantity prevails in a market when the market:
yields the largest possible economic surplus
Suppose that the world price of TVs is $400, and the government imposes a $100 tariff. The new price domestic consumers pay for a TV is:
$500
What is a corrective tax?
A tax designed to induce people to tax account of the negative externalities they cause
What is a tariff?
A tax on imported products
Which of the following can you have in both tasks? Absolute Advantage Comparative advantage
Absolute
What is a negative externality?
Activity that's side effects harms others
Ang can mow the lawn in two hours. Bill takes three hours to mow the same lawn. What can you conclude from this information?
Ang has an absolute advantage over Bill in mowing the lawn
How do you measure consumer surplus?
CS = marginal benefit - price
What type of good is rival and nonexcludable?
Common Resources
How do you measure deadweight loss?
DWL = economic surplus at efficient quantity - actual economic surplus
The efficient outcome maximizes:
economic surplus
Equity
how the pie is divided
What is a private good?
rival and excludable
What is an example of a positive statement?
Lower college tuition will lead more children from poor families to attend college.
What is the tragedy of the commons?
The tendency to overconsume a common resourse
What does it mean to be rival in consumpotion?
We both can't use it at the same time
When is a price floor not binding?
When the lowest price that sellers can charge is above the equilibrium price.
How do we fix the problem of the tragedy of the commons?
assign ownership rights to solve the tragedy of the commons.
Quotas change _____, and taxes change _____ when they are used to deal with externalities.
quantity; price
How could private bargaining fix the problem?
private bargaining can solve externality problems when bargaining costs are LOW
What are the changes in consumer and producer surplus when talking about importing?
producer surplus declines consumer surplus rises
What are the changes in consumer and producer surplus when talking about exporting?
producer surplus rises consumer surplus declines
Why might economic efficiency not be the ultimate goal of policymakers?
Government failure occurs when government policies lead to worse outcomes.
A corrective tax designed to resolve a negative externality problem is typically set at an amount equal to the _____ cost.
Marginal External
What is an aggregate information when talking about a price?
Market price broadcast useful information?
Efficency
The size of the pie
When trade is voluntary, neither the buyer nor the seller will:
be worse off after the trade
When trade is based on comparative advantage
both trading partners end up better off than when there is no trade
The economic burden of a tax is the:
burden created by the change in after-tax prices faced by buyers and sellers
A good that is excludable but nonrival in consumption is known as a _____ good.
club
In 2018, the state of Kentucky raised the tax on cigarettes by 50 cents per pack. Holding all else constant, the effect of this tax would be to _____ in Kentucky.
decrease smoking of cigarettes
Buyers bear a smaller incidence of the tax when:
demand is MORE elastic than supply
Economic surplus is maximized when
marginal revenue equals marginal cost
Helena works in a factory that makes plastic phone cases. The four main tasks are mixing, molding, curing, and polishing. Out of all the workers, she is the fastest mixer, has the lowest opportunity cost for molding, is the most careful in curing, and enjoys polishing the most. If her manager makes assignments in a way that maximizes output, then she will be assigned to
molding
Why would a country limit international trade? (know all 5)
1. National security requires that we produce strategically important goods ourselves 2. Protect can help infant industries develop 3. Anti-dumping laws prevent unfair competition 4. Trade should not be a way to skirt regulations 5. Foreign competition may lead to job losses.
What is a common resource and provide an example.
A good that is rival and also non-excludable ex: fish
What is a club good and provide an example.
A good that is rival and also nonexcludable example: cable TV
How do you measure economic surplus?
ES = marginal benefit - marginal cost
Which groups gain when a country imports or exports?
Exporters and import-dependent businesses often support international trade (gain)
Which of the following is NOT a source of comparative advantage?
Global Supply Chains
What is deadweight loss?
How far economic surplus falls below the efficient outcome
Which of the following statements describes the Coase Theorem?
If bargaining is costless, and property rights are clearly established and enforced, then externality problems can be solved through private bargaining.
What is an example of a negative externality?
If i smoke near you, my secondhand smoke might cause you to get cancer
When World Price > Domestic price
it will be an exporter
Normative analysis is analysis that focuses on:
what SHOULD happen or what ought to be, and it involves value judgments
Bae is willing to pay up to $160 for a particular pair of boots. She is able to buy the boots for $120. The marginal cost of producing the boots is $70. Which of the following is TRUE regarding the economic surplus associated with her purchase of the boots?
Consumer surplus is $40, and producer surplus is $50.
Which group lose when a country imports or exports?
Import-competing businesses often oppose international trade (lose)
Suppose that one hour of labor in Singapore can produce 20 computers or 40 cellphones. Further, suppose that one hour of labor in Ireland can produce 10 computers or 15 cellphones. _____ has a comparative advantage in the production of computers. _____ has a comparative advantage in the production of cellphones.
Ireland; Singapore
What does it mean to be excludable?
It can prevent someone from using
Which of the following illustrates a positive externality?
The value of Maria's house rises when the city builds a park nearby, enhancing her view.
Externalities tend to occur because decision makers consider _____ and do NOT consider _____.
Their own costs and benefits the effects of their actions on others
What could give a country a comparative advantage?
abundant inputs, specialized skills, mass production.
What is a positive externality?
activity that's side effects benefit others
You have a comparative advantage if you can complete a task
at a lower opportunity cost than anyone else
Why do policy makers want to use either a quota or a mandate?
example: The government in the past has capped the number of medical residents, or doctors in training, that it funds.
A key difference between equity and efficiency is that equity deals with _____ and efficiency focuses on _____.
fairness; maximizing economic surplus
To maximize production, people should
focus on the task in which they have a comparative advantage
What is an example of a normative statement?
income taxes are too high, and the federal government SHOULD cut them
The price of celery rises, but nothing has changed on the supply side of the market. What does this mean to celery farmers?
it is a signal that celery is more valuable to consumers than it was before
When World Price < Domestic price
it will be an importer
What is a public good and provide an example.
nonrival and nonexcludable afflicted by the free-rider problem Example: national security
A market with negative externalities will tend to _____ compared to a market producing the socially optimal output.
overproduce and sell at a lower price
What is comparative advantage?
the ability to do a task at a lower opportunity cost
what is the tax incidence?
the division of the economic burden of a tax between buyers and sellers
How does a quota work to limit trade? Who benefits from a quota?
It has a market effect similar to a tariff
When the price elasticity of demand is _____ relative to the price elasticity of supply, then buyers bear _____ of the economic burden of a tax.
large; a bigger share
When is a price ceiling not binding?
It is not binding if it is not preventing the market from reaching the market equilibrium price
How does a negative externality impact the market?
It leads to OVERproduction
How does a positive externality impact the market?
It leads to UNDERproduction
One hour of labor in Mexico can produce 10 avocados or 20 bananas. One hour of labor in Canada can produce four avocados or 16 bananas. _____ has a comparative advantage in the production of avocados. _____ has a comparative advantage in the production of bananas.
Mexico; Canada
How do you measure producer surplus?
PS = price - marginal cost
Which of the following statements is TRUE regarding comparative advantage and absolute advantage?
People can have a comparative advantage without having an absolute advantage in a task
What is a signal when talking about a price?
Shows potential to suppliers who may not know what is happening on the demand along with potential buyers who may not know what is happening on the supply side.
How do you calculate social cost?
Social Cost = private cost + external cost
What is absolute advantage?
The ability to do a task using fewer inputs
What is the statutory burden of the tax?
The burden of being assigned by the government the responsibility of sending a tax payment
Explain how it is possible for an exporting country to realize a net increase in economic surplus if economic surplus decreases for domestic consumers.
The higher price raises the quantity supplied by domestic producers and reduces the quantity demanded by domestic consumers. This in turn means that we export goods that other buyers are willing to pay more for which would raise the price of those goods.
Margarite opened a successful restaurant two years ago on a block of connecting row houses. All of the other businesses on the block are well-established accounting and law offices. Those businesses have complained that the garbage bins in back of the restaurant are attracting mice, rats, and stray cats and dogs and that they are spending more and more on exterminators. In economic terms, what is happening?
The other businesses on the block are dealing with an externality because Margarite considers only her marginal private costs as she makes decisions.
Pedro attends a university that requires all students, faculty, and staff to have antivirus software on their personal computers and even provides — at no cost to students, faculty, and staff — antivirus software for their personal computers. Why would the university pay for the protection for the personal computers of students, faculty, and staff?
The university would pay for it because it spreads just like a human virus. Having it on your home computer and bring it to school that would be a negative externality. Software would be the subsidy or prevention.
Explain how quantity restriction can fix the problem?
They attempt to harness the power of the market to solve externality problems as efficiently as possible.
Katie is much faster than her husband, Brett, at putting up a tent and starting a fire. Who should take care of these tasks on their camping trip if they want to maximize their time sitting around a campfire?
They each have a comparative advantage in a particular task, and they should focus on doing that. Katie can help Brett when she finishes her task.
Who benefits from a tariff?
They use supply and demand analysis to see the consequences of a tariff
True or False: A price ceiling causes a shortage.
True
True or False: A price floor causes a surplus.
True
what does the graph of a market with a subsidy look like?
Wedge will be on the right the quantity is going up the price the sellers receive will be higher the price the buyers receive is lower
What is an example of a positive externatlity?
When you plant a tree, it'll recycle carbon dioxide into oxygen, which improves air quality for your neighbors.
Carlos buys six new plants for his garden. If he has purchased according to the rational rule, his consumer surplus on the sixth plant is equal to:
Zero
Which of the following would be MOST likely to support an increase in barriers to international trade?
a firm in an IMPORT COMPETING industry
What is the free-rider problem with public goods?
a situation that arises when someone can enjoy the benefits of a good without bearing the costs.
People gain consumer surplus when they purchase an item:
at a price below the value of the benefit they receive from the item
In a market system, public goods would:
be underproduced
