ECO 201 Exam 3
operate; shut down
A firm is experiencing a loss of $5,000 per year when operating. The firm has fixed costs of $8,000 per year. The firm should __________ in the short run and should __________ in the long run.
d. at zero profit, her revenue will cover all her costs, both explicit and implicit (opportunity cost).
A producer would decide to produce in a competitive market in which she will earn a. zero profit in the long run because in the short run her profit is positive. b. the zero profit in the long run is, in fact, zero accounting profit, and only matters on the books. c. the producer has a high cost of exiting this market and, counting that cost, it's better for her to continue operating at zero profit. d. at zero profit, her revenue will cover all her costs, both explicit and implicit (opportunity cost).
41 in order to break even, revenues must equal costs pre-game costs are $3,300/6=$550 tickets that must be sold to break even x * $13.50=$550 x=41
A semiprofessional baseball team near your town plays two home games each month at the local baseball park. They split the concessions 50/50 with the city, but keep revenue from ticket sales for themselves. The city charges the team $100 each month for the 3-month season. The team pays the players and manager a total of $1,000 a month. The team charges $10 for each ticket, and the average customer spends $7 at the concession stand. Attendance averages 30 people at each home game.In order to break even, how many tickets does the team need to sell for each game?
Internalize
An externality when they take into account the external costs (or benefits) to society that occur as a result of their actions
Public good
Are consumed by more than one person, and nonpayers are difficult to exclude
Explicit costs
Are tangible out of pocket expenses
Implicit costs
Are the costs of resources already owned, for which no out of pocket payment is made
Factors of production
Are the inputs (labor, land, capital) used in producing goods and services
Sunk costs
Are unrecoverable costs that have been incurred as a result of past decisions
a. If the explicit cost for the consulting job is $25,000 per year, your economic profit is equal to $15,000. Economic profits are calculated by subtracting implicit cost from accounting profit (Equation 8.5). With explicit costs of $25,000, the accounting profit is equal to $75,000. Because you're giving up your next best job, being a waiter, the implicit cost of being a consultant is $60,000. Therefore, your economic profit is equal to $15,000.
As a waiter you earn $60,000 per year, including tips. Someone offers you a new job as an economic consultant, which pays $100,000 per year. In order to be a consultant, you'll need to rent an office and purchase supplies and new computer equipment. We can conclude which of the following? If the explicit cost for the consulting job is $30,000 per year, your accounting profit is equal to $30,000. a. If the explicit cost for the consulting job is $25,000 per year, your economic profit is equal to $15,000. b. If the explicit cost for the consulting job is $20,000 per year, your economic profit is equal to $80,000. c. If the explicit cost for the consulting job is $20,000 per year, your accounting profit is equal to $140,000.
Variable costs
Change with rate of output
neglect
Common resources are associated with the incentive to
Production function
Describes the relationship between the inputs a firm ushers and the output it creates
Price taker
Has no control over the price set by the market. It "takes" (accepts) the price determined from overall supply and demand conditions that regulate the market
b. the marginal cost curve must be below the average total cost curve.
If the average total costs is falling, a. the marginal cost curve must be above the average total cost curve. b. the marginal cost curve must be below the average total cost curve. c. the MC curve is rising. d. the MC curve is horizontal (neither rising nor falling).
The benefits of building the shopping center outweigh the costs, including that of relocating the toads.
In most areas, developers are required to submit environmental impact studies before work can begin on new construction projects. Suppose that a commercial developer wants to build a new shopping center on an environmentally protected piece of property that is home to a rare three-eyed toad. The shopping complex, if approved by the local planning commission, will cover 10 acres. The planning commission wants construction to go forward, since that means additional jobs for the local community, but it also wants to be environmentally responsible. One member of the commission suggests that the developer relocate the toads. She describes the relocation process as follows: "The developer builds the shopping mall and agrees to create 10 acres of artificial toad habitat elsewhere." The builder will agree with the proposed solution under what circumstances?
Rival good
Is a good that cannot be enjoyed by more than one person at a time
Cost benefit analysis
Is a process that economists use to determine whether the benefits of providing a public good outweigh the costs
Economic profit
Is calculated by subtracting both the explicit costs and implicit costs from total revenue
Accounting profit
Is calculated by subtracting the explicit costs from total revenue
Average fixed costs (AFC)
Is determined by dividing total fixed cost by the output
Excludable good
Is one for which access can be limited to paying customers
Marginal revenue
Is the change in total revenue a firm receives when it produces one additional unit of output
Marginal cost (MC)
Is the increase in cost that occurs from producing one additional unit of output
Tragedy of the Commons
Occurs when a common resource good becomes depleted
Economies of scale
Occurs when long run average total costs decline as output expands
Constant returns to scale
Occurs when long run average total costs remain constant as output expands
Diseconomies of scale
Occurs when long run average total costs rise as output expands
Diminishing marginal product
Occurs when successive increases in inputs are associated with a slower rise in output
Market failure
Occurs when there is an inefficient allocation of resources in a market
Third party problem
Occurs when those not directly involved in a market activity experience negative or positive externalities
free rider problem
Occurs whenever someone receives a benefit without having to pay for it
Scale
Refers to the size of the production process
Profit
Results when total revenue is higher than total cost
Loss
Results when total revenue is less than total cost
Coarse theorem
States that if there are no barriers to negotiations, and if property rights are fully specified, interested parties will bargain to correct externalities
Profit maximizing rule
States that profit maximization occurs when a firm chooses the quantity of output that equates marginal revenue and marginal cost, or MR=MC
common-resource good
Suppose visitors can enter the local park free of charge, but frequently all the picnic tables in the park are in use. As a result, we can say that the park is a
Total revenue
The amount a firm receives from the sale of goods and services
Total cost
The amount a firm spends to produce and/or sell goods and services
Marginal product
The change in output associated with one additional unit of an input
Internal costs
The costs of a market activity paid only by an individual participant
intersects the ATC at its minimum point.
The marginal cost curve
Efficient scale
The output level that minimizes average total cost in long run
Social optimum
The price and quantity combination that would exist if there were no externalities
Output
The product the firm creates
Average total cost (ATC)
The sum of average variable cost and average fixed cost
Social costs
The sun of the internal costs and external costs of a market activity
the good is rival in consumption, and nonexcludable
The tragedy of the commons occurs when
the person who plays Modern Warfare will compensate his roommate for loss of sleep
Two roommates are opposites. One enjoys playing Modern Warfare with his friends all night. The other likes to get to bed early for a full 8 hours of sleep. The roommate who plays Modern Warfare values gaming more than his roommate values his sleep. According to the Coase theorem, if the roommates make a deal to resolve this conflict,
c. Visitors can enter the park free of charge, and there are always plenty of empty picnic tables.
Under which of the following scenarios would a park be considered a public good? a. Visitors to the park must pay an admittance fee, but there are always plenty of empty picnic tables. b. Visitors to the park must pay an admittance fee, and frequently all the picnic tables are in use. c. Visitors can enter the park free of charge, and there are always plenty of empty picnic tables. d. Visitors can enter the park free of charge, but there are a limited number of picnic tables, which are frequently in use.
c. passing a law that bans all pollution
Which antipollution policy does NOT consider cost-benefit analysis? a. issuing pollution permits that can be traded in an open market b. charging an emissions fee that taxes polluters c. passing a law that bans all pollution d. giving tax breaks for switching to eco-friendly equipment
d. You and your friends volunteer to plant wildflowers along the local highway.
Which of the following activities create positive externalities? a. Late-night road construction begins on a new bridge. As a consequence, traffic is rerouted past your house while the construction takes place. b. An excavation firm pollutes a local stream with acid rock drainage. c. A student talks on her cell phone during class. d. You and your friends volunteer to plant wildflowers along the local highway.
a. international market for coffee beans
Which of the following can be considered a competitive market? a. international market for coffee beans b. market for U.S. Treasury bonds c. market for fast food d. market for cars
d. a swimming pool
Which of the following is a club good? a. a bacon double cheeseburger b. streetlights c. a Fourth of July fireworks show d. a swimming pool
a. A river is polluted by a local fertilizer plant.
Which of the following is an example of market failure? a. A river is polluted by a local fertilizer plant. b. A firm that produces sugar lowers its prices after good weather produces a bumper crop. c. A firm goes out of business because taxes on its products increased. d. A local supermarket replaces its plastic bags with reusable bags, which reduces landfill waste.
a. The AFC curve can never rise.
Which of the following statements is true? a. The AFC curve can never rise. b. If a firm can't decide between the short and long run, it settles for the medium run. c. Accounting profit is smaller than economic profit. d. The short run is always somewhere between 6 and 12 months.
Fixed costs
are unavoidable; they do not vary with output in the short run (overhead)
Property rights
give the owner the ability to exercise control over a resource
Private good
has two characteristics: it is excludable and rival in consumption
club good
has two characteristics: it is nonrival in consumption and excludable
Common resource good
has two characteristics: it is rival in consumption and nonexcludable
cap and trade
is an approach used to curb pollution by creating a system of pollution permits that are traded in an open market
Average variable cost (AVC)
is determined by dividing total variable costs by the output
Signals
of profits and losses convey information about the profitability of various markets
Private property
provides an exclusive right of ownership that allows for the use, and especially the exchange, of property
External costs
the costs of a market activity imposed on people who are not participants in that market
Externalities
the costs or benefits of a market activity that affect a third party