ECO 201 Exam 3

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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


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