Econ 1101 Midterm

Explain the concept of a production possibility frontier (PPF).

A PPF represents the maximum quantity of two goods that an economy can produce given its level of technology and resources. It illustrates the trade-off between producing one good over the other.

Define cartel and describe how it operates.

A cartel is a group of producers or sellers in an industry who collaborate to coordinate pricing, production, and marketing strategies to maximize joint profits.

Explain why a cartel's stability is often fragile.

A cartel's stability is fragile because each member has an incentive to cheat on the agreed-upon output and pricing levels in order to increase their individual profits.

Explain why a monopoly firm is a price maker.

A monopoly firm is a price maker because it has significant market power and can set the price of its product due to the absence of close substitutes and barriers to entry.

Define Monopoly and provide an example.

A monopoly is a market structure characterized by a single seller or producer with no close substitutes. Example: Local utilities (e.g., water or electricity) in some areas.

What is a natural monopoly? Provide an example.

A natural monopoly arises when economies of scale allow a single firm to provide a good or service at the lowest cost. Example: Water treatment plants or electricity grids.

Suppose that in the interest of boosting incomes of the working poor, Congress imposes a minimum wage of $6.00 per hour. This minimum wage rate creates a(n):

A new labor market equilibrium. A change in the wage or salary will result in a change in the quantity demanded of labor. If the wage rate increases, employers will want to hire fewer employees. The quantity of labor demanded will decrease, and there will be a movement upward along the demand curve.

Explain why a perfectly competitive firm is a price taker.

A perfectly competitive firm is a price taker because it has no influence over the market price; it must accept the prevailing market price as given and can sell any quantity at that price.

What does a point inside the PPF indicate?

A point inside the PPF indicates that the economy is not utilizing all of its available resources efficiently. It suggests that there is unused or underutilized capacity in the economy.

Define absolute poverty and relative poverty.

Absolute poverty refers to a condition where individuals or families lack the resources necessary for basic survival needs, such as food, shelter, and clothing. Relative poverty refers to a condition where individuals or families have an income level significantly lower than the average for their society or country.

Describe an oligopoly and give an example.

An oligopoly is a market structure with a small number of large firms dominating the industry. Example: The automobile industry, where a few major companies dominate the market.

Describe how barriers to entry contribute to monopoly power, and provide examples.

Barriers to entry make it difficult for new firms to enter a market, allowing existing firms to maintain their market power and act as monopolies in their respective industries. Examples: Legal contract, Patent, expensive entry, etc.

Differentiate between collusion and price leadership.

Collusion involves explicit agreements among firms to coordinate their actions, while price leadership occurs when one dominant firm sets prices and others follow suit.

What are some common measures used to assess poverty?

Common measures of poverty include the poverty line (a specific income threshold), the poverty rate (percentage of the population below the poverty line), and the Gini coefficient (a measure of income inequality within a population).

How does economic growth affect the PPF?

Economic growth shifts the PPF outward, indicating an increase in the maximum possible combination of goods that can be produced. This is typically achieved through advancements in technology, increased resources, or improved efficiency.

What factors can influence labor demand?

Factors influencing labor demand include the overall level of economic activity, industry-specific demand for goods and services, technological advancements, changes in production techniques, and government policies affecting labor markets.

What factors can influence labor supply?

Factors influencing labor supply include wage rates, non-wage benefits (e.g., healthcare), preferences for work-life balance, education and skills, demographic factors, and government policies (e.g., unemployment benefits, minimum wage laws).

What factors can cause a shift in the demand curve?

Factors that can shift the demand curve include changes in consumer preferences, income levels, prices of related goods (substitutes or complements), population demographics, and expectations about future prices or economic conditions.

What factors can cause a shift in the supply curve?

Factors that can shift the supply curve include changes in production costs (e.g., wages, raw materials), technology, taxes or subsidies, the number of sellers, and expectations about future prices or economic conditions.

What is the difference between variable and fixed costs?

Fixed costs are expenses that remain constant within a certain range of production or sales, regardless of the level of output or sales. Examples: property tax, renting of permanent space Variable costs are expenses that vary in direct proportion to the level of production or sales. As production increases, variable costs increase; as production decreases, variable costs decrease. Examples: raw materials, wages for non-permanent employees

Medicaid and SNAP (food stamps) are:

In kind transfers

What are reasons that the Labour Demand curve shifts rightward?

Increase of product price, tech changes that compliment labor (makes workers more productive)

A monopoly sets a market price that is higher than the marginal cost of production. This fact implies that a monopoly's allocation of resources is:

Inefficient

Define labor supply and labor demand.

Labor supply refers to the quantity of labor that individuals are willing and able to offer at different wage rates. Labor demand refers to the quantity of labor that employers are willing to hire at different wage rates.

What is MPR and why is it important?

MRP = mariginal physcial product x mariginal revenue Example: John is the manager of a shoe manufacturing plant, and he is considering hiring another employee to meet the increasing demand. Assumes that each unit sells for $10, and John knows that a new employee will produce an extra 200 pairs of shoes every week, the marginal revenue product is calculated as follows: MRP= 200 x $10 MRP = $2,000 Therefore, if John hires a new employee, the employee produces and additional 2,000 weekly for the company.

Explain the concept of monopolistic competition.

Monopolistic competition is a market structure with many firms producing differentiated products, allowing some control over price, but facing competition from close substitutes.

Provide an example of a real-world cartel.

OPEC (Organization of the Petroleum Exporting Countries) is an example of a real-world cartel that aims to coordinate oil production and pricing among its member countries.

The automobile, steel, and oil markets are all examples of:

Oligopolies

What are the key characteristics of perfect competition?

Perfect competition is characterized by many small firms, identical products, perfect information, easy entry and exit, and no individual firm has control over price.

Describe how product differentiation is a feature of monopolistic competition.

Product differentiation involves firms producing similar but not identical products, allowing them to compete based on branding, quality, design, or other factors.

Define the law of demand.

The law of demand states that, all else being equal, as the price of a good or service increases, the quantity demanded decreases, and vice versa.

Define the law of supply.

The law of supply states that, all else being equal, as the price of a good or service increases, the quantity supplied increases, and vice versa.

In order to make oil profits as large as possible, OPEC meets to set oil production quotas for its members. OPEC is best classified as a:

cartel

The process of negotiating labor contracts between the union and management concerning wages and working conditions is called

collective bargaining

A monopolist demand curve is.....

downward sloping because a monopoly firm is the sole producer in its market. Its demand curve is the same as the market demand curve

What are reasons that the Labour Demand curve shifts leftward?

higher wages, substitutes (tech changes that replace labor)

An increase in the demand for a product will shift the demand curve for labor....

rightward, because companies demand for labor to increase production

Nonprice competition in monopolistically competitive markets results in

rivalry among competing firms based on the characteristics that differentiate their products.

A union may attempt to obtain stricter certification requirements or longer apprenticeships. These changes would raise workers' wages because they:

shift the labor supply curve leftward