ECON 206- Exam #3
If an individual in this economy had a taxable income of $80,000, how much income tax would be due?
$19,000
In a market without a price floor or a price ceiling, a shortage is eliminated by
A price increase
Are property taxes proportional, regressive, or progressive? Why?
Again, it depends upon how people spend their incomes. A property tax can be regressive or progressive depending upon whether or not individuals with larger incomes spend relatively more or less on housing. If those with higher incomes spend a larger portion of their incomes on housing, the tax is a progressive one. If they spend a smaller portion of their incomes on housing, the tax is a regressive one. Complications enter when you look at what people pay for when they buy a house. Housing prices include the benefits home owners get from the neighborhood. Houses in better school districts or areas with lower crime rates may cost more than similar houses in worse school districts or areas with higher crime rates.
In an unregulated and competitive market, a shortage is eliminated by
An increase in the price
If an activity has an external cost, then its private marginal cost will
Be smaller than the social marginal cost
If a firm is producing the output level where MR=MC bit is suffering (economic) losses, then price must be
Below the average cost
A price celling will only be binding if it is set
Below the market equilibrium price
In a supply-and-demand graph, the areas under the demand curve but above the price shows the amount of
Consumer surplus
A private good is
Excludable and rivalrous
Lets say a typical combative-firm has thee following in the short run: Price = $10; ATC = $8; AVC = $7. What is likely to happen?
In the long run the industry will expand because of economic profits
How much higher fixed costs affect the output level of competitive firms in the short run?
It would lead to no change in output
Which of the following goods and services is likely to be non-excludable and non-rivalrous?
National defense
Does the best singer earn the same as the next-best person, less than, more than, or a significantly larger amount?
Significantly more than
Human Capital
The factors such as experience, skills, education, and work habits that affect the value of a worker's marginal product
Sumanta is willing to pay $300 for a new mattress while Leroy is willing to pay $400. If the price of a mattress is $250, what is the total consumer surplus?
$200
Consider a monopsonistic labor market. 10 units of labor will be supplied if the wage rate is $13, and 11 units of labor will be supplied if the wage rate is $15. For the 11th unit , the marginal cost of labor is
$35
Assume a monopolist's marginal revenue is MR=20-2Q and its marginal cost is MC=6. The profit-maximizing quantity is
7
Labor Unions
A group of workers who have organized in an efforts to increase wages and improve working conditions
For every professional basketball and baseball player, there are hundreds, if not thousands, of players who are almost as good and they are struggling in the minors at extremely low income. Why?
A high marginal revenue product of the winners does explain much of the difference. Fifty years ago, only those attending the game saw a baseball star. But now, that game is shown to millions on television.
Think of a regular supply and demand diagram for ice cream. If the price of milk (which is used in theproduction of ice cream) increases, then the new equilibrium will have
A higher price and a smaller quantity
Relative to a competitive labor market, the outcome in a monopsonistic labor market will have
A lower level of employment and a lower wage
Which of the following taxes is progressive?
A tax of 20% on the first $100,000 of income and 30% on any additional income
Tariffs
A tax on imported goods
A tariff will cause which of the following to happen?
An increase in the price the consumer pays for the imported good and an increase in the price of similar domestically produced goods.
If a firm finds that it must pay more to hire workers, it will find that it will end up with ______ in the marginal product of labor.
An increase. (The firms no longer find to worthwhile to hire as many workers)
Monopolistically Competitive
An industry with many competitors, all producing slightly different products
We use the term 'marginal utility' to describe the
Change in total satisfaction caused by consumption of an additional unit of a good
As the elasticity of demand increases, all other things being equal, the impact of a tax on equilibrium quantity does which of the following?
Gets smaller
Which policy would you choose?
Given that there is no evidence of a particular need to protect U.S. shrimp producers, we should lower the tariff.
What can you say about the social cost of production at that point, compared to the consumer's marginal benefit? The social cost of production is ______ than the consumer's marginal benefit.
Higher
What do you predict will happen to the number of students willing to work on an economic study as the professor increases the pay? Why?
How would you and your classmates decide whether to work for the economics department? Your decision to work means that you are going to have to give up something, whether it is working at another job, going to a movie, or listening to music. There is an opportunity cost. Most individuals will compare the wage paid by the economics department to what they could earn elsewhere or the amount of enjoyment they are going to have to give up. Once the wage is high enough that it provides greater satisfaction than what must be given up, the decision will be made to work. Thus, we end up with an upward sloping supply of labor. As the wage increases, work in the economics department is substituted for other work or for leisure.
Explain why the concepts of opportunity cost should be used to determine how countries specialize and trade.
If country A's opportunity cost is less than another's (B), country A should specialize where its opportunity cost is the smallest. Country A, by producing where the opportunity cost is the lowest, is giving up less than if Country B produced the good. Thus, the world gives up less by producing where opportunity cost is the lowest.
What happens to wages in an industry if the demand for the product decreases?
If demand for a product decreases, the price of the product will fall. Because the marginal revenue product of labor at each level of hiring is the marginal product of labor times the price of the product produced, the marginal revenue product of labor will fall. The marginal revenue product of labor will then be less than the cost of hiring the last laborer hired. This means that the worker costs the firm more than he or she creates revenue. This is a loss of profit. The labor demand falls and a new equilibrium is found between the supply and demand with lower wages.
What will happen in the monopolistically competitive industry if demand increases?
If demand increases, in the short run marginal revenue will rise. Firms will increase output since marginal revenue exceeds marginal cost. Economic profits will rise in the long run, new firms will enter, and this will lower demand for each firm's output; thus, profits will go down again.
What will happen to prices and quantities if a tax is placed on a good with an elastic demand? An inelastic demand?
If demand is relatively elastic, the rise in price due to the tax will be relatively small and the fall in output relatively large. Think of it as the price starting to increase to cover the new costs (of the tax), and as that happens, the quantity demanded falls quickly due to the elastic demand. If demand is inelastic, the rise in price due to the tax will be relatively large and the fall in quantity relatively small.
For a product with external costs, the social cost curve lies above the market supply curve. Explain why that is the case.
If one curve lies above another, then the marginal costs depicted in the higher curve exceed the marginal costs depicted in the lower curve at any given quantity of production. So in order to depict social costs that are in excess of the private costs incurred by the producer, the social cost curve must lie above the market supply curve.
What might happen if one firm lowers its price?
If one firm lower its price it will likely attract new customers and attract some existing companies' customers away.
Why do nonprofit organizations tend to pay less for secretaries and executives when compared to incomes for very similar work done at profit-making organizations?
If the marginal revenue products are the same, then the difference in income must be due to a difference in the willingness of individuals to work in nonprofit organizations and for-profit companies. If people are willing to accept a lower pay for their work, the supply curve could be very flat for non-profit firms. If the marginal revenue products are different, with the for-profit values being greater, that too can explain the difference in income.
What will happen to prices and quantities if a tax is placed on a good with an elastic supply? An inelastic supply?
If the supply is relatively inelastic, the fall in output will be small; if the supply is relatively elastic, the decrease in the quantity will be much larger.
If the marginal cost is zero, how much of a good should be produced? Or how many customers should be allowed or encouraged to consume the good? Why?
If there is no marginal cost of producing additional quantities, and if consumers derive any marginal benefit from the good at all, then the allocatively efficient quantity of production is "as much as possible" and as many consumers as possible should consume the good.
What will happen in the monopolistic competitive industry if variable costs increase?
If variable costs increase, firms will reduce production. Since average cost increased, firms will be making economic losses. In the long run, some firms will leave the industry. Demand for each reminding firm's output will increase. The likely result will be an increase in price. It is more difficult to tell about quantity.
Why would a perfectly competitive firm be able to increase profit when discrimination exists and, as a result, reduce the effects of the discrimination?
In a market equilibrium with discrimination, the actual marginal product of labor is greater than the wage being paid to individuals facing discrimination. So, if firms can hire a great female accountant for $80,000 but must pay $100,000 for a male that is equally productive, then the only sensible profit-maximizing thing to do is to hire only female accountants. But, this increases the demand for female accountants and will bid up their wages. Simultaneously, the demand for male accountants would decrease and their wages would decrease. In other words, if women are systematically underpaid, then men must be systematically overpaid. If the two are inherently equally productive, firms can always increase profits by hiring women and employing fewer men, until the wages equalize. If irrational consumer bias reduces the productivity of women, firms would still have a profit incentive to try to persuade those consumers to work with women, perhaps by offering money-back guarantees and introductory discounts, which would be affordable if women are underpaid.
Why are anti-dumping duty and quota similar?
In both cases, someone other than the government is receiving the increase in prices of foreign shrimp.
Flat Tax
Marginal rates are the same at all levels of income. Often exemptions and standard deductions are proposed at low levels of income
When a firm holds all other inputs fixed and increases the amount of labor it employs, what will happen to the marginal revenue product of labor?
Marginal revenue product decreases
A profit-maximizing firm will keep adding labor until the...
Marginal revenue product equals the marginal cost of labor
How would you classify television broadcasts?
Public goods
If marginal cost exceeds average cost, then producing one more unit of output will
Raise the average cost
What does the equation, W = Marginal revenue product of labor mean in words?
Recall that the marginal productivity of labor tells us how much the output will change when we hire one additional worker. This is asking us to determine hoe output changes when we hire one additional worker. Then we hire employees until the recline the new workers prosumers is exactly equal to the cost of hiring that worker.
A tax preparer calculated that the demand for their services has a price elasticity of 1.4. If their goal is toincrease revenues, they should...
Reduce prices
Suppose that Marginal Cost is currently below Average Cost. Producing one more unit of output will
Reduce the average cost
A tax that takes a lower fraction of income from people with higher income is called a
Regressive tax
If the pice of a normal good changes, the income effect will
Reinforce the substitution effect
Francine has 10 employees. The marginal product of the 10th worker is 25 units per week. The average product of the 10 workers is 20 units per week. If Francine hires one more worker, the marginal product of the 11th worker will be 23 units per week. The average product of labor will
Rise
In efforts to increase economic efficiency, governments should ______ public goods.
Subsidize
Is the social security tax system proportional, regressive, or progressive for individuals earning between $10,000 and $60,000? For people earning between $100,000 and $200,000? Why?
The Social Security system is proportional up to the maximum amount of income that is taxed ($127,200 in 2017). Beyond that amount, the Social Security part of the tax does not apply and thus the tax becomes regressive. So, on average, the tax is regressive. For example, an individual who earns $118,500 pays 6.2 percent in social security tax. A person who earns twice that amount pays 6.2 percent on the first $127,200 and zero on the second. The second person pays an average of 3.1 percent of his or her income in social security tax.
What is meant by the "excess burden" of a tax?
The amount of economic surplus that is lost because of tax
Regressive
The amount of tax paid as a percentage of income decreases as one's income increases
Progressive
The amount of tax paid as a percentage of income increases as one's income increases
Proportional
The amount of tax paid as a percentage of income says the same as one's income increases
Marginal Tax Rates
The amount of tax paid on one more dollar of inocme
If the government uses a lottery to raise money to pay for education, would you describe the funding of education as proportional, regressive, or progressive? Explain why.
The answer depends upon who plays the lottery. If every person buys one lottery ticket, it becomes a regressive means of financing education. Low-income individuals would be spending a larger portion of their incomes on the tickets than higher income individuals. If poor people are more likely to buy lottery tickets, then the approach becomes even more regressive.
In addition to taxes, what other regulations could the government impose that would achieve the efficient outcome?
The government would have to mandate that there be no quantity produced greater than the allocatively efficient quantity in Figure 13.09. That means firms would be producing where the private marginal cost of production is less than the marginal benefit to consumers.
Stan consumes a lot of milk, which is a normal good for this consumer. When the price of milk increases,
The income effect causes him to consume less milk
Marginal Revenue Product of Labor
The increase in revenue resulting from the hiring of one additional worker
Sometimes it is not changes in demand for two types of labor causing differences in market outcomes. Suppose that women are prevented from entering most professions - except perhaps teaching and nursing. What is the likely to happen to wages in those two professions as a result?
The increase run supply will mean that more women are hired in teaching and nursing and that the wages will be lower than they otherwise would be.
Deadweight
The loss in consumer and producer surplus less any tax revenue generated from a tax
Marginal Social Benefits
The marginal benefit of consumption from society's point of view
Marginal Social Cost
The marginal cost of production from society's point of view
Is marginal revenue facing a single firm in the cartel different than the marginal revenue curve facing the whole market? Which is higher why?
The marginal revenue for the individual firm include the marginal revenue for the elastic industry plus some additional revenue that is take away from the other existing firms.
A profit maximizing firm hire an additional worker if which of the following is true?
The marginal revenue product is greater than the wage.
Real Wage
The nominal wage adjusted for the effects of inflation
What is meant by firm's capacity?
The output level where ATC are minimized
Winner-Take-All Market
Top performers earn high income, while others, who may be almost as good, earn significantly less
Economies of Scale
When all inputs are doubled, output more than doubles
Market Failures
When private markets do not produce an economically efferent allocation of resources. In other words, when the positive market does not maximize total surplus
The equilibrium price consumers pay for the product without the $4 excise tax is ______________. The equilibrium price consumers pay with the $4 excise tax is ______________. The change in equilibrium price due to the $4 excise tax is ______________.
$12, $14, $2
The equilibrium price consumers pay for the product without the 40% sales tax is ______________. The equilibrium price consumers pay with the 40% excise tax is ______________. The change in equilibrium price due to the 40% sales tax is ______________.
$12, $14, $2
At the profit-maximizing output level for a monopolist, the following numbers are observed: P=$35, MR=$25, MC=$25, ATC=$20, Q=200. What is the monopolist's profit?
$3,000
You purchased a $25 ticket to an event. When you arrive at the event, you realize that you lost your ticket on the bus. If you still want to attend the event, you will have to purchase a $30 ticket at the door. What is the opportunity cost of attending the event?
$30, plus the opportunity cost of your time
Suppose a firm is producing 100 units of output, what a total cost of $6,000 and total variable cost of $2,000. We conclude that average fixed cost is
$40
You purchased a $30 ticket to a concert. When you arrive at the concert, you realize that you lost your ticket on the bus. If you still want to attend the concert, you will have to purchase a $40 ticket at the door. What is the opportunity cost of attending the concert/
$40, plus the opportunity cost of your time
The (competitive) market for services is described by the following two equations Qd=230-20P Qs=80+10P, where P is the price of a scarf. What is the equilibrium price in this market?
$5.00
Ken's Bakery is producing 1,000 loaves of bread, at a total cost of $1,500 and an average fixed cost of $1. We can conclude that total variable cost is
$500
With a vertical demand curve, the price elasticity of demand is
0
Based on the U.S. wages and productivity figures, what is the cost to make a DVD in the U.S.?
0.5
As the price of a magazine increased for $5.00 to $6.00 per issue, quantity demanded fell from 9,000 to 8,000 per week. For this segment of the demand curve, the (absolute value of the) price elasticity of demand is
0.56
Based on the wages and productivity figures for Argentina, what is the cost to make a DVD in Argentina?
0.67
Morgan has a budget of $30. With this budget, Morgan can afford to most 10 sandwiches. Alternatively, the entire budget could be spent on 20 sodas. With is the opportunity costs of one sandwich?
2 sodas
In the U.S. in 2017, an individual who earns $225,000 a year (after standard deductions and exemptions) faces an average tax rate of ______________.
26%
In the U.S. in 2016, an individual who earns $225,000 a year (after standard deductions and exemptions) faces a marginal tax rate of ______________.
33%
In 2017, a person in the U.S. who earns $25,000 pays a marginal tax rate of ______________% into the Social Security Program, while a person who earns $135,000 pays a marginal tax rate of ______________% into the Social Security Program.
6.2, 0
A monopolist's demand curve is P=80-Ql; its marginal cos is MC=20+2Q. The profit-maximizing quantity is
60
The market equilibrium quantity without the $4 excise tax is ______________ units. The market equilibrium quantity with the $4 excise tax is ______________ units. The change in equilibrium quantity due to the $4 excise tax is ______________ units.
60, 50, 10
The market equilibrium quantity without the 40% sales tax is ______________ units. The market equilibrium quantity with the 40% sales tax is ______________ units. The change in equilibrium quantity due to the 40% sales tax is ______________ units.
60, 50, 10
Compensating Differential
A difference in the wages of jobs with similar skill requirements when the cause is that something about the position makes it less attractive than alternative position
Private Goods
A good and service that can be consumed by only one person at a time. It is also possible to exclude non-buyers form consuming the goods
Cartel
A group of producers agreeing to act in concert with one another
Consider a regular supply and demand diagram for laptops. If the price of microchips (which are needed in the production of laptops) fall, then the new equilibrium will have
A lower piece and a larger quantity
Summarize in your one words what monopolistically competitive market is and what is important about that type of market structure.
A market that is monopolistically competitive will have many firms; a variety of types of products, each one slightly different; relatively easy entry and exit, there will not be economic profits in try long run. However, firms will produce e where marginal costs are less that prices, and thus less than an allocatively efficient amount of output will be procured.
Why are the cartel's profit-maximizing price and quantity similar to the monopoly price and quantity?
A monopoly maximizes its profits if it produces when marginal cost equal marginal revenue. Because a monopoly is the only firm in an industry, it is producing where industry profits are maximized. Thus, a small group of firms would want to produce the same level of output and prices as a monopolistic if total industry products are to be maximized.
Payoff Matrix
A payoff matrix is usually a two-by-two table with two actors or players. Each player will have a set of actions that will result in different payoffs. Each player's payoff is dependent on both players' course of action.
Will the monopolistically competitive firms tend to have a more elastic or less elastic demand that a monopoly? Explain why?
A perfectly competitive firm will not influence the price of goods. Market supply and demand will determine the equilibrium price and equilibrium quantity for he whole market. For any single perfectly competitive firm, raising prices will mean that all consumers will buy their products from someone next door. From a graphing perspective, we will have a horizontal demand curve.
Public Goods
A public good has two characteristics. First, it is difficult or impossible to exclude non-buyers from consuming the goods. Second, consumers can consume a public good without interfering with others' consumption of the same goods
A binding price ceiling leads to
A reduction in economic surplus
Common Resources
A resource that can be consumed by only one producer or consumer at a time and is found in environments in which it is difficult to exclude nonpaying users
Give one reason why a country might decide to place a tariff or a quota on an imported good? What are the real costs to the country of doing so?
A tariff or quota may be placed upon a good in order to protect workers in that industry, to protect an industry that is deemed vital for national security, or to allow a new industry time to grow before being subject to competition. The costs to the country are higher prices of imported and domestic goods and less overall production.
Which of the following taxes is regressive?
A tax of 25% on the first $100,000 of income and of 20% on any additional income
Sales Tax
A tax on most good and services purchased
Excise Taxes
A tax on specific goods and servies
Value-Added Tax
A tax on the value added of intermediate inputs at each step of the production process
Property Tax
A tax on the value of property (usually real estate) owned by businesses and individuals
A price floor is only binding if it is set
Above the free-market equilibrium price
Can you think of other examples of goods with this quality? You might have some of the same goods on this list as you did in the previous question.
Again, public radio is a great example. Any number of people can consume this product without interfering with anyone else's consumption of it. More examples are contained in the text below.
Which of the following events would not shift the demand curve for Sierra Mist (a soft drink)?
Aluminum cans become more expensive
The number in parentheses are (profit for American, profit for Untied). In the Nash equilibrium in this game,
American is producing, 5,000 units and United is producing 4,000 units
Which of the following taxes is proportional?
An equal sales tax on all purchases savings accounts
Sales taxes are which of the following?
An important source of revenue for state and local governments but not very important for the federal government in the U.S.
Which of the following will NOT cause a shift in the supply curve of potatoes?
An increase in the price of steaks
Specialization:
An individual, business, or county focusing on the production of a limited number of goods and services in order to attain a higher level of efficiency
Are there any disadvantages associated with limiting the amount of imports coming into the country?
As mentioned earlier, the prices of Japanese cars rose $1,000 and U.S. automobiles rose $1,400 in price. The total cost per U.S. job saved, per year, has been estimated to be about $150,000. You might ask why would we ever pass a law that helped protect jobs at the cost of $150,000 per year. The answer is that the $150,000 cost is not obvious. U.S. purchasers of Japanese and U.S. automobiles pay it in small increments and those increments are not obvious. This is because increases in prices of Japanese and U.S. automobiles are not labeled as 'due to limits on imports'. Consumers end up paying higher prices, reducing their purchases of imported goods, and increasing their consumption of domestic goods. In addition, we lose the increased production that we gain from specialization. A more subtle cost of protecting local firms is the possibility of retaliation by other countries.
What elasticity of supply or demand curves will cause the consumers to have to pay a larger portion? A smaller portion?
As the price begins to increase with a tariff, the quantity demanded decreases more with very elastic demand than if demand were less elastic. An equilibrium is reached before the price has increased as much as it would have with a less elastic demand curve. Consumers will therefore pay a smaller portion of the tax and producers a larger portion. If demand is relatively inelastic, consumers will end up paying a larger portion. We will not dwell on the issue here, but the elasticity of supply will also affect the portions paid by consumers and producers.
Diminishing Marginal Productivity of Labor
As we hire an additional worker, the additional output created by the worker increases total output, but is smaller and smaller for each additional worker
Explain why it is difficult for governments to solve the asteroid defense problem.
Asteroid defense is a global good in the sense that every country in the world would benefit from not having its citizens annihilated. But it suffers from the free rider problem: even countries that do not contribute to an asteroid defense system would be able to use it. Thus, it is hard to convince individual countries to pony up. You heard the congressman! Ask Russia to pay for it!
Among the following, which will have the least elastic (or more inelastic) demand?
Beverages
Assume that books cost $15 each, and manicures cost $45 each. Leslie has $300 to spend.
Books= 5 MU of Books= 8 Manicures= 5 MU od Manicures= 24
Which of the following will NOT shift the supply curve for a product?
Changes in consumers' taste
In a day's work, Chris could pick 35 pounds of apples or catch 20 fish, while Kim could pick 45 pounds of apples of catch 25 fish. Who has the comparative advantage in finishing?
Chris
Explain why the efficient amount of production in a competitive market with external benefits is greater than the equilibrium market .
Compare the marginal social benefits with the producer's marginal cost at the equilibrium market quantity. The benefits, derived from the marginal social benefit curve, are higher than the supplier's costs at that point, derived from the supply curve. The market should produce more of this good - and keep producing as long as the social benefit exceeds the cost. When that is no longer true, the market will be at the efficient quantity.
Comparative Advantage
Compare two individuals' opportunity costs of producing the same good. The individual with the lowest opportunity cost (that is, the one who gives up the fewest number of other goods) has the comparative advantage in the production of that good
Given your answer to the previous question, use our model of allocative efficiency to justify regulations that increase information for consumers.
Consumers will consume the allocatively efficient quantity if they can accurately estimate marginal utilities of goods. Government information that helps consumers more accurately estimate these utilities will reduce the amount of over- and under-consumption of goods and move consumers closer to consumption of the allocatively efficient amount.
A unit of labor costs $10, while a unit of capital costs $5. Currently, the MP of labor is 12 units, and the MP of capital is 10 units. To minimize the cost of producing its current output level, this firm should
Decrease labor and increase capital
Assume that a unit of labor cost $10, while a unit of capital costs $12. Currently the MP of labor is 14 units, and the MP of capital is 18 units. In order to minimize the cost of producing its current output, this firm should
Decrease labor and increase capital
Is the demand curve facing one of the in a cartel more elastic or less elastic than market demand? Why?
Demand facing a single firm is more elastic. This is because a small decrease in piece will not only attract more buyers (movement along the market demand curve) but it will also attract buyers from the other members of the cartel who are charging a higher price.
Derived Demand
Demand that is derived from the demand for something else. The demands for inputs into the production process and derived from the demand for the goods and services that they produce
A firm was using 20 units of labor and 20 units of capital to produce 50 units of output per hour. After it doubled both inputs, its output rose to 87 units per hour. This firm experienced
Diseconomies of scale
What do you think would happen in a commercial neighborhood near home if a restaurant in that neighborhood were making a great deal of profit?
Domino's Pizza will move to this neighborhood from another area of the town
If the government imposed an emissions tax of $500 per ton of emissions, then we know that
Each firm would abate at the same marginal cost
Consider two people who can produce sandwiches and lemonade, but have different opportunity costs. The gains from specialization can be enjoyed when
Each person specializes in the production of the good in which he/she has an absolute advantage
A firm was using 20 workers and 20 machines to produce 50 skateboards per hour. After it increases both inputs to 30 units, the output rose to 85 skateboarder per hour. This firm experienced
Economics of scale
Can you think of some reasons why economies of scale may arise?
Economies of scale take place when firms expand their scale of production and, as a result, the unit cost of production decreases. By producing larger quantities of output, businesses are able to specialize and produce goods more efficiently, reducing the resources needed per unit of output. Another possible reason for a lower average cost of production is that the business overhead costs are spread over a larger scale of output, which decreases the overhead costs attributed to a single unit of output.
Refer to the Graph A and B below. Which individual is right about efficiency? What role does the elasticity of supply of labor play?
Either could be right, depending upon the elasticity of the labor supply (with elasticity of demand the same). If workers are very sensitive to changes in wages, then there will be a significant reduction in employment as income taxes rise. Thus, reducing income taxes should expand employment. If workers are less sensitive to changes in wages, the effects on the labor market will be less and the reduction in efficiency is smaller. Reducing income taxes will do little to expand employment. Economists place a lot of importance on understanding the impact of taxes on the labor market. Because there are many different labor markets (workers with specific skills or few skills, teenage workers or middle-age workers, male workers or female workers, to name a few), there are many estimates for both the elasticity of supply and the elasticity of demand for labor. But the majority of the estimates suggest that both labor supply and labor demand for most people under most circumstances is relatively inelastic. A recent survey conducted by the Congressional Budget Office (2012) found that on average, the elasticity of supply for labor is between 0 and 0.3. This would mean that Graph B is more likely to capture the impact of a tax on labor income than Graph A.
If a country is better than every other country at producing almost all of the goods it wants, why would it benefit from trade? Explain in your own words.
Even though a country may be more efficient in producing most goods than any other country, it should specialize in the area where it is the most efficient relative to others and let some other country specialize in the area where it is, on a relative basis, less efficient. This way, the total production in both countries will increase. For example, the U.S. should specialize where its opportunity cost is less and let other countries specialize where their opportunity costs are less compared to the U.S.
Bill Gates, co-founder of Microsoft, was reputed to be the best computer programmer in his company. He was also apparently the most creative business mind by far in the company. Why did he specialize in one or the other activity (that is, programming or managing the business)?
Even though he was more efficient in both programming and managing than anyone else, he specialized in the area where he was the most efficient relative to others and let someone else specialize in the area where Bill Gates was, on a relative basis, less efficient. Total production thus increased. An alternative answer would be that he specialized where the opportunity cost was less and let someone else specialize where their opportunity costs were less. For example, he would have had to give up very valuable results of successful business management, if he were to program. However, by managing he gave up a less valuable output, that of programming.
If total expenditures on painkillers fall when the price of painkillers rises, then the price elasticity of demand is
Greater than one
If labor is the only input and all goods can be produced with fewer hours of work in the U.S. than in Thailand, then the U.S. will ___________.
Have an absolute advantage in the production of all goods.
Can you determine the effect of a new union in formerly nonunion labor markets?
If a union can successfully restrict the supply of labor in an industry, this causes the supply of labor to decrease. When this occurs, it causes the wage in the industry to rise in response. Some of the workers who want jobs in the unionized market will be unable to get jobs and will search for work in similar industries . The supply of workers in those non-unionized industries will increase and the result will be downward pressure on the non-unionized wages. In other words, when the supply increases, wages decrease. We therefore see two effects from the union: increased wages in the unionized labor market and decreased wages in the non-unionized labor market.
If the job barriers for women were removed from all jobs and the wages of teachers and nurses did not adjust quickly, what would happen the market equilibrium for teaching and nursing?
In that case, there will be a shortage of teachers and nurses as the individuals who would have been willing to work in those professions are attracted away by other professional possibilities. This decreases supply. Wages should increase when supply decreases. If wages do not adjust quickly, then there will be a shortage of teachers and nurses. But the market will go to equilibrium since the shortage will cause competition for the teachers and nurses and wages will rise.
Suppose the price of textbooks increased, and as a result the total expenditure on textbooks increased, too.Then we know that the demand for textbooks was
Inelastic
When the percentage change in quantity demanded is smaller than the percentage change in price thatbrought it about, then we say demand is
Inelastic
If a demand curve is a horizontal straight line, then the (absolute value of the) price elasticity of demand is
Infinite
Economic profits in a perfectly competitive industry usually do not last because of the
Introduction of brand names products by existing firms
A criticism of the current Social Security program (in the U.S.) that focuses on its equity implications is that it is which of the following?
Is funded by a regressive tax
Will a low-wage country take jobs and business away from the U.S.? Explain why or why not in your own words.
It may seem that due to international trade, low-wage workers in other countries will unfairly compete with workers in the U.S. This may not always be true, because even if other countries are not as efficient as the U.S. is in producing goods, it still pays to trade. The low-wage countries will indeed specialize where they are least disadvantaged and U.S. workers in those industries will be hurt. Yet, since total output increases, total output per person (or the average standard of living) increases. Moreover, as shown in the examples above, it is not true that all "low-wage countries" are also low-cost countries and thus will not be able to compete with a high-wage country. Due to dramatic differences in productivity, there can be dramatic differences in wages and the products will still be less expensive to produce in the high-wage economy.
Using the concepts we have used to determine that "optimal amount," describe the conditions under which no pollution should be allowed. In other words, when does it make sense to have seers pollution?
It may well make sense in some cases to have zero pollution. If the costs to consumers of each additional amount of pollution (i.e., the marginal benefits of pollution reduction) are greater than the costs of eliminating the pollution, and this is true at all levels of pollution, then the pollution should be eliminated - and we will be better off as a result.
If one state has an absolute advantage in the production of two goods, what should it do?
It should produce the good in which it has a comparative advantage and let another state produce the good in which it has a comparative advantage.
Movie tickets and movie downloads are substitutes. When movie tickets become more expensive, what will be the effect on the market for movie downloads?
It will raise both the equilibrium price and equilibrium quantity
Movie tickets and DVD rentals are substitutes. When movie tickets become more expensive, what will be the effect on the market for DVD rentals?
It will rise both the equilibrium price and equilibrium quanity
Butter and "I Can't Believe It's Not Butter" are substitutes. Now suppose that there is an increase in the price of"I Can't Believe It's Not Butter." What effect will this have on the demand for butter?
It will shift the demand curve to the right
In one hour of work, Jordan could chop 4 pounds of onions or type 12 pages, while Parker could chop 5 pounds of onions and type 16 pages. Who has the lower opportunity cost per pound of onions chopped?
Jordan
Which of the following would increase the efficiency loss of a progressive income tax?
Labor supply gets more elastic as income rises
Quotas
Legal limits on the amount of a good or service that can be imported
Which of the following is likely to have the most elastic demand?
Levi's Jeans
Compared with a perfectly competitive industry, a monopoly will produce
Lower output, a higher price, and a loss in economic surplus
Faced with same cost conditions as a perfectly competitive industry, a monopoly will lead to
Lower output, a higher price, and a loss in economic surplus
Earning distributions tend to be positively skewed, so median earnings will be
Lower than mean earning
Once a government has introduced a proper (that is, economically efficient) policy to address the market failure, the price of a good that has external benefits will be _______ than its free market price and the price of a good that has external costs will be ______ than its free market price.
Lower; Higher
In which of the following situations would the idea of vertical equity be violated?
Marcus earns $50,000 in income and $20,000 worth of benefits each year. He pays $15,000 in taxes each year. Claudia earns $60,000 running her own business. She receives no additional non-monetary benefits. She pays $18,000 in taxes each year.
Demand curves in competitive markets represents which of the following?
Marginal benefit to consumers
Supply curves in competitive markets represent which of the following?
Marginal cost of production
Consider a food produced in a competitive market that has external costs. Too _______ of the good will be produced for economic efficiency and the price will be _______ than the price that will convince consumers to purchase the efficient amount.
Much; lower
What is the difference between the nominal and real wage?
Nominal wages have not been corrected for inflation and real wages are corrected for inflation
Can you give some examples of situations in which markets may not be efficient?
One answer, based on Chapter 10, is a market with a monopoly supplier. You saw there that monopolists choose to sell a lower quantity than the allocatively efficient quantity. This chapter will highlight many other cases of market conditions that generate quantities other than the allocatively efficient quantity.
Given these facts, what do you think is likely to happen to Atlantic salmon off the coast of Maine if there are no regulations on fishing?
One possible outcome is if a profit-maximizing fishing fleet owned by a single company fishes the area. The fleet knows that it must be careful and manage its catch well, or the fish will soon disappear and the company will go out of business. The second scenario is one in which several smaller companies fish the area. The fleet has been growing and is beginning to catch more than 1,000 tons. Each fishing boat knows that if it does not catch its share, someone else will. In order to protect their current profits, each boat begins to expand its fishing. As they all do that, the salmon begin to disappear.
If a compensating differential exists, this means what?
One wage will be higher than the other because the job with lower wages has more desirable working conditions
Oligoplistic Competition
Only a few firms producing similar (or differentiated) products
Jack's Corn Farm faces a price of $7 per bushel of corn. Given the information below, which of these output levelsproduces the highest profit?
Output= 0 Average Variable cost= - Marginal Cost: $2
In the short run, a price-talking firm will produce the output level where
P=MC, provided that P is greater than or equal to AVC
Vertical Equity
People who earn more should pay at least as mush as those who earn less
Horizontal Equity
People who have equal incomes should pay the same taxes
In which market structure will firms reach capacity in the long run?
Perfect Competition
How can pollution be good? Or is that really what we mean?
Pollution is not necessarily good, but there may be positive amounts of pollution where the costs of getting rid of the pollution are greater than the damages done by the pollution. In those cases, the optimal (or perhaps "good") amount of pollution is a positive amount.
Accounting profits at a firm's economic profit break-even point are
Positive
If selling more units raises total revenue, then marginal revenue must be
Positive
Discrimination in a labor market will result in which of the following changes in profits?
Profits will decrease. The firm will be hiring many workers where the marginal revenue product is greater than the wage.
What incentive does Ford have to lower prices? What happens to all of the firms? What are the incentives and what might happen as a result?
Profits will increase for Ford if it can lower prices and get away with it, that is, not have General Motors also lower prices. the same is true for General Motors. However, when Ford lowers prices, General Motors will find its profits falling rather dramatically as customers switch to Ford. To protect itself, General Motor may well lower prices in response to the initial cut by Ford. The end result is that both companies end up earning less than they could have earned ifs they all kept their higher prices.
Can you think of examples of goods where excluding non-payers is difficult?
Public radio is a product rife with free riders—people who don't donate to the station, but listen to the programming anyway. More examples are detailed below.
Common resources are used too ______ for economic efficiency because the marginal cost of using the resource is ______ then if the resources were private goods.
Quickly; Lower
If the U.S. has an absolute advantage in the production of software and the production of computers when compared to Mexico, but has a comparative advantage in the production of software, what should it produce?
Software and let Mexico produce computers
Consider a market where the price is stuck below the equilibrium price. In such a case,
Some buyers will be unable to find sellers
We have shown that all individuals and countries can gain from trade. Can you think of a reason why some individuals or countries may object to free trade?
Someone who loses his or her job or business as a result of competition from someone else pays significant costs from trade. The next section lists some of the objections to free trade.
If efforts to increase economic efficiency, governments should ______ goods with external benefits.
Subsidize
Fishing, as an industry, is in trouble around the world due to declining fish populations. Some countries are subsidizing their fishing industries in order to assist them. What do you think of that as a policy to aid fishermen?
Subsidizing fishing industries is exactly the wrong thing to do as it encourages more fishing, thereby worsening the fish population problem. The nature of the industry is such that fish are a common resource and production and consumption should be restricted, not encouraged.
If the price of soda falls, and a consequence the demand for coffee falls, then, soda and coffee must be
Substitute goods
What do you think of suggestions one and four in this case?
Suggestions one and four would make little sense. Requiring producers to do less is changing the market in the wrong direction. A tax would also reduce production. You should be able to show that.
If efforts to increase economy efficiency, governments should ______ goods with external costs.
Tax
In efforts to increase economic efficiency, governments should ______________ common resources.
Tax
External Benefits
The benefit received by individuals other than the producer or consumer
External Costs
The costs of producing a good or services that are borne by individuals other than the producer or consumer
What can you say about the equilibrium quantity of production for a market with external cost?
The equilibrium market quantity is too high and the equilibrium market price is too low, relative to the efficient point
What can you say about the equilibrium quantity of production and the equilibrium price for a marker with external benefits?
The equilibrium market quantity is too low and the equilibrium market price is too low, relative to the efficient level of production.
Of the available options for government action above, which are most likely to be successful addressing the problem of external costs?
The government could add taxes to the market or otherwise enforce lower production levels. (Choices 1 and 4.)
The establishment of a quota will have which of the following effects?
The government will likely gain more revenue with a tariff than with a quota.
Summarize, in your own words, the economic model of oligopolistic behavior
The moral of this story is that oligopolistic industries will benefit for agreements to price and produce like monopolies. If they are able to fo that, they will be able to maximize profits for all firms together, that is, for the entire industry. However, there is always the incentive to "cheat" an agreement. A firm that lowers it spruces will fo so to increase its own production and profits. However, other firms will match the decreases. That cheating on the original attempts to maximize industry profits will result in lower profits, lower prices, and greater quantities for all firms together than the monopoly level of profits, prices, and quantities
A homeowner decides to buy three large dogs that sleep outdoors and howl at the moon. An external cost associated with this decision is
The neighbors' lost sleep
Ability to Pay
The principle based on the idea that one should pay for government services according to one's ability. We define that ability most often as the amount or amount of wealth
Benefit Principle
The principle that one should pay taxes according to the benefits received from government goods and services
Production Possibilites Frontier
The production possibilities frontier plots the maximum output of goods and services that a country can produce with its resources
A consumers' utility is maximized when
The ratio of marginal utilities equals the ratio
A lowering of tariffs and an elimination of quotas will mean increased competition from foreign producers. This shift will lead to increased unemployment and decreased profits in some industries. Why should we allow this to happen?
The reason we may allow this to happen is that with increased trade, prices will be kept low and businesses will be forced to produce products which are competitive in quality. With the specialization that will result, more can be produced and consumed by both countries. The resulting unemployment in the formerly protected industries can be reduced with the use of proper fiscal and monetary policy.
Infant Industry Argument
The reasons for temporarily protecting new industries because they do not yet have the economies of scale that their older foreign competitors enjoy
Suppose each dollar of your income is taxed at the same rate. Then your marginal tax rate is
The same as your average tax rate
Average Tax Rate
The total tax paid divided by the amount of income
When economists model consumers' decision, they assume that consumers are tying to maximize...
Their utility
When economists model consumers' decisions, they assume that consumers are trying to maximize...
Their utility
What is similar and what is different between the automobile industry and restaurant industries?
There are far more competitors in the restaurant industry than in the automobile industry. This is likely due to the barriers to entering the automobile industry compared to opening a new restaurant. There are much larger economies of scale in the automobile production compared to the production of a meal. Both industries produce goods that are unique when compared to a competitor's product
One difference between 'perfect competition' and 'monopolistic competition' is that
There is precut differentiation in monopolistic competition
What will happen in a competitive market if consumers are unable to accurately estimate the marginal utilities of goods?
There will be no change relative to a market where consumers know marginal utilities. Consumers may over-estimate benefits and consume too much of a good. Consumers may under-estimate benefits and consume too little of a good.
What can you say about the allocative efficient level of output compared to the new equilibrium market quantity after the tax is imposed?
They are the same
Direct pollution controls are usually inefficient because, for any given amount of pollution reduction,
They fo not minimize the total cost of pollution abatement
Flat tax proposals generally fail to be truly proportional because which of the following is true?
They offer exemptions or deductions which create increasing average tax rates
What will a firm do if marginal revenue product is less than wage?
This firm could increase profits by reducing the amount of labor it employs. The firm's wage expenses would fall by more than its revenue so it should release some workers. By doing this, marginal revenue produce will rise as the remaining workers are more productive than the ones that were released. The firms will continue to reduce the amount of labor it employs until marginal revenue product is equal to the wage.
What happens to wages in an industry if productivity of labor decrease?
This is the same as a decrease in demand for labor. If productivity decreases, the marginal product of labor at each level of hiring decreases and thus the marginal product of labor decreases. This means for the last worker hired that his output has decreased which means his marginal product and marginal revenue product has decreased. Now the worker is paid more than the value he creates. The quantity demanded of labor decreases at each wage, thus an decrease in the demand for labor results. Given the decrease in demand, there will be a surplus of labor, the wage rate will fall until it reaches a new higher equilibrium and less workers will be hired.
What happens to wages in an industry if productivity of labor increases?
This is the same as an increase in demand for labor. Why? If productivity increases, the marginal product of labor at each level of hiring increases and thus the marginal product of labor is greater than the cost of hiring another laborer. In other words, when productivity rises, all workers create more output. Since output has increased, this means the marginal revenue per worker increases. Now the quantity demanded of labor increases at each wage, thus the demand for labor increases. Given the increase in demand, there will be a shortage of labor, the wage rate will be bid up until it reaches a new higher equilibrium, and more workers will be hired.
Are local and state property taxes proportional, regressive, or progressive? Why?
This question is a little tricky and is not quite the same as the question about a tax on food. It depends upon how people spend their incomes. If individuals with higher incomes save more, then those individuals will be spending a smaller portion on goods and services that are subject to sales taxes. Thus, they will pay a smaller portion of their incomes in tax - the tax becomes regressive. That is why many states and localities will exempt necessities such as basic food items and rent from sales tax. The effect is to make the sales tax less regressive. But, if all savings eventually get spent on goods and services that are subject to the tax, then over time the tax looks more proportional.
In a market in equilibrium, the area above the supply curve but below the equilibrium price represent the
Total producer surplus
Why might two countries want to specialize and trade even when both countries could produce all goods?
Total production can increase when countries can engage in specialization. If total production increases and trade takes place, both countries can have more of both goods and therefore be better off.
Why do individuals, businesses and countries trade with not another? Make a list of the benefits of trade.
Trade is buying and selling of goods and services on the parts of individuals and businesses. Trade occurs between rational people because everyone benefits. Trade enables individuals and countries to obtain goods and services that they cannot produce for themselves, either because they do not possess the resources to produce them or simply because they cannot produce them in an efficient way. Specialization and trade allow us to produce more with the same resources and the average real standard of living is greater as a result.
If a union reduces supply of workers for a group of firms, what would you expect to happen to wages paid by those firms and wages paid by nonunion firms?
Union wages will increase and nonunion wages will decrease.
At the shut-down price, a perfectly competitive firm can just cover its
Variable costs
In which case does the income effect dominate the substitution effect?
Wages increase and people work less hours which means they purchase less leisure
In which cases does the substitution effect dominate the income effect?
Wages increase and people work more hours which means they purchase less leisure. Wages decrease and people work less hours which means they purchase more leisure.
Suppose that investment banking becomes a very fashionable career path for university graduates to follow. What is likely to happen to wages?
Wages will decrease as supply increases
Is an income tax like the U.S. income tax system proportional, regressive, or progressive? Why?
We have already pointed out that an income tax is likely to be fairly efficient, as labor supply is inelastic. We have also seen that as income rises, the marginal tax rates increase. If we ignore all other aspects about the U.S. income tax system (such as deductions and tax credits), the correct conclusion is that the U.S. income tax system is progressive. The tax takes a larger percentage of income from those with higher incomes. A full evaluation of all of the nuances in the U.S. tax system would require a more advanced treatment. But most of the aspects of any tax system that deviate from a simple percent tax on income typically exist to either try to add more efficiency or more fairness to the tax code.
What is the rationale to use in setting price, if the firms in the entire industry are acting together?
We would use the same rationale as in the case of monopoly. We would maximize the profit for one firm within an industry structure. For firms operating in oligopoly industry structure, setting marginal revenue equal to marginal cost will achieve that goal of maximizing profits for the industry
When you are moving form one point on your production possibilities frontier to another point on the frontier,
You are giving up production of one good to produce more go another good
Absolute Advantage:
n individual (or business or a country) has an absolute advantage in the production of a good if that individual can produce that good using fewer resources than another individual would
