ECON 2102 Final Exam
//Problems I don't understand
7.1 #12/14 7.2 # 1/10 8 #
A price maximum (ceiling) that is set above the equilibrium price or a price minimum (floor) set below the equilibrium will result in:
> NO deadweight loss > NO reduction in total economic surplus and
prozac and wellbutrin are both prescription medications to treat depression. If the price of Prozac increases, then this should lead to
> an increase in the price of wellbutrin > an increase in the number of people who use wellbutrin
When supply is more elastic than demand, the tax burden falls on ___. If demand is more elastic than supply, ___ will bear the cost of the tax.
> buyers > producers
Examples of price discrimination include:
> child discounts > student discounts > senior discounts
A price minimum (floor) that is set above the equilibrium price or a price maximum (ceiling) set below the equilibrium will result in:
> deadweight loss > reduction in total economic surplus
The allocative function of price cannot operate unless firms can ___
> enter new markets and leave existing ones at will > If new firms could not enter a market in which existing firms were making a large economic profit. economic profit would not tend to fall to zero over time, and price would not tend to gravitate toward the marginal cost of production.
If the firms in a market are earning a positive economic profit, then in the long run, ___ the market will lead economic profit to ___.
> entry into > fall
failure to achieve economic efficiency means that
> everyone in the economy could be made better off > total economic surplus is not maximized
if the firms in a market are earning an economic loss, then in the long run there will be ___ the market, leading the equilibrium price to ___
> exit from > rise
the demand curve for a good can be interpreted either horizontally or vertically The horizontal interpretation tells us ___ The vertical interpretation tells us ___
> for each price, the total quantity that consumers wish to buy at that price > for each quantity, the most a buyer would be willing to pay for the good at that quantity
Changes in ___ and ___ are two of the most important factors that give rise to shifts in supply curves.
> input prices > technology
steeper slope means ___ elastic flatter slope means ___ elastic
> less > more
steeper slope means ___ flatter slope means ___
> less elastic > more elastic
price elasticity of demand must be ___ at any point below the midpoint. price elasticity must be ___ for any point above the midpoint.
> less than 1 > greater than 1
By breaking up large companies and discouraging mergers between companies in the same industry, antitrust laws ___
> may help to promote competition > also may prevent companies from achieving economies of scale.
private negotiations (payoffs) can make an outcome ___ if ___
> more efficient > the overall surplus is greater for both player
The hurdle method of price discrimination is ___ efficient, however, it is ___ efficient than charging a single price to all buyers.
> not perfectly > more
whereas the perfectly competitive firm faces a ___ demand curve for its product, the imperfectly competitive firm faces a ___ demand curve.
> perfectly elastic > downward-sloping
If altering the ___ is not possible, commitment problems can sometimes be solved by altering people's ___.
> relevant material incentives > psychological incentives
in a payoff matrix, each company has ___ choices to make
2
Pitfall #1
MEASURING COSTS AND BENEFITS AS PROPORTIONS RATHER THAN ABSOLUTE DOLLAR AMOUNTS
The profit-maximizing rule for a monopolist is to choose the level of output such that ___
MR = MC
Is price discrimination a bad thing?
Not always. We are so conditioned to think of discrimination as bad that we may be tempted to conclude that price discrimination must run counter to the public interest, but consumer surplus and producer surplus can actually enhanced by the monopolist's use of the hurdle method of price discrimination.
"Rule number one" helps you find the optimal quantity. Optimal quantity for a firm is the quantity where:
Profit is maximized and Price=Marginal Cost
In a market where government has set the price below the equilibrium price, one might expect
a black market to develop as individuals try to take advantage of unexploited opportunities.
In a market where government has set the price below the equilibrium price, one might expect ___
a black market to develop as individuals try to take advantage of unexploited opportunities.
The fact that firms enter industries in response to positive economic profit and leave industries in response to economic loss illustrates the:
allocative function of price.
The Rational Spending Rule
Spending should be allocated across goods so that the marginal utility per dollar is the same for each good
Condition #4 for a perfectly competitive market: Buyers and sellers are well informed.
This condition implies that buyers and sellers are aware of the relevant opportunities available to them. If that were not so, buyers would be unable to seek out sellers who charge the lowest prices, and sellers would have no means of deploying their resources in the markets in which they would earn the most profit.
True or false: Both monopolists and perfectly competitive firms choose the level of output such that marginal revenue equals marginal cost.
True > The distinction is that whereas marginal revenue equals price for a perfectly competitive firm, marginal revenue is less than price for a monopolist.
the pursuit of individual self interest doesn't ___
always coincide with society's interest > Ex. pollution/fraud
government revenue equals
amount of tax * new equilibrium quantity
taxes don't change the ___
amount that the seller receives from transactions
economic loss
an economic profit that is less than zero
dominated strategy
any other strategy available to a player who has a dominant strategy
producer surplus
area of the triangle left of the equilibrium point and below the price line
an extraordinary feature of private markets for goods and services is their
automatic tendency to gravitate toward their respective equilibrium prices and quantities Ex. Pizza sellers lowering the prices of their pizza until it becomes appealing enough for consumers to buy enough to reduce the excess supply
the additional utility from additional units of consumption ___ as total consumption increases
declines > Ex. whereas one cone per hour is 50 utils better than zero, five cones per hour is just 10 utils better than four
The elasticity of demand thus ___ as we move downward along a straight-line demand curve.
declines steadily
For products that have extremely high fixed costs relative to their marginal cost. the average total cost of production will typically ___ as output increases.
decrease
in many sequential games, the player who gets to move first ___
enjoys a strategic advantage.
perfectly elastic demand
demand is perfectly elastic with respect to price if price elasticity of demand is infinite > horizontal demand curve
perfectly inelastic demand
demand is perfectly inelastic with respect to price if price elasticity of demand is zero > vertical demand curve > Ex. Water / Oxygen
In the perfectly competitive industry, the supply and demand curves intersect to ___
determine an equilibrium market price
The market equilibrium typically will not be socially optimal when the costs and benefits to individual participants in the market ___ those experienced by society as whole.
differ from
demand will tend to be more elastic with respect to price for products for which ___
close substitutes are readily available Ex. Salt, but not specific brands
market
combination of all the potential buyers and all the potential sellers of something
When the cross-price elasticity of demand for two goods is negative, the two goods are ___
complements > The elasticity of demand for tennis racquets with respect to court rental fees, for example, is less than zero
In repeated prisoner's dilemmas, tit-for-tat strategies have been shown to be effective at limiting defection in ___
computer simulations but not real-world cartel agreements. > Tit-for-tat strategies have been shown to be effective at limiting defection in computer simulations. but there are numerous practical problems involved with using tit-for-tat strategies to maintain real-world cartel agreements(like there being more than two firms in most markets).
equates price with marginal cost, it is also equating marginal revenue with marginal cost. Thus, the only significant difference between the a perfectly competitive firm and a monopolistic curve ___
concerns the calculation of marginal revenue.
price elasticity of demand for any good or service will be ___
higher in the long run than in the short run. > substitution of one product or service for another takes time
an issue monopolisticially competitive firms face is
how to differentiate their products from those of existing rivals. > Should a product be made to resemble a rival's product, be different from it, or something in between?
Whenever P>MC, the firm should ___
expand output.
The income effect of this $3 to $4.50 price change refers to the fact that:
fewer downloads can now be purchased with any number of rentals
Suppose a perfectly competitive firm is producing 1,000 units of output and the marginal cost of the 1,000th unit is $7. If the firm can sell each unit of output for $7 and the firm's revenue is sufficient to cover its variable cost, the firm should
leave production unchanged.
Consider a tax on cigarettes. The tax incidence will fall more heavily on the side of the market that is:
less elastic, which is likely to be the demand (consumer) side because of the addictive nature of the product.
A monopolist's profit-maximizing level of output is inefficient because the marginal cost of the last unit produced is ___ than the marginal benefit to society of the last unit produced.
less than
Price-setters face ___
less than perfectly elastic demand.
In the short run, firms in a market will shut down if the market price is:
less than the average variable cost
Profit is maximized at the ___
level of output for which marginal revenue precisely equals marginal cost.
The perfectly competitive firm's supply curve is the portion of its marginal cost curve that ___
lies above its average variable cost curve > At the profit-maximizing quantity, the firm's profit is the product of that quantity and the difference between price and average total cost.
the company with the ___ average production cost will grow in relative terms to another company
lower
For a monopolist, profit maximization occurs when ___
marginal cost equals marginal revenue
In general, perfectly competitive firms maximize their profit by producing the level of output at which:
marginal cost equals price.
Under perfect competition profit maximization occurs when ___
marginal cost equals the market price—the same criterion that must be satisfied for social efficiency > This difference explains why the invisible hand of the market is less evident in monopoly markets than in perfectly competitive markets.
production occurs when the ___
marginal cost is greater than or equal to the average total cost
when the ATC is below the MC, average cost is declining because:
marginal cost is less than average cost
The market price measures the
marginal cost: the amount the buyer will actually have to pay
Suppose it's possible to find a transaction that will make some people better off without hurting others. In this case, we know the market equilibrium ____
isn't socially optimal
Suppose farmers in a given market can either grow soy beans or corn on their land. In addition, suppose an increase in the demand for corn causes the price of corn to increase. In the long run, this increase in the demand for corn is likely to ______ the price of soy beans.
lead to an increase in
moving towards the equilibrium is ___ because ___ and moving away from the equilibrium is ___ because ___
more efficient, more people can buy and sellers can sell more less efficient, either fewer people can buy or sellers have to sell too much
total cost =
multiply (price * quantity) on the ATC line at the same x-coordinate as the point you used to find the total revenue
An increase in consumers' demand for espresso will lead to an increase in ______, while an increase in the number of firms producing espresso will lead to a(n) ______.
quantity supplied; increase in supply
subsidies ___ the total economic surplus
reduce
If a perfectly competitive firm produces an output level at which price is less than marginal costs, then the firm should:
reduce output to earn greater profits or smaller losses.
If the total economic surplus from a market is thought of as a pie to be divided among the participants in the market, then imposing price controls will:
reduces the size of the pie
consumer surplus
refers to the surplus received by a single buyer in a transaction > also used to denote the total surplus received by all buyers in a market or collection of markets
positive economic principle
one that predicts how people will behave
normative economic principle
one that says how people should behave
dominant strategy
one that yields a higher payoff no matter what the other players in a game choose > a strategy is dominant if both dominant payoffs are higher than the one other payoff in each of their respective columns/rows
tit-for-tat depends on there being ___
only two players in the game
An individual's supply curve shows that person's ____
opportunity cost of producing at each quantity.
The geographic clustering of gas stations is ___
optimal from the standpoint of gas station owners > Since gas station owners want as many customers as possible, it is often optimal for them to cluster geographically.
rational
people have well-defined goals and try to fulfill them as best they can
Strictly speaking, the rational spending rule applies to goods that are ___
perfectly divisible > Ex. milk or gasoline > Many other goods. such as bus rides and television sets, can be consumed only in whole-number amounts. In such cases, it may not be possible to satisfy the rational spending rule exactly.
in a perfectly competitive market, the demand curve is:
perfectly elastic since if an company raises it's price, then consumers will never buy it, due to the fact that the market is perfectly competitive
A monopoly that results from economies of scale is called a(n):
natural monopoly.
To sell an extra unit of output, a perfectly competitive firm ___ and an imperfectly competitive firm ___
need not alter its price; must lower its price
The income elasticity of demand for inferior goods is ___
negative
The amount by which price exceeds the seller's reservation price is ___
producer surplus
economic rent
that part of the payment for a factor of production that exceeds the owner's reservation price.
producer/consumer surplus value is equal to:
the area of the producer/consumer surplus
utility maximization
the assumption that people try to allocate their incomes so as to maximize their satisfaction and reach a goal
marginal benefit
the benefit of an additional unit of the activity > change in benefit / change in output
economic surplus
the benefit of taking an action minus its cost (when benefit - cost is a positive number)
marginal revenue
the change in a firm's total revenue that results from a one-unit change in output
income effect
the change in the quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power
income effect of a price increase/decrease
the change in the quantity demanded of a good that results because an increase/decrease in the price of a good decreases/increases buyers' purchasing power
substitution effect
the change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes
marginal cost
the cost of an additional unit of activity > change in cost / change in output
Suppose a firm is collecting $1,700 in total revenues and the total costs of its variable factors of production are $1,900 at its current level of output. One can predict that the firm will:
shut down
It is ___ in a firm's best interest to offer a product that is similar those already being sold by its competitors.
sometimes
to find consumer surplus:
subtract profit maximizing price from each price entry before the profit maximizing price
perfectly elastic supply
supply is perfectly elastic with respect to price if elasticity of supply is infinite > Ex. horizontal supply curve
perfectly inelastic supply
supply is perfectly inelastic with respect to price if elasticity is zero > Ex. vertical supply curve
The Equilibrium Principle (No-Cash-on-the-Table Principle)
tells us that when a market reaches equilibrium, no further opportunities for gain are available to individuals. > This principle implies that the market prices of resources that people own will eventually reflect their economic value.
exclusive contracting for natural monopoly
the government specifies a desired service and the lowest bidder gets the government contract, which incentivizes cost cuts to be able to be the lowest bidder
The larger the share of your budget an item accounts for, ___
the greater is your incentive to look for substitutes when the price of the item rises > big ticket items have higher elasticity
In general, the more easily additional units of these inputs can be acquired, ___
the higher price elasticity of supply will be
marginal cost
the increase in total cost that results from carrying out one additional unit of an activity
the method of simultaneous equations
the intersection of Line 1 and Line 2 can be calculated by Line 1 - Line 2 and then solving for X, then plugging that X back in to find Y
buyer's reservation price
the largest dollar amount the buyer would be willing to pay for a good > measurement of marginal benefit
deadweight loss
the loss of consumer and producer surplus caused by disparity between price and marginal cost
supply curves shift to the right as ___
the number of individual suppliers grows. > Ex. if container recyclers die or retire at a higher rate than new recyclers enter the industry, the supply curve for recycling services will shift to the left. Conversely, if a rise in the unemployment rate leads more people to recycle soft drink containers (by reducing the opportunity cost of time spent recycling), the supply curve of recycling services will shift to the right.
"Number of items to be sold at the discounted price" means:
the number of the total items which will be bought for the same amount as the discounted amount
pure monopoly
the only supplier of a unique product with no close substitutes > Ex. producer of Magic trading cards
Implicit costs
the opportunity costs of the resources supplied by the firm's owners
income elasticity of demand
the percentage by which a good's quantity demanded changes in response to a 1 percent change in income > may be either positive or negative
cross-price elasticity of demand
the percentage by which the quantity demanded of the first good changes in response to a 1 percent change in the price of the second > may be either positive or negative > Ex. in response to a 10% increase in the price of fuel, the demand for new cars that are fuel inefficient decreased by 20%, the cross elasticity of demand would be -2
price elasticity of demand (Ed) (Eqxpx)
the percentage change in the quantity demanded of a good or service that results from a 1 percent change in its price > a measure of the responsiveness of the quantity demanded of that good to changes in its price > Ex. if the price of beef falls by 1 percent and the quantity demanded rises by 2 percent, then the price elasticity of demand for beef has a value of ~2.
if the problem says a person can make a credible commitment even when they can't, then ___
the person not making the commitment can get their maximum benefit options since apparently they can control what the other person chooses when the problem says so???
A game has three basic elements:
the players, the list of possible actions (or strategies) available to each player, and the payoffs the players receive for each possible combination of strategies
the price that the profit maximizing monopolist charges is ___
the point on the demand curve directly above the intersection of MC and MR
hurdle method of price discrimination
the practice by which a seller offers a discount to all buyers who overcome some obstacle
price discrimination
the practice of charging different buyers different prices for essentially the same good or service
equilibrium price and equilibrium quantity
the price and quantity at the intersection of the supply and demand curves
the upward slope of the supply curve reflects ___
the fact that costs tend to rise at the margin when producers expand production, partly because each individual exploits her most attractive opportunities first, but also because different potential sellers face different opportunity costs.
When the firm lowers price from $8 to $7, marginal revenue is less than $7 because:
the firm is charging $1 less for each of the first three units of output.
Cartel agreements confront participants with the economic incentives inherent in ___
the prisoner's dilemma, which explains why such agreements have historically been so unstable and unsuccessful
Tax incidence is:
the relative tax burden borne by buyers and sellers.
A seller's reservation price is generally equal to:
the seller's marginal cost.
seller's reservation price
the smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost > measurement of marginal cost
if a monopolist can perfectly price discriminate, then they will produce ___
the socially optimal level of output.
If a monopolist can perfectly price discriminate, then ___
the socially optimal quantity will be produced.
Jen spends her afternoon at the beach, paying $1 to rent a beach umbrella and $11 for food and drinks rather than spending an equal amount of money to go to a movie. Her opportunity cost of going to the beach is:
the value she places on seeing the movie.
A prisoner's dilemma illustrates situations in which:
there is a conflict between the narrow self-interest of individuals and the broader interests of a group.
The challenge confronting the perfectly competitive firm is ___
to choose its output level so that it makes as much profit as it can at that price
on the right side of the profit graph the lines from highest to lowest are:
top) marginal cost middle) average total cost bottom) average variable cost
Average total cost is total cost divided by ___
total output
accounting profit
total revenue - explicit costs
profit =
total revenue - total cost
marginal cost and benefits must be taken into account rather than ___
totals or averages (true for utility, revenue, and cost) whenever you are deciding on the right quantity
average variable cost (AVC)
variable cost / quantity sold
For the purpose of computing consumer surplus, we rely on the ___ interpretation of the demand curve
vertical > The value on the vertical axis that corresponds to each point along the demand curve corresponds to the marginal buyer's reservation price
simple equation for rational spending for two goods
when MUc / Pc = MUv / Pv then total utility will be maximized > MUc = marginal utility from from attaining more c > Pc = the price of c > MUv = marginal utility from from attaining more v > Pv = the price of v
number of firms in the market formula:
(entire market revenue) / (single representative firm revenue)
average production cost:
(fixed cost + (marginal cost * units)) / (units)
economic profit can also be equal to ___ on a graph
(marginal cost x Q) - (ATC x Q)
profit is equal to:
(price - ATC) * quantity
price elasticity of demand at point A on the demand curve equation:
(price / quantity) * (1 / slope) > all the values are taken at A
the lowest amount of shortage there can be is ___
0 > any negative amount is also just 0
to find the Nash Equilibrium(s) of a table:
1) check each square of the table and assess if each player has an incentive to make a change (they need more money for an incentive, not an equal amount) given that the other player still picks that square 2) if they do change, then that square isn't an equilibrium, if they don't change, then that square would be an equilibrium.
Markets ask:
1) what to produce = how much? 2) how or by whom? 3) for whom?
When perfectly competitive firm decides to shut down it is most likely that:
> price < average variable cost > total revenue < variable cost
profit-maximizing firm
a firm whose primary goal is to maximize the difference between its total revenues and total costs
price taker
a firm with no influence over the price of its product
tax revenue is included in:
the total surplus along with consumer and producer surplus
opportunity cost
the value of what you must sacrifice to take an action
companies suffer a loss when ___
their profit-maximizing price is lower than their ATC
In the long run, ___ are the only truly significant supply bottleneck
unique and essential inputs > If it were not for the inability to duplicate the services of such inputs, most goods and services would have extremely high price elasticities of supply in the long run.
A fundamental property of the supply curve is that it is ___ with respect to price
upward-sloping
to find market supply at a certain price from multiple suppliers with identical supply curves:
use horizontal summation to add the quantities of each identical supply curve to get a total, aka the market supply
Any hurdle method of price discrimination is an attempt to ___
separate consumers on the basis of their reservation prices.
The opportunity cost of farmers' time increases. The market supply curve would:
shift to the left
there are exceptions to the law of diminishing marginal utility, like:
songs, since the more you listen to the song, the more you may enjoy it
The rational spending rule is easily generalized to apply to ___
spending decisions regarding large numbers of goods
Compared to private natural monopolies, state—owned natural monopolies are likely to face ___ incentives to cut costs.
weaker
In general, the efficacy of the invisible hand depends on ___
how well the individual costs and benefits of actions in the marketplace coincide with the costs and benefits of those actions of society
short-run shutdown condition:
if (price * quantity) < (variable cost)
formula for marginal revenue based on the demand curve:
if P = a - bQ(demand curve) then MR = a - 2bQ(marginal revenue_)
slope
in a straight line, the ratio of the vertical distance the straight line travels between any two points (rise) to the corresponding horizontal distance (run)
vertical intercept
in a straight line, the value taken by the dependent variable when the independent variable equals zero
The fact that the profit-maximizing price for a monopolist will always be greater than marginal cost provides ___
no assurance that the monopolist will earn an economic profit.
When the market is in equilibrium, there are ___ opportunities for gain available to individuals.
no further
if the MC is below the AVC then:
no units are produced
price elasticity of demand formula:
% change in quantity demanded / % change in price
percent change
(New Amount - Old Amount) / Old Amount
Which of the following are examples of price discrimination?
1.) Mall-in rebates 2.) Discounted airfare for passengers who purchase their tickets 21 days in advance
In general, if the price of a fixed factor of production increases:
marginal costs are unchanged.
What is the most widespread and enduring source of market power?
Economies of scale and network economies
Why is market equilibrium pareto efficient?
The answer is that it is always possible to construct an exchange that helps some without harming others whenever a market is out of equilibrium
Julie says, "I am willing to pay $10.00 for a pizza." Which of the following is true?
The benefit that Julie will receive from the pizza is $10.
What is the socially desirable price for a monopoly to charge?
The price at which the marginal benefit to the consumer equals the marginal cost of production.
horizontal addition
The process of adding individual demand curves to get the market demand curve > adding quantities, which are measured on the horizontal axes of individual demand curves.
law of diminishing marginal utility
The tendency for marginal utility to decline as consumption increases beyond some point
cartel
a coalition of firms that agree to restrict output for the purpose of earning an economic profit
price ceiling
a maximum allowable price, specified by law
natural monopoly
a monopoly that results from economies of scale (increasing returns to scale)
___ are opportunity costs
all costs—both implicit and explicit—are opportunity costs
The profit maximizing rule MR = MC applies to:
all firms.
Any force that prevents firms from entering a new market is called a ___ to entry
barrier
for every price—quantity pair along the market supply curve, price will ___
be equal to each seller's marginal cost of production
allocative function of price
changes in prices direct resources away from overcrowded markets and toward markets that are underserved
rationing function of price
changes in prices distribute scarce goods to those consumers who value them most highly
anti-trust laws can lead to ___
costly administrative squabbles about whether a regulated firm is able to recover certain costs
sunk costs
costs that are beyond recovery at the moment a decision is made, regardless of which option is chosen, and as such are irrelevant to the decision
A fundamental property of the demand curve is that it is ___ with respect to price
downward-sloping
If a firm has market power, then it faces a(n) ___
downward-sloping demand curve
One reason for the ________ slope of the demand curve is that as prices fall ________.
downward; more people find that the price is less than their reservation price.
Suppose farmers in a given market can either grow soy beans or corn on their land. In addition, suppose an increase in the demand for corn causes the price of corn to increase. As a result of the increase in the price of corn, farmers who were already growing corn will earn an:
economic profit in the short run.
According to the textbook, the most important and enduring source of market power is:
economies of scale
One problems with antitrust laws is that they may prevent companies from achieving:
economies of scale
monopolistically competitive firms can't expect to earn positive economic profits in the long run because ___
entry and exit of firms is similar to perfect competition, since entry and exit from the market ensures the invisible hand is in effect since there isn't a complete monopoly
lf total consumer surplus in a market is $2,000 per day, then the total amount, in aggregate, that consumers would be willing to pay to participate in that market is __
equal to $2000 per day.
Willingness to pay is:
equal to the benefit that a consumer receives from a good
As compared to perfect competition, perfect price discrimination is ___
equally efficient
For a firm in a perfectly competitive market, marginal revenue ___
equals price
when demand shifts left and supply shifts right, ___
equilibrium price falls
The deadweight loss due to monopoly:
exists because the monopoly restricts output.
If a perfectly competitive firm produces an output level at which price is greater than marginal cost, then the firm should:
expand output to earn greater profits or smaller losses.
The fact that firms are free to enter or leave an industry at any time ensures that ___
in the long run, all firms in the industry will tend to earn zero economic profit > Their goal is not to earn zero profit. Rather, the zero-profit tendency is a consequence of the price movements associated with entry and exit.
In the CPU chart problem, the marginal benefit is placed:
in the same row as the total benefit/cost it is being used to upgrade to
Expectations of future price decreases lead current supply to ___
increase because suppliers prefer to sell their product when prices are high
If a per unit tax is imposed, the more elastic demand is, the ___
larger the deadweight loss.
marginal cost is upward sloping because:
marginal productivity of at least one input is declining
You should continue to consume more as long as:
marginal utility isn't negative
actual price
market price > same for all buyers > actual price = MC
in the long run, oligopolists ___ earn a positive economic profit.
might or might not
For two goods, coffee and scones, suppose that MU(coffee)/P(coffee) = 4 and MU(scones)/P(scones) = 3. To maximize your total utility from these two goods, you should purchase:
more coffee and fewer scones.
All else equal, a monopolist that price discriminates will tend to produce ___ one that does not.
more than
Airlines that charge higher prices for seats in the first class cabin are:
not price discriminating because the product is not the same.
Scientists discover that corn consumption improves performance on standardized tests The market supply curve would
not shift
The government taxes sodas sweetened with high-fructose corn syrup The market supply curve would:
not shift
total revenue =
price * quantity
a loss occurs when: a profit occurs when:
price < ATC price > ATC
A monopoly that attempts to charge the socially desirable price will invariably reduce their economic profit because ___
price and marginal cost is higher than marginal revenue.
when output and employment can be varied continuously, the maximum-profit condition is that ___
price be equal to marginal cost
the price elasticity of demand will always be negative (or zero) because ___
price changes are always in the opposite direction from changes in quantity demanded. So for convenience, we drop the negative sign and speak of price elasticities in terms of absolute value.
in the prisoner's dilemma, the dominant strategy will be used until ___
price falls enough to equal marginal cost
When the cross-price elasticity of demand for two goods is positive the two goods are ___
substitutes > peanuts/cashews
to find economic profit:
subtract MC from each MR entry before the profit maximizing price
producer surplus
the difference between the equilibrium price and the lowest price the supplier would sell the product for (seller reservation price) > triangle left of the intersection point and below the price line
consumer surplus
the difference between the highest price the buyer is willing to pay (buyer's reservation price) and the equilibrium price > triangle left of the intersection point and above the price line
seller's surplus
the difference between the price received by the seller and his or her reservation price
loss in total economic surplus:
the difference between the producer and consumer surplus > always a positive number i think
total revenue is highest at ___
the midpoint
price elasticity of supply
the percentage change in quantity supplied that occurs in response to a 1 percent change in price
Tax incidence depends on:
the relative elasticity of the supply and demand curves in a market.
If all firms in a perfectly competitive industry are earning a normal profit, then:
there is no incentive for firms to enter or exit the industry.
One reason that variable factors of production tend to show diminishing returns in the short run is that:
there is only so much that can be produced using additional variable inputs when some factors of production are fixed.
if the fixed cost is greater than the loss at the profit maximizing value, ___
there would be no shutdown because the loss of producing zero units would be greater than the loss of producing at the profit maximizing value
average total cost (ATC)
total cost / quantity sold > the cost of one unit
the supply curve is upward-sloping because
when the price of skateboards is low, only those potential sellers whose marginal cost of making skateboards is low can sell boards profitably, whereas at higher prices, those with higher marginal costs also can enter the market profitably
the actual outcome in a payoff matrix is ___
where the two choices from each company intersect > so like draw a line either down or across and the intersection of those lines is the actual outcome of each company choosing those choices
Whether the demand curve captures all relevant costs and benefits of consumption is a determinant of ___
whether the market is efficient, not whether it's perfectly competitive.
Shouting at parties may make everyone ___
worse off, but is a dominant strategy for each individual.
Marginal utility from the last morsel of food you swallow should be ___
zero
In the long run. in a market in which firms are earning a positive economic profit, entry will occur until all firms earn
zero economic profit.
Which of the following is NOT true of a perfectly competitive firm?
It seeks to maximize revenue.
in order to determine if someone is maximizing their total utility you need BOTH:
MARGINAL utility and price
PATENTS AND COPYRIGHTS
Patents give the inventors or developers of new products the exclusive right to sell those products for a specified period of time. By insulating sellers from competition for an interval, patents enable innovators to charge higher prices to recoup their product's development costs. Pharmaceutical companies, for example, spend millions of dollars on research in the hope of discovering new drug therapies for serious illnesses. The drugs they discover are insulated from competition for an interval—currently 20 years in the United States—by government patents. For the life of the patent, only the patent holder may legally sell the drug. This protection enables the patent holder to set a price above the marginal cost of production to recoup the cost of the research on the drug. In the same way, copyrights protect the authors of movies. software. music. books. and other published works.
Law of Demand
People do less of what they want to do as the cost of doing It rises.
a strategy is dominant if ___
both dominant payoffs are higher than the one other payoff in each of their respective columns/rows
For a monopolist and a perfectly competitive firm, the calculation of marginal cost ___
is the same.
price should be equal to ___
marginal cost
profit is highest when ___
marginal cost = price
change in the quantity demanded
a movement along the demand curve that occurs in response to a change in price > caused by a change in supply
change in the quantity supplied
a movement along the supply curve that occurs in response to a change in price
efficient (or Pareto efficient)
a situation is efficient if no change is possible that will help some people without harming others > if you change from pareto efficiency (equilibrium) then somebody will be hurt for the benefit of another
principle of increasing opportunity cost
a principle that states that once all factors of production are at maximum output and efficiency, producing more will cost more than average. > As production increases, the opportunity cost does as well
constant returns to scale
a production process is said to have constant returns to scale it, when all inputs are changed by a given proportion, output changes by the same proportion
increasing returns to scale (or economies of scale)
a production process is said to have increasing returns to scale if, when all inputs are changed by a given proportion, output changes by more than that proportion
parameter
a quantity in an equation that is fixed in value, not free to vary
demand curve
a schedule or graph showing the quantity of a good that buyers wish to buy at each price
change in demand
a shift of the entire demand curve > caused by a change in marginal benefit (MB) > increase in MB = right shift > decrease in MB = left shift
change in supply
a shift of the entire supply curve > caused by a change in marginal cost (MC) > increase in MC = left shift > decrease in MC = right shift
abstract model
a simplified description that captures the essential elements of a situation and allows us to analyze them in a logical way
commitment problem
a situation in which people cannot achieve their goals because of an inability to make credible threats or promises
repeated prisoner's dilemma
a standard prisoner's dilemma that confronts the same players repeatedly
tit-for-tat
a strategy for the repeated prisoner's dilemma in which players cooperate on the first move and then mimic their partner's last move on each successive move
payoff matrix
a table that describes the payoffs in a game for each possible combination of strategies
credible threat
a threat to take an action that is in the threatener's interest to carry out
perfect hurdle
a threshold that completely segregates buyers whose reservation prices lie above it from others whose reservation prices lie below it, imposing no cost on those who jump the hurdle
independent variable
a variable in an equation whose value determines the value taken by another variable in the equation
dependent variable
a variable in an equation whose value is determined by the value taken by another variable in the equation
perfectly inelastic demand is ___
a vertical line
commitment device
a way of changing incentives so as to make otherwise empty threats or promises credible
a "leftward shift" in a supply curve also can be viewed as an ___
"upward shift" in the same curve. The first corresponds to the horizontal interpretation of the supply curve, while the second corresponds to the vertical interpretation
Total consumer surplus
(1/2) * (items per x-amount) * ($ per y-amount) > its just the area of the triangle formed when you plot the horizontal and diagonal lines on a price/quantity graph
marginal cost per unit is equal to:
(change in total cost) / (change in number of units)
Factors that cause an increase (rightward or downward shift) in supply:
1. A decrease in the cost of materials, labor, or other inputs used in the production of the good or service. 2. An improvement in technology that reduces the cost of producing the good or service. 3. An improvement in the weather (especially for agricultural products). 4. An increase in the number of suppliers. 5. An expectation of lower prices in the future. When these factors move in the opposite direction, supply will shift left.
Factors that cause an increase (rightward or upward shift) in demand:
1. A decrease in the price of complements to the good or service. 2. An increase in the price of substitutes for the good or service. 3. An increase in income (for a normal good). 4. An increased preference by demanders for the good or service. 5. An increase in the population of potential buyers. 6. An expectation of higher prices in the future. When these factors move in the opposite direction, demand will shift left.
The following four conditions are characteristic of markets that are perfectly competitive:
1. All firms sell the same standardized product. 2. The market has many buyers and sellers, each of which buys or sells only a small fiaction of the total quantity exchanged. 3. Productive resources are mobile. 4. Buyers and sellers are well informed.
5 sources of market power:
1.) EXCLUSIVE CONTROL OVER IMPORTANT INPUTS 2.) PATENTS AND COPYRIGHTS 3.) GOVERNMENT LICENSES OR FRANCHISES 4.) ECONOMIES OF SCALE AND NATURAL MONOPOLIES 5.) NETWORK ECONOMIES
3 Determinants of elasticity
1.) # of substitutes (more substitutes = more elastic) 2.) how much of your income is used/spend (more of income = more elastic) 3.) the time you have to make the purchase (more time = more elastic)
Suppose you are advising a mayoral candidate in your town. The candidate's platform includes strong opposition to monopoly suppliers because consumer welfare is compromised by monopoly pricing. Which of the following statements would present your candidate with an alternative view about why it may make sense to tolerate the existence of some monopoly firms?
1.) Some goods are too dangerous or important to let "just anyone" produce them 2.) Monopolies reduce average total cost when there are very large fixed costs in production 3.) Some goods may not exist if it were not for the monopoly profits that a patent ensures to create incentives for research and development.
A firm that has market power:
1.) can raise the price of its good without losing all of its sales 2.) faces a downward-sloping demand curve
examples of price discrimination:
1.) cash rebates 2.) hardcover vs. paperback books 3.) different models/trim/accessories 4.) mall-in rebates 5.) discounted airfare for purchasing tickets in advance
pitfalls of cost-plus regulation
1.) costly administrative proceedings 2.) it hurts the firm's incentive to adopt cost-saving innovations, since that would cause further rate cuts due to regulation 3.)doesn't solve the inability to set price equal to marginal cost without losing money.
If the market equilibrium is efficient. then:
1.) economic surplus Is maximized. enabling society easily achieve its goals 2.) It's not possible to find a transaction that will make some people better off without harming others
If the market for soccer balls is in a long run equilibrium, and the demand for soccer balls fails, then we would expect:
1.) firms to exit the market in the long run 2.) the price of soccer balls to fall in the short run
Cost-plus regulation:
1.) may give the regulated firm an incentive to increase rather than decrease costs 2.) can lead to costly administrative squabbles about whether a regulated firm is able to recover certain costs
When the perfect hurdle method is used, the price to charge those who jump the hurdle can be found by:
1.) split the table up into each sub-market formed by the hurdles 2.) each time a new sub-market is established, the number sold/bought is reset to 1, since the buyers in other sub-markets won't be purchasing at the discounted price 3.) for each sub-market, the amount sold from that sub-market increases and stops after the point where MR = MC
The market equilibrium is only efficient if:
1.) the market is perfectly competitive 2.) the market demand curve captures all of the relevant benefits of buying another unit of the good 3.) the market supply curve captures all of the relevant costs of producing another unit of the good
a price movement of a given absolute size is ___ a quantity movement of a given absolute value is ___
> small in percentage terms when it occurs near the top of the demand curve, where price is high, but large in percentage terms when it occurs near the bottom of the demand curve, where price is low. > large in percentage terms when it occurs near the top of the demand curve, where quantity is low, and small in percentage terms when it occurs near the bottom of the curve, where quantity is high.
if people tend to go swimming more in the summer than in the winter then we would expect
> the price of swimsuits to be higher in the summer > the demand for swimsuits to be higher in the summer > the quantity of swimsuits bought and sold to be higher in the summer
The only costs that should influence a decision about whether to take an action are ___. Similarly, the only benefits we should consider are ___
> those we can avoid by not taking the action > those that would not occur unless the action were taken
economic profit (or excess profit)
> total revenue - explicit costs - implicit costs > quantity(price - average total cost)
When a perfectly competitive firm sells additional units of output, ___ and when a monopolist sells additional units of output, ___
> total revenue always rises > total revenue could rise, fall, or remain unchanged
simultaneous changes in curves
> when one curve (demand or supply) shifts we can always determine two outcomes (price / quantity) > when two curves shift we can only determine one outcome, the other an go either way depending on the values
Which of the following is NOT an example of a good with network economies?
A computer printer
Does a decrease in the wage rate of carpenters have any effect on the demand curve for houses?
A decline in the wage rate of carpenters reduces the marginal cost of making new houses, and this means that, for any given price of houses, more builders can profitably serve the m arket than b efore. Diagrammatically, this means a rightward shift in the supply curve of houses, from S to S9. (A "rightward shift" in the supply curve also can be described as a "downward shift.")
The Incentive Principle:
A person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises. In short, incentives matter.
invisible hand theory
Adam Smith's theory that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources
Condition #1 for a perfectly competitive market: All firms sell the same standardized product.
Although this condition is almost never literally satisfied, it holds as a rough approximation for many markets. Thus, the markets for concrete building blocks of a given size, or for apples of a given variety, may be described in this way. This condition implies that buyers are willing to switch from one seller to another if by so doing they can obtain a lower price.
Scarcity Principle
Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another.
A single-priced, profit-maximizing monopolist:
Always charges a price above the marginal cost of production.
Peanut butter and jelly are complements. A decrease in the price of one will result in:
An increase in the demand for the other.
The Effect of an Increase in the Vertical Intercept:
An increase in the vertical intercept of a straight line produces an upward parallel shift in the line
The Cost-Benefit Principle:
An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.
example of the income effect on two items
At the original prices ($2 per pint for chocolate, $1 per pint for vanilla), Sarah's $400 annual ice cream budget enabled her to buy at most 200 pints per year of chocolate or 400 pints per year of vanilla. If the price of vanilla rose to $2 per pint, that would reduce not only the maximum amount of vanilla she could afford (from 400 to 200 pints per year), but also the maximum amount of chocolate she could afford in combination with any given amount of vanilla. For example, at the original price of $1 per pint for vanilla, Sarah could afford to buy 150 pints of chocolate while buying 100 pints of vanilla, but when the price of vanilla rises to $2, she can buy only 100 pints of chocolate while buying 100 pints of vanilla
Time
Because it takes time for producers to switch from one activity to another, and because it takes time to build new machines and factories and train additional skilled workers, the price elasticity of supply will be higher for most goods in the long run than in the short run. In the short run, a manufacturer's inability to augment existing stocks of equipment and skilled labor may make it impossible to expand output beyond a certain limit. But if a shortage of managers was the bottleneck, new MBAs can be trained in only two years. Or if a shortage of legal staff is the problem, new lawyers can be trained in three years.
The Effect of an Increase in the Charge per Minute:
Because the fixed monthly fee continues to be $4, the vertical intercept of the new plan is the same as that of the original plan. With the new charge per minute of 40 cents, the slope of the billing plan rises from 0.20 to 0.40
Once a week, Smith purchases a six-pack of cola and puts it in his refrigerator for his two children. He invariably discovers that all six cans are gone on the first day. Jones also purchases a six-pack of cola once a week for his two children, but unlike Smith, he tells them that each may drink no more than three cans. If the children use cost-benefit analysis each time they decide whether to drink a can of cola, Explain why the cola lasts much longer at Jones's house than at Smith's.
Each Smith child has a higher marginal cost of not drinking a cola.
Suppose Emily is an exceptionally talented architect. Her opportunity cost of working as an architect is $60,000 per year, and her salary at the architectural firm where she works is $150,000 per year. Thus, Emily's economic rent from being an architect is:
Economic rent is the part of the payment for a factor of production that is above the owner's reservation price: $150,000-$60,000=$90,000
How will a new law mandating an increase in required levels of automobile insurance affect the equilibrium price and quantity in the market for new automobiles?
Equilibrium price will fall; quantity will fall.
Pitfall #3
FAILURE TO THINK AT THE MARGIN When deciding whether to per- form an action, the only costs and benefits that are relevant are those that would result from taking the action. It is important to ignore sunk costs
In a monopoly market, P = MR at the monopoly output. (T/F)?
False
True or false: Economists do not believe that it's important to address poverty and inequality because all that matters is whether the market Is efficient.
False
True or false: The market equilibrium is always efficient.
False > The market equilibrium may not be efficient if the market is not perfectly competitive or if the market supply curve and the market demand curve do not capture all of the relevant costs and benefits of a good.
Consider a payoff matrix. GM and Chrysler must decide whether to invest in a new product. Is this game a prisoner's dilemma?
GM has a dominant strategy to invest, and Chrysler has a dominant strategy to not invest. In following their dominant strategy, each does BETTER than if they had followed their dominated strategy (10>5). So, this game is NOT prisoner's dilemma.
NETWORK ECONOMIES
Firmly entrenched network economies can be as persistent a source of natural monopoly as economies of scale. Indeed, network economies are essentially similar to economies of scale. When network economies are of value to the consumer, a product's quality increases as the number of users increases, so we can say that any given quality level can be produced at lower cost as sales volume increases. Thus network economies may be viewed as just another form of economies of scale in production, and that's how we'll treat them here
Pitfall #2
IGNORING IMPLICIT COSTS
EXCLUSIVE CONTROL OVER IMPORTANT INPUTS
If a single firm controls an input essential to the production of a given product, that firm will have market power. For example. to the extent that some US. tenants are willing to pay a premium for office space in the country's tallest building, One World Trade Center, the owner of that building has market power.
Mobility of Input
If inputs can be easily transported from one site to another. an increase in the price of a product in one market will enable a producer in that market to summon inputs from other markets. For example, the supply of agricultural products is made more elastic with respect to price by the fact that thousands of farm workers are willing to migrate north- ward during the growing season. The supply of entertainment is similarly made more elastic by the willingness of entertainers to hit the road. Cirque performers, lounge singers, comedians, and dancers often spend a substantial fraction of their time away from home. For most goods. the price elasticity of supply increases each time a new highway is built. or when the telecommunications network improves. or indeed when any other devel- opment makes it easier to find and transport inputs from one place to another.
Which of the following is not a true statement?
In a monopoly market, P = MR at the monopoly output.
Tom is a mushroom farmer. He invests all his spare cash in additional mushrooms, which grow on otherwise useless land behind his barn. The mushrooms double in weight during their first year, after which time they are harvested and sold at a constant price per pound. Tom's friend Dick asks Tom for a loan of $200, which he promises to repay after 1 year. How much interest will Dick have to pay Tom in order for Tom to recover his opportunity cost of making the loan?
Interest to be paid to Tom: $200
socially efficient output is when:
P = MC
If a monopolist has a straight-line demand curve whose vertical intercept is a and whose horizontal intercept is Q0 then the marginal revenue curve will have a horizontal intercept of ___
Q0 / 2
Recall that the existence of inefficiency means that the economic pie is smaller than it might be. If that is so, why doesn't the monopolist simply expand production?
The answer is that the monopolist would gladly do so. if only there were some way to maintain the price of existing units and cut the price of only the extra units.
Which of the following is the same for a monopolist and a perfectly competitive firm?
The calculation of marginal cost
Suppose a museum charges different entrance fees for children, students, adults, and seniors, but these groups all pay the same amount for souvenirs at the gift shop. Which of the following explains why the museum price discriminates on admission but not souvenirs?
The entrance ticket is individual, while souvenirs are transferable.
Ability to Produce Substitute Inputs
The inputs required to produce finished diamond gemstones include raw diamond crystal, skilled labor, and elaborate cutting and polishing machinery. In time, the number of peo- ple with the requisite skills can be increased, as can the amount of specialized machinery. The number of raw diamond crystals buried in the earth is probably fixed in the same way that Manhattan land is fixed. but unlike Manhattan land. rising prices will encourage miners to spend the effort required to find a larger proportion of those crystals. Still, the supply of natural gemstone diamonds tends to be relatively inelastic because of the diffi- culty of augmenting the number of diamond crystals. The day is close at hand, however, when gemstone makers will be able to produce synthetic diamond crystals that are indistinguishable from real ones. Indeed, there are already synthetic crystals that fool even highly experienced jewelers. The introduction of a perfect synthetic substitute for natural diamond crystals would increase the price elasticity of supply of diamonds (or. at any rate. the price elasticity of supply of gemstones that look and feel just like diamonds).
scarcity
There is never enough time, money, or energy to do everything we want to do or have everything we'd like to have.
Condition #3 for a perfectly competitive market: Productive resources are mobile
This condition implies that if a potential seller identifies a profitable business opportunity in a market, he or she will be able to obtain the labor. capital, and other productive resources necessary to enter that market. By the same token. sellers who are dissatisfied with the opportunities they confront in a given market are free to leave that market and employ their resources elsewhere.
Condition #2 for a perfectly competitive market: The market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged.
This condition implies that individual buyers and sellers will be price takers, regarding the market price of the product as a fixed number beyond their control. For example, a single farmer's decision to plant fewer acres of wheat would have no appreciable impact on the market price of wheat, just as an individual consumer's decision to become a vegetarian would have no perceptible effect on the price of beef.
Flexiblity of Input
To the extent that production of a good requires inputs that are also useful for the production of other goods. it is relatively easy to lure additional inputs away from their current uses, making supply of that good relatively elastic with respect to price. Thus the fact that lemonade production requires labor with only minimal skills means that a large pool of workers could shift from other activities to lemonade production if a profitable opportunity arose. Brain surgery, by contrast, requires elaborately trained and specialized labor, which means that even a large price increase would not increase available supplies, except in the very long run.
ECONOMIES OF SCALE AND NATURAL MONOPOLIES
When a firm doubles all its factors of production, what happens to its output? If output exactly doubles, the firm's production process is said to exhibit constant returns to scale. If output more than doubles. the production process is said to exhibit increasing returns to scale. or economies of scale. When production is subject to economies of scale, the average cost of production declines as the number of units produced increases. For example, in the generation of electricity, the use of larger generators lowers the unit cost of production. The markets for such products tend to be served by a single seller, or perhaps only a few sellers, because having a large number of sellers would result in significantly higher costs. A monopoly that results from economies of scale is called a natural monopoly.
Price Elasticity Rule 1:
When price elasticity of demand is greater than 1, changes in price and changes in total expenditure always move in opposite directions.
Price Elasticity Rule 2:
When price elasticity of demand is less than 1, changes in price and changes in total expenditure always move in the same direction.
Law of Diminishing Returns
When some factors of production are held fixed, increased production of the good eventually requires ever-larger increases in the variable factor.
GOVERNMENT LICENSES OR FRANCHISES
Yosemite Concession Services Corporation has an exclusive license from the US. government to run the lodging and concession operations at Yosemite National Park. One of the government's goals in granting this monopoly was to preserve the wilderness character of the area to the greatest degree possible. And indeed. the inns and cabins offered by Yosemite Concession Services Company blend nicely with the valley's scenery. No garish neon signs mar the national park as they do in places where rivals compete for the tourist's dollars.
Nash equilibrium
a concept of game theory where the optimal outcome of a game is one where no player has an incentive to deviate from his chosen strategy if the opponent's strategy is unchanged > Ex. Prisoner's Dilemma
efficiency (or economic efficiency)
a condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels
decision tree (or game tree)
a diagram that describes the possible moves in a game in sequence and lists the pay-offs that correspond to each possible combination of moves
perfectly discriminating monopolist
a firm that charges each buyer exactly his or her reservation price
price setter
a firm with at least some latitude to set its own price > Ex. The holder of a copyright
market power
a firm's ability to raise the price of a good without losing all its sales
imperfectly competitive firm (or price setter)
a firm that has at least some control over the market price of its product
price taker
a firm that has no influence over the price at which it sells its product
prisoner's dilemma
a game in which each player has a dominant strategy, and when each plays it, the resulting payoffs are smaller than if each had played a dominated strategy
inferior good
a good whose demand curve shifts leftward when the incomes of buyers increase and rightward when the incomes of buyers decrease
normal good
a good whose demand curve shifts rightward when the incomes of buyers increase and leftward when the incomes of buyers decrease
supply curve
a graph or schedule showing the quantity of a good that sellers wish to sell at each price
perfectly elastic demand is ___
a horizontal line
The substitution effect of this $3 to $4.50 price change refers to the fact that:
a larger portion of John's income will now be spent on downloads
perfectly competitive market
a market in which no individual supplier has significant influence on the market price of the product
cost-plus regulation
a method of regulation under which the regulated firm is permitted to charge prices that cover explicit costs of production plus a markup to cover the opportunity cost of resources provided by the firm's owners
long run
a period of time of sufficient length that all the firm's factors of production are variable
short run
a period of time sufficiently short that at least some of the firm's factors of production are fixed
once we have achieved bare subsistence levels of consumption (the amount of food, shelter, and clothing required to maintain our health) we can ___
abandon all reference to needs and speak only in terms of wants
normal profit
accounting profit - implicit costs > to make a normal profit the minimum is 0
profitable
achieved if a firm's revenue (P x Q) exceeds its total cost (ATC x Q) for some level of output
Wants (preferences/tastes)
an important determinant of a consumer's reservation price for a good > come from biology, culture and social influence > some wants may be stable but others are highly volatile
a simultaneous increase in demand and increase in supply at the same time cause ___
an increase in the equilibrium quantity but the equilibrium price could go up or down, since you don't know how much each curve has shifted > both curves shift the same amount then just the quantity changes > supply shifts more then price goes down and quantity goes up > demand shifts more then price goes up and quantity goes up
monopolistic competition
an industry structure in which a large number of firms produce slightly differentiated products that are reasonably close substitutes for one another > Ex. local gasoline retailing > not perfect competition
oligopoly
an industry structure in which a small number of large firms produce products that are either close or perfect substitutes
factor of production
an input used in the production of a good or service
variable factor of production
an input whose quantity can be altered in the short run
fixed factor of production
an input whose quantity cannot be altered in the short run
Since the monopolist's marginal revenue is always less than price, the monopolist's profit-maximizing output level is always ___
below the socially efficient level
actual buyer
buyer who is OK with the existing price
OPEC Cheat Abide Cheat OPEC: 175 OPEC: 150 MEX: 80 MEX: 110 Mexico Abide OPEC: 185 OPEC: 200 MEX: 60 MEX: 100 Suppose Mexico picks its strategy first and OPEC knows what they choose. OPEC told Mexico that in the event Mexico cheats on the agreement, OPEC will cheat as well but if Mexico does not cheat, neither will OPEC. This is an example of a ________ and the outcome is that ________.
credible threat and promise; neither will cheat
Residents of your city are charged a fixed weekly fee of $6 for garbage collection. They are allowed to put out as many cans as they wish. The average household disposes of three cans of garbage per week under this plan. Now suppose that your city changes to a "tag" system. Each can of garbage to be collected must have a tag affixed to it. The tags cost $2 each and are not reusable. What effect do you think the introduction of the tag system will have on the total quantity of garbage collected in your city? Under the "tag" system, the total quantity of garbage collected in the city will
decrease
if the average cost of production declines as the number of units produced increases, then the production process exhibits ___
economies of scale
If a firm is experiencing economies of scale, then as the firm's output rises, its average total cost ___
falls
In perfectly competitive markets, an implication of entry and exit in response to economic profit and loss is that:
firms will produce the quantity that minimizes average total costs in the long run.
A firm's profit-maximizing level of output will not change when the firm's ___ cost changes.
fixed
average fixed cost (AFC)
fixed cost / quantity sold
when plotting the marginal utility graph:
graph each point in between the stated quantity like in class
One reason that firms have a strong incentive to develop cost-saving innovations is that these innovations enable the firm to earn an economic profit ___
in the short run
Suppose a single-price monopolist is considering becoming a price discriminating monopolist. If the firm does begin to price discriminate, it can expect to ___
increase both its output and its profit.
If a tax of one dollar per unit is imposed on the producers of this commodity, the price consumers will pay in the market will ___
increase by less than one dollar.
the definition of marginal cost implies that the marginal cost curve must ___
intersect both the average variable cost curve (AVC) and the average total cost curve (ATC) at their respective minimum points. > To see why, consider the logic that explains what happens to the average weight of children in a third-grade class when a new student joins the class. If the new (marginal) student is lighter than the previous average weight for the class, average weight will fall, but if the new student is heavier than the previous average, average weight will rise. By the same token, when marginal cost is below average total cost or average variable cost, the corresponding average cost must be falling, and vice versa. And this ensures that the marginal cost curve must pass through the minimum points of both average cost curves.
equation
is a simple mathematical expression that describes the relationship between two or more variables
The Efficiency Principle: Efficiency
is an important social goal because when the economic pie grows larger, everyone can have a larger slice.
a price increase will produce an increase in total revenue whenever ___
it is greater, in percentage terms, than the corresponding percentage reduction in quantity demanded
when considering a credible threat/commitment you need to:
just think about it more, like if the opponent can know the player's choice before they choose, then that can change if a threat is credible, you need to look a step ahead since credibility can be affected by if an opponent can sidetrack a player's strategy
lrina's current marginal utility from consuming tofu is 200 utils per pound, and her marginal utility from consuming chicken is 300 utils per pound. If tofu costs $2 per pound and chicken costs $2.50 per pound, then ____
lrina should buy more chicken and less tofu > Irina gets 100 utils per dollar spent on tofu and 120 utils per dollar spent on chicken. So, she should buy more chicken and less tofu.
At equilibrium, all ___
mutually beneficial transactions have taken place.
if all of the firms in a market earn zero economic profit, then we would expect:
neither entry into nor exit from the market.
The supply is upward sloping because:
of diminishing returns to variable factors of production.
the income elasticity of demand for normal goods is ___
positive
In the long run, new firms will enter a market if existing firms are earning a ___
positive economic profit
Which ordering best describes how a perfectly competitive industry would respond to a sudden increase in popularity of the product? The market demand function will shift to the right causing the market ___
price to increase. > Increased profits will encourage new firms to enter, shifting the market supply function to the right. Long-run market equilibrium will be at a higher quantity but at the same price as before the surge in popularity.
The reason economists consider monopoly to be socially undesirable is that monopolists:
produce less than the socially optimal level of output.
variables
quantities that are free to assume different values in some range
utility
represents the satisfaction people derive from their consumption activities
To a monopolist, the marginal benefit of selling an additional unit is ___
strictly less than the market price > the monopolist can sell an additional unit only if it cuts the price, and it must do so not just for the additional unit but for the units it is currently selling.
nominal price
the absolute price of a good in dollar terms
explicit costs
the actual payments a firm makes to its factors of production and other suppliers
optimal combination of goods
the affordable combination that yields the highest total utility
excess demand
the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price
excess supply
the amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price
marginal utility
the amount by which total utility changes when consumption changes by one unit
total daily expenditure
the daily number of units bought times the price for which it sells
elastic
the demand for a good is elastic with respect to price if its price elasticity of demand is greater than 1
inelastic
the demand for a good is inelastic with respect to price if its price elasticity of demand is less than 1
unit elastic
the demand for a good is unit elastic with respect to price if its price elasticity of demand equals 1
buyer's surplus
the difference between the buyer's reservation price and the price he or she actually pays
total surplus
the difference between the buyer's reservation price and the seller's reservation price
total expenditure (total revenue)
the dollar amount that consumers spend on a product (P x Q) is equal to the dollar amount that sellers receive
real price
the dollar price of a good relative to the average dollar price of all other goods
a company should continue to sell more of a product at the same price until:
the marginal cost of producing another unit becomes larger than the marginal benefit from producing one
Social efficiency is thus achieved at the output level at which ___
the market demand curve intersects the monopolist's marginal cost curve
reservation price
the max price a buyer is willing and able to pay for something > measurement of the marginal benefit received by the buyer > different buyers have different reservation prices
next best option refers to ___
the most valuable alternative option
socially optimal quantity
the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good
In its most general form, the rational spending rule says that ___
the ratio of marginal utility to price must be the same for each good the consumer buys > If the ratio were higher for one good than for another, the consumer could always increase her total utility by buying more of the first good and less of the second.
Economics
the study of how people make choices under conditions of scarcity and of the results of those choices for society.
fixed cost
the sum of all payments made to the firm's fixed factors of production
variable cost
the sum of all payments made to the firm's variable factors of production
Total consumer surplus in a market is ___
the total amount that consumers would be willing to pay, in aggregate, for the right to participate in that market.
average cost
the total cost of undertaking n units of an activity divided by n
a firm's profit for a single unit is equal to:
the total revenue (price * quantity sold) minus the ATC (total cost / output)
profit
the total revenue a firm receives from the sale of its product minus all costs, explicit and implicit, incurred in producing it
Governments create monopolies through intellectual property rights such as patents and copyrights because:
they encourage innovation.
microeconomics
to describe the study of individual choices and of group behavior in individual markets.
complements
two goods are complements in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease causes a rightward shift)
substitutes
two goods are substitutes in consumption if an increase in the price of one causes a rightward shift in the demand curve for the other (or if a decrease causes a leftward shift)
