Econ Exam 2
Farmer McDonald gives banjo lessons for $20 per hour. One day, he spends 10 hours planting $100 worth of seeds on his farm. What total cost has he incurred?
$300
The government auctions off 500 units of pollution rights. The rights sell for $50 per unit, raising $25,000 of revenue for the government. This policy is equivalent to a corrective tax of _____ per unit of pollution.
$50
The supply curve for a product is QS = 2P, and the market price is $10. What is producer surplus? (Hint: Graph the supply curve and recall the formula for the area of a triangle.)
100; think that the supply surve meets the price at 20 (2P); this is the base of the triangle; height is 10 (market price); 20 x 10 x 0.5 = 100
Riva crafts and sells hard cider as a part-time job. She can bottle and sell four cases in a week. She is considering hiring her friend Atul to help her. Together, Riva and Atul can bottle and sell seven cases per week. What is Atul's marginal product?
3 cases
Diego, Emi, and Finn are available to work as tutors for the semester. The opportunity cost of tutoring is $100 for Diego, $200 for Emi, and $400 for Finn. The university is hiring tutors at a price of $300. Producer surplus equals
300
Xavier opens up a lemonade stand for two hours. He spends $10 for ingredients and sells $60 worth of lemonade. In the same two hours, he could have mowed his neighbor's lawn for $40. Xavier earns an accounting profit of _____ and an economic profit of ____.
50, 10
A firm is producing 1,000 units at a total cost of $5,000. When it increases production to 1,001 units, its total cost rises to $5,008. For this firm, marginal cost is $________, and average total cost is $________.
8, 5
Pw < Pd. so Qd ____ Qs. if this was a closed economy, we'd have a ____, but we can ____ goods to make up for the difference. ____ are going to gain here, so we expect ____ surplus to be higher. gains to the ____ outweigh losses to the ____, so the country as a whole will gain from free trade
>, shortage, import, consumers, consumer, consumers, producers
Pw > Pd. this now means that Qs ____ Qd. If this was a closed economy, we'd have a ____, but all of this can be ____ abroad. So we will ____ 450 units. ____ are going to gain here, so we expect ____ surplus to be higher.. Gains to our ____ outweigh the losses to the ____. So country as a whole gained as a result of free trade (gained by D)
>, surplus, sold, export, producers, producer, producers, consumers
Price ceiling: non-binding Price ceiling (PC) set ____ the equilibrium PRICE ____ ____ on the market Market ____ to operate at the ____ Prevailing price = Pe Prevailing quantity = Qe Non-binding legislation - can continue to operate as though there was no ____ Ceiling for ice cream is $3 but ice cream was previously being sold for $2
ABOVE, no impact, continues, equilibrium, ceiling
Price ceiling: binding Price ceiling (PC) set ____ the equilibrium PRICE Price is kept ____ too ____ Leads to a ____ (excess ____) of goods and services Quantity demanded (Qd) is ____ than quantity supplied (Qs) Ceiling for ice cream is $1 but ice cream was previously being sold for $2 With price ceilings, it cannot readjust to equilibrium.
BELOW, artificially, low, shortage, demand, higher
Without free trade, Diamonique has market power as a local producer. Once free trade is implemented in the local economy, Diamonique is no longer able to raise its prices above competitive levels. The previous scenario represents which of the following benefits of free trade?
Increased competition;;; Market power is a type of market failure that prevents prices from settling at their competitive levels. When the economy is opened to international trade, international companies that make the same goods will enter the new market with competitive prices. This will diminish Diamonique's market power and force it to lower its price. Therefore, this scenario is an example of the benefit of increased competition.
Suppose the Environmental Protection Agency (EPA) wants to mandate that all methane emissions must be reduced to zero in order to alleviate global warming in the United States. Which of the following describes why most economists would disagree with this policy?
The opportunity cost of zero pollution is much higher than its benefit.;; While it is clearly desirable to breathe clean air, fully reducing emissions comes with a high cost. The question economists ask is whether or not this cost is worth it. Therefore, they believe you must compare the costs of zero pollution with the benefits from clean air. Specifically, eliminating all pollution is very costly and would likely cause more harm than good by restricting output, technology, and growth. Thus, zero pollution is likely not an economically efficient outcome because the social costs outweigh the benefits.
When cities prevent landlords from charging market rents, which of the following are common long-run outcomes? Check all that apply.
The quantity of available rental housing units falls., black markets develop
A $1 per unit tax levied on consumers of a good is equivalent to
a $1 per unit tax levied on producers of the good.
If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then
a one-unit decrease in output will increase the firm's profit.
The government imposes a $1,000 per year license fee on all pizza restaurants. As a result, which cost curves shift?
a. average total cost and average fixed cost
Gavin has been working full-time as a gardener for $300 a week. When the market price of gardeners rises to $400, Hector becomes a gardener as well. How much does producer surplus rise as a result of this price increase?
a. between $100 and $200
Price floor: binding Price floor set ____ the equilibrium PRICE Price is set artificially too ____ Leads to a ____ (excess ____) of goods and services Quantity supplied (Qs) is ____ than quantity demanded (Qd)
above, high, surplus, supply, higher
If the production of a good yields a negative externality, the social-cost curve lies ________ the supply curve, and the socially optimal quantity is ________ than the equilibrium quantity.
above, less
tariff: Tax on goods produced ____ and sold ____ Free trade - Domestic price = world price; Tariff on imports: Raises ____ price above ____ price by the amount of the ____
abroad, domestically, domestic, world, tariff
Welfare economics: Studies how the ____ of ____ affects economic ____;; Allocation of resources refers to: How much of each good is ____, Which ____ produce it, Which ____ consume it;; In a ____ market, ____ allocate resources; Well-being of producers and consumers is measured by consumer ____ and producer ____
allocation, resources, well-being, produced, producers, consumers, competitive, prices, surplus, surplus
Tax wedge is always the ____ of the ____; tax wedge = ____ per unit (look at notebook)
amount, tax, tax
The nation of Openia allows free trade and exports steel. If steel exports were prohibited, the price of steel in Openia would be ________, benefiting steel ________.
b. lower, consumers
Command-and-control regulation may be better than a corrective tax if
b. the negative externality is so large that the optimal quantity is zero.
Why doesn't the total cost curve begin at the origin (the point 0,0)?
bc fixed costs are positive when output is 0
If a price ceiling is non-binding, then the equilibrium price is ____ the price ceiling
below
Price floor: non-binding Price floor set ____ the equilibrium PRICE ____ ____ on the market Market ____ to operate at the ____ Prevailing price = Pe Prevailing quantity = Qe No ____/____
below, no impact, continues, equilibrium, shortage/surplus
When a country allows trade and becomes an exporter of a good, domestic producers of the good are ______ off, and domestic consumers of the good are ______ off. Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers.
better, worse
When a country allows trade and becomes an importer of a good, domestic consumers of the good are ______ off, and domestic producers of the good are ______ off. Trade raises the economic well-being of a nation in the sense that the gains of the winners exceed the losses of the losers.
better, worse
suppose the demand for lightbulbs is inelastic, and the supply of lightbulbs is elastic. a tax of $2 per bulb levied on light bulbs will increase the price paid by buyers of light bulbs by
between $1 and $2
Tax incidence: the manner in which the ______ of a tax is ______ among participants in a market
burden, shared
Price ceiling - government is trying to help ____ by keeping prices ____ ; government is trying to help ____ with price floors Unsatisfied consumers/producers may lobby government to institute laws forcing the price above or below equilibrium Generally enacted to help make market outcomes more "____" Ex: ice cream is $2 per scoop; ice cream eaters (consumers" complain the market price is too high. They lobby for a price ____ ;;;; Ice cream makers (producers) complain the market price is too low. They lobby for a price ____
buyers, low, sellers, fair, ceiling, floor
The country Autarka does not allow international trade. In Autarka, you can buy a wool suit for 3 ounces of gold. Meanwhile, in neighboring countries, you can buy the same suit for 2 ounces of gold. This suggests that
c. Autarka does not have a comparative advantage in producing suits and would become a suit importer if it opened up trade.
The demand curve for cookies is downward-sloping. When the price of cookies is $3, the quantity demanded is 100. If the price falls to $2, what happens to consumer surplus?
c. It rises by more than $100.
Example of a binding price ____: rent control in NYC Rent control Covers about 27,000 apartments Occupied generally by an older, lower income population Slowly being phased out; Rent is too high, government tries to help the buyers by making it more affordable. Any prices above 27000 are illegal. Now that rent is so low, lots of renters are going to try to find apartments in nyc. Now Qs is ____ and Qd is ____ bc the price is ____ - there is a ____ bc the price of housing is too ____ artificially . ends up hurting the ppl it was meant to help bc of the shortage. Leads to lower ____ apartments bc landlords don't have an ____ to keep them nice...
ceiling, lower, higher, lower, shortage, low, shortage, quality, incentive
corrective taxes are unlike most other taxes because they move the allocation of resources ____ to the social optimum
closer
When a good is taxed, the burden of the tax falls mainly on consumers if
d. supply is elastic and demand is inelastic.
So the gas tax, rather than causing ______ ______ like most taxes, actually makes the economy work ______. It means less traffic congestion, safer roads, and a cleaner environment.
deadweight losses, better
A firm is producing 20 units with an average total cost of $25 and a marginal cost of $15. If it increases production to 21 units, which of the following must occur? Average total cost will ________.
decrease
In a market with a binding price ceiling, increasing the ceiling price will _____ the shortage.
decrease
Average fixed cost curve - it would be ____ bc you are dividing the fixed cost by increasingly large numbers (Q- total quantity) ; dividing fixed cost by a larger and larger quantity ;;; Average variable cost curve - starts ____, then ____, then ____ (____ shape) ;;; If you only have info about AFC and AVC, you use those to calculate ____; if you only have info about ____, you use that ;;; Variable cost is always ____ as quantity increases bc if you want to produce more you have to ____ more; usually simplified as a ____ line even tho it technically ____ slightly; starts at the ____ bc if you produce 0, you have 0 variable costs ;;; ____ cost starts at the fixed cost amount and lies above the ____ cost curve. The difference between the two curves is the ____ cost curve ;;; Difference between AC and AVC is the ____ ;;; Marginal = additional;;; As marginal product of labor decreases/diminishing marginal product, the marginal cost ____; Total variable cost is always ____ as we produce more output; Producing at the minimum of your cost curve = ____ scale If marginal cost is less than the average cost, then the average cost ____. If marginal cost is greater than the average cost, then the average cost ____. If it is the same, the average is not going to change. (GPA analogy)
decreasing, high, drops, increases, U, AC, TC, increasing, increases, spend, straight, curves, origin, total, variable, fixed, AFC, increases, increasing, efficient, decreases, increases
An increase in the minimum wage reduces the total amount paid to the affected workers if the price elasticity of ________ is ________ than one.
demand, greater
Command-and-control policies regulate behavior ______. Market-based policies provide ______ so that private decision makers will choose to solve the problem on their ______.
directly, incentives, own
Command-and-control policies: Regulate behavior ____; making certain behaviors either ____ or ____ Environmental Protection Agency (EPA): Dictates maximum level of pollution Develop and enforce regulations (ex. Emission controls) Requires that firms adopt a particular technology to reduce emissions (technology forcing) Massachusetts flu shot mandate; mask mandates Most economists agree that mandating a vaccine has more social benefits than social costs; telling firms what they can and can't do, the amount of pollution they're allowed to produce, what machines they can use, etc
directly, required, forbidden
If Boeing produces 9 jets per month, its long-run total cost is $9 million per month. If it produces 10 jets per month, its long-run total cost is $11 million per month. Boeing exhibits
diseconomies of scale
Corrective taxes are unlike most other taxes. Most taxes ______ incentives and move the allocation of resources ______ from the social optimum. The reduction in economic well-being—that is, in consumer and producer surplus—exceeds the amount of revenue the government raises, resulting in a ______ ______. By contrast, when externalities are present, society also cares about the well-being of the affected bystanders. Corrective taxes ______ incentives that market participants face to account for the presence of externalities and thereby move the allocation of resources ______ to the social optimum. Thus, while corrective taxes ______ revenue for the government, they also enhance economic ______.
distort, away, deadweight loss, alter, closer, raise, efficiency
tax on buyers: At $2, there is no government in the market. If a $1 tax is added, the demand for buyers goes ____. Equilibrium quantity with tax is ____. tax wedge - different in the price that buyers pay for and what sellers receive (two prices) . now if sellers want to sell any ice cream at all, they have to ____ the price. Higher price - price that buyers pay. Buyers are paying 2.50, but sellers only pocket 1.50. Amount of tax is $1 per unit. So buyers are only paying 50 cents of the tax, and sellers are receiving 50 cents less. Government tax revenue is the blue square (see camera roll)
down, less, lower
Explicit versus implicit costs ____ costs are both explicit and implicit Explicit costs: Costs of inputs Require an ____ of ____ by the firm Implicit costs: ____ cost of next best alternative The opportunity costs are vital to include in ____ analyses Foregone wages: ____ cost of alternative ____ Foregone interest: ____ cost of foregone ____;; take money out of ur savings account to start a new business; this money was in ur savings account, it was generating interest; when you take that money out, you are giving up the interest it would be making;; foregone interest; we are not looking at the actual money you give up, bc that was just hanging around anyways, but the interest it was making
economic, outlay, money, opportunity, economic, opportunity, work, opportunity, capital
If a higher level of production allows workers to specialize in particular tasks, a firm will likely exhibit ________ of scale and ________ average total cost.
economies, falling
when externalities exist, buyers and sellers neglect the external effects of their actions, and the market equilibrium is not ____; When you make decisions, you only look at the benefits and the costs that apply to you. We dont care ab externalitites. market equilibrium is no longer efficient bc ppl arent taking the costs and benefits into account when making decisions
efficient
World Price and Comparative Advantage Pw = the world price of a good, the price that prevails in world markets Pd = domestic price without trade (always the ____ price) If Pd____Pw, domestic country has comparative advantage, country ____ the good If Pd____Pw, domestic country does not have comparative advantage, country ____ the good
equilibrium, <, exports, >, imports
____ price maximizes total ____
equilibrium, surplus
Price ceiling: Legal or maximum price a seller can charge for a product or service Historically used to provide "____" goods/services at ____ prices Prices are: ____ by the ____ kept ____ to help ____
essential, affordable, regulated, government, low, buyers
In order for a firm to be willing to sell one of its permits, the price it receives for the permit must ________ the cost of eliminating the unit of pollution the permit represents:
exceed
when Pd < Pw, the country will
export
An ideal corrective tax would equal the ______ cost from an activity with negative externalities, and an ideal corrective subsidy would equal the ______ benefit from an activity with positive externalities.
external, external
When a transaction between a buyer and seller directly affects a third party, the effect is called an ______. If an activity yields negative externalities, such as pollution, the socially optimal quantity in a market is ______ than the equilibrium quantity. If an activity yields positive externalities, such as technology spillovers, the socially optimal quantity is ______ than the equilibrium quantity.;;; Governments pursue various policies to remedy the inefficiencies caused by externalities. Sometimes the government prevents socially inefficient activity by regulating behavior. Other times it internalizes an externality using ______ taxes. Another public policy is to issue permits. For example, the government could protect the environment by issuing a limited number of pollution permits. The result of this policy is similar to imposing ______ taxes on polluters.;;; Those affected by externalities can sometimes solve the problem privately. For instance, when one business imposes an externality on another business, the two businesses can internalize the externality by ______. Alternatively, the interested parties can solve the problem by negotiating a contract. According to the Coase theorem, if people can bargain without ______, then they can always reach an agreement in which resources are allocated efficiently. In many cases, however, reaching a bargain among the many interested parties is difficult, so the Coase theorem does not apply.
externality, less, greater, corrective, corrective, merging, cost,
if marginal cost is rising, marginal product must be ________
falling
when Pd < Pw, consumer surplus
falls
when Pd > Pw, producer surplus
falls
Economies of scale: property whereby LRAC ____ as output ____ typically due to benefits from ____ and ____ purchasing Diseconomies of scale: property whereby LRAC ____ as output ____; typically due to rising management and operating ____ Constant returns to scale: LRAC of production stays the ____ as production ____.
falls, increases, specialization, bulk, LRAC, rises, increases, costs, same, increases
firm a and firm b are each currently emitting 100 units of pollution. the gov't gives out 50 pollution permits to each firm. firm a: cost of reducing one unit of pollution $50. firm b: cost of reducing one unit of pollution $20
firm b sells its pollution permits to firm a;; Firm A is willing to pay $50 at the highest for the permit Firm b must sell it for at least $20
Short run vs long run costs: Some costs are ____ in the short run (SR), but all costs are ____ in the long run (LR). The most common SR FC are associated with ____. The LRAC curve lies along the ____ of the SR-AC curves due to flexibility in dealing with changes in production with being able to choose different ____ sizes. The length of time considered "long run" varies depending on the type of firm and the firm itself.; Always operating at the bottom/minimum of these scales = ____
fixed, variable, capital, minimums, factory, efficient
Production function: relationship between quantity of inputs used to produce a good and quantity of output of that good In the short-run, there is at least one ____ input Let's assume two inputs: labor (____) and capital (____, capital is machines, tools, factories used in production);; Short-run - cannot change ____ ____; at least 1 ____ cost; operating decisions in the short run are based on this limitation Long run - no fixed costs or inputs; everything is ____ when u make ur long run decisions
fixed, variable, fixed, physical capital, fixed, variable
tax on sellers: elastic supply (____); inelastic demand (____); tax on sellers: supply shifts ____; ____ pay most of the tax
flat, steep, left, buyers
tax on buyers: elastic supply (____); inelastic demand (____); tax on buyers: demand shifts ____; shape of the graphs means that ____ pay most of tax; ____ need it (their demand is ____) so theyre ____ to pay most of the tax
flat, steep, left, buyers, buyers, inelastic, willing
Diminishing marginal product explains why, as a firm's output increases, the production function gets ________, while the total-cost curve gets ________.
flatter, steeper
Minimum Wages: Example of a Price ____ A binding price ____ for ____-skilled workers Labor market: labor supply (LS): Households sell labor Number of ppl who want to work from households; Labor demand (LD): Firms buy labor Number of ppl firms want to hire; Causes a ____ of labor (____) of ____ skilled workers
floor, floor, low, surplus, unemployment, low
consumer surplus: CS = WTP - P; amount a buyer is willing to pay minus the amount the buyer actually pays; buyers' ____ from participating in the market; consumer surplus is the area ____ the demand curve and ____ the price; calculate this by finding the area of the triangle
gains, below, above
if an aluminum manufacturer does not bear the entire cost of the smoke it emits, it will emit a ____ level of smoke than is socially efficient
higher
Competitive Market Characteristics: Many buyers and sellers trade ____ (nondifferentiable or identical) products; Individual buyers and sellers are "price ____" -- Individual buyers cannot influence the price, Individual sellers cannot influence the price (cannot sell at prices ____ market price; no incentive to sell ____ market price.); In the short-run, sellers maximize profit (π) or minimize loss by adjusting ____ rather than choosing ____ In the long-run, firms can freely enter or exit the market. There are no ____ to entry or exit.
homogenous, takers, above, below, output, price, barriers
when Pd > Pw, the country will
import
Market-based policies: Alter ____ so that ppl take ____ of the ____ effects of their actions Firms ____ for their negative externality: ____ the externality (____ taxes: pay to the government; ex: pollution permits - pay to buy permits ) Government pays for ____ externalities (subsidies);; provide services at low to no cost (vaccinations)
incentives, account, external, pay, internalizing, corrective, positive
The marginal product of labor is equal to the
increase in output obtained from a one unit increase in labor
When the government levies a tax on a good equal to the external cost associated with the good's production, it ________ the price paid by consumers and makes the market outcome ________ efficient.
increases, more
Increasing at an increasing rate = positive, ____ marginal product (left most part of the graph) Increasing at a decreasing rate = positive, ____ marginal product (middle of graph) Decreasing = ____/____ marginal product (right side of graph) Stage 1: MPl is positive, increasing Stage 2: MPl is positive, decreasing/diminishing Stage 3: MPl is negative
increasing, decreasing, decreasing, negative
Negative externalitites Markets produce a ____ quantity than is socially desirable The social cost of the good ____ the private cost Cost to society (of producing a good) is ____ than the cost to the good producers Eliminating all pollution is impossible Clean water and clean air: opportunity cost: lower standard of living Weigh benefits and costs of public policies
larger, exceeds, larger
Negative externalities lead markets to produce a ______ quantity than is socially desirable. Positive externalities lead markets to produce a ______ quantity than is socially desirable. To remedy the problem, the government can ______ the externality by ______ goods with negative externalities and ______ goods with positive externalities.
larger, smaller, internalize, taxing, subsidizing
Marginal buyer: the buyer that would ____ the market if P were any ____
leave, higher
Marginal seller: the seller who would ____ the market if the price were any ____
leave, lower
Taxes on buyers/consumers: demand shifts ____; market quantity ____, this is ____; tax causes a tax wedge; Pst: price ____ receive w ____; Pdt: price ____ pay with ____; burden of tax is ____; tax per unit: ____-____d; tax buyers pay: Pdt - Pe; tax sellers pay: Pe - Pst; government tax revenue: Qt x tax per unit
left, decreases, inefficient, sellers, tax, buyers, tax, shared, Pdt-Pst
High-skilled worker labor supply: towards the ____ (not a ton of them) Labor demand: to the ____ bc there is a greater demand for them Equilibrium Intersection is ____, around $150 or more Low-skilled worker labor supply: towards the ____ (theres a lot of them) Labor demand: to the ____ bc there is not a great demand for them Equilibrium intersection is ____ (____ ____) Minimum wage is the price ____ bc it is the legal ____ price Quantity of labor supply > quantity of labor demanded = surplus of labor (____); occurs when you ____ the minimum wage - og price becomes ____
left, right, high, right, left, low, minimum wage, floor, minimum, unemployment, raise, binding
Import quota: Quantitative ____ on ____ of a good; Mostly has the same effects as a ____: ____ prices, ____ quantity of imports ____ buyers' welfare ____ sellers' welfare Creates ____ for the ____ producers of the ____ goods, who can sell them at ____ price If we get ____ producers to pay for the import ____, our government will ____
limit, imports, tariff, raises, reduces, reduces, increases, profits, foreign, imported, higher, foreign, licenses, profit
Results of a binding price ceiling: Due to shortage caused by excess demand, some consumers still end up not getting the good or service; Rationing processes and mechanisms: ____ ____: first come, first serve ____ ____ (seller can pick and choose who they want to sell to) ____ market; ____ and ____ rationing systems; end up hurting the ____
long lines, bribery, discrimination, black, inefficient, unfair, consumer
Rent control causes larger shortages in the ________ run because over that time horizon, supply and demand are ________ elastic.
long, more
how to find the short-run economic profit
look at where the price intersects with the MC (MR=MC); find the quantity at which this happens; find the AC at this quantity; the box this forms is the profit
Willingness to Sell (Cost) Willingness to Sell (WTS): Measure of willingness to sell: produce and sell the good/service only if the price >/= cost; First step of the step-supply function represents the ____-cost producer's willingness to sell
low
if a positive externality exists in the market for flu shots, the private market equilibrium occurs at a price that is too ____ and a quantity that is too ____ in comparison to the socially optimal equilibrium; We should be valuing this good ____, and there should be more of this good being exchanged
low, low, more
perfect competition - ____ firms - ____ product - ____ market power of individual firms - price ____ - ____ barriers to entry;;; monopoly - ____ firm - ____ products - ____ market power of individual firms - price ____ - ____ barriers to entry; monopolistic competition - ____ firms - ____ ____ products - ____ market power of individual firms - price ____ - ____ barriers to entry; oligopoly - ____ firms - ____ or ____ products - sometimes a dominant firm might exist but not always - ____ decision making - ____ to ____ barriers to entry;;; Ideal market/adam smith - perfect competition; no government intervention ; many firms selling the same good; firms don't have market ____ bc they are price ____; Barrier to entry for monopoly: ____ ____ costs; control of ____ resources; ____ competition example: restaurant industry; slightly different menus; differentiated products so they can charge different ____ (bc there's so much ____); price makers; another example is ____; Auto industry - ____ with ____ products Crude oil industry - ____ with ____ products Decision making is ____ bc they watch the actions of their competition closely - if one proposes a discount, they must respond
many, homogenous, no, taker, no, taker, no, one, heterogeneous, high, maker, high, many, slightly differentiated, low, maker, low, few, homo, hetero, interdependent, medium, high, power, takers, high fixed, natural, monopolistic, prices, competition, makers, dentists, oligopoly, heterogeneous, oligopoly, homogenous, interdependent
the slope of the production function measures the ______hor ______
marginal product
Willingness to pay (WTP): A buyer's willingness to pay for a good ____ amount the buyer will pay for that good How much the buyer ____ the good Buy the good/service only if the WTP>price (greater than or equal to)
maximum, values
Example of a price ceiling: ceiling on gas in the 1970s: In the 1970s, the US government imposed a price ceiling on gas (OG price was $1, ceiling was $2 - this was a ____ ceiling) OPEC increased the price of crude oil Increased the cost of ____ of gas Led to decrease in the ____ of gas Non-binding price ceiling became a ____ price ceiling, causing a ____ In order to return to equilibrium, it would need to go ____ than the ceiling. But this was impossible. So now Qd>Qs, another ____
non-binding, production, supply, binding, shortage, higher, shortage
The marginal product of any input in the production process is the change in the quantity of ______ obtained from one ______ unit of that input.
output, additional
Slope of any curve: change in y / change in x Slope of production function: change in ____ / change in ____ ;; this is ALSO ur ____ ____ of labor Slope of production function = ∆𝑌 / ∆𝑋 = ∆output / ∆labor = MPL
output, labor, marginal product
Total Costs: Fixed Costs (FC) and Variable Costs (VC) Fixed costs: costs that stay the same regardless of how much output is produced Do not vary with output. Variable costs: costs that vary with the amount being produced. increases as output increases.;; variable costs includes utility bills - the more cups of coffee you produce, the longer your machines will be running; raw materials; labor; Total cost (TC) = FC + VC;; Meat in hamburgers - VC Fire insurance in dry cleaning - FC (paying a fixed amount every month) Tires in automobiles - VC Property tax in textile production - FC Gasoline in trucking services - VC
output, produced, output, amount, produced, output
marginal product = change in ____/____ divided by change in ____
output, quantity, labor
Externalities result in market failures; The free market outcome is not equal to the socially optimal outcome;; A free market ____ a good with negative externalities; socially optimal quantity ____ free market quantity;; a free market ____ a good with positive externalities; socially optimal quantity ____ free market quantity;; Government intervention can help the market achieve the socially optimal quantity;;; Market fails to allocate resources efficiently when externalities are present:• Negative externalities: over-allocation of resources to the production of the good; Positive externalities: under-allocation of resources to the production of the good;; Eliminating all pollution is impossible; Clean water and clean air — opportunity cost: lower standard of living; Weigh the marginal benefits and marginal costs of pollution reduction;;; Solutions to pollution: Command and Control: Regulate behavior directly; Market based Solutions: Pigovian taxes/ subsidies- Marketable pollution permits; Private Solutions: » Coase Theorem; Moral codes and social sanctions; Charities; Self-interest of the relevant parties; Integrating different types of businesses
overproduces, <, underproduces, >,
marginal product is ____ and ____; but eventually the kitchen starts getting crowded; now there is ____ marginal ____/____; to hire a third unit of labor produces ____ than hiring the second unit of labor did ; still ____, but ____ at a ____ rate
positive, increasing, diminishing, product, returns, less, increasing, increasing, decreasing
Other benefits of international trade: Consumers: increased variety of goods Producers: lower costs - economies of scale Increased competition: reduce market ____ of domestic firms (increase total welfare) Enhanced flow of ideas, facilitates the spread of technological advances around the world NAFTA - not american free trade agreement;; Then why all the opposition to trade? The losers have more incentive to organize and lobby for restrictions on trade: Losses: concentrated among a small group of people, who feel them acutely Gains: spread thinly over many people, who may not see how trade benefits them The winners from trade could compensate the losers and still be better off (such compensation rarely occurs)
power
In a free, competitive market, what is the rationing mechanism?
price
Unregulated free markets in perfect competition (many buyers and sellers of the same product): Market forces establish equilibrium price and quantity;; Rationing mechanism is ____ (equilibrium ____ is the most ____; rationing mechanism - what determines ____ gets to ____ in the market-which buyers and sellers are ____ and ____ to ____ for the product and ____ to ____ it);;; who gets to sell? ____ ____ producers who can efficiently produce at the equilibrium price; Who gets to buy? Consumers who are ____ and ____ to pay the equilibrium price
price, price, efficient, who, participate, willing, able, pay, pay, produce, low cost, willing, able
in a free competitive market, ____ serve as the rationing mechanism. this is an efficient way of rationing goods and services; price ceilings must be set ____ equilibrium to be binding (lobbied for by ____ who think the price is too ____; binding ceiling: ____>____ leads to ____ of goods and services); price floors must be set ____ equilibrium to be binding (lobbied for by ____ who think the price is too ____; binding floor: ____>____ leads to ____ of goods and services)
prices, below, consumers, high, Qd, Qs, shortage, above, producers, low, Qs, Qd, surplus
Industrial Organization (IO) The study of how a firm's decisions regarding ____ and quantity ____ depend on market ____ (market structure) that they face
prices, supplied, conditions
positive externalities and market inefficiency:: social benefits: ____ benefits (personal knowledge, wages) plus ____ benefits to society of an educated population (better gov't, lower crime rates, higher productivity, higher taxable income); ____ value is greater than ____ value: social value curve is ____ the demand curve; the optimal quantity, Qoptimum, is ____ than the equilibrium quantity, Qmarket
private, external, social, private, above, larger
negative externalities and market inefficiency:: social cost: ____ costs of the producers (____) plus the ____ to those bystanders affected adversely by the negative externality (ex. pollution);; social cost curve is ____ the supply curve: takes into account the external costs imposed; exceeds the private cost ;; the optimal quantity, Qoptimum, is ____ than the equilibrium quantity, Qmarket; We get to the optimum by ____ the firm
private, supply, costs, above, smaller, taxing
Tariff restricts imports, but it works for the goal we are trying to pursue. Our ____ gain bc they no longer have to compete at the price of 20. They can charge higher now
producers
Marginal product of labor (MPl): Slope of the ____ ____: change in ____ resulting from one ____ unit of ____ ____ The contribution of an additional unit of labor (L) The more people you add, the ____ the output bc ppl can ____
production function, output, additional, labor input, greater, specialize
A production function is a relationship between inputs and
quantity of output
______ ______ on the horizontal axis and ______ ______ on the vertical axis. This graph is called the total-cost curve.
quantity produced, total cost
According to the Coase theorem, if private parties can bargain over the allocation of resources at no cost, then the private market will always solve the problem of externalities and allocate resources efficiently.;;; The Coase theorem says that private economic actors can potentially solve the problem of externalities among themselves. Whatever the initial distribution of rights, the interested parties can reach a bargain in which everyone is better off and the outcome is efficient.;;; makes some assumptions - assume that all of the actors are ______, ______ costs are 0, ______ rights are well ______ and enforced;;; Despite the appealing logic of the Coase theorem, private individuals on their own often ______ to resolve the problems caused by externalities. The Coase theorem applies only when the interested parties have no ______ reaching and enforcing an agreement. In the real world, however, bargaining does not always work, even when a mutually beneficial agreement is possible.
rational, transaction, property, defined, fail, trouble
Lower prices ____ PS for two reasons: 1) fall in PS due to sellers ____ the market (no longer have ____ from these sellers); 2) fall in PS due to ____ sellers getting ____ P
reduce, leaving, surplus, remaining, lower
Higher price ____ CS for two reasons: 1) fewer people ____ the good because it is ____ some people's WTP (fall in CS due to buyers ____ market); 2) fall in CS due to ____ buyers paying ____ P (higher P = smaller CS)- existing buyers have to pay more for the good
reduces, buying, above, leaving, remaining, higher
The amount that the firm receives for the sale of its output (cookies) is called total ______. The amount that the firm pays to buy inputs (flour, sugar, workers, ovens, and so forth) is called total ______. As the business owner, Chloe gets to keep any revenue above her costs. That is, a firm's ______ equals its total revenue minus its total cost:
revenue, cost, profit
when Pd < Pw, producer surplus
rises
when Pd < Pw, total surplus
rises
when Pd > Pw, consumer surplus
rises
when Pd > Pw, total surplus
rises
1) marginal cost ________ with the quantity of output 2) the ________ ________ ________ curve is u-shaped 3) the ________ ________ curve crosses the ________ ________ ________ curve at the minimum of ________ ________ ________
rises, average total cost, marginal cost, average total cost, average total cost
Tradable pollution permits/Permits to pollute New ____ ____: pollution permits In the market to trade permits: voluntary ____ of the ____ to pollute from one ____ to another Firm's willingness to pay depends on its ____ of ____ pollution;;; Advantages of marketable for pollution permits: ____ allocation of pollution permits doesn't matter Can ____ the permit and reduce pollution, or ____ a permit and produce more pollution If firms can reduce pollution at a ____ cost: sell whatever permits they get If firms can reduce pollution only at a ____ cost: buy whatever permits they need ____ final allocation
scarce resource, transfer, right, firm, cost, reducing, initial, sell, buy, low, high, efficient
Price Floors Legal minimum price a good or service can be sold for Generally set to help ____ facing ____ prices or wages Prices are: ____ by the ____ Kept ____ To help ____
sellers, low, regulated, government, high, sellers
Binding Price ceiling: Deadweight Losses Outcome is no longer the most efficient outcome ____: ____ is no longer the rationing mechanism No longer maximizing TS Results in deadweight losses (DWL) DWL: loss in ____ as a result of the policy (binding price ceiling)
shortage, price, TS
Positive externalities Markets produce a ____ quantity than is socially desirable Socially optimal quantity is ____ than market equilibrium quantity Public Policy: Government corrects the market failure Internalize the externality example: ____
smaller, greater, subsidy
Corrective taxes or subsidies Example: carbon tax Induces private decision makers to take account of the ____ costs that arise from a ____ externality Places a ____ on the ____ to pollute Reduces pollution at a ____ cost to society than technology forcing ____ revenue for the government Enhance economic ____ Pigovian tax: a tax ____ to the ____ externality
social, negative, price, right, lower, raises, efficiency, equal, negative
Why is gasoline taxed so heavily? Negative externalities associated w driving (congestion, accidents, pollution, oil dependency) ____ cost is greater than the ____ cost The gas tax is a ____ tax Makes the economy work better - less traffic congestion, safer roads, cleaner environment;; Most economists agree that a tax on carbon content of fuels is a less expensive way to reduce CO2 emissions than CAFE standards
social, private, corrective
When a perfectly competitive firm increases the quantity it produces and sells by 10 percent, its marginal revenue ________ and its total revenue rises by ________.
stays the same, exactly 10%
tax on buyers: inelastic supply (____); elastic demand (____); tax on buyers: demand shifts ____; ____ pay most of tax
steep, flat, left, sellers
tax on sellers: inelastic supply (____); elastic demand (____); tax on sellers: supply shifts ____; ____ pay most of tax
steep, flat, left, sellers
The total-cost curve gets steeper as the amount produced rises, whereas the production function gets flatter as production rises. These changes in slope occur for the same reason. High production of cookies means that Chloe's kitchen is crowded with many workers. Because the kitchen is crowded, each additional worker adds less to production, reflecting diminishing marginal product. Therefore, the production function is relatively flat. But now turn this logic around: When the kitchen is crowded, producing an additional cookie requires a lot of additional labor and is thus very costly. Therefore, when the quantity produced is large, the total-cost curve is relatively steep.
steeper, flatter, diminishing marginal product, flat, costly, steep
tax on sellers/producers: Sellers are taxed, so they cut down on their supply, causing a shift to the left. Tax wedge - first price you go straight across from the new equilibrium (2.50). Sellers have passed on half of the tax to buyers. Second price you find by going straight along the new quantity to where it intersects with the old supply curve (bottom red point); Not always going to be 50/50 - depends on elasticities
supply, left, elasticities
When the government imposes a binding price floor, it causes a _____ of the good to develop.
surplus
Binding Price floor: DWL Outcome is no longer the most efficient outcome ____: ____ is no longer the rationing mechanism No longer maximizing TS Results in deadweight loses (DWL) DWL: loss in ____ as a result of the policy; Consumer surplus - below the demand and above the price; producers are producing 130, but can only sell 80, which puts a constraint on the producer surplus;
surplus, price, TS,
The small economy assumption: A small economy is a price ____ in world markets; Its actions have no ____ on Pw When a small economy engages in free trade, ____ is the only relevant price: no seller would accept ____ than Pw (can sell the good for Pw in world markets); no buyer would pay ____ than Pw (can buy the good for Pw in world markets)
taker, world, effect, Pw, less, more
***Which of the following increases quantity supplied, decreases quantity demanded, and increases the price that consumers pay?
the imposition of a binding price floor
the students living in the party house are prone to host loud parties on saturday night. they value these celebrations at $100. their studious neighbors value peace and quiet at $90. according to coase, an efficient solution would be
the party house to pay the neighbors $91 to not call the police
Which of the following increases quantity supplied, increases quantity demanded, and decreases the price that consumers pay?
the repeal of a tax on a good
true statements about corrective taxes
they increase government revenue, they increase what consumers pay for the good, they reduce the quantity sold in the market... they do NOT cause deadweight losses
True or False: The shape of the production function reflects the law of diminishing marginal returns.
true
Total surplus = CS + PS Consumer surplus = value to buyers - amount paid by buyers; Buyer's gains from participating in the market; Producer surplus = amount received by sellers - cost to sellers Sellers' gains from participating in the market Total surplus = ____ to ____ - ____ to ____
value, buyers, cost, sellers
is the market equilibrium efficient? 1) the goods are consumed by the buyers who ____ them most ; 2) the goods are produced by the producers w the ____ costs ; 3) ____ allocation of resources ____ TS. raising or lowering the price would not ____ TS ; Make sure the ____-cost sellers end up participating in the market and the ____-cost buyers
value, lowest, efficient, maximizes, increase, low, high
The Coase theorem: If private parties can bargain without cost over the allocation of resources They can solve the problem of externalities on their own; i value smoking at 100. if you pay me at least 100 i will stop smoking. but if you only offer me 50 i will still smoke - i will pay you 50 bc i value it at 100;; Whatever the initial distribution of rights -- Interested parties can reach a bargain: Everyone is better off Outcome is efficient;;; •Example 1: Dick has the legal right to keep a barking dog Dick gets a $500 benefit from the dog; Jane bears an $800 cost from the barking Solution: Jane can offer Dick $____ to get rid of the dog Example 2: Jane can legally compel Dick to get rid of the dog Dick gets a $1,000 benefit from the dog; Jane bears an $800 cost from the barking Solution: Dick can offer $____ to Jane to keep the dog;;; Solution: If the benefit of the dog to Dick ____ the cost of the barking to Jane, Dick and Jane will strike a bargain in which Dick keeps the dog Why private solutions do not always work: ____ transaction costs (Costs that parties incur in the process of agreeing to and following through on a bargain) Bargaining simply breaks down ____ number of interested parties (Coordinating everyone is ____)
without, solve, externalities, 600, 900, exceeds, high, large, costly