econ final
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.
Free Rider
a person who receives the benefit of a good but avoids paying for it
Granting a pharmaceutical company a patent for a new medicine will lead to
a product that is priced higher than it would be without the exclusive rights.
Government can remedy the free rider problem if
total benefits of a public good exceeds its cost provide the public good pay for it with tax revenue make everyone better off
The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average
total cost.
A corrective tax places a price on the right to pollute
true
The Three Amigo's company produced and sold 500 dog beds. The average cost of production per dog bed was $50. Each dog bed can be sold for a price of $65. The Three Amigo's total costs are
$25,000.
Marcus sells 300 candy bars at $0.50 each. His total costs are $125. His profits are
$25.
Public Goods and Common Resources
- Externalities arise because something of value has no price attached to it - Private decisions about consumption and production can lead to an inefficient outcome - Public policy can potentially raise economic well-being
free rider problem
- Public goods are not excludable - Prevents the private market from from supplying the goods - Market failure
cost-benefit analysis
- compare the costs & benefits to society of providing a public good - doesn't have any price signals to observe - government findings: rough approximations
Four types of goods
- private goods - club goods - common resources - public goods
determine whether something is a public good
-> determine who beneficiaries are, then whether they can be excluded from using the good - a free rider problem
examples of public goods
-Tornado Siren -National Defense -Uncongested non-toll roads
Suppose a certain firm is able to produce 165 units of output per day when 15 workers are hired. The firm is able to produce 181 units of output per day when 16 workers are hired, holding other inputs fixed. The marginal product of the 16th worker is
16 units of output.
Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without government intervention in the vaccination market, which of the following statements is correct?
At the current output level, the marginal social benefit exceeds the marginal private benefit.
Who among the following is a free rider?
Ernie listens to National Public Radio, but does not contribute to any fundraising efforts.
A firm's total profit equals its marginal revenue minus its marginal cost.
False
Economic profit is greater than or equal to accounting profit.
False
For a firm operating in a competitive market, both marginal revenue and average revenue exceed the market price.
False
One person's use of common resources does not reduce the enjoyment other people receive from the resource.
False
The Coase theorem asserts that private economic actors can solve the problem of externalities among themselves, without government intervention, regardless of whether those actors incur significant costs in reaching and enforcing an agreement.
False
The Coase theorem suggests that taxes should be enacted to alleviate the effects of negative externalities.
False
examples of common resources
Fish in the ocean, the environment, congested non-toll roads
When a good is rival in consumption,
one person's use of the good diminishes another person's ability to use it.
The phenomenon of free riding is most closely associated with which type of good?
Public good
If T represents the size of the tax on a good and Q represents the quantity of the good that is sold, total tax revenue received by government can be expressed as
T × Q
Which of the following is an example of an implicit cost?
The owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm
Excludability
the property of a good whereby a person can be prevented from using it
Which of the following is an example of the Tragedy of the Commons?
The number of satellites increases to the point where they begin running into each other.
The privately-owned school system in Smalltown has a virtually unlimited capacity. It accepts all applicants and operates on both tuition and private donations. Although every resident places value on having an educated community, the school's revenues have suffered lately due to a large decline in private donations from the elderly population. Because the benefit that each citizen receives from having an educated community is a public good, which of the following would not be correct?
The private market is the best way to supply education.
A corrective tax places a price on the right to pollute.
True
As the price elasticities of supply and demand increase, the deadweight loss from a tax increases.
True
Declining average total cost with increased production is one of the defining characteristics of a natural monopoly.
True
Markets may fail to allocate resources efficiently when property rights are not well established.
True
One solution to the "Tragedy of the Commons" is to turn the common resource into a private good.
True
The government can internalize externalities by taxing goods that have negative externalities and subsidizing goods that have positive externalities.
True
The larger the deadweight loss from taxation, the larger the cost of government programs.
True
The three main sources of barriers to entry are monopoly resources, government regulation, and the firm's production process.
True
Which of the following is an example of public ownership of a monopoly?
U.S. Postal Service
rivalry in consumption
the property of a good whereby one person's use diminishes other people's use
Zaria and Hannah are roommates. Zaria assigns a $30 value to smoking cigarettes. Hannah values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem?
Zaria pays Hannah $16 so that Zaria can smoke.
For an individual firm operating in a competitive market, marginal revenue equals
average revenue and the price for all levels of output.
When a firm has a natural monopoly, the firm's
average total cost curve is downward sloping.
When marginal cost is less than average total cost,
average total cost is falling.
Governments can improve market outcomes for
both public goods and common resources.
A monopoly can earn positive profits because it
can maintain a price such that total revenues will exceed total costs.
Pay-per-view broadcasts are
club goods
Goods that are rival in consumption but not excludable would be considered
common resources.
When profit-maximizing firms in competitive markets are earning profits,
new firms will enter the market.
Both public goods and common resources are
nonexcludable
public goods
not excludable and not rival in consumption
The decrease in total surplus that results from a market distortion, such as a tax, is called a
deadweight loss
When a monopolist increases the amount of output that it produces and sells, average revenue
decreases, and marginal revenue decreases.
private goods
excludable and rival in consumption
club goods
excludable but not rival in consumption - one type of natural monopoly
A firm's opportunity costs of production are equal to its
explicit costs + implicit costs.
The two characteristics of a competitive market are 1) many buyers and sellers in the market and 2) the goods offered by the various sellers are highly differentiated.
false
examples of club goods
fire protection, cable TV, un-congested toll roads
examples of private goods
ice cream cones, clothing, congested toll roads
When a country is on the downward-sloping side of the Laffer curves, a cut in the tax rate will
increase tax revenue and decrease the deadweight loss.
When an externality is present, the market equilibrium is
inefficient, and the equilibrium does not maximize the total benefit to society as a whole.
In the long run,
inputs that were fixed in the short run become variable.
When a factory is operating in the short run,
it cannot adjust the quantity of fixed inputs.
Economies of scale occur when
long-run average total costs fall as output increases.
A good is excludable if
people can be prevented from using it
The provision of a public good generates a
positive externality and the use of a common resource generates a negative externality.
A key characteristic of a competitive market is that
producers sell nearly identical products.
The deadweight loss associated with a monopoly occurs because the monopolist
produces an output level less than the socially optimal level.
If there is an increase in market demand in a perfectly competitive market, then in the short run
profits will rise.
A tax on a good
raises the price that buyers pay and lowers the price that sellers receive.
Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to
remain unchanged.
common resources
rival in consumption but not excludable
Price discrimination is the business practice of
selling the same good at different prices to different customers
When negative externalities are present in a market
social costs will be greater than private costs.
One problem with government operation of monopolies is that
the government typically has little incentive to reduce costs.
The short-run supply curve for a firm in a perfectly competitive market is
the portion of its marginal cost curve that lies above its average variable cost.
