Econ Midterm
The cost of the next most valuable opportunity is known as a
opportunity cost
The economic definition of profit differs from the accounting definition of profit in that the economic definition includes:
opportunity costs
Private Cost
a cost paid by the consumer or the producer
During a crisis such as Hurricane Katrina, governments often make it illegal to raise the price of emergency items like flashlights and bottled water. In practice, this means that these items get sold on a first-come, first-served basis. If a person has a flashlight that she values at $5, but its price on the black market is $40, what gains from trade are lost if the government shuts down the black market?
$35
When will entrepreneurs be more likely to fill up their pickup trucks with flashlights and drive into a disaster area: when they can sell their flashlights for $5 each or when they can sell them for $40 each?
$40
Barriers to enter a market
-patent -government regulations -exclusive access to input -tech innovation
Rent Control Effects
-reduces housing quality -makes slums -makes search costly -bribes are disguised
Effects of Price Ceilings
-shortages -reductions in product quality -wasteful lines -loss in gains from trade -misallocation of resources
Price Floors Effects
-surpluses -deadweight loss -wasteful increases in quantity -misallocation of resources
For a competitive firm supplying wheat, if the world price (P) equals the firm's minimum average cost (AC), then profits will be:
0
How to find total profits of monopolist:
1. Find MR (multiply variable's digit by 2) 2. Solve MR=MC for Q 3. Find Price (use original equation) 4. Find Total Revenue (PxQ) and Total Costs (FC+(MC+Q) 5. Find Profit (TR-TC)
In the United States, the long-run elasticity of oil demand has been estimated at -.05. Some policymakers and environmental scientists would like to see the United States cut back on its use of oil in the long run. We can use this elasticity estimate to get a rough measure of how high the price of oil would have to permanently rise in order to get people to make big cuts in oil consumption. How much would the price of oil have to permanently rise in order to cut oil consumption by 50%?
100% increase
The long-run elasticity of oil demand has been estimated at -.05. If the price of oil rises by 10%, how much will the quantity of oil demanded fall?
5%
Elasticity
A measure of how much one economic variable responds to changes in another economic variable.
Externalities
A side effect of an action that affects a third party other than the buyer or seller.
How is international trade similar to domestic trade?
All of the above: a. international trade makes people better off when preferences differ b. international trade increases productivity through specialization and the division of knowledge c. international trade increases productivity through comparative advantage
Price Ceilings
Are maximum prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them; creates shortage
In a competitive market, sellers sell their product at what world price?
At the world price
How does a free market eliminate a shortage?
By letting the price rise
Data can write 12 excellent poems per day or solve 100 difficult physics problems per day. Riker can write one excellent poem per day or solve 0.5 difficult physics problems per day. Who has the absolute and comparative advantage?
Data
Which is more elastic, the demand for computers or the demand for Dell computers?
Dell computers
When a price ceiling is in place keeping the price below the market price, what's larger: quantity demanded or quantity supplied?
Demanded
Suppose the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price. To keep it simple, assume that people must wait in line to get bread at the controlled price. Would consumer surplus rise, fall, or can't you tell with the information given?
Fall
With these price controls on bread, would you expect bread quality to rise or fall?
Fall
The elasticity of demand is 1.1. Is the demand curve steep or flat? Will a fall in price raise total revenue or lower it?
Flat; lower total revenue
The elasticity of demand is 2. Is the demand curve steep or flat? Will a fall in price raise total revenue or lower it?
Flat; raise total revenue
Do monopolies use MR=P?
No, MR is less than P
Business leaders often say that there is a "shortage" of skilled workers, and so they argue that immigrants need to be brought in to do these jobs. For example, an AP article entitled "New York farmers fear a shortage of skilled workers," pointing out that a special U.S. visa program, the H-2A program, "allows employers to hire foreign workers temporarily if they show that they were not able to find U.S. workers for the jobs." (Source: Thompson, Carolyn. May 13, 2008. N.Y. farmers fear a shortage of skilled workers Associated Press.) How do unregulated markets cure a "labor shortage" when there are no immigrants to boost the labor supply?
Let the price of labor increase
Why does a monopolist want to segment a market?
Maximize profit through price discrimination
In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In an almost identical town of Meterville, parking costs $5 per hour (or $1.25 per 15 minutes). Where will it be easier to find parking: in Freedonia or Meterville?
Meterville
One town will tend to attract shoppers who hate driving around looking for parking. Which one?
Meterville
Which town will likely attract shoppers with higher incomes?
Meterville
In 30 minutes, Kana can either make miso soup or she can clean the kitchen. In 15 minutes, Mitchell can make miso soup; it takes Mitchell an hour to clean the kitchen. Who has absolute or comparative advantage?
Mitchell has absolute and comparative advantage in making miso soup. Kana has absolute and comparative advantage at cleaning the kitchen.
Imagine that you can hire four low-skilled workers to move dirt with shovels at $5 an hour, or you can hire one skilled worker at $24 an hour to move the same amount of dirt with a skilled loader. Who will you hire if the minimum wage increases from $5 per hour to $6.50 per hour?
One skilled worker
In a competitive market, MR is equal to
Price
Is rent control a "price ceiling" or a "price floor?"
Price ceiling
A review of the jargon: Is the minimum wage a "price ceiling" or a "price floor?"
Price floor
Law of Demand
Price increases, quantity decreases and vice versa
Law of Supply
Price increases, quantity supplied increases
In one hour, Ethan can bake 20 cookies or lay the drywall for two rooms. In one hour, Sienna can bake 100 cookies or lay the drywall for three rooms. Who has the absolute and comparative advantage?
Sienna
The elasticity of demand is 0.2. Is the demand curve steep or flat? Will a fall in price raise total revenue or lower it?
Steep; lower total revenue
The elasticity of demand is 0.9. Is the demand curve steep or flat? Will a fall in price raise total revenue or lower it?
Steep; lower total revenue
Jon is on eBay, bidding for a first edition of the influential Frank Miller graphic novel Batman: The Dark Knight Returns. In this market, who is Jon competing with?
The other bidders
Who is impacted most by a change in the minimum wage?
Unskilled workers
Which type of cost is dependent on the amount of quantity produced by a firm?
Variable cost
External Cost
a cost paid by people other than the consumer or the producer trading in the market
Which of the following two goods is more likely to be inelastically demanded? a. demand for insulin b. demand for vitamins
a.
If the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price, what would happen to the quantity supplied of bread? a. quantity supplied decreases. b. quantity supplied increases. c. Indeterminate with the given information.
a. quantity supplied decreases.
If a government decides to make health insurance affordable by requiring all health insurance companies to cut their prices by 30%, what will probably happen to the number of people covered by health insurance? a. More people will be covered because it's cheaper and more people can now afford it. b. Fewer people will be covered because health insurance companies will supply less. c. The number of insured will not change. d. Indeterminate with the given information.
b.
Who follows the rule of MR=MC: monopolies, competitive firms, both, or neither?
both
Thinking on the margin
comparing marginal costs and benefits
If the elasticity of demand for college textbooks is -0.1, and the price of textbooks increases by 20%, how much will the quantity demanded change and in what direction?
decrease by 2%
If the elasticity of demand for spring break packages to Cancun is -5, and if you notice that this year in Cancun the quantity of packages demanded increased by 10%, then what happened to the price of Cancun vacation prices?
decreased by 2%
When the price of a good increases, the quantity demanded
decreases
Which of the following two goods is more likely to be inelastically demanded? a. demand for beef next month b. demand for beef over the next decade
demand for beef next month
After the invention of nuclear power plants, will the demand curve for coal power plants be more elastic or inelastic?
elastic
Henry Ford famously mass-produced cars at the beginning of the twentieth century, starting Ford Motor Company. He made millions because mass production made cars cheap to make, and he passed some of the savings to the consumer in the form of a low price. Cars became a common sight in the United States thereafter. Keeping total revenue and its relationship with price in mind, do you expect the demand for cars to be elastic or inelastic given the story of Henry Ford?
elastic
If a fashionable clothing store raised its prices, what does that tell you about the store's estimate of the elasticity of demand for its products?
elastic
When arbitrage is easy in a market of would-be price discriminators, who is more likely to get priced out of the market: those with elastic demand or those with inelastic demand?
elastic (smaller markup)
True or false: when a competitive firm maximizes profit, profits are always greater than 0.
false
If the price of cars falls, are carmakers likely to make
fewer cars
Which of the following two goods is more likely to be inelastically demanded? a. fruit b. tangerines
fruit
Even if profit is negative, if revenues are ___________ variable costs, then it's best to stay open in the short run.
greater than
If Congress passed a privacy law making it illegal for colleges to ask for parents' tax returns, would that help students from high-income families or low-income families?
high-income
Would a price discriminating firm set a high or lower price for a market segment with more inelastic demand?
higher
Along a supply curve, if the price of oil falls, what will happen to the quantity of oil supplied?
it will decrease
Determinants of elasticity:
long-term, luxuries, more substitutes, more than 1, price and revenue move opposite
A competitive firm maximizes profit by choosing a level of output where the world price is equal to the firm's
marginal cost
Where will you see more price discrimination: in monopoly-type markets with just a few firms or in competitive markets with many firms?
monopoly-type markets
After more employers allow employees to telecommute, will the demand curve for cars be more elastic or inelastic?
more elastic
Now, Jon is in Japan, trying to get a job as a full-time translator; he wants to translate English TV shows into Japanese and vice versa. He notices that the wage for translators is very low. Who is the competition that is pushing the wage down?
other translators
What kind of demand elasticity curve does a competitive firm face?
perfect elastic
When the price is above the equilibrium price, greed (self-interest), lends to
push the price down
A competitive firm maximizes profit by choosing:
quantity
Marginal Utility
satisfaction or usefulness obtained from acquiring one more unit of a product
Determinants of inelasticity:
short-term, necessities, not many substitutes, less than 1, price and revenue move together
A competitive market has which of the following characteristics?
small-scale sellers, buyers, and a product that is similar across sellers
Normative Statement
statement which describes how the world should be
Positive Statement
statement which describes the world as it is
If the price in a market is above the equilibrium price, this creates
surplus
Market Power
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
Comparative Advantage
the ability to produce a good at a lower opportunity cost than another producer
Absolute Advantage
the ability to produce a good using fewer inputs than another producer
Price Discrimination
the business practice of selling the same good at different prices to different customers
Consumer Surplus
the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays
Producer Surplus
the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives
Gains of Trade
the extra output that trading partners obtain through specialization of production and exchange of goods and services
Arbitrage
the process of buying a currency low and selling it high
Coase Theorem
the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
Marginal Rate of Substitution
the rate at which a consumer is willing to trade one good for another
Average Cost
the total cost divided by the quantity produced
Social Cost
the total cost of producing a good or service, including both the private cost and any external cost
Deadweight Loss
the total loss of producer and consumer surplus from underproduction or overproduction
True or False: every country has at least one comparative advantage in something
true
Surplus of Labor
unemployment
When will a monopoly create more output: when the government bans price discrimination or when the monopoly is allowed to and can perfectly price discriminate?
when the monopoly can perfectly price discriminate
When will people search harder for substitutes for oil?
when the price of oil is high