ECON202 EXAM 2

The equal marginal principle equation is

(Mu1)/(Price1) == (Mu2)/(Price2)

Marginal Utility's equation is

(change in total utility) / (change in number of units)

How is the definition of a successful Private Market Outcome is changed by the existence of externalities?

- Goods and services are distributed according to private value - Relevant signals are limited to agents involved in the transaction

How is the definition of a successful Public Market Outcome is changed by the existence of externalities?

- Goods and services are distributed according to quantity, whether too much or too little is provided - Relevant signals are effects on the public, those in and outside a transaction

If the goal is to decrease distribution (Q) to correct a negative externality, then either

- Supply must decrease, which would increase mkt price so that it would accurately reflect social cost of distribution - Demand must decrease (change consumer behavior); This leads to decreased price, and prices being too low will decrease quantity supplied

correct negative externalities through demand, there can be

1) Increase personal/implicit costs of consumption 2) Decrease utility of consuming a product 3) Explicitly restrict the type of consumers

Increasing positive externalities through demand: Requires policy correction that

1) Increases number of customers 2) AND brings market price down

Increasing positive externalities through supply: Requires policy that:

1) encourages production and innovation 2) AND maintains market value TO FIRMS

Utility is maximized when

1. A consumer purchases a bundle of goods on the BC -- Consumer MUST be able to purchase the goods 2. The bundle of goods gives the consumer max utlity possible -- The consumer must be willing or need to purchase the goods

What are all properties of an indifference curve

1. Downward sloping -- in order to consume more of one good, consumption of another must decrease 2. Higher indifference curves (farther from origin) -- reflect the higher utility, and more is better 3. curves should not cross due to rational consumption 4. Most indifference curves are curved inward (convex) as the value of the trade-off is decreasing

Which of the following is most likely to cause variation in American household spending patterns? 1. each household's personal preferences 2. differing levels of family income 3. geographical location of households 4. each of the above will cause a variation

4. Each of the above will cause a variation

equal marginal principle (EMP) is defined as

A consumer maximized their utility when the Marginal Utility Per Dollar (MU / Price) is equal across all consumed goods and services.

Having an outdoor arena that will host country music concerts a half-mile from your neighborhood would be called a positive externality if you loved country music. If you hated country music that situation would be called? A public good. A great opportunity to learn to like country music. A frictional externality. A negative externality.

A negative externality.

With the existence of externalities, the definition of

A successful market outcome changes

negative externality is defined as

A two-party transaction occurs, but there are costs imposed on a third party.

Positive Externality is defined as

A two-party transaction occurs, but there is a third-party benefit

What happens to the Budget Constraint when income changes?

Ability to consume all goods changes

The OC represents

All possible spending at or below the given budget

Complementary goods

An increase in price of Good A causes a decrease in the consumption of Good B

Substitute goods

An increase in the price of Good A causes an increase in the consumption of Good B

Opportunity set:

Area that identifies all of the possible consumption combinations within a consumers budget.

Why does the law of diminishing marginal utility occur?

As consumption increases, this good becomes less scarce. Therefore, the more of a good an individual has consumed, the less valuable and important it becomes to overall satisfaction.

Why is the free-rider dilemma a market failure?

Because prices do not accurately reflect production costs.

What is a way to increase customers, but also bring market price down to increase a positive externality?

By increasing preferences to consumer, which will increase demand, and by instituting a subsidy, which will decrease price for consumers.

What happens to a BC Set when prices change?

Change in the value of the trade

Which of the following would be classified as a situation where a third-party benefits from a market transaction by others? Increased levels of air pollution in neighborhoods near a football stadium. Allowing a mining company to use a natural lake to discharge waste. Two firms trading pollution credits to avoid cutting their toxic emissions. City buying 10,000 trees for green space renewal projects.

City buying 10,000 trees for green space renewal projects.

For household/consumers, the optimal behavior is when:

Consumers maximize utility across all goods given their available income

If the goal is to increase distribution (Q) in the market, the either

Demand must increase - But this leads to increased price, which may be too high to encourage consumption Or supply must decrease - But this less to a decreased price, but this may become too low to encourage firms to supply it

Public good is defined as

Good or service whose consumption by one person does not exclude consumption by others.

The updated law of demand states that

If market prices increase, then the quantity demanded AND overall utility will decrease, and vice versa.

Market Failure is defined as

In an unregulated market, free/private market outcomes are inefficient because market prices and market distribution fail to provide proper signals to firms and consumers.

A market correction for negative externalities requires that: 1) Costs/Prices must ________________ to reflect costs to society 2) Production and distribution (Q) must ______________ to limit distribution of damaging byproducts or spillover effects

Increase; Decrease.

Indifference Curve

Line that shows the different combinations of goods and services that give an individual the same level of satisfaction

MSC is equal to

Marginal Private Cost (MPC) + Marginal Damage Cost (MDC)

MPC is the

Market price

How to solve for optimal consumption

Method 1) Identify where Total Utility is highest Method 2) Identify where EMP is satisfied

The presence and measurement of MDC indicates that

Negative externalities exist in a market, i.e. economic/market cost ≠ cost to society

Non-rival in consumption is defined as

One person's consumption of the good will not interfere with another's consumption of the good -- availability will not be diminished.

What is a way to to increase the incentive, ability to produce, as well as profit without increasing the price.

Policy must increase supply, but that will decrease the market price, so a subsidy will ensure that the price doesn't fall, but instead increases.

A firm offloads some of its production costs to 3rd parties. This would contribute to market failure because: Consumers would love the lower prices. The firm would lose money. Private benefits would not be the same as the benefits to society as a whole. Private costs would be the same as the costs to society as a whole.

Private benefits would not be the same as the benefits to society as a whole.

Ecotourism loosely defined is about tourists who hope to appreciate the ecology of their destination. This willingness of people to travel to countries and enjoy their wildlife motivates countries to Allow tourists to pay for the environmental protections. Increase housing in wilderness areas. Export wildlife. Pursue environment protections

Pursue environment protections

When the quantity of environmental protection is low so that pollution is extensive, there are usually numerous relatively cheap and easy ways to reduce pollution, and the marginal benefits of doing so are? Perfectly inelastic. Quite high. Quite low. Perfectly elastic.

Quite high

- In a positive externality, Third parties _________________ because of a private market transaction. - In private markets, __________________ is produced and sold because the private market ______________________ the total benefits to society.

Receive a benefit; too little; undervalues.

Describe the steps of constrained optimization

Step 1: Identify what a consumer is most willing to consume -- what do they like, dislike, need, or want? Step 2: Identify what a consumer is able to consume with the resources they have

If the consumption of a good changes, but the income does not, then what is the focus of the graph?

Substitutes and Complements

In the negative externality: - third parties _____________________ because of a market transaction. - ______________ is produced and sold because society's costs are ___________________ market costs.

Suffer a cost; Too much; greater then

Utility is maximized when the indifference curve and budget constraint are

Tangent to each other (i.e. the slopes are equal)

The free-rider dilemma is defined as

The communal nature of Public Goods may cause some consumers to try without paying.

When (Mu1)/(Price1) > (Mu2)/(Price2), what does this mean

The consumer has greater incentive to purchase the first good, as it brings more utility.

Spillover effects are defined as

The costs/benefits imposed on a third party.

Marginal Social Cost (MSC)

The total cost to society of producing an additional unit of a good or service.

Diminishing MRS:

Willingness to trade decreases as consumer attain more or less of a good (faux scarcity)

Are positive externalities still a market failure?

Yes, as we don't take account the positive benefit into equilibrium price

Inferior good:

a good that consumers demand less of when their incomes increase

When the quantity of environmental protection is low so that pollution is extensive, then there are usually__________________to reduce pollution and the __________________. a lot of cheap and easy ways; marginal benefits of doing so are quite high. a lot of expensive and innovative methods; marginal benefits are quite high only a few expensive and innovative methods; average benefits are higher a few inexpensive and easy ways; average benefit is slightly higher

a lot of cheap and easy ways; marginal benefits of doing so are quite high.

In terms of microeconomic analysis, what is the function of "utils"?

a measurement of utility

The refundable charge of 5 or 10 cents for returning recyclable cans and bottles works like a pollution tax incentive to avoid littering. command-and-control regulation. a market permit program. an incentive to throw bottles and cans in the trash.

a pollution tax incentive to avoid littering.

The BC is the

absolute limit of a consumers spending power

Normal good:

an increase in income will cause this good's consumption to increase

Marginal utility can:

be positive, negative, or zero

Marginal utility examines the

benefits vs the costs of trade-offs between consumption goods

The budget constraint shows what consumers

can afford

If goods are related, then a market price change will cause a(n)

change in relative prices

Budget Constraint

combinations of goods and services a consumer can afford given the level of household income and market prices.

Which of the following would be classified as a positive externality? removing government education subsidies for public schools a surcharge for ambulance service is shifted to property taxes reselling outdated textbooks to under-funded public schools converting a derelict empty lot to a public vegetable garden

converting a derelict empty lot to a public vegetable garden

Market-oriented environmental tools ______________________ for firms to take the social costs of pollution into account and ______________________ in reacting to these incentives. lack incentives; prohibit firms from having flexibility draw distinctions; lower the social costs incurred create incentives; allow firms some flexibility specify particular technology; lower the social costs incurred

create incentives; allow firms some flexibility

Increasing restrictions on consumption will

decrease demand

The most common pattern for marginal utility is ____________________.

diminishing marginal utility

The term ___________________ is used to describe the common pattern whereby each marginal unit of a consumed good provides less of an addition to utility than the previous unit.

diminishing marginal utility

When income doubles, the ability to consume a range of goods on the BC

doubles as well

Policy can be established to either

encourage increase in either Supply or Demand

Which of the following is the most appropriate response of public policy to a negative externality like pollution? assist the private party creating the negative externality to receive more social benefits find ways to account for the social costs of the negative externality in economic decisions modernize, update, and restore homes in run down neighborhoods to decrease littering encourage high standards of public education to increase innovation capability of youth

find ways to account for the social costs of the negative externality in economic decisions

Which of the following is the most appropriate response of public policy to a negative externality like pollution? modernize, update, and restore homes in run down neighborhoods to decrease littering find ways to account for the social costs of the negative externality in economic decisions assist the private party creating the negative externality to receive more social benefits encourage high standards of public education to increase innovation capability of youth

find ways to account for the social costs of the negative externality in economic decisions

An inferior good is a product:

for which demand decreases as income increases.

With respect to the benefits of clean air and water, which of the following would most likely be classified as being relatively easy to value in economic terms? gains from lower levels of corrosion all of the above are correct answers gains in farming, fishing and tourism gains in environmental enjoyment

gains in farming, fishing and tourism

A market correction for a positive externality requires that: 1) Production and distribution (Q) must ________________ to increase the positive spillover effects 2) ______________ increases to reflect benefits to society

increase; value.

The key assumption that accompanies the use of numbers for measuring utility is that:

individuals choose based on their preferences.

When Marietta chooses to only purchase a combination of goods that lie within her budget line, she:

is maximizing utility.

Why would a typical U.S. business fail to take the social costs of pollution into consideration during the development of their operating strategies? it is following the principle of voluntary exchange of benefits government regulated the limits for how much pollutant can be emitted the range of flexible, market-oriented pollution control policies are flawed it isn't required to pay any of the cost of cleaning up its pollution

it isn't required to pay any of the cost of cleaning up its pollution

The indifference curve shows what consumers

like

Rather than arguing over whether the ultimate goal is zero pollution or a reasonable level of pollution, the immediate focus should be to tackle the environmental issues where the __________________and the__________________. marginal benefits are greatest; marginal costs are least marginal benefits are least; marginal costs are greatest environmental benefits are greatest; social costs are least social costs are greatest; environmental benefits are least

marginal benefits are greatest; marginal costs are least

Rather than arguing over whether the ultimate goal is zero pollution or a reasonable level of pollution, the immediate focus should be to tackle the environmental issues where the __________________and the__________________. social costs are greatest; environmental benefits are least environmental benefits are greatest; social costs are least marginal benefits are least; marginal costs are greatest marginal benefits are greatest; marginal costs are least

marginal benefits are greatest; marginal costs are least

The term _________________ refers to the additional utility provided by one additional unit of consumption.

marginal utility

A decrease in consumer preference for a product, other things being equal, will cause:

market demand to shift to the left.

When externalities are present

market prices are not a valid measure of a good's value to society

Utility

measure of pleasure or satisfaction obtained from consuming a good or service

The bundle of goods that satisfy both conditions in constrained optimization is the

most optimal for consumers

Two rubber companies, Boing and Twang, are currently producing along, and polluting, the same river. Both companies are considering whether to install pollution filters on their factories. These filters cost $15 million each. If a filter is installed, there is a benefit of $20 million, but this benefit is divided equally between the two companies. In the absence of any government intervention or agreement between the firms, Twang will install a filter, Boing will not Boing will install a filter, Twang will not neither firm will install a filter both firms will install filters

neither firm will install a filter

When it is costly or impossible to exclude someone who hasn't paid to use a particular good from using it, then that good is classified as being

nonexcludable

In order for a good to be classified as _____________________, when one person uses the good, others are also able to use it.

nonrivalrous

If the maintenance fees for a lighthouse are paid in full each year by charging port fees, then the lighthouse is nonrivalrous and nonexcludable nonrivalrous and excludable rivalrous and nonexcludable rivalrous and excludable

nonrivalrous and nonexcludable

Non-excludable

once a good is produced, no one can be excluded from enjoying its benefits even if they are unwilling or unable to pay.

When a firm invests in new technology, the _____________________ that the firm receives are _____________________. private benefits; about three-quarters of the economic benefits social benefits; only a portion of the overall private benefits private benefits; only a portion of the overall social benefits social benefits; about one-third of the overall private benefits

private benefits; only a portion of the overall social benefits

Raven Farms raises a substantial number of bees and uses the honey to produce its own skin healing cream. Raven Farms is situated next to the Oakcreek Apple Orchard. The bees from Raven Farms pollinate Oakcreek's apple trees. In this instance, Raven Farms provides more social benefits than it derives in private benefits. derives more private benefits and provides less social benefit. provides a complete social benefit and derives a marginal private benefit. provides a marginal social benefit and derives a complete private benefit.

provides more social benefits than it derives in private benefits.

Cathy can take either of two separate roads to drive to work. The first is a lightly used new toll road that is rarely congested. The second road is a local road with no tolls, but it is often congested and has many potholes. In this instance, the toll road is nonrivalrous and excludable nonrivalrous and nonexcludable rivalrous and nonexcludable rivalrous and excludable

rivalrous and nonexcludable

There is a skating rink in your city that is open to anybody to use at any time. They even provide skates for people who don't own any. This is an example of a good that is nonrivalrous and excludable rivalrous and excludable rivalrous and nonexcludable nonrivalrous and nonexcludable

rivalrous and nonexcludable

Utility is maximized when a consumer is willing to make the _____________________; Market Signals _____________________________; Consumers are diverting __________________

same trade-off that the market requires; Reflect internal preferences, vice-versa; resources to consumption that is optimal.

non-rivalrous and non-excludable goods, the typical free-market notion of ______________ does not typically hold here

shortage

Marginal Rate of Substitution

slope of the indifference curve and it shows the value of trading away one good in order to gain one more unit of another

Economists are able to determine total utility by:

summing up the marginal utilities of each unit consumed.

marginal damage cost (MDC)

the additional harm done by increasing the level of output by one unit

Marginal Private Cost (MPC) is defined as

the amount that a consumer pays to consume an additional unit of a particular good; The cost to a firm to produce 1 additional unit of a good.

marginal utility is defined as

the change in total utility obtained by consuming one additional (marginal) unit of a good or service.

law of diminishing marginal utility

the marginal utility or additional utility, of a good decreases as more of it is consumed over a given period of time

A beekeeper decides to locate her business on a plot of land that is between an apple orchard and an elementary school. A negative externality that can result is the bees helping to pollinate the orchard, leading to more fruit. the cost of the bee hives to the beekeeper. the honey the bees produce. the possibility of the bees stinging the students at the school.

the possibility of the bees stinging the students at the school.

If large numbers of individuals choose to behave as free riders, public domain technologies become more difficult to obtain. the public good may never be provided. more of the public good will be available for paying riders. public goods will quickly be privatized.

the public good may never be provided.

Opportunity Cost

the value of the next best alternative

total utility

total amount of satisfaction obtained from the consumption of many products

as long as MU > 0, _____________

total utility increases

In microeconomic terms, the ability of a good or a service to satisfy wants is called:

utility

The demand curve is a summarization of

utility maximization behavior for households in the market.

The utility maximization model shows us how __________________ and ______________ must adjust to changes in market prices, income

well-being; preferences

If no externalities of pollution exist in a particular industry, the interaction of demand and supply ______________________. is based on choices about production relative to total average costs is based on benefits individuals perceive while maximizing utility shifts so supply has no relation to social costs will coordinate social costs and benefits

will coordinate social costs and benefits

If no externalities of pollution exist in a particular industry, the interaction of demand and supply ______________________. shifts so supply has no relation to social costs is based on choices about production relative to total average costs is based on benefits individuals perceive while maximizing utility will coordinate social costs and benefits

will coordinate social costs and benefits

Marginal rate of substitution is a measure of

willingness to trade away coming from preference

If you are highly asthmatic, then having high levels of industrial air pollutants waft over your house every day is positively a voluntary exchange would be an external voluntary exchange is a voluntary exchange. would be a negative externality.

would be a negative externality.