MicroEcon

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Companies producing toilet paper bleach the paper to make it white. The bleach is discharged into rivers and lakes and causes substantial environmental damage. The diagram to the right illustrates the situation in the toilet paper market. Suppose the government wants to use a Pigovian tax to bring about the efficient level of production. What should the value of the tax be?

$(P2-P0) per ton of output. Highest cost of benefit per unit - lowest cost of benefit.

Consider the ultimatum game , where an "allocator" is given, say, $100.00 to decide how to divide with a "recipient," who then decides whether to accept or reject the allocation, ultimately determining whether the pair receives the allocation or nothing. What is the optimal play in the ultimatum game? The optimal play in the ultimatum game is for the allocator to propose a division of the money such that the recipient receives __ and the recipient then _____ the division. When the ultimatum game experiment is carried out, both allocators and recipients act as if fairness _____ important.

$.01; accepts is

Consider a market with two firms, Coke and Pepsi, that produce soft drinks. Both firms must choose whether to charge a high price ($1.25) or a low price ($0.85) for their soft drinks. These price strategies with corresponding profits are depicted in the payoff matrix to the right. Coke's profits are in red and Pepsi's are in blue. Coke's dominant strategy is to pick a price of ___ and Pepsi's dominant strategy is to pick a price of ___. Nash equilibrium

$0.85;$0.85 Both choose $0.85

Suppose a pizza parlor has the following production costs: $2.00 in labor per pizza, $1.00 in ingredients per pizza, and $0.20 in electricity per pizza, $2,500 in restaurant rent per month and $450 in insurance per month. Assume the pizza parlor produces 5,000 pizzas per month. The variable cost of production is $ The fixed cost of production is $

$16000 $2950

Mr. Jernigan owns a piece of land on which he grows corn. Corn production annually requires $4,000 in seed, $3,000 in fertilizer, and $10,000 in pesticides. Mr. Jernigan uses his own labor to grow the corn and therefore hires no workers. If Mr. Jernigan did not use his time to grow corn, he would instead be able to sell insurance, earning $30,000 per year. Suppose another farmer has just offered to pay Mr. Jernigan rent of $20,000 per year for use of the land. If Mr. Jernigan refuses to rent the land to another farmer, then what will be his accounting costs from farming corn himself on his land? What will be his economic costs? Mr. Jernigan's accounting costs will be _____ per year, and his economic costs will be _____ per year.

$17000 $67000

Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. The table to the right shows the firm's demand and cost schedules. What is the marginal profit from producing and selling the 5th case? 1 $75 $75 $60 2 70 140 85 3 65 195 105 4 60 240 115 5 55 275 130

$20

Suppose a pizza parlor has the following production costs: $4.00 in labor per pizza, $2.00 in ingredients per pizza, $0.50 in electricity per pizza, $4,000 in restaurant rent per month, and $450 in insurance per month. Assume the pizza parlor produces 4,000 pizzas per month. The variable cost of production is _____. (Add labor, ingred, electricity) The fixed cost of production is _____. (Add rent and insurance)

$26,000; $4450

Refer to the table to the right which shows cost data for Lotus Lanterns, a producer of whimsical night lights. What is the marginal cost per unit of production when the firm produces 100 lanterns?

$32

Suppose the United States has two utilities, Commonweath Utilities and Consolidated Electric. Both produce 20 million tons of sulfur dioxide pollution per year. However, the marginal cost of reducing a ton of pollution for Consolidated Electric is $275 per ton and the marginal cost of reducing a ton of pollution for Commonwealth Utilities is $375 per ton. The government's goal is to cut sulfur dioxide pollution in half (by 20 million tons per year). If the government issues 10 million tradable pollution permits to each utility, what will be the cost of eliminating half of the pollution to society? Using a cap-and-trade system of tradable emission allowances will eliminate half of the sulfer dioxide pollution at a cost of ___ million per year. If the permits are not tradable, what will be the cost of eliminating half of the pollution? If permits cannot be traded, then the cost of the pollution reduction will be ___ mil per year.

$5500 $6500

Suppose the demand for J. Crew sweaters is illustrated in the figure to the right. Suppose the price of J. Crew sweaters is $70. What is total revenue? Price increases to $80. Total revenue is

$7000 (P X Q) $4000 elastic

Charles has decided to open a lawn-mowing company. To do so, he purchases mowing equipment for $3,000, buys gasoline ($1.60 in gas is required to mow each yard), and pays a helper $15.00 per yard. Prior to opening the lawn company, Charles earned $7,000 as a lifeguard at the neighborhood swimming pool. Assume the money he used to purchase the mowing equipment could otherwise have earned 2 percent per year in the bank and that the mowing equipment depreciates at 10 percent per year. Charles plans to mow 250 yards per year. Charles's implicit cost of production is _____ per year.

$7360

Sarah owns a bakery that sells cakes. The long run average cost of selling cakes is illustrated in the graph to the right. Suppose Sarah is currently selling 700 cakes. In the long run, Sarah should _____ output to reduce the long run average cost of production. Specifically, to sell on the minimum efficient scale in the long run, Sarah should expand output to _____ cakes.

(Before minimum efficiency) expand. 900 cakes (Minimum efficiency)

The figure to the right illustrates the demand for taxi rides in a large city. Suppose the price per ride is initially $10 but then falls to $5 due to a recession.What is the price elasticity of demand for taxi rides? Using the midpoint formula, the price elasticity of demand is ___. Demand is _____.

-.16 inelastic

Suppose the price of pepper increases by 20% and the quantity of salt demanded decreased by 4%. The cross-priced elasticity of demand between pepper and salt is ___. Pepper and salt are _____ If substitutes

-.2 (4/20) complements. positive.

CHAPTER 6 In fall 2006, Pace University in New York raised its annual tuition from $24,750 to $29,000. Freshman enrollment declined from 1,425 in fall 2005 to 1,120 in fall 2006. Assuming that the demand curve for places in the freshmen class at Pace did not shift between 2005 and 2006, use this information to calculate the price elasticity of demand. Use the midpoint formula in your calculation. Source: Karen W. Arenson, "At Universities, Plum Post at Top Is Now Shaky," New York Times, January 9, 2007. The price elasticity of demand for Pace University for the fall of 2006 is ___. The demand for places in Pace's freshman class is price Calculate the total revenue generated from Pace's freshman class in 2005 $ Calculate the total revenue generated from Pace's freshman class in 2006 $ The total amount of tuition Pace received from its freshman class _____ in 2006 compared with 2005.

-1.50 (midpoint formula) elastic 35268750 (tuition X enrollment) 32480000 fell

If a 14 percent increase in the price of Cheerios causes a 26 percent reduction in the number of boxes of cereal demanded, the price elasticity of demand for Cheerios is ___. The demand for Cheerios is _____.

-1.86 Elastic

In the graph on the right, the demand for syrup has changed because the price of frozen waffles has risen from $2.30 to $2.55 per package. The cross-price elasticity of demand between frozen waffles and syrup is ___. Graph: D1 @ 1.89, 9,000 D2 @ 1.75, 7,000

-3.89

Given this information, compute the range of price elasticity of demand for cigarettes. Source: Shaila Dewan, "States Look at Tobacco to Balance the Budget," New York Times, March 20, 2009. According to the article, the price elasticity of demand for cigarettes ranges from __ to __. Explain whether the demand for cigarettes is elastic, inelastic, or unit elastic. The price elasticities in this range

.3; .5 are inelastic because they are less than one. increase because the percentage increase in price will be larger than the percentage decrease in quantity.

Consider the market for North Face coats. Suppose average household income increases from $36 thousand to $59 thousand per year. As a result, the demand for North Face coats increases from 331 to 536. Using the midpoint formula, what is the income elasticity of demand for North Face coats? __ For this instance, North Face coast are _____ good. Furthermore, North Face coats are a _____.

.99 a normal necessity

When quantity demanded is completely unresponsive to price, what is the value of price elasticity of demand?

The graph to the right depicts the average total cost of producing meals for Ryan's Restaurant. Suppose this industry's total sales equals 10,000 meals. According to the average total cost of producing meals, this industry has room for ____ firms.

10,000 is to the right of the ATC's lowest point. Many.

Refer to the diagram to the right which shows the cost and demand curves for a profitminus−maximizing firm in a perfectly competitive market. If the market price is $30, the firm's profit maximizing output level is If the market price is $30, should the firm represented in the diagram continue to stay in business?

180 (Lower pt of ATC) Yes, because it is covering part of its fixed cost.

What is the value of the Herfindahl-Hirschman Index (HHI) when there are four firms in an industry and each firm has an equal market share? The Department of Justice and the FTC consider markets as highly concentrated if the postmerger HHI for a proposed horizontal merger is

2500 above 2500

Marginal cost = change in Total cost/Output For example, if the total cost of producing three units of output is $2,331 and the total cost of producing four units of output is $3,391, then the marginal cost of the fourth unit is _____.

3391-2331=1060.

Suppose a market has \twenty−five firms, each with 4 percent market share. What is the Herfindahl-Hirschman Index (HHI) of concentration for this market? The HHI is Higher HHI values correspond to _____ market concentration.

400 greater

The following table shows Madison's utility from consuming popcorn and Coke. Suppose that Madison has income of $21.00, the price of popcorn is $3.00, and the price of Coke is $2.25. If Madison wants to maximize her utility, how much popcorn and Coke should she buy? Popcorn MU 192 144 96 48 24 12 Coke MU 144 108 72 36 18 9 Madison should buy __ boxes of popcorn and __ cans of Coke.

4; 4.

Suppose a market has 25 firms, each with 44 percent market share. What is the Herfindahl-Hirschman Index (HHI) of concentration for this market? The HHI is ___. Higher HHI values correspond to _____ market concentration.

4^2 X 25 = 400 greater

Suppose the top figure to the right illustrates the long-run average cost curve (AC) and the marginal cost curve (MC) for a representative firm in a perfectly competitive market. Assume all firms in the industry have the same cost structure. The bottom figure illustrates the market, with a market supply curve (S) and a market demand curve (D). MC intersects AC at bottom of AC slope at $40,5. S and D intersect at $60,300 How many firms are there initially? The industry has ___ firms. Will new firms enter or will existing firms exit in the long run? In the long run, firms will _____. How many firms will there be at the long-run equilibrium? In the long-run equilibrium, there will be ___ firms.

50 enter 160

Suppose the figure to the right illustrates the marginal cost and marginal benefit from reducing sulfur dioxide pollution. Suppose also that the United States is currently generating 11.5 million tons of pollution per year. What is the optimal level of pollution reduction? The optimal level of pollution reduction is

7. Intersection.

When a firm produces 50,000 units of output, its total cost equals $6.5 million. When it increases its production to 70,000 units of output, its total cost increased to $9.4 million. Within this range, the marginal cost of an additional unit of output is

9.4-6.5=2.9/20000 .000145*1000 $145.

Country A's PPF 200 corn 200 oil Country B's PPF 270 Corn 180 oil From the PPFs shown above it can be determined that the opportunity cost of oil is lower in country ___. Given the comparative opportunity costs as revealed by the PPFs shown above, the comparative advantage for country B lies in _____. After these two countries specialize and trade with each other, country A will import _____.

A Corn Corn

What is an externality? Which of the following is an example of a good or service having the effects of a positive externality? Which of the folowing is an example of a good or service having the effects of a negative externality?

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service. Medical research Education Cigarette smoking

Match the terms below on the left with the definitions to their right. Do this by inserting into each term's response box the number associated with its correct definition. Health insurance Free-for-Service Single-payer health care system Socialized medicine

A contract under which a buyer makes payments in exchange for the provider's agreeing to pay some or all of the buyer's medical bills. A type of health insurance plan under which doctors and hospitals receive a payment for each service they provide. A health care system where one entity, usually the government, provides national health insurance to all residents. A health care system in which the government owns most hospitals and employs most doctors.

A form of market structure studied by economists is monopoly. When is a firm a monopoly, or are monopolies only theoretical concepts that do not exist?

A firm is a monopoly if its economic profits are not competed away in the long run.

CHAPTER 15 A form of market structure studied by economists is monopoly. When is a firm a monopoly, or are monopolies only theoretical concepts that do not exist?

A firm is a monopoly if its economic profits are not competed away in the long run.

When Wal-Mart decides to build a new retail store in a town, it will decide to build a large store rather than a small store if the large store is expected to earn a greater economic profit. What other motive would Wal-Mart have for chooseing to build a large store?

A larger store may deter entry into the town by a rival firm.

What is a market failure?

A market failure is when the market fails to produce the efficient level of output.

What is the definition of monopoly?

A monopoly is a firm that is created and regulated by the government. A monopoly is a firm that is the only seller of a product in a given industry. A monopoly is a firm that is the only seller of a product that can ignore the fixed cost of production. A monopoly is a firm that earns large economic profits.

What is the definition of monopoly?

A monopoly is a firm that is the only seller of a product in a given industry.

Consider the market for Hewlett-Packard (HP) printers, depicted in the figure to the right, where the supply of HP printers has increased from S1 to S2. What would cause the supply curve for HP printers to shift to the right?

A positive technological change. A decrease in the price of a substitute in production.

Lauren grows grapes. Her average variable cost (AVC), average total cost (ATC), and marginal cost (MC) of production are illustrated in the figure to the right. Assume the market for grapes is perfectly competitive and that the market price is $4.00 per crate. Characterize Lauren's economic profits. Assume she produces such that she maximizes profits in the short run.

ACT is above MC at this price. Price loss where MC intersects market price to where ACT intersects market price.

Average Fixed Cost Average Variable Cost Average Total Cost Marginal Cost Profit Maximizing Profit. Optimal Profit Total Revenue

AFC = TC when Q is 0/Q AVC = Variable Cost/Output AVC = TC - (TC when Q is 0)/Q VC = AVC x Q ATC = Total Costs/Output = TC/Q TC = ATC X Q MC = Change in TC/Change in Q Total Revenue - Total Cost (TR - TC) MR = MC Competitive firm P = MR. TR - TC (TR = P x Q) OP = the next TC - this TC TR = P x Q

Farmer Jones grows oranges in Florida. Suppose the market for oranges is perfectly competitive and that the market price for a crate of oranges is $14 per crate. Fill in total revenue, average revenue, and marginal revenue in the table below.

AR = TR/Q MR = change in TR/change in Q (same as price)

Which of the following equations is incorrect?

ATC = AVC - AFC

The figure to the right illustrates the short-run cost curves for a company that produces cell phones. Identify the average total cost curve (ATC), the average variable cost curve (AVC), the average fixed cost curve (AFC), and the marginal cost curve (MC) in the figure.

ATC is C3 AVC is C2 AFC is C1 MC is C4

The graph to the right depicts the demand (and marginal revenue) for a monopolistically competitive firm's perfume along with the average total cost and marginal cost of producing perfume in the short run. As the market for perfume moves toward a long-run equilibrium, firms will _____ the industry. This will shift demand curves for existing firms to _____ and demand curves of existing firms will become _____ elastic.

ATC is above everything. Exit. right;less

Consider the production of slices of pizza. The average total cost (ATC) and average fixed cost (AFC) of producing slices of pizza are illustrated in the graph to the right. Use the four-point curve drawing tool to graph the average variable cost of producing one, two, three, and four thousand slices of pizza.

ATC-AFC = AVC

Suppose the figure to the right represents the market for a particular brand of shampoo, such as L'Oreal, Lancome, or Maybelline. Assume the market is monopolistically competitive. What is the firm's profit-maximizing price and quantity? The monopolistically competitive firm's profit-maximizing quantity is ___ thousand bottles of shampoo, and it's profit-maximizing price is $2.00 per bottle. What are the firm's profits? Profit equals $___ thousand.

Above intersec of MR and MC on D line. 10; $2.00 Dif between point on D and bottom of ATC. $2

A small town provides a fireworks display, which is a public good, every fourth of July. For simplicity, assume the town only has two residents: Hayden and Madison. Their demands for the fireworks display are illustrated in the figure to the right. Construct the market demand curve for this public good.

Add price together for starting D. Add price together for ending D.

Economics is a social science because

All of the above

What must be true for the Coase Theorem to hold?

All parties to an agreement must be willing to accept a reasonable agreement.

Suppose the economy whose PPF is shown on the right experiences economic growth. 1.) Use the 3-point curved line drawing tool to show how growth affects the trade-offs the country faces between producing ships and food. 2.) Use the point drawing tool to draw and label a point on the new PPF that shows the economy producing more of both goods. Label this point 'B'. Which of the following may have caused the shift you have drawn? (Check all that apply.)

An increase in capital stock Advances in technology A larger labor force.

All of the following statements are true of the minimum efficient scale except one. Which one?

An increase in the output level will reduce profit.

Refer to the diagram to the right. The marginal revenue from selling the additional unit Qb instead of Qa equals

Area between Qa and Qb not along D line + area between Pa and Pb not along D line.

Which of the following is an example of a trademarked name that has become so widely used for a type of product that it is no longer associated with the product of a specific company?

Asprin OR esclalator thermos.

Farmer Jones grows applesapples. The average total cost and marginal cost of growing applesapples for an individual farmer are illustrated in the graph to the right. Assume the market for applesapples is perfectly competitive. According to the graph, farmer Jones will earn profit (positive economic profit as opposed to losses) at any market price above ___ per box. Assume that the market price specifically is $32 per box. If farmer Jones produces the profit maximizing quantity, what will be her profit? ___

At ATC slope. $18. subtract point where new Q intersects ATC by 32, market price, Xs new Q. $900

Which of the following best explains why firms don't maximize revenue rather than profit? If a firm decided to maximize revenue, would it be likely to produce a smaller or a larger quantity than if it were maximizing profit? The firm would produce a _____ quantity of output.

At the point where revenue is maximized, the difference between total revenue and total cost may not be maximized larger

What is the difference between a firm's shutdown point in the short run and its exit point in the long run? In the short run, a firm's shutdown point is the minimum point on the Why are firms willing to accept losses in the short run but not in the long run?

Average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve. There are sunk costs in the short run but not in the long run.

What is the relationship between a perfectly competitive firm's marginal cost curve and its supply curve?

A firm's marginal cost curve is equal to its supply curve for prices above average variable cost.

Why are consumers so powerful in a market system?

Because it is consumers' demand that influences the market price and dictates what producers will supply in the market.

How does perfect competition lead to allocative and productive efficiency? Perfect competition leads to allocative and productive efficiency

Because prices reflect consumer preferences. firms are motivated by profit.

Behavioral economists attribute some consumer behavior to the endowment effect. Which of the following is an example of the endowment effect? An example of the endowment effect is

Being unwilling to sell a vase for a price that is greater than the price you would be willing to pay to buy the vase if you didn't already own it.

Suppose Best Buy is the only electronics store in a particular market, but RadioShack is thinking about entering the market. Best Buy chooses how much to produce first and then RadioShack chooses whether to enter the industry. The strategies and corresponding profits for Best Buy (BB) and RadioShack (RS) are depicted in the decision tree to the right. What will the firms do?

Best Buy will choose the large quantity and RadioShack will not enter. BB second best profit, but RS won't make anything.

Consider a market with two firms, Kellogg and Post, that sell breakfast cereals. Both companies must choose whether to charge a high price ($5.00) or a low price ($2.50) for their cereals. These price strategies, with corresponding profits, are depicted in the payoff matrix to the right. Kellogg's profits are in red and Post's are in blue. What is the cooperative equilibrium for this game? Is the cooperative equilibrium likely to occur? The cooperative equilibrium

Both price $5.00 unlikely because $5 is not dominant strategy.

Suppose the figure to the right illustrates the cost curves for a firm in a perfectly competitive market. Let MC be the marginal cost curve and ATC be the long-run average total cost curve. At what point does the firm achieve productive efficiency? Using the point drawing tool, identify the quantity and the average cost at which the firm achieves productive efficiency. Label the point "Productive efficiency."

Bottom of ATC.

In the diagram to the right, illustrating a binding price ceiling at P3, the amount of producer surplus transferred to consumers is represented by area ___. and the deadweight loss is equal to areas _____.

C B and D.

Which of the following countries operates under a single-payer health insurance system? Which of the following best describes the system of socialized medicine?

Canada a health care system under which the government owns most of the hospitals and employs most of the physicians

Refer to the diagram to the right. The marginal revenue from selling the additional unit Qb instead of Qa equals

Change in quantity from Qb to Qa (Not including triangle) - Change in price from Pa to Pb (not including triangle)

How does the long-run equilibrium for a monopolistically competitive market differ from the long-run equilibrium for a perfectly competitive market? One way in which monopolistically competitive markets and perfectly competitive markets differ is that in long-run equilibrium, monopolistically competitive firms

Charge a price greater than marginal cost. OR Do not produce at minimum average total cost.

Suppose a consumer is trying to decide how much to spend on housing and how much to spend on all other (non-housing) consumption. The economic model of consumer behavior predicts that the consumer will

Choose the combination of housing and non-housing consumption that makes her as well off as possible from among the combinations of housing and non-housing items she can afford.

The figure to the right illustrates the average total cost (ATC) and marginal cost (MC) curves for an apple farmer. Assume the market for apples is perfectly competitive. If the market price for apples is $42.00 per crate, then what will be this apple farmer's profit?

Click at $42, drag to ATC point vertical to MC.

Which of the following will influence the level of competition in an industry?

Competition from other firms in the form of longer warranties. The bargaining power of buyers. The threat of new entrants. The bargaining power of suppliers.

How do market economics ultimately determine what goods and services are produced, how to produce them, and who will receive them?

Consumers determine what goods and services are produced, firms determine how to produce them, and markets determine who will receive them.

In the diagram to the right, illustrating a per-unit tax equal to P2 minus P3, tax revenue is represented by the areas _____ and the excess burden of the tax is rep by areas _____.

D and F E and G.

Consider the polar case where the price elasticity of demand is perfectly inelastic.

D is vertical.

Deadweight loss is the triangle to the left along D and MC.

How do firms use marketing? A firm might use marketing to

Decide how to distribute the product OR determining which products to produce Designing the product. Advertising the product Monitoring how changes in consumer tastes are affecting the market for the product.

Consider the market for eggs illustrated in the figure to the right. Suppose the market is perfectly competitive and initially in equilibrium at a price of 5 cents and a quantity of 50 (thousand). If the price were 7 cents instead of 5 cents, then consumer surplus would In turn, producer surplus would Consequently, at a price of 7 cents, deadweight loss would equal

Decrease by areas B and E. Increase by area B and decrease by area F. Areas E and F.

Consider the market for sugar illustrated in the figure to the right. Suppose the market is perfectly competitive and initially in equilibrium at a price of p2 and a quantity of Upper Q2. Now suppose the government applies a price floor of p3. Compared with the market-clearing equilibrium, consumer surplus would In turn, producer surplus would Consequently, with the price floor, deadweight loss would equal

Decrease by areas B and E. Increase by area B and decrease by area F. Areas E and F.

Suppose that Symantec is a small firm that has developed anti-virus computer software. Symantec currently earns $1 million per year in profits from selling its software. Dell informs Symantec that it is considering installing the software on every new computer it sells. Dell currently earns profits of $30 million but expects to sell more computers at a higher price if it can install Symantec's software. Dell first chooses whether to offer Symantec $30 or $20 for each copy of its software, and then Symantec responds by either accepting or rejecting the offer. The strategies and corresponding profits (in millions) for Dell (D) and Symantec (S) are depicted in the decision tree to the right. What is the Nash equilibrium of the game? Offer $30 D: $35 S: $12 D: $30 S: $1 - reject Offer $20 D: $46 S: $9 D: $30 S: $1

Dell will offer $20 per copy of the software and Symantec will accept the offer.

CHAPTER 12 Suppose Farmer Smith grows apples. The entire market for apples is shown in the figure below. Assume the market for apples is perfectly competitive.

Demand curve is horizontal

Assume the market price is $26. The graph to the right shows a firm in a perfectly competitive market operating at a loss. The graph includes the firm's marginal cost curve, average total cost curve, and average variable cost curve. 1.) Use the line drawing tool to graph the firm's demand curve. Label this line 'Demand'. 2.) Use the point drawing tool to plot the firm's profit-maximizing price and quantity. Label this point 'Point A'. 3.) Use the rectangle drawing tool to shade in the firm's profit (Profit/Loss). Properly label this shaded area.

Demand curve is horizontal at $26. Point A is at intersection of Demand and MC. Rectangle from Point A to price that's at the bottom of ATC.

Suppose a small town has only one artist who sells paintings, making that artist a monopoly. One of the artist's paintings is demanded at a price of $600, two paintings are demanded at a price of $450, three at $300, four at $150, and five if the paintings are given away (with a price of zero).

Demand curve starts at 600,1 and goes to 0,5. Marginal Revenue goes from 600,1 to 0,3 MR = change in TR/change in Q. So pretty much just change in TR unless Q increases more than 1 each time.

Consider the demand curve illustrated in the figure to the right. Is demand elastic or inelastic? At what price is total revenue maximized? Total revenue is maximized when price equals

Demand is elastic at all prices above $8.00 and inelastic at all prices below $8.00. 8

Suppose Farmer Smith grows apples. The enitre market for apples is shown in the figure below. Assume the market for apples is perfectly competitive

Demand is horizontal, through D and S intersection.

[Related to Don't Let This Happen to You] The publisher of a magazine gives his staff the information in the table below. He tells them, "Our costs are currently $150,000 more than our revenues each month. I propose to eliminate this problem by raising the price of the magazine to $3.00 per issue. This will result in our revenue LOADING... being exactly equal to our cost."

Demand is perfectly inelastic.

Consider the market illustrated in the figure to the right. Supply curve Upper S1 represents the private cost of production and demand curve Upper D1 represents the private benefit from consumption. Suppose consumption of this good creates a positive externality. Show how the externality affects the market.

Demand shifts right. Market equilibrium is initial intersection. Efficient equilibrium is on D2.

Suppose the figure to the right represents the market for a particular brand of shampoo, such as L'Oreal, Lancome, or Maybelline. Assume the market is monopolistically competitive and is in long-run equilibrium. How much excess capacity does the firm have? Monopolastically competitive firm's excess capacity is Instead, suppose the market is perfectly competitive and is in long-run equilibrium (with the same cost structure as that illustrated in the figure.) How much excess capacity does the firm have? The perfectly competitive firm's excess capacity is

Difference of Qpc and Qmc = 4 thousand 0 thousand

What is a key factor that determines a firm's profitability?

Differentiation of a firm's product from other products Chance events. A firm's average cost of production relative to that of competing firms. Factors affecting a firm's entire market.

Suppose Abercrombie & Fitch sells clothing in a monopolistically competitive market and that a farmer sells oranges in a perfectly competitive market. 1.) Use the line drawing tool to draw the type of demand curve likely faced by Abercrombie & Fitch. Label this line DAF. 2.) Use the line drawing tool to draw the type of demand curve faced by an individual orange farmer. Label this line DOranges.

Doranges is horizontal Daf slopes down

CHAPTER 5 Consider the market illustrated in the figure to the right. Supply curve Upper S1 represents the private cost of production and demand curve Upper D1 represents the private benefit from consumption. Suppose the consumption of this good creates a negative externality. In turn, the social benefit from consumption is represented by demand curve Upper D2. Show how the externality affects market efficiency. Use the triangle drawing tool to shade in the new economic surplus (New surplus) or the deadweight loss (Deadweight loss) created by the negative externality. Properly label this shaded area.

Draw triangle at intersection of D1 and S1, intersection of D2 and S1, and down along D2.

Nutco is a cashew-processing firm that operates in the developing country of Ecotopia. After procuring raw cashews from farms around the country, Nutco processes them using a labor-intensive method. The workers at Nutco recently demanded a 20 percent increase in their overtime wage rate. All members of Nutco's labor union, which was a substantial proportion of the company's labor force, went on an unannounced strike when the management only agreed to a 5 percent hike. During negotiations that followed, the management informed the union leader that this was a take-it-or-leave-it offer. The union leader was not convinced and declared that the workers would not come back to work unless their demands were fully met. Kurt Whitman, Nutco's human resources manager, however thinks that the strike will end soon because of the company's strong stand. Which of the following, if true, would suggest that the management's threat of not accepting the workers' demands is not credible?

Due to the impact on production and the consequent delay in delivering export orders, several of Nutco's customers have indicated that they may cancel existing contracts.

What is economic efficiency? Externalities affect the economic efficiency of a market equilibrium by causing a difference between

Economic efficiency is where consumer surplus and producer surplus are maximized. the private cost of production and the social cost of production. the private benefit of consumption and the social benefit of production.

When are firms likely to enter an industry & when are they likely to exit?

Economic profits will attract firms and economic losses will drive firms out

_____ is the study of the choices people make to attain their goals, given their scarce resources.

Economics

_____ is the study of the choices people make to attain their goals, given their scarce resources.

Economics.

A(n) _____ is someone who operates a business, bringing together the factors of production -- Labor, capital, and natural resources-- to produce goods and services.

Entrepreneur.

How do property rights affect externalities and market failure?

Externalities and market failure will result from incomplete property rights.

How do property rights affect externalities and market failure?

Externalities and market failure will result from the difficulty of enforcing property rights.

What is a key factor that determines a firm's profitability?

Factors affecting a firm's entire market. Chance events. A firm's average cost of production relative to that of competing firms. Differentiation of a firm's product from other products.

When demand curves intersect, the curve with the larger slope in absolute value (the steeper demand curve) is more elastic.

False.

Brad owns a restaurant that sells soup in a monopolistically competitive market. The graph to the right depicts the demand and marginal revenue for his soup. Suppose that Brad's restaurant is maximizing profits at 30 bowls of soup (per day). Assume that restaurants in this market are earning positive economic profits in the short run. Use the three-point curve drawing tool to add Brad's average total cost (ATC) curve to the graph. Properly label this curve.

First point at 1/2 Q and 1/2. Second point on maximized profit (35). Third point on D line, half the cost of when at 35.

Any cost that remains unchanged as output changes represents a firm's Any cost that changes as output changes represents a firm's Which of the following is most likely to be a fixed cost for a farmer? Which of the following is most likely to a variable cost for a business firm?

Fixed cost. Variable cost. Insurance premiums on property Cost of shipping products

What is free riding?

Free riding is benefiting from a good without paying for it. the market producing a quantity of public goods that is inefficiently low because they are nonexcludable.

Farmer Brown grows cotton. The average total cost and marginal cost of growing cotton for an individual farmer are illustrated in the graph to the right. Assume the market for cotton is perfectly competitive and that the market price is $22 per bushel. Also assume that farmer Brown is producing the amount of cotton that maximizes profits. Use the rectangle drawing tool to shade in farmer Brown's profit. Properly label this shaded area.

From Price line @ $22, to bottom of ATC line, right of MC.

Farmer Brown grows peaches. The average total cost and marginal cost of growing peaches for an individual farmer are illustrated in the graph to the right. Assume the market for peaches is perfectly competitive and that the market price is $20 per box. Also assume that farmer Brown is producing the amount of peaches that maximizes profits.

From price line intersection to MC to bottom of ATC

The five competitive forces model suggests the bargaining power of buyers may affect industry competition. Which of the following is an example of a way buyers might affect an industry?

GM has significant bargaining power in the tire market, which reduces the profitability of tire manufactures. OR Wal-Mart has significant bargaining power over it's supplier, which decreases the profitability of the suppliers.

Refer to the diagram to the right. If the firm is producing 700 units, what is the amount of its profit or loss?

Graph Market Price is through MC line. Right side of MC to MP are is filled in. There is insufficient information to answer the question.

The table below shows the demand for tickets to professional basketball games for you, Gina, and Chad.

Graph starting point at highest price and all demands together; ending point at lowest price and demands together.

In England during the Middle Ages, each village had an area of pasture, known as a commons, on which any family in the village was allowed to graze its cows or sheep without charge. Was the common land used optimally?

Grazing created a negative externality, resulting in the commons being overused.

CHAPTER 7 Match the countries below on the left with the health care system descriptions to their right. Do this by inserting into each country's response box the number associated with the description of its health care system. Canada Japan UK US

Has a single-payer health care system where the government provides national health insurance to all residents. Has a system of universal health insurance under which every resident is required to either enroll in a non-profit health insurance society or in a government health insurance program. The government owns most hospitals and employs most doctors, so the health care system is referred to as socialized medicine. Most people have private health insurance through employers, with the government also providing insurance to the poor, aged, and military veterans.

Firms must typically purchase inputs from suppliers to produce output. What effect might suppliers have on an industry?

If many firms can supply an input, then suppliers are unlikely to have the bargaining power to limit a firm's profits.

What is the distinction between the economic short run and the economic long run?

In the short run, at least one input is fixed, but in the long run, the firm can vary all inputs.

What is the difference between the short run and the long run? Is the amount of time that separates the short run from the long run the same for every firm?

In the short run, at least one of a firm's inputs is fixed, while in the long run, a firm is able to vary all its inputs and adopt new technology. No

Rainbow Writer (RW) is a small online company selling a highly rated software package for printing color labels directly onto CDs. The firm currently earns a profit of $2 million per year selling its package exclusively on its website. Odeon, the producer of the most popular software package for editing and burning CDs and DVDs has expressed interest in bundling Rainbow Writer's product into its own package. Odeon expects that bundling would further boost its sales and allow it to sell the new bundled product at a higher price, thus raising its profits beyond its current profit of $12 million. The diagram above shows the decision tree for the Rainbow Writerminus−Odeon bargaining game. Refer to the decision tree above. What is the equilibrium outcome in this game and is this a subgameminus−perfect equilibrium?

In the equilibrium, Odeon offers $40 per copy of the software package and is accepted but this is not a subgame-perfect equilibrium.

Many firms advertise. What effect does advertising have on firm profits? One possible effect of advertising is to

Increase profits by shifting the demand curve for the product to the right.

Suppose Dell is currently selling 2,000,000 computers per year. However, managers at Dell are considering whether to increase production by 200,000. One manager explains that after increasing production by this amount, total profit would be $100 million. Given this information, should Dell increase production by 200,000 computers?

Information about the additional revenue earned and the additional cost incurred from producing 200,000 additional computers is required to answer this question.

Your neighbor John has a barking dog. Which of the following statements is true?

It can create negative externalities by disrupting your sleep and can also create positive externalities by discouraging intruders.

Refer to the diagram to the right. What happens to the average fixed cost of production when the firm increases output from 150 to 200?

It falls.

CHAPTER 3 Consider the figure to the right and assume that it is the market for health-care services. When the "baby boomer" generation retires, the number of people who require health care increases by 30%, and, as a result, the number of health-care providers also increases, but by only 25%. What is the effect on the price of health-care services over time?

It increases because demand increased by more than supply.

Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. The table to the right shows the firm's demand and cost schedules. What is likely to happen to the product's price in the long run? 1 $75 $75 $60 2 70 140 85 3 65 195 105 4 60 240 115 5 55 275 130 6 50 300 155 7 45 315 190 8 40 320 230 9 35 315 280

It will fall.

The figure to the right shows the market demand for goods and services provided by discount department stores. Show how economies of scale in this industry can lead to an oligopolistic market by comparing the long-run average cost curves for a typical firm assuming a competitive market with a typical firm assuming an oligopolistic market.

LRAC for competitive is on far left side of graph,. LRAC for oligopolistic intersects LRAC and Demand curve.

Suppose the figure to the right illustrates the marginal cost and marginal benefit from reducing sulfur dioxide pollution. How could the government use a command-and-control approach to reduce pollution to the optimal level for society? The government could Suppose the government requires each firm to reduce sulfur dioxide emissions by an equal amount such that total emissions are reduced by 8.5 million tons per year. Is this approach necessarily economically efficient? This command-and-control approach

Limit sulfur dioxide pollution to a particular quantity per year. Is not efficient because firms can have different costs of reducing pollution.

CHAPTER 10 HW The table below shows the relationship between the number of movies seen per month and the total utility. Movies 0 1 2 3 4 5 Total Utility 0 48 80 96 104 108 In this example, consuming additional movies _____ the law of diminishing marginal utility.

Marginal Utility - 48 32 16 8 4 Illustrates

What is marketing to an economist?

Marketing is monitoring how changes in consumer tastes affect demand for product. Marketing is maintaining product differentiation through brand management Marketing is advertising the product. Marketing is deciding how to distribute product.

Is zero economic profit inevitable in the long run for monopolistically competitive firms? In the long run, monopolistically competitive firms

May continue to earn profit by convincing consumers their product is different. May continue to earn profit by improving their product.

Suppose ham is an inferior good. How will consumers adjust their buying decisions if the price of ham changes? If the price of ham increases, then consumers will demand Suppose ham is a normal good. If the price of ham increases, consumers demand ______ ham due to income effect and _____ ham due to the substitution effect.

More ham due to the income effect because their purchasing power decreases and less ham due to the substitution effect because the opportunity cost of consuming ham is higher. Less; less.

Michael Porter has argued that in many industries " strategies LOADING... converge and competition becomes a series of races down identical paths that no one can win." Source: Michael E. Porter, "What Is Strategy?" Harvard Business Review, November-December 1996, p. 64. Are firms in these industries likely to earn economic profits?

Quiz 1. 1. Trade-Offs force society to make choices, particularly when answering the following three fundamental questions:

One, what goods and services will be produced? Two, how will the goods and services be produced? Three, who will receive the goods and services produced?

Refer to the table to the right. What portion of the marginal revenue of the 4th unit is due to the output effect and what portion is due to the price effect?

Output effect = That quantity's price. Price effect = First price minus the price of this unit

Refer to the table to the right. What portion of the marginal revenue of the 4th unit is due to the output effect and what portion is due to the price effect? Q/P/R 1 $7.50 $7.50 2 7.00 14.00 3 6.50 19.50 4 6.00 24.00 5 5.50 27.50 6 5.00 30.00

Output effect = $6.00; Price effect = −$1.50

A monopolistically competitive firm doesn't produce where P = MC like a perfectly competitive firm because

P exceeds MR for a monopolistically competitive firm, and it's MR that must equal MC for profit maximization.

Suppose Pfizer has been the only pharmaceutical company to produce a certain kind of medicine, but a new firm (Mimi's Drugs) is thinking about entering the market to produce a generic version of Pfizer's drug. Absent entry, Pfizer can maximize profits by producing a small quantity. However, by producing a large quantity, Pfizer can attempt to deter entry by reducing prices and, consequently, profits. Pfizer must choose how much to produce first and then Mimi's Drugs will choose whether to enter the industry. The strategies and corresponding profits for Pfizer (P) and Mimi's Drugs (MD) are depicted in the decision tree to the right. What is the Nash equilibrium of the game? small quantity P: $47 MD: $47 P: $88 MD: $0 large quantity P: $0 MD: -$13 P: $60 MD: $0

Pfizer will choose the large quantity and Mimi's Drugs will not enter.

The figure to the right represents the demand for ice cream cones. Which of the following statements is true?

Points a and b are the utility−maximizing quantities of ice−cream cones at two different prices of ice−cream.

_____ is concerned with what is, and _____ is concerned with what ought to be. Economics is about _____, which measures the costs and benefits of different courses of action.

Positive Analysis; Normative analysis; Positive

The following information regarding cable television is from the Federal Communications Commission (FCC) Web site: In general, a cable television operator has the right to select the channels and services that are available on its cable system. With the exception of certain channels like local broadcast television channels which are required to be carried by federal law, the cable operator has broad discretion in choosing which channels will be available and how those channels will be packaged and marketed to subscribers. With the exception of programming that is required to be carried on the basic tier, the cable operator and the entity that owns the channel or programming service negotiate the terms and conditions for carriage on the cable system. Terms may include whether the channel or service will be offered in a package with other programming or whether the channel or service will be offered on a per-channel or pay-per-view basis. Source: Consumer and Government Affairs Bureau, "Choosing Cable Channels," www.fcc.gov/cgb/consumerfacts/cablechannels.html, November 6, 2008. Suppose you are a fan of The Daily Show with Jon Stewart and The Colbert Report, both on the Comedy Central cable channel, but the only way you can get Comedy Central from your local cable provider is to subscribe to a package that includes 30 other channels. Is there an externality involved here? If so, is it an externality in production or consumption, and is it positive or negative? If there is an externality, discuss possible solutions. This is potentially an example of a What would be a possible solution to this externality? (Mark all that apply.)

Positive externality in production. Have other components of the package pay Comedy Central a portion of their revenue. Allow Comedy Central to operate independently from the platinum package. Have other components of the package pay for a portion of Comedy Central's costs of producing The Daily Show and The Colbert Report. Merge the companies in the package into one company. Have other components of the package pay Comedy Central a subsidy.

How might society solve problems associated with externalities and market failure? If an externality is present, resulting in market failure, then

Private solutions may reduce or correct market failure.

Productive efficiency is intersection of MC and ATC.

_____ occurs when a good or service is produced at the lowest possible cost. _____ occurs when production is in accordance with consumer preferences.

Productive; Allocative

What affects the desirability of a product? Products become more desirable when

Professional athletes use a product because consumers who use the same product may feel closer to famous people. celebrities use a product because consumers who use the same product may feel more fashionable. movie stars use a product because consumers perceive them to be particularly knowledgeable about it.

Which of the following is an expression of profit for a perfectly competitive firm? Profit for a perfectly competitive firm can be expressed as

Profit = (P X Q) - (ATC X Q), where P is price, Q is output, and ATC is average total cost.

Suppose the figure to the right represents the market for diamond necklaces, where the company that supplies necklaces is a monopoly because it is the only firm with access to diamond mines. What is the firm's profit-maximizing price and quantity? What are profits?

Profit-maximizing is on D curve, above intersection of MC and MR. Economic profits are point on D down to ATC

How do externalities in the production of electricity result in market failure? Because of externalities, the market for electricity will

Provide too much electricity.

Q3. Intersecting Marginal private cost and Marginal Benefit.

Refer to the graph to the right, which shows two potential demand curves in the market for photocopies at a printing company. If you start at point A on D1, what is the percentage change in quantity demanded when price falls from $30 to $20? Use the midpoint formula to calculate this percentage change. Quantity from 16 to 28. Price from 30 to 20

Quantity demanded rises by 55%

As part of their budget tightening process, many states are cutting aid to colleges and universities, with students being asked to pick up a bigger part of the escalating tab of higher education. Which of the following would do the most to enable you to cope with those higher expenses without impairing your progress toward a degree?

Reducing your consumption of goods and services not essential to your education.

What role does utility play in the economic model of consumer behavior? When modeling consumer behavior, utility

Reflects the satisfaction a consumer receives from consuming a particular set of goods and services.

Match the terms below on the left with the definitions to their right. Do this by inserting into each term's response box the number associated with its correct definition. Principal-agent problem Adverse selection Asymmetric information Moral hazard

Results from agents pursuing their own interests rather than the interests of the principals who hired them. Is the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction. Occurs when one party to an economic transaction has less information than the other party. Refers to actions people take after they have entered into a transaction that make the other party to the transaction worse off.

Consider the market illustrated in the figure to the right for wood from a forest. Suppose the trees are a common resource. Supply curve S1 represents the private cost of production and demand curve D1 represents the private benefit from consumption. Show how the private market overuses common resources.

S shifts up/left. Actual equilibrium is intersection of D1, S1. Efficient equilibrium is inter of D1, S2.

Consider the market for gasoline illustrated in the figure to the right. Suppose the market is perfectly competitive and initially in equilibrium. Now suppose the government imposes a gasoline tax of 0.75 to be paid for by producers. The effect of this tax is illustrated in the figure to the right. Who bears the burden of the tax? Consumers pay ___ of the $0.75 tax (enter a numeric response using a real number rounded to two decimal places) and producers pay ___ of the tax.

S1 @ 50gas $2.50 S2 @ 45ga $3.00. $0.50 $0.25

What happens if firms in an industry merge? Suppose the figure to the right represents a perfectly competitive market. Then, the firms in the industry merge, forming a monopoly.

S1, MC1 decrease (shift right) half.

Suppose the figure to the right represents the market for a particular brand of soap such as Zest, Dove, or Ivory. Suppose also that the market is monopolistically competitive and the firm behaves optimally to maximize profit. MC intersects MR @ $0.80, 8packs. MC, D1, and ATC intersect at $1.60, 12packs. Above ATC = profit. Profit = (P - ATC) X Q. In the long run, will new firms enter the market or will existing firms exit? In the long run,

Shade D1 point (that intersects MC/MR) to ATC directly up or down from it. New firms will enter because the firm is currently making profit.

Suppose the figure to the right illustrates the marginal cost and marginal benefit from reducing sulfur dioxide pollution. Suppose also that the United States is currently planning to eliminate 5.5 million tons of pollution per year. What would be the net benefit to the United States of instead eliminating 8.5 million tons of sulfur dioxide? Use the triangle drawing tool to shade in the net benefit to society from eliminating 8.5 million tons of pollution per year compared to eliminating 5.5 million tons of pollution. Label this shaded area 'Net benefit'.

Shade above MC line, from 5.5-8.5mil tons.

Which of the following statements is true?

Sheer chance can play a significant role in the success or failure of a business.

The recent recession that began in December 2007 resulted in declining incomes as some people lost their jobs and others were forced to work fewer hours or have their wages reduced. How did this affect the market for fast food restaurantsfast food restaurants? In the figure to the right, show how the recent recession likely affected the market for fast food restaurantsfast food restaurants. Using the line drawing tool, draw either a new supply curve (Upper S2) or a new demand curve (Upper D2). Properly label your line.

Shift demand right.

Suppose the figure to the right shows the demand curve for a monopolistically competitive firm. Show the firm's marginal revenue curve. Using the line drawing tool, graph the firm's marginal revenue curve. Label this curve "MR."

Start up where it did, down to halfway between 0 and D.

Identify the one statement that does not demonstrate how social effects influence consumer choice.

Students in an Economics class are required to purchase a textbook assigned by the professor.

The figure to the right represents the market for peaches. Assume the market for peaches is perfectly competitive and a constant-cost industry. Also assume the industry is initially in long-run equilibrium. Then, the demand for peaches increases, as shown, from D1 to D2.

Supply shifts to right, intersecting D and Slr.

Assume the figure to the right illustrates the market for orange juice. Suppose the government begins providing orange juice producers a $0.30 per pound subsidy. What will be the effects of this subsidy on the market for orange juice? 1.) Using the point drawing tool, indicate the pre-subsidy competitive market equilibrium. Label this point 'e1'. 2.) Using the line drawing tool, draw a new supply curve reflecting the subsidy. Label this line 'SupplyS'. 3.) Using the point drawing tool, indicate the market price and quantity with the subsidy. Label this point 'e2'.

Supply shifts up 30 cents.

The market for corn is perfectly competitive with 1,000 farmers. Suppose the farmers have identical short-run cost curves, which are illustrated in the figure below. Describe the market's supply curve. Use the line drawing tool to draw the short-run market supply curve for corn. Label this line 'Supply'.

Suppy is same as MC

Refer to the table below. What is the marginal cost of producing the 200th pizza?

TC of Pizzas at quantity of 200 minus the initial cost, divided by 200 TC2 - TC1 = $$/Marg Prod of Labor

CHAPTER 13 Suppose a monopolistically competitive firm sells a particular brand of jeans. The quantities of jeans sold per day at various prices are shown in the table below. Fill in total revenue and marginal revenue in the table below.

TR = P X O MR = TR2 - TR1

Edward Scahill produces table lamps in the perfectly competitive desk lamp market. The equilibrium price of lamps is $55. a. Fill in the blanks in the table for total revenue and marginal revenue, as represented by (i and ii). (Enter your responses as integers.) How many table lamps will Edward produce to maximize profit? If next week the equilibrium price of desk lamps drops to $30, should Edward shut down

TR = initial revenue + 55. MR = change from selling 1 more unit. 55. Where MR = MC No because price is greater than minimum AVC.

Farmer Jones grows oranges in Florida. Suppose the market for oranges is perfectly competitive and that the market price for a crate of oranges is $18 per crate. Fill in total revenue, average revenue, and marginal revenue in the table below.

TR=MP*Q

What is the difference between technology and technological change?

Technology is the process of using inputs to make output, while technological change is when a firm is able to produce more output using the same inputs.

What is the difference between technology and technological change?

Technology is the process of using inputs to make output, while technological change is when a firm is able to produce the same amount of output using fewer inputs.

Do consumers benefit in any way from monopolistic competition relative to perfect competition? Compared to perfect competition, when a consumer purchases a product from a monopolistically competitive firm, the consumer benefits from purchasing a product

That is appealing because it is differentiated. That is more closely suited to their tastes.

Give an example of an antitrust law and give a brief description of how that law affects the government's antitrust policy.

The Clayton Act prohibited market entry of new firms if the result would reduce competition. OR The Robinson-Patman Act prohibited charging buyers different prices of the result would reduce competition.

Health care costs in a country have traditionally been moderate. However, some economists in this country predict that healthcare costs are likely to rise in the future. Which of the following trends, if true, would strengthen the argument of these economists?

The average population of the country is becoming older.

What is the definition of marginal utility? The law of diminishing marginal utility suggests that Marginal utility is more useful than total utility in consumer decision making because

The change in utility from consuming an additional unit of a good or service. consumers experience diminishing additional satisfaction as they consume more of a good or service. optimal decisions are made at the margin.

Consider the market for oil. Suppose for simplicity that there are only two oil producing countries—Saudi Arabia and Kuwait. Both countries must choose whether to produce a low output or a high output. These output strategies with corresponding profits are depicted in the payoff matrix to the right. Kuwait's profits are in red and Saudi Arabia's are in blue. Suppose the two countries form a cartel. What is the cooperative equilibrium ? Kuwait Low - $12 high - $17 Low - $9 high - $12 Saudi Arabia Low - $125 Low - $70 High - $100 High - $75 What is the Nash equilibrium for this game?

The cooperative equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a low output. The Nash equilibrium is for Saudi Arabia to produce a high output and Kuwait to produce high output.

The cooperative equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a low output. The Nash equilibrium is for Saudi Arabia to produce a low output and Kuwait to produce a high output. (highest outputs)

Which of the following is an example of a transaction cost associated with negotiating the reduction of a negative externality? An example of a transaction cost is How might transaction costs affect private solutions to externality problems? Transaction costs

The cost associated with monitoring an agreement to reduce a negative externality. May make private solutions to reduce negative externalities no longer feasible.

A country that imports a substantial amount of gasoline every year imposed a $1.2 per gallon excise tax on gasoline, to be paid by sellers. The equilibrium price of gasoline prior to the tax was $4 per gallon. Gasoline being a necessary good, its demand curve is steep and the consumers had to bear the bulk of the tax burden. The post-tax price of gasoline went up to $5 per gallon, causing the country's media to claim that it was unfair that people should have to pay so high a price for such an important consumption item. They further believed that such a high tax was inefficient and could not be justified. Which of the following, if true, would support the media's claim about the tax being inefficient?

The demand for gasoline declined, causing the revenue generation to be much lower than expected.

Assume the market for organic produce sold at farmers' markets is perfectly competitive. All else equal, as more farmers choose to produce and sell organic produce at farmers' markets, what is likely to happen to the equilibrium price of the produce and profits of the organic farmers in the long run?

The equilibrium price is likely to decrease and profits are likely to decrease.

Recent medical reports have brought forth some negative health implications from the use of this product, especially for the young people. As a result, Susanna Campbell, the marketing head of this firm, is anticipating a decline in demand. While the firm's costs have increased on the one hand, she is expecting the market price to decline to $5. If Susanna's prediction does hold true, which of the following will most likely occur?

The firm will have to shut down.

How can the government impose barriers to entry?

The government can require occupational licensing to provide goods and services.

What is the focus of a command-and-control approach to reducing pollution?

The government imposing quantitative limits on the amount of pollution firms are allowed to generate.

Consider the production of hotdogs. Given the average total cost of producing hotdogs illustrated in the graph to the right, which of the following is true of the marginal cost of producing hotdogs? ATC at $0.18. Swoops down 400hotdogs up to $0.22.

The marginal cost of producing up to 400 hotdogs is less than the average total cost, but the marginal cost of producing more than 400 hotdogs is greater than the average total cost. The marginal cost of production is exactly equal to the average total cost at 400hotdogs.

Suppose the equilibrium price and equilibrium quantity of gold both increase. Which of the following would produce such a change?

The market demand curve for gold could have increased.

Why isn't elasticity just measured by the slope of the demand curve?

The measurement of slope is sensitive to the units chosen for quantity and price.

Which of the following is a primary determinant of the price elasticity of supply? The price elasticity of supply is affected by In particular, the supply curve for a particular product will be increasingly more elastic over a _____ period of time.

The passage of time. longer

How do externalities affect markets? If a positive externality in consumption is present in a market, then

The private benefit from consumption will be different than the social benefit from consumption.

Which of the following is a characteristic of perfectly competitive markets?

The products sold by all firms in the market will be identical.

When XYZ firm entered the market for good A two years back, it kept the price of its product low to attract customers away from its leading competitor. The firm has now established itself and has a market share of 20 percent. The management of XYZ is planning to increase price of A from the current $6 per unit to $7 per unit. Timothy Walters, the marketing head, however, feels this is not a good idea because it will reduce quantity demanded drastically from the current 1,200 units to 900 units. His colleague and the head of the sales department, Jake Mayers, feels that the quantity demanded would only decline by 250 units. According to Jake, the firm can afford to increase the price because even after the price increase they would still have significant market share.

The quantity demanded declines by 10 percent in response to the $1 price increase.

What is the tragedy of the commons? How can it be avoided? The tragedy of the commons can be avoided by

The tendency for a common resource to be overused. setting a tax equal to the external cost of overusing common resources. clearly defining and enforcing property rights.

Assume that the four-firm concentration ratio in an industry is 85 percent. Which of the following statements uses one of the five competitive forces to argue that this industry may be more competitive than its concentration ratio suggests?

The threat of entry into this industry can cause firms in the industry to lower their prices and profits in order to deter entry.

Why are firms willing to accept losses in the short run but not in the long run?

There are fixed costs in the short run but not in the long run. OR There are sunk costs in the short run but not in the long run.

A firm sells 3,000 headphones at a price of $3 per unit. Even though this price is slightly higher than competing brands, the management is considering a further increase in price by 25 cents. The firm plans to focus advertising efforts on superior sound clarity. Rachel, the firm's marketing head, feels confident that a price increase by 25 cents will increase revenue. Industry analysts are of the opinion that even though the revenue is likely to increase, the firm must be careful of rivals who are actively competing for higher market share. The firm increased the price of headphones to $3.25 and anticipated a decline in quantity demanded by only 100 units. However, the firm was able to sell only 2,769 headphones at this new price. Which of the following is most strongly implied by this information?

There will be almost no change in the total revenue after the price increase.

What explanation might an economist provide why some people smoke cigarettes when such behavior can lead to health consequences? Some people likely smoke cigarettes because

They overvalue the utility from current choices.

A firm that is first to the market with a new product frequently discovers that there are design flaws or problems with the product that were not anticipated. How do these problems affect the innovating firm?

They reduce profits for the new innovations and open the door to competitors who can enter the new market with a better product.

Suppose Securitex is a small firm that has developed a new anti-theft device for automobiles. Securitex currently sells its device online and earns profit of $17 million per year. GM is considering installing Securitex's system on its automobiles. The two firms first, however, must bargain over what price GM will pay Securitex for its software. GM chooses how much to offer Securitex for its system and then Securitex chooses whether to accept the offer and install its system on GM's automobiles. The strategies and corresponding profits for GM (GM) and Securitex (SX) are depicted in the decision tree to the right. Profits are in millions, and GM's payoffs represent the additional profit it can earn on its automobiles with Securitex's anti-theft system. What is the subgame-perfect equilibrium?

The subgame-perfect equilibrium is for GM to offer a low price and for Securitez to accept the offer. (GM's most profitable/SX most profitable after low price.)

The Commerce Ministry of a country conducts regular surveys on goods and services sold within the country. Researchers at the Ministry study consumer behavior through the choices the consumers make while deciding what to buy. Their report on the industry for beverages last year indicated that the price elasticity of demand for fruit juices in the country was -0.8, while the price elasticity of demand for a particular brand called Fruit Drops was -1.2. According to the report, an average consumer spends about 1 percent of his monthly income on fruit juices. A student of economics, Julio, however feels that the current price elasticity of demand for Fruit Drops is actually higher than -1.2, based on his own experience in purchasing fruit juices.

Three new brands have been introduced in the market for fruit juices in the last month.

Consider a production process where flowers are grown (the output) using gardeners (labor) and greenhouses (capital). The quantity of flowers grown per day with various combinations of labor and capital are shown in the table below.

Total cost is cost of labor and capital. Average total cost is Total cost/ Output.

Why do most economists favor tradable emissions allowances to the command-and-control approach to pollution?

Tradable emissions allowances eliminate pollution at lower cost than the command-and-control approach.

Suppose the United States and Mexico both produce hamburgers and tacos. The combinations of the two goods that each country can produce in one day are presented in the table below. United States HB - 0 70 140 210 T - 126 84 42 0 Mexico HB - 0 7 14 21 T - 105 70 35 0 Which country has an absolute advantage in producing tacos? Which country has a comparative advantage in producing tacos? Suppose the United States is currently producing 140 tons of hamburgers and 42 tons of tacos and Mexico is currently producing 14 tons of hamburgers and 35 tons of tacos. If the United States and Mexico each specialize in producing only one good (the good for which each has a comparative advantage), then a total of ___ additional ton(s) of hamburgers can be produced for the two countries combined (enter a numeric response using an integer) and a total of ___ additional ton(s) of tacos can be produced.

US Mexico 56+hb 28+t

The stocks of Walker Industries have gained considerably following the announcement of a merger with Vicenza Inc. Walker Industries is a family-owned firm that has been in the diamond jewelry business for decades. Vicenza is a luxury jewelry company that also has several fashion labels. In response to queries from the media, John Antonio, a spokesperson for Vicenza, says that the merger will not violate any antitrust laws and will lead to efficiency gains for both firms. Maria Crusoe, a business reporter, claims that the merger will result in even higher diamond prices for consumers. Which of the following questions would be most important to answer in order to determine whether Maria's claim is accurate?

What is the combined market share of the merged entity in the diamond jewelry market?

Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets.

Wheat and corn are sold in perfectly competitive markets and Maybelline cosmetics and Ralph Lauren cologne are sold in monopolistically competitive markets. OR Apples and oranges are sold in perfectly competitive markets and Maybelline cosmetics and Ralph Lauren cologne are sold in monopolistically competitive markets.

There are many wheat farms in the United States, and there are also more than 7,000 Starbucks coffeehouses. Why, then, does a Starbucks coffeehouse face a downward-sloping demand curve when a wheat farmer faces a horizontal demand curve?

Wheat is a homogeneous good, while Starbucks is able to differentiate its coffee from other coffeehouses.

Then, HP and Dell advertise that they will match any lower price of their competitors. For example, if HP charges $350, then Dell will match that price and also charge $350. What effect will matching prices have on profits (relative to the Nash equilibrium without price matching)?

When both at higher price minus when both at lower price.

The private cost of producing a good will differ from the social cost

When there is an externality, such as acid rain generated by the production of electricity.

Which of the following is true of the relationship between the average product of labor and the marginal product of labor?

Whenever the marginal product of labor is less than the average product of labor, the average product of labor must be decreasing.

Farmer Brown grows blueberries. The average total cost, average variable cost, and marginal cost of growing blueberries for an individual farmer are illustrated in the graph to the right. Farmer Brown will incur losses if the market price falls below ___ per crate Furthermore, farmer Brown should shut down in the short run if the market price falls below ___ per crate.

Where ATC slopes lowest. $18 Where AVC slopes lowest. $14.

Farmer Smith grows apples. The average total cost and marginal cost of growing apples for an individual farmer are illustrated in the graph to the right. Suppose the market for apples is perfectly competitive. If the market price is $24 per box, then to maximize profits, farmer Smith should produce

Where MC intersects Price line. 60

Suppose that last semester your semester GPA was 3.70 and your resulting cumulative GPA was 2.83. Next, suppose that this semester your semester GPA will be 3.10. If so, then your cumulative GPA

Will increase because your "marginal" GPA will be above your cumulative GPA.

Why do single firms in perfectly competitive markets face horizontal demand curves?

With many firms selling an identical product, single firms have no effect on market price.

[Related to Solved Problem #4] Suppose you decide to open a copy store. You rent store space (signing a one-year lease), and you take out a loan at a local bank and use the money to purchase 10 copiers. Six months later, a large chain opens a copy store two blocks away from yours. As a result, the revenue you receive from your copy store, while sufficient to cover the wages of your employees and the costs of paper and utilities, doesn't cover all of your rent and the interest and repayment costs on the loan you took out to purchase the copiers. Should you continue operating your business?

Yes, because you are covering your variable costs.

(#9)Consider the graph to the right. Is it possible to say whether this firm is a perfectly competitive firm or a monopolistically competitive firm? The graph shows a _____ equilibrium because the firm is making _____ economic profits. What quantity on the graph represents long-run equlibrium if the firm were perfectly competitive? ___ lattes per week.

Yes. This is a monopolistically competitive firm because its demand curve is downward sloping. Short-run; positive Where ATC intersects D. 6

Suppose you have a monthly entertainment budget that you use to rent movies and purchase CDs. You currently use your income to rent 5 movies per month at a cost of $5.00 per movie and to purchase 5 CDs per month at a cost of $10.00 per CD. Your marginal utility from the fifth movie is 10 and your marginal utility from the fifth CD is 28. Are you maximizing utility?

You are not maximizing utility because the marginal utility per dollar spent on movies is not equal to the marginal utility per dollar spent on CDs.

CHAPTER 13 What is the difference between zero accounting profit and zero economic profit?

Zero economic profit includes a firm's opportunity/implicit costs but zero accounting profit does not.

The marginal cost of production shows the change in a firm's total cost from producing one more unit of a good or service. What is the shape of the marginal cost curve? Graphically, the marginal cost curve is

a U shape, initially falling when the marginal product of labor is rising and then eventually rising when the marginal product of labor is falling.

CHAPTER 2 A production possibilities frontier (PPF) is

a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.

If demand is perfectly elastic, then what is the effect of an increase in price?

a decrease in quantity demanded to zero

An example of technological change is

a firm rearranging the factory floor to increase production. a firm's workers going through a training program.

What is a monopoly? A monopoly is

a firm that is the only seller of a good or service that does not have a close substitute.

Give an example of a public franchise and an example of a public enterprise. An example of a public franchise is

a firm that is the sole, government-designated provider of electricity, and an example of a public enterprise is the gov directly providing water.

A black market is

a market in which buying and selling take place at prices that violate government price regulations.

Economic Efficiency is

a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.

Which of the characteristics in the list above is shared by an oligopolist and a monopolist?

a market structure with barriers to entry firm can reap long run profits.

Which of the characteristics in the list above is shared by an oligopolist and a monopolist?

a market structure with barriers to entry. firm can reap long run profits.

A firm that is the only seller of a good or service that does not have a close substitute is called

a monopoly

Yellowstone National Park is in bear country. The National Park Service, at its Yellowstone Web site, states the following about camping and hiking in bear country: Do not leave packs containing food unattended, even for a few minutes. Allowing a bear to obtain human food even once often results in the bear becoming aggressive about obtaining such food in the future. Aggressive bears present a threat to human safety and eventually must be destroyed or removed from the park. Please obey the law and do not allow bears or other wildlife to obtain human food. Source: National Park Service, Yellowstone National Park, "Backcountry Camping & Hiking," www.nps.gov/yell/planyourvisit/backcountryhiking.htm. What externality does obtaining human food pose for the bear? When campers and hikers leave human food for bears to consume, that poses What externality does the bear's obtaining human food pose for future campers and hikers? When campers and hikers leave human food for bears to consume, that poses

a negative externality for the bears because the taste of human food often causes the bears to be aggressive and since they pose a threat to human safety, they are eventually removed from the park or even destroyed. a negative externality for the future campers and hikers since they may be attacked by aggressive bears who are searching for more human food.

What are implicit costs? An implicit cost is How are implicit costs different from explicit costs?

a nonmonetary opportunity cost. An explicit cost is a cost that involves spending money, while an implicit cost is a nonmonetary cost.

The Department of Justice and the Federal Trade Commission must define the relevant market when determining whether to allow a merger. How do economists identify the relevant market? The relevant market has been identified if

a price increase results in higher profits; otherwise, the market is too narrow.

Consider the consumption of electricity.What type of good is electricity? Electricity is

a quasi-public good.

A Pigovian tax is At what level must a Pigovian tax be set to achieve efficiency? A Pigovian tax must be set equal to

a tax to bring about an efficient level of output in the presence of externalities. the cost of the externality.

labor, capital, natural resources, and entrepreneurial ability.

absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.

What is the law of diminishing returns? The law of diminishing returns states that

adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline.

The five competitive forces model suggests the threat from potential entrants affects industry competition. How might an existing firm deter entry of new firms? An existing firm might

advertise to create loyalty.

Source: Organization for Economic Cooperation and Development, OECD Health Data 2013, June 2013. According to the figure above, health care is a normal good for

all countries

Are consumers only interested in making themselves as well off as possible in a material sense? Consumers are

also concerned with fairness as exemplified by tipping restaurants that will never be visited again

The market for electronic readers consists of relatively few firms, including Amazon, Sony, and Plastic Logic. In an interview, Walter Mossberg of the Wall Street Journal asked Rich Archuleta, CEO of Plastic Logic, what price the company would be charging for a new electronic reader that it was developing, aimed at business users. Archuleta declined to give a specific price, saying instead, "The market sets pricing. We don't set pricing." But Plastic Logic is competing in an oligopolistic industry, so shouldn't the firm, not the market, be setting the price? Source: "Plastic Logic Shows New E-Book Reader," Wall Street Journal, May 27, 2009. Explain why Archuleta made the statement he made. Archuleta likely meant that

although firms in an oligopoly select their price, competitive forces, such as competition from substitute goods, determine which price maximizes profit. NOT: although firms in an oligopoly are typically free to select their price, his firm is unable to pick its price because it is colluding with other firms in the oligopoly. although firms in an oligopoly select their price, competitive forces, such as fixed costsfixed costs, determine which price maximizes profit. although firms in an oligopoly select their price, competitive forces, such as government regulations, determine which prices are legal. although some firms in an oligopoly select their price, his firm is in an oligopoly where firms do not set their own price.

What term describes laws aimed at promoting competition among firms? Which of the following laws was the first to make monopolization illegal?

antitrust aws Sherman Act

The phrase "health care outcome" refers to _____ . Compared with those of other high-income countries, health care outcomes in the United States are In attempting to compare health care outcomes across countries, a problem encountered is

any indicator of societal health. better on some indicators, inferior on others. A lack of data consistency getting an accurate Measurement of health care delivery Distinguishing health care effectiveness from lifestyle choices. Properly assessing consumer preferences.

Are monopolistically competitive firms efficient in long-run equilibrium? Monopolistically competitive firms

are not productively efficient because they do not produce at minimum average total cost and they are not allocatively efficient because they produce where price is greater than marginal cost.

Economies of scale exist as a firm increases its size in the long run because of all of the following except

as a firm expands its production, its profit margin per unit of output increases.

Firms experience economies of scale LOADING... for several reasons. What is one such reason? A firm might experience economies of scale because

as a firm expands, it may borrow money more inexpensively.

In a decision tree, the difference between a decision node and a terminal node is that

at a decision node, a decision must be made while a terminal node shows the payoff.

What is the difference in the short run and the long run? In the short run,

at least one of the firm's inputs is fixed, while in the long run, the firm is able to vary all its inputs, adopt new technology, and change the size of its physical plant.

What is the difference between a firm's shutdown point in the short run and its exit point in the long run? In the short run, a firm's shutdown point is the minimum point on the

average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve.

CHAPTER 14 Why do oligopolies exist? Oligopolies exist due to

barriers to entry.

Substitutes exist for just about every product, so can a firm ever really be a monopoly? A firm can

be a monopoly if it can ignore the actions of other firms.

Suppose a new recreational neighborhood park would cost $20,000, including opportunity costs, to construct and maintain. If built, the park would be a public good. For simplicity, assume the neighborhood park would be used by three families, each of whom would derive a marginal benefit equivalent to $8,000 from the park. Should the neighborhood park be built? It would _____ for the park to be built. If left to the private market, without private bargaining or government intervention, would the park be built? Without private bargaining or government intervention, the park _____ be built.

be optimal. would not.

With a downward-sloping demand curve, marginal revenue is below price

because the firm must lower its price to sell additional units.

Your company incurs a cost for factory rent, which, in the short run, is fixed. What happens to this cost in the long run? In the long run, the cost of factory rent

becomes a variable cost.

In recent years, some economists have begun studying situations in which people do not appear to be making choices that are economically rational. This new area of economics is called Why might consumers not act rationally? Consumers might

behavioral economics. Take into account monetary costs. Ignore nonmonetary opportunity costs. Fail to ignore skunk costs. Unrealistic about future goals.

Suppose a firm's average total cost curve is decreasing with output. What can be said of its marginal cost curve? The firm's marginal cost curve must be

below the average total cost curve.

What is the difference between a horizontal merger and a vertical merger? A horizontal merger is a merger Which type of merger is more likely to increase the market power of a newly merged firm? _____ mergers are more likely to increase market power.

between firms in the same industry, while a vertical merger is a merger between firms at different stages of the production of a good. Horizontal

The production possibilities frontiers depicted in the diagram to the right illustrate

both the labor force and capital stock increasing.

In the market for health insurance, asymmetric information problems arise because

buyers of health insurance policies always know more about the state of their health than do the insurance companies.

How is the price elasticity of demand measured?

by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price

How is the market supply curve derived from the supply curves of individual firms? The market supply curve is derived

by horizontally adding the individual firms' supply curves.

charge a price greater than marginal cost.

Consider the market for fish in public water, illustrated in the figure to the right, where S1 is marginal private cost and D1 is marginal private benefit. Fish are an example of a _____. Suppose that the use of fish in public water generates a negative externality of $150 per unit. If so, then according to the figure, the optimal quantity of fish in public water for society is __ nits.

common resource. 3

The basis for trade is

comparative advantage.

A hospital provides emergency-room medical care for local residents. Suppose the hospital currently provides this care for 15,000 patients per year at a total cost of $45,000,000. If the hospital expands, it can provide emergency-room medical care for 20,000 patients per year at a total cost of $60,000,000. If the hospital expands, will it be experiencing economies of scale, diseconomies of scale, or constant returns to scale? If the hospital expands, it will be experiencing

constant returns to scale

What explanations have economists offered for why firms don't raise prices when doing so would seem to increase profits? Firms might not raise prices when doing so might increase profits because

consumers find it unfair for firms to increase prices after an increase in demand.

What effect does a network externality have on the market for a product? If a network externality is present for a product, then

consumers may be more likely to buy the product because it is more useful.

Research by Daniel Kahneman, Jack Knetch, and Richard Thaler has shown that companies like airlines were explicitly able to include a fuel surcharge in their prices because

consumers see it as fair for firms to raise prices after an increase in costs.

How are decision trees used to analyze sequential games? A decision tree

contains decision nodes where firms must make decisions, arrows illustrating the decisions, and terminal nodes showing the resulting rates of return.

Which of the following is most likely to be a variable cost for a business firm?

cost of shipping products.

To have a monopoly, barriers to entering the market must be so high that no other firms can enter. Do network externalites create or remove barriers to entry? Explain. Network externalities

create barriers to entry because if a firm can attract enough customers initially, it can attract additional customers as its product's value increases by more people using it, which attracts even more customers.

Behavioral economist Richard Thaler has studied several examples of how businesses make use of inconsistencies in consumer decision-making. Which of the following is an example of this? An example of businesses taking advantage of inconsistencies in consumer decision-making is

credit card companies not allowing stores to charge a fee to consumers if they pay with a credit card but allowing stores to provide a discount to consumers if they pay in cash.

What happens if a perfectly competitive industry becomes a monopoly? Suppose the demand curve in the figure to the right is market demand and the corresponding market supply curve represents the marginal cost of production. Compared to perfect competition, a profit-maximizing monopoly would _____ output by ___ units. In addition, a monopoly would _____ price by ___.

decrease; 3 raise; 3

What happens if a perfectly competitive industry becomes a monopoly? Suppose the demand curve in the figure to the right is market demand and the corresponding market supply curve represents the marginal cost of production. Compared to perfect competition, a profit-maximizing monopoly would _____ output by __ units. In addition, a monopoly would _____ price by ___.

decrease; 3. Quantity where D intersects S,MC - Quantitywhere MR intersects S, MC. raise; 3. Price where D intersects - Price where MR intersects.

After World War II in 1945, the United States experienced a "baby boom" as birthrates rose and remained high through the early 1960s. In 2011, the first members of the baby boom generation became older than 65. What effect will this have on the market for nurses? As the first baby boomers become older than 65, the

demand curve for nurses will shift to the right.

A game theory analysis of deterring entry concludes that WM 10% T 10% - enter WM 22% T 0% WM 24% T 24% - enter WM 30% T 0% Given the decision tree above for an entry game, Wal-Mart will

deterring entry may be a good or a bad idea, depending on the circumstances. build a small store

The figure to the right illustrates the long-run average cost curve for a company that makes motors. Suppose the company produces 12 thousand motors per month. Is it experiencing economies of scale, diseconomies of scale, or constant returns to scale? If the company produces 12 thousand motors, then it experiences _____. At what level of output does the firm experience the minimum efficient scale? The minimum efficient scale occurs when the firm produces __ thousand motors.

diseconomies of scale. (line starts going up. 5. (lowest point)

Suppose, in an effort to prevent the population from declining, Italy begins offering new mothers extended periods of paid family leave from work and, consequently, the birthrate per woman increases. If so, then this could best be characterized as an example of people responding to

economic incentive

What effect might market power have on technological change? Market power results in

economic profits that can be spent on research to develop new products.

Many firms might like to be monopolies because such firms earn economic profits in the long run. What might cause a monopoly? A firm is likely to be a monopoly if

economies of scale are so large that the firm has a natural monopoly.

If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in the quantity demanded of 25 percent, demand for Red Bull is _______ in this range.

elastic

MIT economist Jerry Hausman has estimated the price elasticity of demand for Post Raisin Bran cereal to be −2.5 and the price elasticity of demand for all types of breakfast cereals to be −0.9. The price elasticity of demand for Post Raisin Bran cereal is _____, and the price elasticity of demand for all types of breakfast cereals is _____. Why might the price elasticity of demand for Post Raisin Bran cereal be more elastic than the price elasticity of demand for all types of breakfast cereals? Post Raisin Bran cereal

elastic; inelastic has more substitutes available.

MIT economist Jerry Hausman has estimated the price elasticity of demand for Post Raisin Bran cereal to be minus−2.5 and the price elasticity of demand for all types of breakfast cereals to be minus−0.9. The price elasticity of demand for Post Raisin Bran cereal is _____, and the price elasticity of demand for all types of cereals are _____. Why might the price elasticity of demand for Post Raisin Bran cereal be more elastic than the price elasticity of demand for all types of breakfast cereals? Post Raisin Bran cereal

elastic; inelastic is defined more narrowly.

Spending on health care has been growing faster than the economy as a whole for at least the past several decades. What has caused this trend? Health care as a proportion of GDP has been increasing because

expensive medical equipment has been invented.

The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost (ATC) curve, average variable (AVC) curve, and marginal cost (MC) curve. Fixed costs are $50.00. Suppose the market price is $15.00 per unit. Characterize the firm's profit. If the firm produces output, then it will Should the firm instead shut down in the short run? In the short run, the firm should

experience losses. continue to produce because price is greater than average variable cost.

In economic terminology, the inputs used to make goods and services are referred to as

factors of production

What are the most important differences between perfectly competitive markets and monopolistically competitive markets? Unlike in perfectly competitive markets, in monopolistically competitive markets,

firms face downward-sloping demand curves, and the products competitors sell are differentiated.

To develop a model that will answer economic questions, economists typically:

first make simplifying assumptions, then formulate a hypothesis, test the hypothesis, and finally revise the model if necessary.

According to an article in the New York Times, interest payments on bank loans make up more than half the costs of the typical solar panel manufacturer. The owner of a firm that imports solar panels made this observation about solar panel manufacturers: "So as long as companies can cover their variable costs and earn at least some revenue to put toward interest payments, they will continue to operate even at a loss." Source: Diane Cardwell, "Solar Tariffs Upheld, but May Not Help in U.S.," New York Times, November 7, 2012. The interest payments these firms make are a The quote describes logical behavior of solar panel firms in the

fixed cost since they do not vary with output. short run

Consider the supply of crude oil on the world market. In August 2011, the price of oil was roughly $80 per barrel. Which of the following changes would increase the supply of oil? The oil supply curve would shift to the right if

future oil prices were expected to be lower.

Governments often have the potential to influence whether firms are monopolies LOADING... . How might the government affect whether a firm is a monopoly? The government could

grant a copyright to a firm, giving it the exclusive right to produce a product.

Governments often have the potential to influence whether firms are monopolies. How might the government affect whether a firm is a monopoly? The government could

grant a copyright to a firm, giving it the exclusive right to produce a product.

Governments often have the potential to influence whether firms are monopolies . How might the government affect whether a firm is a monopoly? The government could

grant a firm a public franchise, making it the exclusive legal provider of a good or service.

One measure of the extent of competition in an industry is the concentration ratio. What level of concentration indicates that an industry is an oligopoly? Most economists believe that a four-firm concentration ratio of ______ than ___ percent indicates that an industry is an oligopoly. Is the concentration ratio an accurate measure of the extent of competition? The four-firm concentration ratio

greater; 40 is flawed in that it does not measure competition between industries.

Ocean Spray

has had almost exclusive ownership of cranberries, which is a key input.

Suppose an increasing number of school districts across the country find themselves with too few teachers at a time of rising enrollments and calls for improved outcomes in terms of student performance. A market-based remedy for this emerging mismatch between the availability of teachers and school districts' needs would likely emphasize

higher compensation to elicit both a larger quantity of teacher services and a greater reliance by districts on non-traditional instruction methods.

The main sources of health insurance in the United States include all of the following except

household co-operatives, or co-ops.

What effect might the government have on oligopolies? In oligopolies, the government might

impose barriers to entry with a quota to limit foreign competition.

What are the sources of externalities and market failure?

incomplete property rights. the difficulty of enforcing property rights in certain countries

As you move up a linear demand curve, the price elasticity of demand in absolute value

increases inelastic; increase

Consider the demand for cigarettes. Suppose the government decreases the cost of cigarettes by lowering cigarette taxes. How will this affect the demand for cigarettes over time? If the cost of cigarettes decreases, then the quantity of cigarettes demanded will

increase, and this effect will likely become larger (in absolute value) over time.

On the diagram to the right, movement along the curve from points A to B to C illustrates

increasing marginal opportunity costs.

Which of the following is most likely to be a fixed cost for a farmer?

insurance premiums on property.

An externality Which of the following are examples of activities that generate externalities in the market for health care? (Check all that apply.)

interferes with the economic efficiency of a market equilibrium. refers to a benefit or cost of an economic activity that affects someone who is not directly associated with it. may require government intervention. Individuals engaging in injurious or reckless lifestyle choices. People receiving vaccinations against infectious diseases.

The figure to the right shows the average cost of production (AC) for a cable company that is a monopoly as well as the corresponding demand (D) for cable subscriptions in the city to which the company provides service. Is this company a natural monopoly? This firm

is a natural monopoly because average cost is decreasing when it crosses demand.

The figure to the right illustrates market demand for a monopoly along with its average total cost (ATC) curve. Is the monopoly a natural monopoly? The firm Suppose 18 units of output are supplied in the market. How much lower is the average total cost of production for one firm compared to two firms? One firm can supply 18 units of output for ___ less per unit in ave total cost than two firms.

is a natural monopoly because it can supply the entire market at lower average total cost than can two or more firms. Q at intersection of ATC and D divided by two. $1. Price if two firms minus price if one firm.

A firm that has the ability to control to some degree the price of the product it sells

is a price maker

Is the concentration ratio an accurate measure of the extent of competition? The four-firm concentration ratio

is flawed in that it does not include sales in the U.S. by foreign firms.

In the diagram to the right, marginal benefit ______ marginal cost at output level Q1 (the lowest) The output level is considered economically _____.

is greater than. Inefficient.

Describe a monopoly's demand curve. A monopoly's demand curve

is the same as the demand curve for the product.

One of the reasons why monopolies exist is because the government blocks the entry of more than one firm into a market. How might the government do this? The government could block entry by

issuing patents to firms that develop new products or new ways of making existing products.

Why might a monopoly arise? One firm will be present when

it can supply the entire market at lower average fixed average fixed cost than can two or more firms.

Economists have developed broad and narrow definitions to identify monopolies. What is a characteristic that supports a firm being classified as a monopoly? Economists could find that a firm is a monopoly if

it earns profits in the long run.

For many years, the Aluminum Company of America (Alcoa) essentially operated as a monopoly. What made this company a monopoly. The Aluminum Company of America (Alcoa) was essentially a monopoly because

it had almost exclusive control of the world's supply of bauxite, used to make aluminum

For many years, the Aluminum Company of America (Alcoa) essentially operated as a monopoly. What made this company a monopoly? The Aluminum Company of America (Alcoa) was essentially a monopoly because

it had almost exclusive control of the world's supply of bauzite, used to make aluminum.

What conditions make a market perfectly competitive? A market is perfectly competitive if

it has many buyers and many sellers, all of whom are selling identical products, with no barriers to new firms entering the market.

If the firm is charging a price of $12 per unit Graph Market price at 8, through MC line.

it is not selling any output.

When lettuce prices doubled, from about $1.40 per head to about $2.80, the reaction of one consumer was quoted in a newspaper article: "I will not buy [lettuce] when it's $2.80 a head," she said, adding that other green vegetables can fill in for lettuce. "If bread were $5 a loaf we'd still have to buy it. But lettuce is not that important in our family." Source: Justin Bachman, "Sorry, Romaine Only," Associated Press, March 29, 2002. For this consumer's household, which product has the higher price elasticity of demand: bread or lettuce? For this consumer's household, is the cross-price elasticity of demand between lettuce and other green vegetables positive or negative:

lettuce positive

Briefly discuss the relationship between property rights and the existence of externalities. Without property rights (or if property rights are difficult to enforce), externalities are For example, if you buy a house and the government protects your right to exclusive use of that house, then your private benefit from the house will likely _____ the social benefit of the house. In another example, if you buy a college education and you have no property right that will enable you to prevent others from benefiting from your education, then your private benefit will likel

likely to result equal be less than.

Suppose that you own an electronics store that sells LCD TVs. The demand for LCD TVsis illustrated in the figure to the right. If the price elasticity of demand for LCD TVs is elastic, then you can increase your total revenue by _____ the price of LCD TVs. That being the case, if you continue lowering the price of LCD TVs, will total revenue continue to increase?

lowering no

Suppose that you own an electronics store that sells Apple iPods. The demand for Apple iPods is illustrated in the figure to the right. If the price elasticity of demand for Apple iPods is elastic, then you can increase your total revenue by That being the case, if you continue lowering the price of Apple iPods, will total revenue continue to increase?

lowering the price of Apple iPods. No.

The figure on the left represents the cost structure for a perfectly competitive wheat farmer with her average total cost (ATC) ($5, 11bshl) curve and marginal cost (MC) (Inters. ATC @ $5, 11bshl) curve-this firm's cost curves are representative of most firms in the market. The figure on the right represents the market for wheat. S starts at $5, 3bshl, goes to $9, 7bshl. D starts at $9.5, goes to $1, inters S at $7, 3.5bshl. Characterize profits for the firms in this industry. Firms in this market are currently What will be the market price at the long-run competitive equilibrium? The long-run equilibrium price will be In long-run, firms will _____ the market until the marginal firm is earning _____.

making a profit (Above ATC) $500. enter; zero economic profit.

Economists use the work marginal to mean an extra or additional benefit or cost of a decision. An optimal decision occurs when

marginal benefit equals marginal cost.

If the average variable cost curve is above the marginal cost curve, then

marginal costs can be either increasing or decreasing.

The increase in total revenue that results from selling one more unit of output is What is the relationship between price, average revenue, and marginal revenue for a firm in a perfectly competitive market?

marginal revenue. Price is equal to both average revenue and marginal revenue.

Suppose the market for Christmas trees is perfectly competitive and that the market price for Christmas trees is $76 per tree. How many Christmas trees should Sophia grow?

market price for product X amount of trees sold minus Total cost. MP X Q = ? - TC

The price elasticity of demand for milk is likely to be more inelastic than the price elasticity of demand for concert tickets because

milk is more of a necessity.

Oligopolies exist because of barriers to entry. One of the most important barriers to entry is due to economies of scale. Why is this true? It is more likely for an industry to be an oligopoly than competitive in the presence of economies of scale because

minimum average cost occurs when firm output is a large fraction of industry output.

A firm that is the only seller of a good or service that does not have a close substitute is called

monopoly

Which are more economically efficient, perfectly competitive markets or monopolies? Compared to monopolies, perfectly competitive markets are

more economically efficient because they result in more economic surplus.

Compare the price elasticity of demand for pencils with the price elasticity of demand for gasoline. The price elasticity of demand for pencils is likely

more inelastic because pencils tend to represent a smaller fraction of a consumer's budget.

In the 2010 holiday season, Steve Richardson decided to cut the prices of his hand-crafted wooden puzzles to increase sales. According to a newspaper account, "the number of orders at Stave Puzzles Inc., his Norwich, Vt. business, hasn't been enough to offset the price cuts." Source: Emily Maltby, "In Season of Big Discounts, Small Shops Suffer," Wall Street Journal, November 24, 2010. The demand for these puzzles

must be inelastic because the percentage increase in the quantity demanded for orders is less than the percentage decrease in price of the puzzles.

The chapter states that your consuming a Big Mac does not create an externality. But suppose you arrive at your favorite McDonald's at lunchtime and get in a long line to be served. By the time you reach the counter, there are 10 people in line behind you. Because you decided to have a Big Mac for lunchlong dash—instead of, say, a pizzalong dash—each of those 10 people must wait in line an additional 2 minutes. Or suppose that after a lifetime of consuming Big Macs, you develop heart disease. Because you are now over age 65, the government must pay most of your medical bills through the Medicare system. Under these circumstances, when you consume a Big Mac you create a _____ externality in _____. Might there be a justification here for the government to intervene in the market for Big Macs? Explain.

negative; consumption. Because the private benefit of your consuming a Big Mac is greater than the social benefit, the government should intervene to internalize the externality.

The reason that the Fisherman's Friend restaurant in Stonington, Maine had a monopoly on selling seafood dinners in that town is most likely due to

no competitors apparently found the profit level attractive enough to enter the market.

Suppose the production of electricity by a utility generates pollution that harms others. Suppose also that Coase bargaining can occur between the utility and the victims of pollution but that the utility has not been legally liable for the damages from its pollution. How would making the utility legally liable for the damages from its pollution affect pollution reduction? If the electric utility and the people suffering the effects of the utility's pollution can bargain, then making the utility legally liable for the damages from its pollution will

not change the amount of pollution reduction because the marginal benefit and marginal cost of pollution reduction will not change.

A representative monopolistically competitive firm's demand (D), marginal revenue (MR), marginal cost (MC), and long-run average cost (AC) curves are illustrated in the figure to the right. AC is above everything. Is this industry in long-run equilibrium? This industry is

not in long-run equilibrium because firms are incurring losses, which will result in firms exiting.

A monopolistically competitive firm's demand curve (D), marginal revenue curve (MR), and marginal cost curve (MC) are illustrated in the figure to the right. Is this firm maximizing profits if it chooses to produce 8 (pass MC intersection of MR) units of output? Explain. If the firm chooses to produce 8 units of output, then it is

not maximizing profit because marginal cost is greater than marginal revenue, so the firm should produce less.

Consider the market for a common resource such as fish in public water, illustrated in the figure to the right where S1 represents marginal private costs and D1 represents marginal private benefits. The dashed green line represents the corresponding marginal social cost. The private market tends to _____ common resources. Use the triangle drawing tool to shade in the amount of deadweight loss created by the private market. Properly label this shaded area.

overuse Shade above D1 line. Along dash and D1.

Use the graph to the right of the market for basketball tickets at State University to answer these questions: The supply curve is Suppose the basketball team at State University goes undefeated in the first half of the season, and the demand for basketball tickets increases. The equilibrium If State University basketball team continues to do very well in future years, and a new bigger stadium is built, then the price elasticity of supply would

perfectly inelastic (Straight up) price of tickets increases but the equilibrium quantity stays the same. increase

pg. 429

Consider the demand for condominiums illustrated in the figure to the right. What demographic change would likely result in the demand curve for condominiums shifting to the left? The demand curve for condominiums would likely shift to the left if the

portion of the population that is elderly decreases.

A monopolistically competitive firm is not allocatively efficient because

price exceeds marginal cost.

Some factors that allow firms to make economic profits are beyond its control. All but one of the following is an uncontrollable factor. Which factor is controllable?

product differentiation.

The primary difference between product markets and factor markets is that

product markets are markets for goods, while factor markets are markets for factors of production--labor, capital, natural resources, and entrepreneurial ability.

Two health care analysts argue that in the United States, "we have arrived at a moment where we are making little headway in defeating various kinds of diseases. Instead, our main achievements today consist of devising ways to marginally extend the lives of the very sick." Source: David Brooks, "Death and Budgets," New York Times, July 14, 2011. Should "marginally extend[ing] the lives of the very sick" be an important goal of a health care system and, if not, what other goals should have a higher priority? While this normative question has no definite correct or incorrect answer, it seems reasonable to expect that any health care system would, at a minimum and through multiple avenues, The success of health care systems of different countries in extending the lives of the very sick

reduce human suffering may be measured by examining illness/disease mortality ratios.

Compare the price elasticity of demand for water with the price elasticity of demand for wine. The price elasticity of demand for wine is likely

relatively more elastic because wine is a luxury.

Compare the price elasticity of demand for water with the price elasticity of demand for wine. The price elasticity of demand for water is likely

relatively more inelastic because water is a necessity.

The government indirectly influences the level of industry competition with its own barriers to entry. How? The government can restrict entry by

requiring licenses for a firm to produce.

Which one of the following factors helps determine the marginal cost of reducing crime? Which one of the following factors helps determine the marginal benefit of reducing crime? Would it be economically efficient to reduce the amount of crime to zero? Briefly explain.

resources devoted to courts. personal injury from crime. No. It would not be efficient to completely reduce crime because the marginal cost of doing so likely exceeds the marginal benefit.

[Related to Making the Connection] After a federal court judge had found Apple guilty of conspiring with book publishers to raise e-book prices, the Department of Justice recommended that the judge order Apple not to sign agency model contracts with publishers for five years. The publishers objected to the recommendation, arguing that the recommendation would "effectively punish the publishers by prohibiting agreements with Apple using an agency model." Source: Chad Bray, "Publishers Object to E-Book Plan for Apple," Wall Street Journal, August 7, 2013. Under the agency model, the publishers would set the The Department of Justice would want to keep Apple from signing agency model contracts with publishers because it wants to The publishers would want to continue signing such contracts because this would allow them to

retail price of e-books and Apple would keep 30 percent of the price of every e-book it sold. keep firms from artificially restricting competition to raise prices. keep prices higher.

Consider a pair of Nike shoes. Is the consmption of Nike shoes rival and excludable? The consumption of Nike shoes is

rival and excludable.

How are games in game theory played? In game theory,

rules determine what actions are allowable, players employ strategies to attain their objectives, and payoffs are the results of the interaction among the players' strategies.

How are games in game theory played? In game theory, How is game theory used in economics? In economics,

rules determine what actions are allowable, players employ strategies to attain their objectives, and payoffs are the results of the interaction among the players' strategies. the rules of the game include laws that a firm must obey, a strategy is a firm maximizing profits, and the payoffs are profits. OR the rules of the game include matters beyond a firm's control, a strategy is a firm maximizing profits, and the payoffs are profits.

One of the basic facts of life is that people must make choices as they try to attain their goals. This unavoidable fact come from a reality an economist calls

scarcity.

In many business situations one firm will act first, and then other firms will respond. To help analyze these types of situations economists use

sequential games.

How do network externalities affect barriers to entry? Network externalities

serve as barriers to entry because new products are less useful.

Encyclopedia Britannica is an encyclopedia publisher who sells printed encyclopedias. In the 1990s, encyclopedias began to be sold electronically. What effect did electronic encyclopedias have on Encyclopedia Britannica? Electronic encyclopedias

served as a superior product to heavy-bulky, and expensive printed encyclopedias.

Are monopolies economically efficient? Consider the market to the right. Compared to the perfectly competitive outcome, what would be the change in surplus if instead the market had one supplier that was a monopoly? Use the triangle drawing tool to shade in the change in surplus. Properly label this shaded area.

shade along left side of MC and along D. Deadweight loss.

Economist Harvey Leibenstein argued that the loss of economic efficiency in industries that are not perfectly competitive has been understated. He argues that when competition is weak, firms are under less pressure to adopt the best techniques or to hold down their costs. He refers to this effect as "x-inefficiency." If x-inefficiency causes a firm's marginal costs to rise, how is the deadweight loss caused by a monopoly understated? Suppose MC1 is the marginal cost of production with perfect competition and MC2 is the marginal cost of production with x-inefficiency.

shade out to intersection of MR and MC2. Down to MC line up to Demand line.

Why would a monopolistically competitive firm advertise? A monopolistically competitive firm would advertise to

shift its demand curve to the right. More inelastic

Economic models are

simplified versions of reality designed to analyze "what is" to explain human decision making in any context.

Behavioral economics is the study of Three mistakes consumers often make are

situations in which people make choices that do not appear to be economically rational. ignoring nonmonetary opportunity costs, failing to ignore sunk costs, and being overly optimistic about the future.

slopes down with Demand is a natural monopoly because it can supply the entire market at lower average total cost than can two or more firms. 1; point half of 18

Is the loss in efficiency due to market power large or small? Explain. The loss in efficiency due to market power is

small because firms with substantial market power are rare.

Monopolies are recognized to create deadweight loss. How large are the efficiency losses due to monopoly? Economists generally agree that efficiency losses due to monopolies in the economy are

small because true monopolies are very rare.

Is it ever possible for an increase in pollution to make society better off? Referring to the graph to the right,

society would be better off increasing pollution if pollution reduction is at Q3.

EXAM 3 A fast-food restaurant decides to raise the price of its hamburgers. Assume the firm is in a monopolistically competitive industry. What will happen to the demand for its hamburgers? When the fast-food restaurant raises the price of hamburgers,

some of its customers will be willing to pay a higher price because they prefer this brand of hamburgers.

Suppose a local McDonald's hamburger restaurant raises the price of its cheeseburgers from $2.00 to $2.50. What will happen to the quantity of McDonald's cheeseburgers demanded? If McDonald's raises the price of it's cheeseburgers, then

some of McDonald's customers, but not all of them, will still demand McDonald's cheeseburgers because they may prefer McDonald's cheeseburgers to cheeseburgers at other fast-food restaurants.

When the government imposes price floors or price ceilings,

some people win, some people lose, and there is a loss of economic efficiency.

The marginal product of labor potentially increases (from one to three workers) due to

specialization.

Economist X. M. Gao and two colleagues have estimated that the cross-price elasticity of demand between beer and spirits is 0.15. If so, then beer and spirits are _____. Gao and colleagues have estimated that the cross-price elasticity of demand between beer and wine is 0.31. If the price of wine increases by 10 percent, then the quantity of beer demanded will In addition, Gao and colleagues have estimated the income elasticity of demand for beer to be minus−0.09. If so, then beer

substitues. increase; 3.1 an inferior good

The distinction between substitutes and complements is

substitute goods are used for the same purposes while complementary goods are used together.

Many factors under a firm's control affect profitability. Do factors that are not under a firm's control also affect profitability? Factors not under a firm's control

such as rising rising fuel prices affect profitability. OR terrorist events

Suppose the figure to the right illustrates the market for toilet paper, where S1 (intersects D @ $175,550tons) represents the marginal private cost of production and D1 represents the marginal private benefit from consumption. Companies that produce toilet paper bleach the paper to make it white. Some paper plants discharge the bleach into rivers and lakes, causing substantial environmental damage. Assume that S2 (inter D @ $325,250tons) represents the marginal social cost of producing toilet paper (incorporating the externality). What could the government do to internalize the externality? In the presence of a negative externality, the government could _____ toilet paper production. In particular, the gov should set a Pigovian tax of __ per ton of toilet paper produced.

tax $225

What "forces" does the five competitive forces model address? The competitive forces in the five competitive forces model does not include

technological change.

both the labor force and capital stock increasing.

that it makes it possible for society to become better off by increasing both its production and its consumption.

What is the supply curve for a perfectly competitive firm in the short run? The supply curve for a firm in a perfectly competitive market in the short run is

that firm's marginal cost curve for prices at or above average variable cost.

In 2013, the Educational Testing Service (ETS) charged $51 to take the Scholastic Aptitude Test (SAT) but $150 to take the Graduate Record Exam (GRE). One reason for this difference in price is

the ETS faces competition in the market for the SAT but no competition for the GRE.

A narrow definition of monopoly is that a firm is a monopoly if it can ignore

the actions of all other firms

A narrow definition of monopoly is that a firm is a monopoly if it can ignore

the actions of all other firms.

CHAPTER 4 Tax incidence is

the actual division of the burden of a tax between buyers and sellers in a market.

The private benefit is ________, while the social benefit is ________. A positive externality causes

the benefit received by the consumer of a good or service; the total benefits from consuming the good or service the social benefit from consuming the good to be greater than the private benefit.

Suppose a common resource--wood in a public forest--is being overused because residents consider the benefits of gaining firewood or wood for building but do not account for the cost of deforestation when chopping down trees. What could be done to prevent wood in the forest from being overused? To prevent overuse of the common resource,

the community could estab norms where social pressure limits deforestation.

Examples of transaction costs include When are we likely to see private solutions to the problem of externalities?

the cost of monitoring an agreement. the cost of drafting a contract or agreement. the time required to negotiate an agreement. When transaction costs are low. When the parties involved have information about the externality. When the number of parties involved is small.

Consider a form of public consumption such as attending sporting events. An individual's demand for sporting events depends on

the cost of the sporting event. the individual's tastes and preferences. the popularity of the sporting event.

Suppose the market for fast-food value meals is monopolistically competitive, with many restaurants selling their own brand of food. Assume the restaurants in the industry behave optimally by maximizing profit. The figure to the right represents the market for one monopolistically competitive firm's value meals. How will this figure change as the market moves toward long-run equilibrium? In the long run, ATC swoops above everything. MC swops below D1 and MR then comes up above ATC. Short-run at $4.80, 8meals. MC and MR cross @ $1.60, 8meals.

the demand curve will shift to the right and become more inelastic because the firms are currently experiencing losses.

If buyers of a monopolistically competitive product feel the products of different sellers are strongly differentiated, then

the demand for each seller's product is relatively inelastic.

How should firms in perfectly competitive markets decide how much to produce? Perfectly competitive firms should produce the quantity where

the difference between total revenue and total cost is as large as possible.

What factors under the control of owners and managers make a firm successful and allow it to earn economic profits? Owners and managers control some of the factors that make a firm successful such as

the firm's ability to produce its product at a lower average cost than competitors.

Refer to the table below. Which of the following costs are implicit costs? Which of the following are sometimes called accounting costs?

the forgone salary and interest explicit costs

Why might a monopoly arise? One firm will be present when

the government blocks entry of more than one firm by granting a copyright.

What is the government's policy on collusion in the United States? Explain the rationale for this policy. In the United States

the government makes collusion illegal with antitrust laws because monopolies reduce economic efficiency.

Opportunity cost is

the highest valued alternative that must be give up to engage in an activity.

The figure to the right represents the demand for ice cream cones. When the price of ice cream cones increases from $2 to $3, quantity demanded decreases from 4 ice cream cones to 3 ice cream cones. This change in quantity demanded is due to

the income and substitution effects.

For a demand curve to be upward sloping, the good would have to be an inferior good, and

the income effect would have to be larger than the substitution.

The production function is the relationship between

the inputs employed by a firm and the maximum output it can produce with those inputs.

How are prices determined in perfectly competitive markets? In perfectly competitive markets, prices are determined by

the interaction of market demand and market supply because firms and consumers are price takers.

Prepping for a next-day exam over the course of an evening (and possibly into the wee hours of test day) poses increasing costs since

the longer you choose to study will result in an increase in the number and value of foregone activities.

In the world oil market, oil is supplied up to the point where

the marginal cost of the last barrel is just equal to the price buyers are willing to pay for that last barrel.

In perfect competition

the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic.

Refer to the graphs above. Suppose the graph on the left represents a typical firm's supply curve in a perfectly competitive industry, and there are 100 identical firms in the industry. Graph on right is graph left's Q x 100. What does the graph on the right represent?

the market supply curve.

Income elasticity of demand is Use income elasticity to distinguish a normal good from an inferior good. For a normal good, the income elasticity of demand will be Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a necessity?

the percentage change in quantity demanded divided by the percentage change in income. positive, but for an inferior good, the income elasticity of demand will be negative. Yes. If the income elasticity of demand is greater than 1, then the good is a luxury. If the income elasticity of demand is positive but less than 1, then the good is a necessity.

What is the formula for the price elasticity of demand? The formula for the price elasticity of demand is

the percentage change in quantity demanded divided by the percentage change in price.

The cross-price elasticity of demand is If the cross-price elasticity of demand is negative, then the products are:

the percentage change in quantity demanded of one good divided by the percentage change in the price of another good. complements, but if it is positive, then the products are substitutes.

How is the price elasticity of demand measured? The price elasticity of demand is measured as

the percentage change in the quantity demanded divided by the percentage change in price.

CHAPTER 1 When the Fed Gov crafts environmental policies that make it less expensive for firms to follow green initiatives,

the policies are consistent with economic incentives.

Suppose the demand for wheat increased only slightly between 1950 and 2000 but the equilibrium quantity increased dramatically. Absent any other changes, what could explain the large increase in the equilibrium quantity? The equilibrium quantity of wheat could have increased dramatically given a slight increase in demand because

the price elasticity of supply is relatively elastic

CHAPTER 11 HW Technology is An example of technological change is

the processes a firm uses to turn inputs into outputs of goods and services. Being able to produce more output using the same inputs. Being able to produce the same output using fewer inputs. A decline in the quantity of output that can be produced from a given quantity of inputs.

How is game theory used in economics? In economics,

the rules of the game include matters beyond a firm's control, a strategy is a firm's actions to achieve a goal, and the payoffs are profits.

According to the Coase theorem, a steel plant that creates air pollution would agree to curtail production (and therefore pollution) even if it were not legally liable for the damage the pollution was causing because According to the Coase theorem, a pollutor such as the steel plant that creates air pollution will agree to reduce pollution and production

the steel plant may receive payments from the victims of pollution that overcompensate it for the reduction of output. even if the victims of pollution do not have the property right to clean air.

A number of political leaders have expressed concern about the nation's decline as a major steel producer. Many have advocated policies to restrict imports and promote domestic production. These individuals would see their position weakened most by the knowledge that

the substitution of domestic steel for foreign steel absorbs resources that would otherwise produce goods of greater value.

Total revenue is Marginal revenue is Maximizing profit when If next week the equilibrium price of desk lamps drops to $30, should it be shut down?

the total amount of funds received by a seller of a good or service, calculated by multiplying price per unit by the number of units sold. TR = initial TR + first TC the change in total revenue from selling one more unit. TR2 - TR1. All the same. marginal revenue equals marginal cost. Output should be expanded up to this point. No because price is greater than minimum AVC

Which of the following is a threat to a trademarked company name? Trademarked brands are threatened by

their names becoming so widely used for a type of product that they no longer are associated with a specific company.

According to the law of supply,

there is a positive relationship between price and quantity supplied. as the price of a product increases, firms will supply more of it to the market.

According to the law of demand,

there is an inverse relationship between price and quantity demanded.

According to an article in the Economist about the health care system in the United Kingdom, "A defining principle of the National Health Service is that it is 'free at the point of delivery'." Source: "Free-for-All," Economist, June 1, 2013. The reference to "free at the point of delivery" means Is health care actually free to residents of the United Kingdom?

there is no charge to the health care system user. No, because they pay for these services through their taxes.

Does the fact that monopolistically competitive markets are not allocatively or productively efficient mean that there is a significant loss in economic well-being to society in these markets? Though monopolistically competitive markets are not allocatively or productively efficient, consumers benefit in that

they are able to purchase a differentiated product that more closely suits their tastes.

Comparisons of health care outcomes across countries often concentrate on measures such as life expectancy and infant mortality since

they are among the easiest outcomes to measure because a specific event (death) has occurred.

Why does the government issue patents? The government issues patents How long do patents last? A patent is the exclusive right to a product for a period of ___ year from the date the patent is filed with the gov.

to encourage firms to spend money on the research and development necessary to create new products. 20

Why does the government issue patents? The government issues patents How long do patents last?

to encourage firms to spend money on the research and development necessary to create new products. 20yrs.

Suppose a firm introduces a significantly different version of an old product. How might that firm use brand management Such a firm might use brand management to

to postpone the time when they will no longer be able to earn economic profits.

Which of the following is not a reason why government officials are willing to impose entry barriers?

to promote an equitable distribution of income

[Related to Solved Problem #4] According to an article in the Wall Street Journal, in 2007 the insurance company AXA Equitable signed a long-term lease on 2 million square feet of office space in a skyscraper on Sixth Avenue in Manhattan in New York City. In 2013, AXA decided that it only needed 1.7 million square feet of office space, so it subleased 300,000 square feet of space to several other firms. Although AXA is paying a rent of $88 per square foot on all 2 million square feet it is leasing, it is only receiving $40 per square foot from the firms subleasing the 300,000 square feet. AXA's actions might make economic sense in the short run if AXA's AXA's actions could make economic sense in the long run if AXA's

variable cost per square foot was equal to or less than $40. total cost per square foot is equal to $40 or less.

Which costs are affected by the level of output produced?

variable costs.

Giffen goods

were not shown to exist til 2006.

Economies of scale occur For which of the following reason(s) may firms experience economies of scale?

when a firm's long-run average costs decrease with output. Firm's production may increase with a smaller proportional increase in at least one input. Large firms may be able to purchase inputs at lower costs than smaller competitors; they can also borrow money at a lower interest rate. Both managers and workers may become more specialized and hence more productive as output expands.

When is market failure likely to arise?

when property rights are incomplete when it is difficult to enforce property rights.

When will the private benefit from consuming a good differ from the social benefit?

when there is an externality, such as second-hand smoke generated by the consumption of cigarettes. when there is an externality, such as fewer diseases generated by the consumption of vaccines.

What is a sequential game? A sequential game is a game

where one firm acts first and then the other firms respond.

When a proposed merger between two companies is reviewed by the government, the relevant market is defined by

whether or not there are close substitutes for the products of the two firms.

What effect does the entry of new firms have on the economic profits of existing firms? When new firms enter a monopolistically competitive market, the economic profits of existing firms

will decrease because their demand curves will shift to the left.

A few years ago Netflix (N) pioneered an online DVD rental service. Blockbuster (B), a brick and mortar DVD/video rental company, waited until Netflix had been in business for over a year before deciding whether to establish its own online rental service. At this point, Netflix had to decide whether or not to lower its subscription price in order to deter Blockbuster's entry into the market. The figure above shows the decision tree for the Netflixminus−Blockbuster entry game. Refer to the figure above. Does it make sense for Netflix to lower its price in order to deter Blockbuster's entry into the online DVD rental market?

No, because Netflix will make a higher profit by keeping its subscription price unchanged, whether Blockbuster enters the market or not.

Trade-offs force society to make choices, particularly when answering the following three fundamental questions:

One, what goods and services will be produced? Two, how will the goods and services be produced? Three, who will receive the goods and services produced?

With a downward-sloping demand curve, average revenue is equal to price

actually, average revenue is always equal to price, whether demand is downward sloping or not.

MicroEcon

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