Econ Micro Midterm 2

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If Kevin's children run a lemonade stand for a day and sell 200 glasses of lemonade at $0.50 each, their total revenues are

. $100.

diminishing marginal product

the marginal product of an input declines as the quantity of the input increases

The greatest difficulty with cost-benefit analysis of a public project is determining

the value or benefit of the project.

Positive externality graphs point

to the left

Negative externality graphs point

to the right

accounting profit

total revenue - explicit costs

If a firm produces nothing, which of the following costs will be zero?

variable cost

Private good example

wheat (rival and excludable)

The Coase theorem suggests that private markets may not be able to solve the problem of externalities

when the number of interested parties is large and bargaining costs are high

Highway engineers want to improve a dangerous stretch of highway. They expect that it will reduce the risk of someone dying in an accident from 5.3 percent to 2.1 percent over the life of the highway. If a human life is worth $10 million, then the project is worth doing as long as it does not cost more than

$320,000.

Gwen has decided to start her own photography studio. To purchase the necessary equipment, Gwen withdrew $2,000 from her savings account, which was earning 3% interest, and borrowed an additional $4,000 from the bank at an interest rate of 7%. What is Gwen's annual opportunity cost of the financial capital that has been invested in the business?

$340

Economists normally assume that the goal of a firm is to (i) sell as much of its product as possible. (ii) set the price of the product as high as possible. (iii) maximize profit.

(iii) maximize profit.

Suppose the cost to run the ferry for each roundtrip is $1,000 per day and the 4 business owners have agreed to split the costs of the ferry trips equally. How many ferry trips would the owner of Store A prefer to have?

0

Altering incentives so that people take account of the external effects of their actions

1) is called internalizing the externality. 2) can be done by imposing a corrective tax. 3) is the role of government in markets with externalities.

For a construction company that builds houses, which of the following costs would be a fixed cost?

10000 per year premium paid to an insurance company 50000 per year salary paid to a construction foreman 30000 per year salary paid to the company's bookkeeper

Which of the following statements about a well-maintained yard best conveys the general nature of the externality?

A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in the neighborhood.

Pete owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial statements? (i) shoe polish (ii) rent on the shoe stand (iii) wages Pete could earn delivering newspapers (iv) interest that Pete's money was earning before he spent his savings to set up the shoe-shine business

A. (i) and (ii) only

ATC =

AFC + AVC

Average total cost (ATC) is calculated as follows:

ATC = (total cost)/(quantity of output).

TC = FC + VC When divided by Q tho

ATC = AVC + AFC

Each of the following is likely to be a successful way for the government to solve the problem of overuse of a common resource except?

Asking individuals to voluntarily reduce their use of the resource

What should the equilibrium quantity of output be in the market? How do you find this?

When private value = private cost

Maximize total surplus is when

Benefit > than cost

Negative externality

the harm, cost, or inconvenience suffered by a third party because of actions by others

What would not bee considered a private good?

Cable tv service

Suppose that Charles wants to dine at a fancy restaurant, but the only available table is in the smoking section. Charles dislikes the smell of cigarette smoke. He notices that only one person, Sam, is smoking in the smoking section. Charles values the absence of smoke at $40. Sam values the ability to smoke in the restaurant at $15. Which of the following represents an efficient solution in the absence of transaction costs?

Charles offers Sam between $15 and $40 not to smoke. Sam accepts, and both parties are better off.

Paper view broadcasts are

Club goods

Each unit of plastics that is produced results in an external ?

Cost

Difference between the social cost curve and the supply curve reflects the?

Cost of spillover effects from the concert (noise snd traffic)

The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. If the government charged a fee of $69 per unit of pollution, how many units of pollution would the firms eliminate altogether?

Count the first 7 (just as long as you do not go over 69)

Karen's cat causes Danny to sneeze. Karen values her cat's companionship at $300 per year. The cost to Danny of tissues and her allergy medication is $350 per year. Based on the Coase theorem,

Danny should pay Karen $325 to give away her cat.

All accounting costs are included in?

Economic costs

Explicit costs

Enter into the accountant's measurement of a firm's profit and enter into the economist's measurement of a firm's profit

Average Fixed Cost (AFC) formula

FC/Q

common resource goods

Fish in ocean ( rival in consumption and non excludable )

example of an implicit cost

Foregone rent on office space owned and used by firm

The Social-Cost Curve is above the Supply Curve because

It takes into account the external costs imposed on society by the concert

Which of the curves is most likely to characterize the short-run average total cost curve of the smallest factory?

Key word smallest. Look to left!

Best example of a variable cost would be?

Labor - easiest one to change

MR - MC =

Marginal profit

An example of a positive externality is

Mary not catching the flu from Sue because Sue got a flu vaccine

Annual implicit opportunity cost is found

Multiply cost by interest

A cost imposed on someone who is neither the consumer nor the producer is called a

Negative externality

Which graph represents a market with a negative externality? One where social cost and supply cost point?

One where social cost and supply cost point left

To induce firms to internalize the externality in this market, the government should impose a tax measured by

P2 - P0 Social Cost Private Cost

Total Revenue Formula

Price x Quantity

The social cost of the 2nd unit of output that is produced is found how?

Private cost + external cost

he market equilibrium quantity of output is found how? What equals what?

Private value = private cost

When the government intervenes in markets with externalities, it does so in order to

Protect the interest of bystanders

MC curve is what?

SUPPLY CURVE!!!!!!!

The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. If the government wanted to reduce pollution from 16 units to 6 units, which of the following fees per unit of pollution would achieve that goal?

Subtract 6 from 16. Count out that many boxes and find the number that fits!

Average Total Cost (ATC)

TC/Q

Average Revenue (AR)

TR/Q = P

Monte owns a dog; the dog's barking annoys Monte's neighbor, Teresa. Suppose that the benefit of owning the dog is worth $200 to Monte and that Teresa bears a cost of $400 from the barking. Assuming Monte has the legal right to keep the dog, a possible private solution to this problem is that

Teresa pays Monte $300 to give the dog to his parents who live in an isolated farm

On the graph, Q represents the quantity of plastics and P represents the price of plastics. This typically represents?

The equilibrium has been reached

If a sawmill creates too much noise for local residents,

The government can raise economic well being through noise control regulations

Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government impose a $5 per unit tax on the producers. What is the relationship between the after-tax equilibrium and the socially optimal quantity of electricity to bed produced?

They are equal

Average Variable Cost (AVC)

VC/Q

Coase Theorem

What should the outcome be? What does the contract look like?

What is the socially-optimal quantity of output in this market? How do you find this?

When external cost + private cost = private value

When a negative externality exists in a market, the cost to producers

Will bee less than the cost to society

Excludable

a characteristic of a good or service that allows owners to prevent its use by people who have not paid for it

A city street is

a common resource when it is congested, but it is a public good when it is not congested.

economic profit

a firm's total revenue minus its explicit and implicit costs

tax

a required payment to a local, state, or national government

subsidy

a sum of money granted by the government or a public body to assist an industry or business

The provision of a public good generates a

positive externality and the use of a common resource generates a negative externality.

Resources tend to be allocated inefficiently when goods

are available free of charge.

Positive externality

beneficial side effect or value that affects an uninvolved third party

marginal cost formula

change in total cost / change in quantity

The difference between the social cost curve and the supply curve reflects the

cost of spillover effects from the concert (e.g., noise and traffic).

Private markets fail to account for externalities because

decisionmakers in the market fail to include the costs of their behavior to third parties.

Neither public goods nor common resources are

excludable, but only public goods are not rival in consumption.

club good examples

fire protection, cable TV, uncongested toll roads (excludable, not rival)

Total Cost Formula

fixed cost + variable cost

Some costs do not vary with the quantity of output produced. Those costs are called

fixed costs

The long-run average total cost curve is always

flatter than the short-run average total cost curve, but not necessarily horizontal.

It is common knowledge that many U.S. national parks have become overused. One possible solution to this problem is to

increase entrance fees.

The marginal product of labor is equal to the

increase in output obtained from a one unit increase in labor.

implicit costs

input costs that do not require an outlay of money by the firm

explicit costs

input costs that require an outlay of money by the firm

When externalities are present in a market, the well-being of market participants

is directly affected, and market bystanders are indirectly affected.

If the use of a common resource is not regulated,

it will be overused.

Suppose that a "doggie day care" firm uses only two inputs: hourly workers (labor) and a building (capital). In the short run, the firm most likely considers

labor to be variable and capital to be fixed.

Economies of scale occur when

long-run average total costs fall as output increases.

public good examples

national defense, court system (not excludable not rival)

The U.S. military defends Jacob from foreign attackers. The fact that Jacob enjoys this protection does not detract from others Americans' enjoyment of it. For this reason, we say that national defense is

not rival in consumption

rival in consumption (rival)

one person's consumption prevents or decreases others' ability to consume it

Which of the following is not a public good?

patented technological knowledge

Assume that your roommate is very messy. Suppose she gets a $25 benefit from being messy but imposes a $50 cost on you. The Coase theorem would suggest that an efficient solution would be for you to

pay your roommate at least $25 but no more than $50 to clean up after herself.

corrective tax

places a price on the right to pollute

Suppose the production function shifts from TP2 to TP1. Such a shift in the total product curve is most likely due to a decrease in the firm's (shifts up to down)

productivity.

Economists assume that the goal of the firm is to maximize its total

profit

TR - TC =

profit

Positive externalities

result in smaller than efficient equilibrium quantity.

The tragedy of the commons results when a good is

rival in consumption and not excludable

Optimum price is when

social cost and demand intersect

Since air pollution creates a negative externality,

social welfare will be enhanced when some, but not all air pollution is eliminated.

Marginal Revenue (MR) formula

ΔTR/ΔQ


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