Microeconomic Final Exam
Derived demand
demand for labor related to market's demand for firm's product
Positive economics
describe what is taken. It is a fact that can be checked Ex: some people took more than one and not everyone got a piece.
Normative economics
describes what should have been. It is hard to factually check, it's based off of what rules to follow. Ex: everyone should just take one so that everyone gets a piece.
taste-based discrimination
discrimination that arises due to people's prejudices against a group of people can originate with employers, other employees, or customers
In a simultaneous move game, _______________.
each player has to make his choice without knowing his rival's choice
A perfectly competitive market is when
every buyer pays and every seller charges the same market price; no buyer or seller is big enough to influence that market price, and all sellers sell an identical good or service.
In a perfectly competitive market, if market price is lower than the average total cost of production:
existing firms will leave the market
Economies of Scale
factors that cause a producer's average cost per unit to fall as output rises ATC falls as Q increases
Average Fixed Cost (AFC)
fixed cost divided by the quantity of output AFC = FC/Q
Nonrival Goods
goods that more than one person at a time can consume
Rival Goods
goods that only one person can consume at a time
Antitrust Policy
government policies that try to prevent anti-competitive pricing, low quantities, and deadweight loss from emerging and dominating markets Sherman Act (1890): Prohibited restraint of trade-monopoly markets Important application: Microsoft case in 2001
Compared to a competitive market, the price will be ________ in a monopoly market.
higher
Value of marginal product of capital (VMPK)
how much each additional unit of capital contributes to the firm's revenues
Value of marginal product of labor
how much each worker contributes to revenue. The contribution of an additional worker to a firm's revenues Equal to MP x output price
Marginal Product
if cheese-man (from earlier example) hires one more worker, his output rises by the marginal product of labor The marginal product of any input is the increase in output arising from an additional unit of that input, holding all other inputs constant Notation: △(delta) = "change in ..." △Q = change in output, △L = change in labor △Q Marginal product of labor (MPL) = ____________ △L
Generally, a nation should specialize in those products
in which it has a comparative advantage
Land
includes other natural resources
As the income of an individual increases, he can afford more leisure. This refers to the __________ of a wage increase.
income effect.
skill-biased technological change
increase the productivity of skilled workers relative ton that of unskilled workers
Which of the following is true of welfare states?
it entails a large cost on society
Trade between States
just as individuals gain from specialization and trade, so do states -specialized in CA -natural resource -concentration/agglomeration -transportation Export: A good produced domestically and shipped to another state or country Import: A good produced in another state or country but sold domestically
A competitive firm can
keep increasing its output without affecting the market price each one unit increases in Q causes revenue to rise by P, i.e., MR = P MR = P is only true for firms in competitive markets
Technologies that substitute for existing labor inputs are known as
labor-savings technologies
Non-paying activities in economies are referred to as
leisure
In a regressive tax system, ____________.
low income households pay a higher percentage of their income as taxes
A price floor is th e
lower limit on the price of the good
A market in competitive equilibrium will _____________ social surplus.
maximize
In a perfectly competitive market, if market price is lower than the average total cost of production, _________________.
seller of the good will decrease the quantity of the good supplied in the market
If there is a decrease in the price of the final good that an industry produces, the labor demand curve in the industry is likely to:
shift to the left
If there is an increase in the price of the final good that an industry produces, the labor demand curve in the industry is likely to:
shift to the right
Production Possibilities Curve
shows the relationship between the maximum production of one good for a given level of production of another good -point D is possible but would be an inefficient point of production. This point represents a level of production of the goods that can be achieved, but that is inefficient because it does not use all resources -point E is not possible given our productive capacity. This point represents a level of production of the goods that cannot be achieved with the current level of resources. -points A and B represent levels of production of the goods that efficiently use resources
The Production Function
shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good -can be represented by a table, equation, or graph -Ex: A cheese-man from Wisconsin has a factory to make cheese and can hire as many workers as he wants.
Coase Theorem
states that private bargaining will result in an efficient allocation of resources if private solutions do not work, government solutions are: -command-and-control -- direct regulation -market-based policies -- provide incentives
Excess supply occurs when
suppliers provide more than consumers want at a given price. This situation results in a surplus.
When a binding price floor is imposed on a market,
suppliers will want to sell more than without the policy.
Progressive Tax System
system in which average and marginal tax rates are higher for higher income levels
Proportional Tax System
system in which everyone pays the same proportion of their income in taxes, regardless of how much their income is, i.e. marginal and average tax rates are the same for everyone
Regressive Tax System
system in which the lower income, the higher percentage of income is paid in taxes -marginal and average tax rates fall as income rises
If quantity of milk is measured on the Y-axis and quantity of juice is measured in the X-axis, a decrease in the price of milk will cause the budget constraint to change in the following way:
the Y-intercept moves upward
Correlation is
when two things are related. Positive correlation is when they both change in the same direction. Negative correlation is when they change in opposite directions.
Which of the following is subject to the free-rider problem?
National security A neighborhood watch Public libraries All of the above
Can a competitive firm charge any price it wants to?
No, it has to sell at the market price
A green pasture has turned barren due to overgrazing. This happened because the pasture was ______________.
Non-excludable but rival
Dominant Strategy
One player's best response, regardless of what the other person does
Which of the following is likely to use the concepts of game theory?
Pricing decision of a firm operating in an industry comprising two firms.
Which of the following equations calculates economic profits for a monopoly?
Profits = (P - ATC) x Q
Positive Exernality
an economic activity that has a positive spillover effect. ex: education -> private return
Other things remaining the same, a left shift in the supply curve will lead to
an increase in the equilibrium price and a decrease in the equilibrium quantity
A monopoly is
an industry structure in which only one seller provides a good or service that has no close substitutes. This allows the firm to act as a price-maker -- a seller that sets the price of a good. It has the ability to set the price of the good because it has market power, which gives it the ability to affect its own priice.
An economic agent is
any group or individual that makes choices, such as consumers, firms, parents, politicians, etc.
Inelastic Supply
any percentage change in price causes a smaller percentage change in quantity (Es < 1)
Scarce resources
are things that people want, where the quantity that people want often exceeds the quantity that is available. Ex: time
Direct Regulation
attempts by the government to control the amount of an activity also called command and control regulation Price controls: attempts by the government to control the price of any activity Price ceiling
Using the 3-point curve drawing tool, draw the marginal cost curve for this firm in a competitive market. Label your curve 'MC'. When the ATC curve is decreasing, we know that the MC curve is _____________, and when the ATC curve is increasing, we know that MC is _____________.
below the ATC curve; above the ATC
The marginal cost curve intersects
both the average variable cost curve and the average total cost curve at their minimum
Nonexcludable Goods
can be consumed, even if they are not paid for
A seller is said to be a price taker if she
can sell any quantity at the market price.
Unit Elastic Supply
change in prices leads to equal percentage change in quantity (Es = 1) %△Qs Es = __________ > 1 => %△Qs > %△P %△P
Price Discrimination
charging different prices to different customers for the same product when the price differences are not due to differences in cost
barriers to entry
circumstances that prevent potential competitors from entering the market Types of barriers to entry 1. legal market power 2. natural market power -control of key resources -economies of scale
Backward Induction
considering the last decision and deducing what the previous decisions have been
Excess demand occurs when
consumers want more than suppliers provide at a given price. This situation results in a shortage.
Comparing a set of feasible alternatives and picking the best one is an optimization process called _________.
cost-benefit analysis
If a monopoly engages in first-degree price discrimination:
deadweight loss is zero.
The Buyer's Problem
1. What do you like? (preferences or tastes) 2. How much does it cost? 3. How much money do you have?
Maximizing Profit
1. in choice of how much to produce MR = MC 2. in choice of how many workers to hire MP = P = W or VMPL = W
Market price is
the price at which buyers and sellers conduct transactions.
Diseconomies of Scale
the property whereby long-run average total cost rises as the quantity of output increases ATC rises as Q increases
If a good has a price elasticity of demand equal to 0, ______________________.
the quantity demanded is completely unaffected by a change in its price.
Marginal tax rate
the rate paid on the last dollar of income
The general rule for welfare maximization suggests that in personal equilibrium:
the ratio of marginal benefits to price should be identical across all goods
Deadweight Loss
the reduction in social surplus resulting from a market intervention SS = PS + Cs two possible situations: 1. market economy = prices direct flow of resources, provides incentives for participants 2. command economy = control agency directs resources, provides incentives
The demand curve for a good shows
the relationship between the quantity demanded of the good and its price, holding constant everything else.
The supply curve of a good shows
the relationship between the quantity supplied by a firm and the price of the good, holding constant everything else.
The social surplus in a market is $50. If another economic agents enters the market such that the marginal cost he incurs is $10 and the marginal benefit he receives from the trade is $5, then which of the following statements is true?
the social surplus will decrease by $5
Social Surplus
the sum of consumer surplus and producer surplus social surplus = CS + PS
At each price, the market quantity supplied is
the sum of quantities supplied by all firms The SR Supply Curve: -as long as P ≥ AVC, each firm will produce its profit-maximizing quantity, where MR = MC -at each price, the market quantity supplied is the sum of quantities supplied by all firms.
Zero correlation between two variables implies that
the variables are not related to each other
Protectionism
the view that governments should control trade due to the harmful effects of free trade tariffs: a tax added on to the price of an important product -a tariff increases the market price of the product
Total value is
total benefit - total cost = net benefit
Marginal cost is the change in the:
total cost associated with producing one more unit of output.
Average Total Cost (ATC)
total cost divided by the quantity of output ATC = TC/Q
Average tax rate
total taxes divided by total income
Average Variable Cost (AVC)
variable cost divided by the quantity of output AVC = VC/Q
Pecuniary Externality
when a market exchange affects other people through market prices
Network Externalities
when a product's value increases as more consumers begin to use it (ex: eBay, Facebook, etc.)
Free Rider Problem
when an individual does not pay for a good because it is non-excludable Solution: the government males paying for it mandatory With a public good, what we want to know is how much value is places n each unit, not how many units people will consume.
Tragedy of the Commons
when common pool resources are overused solutions: -private ownership (defined by the government) -government regulation (ex: fishing limits) -tax on use
zero-sum game
when one player wins, the other loses, so the playoffs sum to zero
Causation is
when one thing directly affects another (cause and effect). Ex: pulling an all-nighter will make you tired.
First-mover advantage
when the first player in a sequential game benefits from being first
Tom is willing to contribute $400 toward building a public park, Jack is willing to contribute $500, and Joe is willing to contribute $750. What is the total marginal value for the park if Tom, Jack, and Joe are the only residents in the neighborhood where the park is being built?
$1650
If a job pays a wage of $50 per hour, but has a non-wage cost valued at $20 per hour, the net benefit of taking the job equals:
$30 per hour
If the opportunity cost of time is $20 per hour, and an individual spends 20 hours in commuting every month, his opportunity cost of commute is
$400 per month
If a seller's reservation value for a good is $10 and the price at which the good is sold is $15, his producer surplus is
$5
If the marginal product of a worker is 10 units and each unit of the good is sold for $5, the value of marginal product of the worker is
$50 VMPL = p x MPL 5 x 10 = 50
Determinants of Price Elasticity of Demand
- Number and closeness of substitutes - Budget share spent on the good - Time horizon available to adjust to price changes
Why do governments tax and spend?
1. Revise revenues to pay for public goods 2. Redistribute income to address fairness issues 3. Finance operations of government 4. Correct market failures and externalities
When the price of milk is $2 per bottle, Steve purchases 20 bottles of milk. When the price increases to $6, Steve's consumption falls to 12 bottles. Steve's midpoint (arc) elasticity of demand for milk is:
-.05
Scenario: When the price of wine is $10 per bottle, Thomas purchases 30 bottle every month. Later, the government introduces a 50% tax on all alcoholic beverages, which is to be completely borne by consumers. This reduces Thomas's consumption to 20 bottles of wine a month. Refer to the scenario above. Thomas's arc elasticity of demand for wine is (hint: use midpoint method):
-1
A New Firm's Decision to Enter Market
-In the long-run, a new firm will enter the market if it is profitable to do so: if TR > TC -Divide both sides by Q to express the firm's entry decision as: ENTER IF P > ATC -Cost of exiting the market: revenue loss = TR -Benefit of exiting the market: cost savings = TC (zero FC in the long-run) -So, firm exits if TR < TC -Divide both sides by Q to write the firms decision rule as: EXIT IF P < ATC
The Zero-Profit Condition
-Long-run equilibrium: the process of entry or exit is complete - remaining firms earn zero economic profit π = (P - ATC) x Q P = ATC Q: MC = MR = P = ATC MC = ATC at minimum ATC -Zero economic profit occurs when P = ATC -Since firms produce when P = MR = MC, the zero-profit condition is P = MC = ATC -Recall that MC intersects ATC at minimum ATC -Hence, in the long-run, P = minimum ATC
Why do firms stay in business if profit = 0?
-Recall, economic profit is revenue minus all costs, including implicit costs like the opportunity cost of the owner's time and money. -In the zero-profit equilibrium, firms earn enough revenue to cover these costs accounting profit is positive
Costs in the Short-Run and Long-Run
-Short-run: some inputs are fixed (e.g. factories, land). The cost of these inputs are FC -Long-run: all inputs are variable (e.g. firms can build more factories or sell existing ones) -In the long-run, ATC at any Q is cost per unit wins the most efficient mix of inputs for that Q (e.g. the factory size with the lowest ATC).
Why the LR Supply Curve Might Slope Upward
-The LR market supply curve is horizontal if 1. all firms have identical costs, and 2. costs do not change as other firms enter or exit the market. -If either of these assumptions is not true, then LR supply curve slopes upward.
Bottomline
-limited and weak evidence that inward FDI avoids high regulation US states -quantitatively effects are very small compared to other determinants of the FDIn (Amazon HQ) -implications: environmental "race to the bottom" across countries is unlikely
Corruption
-misuse of public funds -can be a cost of government activity -not confined to government sector - corruption exists in private sector as well
Elasticity of supply will be greater
-the more inventory the firm has -the more easily the firm can hire workers -the longer the time horizon
Shifts of the demand curve occur when one of the following changes:
1. Tastes and preferences 2. Income and wealth 3. Availability and prices of related goods 4. Number of scale of buyers 5. Buyers' expectations about the future
Optimization using total value
1. Translate all costs and benefits into common units, like dollars per month 2. Calculate the total net benefit of each alternative 3. Pick the alternative with the highest net benefit
What are the 2 problems with game theory?
1. What are the payoffs? 2. Players may have different abilities
Market Supply
1. All existing firms and potential entrants have identical 2. Each firm's costs do not change as other firms enter or exit the market 3. The number of firms in the market is fixed in the short-run (due to fixed costs) and variable in the long-run (due to force entry and exit)
Government intervention in markets can cause
1. Deadweight losses 2. Increased costs due to bureaucracy 3. Corruption 4. Black markets
What are wage differentials?
1. Differences in human capital -Human capital: each person's investment in themselves, leading to the ability to be more productive -job training: industry- specific training increases productivity within an entire industry; firm- specific training increases productivity for just the hiring firm 2. Differences in compensating wages -compensating wage differentials: wage premiums necessary to attract workers into occupations that have unattractive aspects 3. the nature and extent of discrimination in the job market -taste-based discrimination -statistical discrimination
What are the 3 degrees of price discrimination?
1. First-degree (perfect) -when each consumer is charged the maximum he/she is willing to pay (ex: buying a car, eBay) 2. Second-degree -consumers are charged different prices based on the characteristics of the purchase (ex: when firms sell blocks of product at a lower price than advertises - last minute hotel rooms; utility company pricing for commercial's residential usage) 3. Third-degree -consumers are charged different prices based on the characteristics of the customer or location )ex: senior citizen discounts, student discounts, theater matinee discounts)
Where does the federal money come from?
1. Individual income taxes- 47% of total revenues 2. Payroll taxes (withheld from pay)- 34% of total revenue 3. Corporate income tax (taxes on profits)-10% of total revenue 4. Other taxes (including taxes on specific goods such as excise taxes)- 9% of total revenue
Shifts of the supply curve occur when one of the following changes:
1. Input price 2. Technology 3. Number and scale of sellers 4. Seller's expectations about the future.
What's important about the production table?
1. Marginal product increases when they specialize in production Specialization: workers are more efficient when they specialize in production and work together to produce goods. 2. Eventually, marginal product falls Law of diminishing returns: at some point, each additional worker contributes less output than the worker before. 3. Marginal product can be negative Why? Capital is fixed in the short-run. If more and more workers keep getting added, they will get in each other's way and actually cause output to fall.
Arguments against Free Trade National Security Concerns
1. National security concerns -over reliance on other countries for needed goods and services 2. Effects of globalization - shift toward interdependent economies - on domestic culture -desire to protect culture from dilution or infringement of other values 3. Environmental and resource concerns -countries vary by how stringent their environmental policies are. Free trade can lead to greater pollution and resource depletion in those countries with lax standards because of the increase in demand. 4. Infant industry arguments -when industries are first getting started, they may need some government protection from free trade until they get established
Where does the state and legal money come from?
1. Other - 30% - tolls, taxes on licenses 2. Revenue from federal government - 22% - federal taxes redistribution to state/local 3. Sales and gross receipts taxes - 18% 4. Property taxes - 17% 5. Individual income taxes - 13%
Shifts of the labor supply curve
1. Population changes -the more people there are, the greater the supply labor, so the labor supply curve shifts to the right 2. Changes in worker preferences and tastes -ex: greater proportion of women in the labor force, greater proportion of older workers wanting to continue working rather than retire -workers do not want to go to work, or the government says they can't -shifts labor supply curve inward 3. Opportunity costs -if the alternatives to working change overall, or for a particular industry or firm, the labor supply curve will shift -ex: the affordable care act could cause some workers to leave the labor force because they can get insurance coverage outside of employment
What are the 2 types of strategies?
1. Pure strategy: choosing one strategy 2. Mixed strategy: randomly choosing different strategies
Governments should help consumers make choices because:
1. some decisions are very complex and individuals don't have enough information 2. if an individual behavior benefits the larger society, the government should encourage that behavior 3. MSC is not greater than MC
Consumers should be allowed to make their own choices because:
1. the government can't know what's best for us 2. the government can't be trusted to act in our best interests 3. if the government intervenes, there are costs
Elements of the Game
1. the players 2. the strategies 3. the playoffs
The total cost of a firm is $50, the average variable cost is $2, and the average fixed cost is $3. How many units of output does the firm produce?
10 units
You are a monopolist facing the demand schedule below. You produce a good at a constant marginal cost of $5 per unit. Using this information, fill in the marginal revenue column. (Assume total revenue to be zero when quantity produced is zero.) _________________________________________________________________________________________________ Quantity Price($) Marginal Revenue ($) __________________________________________________________________________________________________ 1 16 -- 2 14 -- 3 12 -- 4 10 -- __________________________________________________________________________________________________ The profit-maximizing output for you is ____ units. Suppose there is a fixed cost of $11. The maximum profit you can earn is $____.
16 12 8 4 3 10
The figure on the right displays the market for video game consoles, where nine buyers are interacting with nine sellers. According to this figure, the equilibrium price is $____, and at that price, the equilibrium quantity is ____. When the market is in equilibrium, social surplus is $____. If the number of consoles is restricted to two less than the equilibrium quantity, social surplus us $____.
250; 5 1000 900
If the pre-tax equilibrium price of Good X was $5 and the price that sellers receive after the imposition of a tax pf $3 is $4, the incidence of the taxation on sellers in approximately __________.
33%
The following table shows the marginal benefit that a consumer derives by consuming different quantities of juice and mild. Quantity (Qts) | Juice ($4/quart | Milk ($2/quart) ___________________________|____________________________________|______________________________ | Marginal Benefits ($) | Marginal Benefits ($) ___________________________|____________________________________|______________________________ 0 | -- | -- 1 | 12 | 10 2 | 8 | 7 3 | 6 | 5 4 | 4 | 2 5 | 3 | 1 ___________________________|____________________________________|_____________________________ Refer to the table above. If the income of the consumer is $24, the optimal choice contains:
4 quarts of juice and 4 quarts of milk
Sharon consumes 10 chocolates when the price of one chocolate is $2. If her arc elasticity of demand for chocolates is -1, she consumes __________ chocolates when the price increases to $4.
5
The total cost of a firm is $50, the average variable cost is $5, and the average fixed cost is $5. How many units of the output does the firm produce?
5 units
Suppose the market for labor consists of only three workers - Alex, Anna, and Jim. The following table shows the labor supplied by the three workers at different wage rates. __________________________________________________________________________________________________ Wage Rate | Labor Supplied by | Labor Supplied by | Labor Supplied ($) | Alex (hrs/week) | Anna (hrs/week) | Jim (hrs/week) ________________|____________________________|____________________________|_______________________ 50 | 12 | 15 | 23 75 | 24 | 28 | 42 100 | 35 | 40 | -- __________________________________________________________________________________________________ Refer to the table above. What is the market supply of labor per week when the wage rate is $50?
50 hours 12 + 15 + 23 = 50
Which of the following is likely to lead to a left shift in the demand curve for labor in the printing ink manufacturing industry?
A decrease in the demand for printing paper
Which of the following factors is likely to lead to an increase in the quantity demanded of pens?
A fall in the price of pens
Elasticity
A measure of how sensitive one variable is to change in another Three measures of elasticity: 1. Price elasticity of demand 2. Cross-price elasticity of demand 3. Income elasticity of demand
Economics is divided into two broad fields of study: microeconomics and macroeconomics. Microeconomics studies _________, while macroeconomics studies _________. Policy decisions made by the government are analyzed by A policy such as reducing government spending to control the national debt would be studied under ______________, since it deals with _____________.
A small piece of the overall economy; the economy as a whole both microeconomics and macroeconomics. macroeconomics; the economy as a whole
Which of the following is an example of capital?
A tractor used by a farmer for plowing his field
Which of the following is a common pool resource?
A walking trail through Boulder
Equity
Addresses the issues of a "fair" distribution of resources across society -perfectly competitive markets are efficient -one if the roles of government in out economy is to address efficient outcomes that we may not consider to be equitable
Suppose that you allocate $20 each week for your entertainment budget. This money is spent on two items: either renting a movie for $1 each at Redbox or downloading songs from iTunes at $1 each. Given this information, which of the following would represent your budget constraint for entertainment?
Amount spent on iTunes + Amount spent at Redbox = $20
Which of the following is an example of a normative economic statement?
An increase government expenditure will lead to an increase in well-being.
Which of the following is likely to shift the production possibilities curve of a nation rightward?
An increase in the education and experience of the workforce
Which of the following statements best describes an inferior good?
An inferior good id a good is a good whose demand decrease with an increase in consumers income.
Demand for Labor
Assumptions: 1. perfect competition in the output market 2. perfect competition in the labor market
The market equilibrium quantity maximizes total surplus:
At any other quantity, can increase total surplus by moving toward the market equilibrium quantity
Which of the following statements is true of competitive market equilibrium?
At the competitive equilibrium, there are no unexploited gains from trade.
There are four consumers willing to pay the following amounts for an electric car: _________________________________________________________________________________________________ Consumer 1: Consumer 2: Consumer 3: Consumer 4: $60,000 $30,000 $80,000 $40,000 _________________________________________________________________________________________________ There are four firms that can produce electric cars. Each can produce one car at the following costs: _________________________________________________________________________________________________ Firm A: Firm B: Firm C: Firm D: $20,000 $60,000 $30,000 $40,000 _________________________________________________________________________________________________ Each firm can produce at most one car. Suppose the market for electric cars is competitive. Why is the equilibrium price in this market $40,000? Complete the following table by calculating consumer surplus, producer surplus, and social surplus when the market price is $40,000.
At this price, three consumers are willing to buy an electric car and three firms are willing to sell an electric car; at this price, the quantity demanded (three cars) equals the quantity supplied (three cars); at $40,000, three consumers have reservation values equal to or above $40,000 and three firms have reservation values equal to or below $40,000; All of the above Which firm will produce an electric car if the price is $40,000? A, C, and D Which consumers will buy an electric car when the price is $40,000? 1, 3, and 4 ______________________________________________________________________________ Consumer Surplus = $60,000 Producer Surplus = $30,000 Social Surplus = $90,000 ______________________________________________________________________________
Which of the following is not an example of causation?
Driving without car insurance will lead to getting into an accident.
Scenario: Barylia and Lithasia are trading parters. Lithasia has an absolute advantage in the production of both coffee and tea. The opportunity cost of producing 1 pound of tea in Lithasia is 2 pounds of coffee and the opportunity cost of producing one per pound of tea in Barylia is 1/3 pound of coffee Refer to the scenario above. If both nations decide to trade, which of the following statements is true?
Barylia should export tea and Lithasia should export coffee.
Sara and Jim are going to lunch together and rank the restaurant options in the following way: ___________________________________________________________________________________________ Sara's Preferences Jim's Preferences ___________________________________________________________________________________________ Chipotle 4th 3rd Naf Naf 1st 4th Panera 2nd 5th Potbelly 3rd 2nd Blaze 5th 1st ____________________________________________________________________________________________ Which of the following restaurant choices are Pareto efficient for Sara and Jim?
Blaze and Naf Naf
Sellers in a perfectly competitive market
Conditions of a perfectly competitive market: 1. No buyers or sellers in the market is big enough to influence the market place -because there are so many consumers and producers, no one individual can change the market price with his/her behavior 2. Sellers in the market produce identical goods -an individual seller can't influence the market price by selling a unique product 3. There is free entry and exit in the market -sellers can respond to potential profits in a market by entering, or by leaving markets that are no longer profitable - both of which have implications on market price
What is Elastic
ED > 1 = Elastic ED < 1 = Inelastic ED = 1 = Unit Elastic (curved line on graph, slope of 1) ED = ∞ = Perfectly Elastic (straight line on graph ---) ED = 0 = Perfectly Inelastic (straight line on graph |)
statistical discrimination
Discrimination that arises due to expectations about a group of people -employers cannot know a potential worker's productivity with certainty -might use characteristics as a proxy for productivity (gender, race, etc.)
Suppose your New Year resolution is to get back in shape. You are considering various ways of doing this: you can sign up for a gym membership, walk to work, take the stair instead of the elevator, or watch your diet. How would you evaluate these options and choose an optimal one? When making your decision about which activity to choose, you should consider the monetary cost ___________ the opportunity cost of the activities. The goal is to choose the option that offers the greatest __________ benefit.
Do a cost-benefit analysis to compare the alternatives. as well as; net
Nash Equilibrium
Each player chooses a strategy that is best, given the strategies of others; i.e. changing strategies does not male anyone better off Two Requirements for Nash Equilibrium: 1. All players understand the game and the playoffs of each strategy 2. All players recognize that the other players understand the game and playoffs
Tax Bracket
Each tax rate and taxable income amount on one line of a tax table Your tax bracket corresponds to your marginal tax rate (which is higher than your average tax rate because the federal tax system is progressive)
What is the difference between accounting profit and economic profit? Is it possible for accounting profit to be positive and economic profit to be negative? Under which of the following examples is it likely that the accounting profit is positive and the economic profit is negative?
Economic profit subtracts both explicit and implicit costs from total revenue, while accounting profit only subtracts explicit costs. Yes, this could occur if explicit costs were modest and implicit costs were high. If you use a diamond mine as a tourist attraction instead of using it for mining.
________________ in one sector combined with __________________ in another will cause a reallocation of resources across sectors.
Economic profits; economic losses
Natural Monopoly
Emerges because it enjoys economies of scale over a very large range of output Both monopolist and perfect competitor -produce an output using a production process and inputs -incur production costs
Which of the following statements is true?
Employers are willing to forego profits when engaging in taste-based discrimination.
What do you like? (buyer's problem)
Everyone has different likes and dislikes, but we can assume that everyone has two different things in common: 1. We all want the "biggest bang for our buck" 2. What we actually buy reflects our tastes and preferences
The playoff matrix given below shows the payoffs of two rival firms in millions of US dollars for each strategy they choose. The first number listed in each cell is the payoff to the row player and the second number listed is the payoff to the column player. Firm B | Strategy X | Strategy Y ______________________|_________________________|____________________________________ Strategy X | 1.2, | 1.2, Firm A ______________________|___________2.5__________|________________0__________________ Strategy Y | 3.5, | 2, | 3.0 | 0 _____________________________________________________________________________________ Refer to the scenario above. Which of the following is true?
Firm B is better off by choosing Strategy X when Firm A choose Strategy Y
What is NOT true about perfectly competitive markets?
Firms face a downward sloping demand curve for their product
Which branch of study helps in economic decision making when an individual's behavior determines the payoffs to others?
Game theory
The Seller's Problem
Goal of the Seller: Maximize Profit To achieve this goal, sellers must solve 3 problems: 1. How to make the product 2. What is the cost of making the product? 3. How much can the seller get for the product in the market?
Transfer Payments
Government payments to individuals or groups
What is the cost of making the product?
If a firm is using inputs, it must be incurring costs - costs of production Costs are associated with the factor of production and the "run" Short-run: total cost = variable cost + fixed cost
If price is $1.13, what is the total revenue if 1 is sold? Two? Three?
If one is sold: TR = P x Q, 1.13 x 1 = $1.13 If two is sold: TR2 = 1.13 x 2 = $2.26 If three is sold: TR3 = 1.13 x 3 = $3.39
A supply curve answers the question:
If the price is $x, how many units does the firm want to produce A monopolist is not a price taker, but a price maker, therefore, the supply relationship does not exist
What does a firm have control over?
In a competitive market, firms have no control over price and are therefore price takers and can decide the quantity they produce
A Pigouvian tax is a tax designed to
Induce producers generating negative externalities to reduce production
Which of the following is true regarding the concept of causation?
It describes how one event can bring about change in another.
Which of the following inputs can be changed in the short run?
Labor employed
Which of the following is an example of factor production?
Land
Physical capital
Long lasting physical goods that are themselves used to produce other products. lasting input into the production process
economics, anthropology, psychology, sociology, and political science all study human behavior. Economics differs from these other social sciences because it also addresses these three key concepts:
Optimization, equilibrium, and empiricism.
What are the three principles of economics
Optimization: making the best choice possible with given information (involve trade-offs and opportunity cost). Equilibrium: when everyone is optimizing, no one would be better off with a different choice. A situation in which no one benefits by changing his/her behavior. Empiricism: using data to figure out answers to interesting questions.Evaluates the accuracy of theories and to understand how the world works.
The pricing rule for a monopolist is
P > MR = MC
Legal Market Power
Patent: government-granted permission to be the sole producer and seller of a good Copyright: government-granted rights to the creator of literary or artistic work
The effect of the invisible hand is likely to be the strongest under which market structure?
Perfect competition
You are the County Commissioner of Hazard County. Dwight's neighbors bring a complaint before you that Dwight's hog farm is creating a terrible odor, and they are demanding government action. You respond to the neighbor's complaints by putting a tax on Dwight's hog production. Taxing Dwight's hog production is an example of _______________________. Use the graph to the right, answer the following questions. Before the tax goes into effect, Dwight will produce _____ thousand hogs and sell them for a price of $___ per pound. The efficient tax is $_____ per pound. After the tax goes into effect, Dwight will produce _______ thousand hogs and sell them for a price of $_______ per pound. As a result of the tax, supply _____________, price ______________, and the negative externality ______________.
Pigouvian taxation 5;5 2.36 3.79; 6.21 decreases; increases; decreases
Simultaneous Move Game
Players pick their strategies at the same time
Social Security taxes in the US tend to be
Regressive
Playoff Matrix
Represents playoffs for each player for each strategy
Price Makers
Sellers that can set the price of a good
In one hour, Ethan can bake 20 cookies or lay drywall for two rooms. In one hour, Sienna can bake 100 cookies or lay the drywall for three rooms.
Sienna has the absolute and comparative advantage at baking cookies.
Budget Deficit
Spending is greater than tax revenues
LoJack is an example of a vehicle tracking system designed to help police recover stolen vehicles. Steve Levitt found evidence that LoJack and other vehicle tracking devices create a positive externality of decreasing all car thefts because car thieves do not know which cars have LoJack installed, making them more hesitant to break into any car. Which of the following policies makes the most sense for the government to pursue?
Subsidize purchase of vehicle tracking devices
Total Revenue
TR = P x Q
Budget Surplus
Tax revenues greater than spending
For a market to be in equilibrium, three conditions must hold. Fill in the blanks below to complete these conditions.
The amount produced by sellers must be equal to the amount purchased by buyers. The costs of making a product must be less than the final price at which the product sells. Buyers must place a value on the uses of the product that is greater than the cost of buying the product.
Fixed Cost
The cost associated with the fixed factors of production. Fixed costs do not change as output changes.
Variable Cost
The cost associated with the variable factors of production. Variable costs change as the level of output changes
Producer Surplus
The difference between the price the firm would be willing to accept and the market price The difference between the market price and the supply curve PS = P - cost Producer Surplus is the area below price but above supply (MC) PS is the area between P and the S curve, from 0 to Q
What does the marginal product of labor tell us?
The extra output produced by one more worker.
When deciding whether to install visible countdown times for pedestrians at crosswalks, which of the following would be considered in the cost-benefit analysis? (Check all that apply.)
The higher maintenance bill associated with fixing these more complex signals when they break down; the cost in terms of dollars if installing these new timers all over the city; the value of the pedestrians' lives saved by having the timers to assist in crossing the street; the value of the lives lost by drivers who watch the countdown timers and try to make it through a light.
Other things remaining the same, which of the following is likely to increase both the wage rate and the number of workers hired in a steel producing factory?
The introduction of labor-complementary technology in the factory.
Which of the following statements is true of the marginal product of an input?
The marginal product of an input can take negative values.
Let's say that you are trying to decide what to do on Friday at 11 a.m. You rank your possible options from the one you value the most to the one that you value the least in the following order: going to class, sleeping in late, going to work early, getting lunch, going to the gym to exercise, and watching television.
The opportunity cost would be sleeping in late, since it was your next-best decision.
Pigouvian Subsidy
The subsidy necessary to make an economic agent increase consumption to the socially optimal level -innovation
Pigouvian Tax
The tax necessary to incentivize a firm to produce the socially optimal level of output Ex: Germany's CO2 tax - Germany has just passed a law according to which a ton of CO2 is taxes at 10 euros
Constant Returns to Scale
the property whereby long-run average total cost stays the same as the quantity of output changes ATC stays the same as Q increases
A local lake requires people to buy a permit in order to go fishing and asks them to only take home one fish per person. There is no one there to enforce the policy, however, and many people overfish the lake, leading the fish population to almost disappear. What is this an example of?
The tragedy of the commons
How much money do you have? (buyer's problem)
There are lots of things to do with your money, but we assume: 1. There is no saving or borrowing, only buying 2. That even though we use a straight like to represent purchase choices, we only purchase whole units.
Why does the budget like have a negative slope?
There is a trade-off, trade-off given limited resources
Extensive-form games
There is an order to play instead of simultaneous pay, i.e. one player goes first
Which of the following best describes why lump-sum taxes on producers don't eliminate deadweight loss in the short run in a market with a negative externality?
They don't alter the firm's marginal cost
Efficiency
Total Surplus = (value to buyers) - (cost to sellers) An allocation of resources is efficient if it maximizes total surplus. Efficiency means: -the goods are consumed by the buyers who value them most highly -the goods are produced by the producers with the lowest costs -raising or lowering the quantity of a good would not increase total surplus
How much does it cost? (buyer's problem)
We also assume two characteristics of prices: 1. Prices are fixed - no negotiation 2. We can buy as much as we want of something without driving the price up (because of an increase in demand)
How to make the product
Turning inputs into outputs short-run: period of time when some of the firm's inputs cannot be changed -Ex: in the short-run, you can't buy another oven, if you are baking cakes today, you are limited by the current number of ovens long-run: period of time when all of the firm's inputs can be changed -Ex: in the long-run, you can buy another oven, even build another kitchen
Biological Clock Argument
Typically, women stop being fecund in their lower 40s, whereas men can still conceive in their 50s and 60s for young workers who want to have children at some point, a reduction in labor demand may mean women drop out of the labor market more than men
Some people argue for protectionism by pointing out that other countries with whom we trade engage is "unfair trade practices," and that we should retaliate with our own protectionist measures. one such policy is the policy of some countries to subsidize exporting industries. India, for example, subsidizes its steel industry. Who is hurt by this subsidy?
U.S. steel producers
Which of the following is more susceptible to the free-rider problem: fishing in public lakes or public roads?
Use of public roads is more susceptible since even those who don't pay taxes still benefit, while fishing in public lakes can charge for a fishing license, so that everyone who goes pays for their share.
Making the Goods: How Inputs are turned to Outputs
Variable factor if production: -input that can be changed in a certain period of time and that changed if the level of output changes Fixed factor of production: -input that cannot be changed in the short-run and that stays the same, regardless of how much output is produced.
Which of the following statements is true?
When a competitive market is allowed to operate efficiently, firms end up producing goods using the least amount of scarce resources.
Natural Market Power
When a single firm obtains market power through barriers to entry created by the firm itself (as opposed to government) Control of key resources, key resources: -are essential for the production of a good or service (ex: technological know-how) intellectual property
Dominant Strategy Equilibrium
When each strategy used is a dominant strategy
Pareto Efficiency
When no one can be made better off without making someone else worse off The invisible hand directs consumers and producer to maximize their surplus and leads to the highest level of social welfare. Because the competitive market is Pareto efficient, then government intervention can't be justified based on efficiency though perhaps it could be justified based on equity. The invisible hand directs firms to seek out profits and results in resources being allocated to their highest value of use
Which of the following is likely a reason for wage inequality between men and women?
Women tend to spend more time out of the labor force as compared to men.
Temporal Flexibility arguement
Women want to be able to spend time with young children more than men or maybe they have to (nursing) as a result, women choose occupations were overtime work, weekend work, time-inflexible work is not required, which essentially pay less
Which of the following is true of the market for labor?
Workers are the suppliers of labor
How to interpret the cross-price elasticity of demand
___________________________________________________________________________ cross-price elasticity | Type of Good of demand | or Service _______________________________________|___________________________________ Negative | complement _______________________________________|____________________________________ Zero | independent _______________________________________|____________________________________ Positive | substitute _______________________________________|____________________________________
How to interpret the income elasticity of demand
____________________________________________________________________________ Income Elasticity | Type of Good of demand | or service ______________________________________|_____________________________________ less than 0 | Inferior ______________________________________|_____________________________________ < 1 and > 0 | Normal and Necessity ______________________________________|_____________________________________ greater than 1 | Normal and Luxury ______________________________________|_____________________________________
negative Externality
an economic activity that has a negative spillover effect occurs when an economic activity affects a third party not engaged in the production or consumption decision
How price elasticity of demand relates to total revenue
____________________________________________________________________________ Price Elasticity | Value | Increasing | Decreasing of Demand | | Price | Price ________________________|___________|___________________|___________________ Elastic | ED > 1 | Decreases | Increases | | revenue | revenue ________________________|____________|__________________|___________________ Unitary Elastic | ED = 1 | No Change | No Change ________________________|____________|__________________|___________________ Inelastic | ED < 1 | Increases | Decreases | | revenue | revenue ____________________________________________________________________________
A budget constraint or budget line is a straight line because:
a consumer faces a fixed price of both goods that do not change with changes in consumption
In the 2020 election, Florida voted to increase the minimum wage to $15. According to this model of demand for labor, what might you expect to happen?
a decrease in the quantity demanded of labor
If the demand and supply curve for a commodity shift to the right by the same amount, then in comparison to the initial equilibrium, the new equilibrium will be characterized by:
a higher quantity and the same price.
Credible Commitment
a long-term strategic decision that is both difficult and costly to reverse when a player can do something to force the other player to make a different decision
Income elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income answers the questions: How much does quantity demanded change when income changes? Mathematically: the percentage change in demand of a good due to a percentage change in income % change in quantity demanded Income elasticity =_______________________________________________ % change in income
price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price answers the question: How much does quantity demanded change when the good's price changes? Mathematically: the percentage change in quantity demanded due to a percentage change in price: price elasticity % change in quantity demanded of demand (ED) = _______________________________________________ % change in price ^ | Q2 - Q1 %△Q △Q =______________ ___________ (Q2 + Q1)/2 %△P P2 - P1 △P = _______________ (P2 + P1)/2
cross-price elasticity of demand
a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good answers the question: How much does the quantity demanded of one good change when the price of another good changes? Mathematically: the percentage change in demand of good 1 due to a percentage change in the price of good 2: cross-price elasticity = % change in quantity demanded of good x ____________________________________________________________ % change in price of good y
A binding price ceiling leads to
a reduction of producer surplus and a reduction of total surplus
Entry of new firms into an existing market causes:
a rightward shift of the market supply curve.
When a binding price ceiling is imposed, it typically results in
a shortage of the good
Price controls
act to restrict efficiency, there are 2 types: 1. Price Ceiling: a legal maximum on the price of a good or service, ex: rent control 2. Price Floor: a legal minimum on the price of a good or service, ex: minimum wage -a price ceiling above the equilibrium price is not binding - has no effect on the market outcome -if the equilibrium price is above the ceiling, it is illegal -the ceiling is a binding constraint on the price, causes a shortage -if the equilibrium price is below the floors, it is illegal -the floor is a binding constraint on the price, causes a surplus
The definition of economics states that it is the study of how
agents choose to allocate scarce resources and the impact of those choices on society.
Price Elasticity of Supply
measures how much the quantity supplies responds to change in price % Change in Qs Price elasticity of supply = __________________________ % Change in P Q2 - Q1 Es = _________________ 1/2(Q2 + Q1) ________________________ P2 - P1 __________________ 1/2(P2 + P1) -loosely speaking, it measures sellers' price-sensitivity -Again, use the midpoint method to compute the percentage changes
Excludable Goods
must be paid for in order to consume them
The three principles of economics include optimization, equilibrium, and empiricism. Equilibrium describes a situation where ___________________________________. Empiricism describes a situation where ____________________________________. Optimization describes a situation where _________________________________.
no one would benefit from changing his or her behavior economists use data ton analyze what is happening in the world people weigh costs and benefits when making a decision
A public good is both _______________ and _______________.
non-rival; non-excludable Public goods suffer from what economists call a free-rider problem, in which a person has no incentive to pay for a good because failure to pay doesn't prevent consumption.
The statement that the United States is too aggressive in increasing the money supply is a ___________ statement since it describes what people ______________. The ethical implications of a hotly debated government policy would be best considered a _______________.
normative; ought to do normative questions, since it deals with a subjective issue based on personal preferences.
A best response is _______________.
one player's optimal action choice taking the other player's action as given
Monopoly
one seller of a good or service with no close substitutes
Free riding occurs when _______ are out of sync with _______
people's private benefits; the public interest
The figure on the right shows the typical firm in a perfectly competitive industry. Equilibrium in the market is currently yielding a price of $70. At this price, the typical firm earns a ____________ economic profit. As a consequence of the current short-run conditions in this industry, it may be expected that firms will _________ this market As this movement of firms occurs, economic profits for the typical firm will __________________.
positive enter approach zero
Fair-return price
price is equal to average total cost
Efficient (socially optimal) price
price is equal to marginal cost
In comparison to firms in other market structures, monopolists:
produce goods that do not have close substitutes
Elastic Supply
quantity supplied is very responsive to price changes (Es > 1)
Game Tree
representation of an extensive-form game
A dominant strategy
results in a higher payoff irrespective of the strategy chosen by the other player
Absolute Advantage
the ability of an economic agent to produce more output than another agent with the same resources Example: ___________________________________________________________________________ Website | Computer Program Opportunity Cost | Opportunity Cost ______________________________________________|_____________________________ You | 2/3 CP (0.67) | 3/2 W (1.5) ____________|__________________________________|____________________________ Your | | friend | 1/2 CP (0.50) | 2 W (2.0) _____________|_________________________________|____________________________
Comparative Advantage
the ability of one economic agent to produce at lower opportunity cost than others Example: ___________________________________________________________________________ Website | Computer Program Opportunity Cost | Opportunity Cost ______________________________________________|_____________________________ You | 2 computer programs | 1/2 websites ____________|__________________________________|____________________________ Your | 1/2 computer | friend | programs | 2 websites _____________|_________________________________|____________________________ Your friend has a comparative advantage in websites You have a comparative advantage in computer program
Market Power
the ability to set the price
Revenue
the amount of money the firm brings in from the sale of its product Total Revenue (TR): TR = P x Q Average Revenue (AR): AR = TR/Q = P Marginal Revenue (MR): MR = △TR/△Q -the change in TR from selling one more unit
When the marginal cost curve lies above the average cost curve,
the average cost curve slopes upward
equity-efficiency trade-off
the balance between ensuring an equitable allocation of resources (equity) and increasing social surplus or total output (efficiency)
Marginal Analysis is
the change in the net benefit of one option compared to another.
If the price of a good increases, ___________________.
the consumer surplus decreases
Producer Surplus us
the difference between the market price and the supply curve (the marginal cost cure).
What is producer surplus?
the difference between the market price and the supply curve for all the quantities sold.
Consumer Surplus is
the difference between the willingness to pay and the price paid for the good
The tax incidence on buyers is higher if ______________.
the elasticity of the market supply curve is higher than the elasticity of the market demand curve
During the process of optimization economists believe that people are considering ______________. The goal of optimization for an individual is to maximize _____________.
the feasibility of a choice, given the information available at the time. overall well-being
Beuracratic costs
the greater the number of regulations = the greater the number of government workers needed to enforce them Costs vs. Benefits
Marginal Cost (MC)
the increase in Total Cost from producing one more unit. △TC MC =____________ △Q
In a regressive tax system,
the marginal tax rate declines with income so that low-income households pay a greater percentage of income in taxes than do high-income households.
If new firms are expected to enter an existing market, ________________.
the market price is likely to fall
A monopolist faces and average total cost of $10 when it produces 400 units of its product. If it sells the 400 units at $6 per unit, ___________.
the monopolist makes a loss of $1,600
Competitive equilibrium is
the part at which the market comes to an agreement about what the price will be (competitive equilibrium price) and how much will be exchanged (competitive equilibrium quantity) at the price.
The long-run supply curve of a firm is
the portion of its marginal cost curve that lies above the average total cost curve.
