Microeconomics Unit 6

The Cliffs of Hamsterville are a popular tourist attraction, however, as more people visit them the paths get worn down and it gets more difficult to see them. The Cliffs are on land owned by the government, and there are currently no restrictions on who can visit them. What kind of good are the Cliffs of Hamsterville, and what issue does it face?

Common resource, tragedy of the commons

Because no private provider was willing to do so, the city of Montrose has decided to provide emergency room services free of charge. However, a doctor can only see one patient at a time. What kind of good is the emergency room service in Montrose?

Common resources as they are non-excludable but rival. The emergency room services are free, so they are non-excludable. Because only one patient can be treated by a doctor at a time they are rival.

When an economist says that a good is rival in consumption, what does that mean?

Only one agent can consume one unit of the good When a good is rival, if someone uses that good it either prevents or interferes with another person using that same good. For example, when one person eats a candy bar, another person cannot eat that same candy bar, and when a person drives a car on a highway no other car can occupy that same space.

A per unit tax is placed on a monopoly with a downward sloping demand curve. What happens to the price consumers pay and to deadweight loss?

Price increases; deadweight loss increases When a tax is imposed on a market with a downward sloping demand curve, the price consumers pay increases and the quantity sold decreases. Deadweight loss exists in a monopoly because sellers produce a quantity that is less than the optimal quantity. Since quantity is reduced even further by a tax, deadweight loss increases.

Lorenz Curve

The curve that illustrates the income distribution

Downward sloping demand curve

A demand curve that is consistent with the law of demand, so that an increase in price leads to a decline in quantity demanded. As a result, the line slopes down when read from left to right.

Gini Coefficient

A measure of income inequality within a population, ranging from zero for complete equality, to one if one person has all the income.

Tragedy of the Commons

A parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

Which of the following must be true to maximize economic surplus in a market?

All social costs and benefits are internalized by agents in the market

All of the following are associated with a market quantity that is the quantity where social marginal cost (MSC) doesn't equal marginal social benefit (MSB) EXCEPT?

Allocative efficiency as it occurs when the quantity produced is the quantity where the marginal benefit of consumption equals the marginal cost of production.

Cost-benefit Analysis (CBA)

Analysis that compares the costs of various possible decisions to each other, forecasts the net impact of each on the bottom line, and recommends the best alternative.

When a rational agent is making a decision that is individually rational and individually optimal, what do they do?

Equate private marginal benefit to private marginal cost

All of the following results in an efficient allocation of resources EXCEPT

Externalities in consumption When agents, private costs and benefits do not include external costs and benefits, then markets inefficiently allocate resources.

What must be true about private goods?

Governments sometimes produce them Sometimes governments choose to produce private goods for a variety of reasons. For example, the private sector might provide an inefficient quantity if there are positive externalities, or the government simply wants to provide a good for free.

All of the following are associated with an inefficient allocation of resources EXCEPT

Internalization of costs and benefits If all costs and benefits associated with a transaction are internalized by agents, then there are no externalities and the market allocation is efficient.

The government of Jacksonia produces and sells cream cheese. Nobody is allowed to consume cream cheese without paying for it, and only one person can consume a given block of cream cheese. What kind of good is cream cheese?

Private good Private goods are excludable and rival. Cream cheese is excludable because you have to buy it before making cream cheese toast, and its rival because only one person can consume the same bite of cream cheese at any given time.

Which of the following best describes when an agent manipulates an environment to achieve market power that serves no productive purpose?

Rent-seeking Rent-seeking behavior is the pursuit of private actions to exploit market power. For example, if an owner of a piece of land on either side of a river put a chain across a river to block passing boats unless they pay a fee, the chain adds no value to society. The owner is merely exploiting their environment to extract surplus for themselves.

The production of good B creates negative externalities, but there are no externalities in the consumption of good B. What must be true at the market equilibrium for good B if the market is not regulated?

The marginal social benefit is less than the marginal social cost In a market equilibrium, the amount exchanged is the amount where marginal private cost equals the marginal private benefit. If there are no externalities in consumption, marginal social benefit equals the marginal private benefit. If there are negative externalities in production, marginal social cost is greater than the marginal private cost. Therefore, in equilibrium, the marginal social benefit is less than the marginal social cost.

There is a negative production externality in the market for peanut butter. Which of the following best describes what is true about quantity sold in this market?

The marginal social cost of that quantity exceeds its marginal private cost. A negative production externality means that the social cost of producing the good is higher than the cost paid by individual producers. As a result, the market quantity is greater than the optimal quantity.

Which of the following best describes the market quantity that will always maximize total economic surplus?

The quantity where the marginal benefit of the last unit equals the marginal cost of producing the last unit.

Which of the following best describes something nonrival in consumption?

Watching a streaming video service with unlimited bandwidth This best describes something nonrival in consumption because usually more than one person can watch the same show on the same streaming service. For example, you and I could both watch "Hamsterville, Live!" from two different places and two different accounts from the same service.

Which of the following best defines the free rider problem?

When goods are nonexcludable, people have no incentive to pay for their production The free rider problem describes a situation where people have no incentive to pay for the production of goods that are nonexcludable, such as public goods. As a result, private agents have little incentive to produce these goods.

Which of the following situations best describes a positive externality?

You bake a pie that makes the whole neighborhood smell delicious. The private benefit of the pie is your enjoyment from the pie. The social benefit of the pie is your private benefit, plus the benefit the entire neighborhood gets from smelling it. When the social benefit of a good is greater than the private benefit of a good, that is a positive externality.

Which of the following situations best describes a negative externality?

You make a sardine and Limburger sandwich that makes your dorm smell terrible. The unbelievable stench caused by this sandwich imposes a cost on your dorm-mates that is not accounted for when you performed a cost benefit analysis on making the sandwich. Had you taken this external cost into account, you might not have made the sandwich at all.