Comprehension Check
Which type of tax raises the most revenue for state and local governments?
Sales tax
Suppose that France is currently producing 1 bottle of wine and 6 pounds of cheese and Germany is currently producing 3 bottles of wine and 10 pounds of cheese. Then, assume instead that France and Germany specialize by producing only the good for which they have a comparative advantage and then trade 3 bottles of wine for 10 pounds of cheese.
After specialization and trade, France gains by consuming the same amount of wine and 4 additional pound(s) of cheese (enter a numeric response using an integer) and Germany gains by consuming the same amount of wine and 5 additional pound(s) of cheese.
Suppose that France and Germany both produce wine and cheese. The table below shows combinations of the goods that each country can produce in a day. Who has the comparative advantage in producing wine and who has the comparative advantage in producing cheese?
France has a comparative advantage producing wine and Germany has a comparative advantage producing cheese.
Which of the following correctly explains the effect of a variable on the labor demand curve?
If the quantities of other inputs increase, then the labor demand curve will shift to the right.
In the presence of shortages, why would a firm, such as a restaurant with people waiting for a table or a theater with people waiting for a ticket, not raise prices when doing so would seem to increase profits?
Increasing prices might result in short run gains at the expense of long run profits. Increasing prices might alienate customers.
Which type of tax raises the most revenue for the federal government?
Individual income taxes.
Why do monopolistically competitive firms have downward-sloping demand curves?
Monopolistically competitive firms sell differentiated products.
How else can you calculate the price elasticity of demand?
Price elasticity of demand can be calculated using initial values for price and quantity. Price elasticity of demand can be calculated using final values for price and quantity.
What would need to be true 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 (in absolute value) than the substitution effect.
What is the advantage of the midpoint method?
The midpoint formula will give the same value whether moving from the higher price to the lower price or from the lower price to the higher price.
Suppose that a large oil field is discovered in Michigan. By imposing a tax on the oil, the state government is able to eliminate the state income tax on wages. What is likely to be the effect on the labor supply curve in Michigan?
The quantity of labor supplied in Michigan will decrease if the income effect is larger than the substitution effect.
The demand for pears is highest during summer and lowest during winter. Yet pear prices are normally lower in summer than in winter. What must be happening to the supply of pears, from winter to summer, for the equilibrium price to fall?
The supply increases more than the demand increases.
What do most economists find to be the most persuasive argument in favor of protectionism?
Trade barriers protect infant industries that initially have relatively high costs.
Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a necessity?
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.
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.
What must be true for the Coase Theorem to hold? For the Coase Theorem to hold,
all parties to an agreement must have full information about the costs and benefits of the externality.
Consequently, with the price ceiling, deadweight loss would equal
areas E and F.
Consequently, at a price of 7 cents, deadweight loss would equal
areas e and f
What are the differences between the long-run equilibrium of a perfectly competitive firm and the long-run equilibrium of a monopolistically competitive firm? Unlike perfectly competitive firms, in the long run monopolistically competitive firms
charge a price greater than marginal cost and do not produce at minimum average total cost
Firms are sometimes able to engage in price discrimination over time. Give an example of this form of price discrimination. A typical example of price discrimination over time would be when a company
charges higher prices for flat− screen plasma televisions when they are first introduced and lower prices later.
A good that is rival and nonexcludable is a:
common resource
In turn, producer surplus would
decrease by areas C and F.
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
decrease by areas b and e
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 $75,000,000. 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 ______
economies of scale
In the circular-flow diagram showing how a market system works,
income flows to households through factor markets.
An accountant increases the price he charges for his services by 18 percent. In response, the demand for his services decreases by 12 percent. Will the accountant's revenue from his accounting services increase, decrease, or remain unchanged? The accountant's revenue will ____
increase
Consider the market for electricity 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 Q2. Now suppose the government applies a price ceiling of p1. Compared with the market-clearing equilibrium, consumer surplus would
increase by area C and decrease by area E
In turn, producer surplus would
increase by area b and decrease by area f
Consider the market for iPhones. Suppose household income increases. Use the line drawing tool to show how this affects the demand for iPhones by drawing a new demand curve. Assume iPhones are a normal good. Properly label this line. Carefully follow the instructions above, and only draw the required objects. According to the graph, when income increases, the demand for iPhones _______ Instead, consider an inferior good. If income increases, then the demand for an inferior good ________
increases, and decreases, the drawn graph should be shifted to the right of the demand curve
Determine whether the demand for the following product is likely to be elastic or inelastic Demand for milk is likely to be ______
inelastic
For many years, the International Nickel Company of Canada essentially operated as a monopoly. What made this company a monopoly? The International Nickel Company of Canada was essentially a monopoly because
it had almost exclusive control of the world's supply of nickel, used to make nickel products.
How is the prisoner's dilemma result changed in a repeated game? In a repeated game,
players can employ retaliation strategies.
Use income elasticity to distinguish a normal good from an inferior good. For a normal good, the income elasticity of demand will be
positive, but for an inferior good, the income elasticity of demand will be negative.
Do producers tend to favor price floors or price ceilings? Why? Producers favor
price floors because, when binding, price floors increase price above the equilibrium and may increase producer surplus.
Profitability is partially determined by the firm's ability to create value for its customers. How can a firm create this type of value? Firms can create value for their customers by
producing their product at a lower average cost than competing firms.
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.
What is the midpoint method for calculating price elasticity of demand? The midpoint method for calculating price elasticity of demand is:
the change in quantity divided by the average of the initial and final quantities divided by the change in price divided by the average of the initial and final prices.
What is the production function? 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 supply because firms and consumers are price takers.
Suppose alcohol generates a negative externality in consumption. If so, then
the marginal social benefit of alcohol is less than the marginal private benefit.
Income elasticity of demand is
the percentage change in quantity demanded divided by the percentage change in income.
What is a compensating differential? Give an example. A compensating differential is
when higher wages are paid to compensate a worker for unpleasant aspects of a job, such as when workers are paid higher wages for dangerous work.
Would a firm earning zero economic profit continue to produce, even in the long run? In long-run competitive equilibrium, a firm earning zero economic profit
will continue to produce because such profit corresponds with positive accounting profit.