Eco Final
critique of advertising
-manipulate peoples tastes - impedes competition -faces a less elastic demand curve, can increase its profits by charging a larger markup over marginal cost
The model of competitive markets relies on these three core assumptions
1. There must be many buyers and sellers—a few players can't dominate the market. 2. Firms must produce an identical product—buyers must regard all sellers' products as equivalent. 3. Firms and resources must be fully mobile, allowing free entry into and exit from the industry. The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behavior, assume for this problem that a market cannot maintain competition in the long run without free entry.
Suppose that there is only one provider of a service in a state. Because this provider experiences economies of scale, the government does not want to break it into smaller pieces, but it does want the provider to supply the efficient quantity. Which of the following policy options might most effectively enable the government to achieve its objectives in this situation? A. Regulate the firm's pricing behavior. B. Turn the company into a public enterprise. C. Do nothing at all. D. Use antitrust laws to increase competition.
A
Which of the following solutions could ensure that the recreational wildlife game area is sustainable in the long run, assuming that the regulation is enforceable?A. Outlaw intensive hunting. B. Convert the recreational wildlife game area to private property, and allow the owner to sell hunting rights. C. Develop a program that entices more hunters to move to the area.
A & B
An oligopolistic market structure has the following characteristics:
A few large sellers Either similar or identical products Mutual interdependence Difficult entry
oligopoly
A market structure in which a few large firms dominate a market
a tit-for-tat strategy
A means of encouraging cooperation by at first acting cooperatively but then always responding the way your opponent did (cooperatively or competitively) on the previous trial
Which of the following statements about expenditures on advertising is true? A. If a firm knows its product is of low quality, it will be willing to spend large amounts of money on advertising. B. When a firm spends a large amount of money on advertising, advertising can be construed as a signal of quality. C. When a firm spends a small amount of money on advertising, this signals that the quality of the good is high.
B
Which of the following statements are true about both monopolistic competition and monopolies? Check all that apply. A. Price equals average total cost in the long run. B. Price is above marginal cost. C. Firms are not price takers. D. Firms earn zero profit in the long run
B & C
Which of the following generate a negative externality? A. Kevin has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season. B. The local airport has doubled the number of runways, causing additional noise pollution for the surrounding residents. C. A microbiology lab has published its breakthrough in swine flu research. D. Your roommate Ana has bought a cat to which you are allergic.
B & D
If the firms decide to collude, what strategies will they end up choosing?
Both firms will choose not to advertise.
price effect
By lowering the price at which each unit is sold, the price change has a negative effect on total revenue
Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing? A. Both firms will choose not to advertise. B. Expresso will choose to advertise and Beantown will choose not to advertise. C. Both firms will choose to advertise. D. Expresso will choose not to advertise and Beantown will choose to advertise.
C
Which of the following describes why most economists would disagree with this policy? A. The environment isn't worth protecting. B. Reducing methane emissions is desirable, but whatever levels of pollution firms decide to emit privately are already efficient. C. The opportunity cost of zero pollution is much higher than its benefit. D. Society would not benefit from lower air pollution.
C
Which of the following generate a positive externality? A. Your roommate Gilberto has bought a bird that keeps you up at night with its chirping. B. The city where you live has turned the publicly owned land next to your house into a park, causing trash dropped by park visitors to pile up in your backyard. C. Charles has planted several trees in his backyard that increase the beauty of the neighborhood, especially during the fall foliage season. D. A leading electronics manufacturer has discovered a new technology that dramatically improves the picture quality of plasma televisions. Firms of all brands have free access to this technology.
C & D
Which of the following statements are true about this natural monopoly? Check all that apply. A. The cable company is experiencing diseconomies of scale. B. The cable company must own a scarce resource. C. The cable company is experiencing economies of scale. D. It is more efficient on the cost side for one producer to exist in this market rather than a large number of producers.
C & D
An oligopolistic market structure is distinguished by several characteristics, one of which is either similar or identical products. Which of the following are other characteristics of this market structure? Check all that apply. A. Neither mutual interdependence nor mutual dependence B. Market control by many small firms C. Market control by a few large firms D. Difficult entry E. Mutual interdependence
C D E
the socially efficient outcome will be reached, regardless of who has the property rights; as long as bargaining costs are low enough, assigning property rights to one party will efficiently solve the problem of externalities
Coase theorem
The government orders every factory to adopt a new technology, which reduces carbon-dioxide emissions into the atmosphere.
Commandand-Control Policy
natural monopolies
Companies that provide public utilities, such as natural gas
Rival
Consumption of the good by one person decreases the ability of other people to consume the good
The government agrees to reimburse all factories that purchase new, emissions-reducing technology in order to provide cleaner air.
Corrective Subsidy
The government charges factories $340 for every ton of carbon dioxide they emit.
Corrective Tax
Suppose the government knows the optimal quantity of pollution as well as how much it costs a particular polluting firm to reduce pollution at each quantity. If this is all the information the government has, which solution to reduce pollution is appropriate?
Corrective taxes & Tradable permits
Fishing in the river will likely lead to the Tragedy of the Commons because of which of the following reasons? A. Nobody will enjoy fishing because of the lack of private contributions to the maintenance of the river. B. All fishermen will choose to fish in the stream believing that there are more fish there. C. All fishermen will choose to fish in the river because of the limited access to the stream. D. Anyone can fish in the river, and one person's fishing activity decreases the ability of someone else to fish with success.
D
In the natural gas industry, low average total costs are obtained only through large-scale production. In other words, the initial cost of setting up all the necessary pipes and hoses makes it risky and, most likely, unprofitable for competitors to enter the market.
Economies of Scale
product variety
Entry of a new firm conveys a positive externality on consumers because they get some consumer surplus from the introduction of a new product
Business-stealing
Entry of a new firm imposes a negative externality on existing firms because this causes other firms to lose customers and profit.
The Aluminum Company of America (Alcoa) formerly controlled all U.S. sources of bauxite, a key component in the production of aluminum. Given that Alcoa did not sell bauxite to any other companies, Alcoa was a monopolist in the U.S. aluminum industry from the late 19th century until the 1940s.
Exclusive Ownership of a Key Resource
At the national level, the Federal Communications Commission licenses only a certain number of radio and television stations in each geographic area.
Government Created Monopolies
monopolistically competitive market
Many sellers Product differentiation Free entry
Product differentiation
Monopolistically Competitive Market
The government has granted a patent to a pharmaceutical company for an experimental AIDS drug. That company is the only firm permitted to sell the drug.
No, no free entry
There are hundreds of colleges that serve millions of students each year. The colleges vary by location, size, and educational quality, which enables students with diverse preferences to find schools that match their needs
No, not an identical product
A few major airlines account for the vast majority of air travel. Consumers view all airlines as providing basically the same service and will shop around for the lowest price
No, not many sellers
perfect price discrimination
Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit.
Government created monopolies
Patent and copyright laws Higher prices Higher profits
Total surplus is maximized
Perfect Price Discrimination
Total Revenue
Price x Quantity
Total revenue
Price x Quantity
There is deadweight loss associated with the profit maximizing output.
Single-price Monopoly
Which of the following scenarios would cause the survey used by the college administrators to yield misleading willingness-to-pay data?
Students believe they will eventually be charged their willingness-to-pay
Profit is equal to
TR-TC
efficient scale
The quantity where the average total cost is minimized
Excludable
Those who are unwilling or unable to pay for the good do not obtain its benefits.
The government limits total carbon dioxide emissions by all factories to 160,000 tons per decade. Each individual factory is given the right to emit 130 tons of carbon dioxide, and factories may buy and sell these rights in a marketplace
Tradable Permit System
Of the four cells of the table, which gives the greatest combined benefits to Neha and Teresa?
When both Neha and Teresa contribute to the botanical garden
Dozens of companies produce plain white socks. Consumers regard plain white socks as identical and don't care who manufactures their socks.
Yes, meets all assumptions
prisoners' dilemma
a certain payoff structure and an inability of players to collude, provides insight into the difficulty of maintaining cooperation
The recreational wildlife game area is an example of
a common resouce
the fish in the river are an example of
a common resource
payoff matrix
a diagram used to describe all the elements of a game
If a good is both excludable and rival in consumption, then it is
a private good
the fish in the private stream are an example of
a private good
It's important to note that sometimes private solutions to externalities do not work. For example, this occurs when communications barriers or social customs are important enough relative to the potential gains involved that
a private solution is not feasible.
Nash equilibrium
a set of strategies (one for each player) in which each player's strategy is the best option for that player, given the chosen strategy of the player's opponent
dominant strategy
a strategy that is best for a player, regardless of the strategies chosen by the other players
the marginal cost curve intersects the average total cost curve
at its minimum
Total cost is equal to
average total cost x quantity
A good that is nonrival in consumption and excludable is a
club good
A cabana along a beach that is open to the public
common resource
Price taker
competitive market
Free entry
competitive market &Monopolistically Competitive Market
Price equals average total cost in the long run
competitive market &Monopolistically Competitive Market
Suppose that a flower nursery benefits from having a butterfly farm located only a few miles away, because the presence of the insects greatly improves flower pollination. Lawyers for the two companies meet to draft a legal document specifying the number of butterflies the farm promises to maintain in exchange for payments to be made by the nursery. Which of the following types of private solutions to the externality of pollination has occurred in this case?
contracts
corrective tax
discourages behavior that has negative external effects
The level of production corresponding to the lowest average total cost is called the firm's
efficient scale
corrective subsidy
encourages behavior that has positive external effects
Profit
equal to total revenue minus total cost
The wages and utility bills that Lorenzo pays
explicit
The wholesale cost for the guitars that Lorenzo pays the manufacturer
explicit
Marginal revenue
extra revenue from the sale of one additional unit of output
when the marginal cost curve is below the average total cost curve, the average total cost must be
falling
True or False: Assuming implicit costs are positive, each of the firms operating in this industry in the long run earns negative accounting profit.
false
True or False: The river will remain polluted, regardless of who has the property rights.
false
in the long run
firms will neither enter nor exit.
Because the estimated benefit is _____ than the cost, the college administrators _____ undertake the beautification initiative
greater, should
The rental income Lorenzo could receive if he chose to rent out his showroom
implicit
The salary Lorenzo could earn if he worked as an accountant
implicit
Exclusive ownership of a key resource
is a potential but rare cause of a monopoly.
The fish cannery will make the most economic profit when
it has property rights to pollute the river
deadweight loss
loss of surplus
The _____ occurs at the intersection of the private cost curve and the private value curve.
market equilibrium quantity
output effect
more units are sold when the price decreases, which has a positive effect on revenue
An externality arises when a firm or person engages in an activity that affects the wellbeing of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is ADVERSE, it is called a
negative externality
For the students of the college, the visual appearance of the campus is
non-rival and non-excludable
a public good is
non-rival and non-excludable
In this case, the failure to maximize total social utility by funding the botanical garden means that the market is
not efficient
If Teresa decides to contribute to the botanical garden, Neha would maximize her benefit by choosing
not to contribute to the botanical garden
if Teresa decides not to contribute to the botanical garden, Neha would maximize her benefit by choosing
not to contribute to the botanical garden.
Tragedy of the Commons
occurs when people consume more of a common resource than society would desire
An externality arises when a firm or person engages in an activity that affects the wellbeing of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is BENEFICIAL, it is called a
positive externality
A new drone that you take turns flying with your friends
private good
At the current short-run market price, firms will___in the short run
produce
A large, beautiful clock in a town square
public good
Explicit costs
refer to all costs that require an outlay of money by the firm
implicit costs
refer to all costs the firm incurs in production that do not involve any monetary transactions
command-and-control policy
remedies an externality by legally limiting a specific behavior by a specific entity
tradable permit system
remedies an externality by regulating general behavior
when the marginal cost curve is above the average total cost curve, the average total cost must be
rising
The fish in the private stream are considered
rival in consumption and excludable
the fish in the river are
rival in consumption and nonexcludable.
Collusion
secret agreement or cooperation
The _____ at the intersection of the social cost curve and the social value curve.
socially optimal quantity
free rider
someone who receives the benefit of a good but does not pay for it
Marginal cost
the cost of producing one more unit of a good
single-price monopoly
the monopoly charges a price above its marginal cost, so not all consumers who value the good at more than its marginal cost are able to buy it
Price discrimination
the practice of selling the same good at different prices to different types of customers
pollution rights
the right to emit a given quantity of sulfur dioxide
average total cost is equal to
total cost/quantity
economic profit
total revenue minus total cost, including both explicit and implicit costs
Accounting profit
total revenue minus total explicit cost
True or False: This indicates that there is a markup on marginal cost in the market for shirts.
true
True or False: Without government regulation, natural monopolies can earn positive profit in the long run
true
Suppose the hiking lodge has the property rights to the river. That is, the hiking lodge has the right to a clean (unpolluted) river. this case, assuming the two firms can bargain at no cost, the fish cannery will _____ the recycling method and will pay the hiking lodge _____ per week.
use, $0
Now, suppose the fish cannery has the property rights to the river, including the right to pollute it. In this case, assuming the two firms can bargain at no cost, the fish cannery will ___the recycling method, and the hiking lodge will pay the fish cannery ________
use, between $800 and $1,200 per week.
Total economic profit is highest when the recycling production method is
used
constant returns to scale
when it can increase production without changing long-run average total cost
economies of scale
when long-run average total cost falls as it increases production
diseconomies of scale
when long-run average total cost increases as it increases production