ECON 101 Final Study Guide

The market for soybeans is competitive. The demand function for soybeans is QD = 12,000 - 15P and the supply function is QS = 25P - 4,000, where prices are in dollars per tonne and the quantity of soybeans is measured in tonnes per day. What is the total surplus generated by the soybean market?

$1,920,000/day Why: Equilibrium Quantity: 12,000-15P=25P-4,000 P= 400 25(400)-4,000 Q= 6000 Q=0 -> 12,000-15P=0 P = 800 25P-4,000=0 P = 160 TS = (6000(800-160))/2 = $1,920,000/day

Calculating Income Elasticity of Demand

%ΔD/%ΔI Percent change in demand divided by percent change in income.

Midpoint Method

%ΔQ/%ΔP = * %ΔQ = (Q2-Q1)/((Q1+Q2)/2)*100 * %ΔP = (P2-P1)/((P1+P2)/2)*100 *%ΔQ/%ΔP = ((Q2-Q1)/((Q1+Q2)/2)*100)/((P2-P1)/((P1+P2)/2)*100)

Price Elasticity of Demand

(%Change in the Quantity Demanded)/(%Change in the Price)

iClicker Question 3-6: Consider the market of red table wine in North America. What is the most likely effect of a discovery that drinking moderate quantities of wine decreases the chance of a heart attack? (A) It would increase the equilibrium price and quantity. (B) It would decrease the equilibrium price and quantity. (C) It would increase the equilibrium price and decrease the equilibrium quantity. (D) It would decrease the equilibrium price and increase the equilibrium quantity.

(A) It would increase the equilibrium price and quantity. Why: There would most likely be an increase in the demand for red table wine. There would be an increase in the quantity demand at every price of red wine. This event does not affect the supply of red wine - it would not make the manufacturing of red wine any easier, and input costs aren't changing. Draw a Supply and Demand diagram - notice that the equilibrium price and quantity both increase.

iClicker Question 2-1: Assume trees can be used to produce lumber, but not automobiles. If the government allowed logging of a large area of old-growth forest that is easy to access and previously untouched, it would allow greater production of (A) both lumber and automobiles. (B) neither lumber nor automobiles. (C) automobiles but not of lumber. (D) lumber but not of automobiles.

(A) both lumber and automobiles. Why: The PPF opens up the possibility for them to expand the production of both.

iClicker Question 3-11: Bovine spongiform encephalopathy (BSE), commonly known as mad cow disease, is a fatal neurodegenerative disease in cattle that causes a spongy degeneration in the brain and spinal cord. The disease may be transmitted to human beings by eating food contaminated with the brain, spinal cord, or digestive tract of infected carcasses. But the infectious agent can be found in virtually all tissues throughout the body. Much like Canada, the United Kingdom (U.K.) exports about 50% of the beef it produces. If there were an outbreak of Mad Cow Disease in the U.K., people in the U.K. would probably (A) eat less beef. (B) eat more beef. (C) eat the same amount of beef.

(A) eat less beef. Why: This decreases the demand for beef, as it's becoming riskier to eat beef.

iClicker Question 9-2: It's the end of term and Mizu is getting her course grades. She took three courses. She finds out she got 76% in Econ 101 and 80% in Math 100, so her average grade on those two courses is 78%. She then finds out she got 84% in Chem 100. As a result (A) her average grade rises. (B) her average grade falls. (C) her average grade neither rises nor falls (ie, it doesn't change).

(A) her average grade rises. Why: - (76+80+84)/3 = 80.

iClicker Question 8-7: If each firm faced an emissions tax of $6.50 a unit, the total social cost of abating emissions from 15 units to 9 units would be (Total Emissions, Firm 1 MAC, Firm 2 MAC, Firm 3 MAC): (1, $20, $10, $8) (2, $19, $8, $7) (3, $18, $6, $5) (4, $17, $4, $4) (5, $16, $2, $3) (A) $19. (B) $24. (C) $33. (D) $43. (E) $82.50.

(B) $24. Why: 2 + 3 + 4 + 4 + 6 + 5 = $24. - Add up all the prices of units that were abated. This is the sum of the Marginal Abatement Costs.

iClicker Question 8-4: What's the lowest possible total cost of reducing aggregate emissions from 15 units to 9 units? (Total Emissions, Firm 1 MAC, Firm 2 MAC, Firm 3 MAC): (1, $20, $10, $8) (2, $19, $8, $7) (3, $18, $6, $5) (4, $17, $4, $4) (5, $16, $2, $3) (A) $19. (B) $24. (C) $33. (D) $43. (E) $46.

(B) $24. Why: - First cheapest: Firm 2 by one unit with $2. Next cheapest: Firm 3 by one unit by $3. Next cheapest: $4 Firm 2 or Firm 3, 2 units. Keep going until you get 6 units. This would be: 2 + 3 + 4 + 4 + 5 + 6 = $24.

iClicker Question 9-5: A small firm uses capital and labour to produce bookshelves. If the wage rate is $20 and the marginal product of labour is 5 bookshelves, what is your estimate of the marginal cost of producing a bookshelf? (A) $2. (B) $4. (C) $5. (D) $20. (E) We do not have enough information to calculate the marginal cost of producing a bookshelf.

(B) $4. Why: - MC = ΔTC/ΔQ - MPL = 5 -> ΔQ - ΔTC = W = $20 - MC = $20/5 = $4 - MC = ΔTC/ΔQ = W/MPL

iClicker Question 8-5: If each firm faced an emissions tax of $15 a unit, aggregate emissions would be (Total Emissions, Firm 1 MAC, Firm 2 MAC, Firm 3 MAC): (1, $20, $10, $8) (2, $19, $8, $7) (3, $18, $6, $5) (4, $17, $4, $4) (5, $16, $2, $3) (A) 3 units. (B) 5 units. (C) 7 units. (D) 9 units. (E) 11 units.

(B) 5 units. Why: Firm 1: All 5 units are over $15 dollars, so paying the $75 dollar tax is cheaper than abating the emissions. Firm 2: All 5 units are less than $15, so abating would be cheaper than paying the tax. All units will be abated. Rather than paying any tax, Firm 2 pays $30 instead in actual costs. Firm 3: All 5 units are less than $15, so abating would be cheaper than paying the tax. All units will be abated. Rather than paying any tax, Firm 3 pays $27 instead in actual costs. Total emissions are 5 units now.

iClicker Question 6-3: Demand for carrots is initially described by the function Q = 20,000 - 5P, where price is in dollars per tonne and quantity is in tonnes per week. The Canadian Medical Association releases a new study about the health effects of eating carrots. As a result, the demand function for carrots becomes Q = 15,000 - 5P. How does the study affect the price elasticity of demand for carrots at a price of $1,000 per tonne? (A) It increases the price elasticity of demand at that price. (B) It decreases the price elasticity of demand at that price. (C) It does not change the price elasticity of demand at that price.

(B) It decreases the price elasticity of demand at that price. Why: - Demand is dropping, so obviously this is bad news. - The slopes of the demand function and therefore the slope of the demand curve (will just simply be one over that) are not changing as a result. Demand for carrots is shifting to the left with a fixed slope if graphed. - ED = (ΔD/ΔP) * (P/Q) -> ΔD/ΔP and P are not changing, so what determines how the PED changes is just how Q changes, and it is decreasing. - Mathematically: * (-1/5)(1000/15000) = -0.013 -> decreased * (-1/5)(1000/10000) = - 0.02

iClicker Question 3-7: Consider the market of red table wine in North America. What is the most likely effect of an increase in U.S. income tax rates? (A) It would increase the equilibrium price and quantity. (B) It would decrease the equilibrium price and quantity. (C) It would increase the equilibrium price and decrease the equilibrium quantity. (D) It would decrease the equilibrium price and increase the equilibrium quantity.

(B) It would decrease the equilibrium price and quantity. Why: Red wine is a normal good. An increase in the income tax rates will reduce disposable income. This means demand is going to decrease. Supply is not affected by the fact that people in America have less disposable income.

iClicker Question 7-3: Consider the following statement: A tax that raises revenue must produce a deadweight loss. (A) The statement is true. (B) The statement is false.

(B) The statement is false. Why: - The equilibrium quantity is unaffected by the amount of tax. - If the same amount of trade takes place in the market, then revenues are being generated, and there is no deadweight loss.

iClicker Question 10-2: Jenny's Spa provides manicures and the market for manicures is competitive. Currently, Jenny's rent and other fixed costs total $7000 per week and she employs 15 workers at a cost of $600 per week per worker. Jenny's total output is 800 manicures per week and the market price of a manicure is $20. In the short run, Jenny should (A) lay off her workers and shut down her business. (B) continue operating her business. (C) be indifferent between operating and shutting down her business.

(B) continue operating her business. Why: - Profit Shut-Down = -$7000 - Profit Operate = $0 - AVC = VC/Q = (15*600)/800 = $11.25 -> this is less than the price of $20, so she should operate. If the price was less than 11.25 she should shut down.

iClicker Question 10-4: TeeFit is one of many firms that produce basic cotton t-shirts. The market for basic cotton t-shirts is perfectly competitive. Currently, TeeFit's long-run economic profit is zero and TeeFit expects it to stay like that for the foreseeable future. If the owners of TeeFit are rational, they should (A) exit the t-shirt industry as soon as they can and find another line of business. (B) continue to operate in their t-shirt business.

(B) continue to operate in their t-shirt business. Why: - Because economic profit is calculated as Total Revenue - Total Costs. Where those costs are evaluated using the concept of opportunity cost. Those costs represent the value that the resources that are being used by the firm could generate in their next best alternative use. - Stay: NB=TR-TC=0 - Go: NB= B-C =0 -> the opportunity cost of leaving the industry is the revenue you forgo. TR becomes the cost of exiting. - There is no better alternative that you currently identify, and in the future you might be able to identify something better, but currently, you haven't.

iClicker Question 3-3: A small firm uses milk and other inputs to produce cheese. Assume the price the firm pays for milk increases from $1 liter to $2 liter. At any given price of cheese, the increase in the price of milk would (A) increase the amount of cheese produced by the firm. (B) decrease the amount of cheese produced by the firm. (C) not affect the amount of cheese produced by the firm.

(B) decrease the amount of cheese produced by the firm. Why: If any input price goes up, all other things being equal, the quantity supplied is going to fall, and the supply curve is going to shift over to the left.

iClicker Question 9-3: It's the end of the term and Ringo is getting his course grades. He took three courses. He finds out he got 70% in Phil 100 and 60% in Phil 120, so his average grade on those two courses is 65%. He then finds out he got 62% in Phil 125. As a result (A) his average grade rises. (B) his average grade falls. (C) his average grade neither rises nor falls (ie, it doesn't change).

(B) his average grade falls. Why: (70+60+62)/3 = 64.

iClicker Question 6-5: Mia is the only person in town who sells apples. When she increases the price of her apples by 10% the number of apples she sells (ie, the quantity demanded) falls by 8%. As a result, the total revenue (ie, money) she gets from selling apples (A) decreases. (B) increases. (C) does not change. (D) might decrease or increase depending on the initial price and quantity demanded.

(B) increases. Why: - The price increase is pushing up total revenues, the quantity decrease is pushing it down. Which of the two effects dominates? 10% is greater than 8%, so the price effect in this case dominates, therefore total revenues will rise. Other ways to answer: - ED = 8%/10% = 0.8 -> inelastic. - Before: P = P0, Q = Q0, Total Revenue (TR0) = P0Q0 After: P1 = (1+0.1)P0, Q1 = (1-0.08)Q0, TR1 = P1Q1 = (1.1)P0*(0.92)Q0 = 1.012*P0*Q0 = 1.012*TR0 -> total revenue has risen

iClicker Question 3-5: A firm produces crude oil. The production of crude oil produces a significant amount of natural gas a by-product, most of which is captured. If the price of natural gas were to decrease, the firm would most likely produce (A) more crude oil. (B) less crude oil. (C) the same amount of crude oil.

(B) less crude oil. Why: If the price of natural gas goes down, it becomes less lucrative to be in the gas game. Supply is going to decrease, and along for the ride, comes crude oil. Natural gas and crude oil are complements in production - if you produce one, you automatically produce the other.

iClicker Question 9-1: Samsung is a firm that uses labour and capital to produce smartphones. Samsung only needs 48 hours to increase the number of workers on its production line. But it takes 3 months to order and install new capital equipment (ie, screwdriving assembly machines). For Samsung, the short run is best defined as a period of time that is (A) less than 48 hours. (B) less than 3 months. (C) more than 3 months.

(B) less than 3 months. Why: - 48 hours is a subset of the 3 months, so less than 3 months is within the short-run, and the long-run is over 3 months.

iClicker Question 7-2: With no tax, the market price is $20. A tax of $12 per unit tax is imposed on consumers and the market price falls to $17. How is the burden of the tax shared between consumers and producers? (A) producers bear 100% of the burden; consumers bear 0%. (B) producers bear 25% of the burden; consumers bear 75%. (C) producers bear 50% of the burden; consumers bear 50%. (D) producers bear 75% of the burden; consumers bear 25%. (E) producers bear 0% of the burden; consumers bear 100%.

(B) producers bear 25% of the burden; consumers bear 75%. Why: - If the tax is imposed on consumers, it's going to reduce the market price, but the tax is applied at the checkout. - With tax, consumers pay $29. With tax, PC = $29. - PC = $20 -> $29. Increasing by +9. This is 9/12, or 75% of the tax. - If consumers pay 75% of the tax, producers pay 25% of the tax.

iClicker Question 1-1: Russell spends an hour studying instead of playing tennis. What is his opportunity cost of studying? (A) the improvement in his grades from studying for the hour. (B) the enjoyment and exercise he would have received had he played tennis. (C) the difference between the improvement in his grades from from studying minus the enjoyment and exercise he would have received had he played tennis. (D) zero, since Russell chose to study rather than to play tennis, the value of studying must have been greater than the value of playing tennis.

(B) the enjoyment and exercise he would have received had he played tennis. Why: The benefit is the improvement in his grades from studying for the hour, and the cost of this benefit is the enjoyment he would have received had he played tennis. This question does not ask for the net benefit, only the opportunity cost.

iClicker Question 4-1: Refer to the figure on page 6 of Lecture Notes 4. When the price increases from $50 to $60, the resulting change in consumer surplus is about (A) -$2,250 (B) -$2,500 (C) -$2,625 (D) -$3,000 (E) -$3,250

(C) -$2,625 Why: 10*((225+300)/2) = 2,625 It's negative since the price is going up, the change is negative because it's decreasing.

iClicker Question 6-1: When the price of motor oil decreases from $8 per liter to $5 per liter, quantity demanded rises from 100 cases per day to 150 cases per day. Based on this information, the price elasticity of demand for motor oil is about (A) -0.56. (B) -1.33. (C) -0.87. (D) -0.92. (E) -1.67.

(C) -0.87. Why: Midpoint QD = (QD2 - QD1)/((QD2+QD1)/2 )= (150-100)/((150+100)/2) = 0.4 Midpoint Price = (P2 - P1)/((P2+P1)/2)) = (5-8)/((5+8)/2) = -0.46 Price Elasticity of Demand = (% change in QD)/(% change in Price) = 0.4/-0.46 ~ -0.87.

iClicker Question 6-6: Economists have estimated the demand function for good X as QD = 1200 - 4P - 0.01M, where QD is quantity demanded, P is the price of good X and M is average household income. The price of good X is $100 and average household income is $50,000. The income elasticity of demand for good X is (A) -0.01. (B) +0.01. (C) -1.67. (D) -2.33. (E) +2.33.

(C) -1.67. Why: - ΔQD/ΔM = -0.01 -> the sign tells us that it is an inferior good, meaning there is a negative income elasticity. - We can cancel out the options with positive numbers (B and E). - The income elasticity of demand cannot be A. - QD = 1200 - 4(100) - 0.01(50000) = 300 - EM = (ΔQD/ΔM)*(M/Q) - EM = (-0.01)*(50000/300) = -1.67.

iClicker Question 9-6: Refer to the figure at the top of page 12 of Lecture Notes 9. If the firm's long-run target level of production was 50,000 units per period, how much capital would the firm install in the long run? (A) 2 units of capital. (B) 3 units of capital. (C) 4 units of capital. (D) 5 units of capital. (E) None of the above.

(C) 4 units of capital. Why: - 43-57 midpoint: draw line up and consider the possibilities that are open to the firm. - There are several curves that intersect with 50,000, however the one that we want is the one that intersects at the lowest point. In this case, this is at 4 units of capital.

iClicker Question 5-3: Refer to the figure on page 5 of Lecture Notes 5. If the government introduces a price floor of $200 per unit and takes no additional action, the likely quantity exchanged in the market will be (A) 60 units per day. (B) 80 units per day. (C) 50 units per day.

(C) 50 units per day. Why: * If P = $200, the QD = 50 units, QS = 80 units. * The quantity exchanged is going to be limited by the number of people who want to buy the good, so it doesn't matter whether or not they want to sell 80 units per period. * QS exceeds QD -> economic surplus. * Suppliers are willing and able to supply more units to the market that people are willing to buy. * Quantity exchanged = Quantity Demanded = 50 units.

iClicker Question 2-2: Argentina and Chile both produce wine and olives. The opportunity cost of producing a crate of olives is 2 gallons of wine in Argentina's and 3 gallons of wine in Chile. At which of the following exchange rates might both countries agree to trade? (A) 2 crates of olives for 10 gallons of wine. (B) 4 creates of olives for 12 gallons of wine. (C) 6 crates of olives for 15 gallons of wine. (D) more than one of the above.

(C) 6 creates of olives for 15 gallons of wine. Why: * Determine who has a comparative advantage in what - the opportunity cost for producing olives is lower for Argentina, so they have the comparative advantage in the production of olives. * If the comparative advantages were the same, there would be no possibility of gains from trade. No potential benefits from specialization in trade. * Argentina gives up 12 gallons of wine (6 crates * 2 gallons/crate) Chile gives up 18 gallons of wine (6 crates * 3 gallons/crate) In this case, Argentina gives up less wine (12 gallons) than it would take to produce 6 crates of olives domestically (which would be 6 crates * 2 gallons/crate = 12 gallons). At the same time, Chile gives up exactly the same amount of wine (18 gallons) as it would take to produce 6 crates of olives domestically (6 crates * 3 gallons/crate = 18 gallons). Given that Argentina benefits by giving up less than its opportunity cost and Chile does not lose more than its opportunity cost, this trade is mutually beneficial.

iClicker Question 8-1: Refer to the figure on page 5 of Lecture Notes 8. At the socially optimal quantity, the total harm to third parties from pollution is (A) zero. (B) B + E. (C) B. (D) B + C. (E) A + B + C.

(C) B. Why: - The externality represents the harm to third parties. This is going to be reflective of the marginal external costs. - Sum of marginal external costs at the socially optimal quantity at Q*. - On the diagram, you start at 0 and go over the range through Q*, and the marginal external cost of the first unit, second unit, and further, is B.

iClicker Question 6-4: What do you think is the relationship between the price elasticity of demand for 2% milk and the price elasticity of demand for milk? (A) It is about the same for 2% milk and milk. (B) It is smaller for 2% milk than for milk. (C) It is bigger for 2% milk than for milk.

(C) It is bigger for 2% milk than for milk. Why: - ED (all types of milk) = (%ΔQD (all types of milk))/(%ΔP (all types of milk)) - ED (2% milk) = (%ΔQD (2% milk))/(%ΔP (2% milk)) - If prices of 2% milk go up, consumers will substitute to other available milks whose prices aren't going up. - The price elasticity of demand for 2% milk is going to be a lot bigger than it is for milk. - The demand for 2% milk is more sensitive to price changes than the demand for milk in general, so the PED for 2% milk is larger in magnitude than the PED for milk. This means that people are more responsive to changes in the price of 2% milk compared to changes in the price of milk in general.

iClicker Question 3-9: Consider the market of red table wine in North America. What is the most likely effect of extreme weather that destroys half of the grape crop in North America? (A) It would increase the equilibrium price and quantity. (B) It would decrease the equilibrium price and quantity. (C) It would increase the equilibrium price and decrease the equilibrium quantity. (D) It would decrease the equilibrium price and increase the equilibrium quantity.

(C) It would increase the equilibrium price and decrease the equilibrium quantity. Why: Demand remains unchanged. Supply is affected, as the price of an input (grapes) increases, and the quantity of the input decreases, which you can find by drawing a diagram for the market of grapes. An increase in the input prices decreases the supply of wine. In the market for wine, the price will increase and the quantity will decrease.

iClicker Question 6-7: Which of the following statements do you think best describes the relationship between cling film and tin foil? (A) They are weak complements. (B) They are strong complements. (C) They are weak substitutes. (D) They are strong substitutes. (E) They are unrelated goods.

(C) They are weak substitutes. - empirical question still. Why: - You can wrap things in cling film and with tin foil as substitutes. - When the price of one changes, how does it impact the quantity demanded for the other?

iClicker Question 3-1: Public transportation in Vancouver (A) is a normal good. (B) is an inferior good. (C) could be a normal or inferior good.

(C) could be a normal or inferior good. Why: Empirical question. There is no data to compare to see what the nature of the relationship is.

iClicker Question 3-2: Liberia is a small country in West Africa with a population of about 4 million. Average per capita income is about $400 a year. Public transportation in Liberia (A) is a normal good. (B) is an inferior good. (C) could be a normal or inferior good.

(C) could be a normal or inferior good. Why: Empirical question. Whether a good is normal or inferior will depend on what the baseline level of income is likely to be for most goods and services. We'd have to gather data from Liberia, look at it, and see.

iClicker Question 9-4: It's the end of the term and Taigen is getting his course grades. He took three courses. He finds out he got 70% in Astr 101 and 90% in Astr 101, so his average grade on those two courses is 80%. He then finds out he got 80% in Phys 100. As a result (A) his average grade rises. (B) his average grade falls. (C) his average grade neither rises nor falls (ie, it doesn't change).

(C) his average grade neither rises nor falls (ie, it doesn't change). Why: (70+90+80)/3 = 80.

iClicker Question 5-2: The government of the small country of Rabindi decides to introduce a binding price ceiling of $0.50 per liter in the market for gasoline, creating a shortage. In response, the government tells gasoline stations to limit sales of gasoline to 10 litres per person per week. In these circumstances, black market trading of gasoline (A) is likely to make people better off. (B) is likely to make people worse off. (C) may make people better off or worse off.

(C) may make people better off or worse off. Why: * The black market trading, if it's well informed and it's voluntary, which is typically is, is going to actually enhance the gains from trade, it's going to increase efficiency. * There are negative side effects associated with this trade, including the fact that even though it might be efficiency enhancing, it's going to make people less likely to consider following the law in a variety of different situation.

iClicker Question 3-10: In 2016, the BC government introduced the Home Owner Mortgage and Equity Partnership. The program provided first time buyers with an interest-free, 25-year loan of up to $37,500 with no payments for the first five years. Eligibility requirements included: (i) being a Canadian citizen or permanent resident for the last five years; (ii) living in BC for at least the 12 months before applying; (iii) having a gross annual household income of $150,000 or less; and (iv) purchasing a home that was $750,000 or less. The program is now closed. Introducing a new program like the Home Owner Mortgage and Equity Partnership today (A) would help first-time buyers in BC. (B) would harm first-time buyers in BC. (C) might help or harm first-time buyers in BC.

(C) might help or harm first-time buyers in BC. Why: This program would stimulate demand, because it provides first-time buyers a free 25-year loan of up to $37,500, effectively decreasing costs for those people, making more people attempt to enter the market. Supply is not affected by this program. This is not good for first-time buyers, as there will be an increase in the amount of starter homes exchanged, however prices will increase.

iClicker Question 10-1: MacDonald operates a relatively small farm where she grows wheat. Given the size of her farm, MacDonald can produce as much as 8,000 tonnes of wheat each year. The market price of wheat is currently $260 per tonne. If MacDonald were to offer to sell her wheat for $261 per tonne, she would likely (A) sell all of the wheat she produces. (B) sell none of the wheat she produces. (C) sell some of the wheat she produces.

(C) sell some of the wheat she produces. Why: - It seems most likely that if she decides to price her wheat at $261, she is going to get extraordinarily limited sales. - The main point of the question is that in a perfectly competitive market, where we talk about firms being price takers, all that is telling us is that they are free to choose whatever price they want. However, only one price is rational. If they set their price above the market equilibrium, they sell none.

iClicker Question 1-2: Ford Motor Inc. has some steel it bought 6 months ago for $800,000 to manufacture cars. As an alternative, Ford could resell the steel to other firms. The price of steel has risen over the last 6 months, so Ford could now resell the steel for $1,200,000. Ford's opportunity cost of using the steel to manufacture cars today is (A) $0 (B) $400,000 (C) $800,000 (D) $1,200,000

(D) $1,200,000. Why: The true opportunity cost of using the steel for this particular course of action (manufacturing cars) is what you can do with it today. Today, you can resell the steel for $1,200,000. The value $800,000 has nothing to do with the answer, as it is irrelevant to the decisions that they make about the steel TODAY.

iClicker Question 5-1: Refer to the supply and demand diagram on page 2 of Lecture Notes 5. Assume the price ceiling of $2.00 per kg is in place and is effective. If the flour supplied is purchased by the first people showing up at the store, what is a good estimate of the average consumer surplus generated for each kg of flour? (A) $4.50 per kg. (B) $2.50 per kg. (C) $3.00 per kg. (D) $2.00 per kg. (E) $1.00 per kg.

(D) $2.00 per kg. Why: The highest possible value is $6.00, and the lowest is $2.00. The highest possible consumer surplus that can be generated by a single kilo of flour is: * If it goes to the person that values it most highly, they value it at 6, but they have to pay 2 to get it. Their consumer surplus is 4 (Consumer Surplus = Amount a consumer is willing to pay - Actual price they pay). * If it goes to the person that values it the least, they value it at 2, and they have to pay 2 to get it. Their consumer surplus will be 0. * The highest consumer surplus is 6-2 = 4. The lowest is 2-2 = 0. The average is (4+0)/2= 2. * Max Consumer Surplus = Max Willingness to Pay - Price * Best estimate of Avg CS = (min CS + max CS)/2.

iClicker Question 1-3: You grow tomatoes and sell them at the local farmers' market for $1.20 per kg. By adding compost to your garden, you can increase your yield of tomatoes as shown in the table. If compost costs $0.80 per kg., how many kgs of compost should you add? (Compost (kg), Tomatoes (kg)) (0, 20.0) (1, 25.0) (2, 29.0) (3, 31.0) (4, 32.0) (5, 32.5) (A) 1 kg of compost (B) 2 kg of compst (C) 3 kg of compost (D) 4 kg of compost (E) 5 kg of compost

(D) 4 kg of compost. Why: Marginal Benefits (MB) - kg of tomatoes: (Find the change in tomatoes) * 5 kg * 4 kg * 2 kg * 1 kg * 0.5 kg Marginal Benefits (MB) - $: (Multiply price ($1.20) by MB of tomatoes) * 5 * 1.2 = $6.00 * 4 * 1.2 = $4.80 * 2 * 1.2 = $2.40 * 1 * 1.2 = $1.20 * 0.5 * 1.2 = $0.60 Marginal Cost ($): $0.80 Compare Marginal Cost to Marginal Benefit. * $6.00 > $0.80 * $4.80 > $0.80 * $2.40 > $0.80 * $1.20 > $0.80 * $0.60 < $0.80 4 kg of compost - that's maximizing something: the total benefits of the activity minus the cost of the activity is as large as possible when you use 4 kg of compost.

iClicker Question 8-6: If each firm faced an emissions tax of $6.50 a unit, aggregate emissions would be (Total Emissions, Firm 1 MAC, Firm 2 MAC, Firm 3 MAC): (1, $20, $10, $8) (2, $19, $8, $7) (3, $18, $6, $5) (4, $17, $4, $4) (5, $16, $2, $3) (A) 3 units. (B) 5 units. (C) 7 units. (D) 9 units. (E) 11 units.

(D) 9 units. Why: - Find all units that are more than $6.50, and add them up. You will find a total of 9 units.

iClicker Question 3-8: Consider the market of red table wine in North America. What is the most likely effect of the discovery of a new production technique that substantially reduces the time needed to ferment wine? (A) It would increase the equilibrium price and quantity. (B) It would decrease the equilibrium price and quantity. (C) It would increase the equilibrium price and decrease the equilibrium quantity. (D) It would decrease the equilibrium price and increase the equilibrium quantity.

(D) It would decrease the equilibrium price and increase the equilibrium quantity. Why: An increase in efficiency is going to increase quantity supplied at every price - a right shift of the supply curve. Demand remains unchanged. When you draw the diagram, you see an increase in quantity and a decrease in price.

iClicker Question 3-4: A small firm uses milk and other inputs to produce cheese. The firm can use the same inputs to produce two different types of cheese: Cheddar and Gouda. If the price of Gouda were to decrease, we would expect the firm to produce (A) more Gouda and more Cheddar. (B) less Gouda and less Cheddar. (C) more Gouda and less Cheddar. (D) less Gouda and more Cheddar.

(D) less Gouda and more Cheddar. Why: Gouda and Cheddar are substitutes in production. The relative price of Gouda goes down, so the firm will use a bit more of their milk to produce a bit more Cheddar.

iClicker Question 7-1: With no tax the market price is $12. A tax of $8 per unit tax is imposed on producers and the market price increases to $14. How is the burden of the tax shared between consumers and producers? (A) producers bear 100% of the burden; consumers bear 0%. (B) producers bear 25% of the burden; consumers bear 75%. (C) producers bear 50% of the burden; consumers bear 50%. (D) producers bear 75% of the burden; consumers bear 25%. (E) producers bear 0% of the burden; consumers bear 100%.

(D) producers bear 75% of the burden; consumers bear 25%. Why: - The amount the consumers are paying has risen by $2. This is 2/8 or 25% of the tax. This is how we know that the consumers are paying 25% of the tax. This automatically tells us that 75% is being paid by the producers.

iClicker Question 4-3: The market for soybeans is competitive. The demand and supply functions are Q^D = 2000-4P and Q^S = 6P-900, where price is dollars per tonne and quantity is in tonnes per day. The total surplus generated by this market each day is (A) $133,000 (B) $210,000 (C) $94,000 (D) $75,000 (E) $147,000

(E) $147,000 Why: Equilibrium Quantity: 2000-4P=6P-900 P=290 2000-4(290)= 840 Q= 840 Q=0 -> 2000-4P=0 P = 500 6P-900=0 P = 150 TS = (840(500-150))/2 = $147,000

iClicker Question 8-2: Demand for crabits is described by the function Q = 100 - 2P. The private marginal cost of producing crabits is a constant $10 per unit. Production of crabits generates a marginal external cost which is described by the function MEC = 0.3Q, where Q is the quantity of crabits produced. If the government taxed the production of crabits, which of the following tax rates would result in the socially efficient quantity of crabits being produced and consumed? (A) $1 per crabit. (B) $2 per crabit. (C) $5 per crabit. (D) $10 per crabit. (E) $15 per crabit.

(E) $15 per crabit. Why: - Make sure to draw diagram. - Demand equals the marginal private benefit of consumption. There is a negative externality, but no positive externality. So that also reflects the marginal social benefit function. - The supply curve is at $10, since this is the PMC. - If Q = 0, MEC = 0. As Q gets larger, the gap between the two curves grows. - MSC = MPC = $10 + MEC -> MSC = 10+ 0.3Q - Q = 100 - 2P -> P = 50 - 0.5Q -> MSB = 50 - 0.5Q - 10 + 0.3Q = 50 - 0.5Q -> Q* = 50 - Marginal External Cost at Q* = 50 -> 0.3(50) = 15 - $15 per crabit.

iClicker Question 8-3: What's the total cost of reducing aggregate emissions from 15 units to 9 units, if each firm is forced to reduce emissions by 2 units? (Total Emissions, Firm 1 MAC, Firm 2 MAC, Firm 3 MAC): (1, $20, $10, $8) (2, $19, $8, $7) (3, $18, $6, $5) (4, $17, $4, $4) (5, $16, $2, $3) (A) $19. (B) $24. (C) $33. (D) $43. (E) $46.

(E) $46. Why: - Firm 1: $17+$16 plus Firm 2: +$4+$2 Plus Firm 3: +$4+$3 = $46. - Add the last two rows for each firm, then add them all together.

iClicker Question 6-2: The equation P = 240 - 4Q describes the relationship between the price of a good, P, and the quantity demanded, Q. If P = $40, the price elasticity of demand for this good is about (A) 5. (B) 4. (C) 3.2. (D) 0.25. (E) 0.20.

(E) 0.20. Why: - ΔP/ΔQ = -4 (the slope) - P = $40 - QD = ? 40 = 240 - 4Q Q = 50 - ED = (ΔQ/ΔP)* (P/Q) = -1/4(40/50) = 0.2 (Make sure to drop negative sign).

iClicker Question 9-7: Refer to the figure at the top of page 12 of Lecture Notes 9. If the firm's long-run target level of production was 95,000 units per period, how much capital would the firm install in the long run? (A) 6 units of capital. (B) 7 units of capital. (C) 8 units of capital. (D) 9 units of capital. (E) More than one of the above.

(E) More than one of the above. Empirical Question 8 or 7 units of capital. Why: Both 7 and 8 units would give them the same price. The best answer to this is E.

The supply of a good is given by the equation QS = P - 200 and the demand for the good is given by the equation QD = 1600 = 3P, where quantity, Q, is measured in millions of units and price, P, is measured in dollars per unit. (a) What is the equilibrium price? (b) What is the equilibrium quantity?

(a) QD = QS 1600 - 3P = P - 200 P = 1800/4 = 450. Equilibrium Price = $450.00/unit. (b) Q* = 1600 - 3P* = 1600 - 3(450) = 250 Equilibrium Quantity = 250,000,000 units. or 250 * 10^6 units.

Two people, Volo and Wyll, are stranded on a desert island. Each works 8 hours a day either catching fish or harvesting nuts. They spend the rest of their time eating and sleeping. On average, it takes Volo 21 minutes to catch a fish and 7 minutes to harvest a nut and it takes Wyll 33 minutes to catch a fish and 11 minutes to harvest a nut. (a) Who has an absolute advantage in the production of fish? (b) Who has a comparative advantage in the production of fish.

(a) Volo, because he takes less time (uses less resources) to catch fish. (b) Opp cost of producing fish: Volo: 21/7 = 3 Nuts. Wyll: 33/11 = 3 Nuts Neither, as Volo and Wyll have the same opportunity cost.

If the price of corn rises, we would expect the (a) quantity of corn supplied to rise. (b) quantity of corn demanded to rise. (c) demand for corn to fall. (d) supply of corn to rise.

(a) quantity of corn supplied to rise. Why: When the price of a good (such as corn) rises, it usually leads to an increase in the quantity supplied, not necessarily the supply. The quantity supplied refers to the actual amount of the good that producers are willing to sell at a given price. As the price increases, producers are generally willing to supply more of the good because they can earn higher revenue.

Aelita owns and operates a nail spa. When she increased the price of a pedicure from $40 to $50, her total monthly revenue decreased from $4,000 to $3,600. Which of the following is the closest to the price elasticity of demand for pedicures at Aelita's nail spa between the original and final prices? (a) 0.68. (b) 1.47. (c) 1.12. (d) 0.89. (e) There is not enough information to calculate price elasticity of demand.

(b) 1.47. Why:

Which of the following is the most likely explanation for the government imposing of a binding price ceiling in the market for corn? (a) Policy makers have studied the effects of the price ceiling and concluded it will benefit society as a whole. (b) Buyers of corn lobbied the government to enact the price ceiling. (c) Sellers of corn lobbied the government to enact the price ceiling. (d) Both buyers of corn and sellers of corn lobbied the government to enact the price ceiling.

(b) Buyers of corn lobbied the government to enact the price ceiling. Why: xA price ceiling is typically imposed to benefit consumers (buyers) by preventing prices from rising above a certain level. In this case, if buyers of corn lobbied the government, it suggests that they wanted to ensure lower prices for the corn they purchase. This aligns with the purpose of a price ceiling, which is often advocated by consumers to protect their interests in obtaining goods at more affordable prices.

The demand for good X is described by the function QD = 2000 - 5 Px - 0.02I - 2Py, where Px is the price of good X, I is average per capita income, and Py is the price of good Y. (a) Good X is a normal good and X and Y are complements. (b) Good X is an inferior good and X and Y are complements. (c) Good X is a normal good and X and Y are substitutes. (d) Good X is an inferior good and X and Y are substitutes.

(b) Good X is an inferior good and X and Y are complements. Why: 1. Price of good X (Px): - The coefficient of Px is -5. If the price of X increases, the quantity demanded (QD) of X decreases. This is typical for a normal good. 2. Average per capita income (I): - The coefficient of I is -0.02. If income increases, the quantity demanded (QD) of X decreases. This suggests that good X is an inferior good. 3. Price of good Y (Py): - The coefficient of Py is -2. If the price of Y increases, the quantity demanded (QD) of X decreases. This implies that X and Y are complements. Summary: * The demand for good X decreases when its own price increases (normal good). * The demand for good X decreases when income increases (inferior good). * The demand for good X decreases when the price of Y increases (complementary goods).

If the price of steel increases, what happens to consumer surplus in the market for cars? (a) It increases. (b) It decreases. (c) It does not change, but producer surplus in the market for cars increases. (d) It does not change, but producer surplus in the market for cars decreases. (e) It does not change and neither does producer surplus in the market for cars.

(b) It decreases. Why: Consumer surplus is the area between the demand curve and the price level, up to the quantity purchased. When the price of cars increases due to higher steel prices, consumers are less willing or able to buy cars at the previous quantity, leading to a reduction in consumer surplus.

Assume the market for RAM computer chips is perfectly competitive. Which of the following statements most accurately describes the impacts of a technological innovation that improves the efficiency of the production of RAM computer chips? (a) It will benefit consumers and producers of RAM chips. (b) It will benefit consumers of RAM chips and may benefit producers of RAM chips. (c) It will benefit producers of RAM chips and may benefit consumers of RAM chips. (d) It may benefit producers of RAM chips and may benefit consumers of RAM chips.

(b) It will benefit consumers of RAM chips and may benefit producers of RAM chips. Why: If a technological innovation improves the efficiency of RAM chip production, it's likely to lead to lower production costs for producers. This, in turn, may allow producers to offer lower prices to consumers. As a result, consumers benefit from potentially lower prices for RAM chips.

Consider the following statements: i. Hurricanes damage properties on the Gulf Coast every year. ii. Canadians should drive their cars less and take public transportation more. Which of the above are normative statements? (a) i only. (b) ii only. (c) both. (d) neither.

(b) ii only. Why: "Canadians should" - matter of opinion.

Consider the following statements: i. Increasing the carbon tax in Canada would substantially reduce Canadian emissions of greenhouse gases. ii. The benefits to Canadians a free trade deal with China would exceed the costs borne by Canadians. iii. The current contribution rates for the Canada Pension Plan are high enough to sustain the plan for decades into the future. Which of the above are normative statements? (a) i only. (b) ii only. (c) iii only. (d) More than one of the statements is a normative statement.

(b) ii only. Why: The word "Would".

Consider the following statements about the effects of introducing a constant per-unit tax into a competitive market with a downward sloping demand curve and an upward sloping supply curve: i. If the tax is collected at the store checkout, the tax will hurt consumers more than producers. ii. If supply is more elastic than demand, the tax would hurt consumers more than producers. Which of the above statements are definitely correct? (a) i only. (b) ii only. (c) both. (d) neither.

(b) ii only. Why: If supply is more elastic than demand, it means that producers can adjust their quantity supplied more easily in response to changes in price. In this case, when a tax is introduced, producers can shift a larger portion of the burden onto consumers by reducing the quantity supplied less than consumers reduce their quantity demanded.

Which of the following factors does NOT influence the demand for OLED TVs in British Columbia? (a) The number of people who live in British Columbia. (b) The price of a Netflix subscription. (c) The price of the glass panels used to manufacture OLED TVs. (d) Expectations about the price of OLED TVs next year. (e) All of the above factors affect demand for OLED TVs in British Columbia.

(c) The price of the glass panels used to manufacture OLED TVs. Why: Demand is typically influenced by factors such as the number of potential consumers (population), the price of related goods (like a Netflix subscription), and expectations about future prices (as mentioned in option (d)). The cost of production inputs, such as the price of the glass panels used to manufacture OLED TVs, is more relevant to supply than demand.

The demand curve for grubs is described by the function P = 120 - 1/2Q. If the price of grubs is $70, demand for grubs is (a) unit elastic. (b) perfectly elastic. (c) elastic. (d) perfectly inelastic. (e) inelastic.

(c) elastic. Why: ED = P/Q * dQ/DP -> P = 120 - 1/2Q. dQ/dP = -2 P = 70. 70 = 120 - 1/2Q Q = 100 ED = (70/100)(-2) ED = -1.4.

In general, we predict demand for butter-leaf lettuces is (a) inelastic. (b) perfectly inelastic. (c) elastic. (d) perfectly elastic.

(c) elastic. Why: Elastic demand means that the quantity demanded is relatively responsive to changes in price. In the case of butter-leaf lettuces, consumers are likely to have alternative options (substitutes), and if the price of butter-leaf lettuces increases, consumers may choose to purchase other types of lettuce or vegetables. Therefore, the demand for butter-leaf lettuces is expected to be elastic.

When comparing alternative courses of an action, a rational person chooses the course of action that (a) has the lowest opportunity cost. (b) generates the greatest benefit. (c) produces the biggest difference between the total benefit and the total opportunity cost. (d) equates total benefit equal to the total opportunity cost. (e) results in the largest difference between the marginal benefit and the marginal opportunity cost.

(c) produces the biggest difference between the total benefit and the total opportunity cost. Why: In some situations, individuals might consider the overall benefit (total benefit) relative to the overall opportunity cost when making decisions. The key idea is to compare the total benefit with the total opportunity cost and choose the option that provides the biggest difference.

The people of Leisure Island have 50 hours of labour a day that can be used to produce entertainment and/or food. The table below shows the maximum quantity of entertainment or food that Leisure Island can produce with different amounts of labour. (Labour (hours), Entertainment (units), or Food (units)) (0, 0, or 0) (10, 100 or 180) (20, 200, or 300) (30, 300 or 360) (40, 400 or 390) (50, 500 or 402) Given the above, an output of 250 units of entertainment and 300 units of good food is (a) unattainable and efficient. (b) unattainable and inefficient. (c) attainable and efficient. (d) attainable and inefficient.

(d) attainable and inefficient. Why: This is a point inside the PPF, but not on the PPF, therefore it is feasible, but not efficient.

In 2022 the equilibrium price of soybeans was $250 per tonne and the equilibrium quantity was 500,000 tonnes. In 2023, the equilibrium price of soybeans was still $250 per tonne but the equilibrium quantity was 700,000 tonnes. Given this information, what likely happened in the market for soybeans between 2022 and 2023? (a) Demand decreased and supply decreased. (b) Demand decreased and supply increased. (c) Demand decreased but supply did not change. (d) Demand increased and supply decreased. (e) Demand increased and supply increased.

(e) Demand increased and supply increased. Why: - Draw a diagram, watch as both demand and supply are increased.

Assume green peppers are an inferior good. Which of the following events might shift the supply curve for green peppers to the left? (a) Someone invents a way to grow green peppers using half the amount of fertilizer. (b) The price of fertilizer falls. (c) The number of farms producing green peppers increases. (d) The average income of consumers rises. (e) The price of yellow peppers increases.

(e) The price of yellow peppers increases. Why: Green peppers are an inferior good, so probably a substitute. If their price increases, then farms could allocate their resources towards other things.

Use a supply and demand diagram to illlustrate how each of the following events is likely to affect the equilibrium price and quantity in the market for take-out pizza. Provide a brief explanation of what is happening in your diagram and why. (b) The average income of consumers decreases.

* Draw a diagram where there are 2 possible outcomes for demand: it can either decrease or increase. If take-out pizza is a normal good, demand will decrease. If it is an inferior good, it will increase. * A decrease in the average income will not affect supply. * If take-out pizza is a normal good, Demand will decrease, the price will increase, and the quantity will decrease. * If take-out pizza is an inferior good, then Demand will increase, price will increase, and quantity will increase.

Use a supply and demand diagram to illustrate how each of the following events is likely to affect the equilibrium price and quantity in the market for take-out pizza. Provide a brief explanation of what is happening in your diagram and why. (a) The price of cheese rises.

* Draw a diagram, where demand stays the same and supply decreases, because an input price increased. * Cheese is an input in the production of pizza, and the increase of an input price decreases supply, but has no effect on demand. Therefore, as supply decreases, the Price increases and the Quantity decreases.

The market for wheat is perfectly competitive. If demand for wheat were to decrease at the same time as the supply for wheat were to increase, what would happen to the equilibrium price and quantity? Explain.

* Draw two diagrams, one where supply increases and one where demand decreases. * Notice in the graph where demand decreases, the price goes down and the quantity goes down. * Notice in the graph where supply increases, the price goes down and the quantity goes up. * Overall, Price will fall, and Quantity could Rise, Fall, or not Change.

Elastic or Not

* If the PED is greater than 1, demand is elastic (responsive to price changes). * If the PED is less than 1, demand is inelastic (not very responsive to price changes). I * f the PED is equal to 1, demand is unit elastic.

(See top figure on Lecture Notes 8, page 4) In a perfectly competitive market with no externalities:

* MSC = MPC since MEC = 0 * MSB = MPB since MEB = 0.

With no tax, the price of gasoline is $2.00 per litre. The government imposes a tax of $0.50 per litre and the price falls to $1.80. What percentage of the tax do consumers pay?

* Make sure to draw diagram of demand with and without tax. * Without tax: P = $2.00 = PC = Pp * With tax: Pp = $1.80 * Pc = Pp + t = $1.80 + $0.50 = $2.30 * Consumers pay $0.30 more, so -> ($0.30/$0.50)*100 = 60% of the tax.

Demand for good X is described by the function QD = 2000 - 6P + 0.01M, where P is the price of good X, M is the average per capita income. If average per capita income is $35,000 and the price of good X is $120, what is the income elasticity of demand?

0.2147 Why: - QD = 2000 - 6(120) + 0.01(35000) = 1630 - EM = (ΔQD/ΔM)*(M/Q) - EM = (0.01)*(35000/1630) = 0.2147

Two conditions must be satisfied for a market to be perfectly competitive:

1. The market must have many independent producers, none of which have a large market share. 2. the are many independent consumers all of which regard the products of all producers as equivalent; ie, industry output is a standardized product.

( See top figure on Lecture Notes 9 Page 3) The above total product curve exhibits several characteristics shared by most firms in the short run:

1. q initially increases at an increasing rate. 2. q eventually switches from increasing at an increasing rate to increasing at a decreasing rate. 3. q eventually decreases if enough of the variable input is used.

You grow beets and sell them at the local farmers' market for $3 per kg. By adding compost to your garden, you can increase your yield of beets as shown in the following table: (Compost (kg), Beets (kg)) (0, 13) (1, 19) (2, 23) (3, 26) (4, 28) (5, 29) If compost costs $10 per kg, how many kgs of compost should you use?

2 kg of compost. Why: Marginal Benefits (MB) - kg of beets: (Find the change in beets) * 6 kg * 4 kg * 3 kg * 2 kg * 1 kg Marginal Benefits (MB) - $: (Multiply price ($3) by MB of beets) * 6 * 3 = $18.00 * 4 * 3 = $12.00 * 3 * 3 = $9.00 * 2 * 3 = $6.00 * 1 * 3 = $3.00 Marginal Cost ($): $10.00 Compare Marginal Cost to Marginal Benefit. * $18.00 > $10.00 * $12.00 > $10.00 * $9.00 < $10.00 * $6.00 < $10.00 * $3.00 < $10.00 2 kg of compost.

For a firm in a competitive market π = TR − TC

= pq − TC = q(pq/q − TC/q) = q(p − ATC)

Use a supply and demand diagram to illlustrate how each of the following events is likely to affect the equilibrium price and quantity in the market for take-out pizza. Provide a brief explanation of what is happening in your diagram and why. (c) Bloomberg releases a study of the pizza market forecasting that one year from now the average price of take-out pizza will have fallen by 50% compared to its price today. This news is reported widely in the media.

A change in the expected price of take-out pizza one year from now will not effect the demand for or supply of take-out pizza TODAY. There is no change in equilibrium price or quantity TODAY.

The firm should exit the market if doing so generates a profit greater than the alternative; ie, the firm should exit if:

ATC > p

iClicker Question 10-3: The market for good X is perfectly competitive, contains 800 identical firms, and is in short-run equilibrium. For a typical firm, the minimum AVC is $20, the minimum ATC is $25, and the upward sloping section of the MC function is described by the function MC = 2q, where q is the firm's production level. The short-run market supply function for good X is (A) QS = 1600P (B) QS = 800P (C) QS = 400P (D) QS = 200P (E) QS = 100P

C) QS = 400P Why: - P = MC = 2q -> q = p/2 - Q = nq = 800(p/2) = 400P - QS = 400P

So a competitive market where firms earn zero economic profit (ie, π = 0):

Can be in long-run equilibrium.

So a competitive market where firms suffer economic losses (ie, π < 0):

Cannot be in long-run equilibrium.

a competitive market where firms enjoy positive economic profit (ie, ıa competitive market where firms enjoy positive economic profit (ie, π > 0):

Cannot be in long-run equilibrium.

Deadweight Loss Formula

Deadweight Loss = (new price) x (original quantity - new quantity)/2

Assume almonds are traded in a competitive market and that the supply of almonds is described by the function QS = 2.5P - 2, where quantity is measured in millions of kg per month and price is dollars per kg. If the price of almonds is $2.40 per kg, what is the producer surplus?

Draw the curve. QS = 2.5P-2, P = $2.40 2.5(2.4)-2 = 4 0 = 2.5P-2 -> P = 0.8 PS = 1/2(4 * 10^6)(2.4-0.80) = $3.2 * 10^6. PS = $3.2 * 10^6 per month.

AFC =

FC/q

Total Costs (TC) =

Fixed Costs (FC) + Variable Costs (VC)

Most perfectly competitive markets also feature free entry and exit in the long run:

Given sufficient time, it is easy for new firms to enter the industry and for exiting firms to leave the industry.

At the current market equilibrium, the price elasticity of demand for lemons is -1.75. Would a small decrease in the price of lemons increase, decrease, or leave unchanged the total amount of money spent on lemons?

Increase Why: * ED = %ΔQD/%ΔP * ED = -1.75 -> |ED|>1 * A small decrease in price will increase the total amount spent on lemons.

Socially optimal level of an activity is the level at which:

MSB of the activity equals the MSC of the activity.

Five workers can produce either beer or computers. The table below gives the output of each worker; for example, Astorian can produce either 48 bottles of beer a day or 4 computers a day. (Beer (bottles/day), Computers (number/day): Astorian: (48, 4) Gale: (16, 3) Karlach: (14/3) Minthara: (6, 1) Withers (32, 2) All five workers are currently producing beer. If you had to move one worker from beer production to computer production, who would you move?

Move Karlach first. Why: Calculate opp costs of producing a computer. Astorian: 48/4 = 12 bottles of beer. Gale: 16/3 = 5.33 bottles of beer. Karlach: 14/3 = 4.67 bottles of beer. Minthara: 6/1 = 1 bottle of beer. Withers: 32/2 = 16 bottles of beer. Karlach has the lowest opportunity cost for producing a computer, at 4.67 bottles of beer.

Italy and Spain both produce drones and computers using only labour. Italy uses 4 units of labour to produce a drone and 1 unit of labour to produce a computer. Spain uses 8 units of labour to produce a drone and 4 units of labour to produce a computer. At an exchange rate of 3 computers for 2 drones, would Italy agree to trade? What about Spain? Expain and/or show your working.

Opportunity Costs of making one drone: Italy: 4/1 = 4 computers. Spain: 8/4 = 2 computers. Opportunity Costs of making one computer: Italy: 1/4 = 0.25 drones. Spain: 4/8 = 0.5 drones. * Spain has a comparative advantage in the production of drones, Italy has one in the production of computers. * If Spain trades, it will specialize in producing drones and trade for computers. * If Italy trades, it will specialize in producing computers and trade for drones. * Exchange Rate of 3 computers for 2 drones: 3/2 = 1.5 Computers per Drone. 2/3 = 0.67 Drones per Computer. * Spain would not trade, because if it trades for computers, the cost is 0.67 drones, and they can produce their own computers for an opp. cost of 0.5. * Italy would trade, because if they trade, the cost for a drone is 1.5 computers per drone, and it would cost them 4 computers to produce their own drones.

Juan and Maria are stranded on a desert island. Each works 8 hours a day either catching fish or harvesting nuts, which are the only two goods that can be produced on the island. They spend the rest of their time eating and sleeping. On average, it takes Juan 40 minutes to catch a fish and 10 minutes to harvest a nut and it takes Maria 30 minutes to catch a fish and 15 minutes to harvest a nut. (a) At a proposed exchanged rate of 5 nuts for every fish would Juan agree to trade? (b) At a proposed exchanged rate of 5 nuts for every fish would Maria agree to trade?

Opportunity cost of One Fish: Juan (40/10): 4 Nuts. Maria (30/15): 2 Nuts. Opportunity cost of One Nut: Juan (1/4): 0.25 Fish Maria (1/2): 0.5 Fish. * Maria would specialize in Fish Production, Juan would specialize in Nut Production. * Juan would not trade, because he can produce his own fish for 4 nuts. * Maria would trade, because her opp. cost of producing her own nuts is 0.5 Fish, whereas the trade gives an opp cost of 0.2 Fish.

Taxes used to correct for the effect of a negative externality are called:

Pigouvian taxes

Haslin is an avid baker. The graph depicts his monthly demand for flour (See graph on question 5 of Midterm Solutions 1). What is Haslin's demand function for flour?

QD = 54 - 3P Why: - Slope = Rise/Run = ΔP/ΔQ = -8/24. - If ΔP/ΔQ = -8/24, then ΔQ/ΔP = 24/-8 = -3 - QD = x + ΔP/ΔQ(P) = QD = x -3P x = QD + 3P When P = 12, QD = 18. -> 18 + 3(12) = 54. QD = 54 - 3P

ATC =

TC/q

Since the firm sells every unit it produces at the market price, the firm's total revenue (TR) is the market price, p, times the firm's output, q:

TR = p × q

When the production or consumption of a good generates a positive externality:

The market produces less than the socially optimal quantity of the good and there is a deadweight loss.

When the production or consumption of a good generates a negative externality:

The market produces more than the socially optimal quantity of the good and there is a deadweight loss.

Hence, for competitive market in long-run equilibrium:

The profit of all incumbent firms must be zero.

AVC =

VC/q

iClicker Question 4-2: If the market supply curve is described by the function Q^S = 0.5P-25 and the price is $100, producer surplus is about (A) $350 (B) $625 (C) $1250 (D) $2500

Why: Make sure to draw out a diagram. 0 = 0.5P-25 P=50 0.5(50)-25 = 0 When Q=0, P=50. PS = 0.5(25)($100-$50) = $625.

(See top figure on Lecture Notes 8, page 7) At the socially optimal quantity Q*: a. The total social benefits of taking flu shots are: b. The total social costs of producing flu shots are: c. The total social surplus is: d. The DWL is:

a. (A + B + C + D + E + F) b. (C + D + E) c. (A + B + F) d. zero

(See top figure on Lecture Notes 8, page 5) At the quantity produced by the market Qm: a. The total social benefits of consuming cement are: b. The total social costs of producing cement are: c. The total social surplus is:

a. (A + B + C + D + E). b. (B + C + D + E + F). c. (A − F) • the DWL is (F).

(See top figure on Lecture Notes 8, page 7) At the quantity produced by the market Qm: a. The total social benefits of consuming flu shots are: b. The total social costs of producing flu shots are: c. The total social surplus is: d. the DWL is:

a. (A + B + C) b. (C) c. (A + B) d. (F)

(See top figure on Lecture Notes 8, page 5) At the socially optimal quantity Q*: a. The total social benefits of consuming cement are: b. The total social costs of producing cement are: c. The total social surplus is: d. the DWL is:

a. (A + B + C). b. (B + C). c. (A) d. zero.

The town of Port Hope in Ontario find that well-tended lawns provide both private and external benefits. The marginal private benefit (MPB) of lawn upkeep is MPB = 50 - 0.5Q, where Q is the number of hours spent tending to lawns. The marginal private cost (MPC) of lawn upkeep is MPC = 0.5Q, where Q is again the number of hours spent tending to lawns. How many hours of lawn upkeep will occur in this community, and what will be the marginal private benefit of such upkeep? a. 50 hours and $25. b. 100 hours and $50. c. 45 hours and $20. d. 50 hours and $50.

a. 50 hours and $25. Why: * MPB = 50 - 0.5Q MPC = 0.5Q MPB = MPC 50 - 0.5Q = 0.5Q Q= 50 -> 50 hours * MPB = 50 - 0.5(50) 50-25 MPB = $25

a. Increasing returns to scale (IRTS) b. constant returns to scale (CRTS) c. decreasing returns to scale (DRTS)

a. LRATC falls as its output increases. b. LRATC does not change as its output increases. c. LRATC rises as its output increases.

In the long run, a firm that produces no output (ie, q = 0) lays off all of its workers, liquidates all of its assets, and

exits the market.

Negative externalities impose ____ on bystanders and positive externalities confer ____ on bystanders.

external costs, external benefits

Market transactions generate ________, but the production and/or consumption of goods can also produce side effects that affect the well-being of bystanders (ie, people who are not directly involved in the market transaction) such as:

gains for consumers and producers. • When you buy gas for your car and drive, you contribute to air pollution and traffic congestion • When you buy a mask and wear it to reduce your chance of contracting Covid-19, you reduce the chance that other people you encounter will contract Covid-19

To find how many firms in the market: n = Q/q.

n = Q/q.

Side effects from the consumption of goods may harm or benefit bystanders. If it harms bystanders, the side effect is called a ____. If it benefits bystanders, the side effect is called a ____.

negative externality, positive externality.

Average product of labour (AP) =

q/L

If a market transaction generates an externality,

society's interest extends beyond the just well-being of consumers and producers of the good being exchanged and also includes the well-being of any impacted bystanders

Although such command-and-control policies can be an effective way of achieving any target level of emissions,

they are not always the lowest cost way of achieving the target.

On the other hand, if the firm exits the market (ie, q = 0), it generates no revenue (ie, TR = 0) and incurs no costs (ie, TC = 0), so the firm's long-run profit is:

zero

We assume each firms sets its output level, q, to maximize its economic profit π = TR − TC where:

π is the firm's profit, TR is the firm's total revenue, and TC is the firm's total cost.

Firms can vary the quantities of some inputs more quickly than others, for example:

• A firm may be able to change the amount of unskilled labour it uses in less than 24 hours by using contract workers. • A firm may need several months (or years) to order, install, and commission specialized capital equipment.

When the inefficiency created by a positive externality is large, the government may attempt to solve the problem using either:

• A market-based policy such as corrective subsidy. • Command-and-Control policies.

Command-and-control policies usually take the form of regulations that either forbid or require certain behaviors. Examples of such policies for dealing with positive externalities include:

• A requirement that all health care workers be immunized against the flu or wear masks while working. • A requirement that all condos in apartment buildings have functioning sprinkler systems.

Since the flexibility a manager has in making production decisions depends on the time frame, it is useful to classify inputs as either fixed or variable, which are:

• A variable input can be varied in the time frame being considered. • A fixed input cannot be varied in the time frame being considered.

Other important measures of a firm's costs include:

• Average fixed cost (AFC). • Average variable cost (AVC). • Average total cost (ATC).

If π < 0 for firms in the market, one or more firms will exit the market, which will:

• Decrease supply in the market. • Drive up the market price. • Increase the profit of firms in the market.

The amount of good or service a firm supplies to a market depends on:

• Firm's goals (profit maximization). • Firm's technology (firm's production/cost function). • Market structure.

Outputs include goods and services, which are:

• Goods are items that are tangible, such as pens, laptops, and hats . • Services are activities carried out by other people like doctors, hairdressers and car mechanics.

If a market maximizes social surplus, we say the market:

• Has produced an efficient allocation of resources. • Generates no DWL.

If a market does not maximize social surplus, we say the market has failed because the market:

• Has produced an inefficient allocation of resources. • Generates a DWL.

If π > 0 for firms in the market, one or more new firms will enter the market, which will:

• Increase supply in the market. • Drive down the market price. • Decrease the profit of firms in the market.

social benefit = private benefit + external benefit can be expressed in terms of marginal benefits. MSB = MPB + MEB. Where:

• MSB is the marginal social benefit of the activity. • MPB is the marginal private benefit of the activity. • MEB is the marginal external benefit of the activity.

social cost = private cost + external cost can be expressed in terms of marginal costs. MSC = MPC + MEC. Where:

• MSC is the marginal social cost of the activity. • MPC is the marginal private cost of the activity. • MEC is the marginal external cost of the activity.

When the inefficiency created by a negative externality is large, the government may attempt to solve the problem using either:

• Market-based policies such as a corrective tax. • Command-and-Control policies.

Command-and-control policies usually take the form of regulations that either forbid or require certain behaviors Examples of such policies include:

• Maximum allowable emission levels for pollutants. • Requirements that certain emission control devices be installed.

If π = 0 for firms in the market:

• No new firms will enter the market. • No incumbent firms will exit the market.

Some production processes release harmful by-products (pollutants) into the environment that generate negative externalities, such as:

• Pulp and paper production can produce dioxins that increase the risks of cancer, birth defects, etc. • Burning fossil fuels to produce electricity produces sulphur dioxide that can damage plants, animals, and property and carbon dioxide that contributes to climate change.

Corrective Subsidies - When there is a positive externality, the government could use a subsidy to achieve the socially optimal level of output. To do so, the government can either:

• Subsidize consumption of the good; or • Subsidize production of the good

Corrective Taxes - When there is a negative externality, the government can use a tax to achieve the socially optimal level of output and/or the externality To do so, the government can either:

• Tax production of the good; or • Tax consumption of the good

Marginal product is

• The extra output generated by adding one more unit of a variable input while holding the quantities of all other inputs constant. • The rate of change of q with respect to the variable input; ie, the slope of the q curve.

In the short run, at least one input needed for production is fixed, which implies:

• The number of firms in the market is fixed. • The aggregate quantity supplied at any given price is just the sum of quantities supplied by those firms.

In production theory:

• The short run refers to the time frame during at least one input is fixed. • The long run refers to the time frame during which all inputs are variable.

For any activity, social benefit = private benefit + external benefit. Where:

• The social benefit is the benefit of the activity summed across everyone affected by the activity. • The private benefit is the benefit of the activity accruing to those engaging in the activity. • The external benefit is any uncompensated benefit of the activity accruing to bystanders.

For any activity, social cost = private cost + external cost Where:

• The social cost is the cost of the activity summed across everyone affected by the activity. • The private cost is the cost of the activity borne by those engaging in the activity. • The external cost is any uncompensated cost of the activity borne by bystanders.

(See top figure on Lecture Notes 8, page 3) At the socially optimal quantity Q*:

• The total social benefits of producing and consuming the good is (A + B). • The total social costs of producing and consuming the good is (B). • The total social surplus is (A) • the DWL is zero.

In the short run, we divide the firm's costs into two major categories: variable costs and fixed costs which are:

• Variable costs: costs that vary with the firm's output. • Fixed costs: costs that do not vary with the firm's output.

The AP and MP are closely related

• When MP > AP, AP is increasing. • When MP = AP, AP is at its maximum (ie, neither increasing nor decreasing). • When MP < AP, AP is decreasing.

Inputs, also called factors of production or resources, include:

• capital (ie, physical capital such as machinery, computers, etc.) • labour • energy • materials • land

MC =

∆TC/∆q - change in the total cost over the change in output.

Marginal Revenue (MR) =

∆TR/∆q = p

MPL =

∆q/∆L - the extra output the firm gets by using an additional unit of labour.