Econ Final
Perfectly Elastic Supply
change in qty do not effect market price
Income effect
change in quantity demanded that results from a change in the purchasing power of income
Substitution effect
change in quantity demanded that results of consumer subsituting to a relatively cheaper good (substitute)
A differentiated product has
close but not perfect subsititues
Entrepreneurship
combines the resources of labor, land, and capital to produce goods and services
In a month, Samantha consumes the quantity of lobster dinners so that her marginal utility from a lobster dinner is 500 units. The price of a lobster dinner is $25. She also is consuming the quantity of spaghetti dinners so that its marginal utility is 300 units, while its price is $15. Samantha is allocating her entire budget. What should she do to maximize her total utility?
consume the current combination of lobster and spaghetti dinners
If a consumer places a value of $20 on a particular good and if the price of the good is $25, then the
consumer does not purchase the good.
A single-price monopoly transfers
consumer surplus to producers
If a perfectly competitive seller is maximizing profit and is making zero economic profit, which of the following will this seller do?
continue at the current output, making zero economic profit
Explicit Costs
cost in which there is an actual dollar expnditure
Implicit Costs
cost in which there is not an actual dollar expenditure but values to the resource employed
Justin builds fences for a living. Justin's out-of-pocket expenses (for wood, paint, etc.) plus the value that he places on his own time amount to his
cost of building fences.
Variable Cost
cost that are dependent upon output
Fixed Costs
cost that are non dependent upon output
A drought in California destroys many red grapes. As a result of the drought, the consumer surplus in the market for red grapes
decreases, and the consumer surplus in the market for red wine decreases.
If the demand for leather decreases, producer surplus in the leather market
decreases.
Oil is used to produce gasoline. If the price of oil increases, consumer surplus in the gasoline market
decreases.
When a firm becomes so large it is difficult to coordinate and control, it is most likely that
diseconomies of scale have begun
Denise values a stainless steel dishwasher for her new house at $500. The actual price of the dishwasher is $650. Denise
does not buy the dishwasher, and on her purchase she experiences a consumer surplus of $0.
The fact that diamonds have a much higher price than water
does not violate the rules of utility maximization because water's marginal utility is low.
The demand curve for a monopoly is
downward sloping
The short run is the time frame
during which the quantities of some resources are fixed.
Unit Elastic Demand Curve
e^d=1 a change in price results in and identical change in Q^d
Elastic Demand
e^d>1 indicates a high degree of price sensitivity
A firm's total revenue minus its total opportunity cost is called its
economic profit
When a perfectly competitive industry is taken over by a monopoly, some consumer surplus is transferred to the monopolist in the form of
economic profit
What is economic profit?
economic profit = (price - average cost) x quantity produced
In the used car market, with a pooling equilibrium the price of a lemon is ___ the price of a good used car and with a seperating equilibrium the price of a lemon is __ the price of a good used car
equal to; less than
Screening
explains why insurance companies offer low-premium, high deductible policies and high-premium, low-deductible policies.
A perfectly competitive market is in equilibrium and then demand decreases. The decrease in demand means the market price will___ and eventually there will be ___
fall; exit by existing firms
allocative efficiency
firms charge a price equal to marginal cost
Productive Effieciency
firms produce at a minimum ATC
Total Cost
fixed cost+ variable cost
Advertising is a ___ cost that is incurred by ___
fixed; monopolistically competitive firms
If you have found the percentage of the value of total revenue accounted for by the four largest firms in an industry, you have found the
four-firm concentration ratio
Excise Tax
government taxes an individual good/service
The main source of economics of scale is
greater specialization of both labor and capital
For a monopolistically competitive firm, the demand curve
has a negative slope
The good produced by a monopoly
has no close substitutes
If Melissa owns a software company that incurs no fixed costs, then
her total cost equals her total variable cost
A safe drive is likely to prefer an auto insurance policy that has a ___ deductible and ___ premium
high;low
Technology reduces the average cost of production, so in the long run.
i, ii, iii i. perfectly competitive firms produce at a lower average cost. ii. the market price of the goods falls. iii. firms with older plants either exit the market or adopt the new technology.
Moral hazard is
when one of the parties to an agreement has an incentive after the agreement is made to act in a manner that brings additional benefits to himself or herself at the expense of the other party.
Rational Behavior
when people do the best they can based on their values and information, under current and anticipated future consequences. Rational individuals weigh the benefits and costs of their actions and they only pursue actions if they perceive their benefits to be greater than the costs.
Economic Resources
labor, land, capital, and entrepreneurship.
Role of Market Participants
the buyers drive the demand side of the market.
Marginal Benefit
the chane in total benefit from an activity
Land
"gifts of nature" or the natural resources used in the production of goods and services
Portion of Income
large portion of income=consumers are more price sensitive (elastic demand)
Which of the following statements is correct?
The slope of the budget line shows the opportunity cost of the good measured along the x-axis
What is game theory?
The study of decision making in strategic situations
Opportunity Cost
The value of the next option not chosen. The value of the next best forgone alternative.
Jeff decides that he would pay as much as $2,000 for a new laptop computer. He buys the computer and realizes a consumer surplus of $300. How much did Jeff pay for his computer?
$1,700.
Chad is willing to pay $5.00 to get his first cup of morning latté. He buys a cup from a vendor selling latté for $3.75 per cup. Chad's consumer surplus is
$1.25.
Caroline sharpens knives in her spare time for extra income. Buyers of her service are willing to pay $2.95 per knife for as many knives as Caroline is willing to sharpen. On a particular day, she is willing to sharpen the first knife for $2.00, the second knife for $2.25, the third knife for $2.75, and the fourth knife for $3.50. Assume Caroline is rational in deciding how many knives to sharpen. Her producer surplus is
$1.85.
Celine buys a new MP3 player for $90. She receives consumer surplus of $15 on her purchase if her willingness to pay is
$105.
Cameron visits a sporting goods store to buy a new set of golf clubs. He is willing to pay $750 for the clubs but buys them on sale for $575. Cameron's consumer surplus from the purchase is
$175.
If Martin sells a shirt for $40, and his producer surplus from the sale is $8, his cost must have been
$32.
If a consumer is willing and able to pay $20 for a particular good and if he pays $16 for the good, then for that consumer, consumer surplus amounts to
$4.00.
Lauren runs a chili restaurant in San Francisco. Her total revenue last year was $110,000. The rent of her restaurant was $48000, her labor costs were $42000, and her materials, food and other variable costs were $24000. Lauren could have worked as a biologist and earned $50,000 per year. An economist calculates her implicit costs as
$50,000
George produces cupcakes. His production cost is $10 per dozen. He sells the cupcakes for $16 per dozen. His producer surplus per dozen cupcakes is
$6.
Pat bought a new car for $15,500 but was willing to pay $24,000. The consumer surplus is
$8,500.
CPE Formula
(% chg in Demand of good B)/(% chg in Price of Good A)
Income Elasticity Formula
(% chg in Demand)/(% chg in Income)
Midpoint
(Chg Q^s/Qmidpoint)/(chg in Price/ P midpoint)
Marginal Utility Formula
(Chg in Total Utility)/(chg in Q)
Midpoint Formula
(chg in Qty D/Qmidpoint)/(chg in Price/ P midpoint)
marginal cost
(chg in total cost)/ (chg in Qty)
average total cost
(total cost)/ qty
Average Fixed Cost
(total fixed cost)/(qty)
average variable cost
(total variable cost)/ qty
How do oligopolies occur?
...
What is duopolists' dilemma and how do firms solve it?
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What is the shape of the demand curve facing a monopoly firm?
...
What is the shape of the demand curve for a firm in a monopolistic market?
...
What is the shape of the demand curve of a firm in a perfect competition?
...
Suppose a consumer has $100 to spend on two goods, shoes and shirts. If the price of a pair of shoes is $20 per pair and the price of a shirt is $15 each, which of the following combinations is unaffordable to the consumer?
0 pairs of shoes and 7 shirts
Inelastic Supply
0<E^s<1
Inelastic demand
0<e^d<1 indicates a low degree of price sensitivity
Price Controls
1) Price Ceiling 2)price floor
Criteria for Public Goods/ Services
1) non excludable 2) non rival 3) marginal cost of providing is zero
Drivers of the law of demand
1) observed consumer behavior 2) diminishing marginal benefit 3)Income and substitution effect
Optimum Consumption Bundle
1) the marginal utility per dollar is = across all goods (MU of good A)/(Price good A)=that of B 2) the bundle must be affordable given the budget constrant 3)Maximize total utility
3 Questions every economy must answer
1) what goods and services will be provided 2)How are those goods and services produced 3)Who gets the goods and services produced
Determinants of Supply
1)a change in the price of a related good 2) a change in input prices 3)a change in the number of firms in the market 4) a change in technology 5) governments role in market places 6) changes in future price expections 7)weather
Determinants of Demand
1)changes in thepriceof a related good 2)a change in consumer taste and preferencce 3)a change in the number of consumers int he market place 4) changes in income 5) a change in future price expectations 6) governments role on the market place
Four Step Process
1)determine profit maximizing price 2) calculate total revenue (TR=P X Qty) 3) calc. total cost (TC=ATC X Qty 4) compare TR & TC
Perfect Competition
1)many buyers and sellers: no market participant has any degree of price/market influence 2)Homogeneous product: all firms bring an identical product to market 3) easy entry and exit from the market
Cost Curves
1)the relationship between marginal productivity and marginal cost 2)the average total cost curve is always U-shaped 3) the MC curve will always intersect ATC curve At the minimum.
What are the characteristics of a monopolistic market?
1. Each firm in the market produces a good that is slightly different from the goods of the other firms, so each firm has a narrowly defined monopoly 2. The product sold by different forms in the market are close substitutes for one another, so there is intense competition between firms for consumers
What are the characteristics of oligopoly market?
1. Government barriers to entry 2. Economies of scale in production 3. Advertising campaigns
What are the necessary conditions for successful price discrimination?
1. Market power 2. Different consumer groups 3. Resale is not possible
What are the characteristics of a monopoly market?
1. Single supplier 2. Unique Product 3. Barriers to entry and exit 4. Specialized information 5. Government regulation
What happens to price and output when other firms enter a monopolistic market?
1. The market price drops 2. The quantity produced by the first firm decreases 3. The first firm's average cost of production increases
What are the characteristics of a perfect competition market?
1. There are many sellers 2. There are many buyers 3. The product is homogenous 4.There are no barriers to market entry 5.Both buyers and sellers are price takers
For Jack, the total utility from three shirts is 50 units and the marginal utility of one more shirt is
55
Break Even Point
MC=ATC
Shut down pt
MC=AVC
What is the short run supply curve for a perfectly competitive firm?
A curve showing the relationship between the market price and quantity supplied in the short run
What does a four firm or eight firm concentration ratio measure?
A four or eight firm concentration ratio measures the percentage the markets produce
What is a cartel?
A group of firms that act in unison, coordinating their price and quantity decisions
c. its product, which is differentiated in some way from competing products.
A monopolistically competitive firm derives its ability to influence price from: a. the perfectly elastic demand curve it faces. b. barriers to entry. c. its product, which is differentiated in some way from competing products. d. its position as the sole supplier in the market.
c. potential gains from trade exist but are not captured by the monopolist.
A monopoly charging a single price creates deadweight losses because: a. consumers are forced to pay higher prices for products. b. firms are able to earn economic profits. c. potential gains from trade exist but are not captured by the monopolist. d. price exceeds marginal revenue.
What is a monopoly market?
A monopoly market is a market in which a single firm sells a product that does not have any close substitutes
What are the barriers to entry into a monopoly market?
A monopoly occurs when a barrier to entry prevents a second firm from entering a market: 1. Patent 2. Network externalities 3. Under licensing policy, the government chooses a single firm to sell a particular product 4. If a firm owns or control a key resource, the fir can prevent entry by refusing to sell the input to other firms
b. horizontal and perfectly elastic.
A perfectly competitive firm faces a demand curve that is: a. horizontal and perfectly inelastic. b. horizontal and perfectly elastic. c. vertical and perfectly inelastic. d. vertical and perfectly elastic.
c. shows the relationship between inputs and the maximum output that can be produced from those inputs.
A production function: a. shows the relationship between a firm's costs and revenues. b. shows the relationship between production and profits. c. shows the relationship between inputs and the maximum output that can be produced from those inputs. d. shows the relationship between variable inputs and fixed inputs.
c. one in which a large number will each suffer small costs and a small number will each receive large benefits.
A special interest issue is best described as: a. one in which both sides utilize paid lobbyists to represent them. b. one which one party strongly supports and the other party strongly opposes. c. one in which a large number will each suffer small costs and a small number will each receive large benefits. d. one decided in a special session of the legislature
a. New firms would be likely to enter this industry.
If the firm below is representative of firms in a monopolistically competitive industry, what will likely occur? a. New firms would be likely to enter this industry. b. Existing firms would be likely to exit this industry. c. Firms would neither enter nor exit this industry. d. New firms would like to enter but since there are substantial barriers to entry they cannot do so.
Profit Maximization
MC=MR
b. $210
Based on the graph above, what is the maximum amount of profit this firm could earn? a. $150 b. $210 c. $245 d. $315
How does a firm in a monopolistic market differentiate its product?
By using produce differentiation which is the process used by firms to distinguish their products from the products of competing firms
How do you calculate Total Surplus
C.S+P.S
Chad is willing to pay $5.00 to get his first cup of morning latté; he is willing to pay $4.50 for a second cup. He buys his first cup from a vendor selling latté for $3.75 per cup. He returns to that vendor later in the morning to find that the vendor has increased her price to $3.90 per cup. Chad buys a second cup. Which of the following statements is correct?
Chad's willingness to pay for his second cup of latté was smaller than his willingness to pay for his first cup of latté.
All else equal, what happens to consumer surplus if the price of a good increases?
Consumer surplus decreases.
What happens to consumer surplus in the iPod market if iPods are normal goods and buyers of iPods experience an increase in income?
Consumer surplus may increase, decrease, or remain unchanged.
When does a firm in a perfect competition market shut down?
Depending on the decision rule: operate if total revenue > variable cost shut down if total revenue < variable cost
Elasticity of Demand Formula
E^d= (% chg. in Qty D)/( % chg. in Price)
Perfectly Inelastic Demand
E^d=0 q^d does not respond to change in market prices
Elasticity of Supply
E^s= (% chg in QS)/(% chg in Price)
Perfectly Inelastic Supply
E^s=0 Q^s is non responsive to change in price
Unit Elastic Supply
E^s=1 A change in price results in a identical change in Q^s
Elastic supply
E^s>1 Indicates a high degree of price sensitivity
b. maximize profits.
Economists normally assume that the goal of a firm is to: a. sell as many units of output as possible. b. maximize profits. c. sell products at the highest prices possible. d. maximize sales revenue.
The student may give an explanation along the lines of the following—market entry increases supply, which causes prices to fall. This will cause the competitive firm to face a lower price and the profit-maximizing quantity to fall.
Explain how market entry affects the profit level of a competitive firm.
c. any economic profits have been competed away.
Firms will continue to enter a competitive industry until: a. the supply curve is vertical. b. the market price falls below average variable cost. c. any economic profits have been competed away. d. all resources are fully employed.
Which of the following is FALSE?
Fixed costs increase in the long run
Suppose Katie, Kendra, and Kristen each purchase a particular type of cell phone at a price of $80. Katie's willingness to pay was $100, Kendra's willingness to pay was $95, and Kristen's willingness to pay was $80. Which of the following statements is correct?
For the three individuals together, consumer surplus amounts to $35.
An accounting profit of zero is most likely a bad result because the firm generated only enough revenues to cover explicit cost meaning that there was no compensation for the time, investment or other opportunity costs associated with the operations. In contrast, an economic profit of zero indicates a satisfactory result because total revenues were sufficient not only to cover all explicit costs but also to provide a fair rate of return on the time, money, and other opportunity costs associated with operating this firm.
From a business owner's perspective, is an accounting profit of zero a good result, a bad result, or merely a satisfactory result? Explain. Is an economic profit of zero a good result, a bad result, or merely a satisfactory result? Explain.
Income Elasticity info
If IE is positive the goods are normal if IE is negative the goods are inferior
b. the welfare loss from monopoly is decreased.
If a monopolist is able to price discriminate: a. consumer surplus is increased. b. the welfare loss from monopoly is decreased. c. producer surplus is decreased. d. all of the above
c. minimum efficient scale.
In the graph above, Point A refers to: a. break-even point. b. efficient equilibrium. c. minimum efficient scale. d. zero economic profit.
Restaurants choose to offer the early bird specials because they are trying to segment the market into those that have a very elastic versus inelastic demand for dining out. Those people who have a very elastic demand for dining out would not be willing to pay the higher prices later in the evening, but they may be willing to pay a lower price to come a bit early. The types of individuals that would tend to be the most responsive to price changes may be senior citizens or students.
Many restaurants offer early bird specials to diners who come in before 6 P.M. to eat dinner. a.) Explain why restaurants might choose to give discounts to those people willing to eat early. b.) What types of people would you expect to see at the early bird specials? Explain.
What is market power?
Market power is the ability of a firm to affect the price of its product
c. Marginal cost will increase.
Mauricio realizes that his increasingly popular restaurant is experiencing diminishing marginal product. As he provides more meals in the short run, what will happen to the marginal cost of providing those additional meals? a. It is impossible to say anything about marginal cost with the information provided. b. Marginal cost will decrease. c. Marginal cost will increase. d. Marginal cost will stay the same.
b. $35,000; $2,500
Mia quit her job as a professional soccer player, which paid an annual salary of $32,000, and became a street food vendor. She used $10,000 out of her savings account that paid a 5% annual interest rate to buy a street cart to sell food. In her first year of operations, she spent $10,000 on food and supplies (napkins, cups, plates, etc.) and earned total revenue of $45,000. Marcie's accounting profit is ______ and economic profit is ______. a. $25,000; $15,000 b. $35,000; $2,500 c. $25,000; $7,000 d. $35,000; $3,000
Public Goods
National defense, roads, public parks government provides and funded by tax dollars in which you are forced to pay
Are economic profits possible for firms in a monopolistic market in the long run?
No
What is the difference between oligopoly and perfect competition market?
Oligopoly, there are not many industries that produces the product and there is a leader industry which "Rules" and controls the price Perfect competition, here are many industries and the product is homogeneous
c. firms are still generating economic losses.
Over the last year, several firms have exited the car wash business in Paris, TX. Though prices have risen over that time period, it appears that firms are still leaving the industry. Apparently: a. economic profits exist but they are not as high as in other industries. b. economic profits are zero and firms won't stay in the industry if they are not earning an economic profit. c. firms are still generating economic losses. d. economic profits have decreased because of the exit of existing firms.
Which of the following is always true for a single-price monopolist?
P > MR
When a firm maximizes its profit, which of the following is correct for firms in monopolistic competition and perfect competition?
P=MR=MC for firms in perfect competition and P>MR=MC for firms in monopolistic competition.
b. selling the same good at different prices to different customers without cost differences.
Price discrimination refers to: a. selling the same good at different prices to different customers because of cost differences. b. selling the same good at different prices to different customers without cost differences. c. the ability of a firm to charge a price in excess of marginal cost. d. consumer bargain hunting.
What is price fixing and why do cartels engage it?
Price fixing is an arrangement in which firms conspire to fix prices. Cartels engage it to reduce market uncertainty
Who are price takers in a perfect competition market?
Price takers are either a buyer or seller that takes the market price as given
c. economic
Public choice theory applies ____ principles to politics. a. altruistic b. ceteris paribus c. economic d. the fallacy of composition
b. is earning positive economic profits.
Refer to the graph above. When the market price equals $105, and the firm sells 675 units of output, the firm: a. is earning a normal profit. b. is earning positive economic profits. c. is experiencing a loss, but should continue operating temporarily because business conditions may improve. d. is experiencing a loss and should shut down.
Why do firms need patents?
So the firm won't lose its monopoly in 3 years, it will earn a profit of $6 million , which is less than the cost of research and development
What is the profit maximizing output for a perfectly competitive firm?
The profit-maximizing level of output is a production level that achieves the greatest level of economic profit given existing market conditions and production cost. For a perfectly competitive firm, this entails adjusting the production level in response to the going market price.
b. are able to vary some, but not all, inputs.
The short run is that period in which firms: a. are free to vary all inputs. b. are able to vary some, but not all, inputs. c. can vary inputs, but only by varying all inputs in equal proportion. d. cannot increase production at all.
What may cause a monopoly to arise?
The simplest way for a monopoly to arise is for a single firm to own a key resource
Marginal Cost
The additional cost from an activity
What is marginal revenue?
The change in total revenue from selling one more unit of output
d. is characterized by all of the above.
The long-run production period: a. is a time when all inputs are variable. b. varies in length according to how capital goods are specialized. c. is likely longer for a steel manufacturer than for a retailer who sells watches off a cart at the local mall. d. is characterized by all of the above.
What output maximizes profit for a monopoly firm?
The monopolist's profit maximizing level of output is found by equating its marginal revenue with its marginal cost, which is the same profit maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output. Indeed, the condition that marginal revenue equal marginal cost is used to determine the profit maximizing level of output of every firm, regardless of the market structure in which the firm is operating.
What are the benefits of patents?
The patent system protects an inventor to the right of his intellectual property by allowing him to be recognized as the inventor so he can secure his income on his invention. It also gives the patent holder the right to sue individuals or corporations using his invention or license his invention to individuals or corporations.
What is a concentration ratio?
The percentage of the market output produced by the largest firms
What is price discrimination?
The practice of selling a good at different prices to different consumers
Why do firms in a monopolistic market hire celebrities to endorse their products?
To gain an increase with profits because celebrities make their products popular
Economic Profit
Total Revenue-[explicit cost+ Implicit cost]
c. large barriers to entry
Which of the following is a characteristic of a monopoly? a. a large number of sellers b. homogeneous products c. large barriers to entry d. price taking firms
c. To promote innovation.
Why does the government allow some markets to be monopolized by granting patents? a. To promote a more equal distribution of income. b. To correct for negative externalities. c. To promote innovation. d. To ensure lower prices for consumers in the short run
c. All are opportunity costs.
What do foregone interest on money invested in a firm, wages paid to production workers, interest paid on bank loans, and the purchase of parts for assembly have in common? a. All are explicit costs. b. All are implicit costs. c. All are opportunity costs. d. None are opportunity costs.
a. long-run average total cost declines as output expands.
When there are economies of scale in production: a. long-run average total cost declines as output expands. b. long-run average total cost increases as output expands. c. marginal cost increases as output expands. d. the marginal product of an input diminishes with increased utilization.
When do other firms enter a monopolistic market?
When there is a long run and each firm has to has its ow unique product
a. perfect competition
Which market structure is characterized by many sellers, easy entry, and homogeneous products? a. perfect competition b. monopolistic competition c. oligopoly d. monopoly
c. excessive competition
Which of the following is NOT a reason that monopolies arise? a. patents b. economies of scale c. excessive competition d. control of natural resources
A firm in monopolistic competition is similar to a firm in perfect competition because they both
can make only zero economic profit in the long run.
Changes in demand
a change in demand is the result in broad market conditions
Marginal Utility
a change in or the additional utility from the consumption of one more unit of a good or service.
Change in Supply
a change in supply is the result in broad market conditions
Consumer surplus is
a concept that helps us make normative statements about the desirability of market outcomes. represented on a graph by the area below the demand curve and above the price. a good measure of economic welfare if buyers' preferences are the primary concern. All of the above are correct.
Marginal Analysis
a focus on the change in or the additional from an activity
Dead Weight Loss
a loss in market efficiency (indicated graphically by a decrease in total surplus)
What is duopoly?
a market with two firms
Utility
a measure of satisfaction
Price Elasticity of Demand
a measure of the consumers degree of price sensitivity
A decrease in Supply=
a shortage
Your grade point average acts as ___ to potential employers?
a signal
When compared to a perfectly competitive market, a single-price monopoly with the same costs produces___ output and charges ___ price.
a smaller; a higher
Total Utility
a summation of utility from consumption of units of a good or service
Utles
a unit of measure for utility
Used cars buyers believe a car is good quality when the seller signals the car's quality by offering a warranty because
a warranty on a lemon is costly to the seller.
Which of the following statements about price discrimination is false?
all forms of price discrimination are illegal
The utility-maximizing rule rays that consumers must
allocate the entire available budget and make the marginal utility per dollar the same for all goods.
A cost paid in money is
an explicit cost and an opportunity cost
Market
any mechanism hat brings together buyers and sellers to exchange goods and services.
Diminishing marginal utility
as consumption of additional units continues the marginal utility of each additional unit declines
Diminishing marginal benefit
as quantity increases the marginal benefit per unit diminishes, therefore consumers willingness to pay would also fall
Dawn's bridal boutique is having a sale on evening dresses. The increase in consumer surplus comes from the benefit of the lower prices to
both existing customers who now get lower prices on the gowns they were already planning to purchase and new customers who enter the market because of the lower prices.
Suppose that the market price for pizzas increases. The increase in producer surplus comes from the benefit of the higher prices to
both existing sellers who now receive higher prices on the pizzas they were already selling and new sellers who enter the market because of the higher prices.
Labor
both physical and mental effort expended by people in the production of goods and services
If a perfectly competitive firm is maximizing its profit and is making an economic profit, which of the following is correct?
i, ii, iii i. price equals marginal revenue ii. marginal revenue equals marginal cost iii. price is greater than average total cost
Which of the following is a legal barrier to entry?
i., ii, iii, i. public franchise ii. government license iii. patent
CPE
if CPE is positive the goods are substitutes if CPE is negative the goods are complements
How to determine if the firm has econ profits, econ losses, or zero econ profits
if TR> TC= econ profits if TR< TC= econ losses if TR=TC = zero econ profits
Long Run Analysis
if econ profits continue, outside firms will enter the market place this increases market supply a econ profits are competed away . in the long run all firms are left generating zero econ profits.
Law of Supply
if price goes up quantity supplied goes up if price goes down quantity supplied goes down
Law of Demand
if price increases quantity demanded decreases if price decreases qty demanded increases
Coasm Theorm
if the exturnality is quantifiable the exturnality is internalize and the transaction cost are low a private solution is obtainable (everyone benefits)
What is the difference between perfect competition and monopolistic competition?
in perfect competition, firms produce identical goods, while in monopolistic competition, firms produce slightly different goods.
Perfect Competition and Market Efficiency
in the long run perfectly competitive markets are both allocative and productive efficient
When there is a technological advance in the pork industry, consumer surplus in that market will
increase.
As more of a good is consumed, total utility
increases
The Surgeon General announces that eating apples promotes healthy teeth. As a result, the equilibrium price of apples
increases, and producer surplus increases.
A consumption point inside the budget line
is possible to afford but has some unspent income
Consumer Surplus
is the amount a consumer is willing to pay minus the amount the consumer actually pays.
Consumer surplus
is the amount a consumer is willing to pay minus the amount the consumer actually pays.
What is Economics?
is the study of the choices we make among our many wants and desires given our limited resources.
Suppose the demand for peanuts increases. What will happen to producer surplus in the market for peanuts?
it increases.
Assume someone organizes all farms int he nation into a monopoly. What is the monopoly's marginal cost curve?
it is the formerly competitive industry's supply curve.
If a monopolistically competitive sellers marginal cost is $3.56, the firm will increase its output if
its marginal revenue is more than $3.56
To produce more output in the short run, a firm must employ more of
its variable resources.
In the long run, perfectly competitive firms will exit the market if the price is
less than average total cost
Which of the following firms is most likely to be a monopoly?
local distributor of natural gas
The long run is a time period that is
long enough to change the size of the firm's plant and all other inputs.
Availability of Substitutes
many subs= more elastic few or no sub=less elastic( lower degree of price sensitivity
The change in cost that results from a one-unit increase in output is called the
marginal cost
For a perfectly competitive syrup producer whose average total cost curve does not change, an economic profit could turn into an economic loss if the
market demand for syrup decreases
Competitive market
market price that they use to bring more or less to market.
A firm in monopolistic compeition
might be selling a brand name product
In the long run, advertising by all firms in a monopolistically competitive industry
might increase or decrease the firms' prices.
An industry with a large number of firms, differentiated products, and free entry and exit is called
monopolistic competition
Which of the following market types has the fewest number of firms?
monopoly
Efficiency of the Tax
more efficient to tax goods that are rather inelastic as it results in a smaller DWL and higher levels of Tax Revenue
Rule of Rational Choice
n trying to make themselves better off, people alter their behavior if the expected marginal benefits from doing so outweigh the expected marginal costs they will bear. If the expected marginal benefits of an action exceed the expected marginal costs, a person will do more of that action; if the expected marginal benefits of an action are less than the expected marginal costs, a person will do less of that action.
Positive Externalities
occurs when BENEFITS from a market transaction spills over on to others outside the market transaction Ex: education, flu shot, smoking
Negative Externalities
occurs when COST from a market transaction spills over onto others outside the market transaction. Ex: pollution, traffic
Asymetric Info
occurs when info regarding the market transaction is not evenly ditributed
Which of the following market types has only a few competing firms?
oligopoly
Private information is a situation in which
one party to an exchange has information that is not available to the other.
When an economist uses the term "cost" referring to a firm, the economist refers to the
opportunity cost of producing a good or service, which includes both implicit and explicit cost.
Suppose that there are only two types of used cars, peaches and lemons. Peaches are worth $10,000 and lemons are worth $4,000. Without effective signals such as warranties, the owners of peaches cannot sell their cars for $10,000 because the
owners of peaches cannot convince buyers that their cars are worth $10,000.
Self Interest
people try to improve their own situation (as they see it, not necessarily as others see it)
Perfectly Elastic Demand
perfectly competitive markets changes in Q do not influence market price
Adverse selection is the tendency for people who accept contracts to be those who
plan to use private information to the disadvantage of the less well-informed party
How do you solve for Revenue
price x quantity
Adverse selection is created by
private information
One of the major benefits to society of monopolistic competition is
product differentiation
Product differentiation allows a firm to compete with another firm on the basis of
quality, price, and marketing
A budget line shows the
quantities of goods a buyer can purchase with given income and prices.
Producer surplus is
the amount a seller is paid minus the cost of production.
Production Possibilities curve
represents the potential total output combinations of any two goods for an economy, given the available factors of production and the available production technology that firms use to turn their inputs into outputs
In the market for auto insurance, in a separating equilibrium,
risky drivers pay a larger premium than do safe drivers for insurance.
If one of the products a consumer buys rises in price, the consumer's budget line will
rotate inward, closer to the origin.
Suppose Alice spends her budget on books and downloaded movies. If her budget does not change and the price of a book stays the same but the price of a downloaded movie falls, her budget line
rotates outward and its slope changes
The economic problem
scarcity forces us to choose and choices are costly because to choose means to forgo other opportunities
A price-discriminating monopoly is a monopoly that
sells different units of a good or service at different prices.
When new firms enter the perfectly competitive Miami bagel market, the market
supply curve shifts rightward
A natural barrier to entry is defined as a barrier that arises because of
technology that allows one firm to meet the entire market demand at lower average total cost than could two or more firms.
Producer Surplus
the difference between the price and the producer/ supplier is willing able to receive and price they actually received
Consumer Surplus
the difference between the price the consumer is willing and able to pay and the price they actually pay.
Capital
the equipment and structures used to produce goods and services
Short Run Supply
the line above the shut down pt along the MC curve
Suppose the market demand curve for a good passes through the point (quantity demanded = 100, price = $25). If there are five buyers in the market, then
the marginal buyer's willingness to pay for the 100th unit of the good is $25.
Price Ceiling
the price ceiling is a maximum price that can be charged in the market place.
Price Floor
the price floor acts as a minimum price that can be charged in the market
Quantity demanded
the quantity consumers are both willing and able to buy
Quantity supplied
the quantity the firm/producer is both willing and able to bring to market
The idea of an insurance company "pooling" the risk means that
the risk is spread over a large population
The price charged by a perfectly competitive firm is
the same as the market price
Burden of The Tax
the side of the market with the lowest degree of price sensitivity bears a larger portion of the tax.
Consumer Choice
the study of how the consumer allocates heir resources to maximize their well being
The market supply in the short run for the perfectly competitive industry is
the sum of the supply schedules of all firms
Producer surplus directly measures
the well-being of sellers.
In monopolistic competition, each firm supplies a small part of the market. This occurs because
there are a large number of firms.
A single- price monopoly faces a linear demand curve. if the marginal revenue for the second unit is $20, then the marginal revenue for the
third unit is less than $20
In the market for automobile insurance, moral hazard implies that
those who are insured might take greater risks.
Accounting profit
total revenue-explicit cost
What is Scarcity?
unlimited wants exceed our limited resources
Consumer Equilibrium
used to derive an optimum consumption bundle
Cross Price Elasticity
used to determine if 2 goods are complement or substitute goods can be used to quantify the expected change in demand from a change in the price of the relate good.
Income Elasticity
used to determine if a good is a normal or inferior good can be used to quantify the expected change in demand from a change in income.
A seller's opportunity cost measures the
value of everything she must give up to produce a good.
The marginal seller is the seller
who would leave the market first if the price were any lower, and the marginal buyer is the buyer who would leave the market first if the price were any higher.
If a consumer has allocated his or her budget and found the combination of goods where all marginal utilities divided by price are equal, what would happen if the consumer were forced to consume some other combination of goods? The consumer
will definitely have lower total utility.
Suppose Larry, Moe, and Curly are bidding in an auction for a mint-condition video of Charlie Chaplin's first movie. Each has in mind a maximum amount that he will bid. This maximum is called
willingness to pay.
Suppose Raymond and Victoria attend a charity benefit and participate in a silent auction. Each has in mind a maximum amount that he or she will bid for an oil painting by a locally famous artist. This maximum is called
willingness to pay.
Short Run Analysis
with resources employed are firms currently in the market opporating with econ profits, econ losses, or zero econ profits
Can a perfectly competitive firm earn economic profits in the long run?
yes
Suppose your own demand curve for tomatoes slopes downward. Suppose also that, for the last tomato you bought this week, you paid a price exactly equal to your willingness to pay. Then
your consumer surplus on the last tomato you bought is zero.
