ECON200 Final
Given the information that the market for smart phones is inefficient, which of the following statements explains why consumers of smartphones might still not want the price to be regulated?
It would reduce product variety
three factors of production
Land, labor, capital
marginal product of labor
change in output that occur when hiring one more employee
marginal product
the increase in output that is generated by an additional unit of input
gains from trade
the increase in welfare in both countries that results from specialization and trade
value of the marginal product
the marginal product generated by an additional unit of input times the price of output
When a producer has the ability to produce a good or service at a lower opportunity cost than others, economists say:
the producer has a comparative advantage at producing that good
human capital
the set of skills, knowledge, experience, and talent that determine the productivity of workers
Consider Jimmy Choo designer shoes. Jimmy Choo faces many competitors, while in another way Jimmy Choo faces no competitors. This contradiction can be explained by:
the substitutability between Jimmy Choo shoes and other shoes
If the cross-price elasticity of two goods is 0.25, then we know that
those goods are substitutes because their elasticity is greater than zero
price effect
what you gain from a price increase because people pay more
quantity effect
what you lose from a price increase because people buy less
In general, the income effect of an increase in the price of a normal good:
will cause the individual to buy less of that good because they have relatively less income
a government-owned monopoly is more likely to
- provide a greater quantity of output than a private one - provide output at a lower price than a private one - serve public interest than maximize profit
Autarky
An economy that does not import or export
If Argentina becomes a net exporter of beef after trade barriers are removed, what will happen to the following compared with autarky?
- Argentine cattle ranchers will be better off - Argentine consumers will be worse off - Total welfare in Argentina will increase
Effects of quota
- Decreases amount of imports - Increases import price
Effects of tariff
- Increases the world price for domestic consumers - Decreases the amount of shortage made up by imports
McDonald's, Burger King, and Wendy's all produce hamburgers, among other things. However, if you prefer burgers from McDonald's, you might consider other burgers an imperfect substitute. What is correct about McDonald's prices in the short run?
- McDonald's will charge a price higher than marginal revenue and marginal cost - McDonald's will set its prices like a monopolist - McDonald's will maximize profit by producing where MC=MR - McDonald's consumers will pay higher price as long as it is equal to how much they value a burger from McDonald's
Suppose a perfectly competitive market for hot dog stands in New York City becomes monopolistically competitive when gourmet, discount, and ethnic hot dog retailers show up, making each cart slightly different. If hot dogs from different stands are now imperfect substitutes and there are numerous carts in the city, compare the following measurements in the short run before and after the change:
- Producer surplus will increase after the change. - Consumer surplus will decrease after the change. - Total social welfare or surplus will decrease after the change. - Price variance between different vendors will be higher after the change.
Compare perfectly competitive markets, monopoly markets, and oligopoly markets on the following economic behavior:
- Producers maximize profit by producing where MR = MC in all three types of markets - The efficient outcome is to produce where P = MC in all three types of markets - The efficient outcome is achieved in perfectly competitive markets only - Market price is greater than marginal revenue (MR) in monopoly markets and oligopoly markets only - Some form of barriers to entry exist in monopoly markets and oligopoly markets only - If they collude, oligopolies will produce at the same level as monopolies
Explain why a country that is more productive than its trading partners in producing wheat would end up importing wheat anyway.
- The country is even more productive in goods other than wheat - The country has comparative advantage in goods other than wheat - The country's trading partners can produce wheat at a lower opportunity cost
Suppose Egypt wants to open its trade borders to the world market for natural gas. What would make Egypt a net exporter of natural gas?
- The domestic price of natural gas being less than the world price - Egyptian comparative advantage in natural gas - Government ownership of natural resources
Large telecom companies like AT&T routinely send repair technicians to customers' homes. Although the technicians are skilled laborers, they must usually train on the job. It takes some time for them to reach a high standard of quality. In addition, their work cannot be constantly supervised. Explain why an efficiency wage could help telecom companies increase the productivity of repair technicians.
- efficiency wages are above the equilibrium wage - workers that receive efficiency wages have a greater incentive to work hard
2 examples of common resources
- fish in a river - forests
Essential characteristics of a perfectly competitive market
- goods are standardized - buyers are price takers - no transaction costs - no barriers to entry for producers - there are many buyers and sellers in market
2 examples of public goods
- light on a front porch - national defense
Leo runs a bicycle repair shop. He recently examined his information on wage and employment levels and noted that he employed the same number of workers in 2009 as he did in 2013. However, real wages (controlling for inflation) increased quite substantially between 2009 and 2013. Assume the supply of labor remained constant over this time period. What are two possible explanations for why Leo's workers were paid more in 2013?
- marginal product increased during this time (workers are more productive) - the price of repairing a bicycle was higher in 2013 than in 2009
An oligopolist (with few competitors) pays more attention to what his competitors are doing than a producer in a competitive market (with many competitors) does because:
- oligopolists are not price takers - perfect competitors have so many competitors that their revenues depend on the market as a whole rather then the actions of individual competitors - the actions of one oligopolist impacts the revenue for all the other oligopolists
If a Pigovian tax is not large enough, the resulting:
- outcome will not maximize surplus - quantity will be too high - outcome will be inefficient
2 examples of artificially scarce goods
- private pools - pay-per-view
Explain why governments are usually more concerned about regulating an oligopoly than a monopolistically competitive market?
Oligopolies are always more inefficient than monopolistically competitive markets
What holds true at the chosen level of output in the long run for firms in a perfectly competitive market?
P = MC MC = MR P = minimum ATC
Suppose an auto manufacturer has one factory in the United States and one in Mexico. The auto manufacturer produces the same number of cars and the same models in each factory but hires more workers in Mexico than in the United States. Give an explanation for the discrepancy in the amount of labor hired in each location.
The US plant has more capital per worker
Suppose a cafe owner wants to switch to automatic espresso machines instead of paying baristas to pack the coffee grounds by hand. The machines are twice as effective as a human, the fixed cost per machine equals the yearly wage of one employee, and each machine needs to be replaced every 3 years. Assume further that the quantity of espresso bought and sold remains constant. Explain how the equilibrium price (wage) and quantity of labor will change.
The equilibrium price (wage) and quantity of labor will both decrease
Suppose BMW runs a great ad campaign that increases demand and drives up the price of BMWs. What do you expect to happen to the equilibrium price and quantity of BMW labor?
The equilibrium price (wage) and quantity of labor will both increase
Consider a labor market that traditionally discriminates against hiring women. Suppose a new law effectively prohibits this practice. Describe what would happen to the wages of men in this industry.
Wages would decrease due to an increase in the supply of labor
import quota
a limit on the amount of a particular good that can be imported
Pigovian tax
a tax on any market activity that generates negative externalities, intended to correct an inefficient market outcome by being set equal to the social cost of the negative externalities
Which of the following is a positive incentive? a.) Discover credit cards offer 0 percent balance transfer rates for someone to open an account b.) McDonalds decides to offer a white chocolate mocha c.) A school teacher decides to retire and focus on gardening d.) A business decides to leave the industry
a.) Discover credit cards offer 0% balance transfer rates for someone to open an account
Income elasticity will be positive for a.) all normal goods b.) all inferior goods c.) only necessities d.) only luxury goods with substitutes.
a.) all normal goods
Free trade: a.) decreases demand for factors of production that are domestically abundant b.) increases the supply of factors of production that are domestically abundant c.) decreases the supply of factors of production that are domestically scarce d.) increases the demand for factors of production that domestically abundant
d.) increases the demand for factors of production that are domestically abundant
A $0.50 tax on lemons currently generates $200 in revenues per day. If the tax were increased to $2, the revenues generated would drop to $70. This tells you that in this range of tax rates: a.) the price effect outweighs the income effect b.) the quantity effect outweighs the income effect c.) the price effect outweighs the quantity effect d.) the quantity effect outweighs the price effect
d.) the quantity effect outweighs the price effect
If Egypt became a net exporter of natural gas, which would be greater: domestic supply or domestic demand?
domestic supply
Give an example of a good that is not excludable
fish in the ocean
quota rent
goes to who we imported from, equal to tax in tariff
Coase theorem
individuals can reach an efficient equilibrium through private trades, even in the presence of an externality
Explain the assumption of rational behavior
it helps economists explain a lot about the real world by assuming that people behave in the way that will best achieve their goals
excludable
it is possible for sellers to prevent its use by those who have not paid for it
The manager of a restaurant is an example of which factor of production?
labor
The plot of land on which a restaurant is built is an example of which factor of production?
land
What's one way to solve the free-rider problem?
make the good or service more excludable
What does the factor of production called "capital" refer to?
manufactured goods that are used to produce new goods
public good
not rival in consumption and not excludable
artificially scare good
not rival in consumption, but excludable
2 examples of private goods
- apple - car
Imagine two nations that have similar landmasses and levels of wealth, yet do not specialize in the same industries. Which characteristics might drive differences in their comparative advantages?
- availability of natural resources - size of labor force - climate - level of technology knowledge
Suppose you run a flower delivery business and employ college students to drive the vans and make deliveries. You are considering hiring an additional worker. What would you need to know to decide whether doing so would increase or decrease your profit?
- the additional cost of another worker - the number of additional deliveries from another worker - the value of each additional delivery
If Billy's reservation price on a snowboard is $250, how many snowboards would he buy if the market price of snowboards is $500?
0
Would Burger King hamburgers or Lady Gaga mp3s have a deadweight loss smaller relative to the total surplus in its market?
Burger King hamburgers because they are less differentiated
Why is the cost of advertising relevant to a consumer's decision about which brand of a product to purchase?
Costly advertising sends a credible signal of product quality
A market has few barriers to entry and many firms. Which of the following is a strategy that a firm can use in this type of market to gain and maintain economic profits?
Create a sense of product uniqueness among consumers
It is the case in both perfectly competitive and monopolistically competitive markets that other firms will enter when firms are making positive economic profits, until price eventually equals ATC and economic profits are zero. Despite these similarities, in a perfectly competitive market total surplus is maximized, while in a monopolistically competitive market surplus is not maximized. What explains this difference?
In perfectly competitive markets, firms operate where MR is equal to MC, which is where ATC is minimized
Who is likely to be in favor of free trade in a country that would be a net-exporter if it moved from autarky to free trade? a.) foreign producers b.) domestic consumers c.) domestic producers
c.) domestic producers
How much deadweight loss a tax causes depends on: a.) whether the tax is imposed on the buyer or the seller b.) how much tax revenue the government generates c.) how responsive buyers and sellers are to a price change d.) it can depend on all of these
c.) how responsive buyers and sellers are to a price change
If society were to experience an increase in its available resources: a.) its production possibilities frontier would not move, but society could change its production choice b.) its production possibilities frontier would shift in c.) its production possibilities frontier would shift out d.) its production possibilities frontier would become convex
c.) its production possibilities frontier would shift out
The total amount of surplus for consumers and producers lost due to taxation is: a.) greater than the amount of revenue generated b.) less than the amount of revenue generated c.) transferred to the government in the form of tax revenues
a.) greater than the amount of revenue generated
Discretionary spending involves public expenditures that: a.) have to be approved each year b.) are planned in the federal budget and do not need annual approval c.) are mandated and regulated by permanent laws d.) entitle people to benefits by virtue of age, income, or some other factor
a.) have to be approved each year
John just won the Megamillions jackpot. We can assume that: a.) his demand for all normal goods will increase b.) his demand for all inferior goods will increase c.) his demand for all normal goods will decrease d.) his demand for all normal goods will stay the same
a.) his demand for all normal goods will increase
When a firm can achieve economies of scale by expanding, its long run ATC curve: a.) slopes down b.) slopes upward c.) is flat
a.) slopes down
The marginal utility gained from the consumption of successive units of a normal good: a.) tends to decrease b.) tends to increase c.) may increase or decrease depending on the cost of the good d.) tends to stay the same
a.) tends to decrease
If the demand curve is less elastic than the supply curve, then: a.) the buyers will bear a greater tax incidence b.) the sellers will bear a greater tax incidence c.) the buyers will bear a smaller tax burden than sellers d.) the sellers will bear a greater tax burden than buyers
a.) the buyers will bear a greater tax incidence
State the law of supply
all else equal, quantity supplied rises as price rises
When positive externalities are present in a market, it means that: a.) social benefits are less than external benefits b.) private benefits are less than external benefits c.) private benefits are less than social benefits d.) external benefits are equal to social benefits
c.) private benefits are less than social benefits
Assume a market that has an equilibrium price of $7. If the price is set at $3, which of the following is true? a.) some surplus is transferred from consumers to producers, but total surplus falls b.) all surplus is transferred from consumers to producers, and total surplus stays the same c.) some surplus is transferred from producers to consumers, but total surplus falls d.) some surplus is transferred from consumers to producers, causing total surplus to increase
c.) some surplus is transferred from producers to consumers, but total surplus falls
Stoves and other cooking equipment are examples of which factor of production?
capital
The demand curve facing the monopolistically competitive firm is: a.) horizontal b.) flatter than that of a monopolist c.) steeper than that of a monopolist d.) flatter than that of a perfectly competitive firm
b.) flatter than that of a monopolist
When a market consists of a few large firms, it: a.) must be perfectly competitive b.) is likely an oligopoly c.) must be monopolistically competitive d.) is likely a monopoly
b.) is likely an oligopoly
Long-run economic profits are possible in which of the following market structures? a.) monopolistic competition b.) oligopoly c.) perfect competition d.) long-run profits are possible in all of these market structures
b.) oligopoly
In the case of borrowing in capital markets, the rental price of capital is a.) the equilibrium wage b.) the interest paid on loans c.) the value of the expected flow of income gained from ownership
b.) the interest paid on loans
When a tax is imposed, the surplus that is lost to buyers and sellers but converted into tax revenue is: a.) lost and considered a cost of taxation b.) transfered to toners through public programs c.) part of deadweight loss d.) all of these statements are true
b.) transfered to others through public programs
embargo
ban from importing something
monopsony
buyers hold all market power
A market with monopolistic competition consists of
many firms that sell goods and services that are similar, but slightly different
the free-rider problem
non-excludability of a public good leads to undersupply due to a loss of revenue
An unintended consequence of price ceilings is
non-price rationing must occur, and can lead to bribes
rival in consumption
one person's consumption prevents or decreases others' ability to consume it
private good
rival in consumption and excludable
common resource
rival in consumption, but not excludable
Sadie works at a factory for $15 an hour and typically works 40 hours a week. Sadie gets a pay raise and now earns $20 an hour. She decides to work 45 hours a week at $20 an hour. Her response to the pay increase demonstrates the
price effect outweighing the income effect
For a monopolist, how is price determined at the profit-maximizing level of output?
price is chosen according to demand
What does the Laffer curve demonstrate?
raising tax rates increases then decreases tax revenues
One way to make consumers take a positive externality into account in their demand decision is to
subsidize the purchase of the item
tariff
tax targeted at certain imports, goal is to reduce the number imports to protect domestic producers
tragedy of the commons
the depletion of a common resource due to individually rational but collectively inefficient overconsumption
