micro final exam

absolute advantage

a firm has absolute advantage if it can produce more of a good than the other firm

why is a budget constraint linear + downward sloping

linear because an individual's income + prices of the things they're buying don't change regardless of quantity you buy downward sloping due to constraints -- we can't have infinite consumption due to scarcity

prices do not cause shifts....

prices emerge in equilibrium from demand and supply, they do not determine demand and supply. prices are determined by demand + supply.

every input to production is paid

roughly their marginal product

elasticity

shape of supply + demand curve

cross-price elasticity of demand

measures how the quantity demanded of one good changes as the price of another good changes complements = negative substitutes = positive

formula for how much govt spends on a subsidy

(subsidy) * (new market equilibrium quantity)

A country will import if ...

If Pworld is lower than P*, the country will import.

which points around/on the PPF are inefficient/efficient?

Points located inside the PPF are inefficient and undesirable; it's better to produce on the line so you maximize both products Points located on the PPF are efficient Points outside the PPF are unattainable but desirable

factors affecting supply

Price of Inputs Production Technology Number of Producers Expectations of Producers

Factors affecting demand

Price of a related good Income of consumers Taste/number/expectations of consumers

Why might marginal cost initially decrease with the quantity of output?

Specialization and Learning This is due to both specialization and learning. Because of the benefits of specialization, each output costs less, so at first the marginal cost curve slopes downward; however, once specialization ceases, the law of diminishing marginal product causes the Marginal Cost curve to be upward sloping. Learning by doing also causes the marginal cost curve to initially slope downward because there's an increased productivity learning curve: the more workers produce, the more they learn and the more productive they are. Eventually, they reach a steady state of knowledge and this is no longer affecting productivity.

The fact that AR = P in a competitive market is true because:

TR = P*Q To find an average, you must divide total by quantity. Average has nothing to do with marginal (which you find by taking a derivative), therefore, A & B are incorrect. Since you divide total by quantity to find average, Average Revenue is equal to Total Revenue divided by Quantity. A version of this equation is seen in III (TR = Price * Quantity) and so TR/Quantity equals Price (the Quantity in the numerator cancels out with the Quantity in the denominator) so AR = Price. Since III is the one that has this equation TR = Price * Quantity, it is the correct answer.

The fact that MR = P in a competitive market is true because:

TR = Price * Quantity Small firms → firm Q unrelated to P To find a marginal, you must take a derivative. Marginal revenue, therefore, is the derivative of Total Revenue, so we will need the equation of TR (Price * Quantity) in order to take the derivative of TR. This is III in the list of statements. The derivative of TR is price, since price is a constant in perfect competition regardless of quantity (all firms are price takers in this market). This is IV, small firms → firm Q unrelated to P. Therefore, MR = Price, and to get this, we needed III and IV. The answer is thus C.

total surplus

TS = CS + PS TS = (Buyer's Valuations - Price) + (Price - Seller's Cost) TS = Buyer's Valuation - Seller's Cost Therefore Total Surplus DOES NOT depend on price

govt tariff revenue formula

Tariff revenue is the area of a rectangle: b*h; our base is the quantity of imports/exports and our height is the amount of the tariff. Tariff revenue = (Q) * (tariff)

comparative advantage

a firm has comparative advantage in a good if it has a lower opportunity cost in producing the good than the other firm's opportunity cost -- not possible for 1 firm to have comparative advantage in both goods for 2-country 2-good model

Why is marginal cost generally increasing with quantity of output?

because marginal product is generally decreasing with quantity of inputs describing the law of diminishing marginal product: marginal cost of each extra unit of output is increasing because we need more and more inputs for each output because each input is producing less and less because of the Law of DMP, which is true because of congestion on the fixed inputs.

what is the law of supply and demand?

The law of supply and demand says that market forces will tend to reduce the price when there is a surplus (i.e., when the quantity supplied outweighs the quantity demanded), and will increase the price when there is a shortage (i.e., when the quantity supplied is outweighed by the quantity demanded). The law says the price will reach equilibrium when the quantity demanded equals the quantity supplied. The price and quantities that emerge in markets tend to be where Demand intersects Supply

true or false: In a 2-country 2-good exchange model, it is possible for one country to have absolute advantage over the other country in both goods.

True

true or false: Suppose it takes a Chinese worker 5 hours to produce a pot, and 20 hours to produce a tablecloth. Suppose that it takes an American worker 5 hours to produce a pot and 10 hours to produce a tablecloth. It will be worthwhile for China to produce extra pots and export them to the United States in return for U.S. tablecloths.

True

true or false: A shortage will occur at any price below equilibrium price and a surplus will occur at any price above equilibrium price.

True -- If a shortage exists, for the market to reach equilibrium we expect buyers to offer higher prices (Shortage causes upward pressure on prices) -- If a surplus exists, for the market to reach equilibrium we expect sellers to offer lower prices (Surplus causes downward pressure on prices)

DWL

decrease in total surplus caused by the policy (taxes, subsidies, price control) DWL = total surplus of missing transactions b/c changing price from equilibrium price lowers quantity of transactions since equilibrium = max # transactions

demand curve vs demand schedule

demand curve: graph that shows entire relationship between price of good + quantity of good demanded demand schedule: table that shows this relationship with the detailed #s

Production Possibilities Frontier (PPF)

economic model that shows the tradeoffs society faces in how to use scarce resources -- on or below the line, we can produce (we have the resources) -- above it is where the scarcity of resources comes into play -- lines flatten out at both ends because it would be inefficient to produce one more than the other

what do economists like to use to change the market equilibrium

economists like taxes/subsidies NOT price controls. price controls aren't government's first choice when wanting to change equilibrium bc they affect no shortage/surplus condition -- produce a lot of losers; when we have price controls, we eliminate price signals which is bad instead, economists like taxes bc they keep constant Qd=Qs and only change 2nd condition PD=PS

price controls

either price ceiling or price floor; government law that says you can't have prices above (ceiling) or below (floor) certain price price controls aren't government's first choice when wanting to change equilibrium bc they affect no shortage/surplus condition -- produce a lot of losers; when we have price controls, we eliminate price signals which is bad

true or false: A markup of price over marginal cost is inconsistent with free entry and zero profit.

false

true or false: When a firm in a monopolistically competitive market earns zero economic profit, its price must equal marginal cost.

false

true or false: When a firm operates with excess capacity in the long-run, it must be in a monopolistically competitive market.

false

w/ same shock to economy, what happens to prices/quantity depends on the shape (elasticity) of other curve

for example if supply is very steep, prices will change more; if supply is very shallow, quantities will change more inelastic supply curve + demand shift = only price changes a lot elastic supply curve + demand shift = only quantity changes a lot

inelastic versus elastic

inelastic: demand changes little when price fluctuates ex) Necessities -- insensitive to change in price elastic: demand changes a lot when price fluctuates ex) Luxuries -- very sensitive to change in price Availability of close substitutes = elastic

macro vs micro

macro is study of factors that affect the entire economy, micro is interactions between individuals in smaller markets

when do market forces exist

market forces exist when there are transactions left on the table that can only take place at different price than current price

price elasticity of demand

measures how much the quantity demanded responds to changes in price change in quantity demanded divided by change in price -- inelastic when elasticity is less than one -- elastic when elasticity is greater than one

price elasticity of supply

measures how much the quantity supplied responds to changes in price - depends on time -- supply is more elastic in the long run than the short run change in quantity supplied divided by change in price -- inelastic when elasticity is less than one -- elastic when elasticity is greater than one

what causes movement along the demand curve vs shift of the demand curve

movement along: price of a good changes, quantity demanded changes shift: quantity demanded/quantity supplied changes

income elasticity of quantity demanded -- what is it when it's positive and what is it when it's negative

negative = inferior goods (higher income lowers quantity demanded) positive = normal goods (higher income raises quantity demanded)

positive versus normative economics

positive economics: can make accurate prediction normative economics: fuzzier, not exactly sure what happens when we're out of equilibrium, when there's price controls, etc

quantity of transactions is always lower of...

quantity of transactions is always lower of quantity demanded or quantity supplied @ given price bc can't force ppl to transact -- if @ any different price other than equilibrium, TS must be lower @ the non-equilibrium price bc quantity of transactions will be lower bc either quantity demanded or supplied will be lower ---- lose total surplus associated with those transactions: this is DWL

upper bound on price

the opportunity cost of the buyer

lower bound on price

the opportunity cost of the seller

Market Quantity Demanded

the sum of the quantities of a good that buyers are willing to purchase at a given price - know how to find this (it's in the review for midterm 1)

Market Quantity Supplied

the sum of the quantities supplied by all sellers at each price - know how to find this (it's in the review for midterm 1)

what does the supply curve represent?

the supply curve represents the maximum quantity that sellers are willing to sell at any given price. the supply curve represents the minimum price that sellers are willing to accept for a good at any given quantity.

Two goods can be perfect complements if and only if

their indifference curves have right angles The indifference curves of two perfect complements cannot be straight because both goods must be consumed together -- increasing the quantity of one good without increasing the quantity of the other good does not make the individual any better off --, so the perfect complements' indifference curves must be right angles or "L shaped."

market consumer surplus

total of all consumer surpluses added up; social wellbeing of consumers in the marketplace - if ppl have very different budgets/incomes market consumer surplus isn't relevant bc only talking about the 2 richest people - Only when ppl have relatively similar budgets is it relevant to generalize the normative decisions about what people like

true or false: A profit-maximizing firm in a monopolistically competitive market always prices its product at some markup over marginal cost.

true

true or false: Excess capacity (producing a lower quantity than that which equates marginal cost and ATC) characterizes firms in monopolistically competitive markets in situations of long-run equilibrium.

true

true or false: For a country producing two goods, the opportunity cost of one good will be the reciprocal of the opportunity cost of the other good.

true

true or false: In a simple circular-flow diagram, the two types of markets in which households and firms interact are the markets for goods and services and the markets for factors of production.

true

true or false: The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income.

true

true or false: When a firm in a monopolistically competitive market earns positive economic profit, then its price must be greater than average total cost.

true

true or false: When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium, marginal cost at the profit-maximizing quantity must lie below average total cost at that quantity.

true

true or false: club goods are often natural monopolies & have low marginal costs

true

comparative advantage in producing a good means what for relationship between world price and domestic price?

comparative advantage in producing good means world price is above domestic price so EXPORTS no comparative advantage means world price is below domestic price so IMPORTS

in terms of x and y goods, if the budget constraint is steeper that means... if the budget constraint is flatter that means...

if the BC is steeper that means the x-good is relatively expensive and the y good is relatively cheaper if the BC is flatter that means the x-good is relatively cheaper and the y-good is relatively expensive

why is a tariff not a tax

tariffs only directly affect international sellers (so no tax wedge), while a sales tax directly affects everyone

2 features of model of choice

1) ppl face constraints (Scarcity exists) + this helps determine what they'll do -- binds us to feasible options 2) preferences -- what we actually choose subject to these constraints Model of Constraints is based on easy assumptions, but w/ preferences, there is infinite ways to model -- but almost any of those models lead to same conclusion of Law of Demand ** Model of Constraints drives law of demand -- the optimal consumption of x increases as price decreases -- only exception to this is wage/leisure, usually income effect causes counterintuitive effects

True or False: If a tax is imposed on the buyers of a product, the tax burden (or tax incidence) will fall entirely on the buyers.

False

True or False: When demand is inelastic, a decrease in price increases total revenue earned by a firm facing that demand curve.

False

true or false: A positive externality of production involves an increase in social cost above and beyond private cost.

False

If a quota and a tariff end up producing the same number of deadweight losses and revenues...

If a quota and a tariff end up producing the same number of deadweight losses and revenues, they must have both had the same # of imports. If you set up a quota with exact # of quota imports equal to new imports with tariff, everything (DWL, gains from trade, etc) will be exactly the same as what we found for the tariff

Marginal profit (for labor)

Marginal Profit = MR - MC Marginal Profit = VMPL - Wages

what is the law of supply?

The law of supply says that supply curves slope upward; this means that at higher prices, sellers supply more goods.

opportunity cost

value of what you give up in order to get something else - slope of the line

A country will export if...

If Pworld is higher than P*, the country will export.

since most ppl get paid their marginal product, most ppl are in equilibrium with their pay. however there are 2 ways we can be out of equilibrium -- explain them

1) labor market discrimination ex) gender wage gap bc women have to take time off for pregnancy, African Americans not being called back for interviews while whites are, etc 2) govt policies that intervene in the mkt- monopocity: monopoly on buyers of labor's side; w/ monopocities, increase in minimum wage causes redistribution of profit but quantity hired doesn't really change

Classic Model of Consumer Choice -- 2 principles + 4 rules that satisfy these 2 principles

2 Principles: 1. More of both goods is always better 2. The more you have of 1 good, the less you like that good relative to the other. 4 Rules of Indifference Curves to Satisfy these 2 Principles: 1. Further out IC is happier than a further in one (Principle 1) 2. ICs are downward sloping (Principle 1) 3. ICs are bowed inward (Principle 2) 4. ICs can't cross

normal good vs inferior goods

A normal good is a good that sees an increase in demand when a consumer's income increases An inferior good is a good that sees a decrease in demand when a consumer's income increases, such as Ramen noodles.

what does a quota do to the 2 equilibrium conditions

A quota maintains the first equilibrium condition, no shortage or surplus, so we can equate the market demand and market supply equations. However, a quota requires a new supply curve for the new high-cost domestic sellers entering the market. The new supply curve will be QS + Quota. Therefore, the equilibrium will be QD = QS + Quota.

Why do economists believe that the Law of Demand tends to be true?

As the price decreases, buyers who were willing to buy at high prices are still willing to buy at low prices, so you cannot lose buyers as the price decreases. As the price decreases, the price begins to be exceeded by the valuations of buyers with lower valuations, so you might gain buyers. Therefore the quantity of buyers must increase as the price decreases. 1) If you're willing to buy at a high price, you're still willing to buy at a low price 2) Diversity across buyers' valuations

where's the best indifference curve?

Best IC you can possibly reach is one that touches Budget Constraint once Any IC that intersects Budget Constraint more than once must have better/further out IC

elasticity + tax revenue

Elastic: smallest tax revenue and big DWL Inelastic: high tax revenue and small DWL (we therefore want to tax inelastic demand but these are necessities, so there's a tradeoff)

thomas malthus

English economist: Said that population tends to increase at ever-increasing rate, while food supply grows linearly -- worried that we would not have enough for a growing population subsistence requirement per capita: total food output / population What really happened? Malthus was right abt population growth but wrong abt everything else -- specifically, food didn't grow linearly; it actually grew exponentially @ much faster rate than population

Do markets tend towards equilibrium prices and quantities because markets tend to produce the maximum total surplus, or is the causality the other way around?

Other way around -- Markets tend to produce the maximum total surplus because markets tend towards equilibrium prices and quantities.

TR as result of tax

TR = Tax * Quantity of transactions As tax increases, new # of transactions decreases Therefore we get a Laffer curve (hill curve), you can't just keep increasing the tax to infinity & keep getting more and more tax revenue

# of units imported/exported with tariff formula

The number of imports/exports is found as the difference between the quantity demanded at world price + tariff and the quantity supplied at world price + tariff. (QD @ Pworld + tariff) - (QS @ Pworld + tariff)

# of units imported/exported formula

The number of units imported is the difference between the quantity demanded at the world price and the quantity supplied at the world price. QD @ Pw - QS @ Pw

What is true of monopolistic competitors in the long-run?

They produce at a markup price and they produce at Q below the efficient scale

True or False: When a determinant of demand other than price changes, the demand curve shifts.

True

what can potentially ameliorate the Tragedy of the Commons?

Turning the resource into Private Property or Limiting use through permits

income effect

a change in indifference curve with no change in slope

substitution effect

a change in slope due to a change in relative prices

one price model/law of one price

all transactions must take place at same price -- causes some to be left out of market --> causes market forces

slope of budget constraint is determined by? position of BC is determined by?

slope of BC is determined by relative prices position of BC relative to origin is determined by nominal income relative to nominal prices

gains from trade formula

½ (imports/exports) (▵ in price)

deadweight loss due to the tax formula

½ (tax) (Q* - Market Equilibrium Quantity)

formula for DWL due to a tariff

½ (△ QD)(tariff) + ½ (△QS)(tariff) △QD is the difference between quantity demanded at the world price and quantity demanded at world price + tariff △QS is the difference between quantity supplied at the world price and quantity supplied at world price + tariff

VMPL

VMPL is demand curve for labor VMPL = Price times MPL

so what do you have to do to get higher wages?

a low wage is because their VMPL is low -- either MPL is low or P is low. So to get higher wages we need a higher VMPL.Either produce more per hour or produce stuff that has a higher value of MPL (price ppl are willing to pay for your output) - Increase MPL and/or increase P thru: Education, experience, technology, example of other people (peer effects)

DWL varies as we vary elasticity

as demand + supply become more inelastic, DWL decreases. w/ more inelastic curves, demand + supply aren't very responsive to price changes so QT is very close to Qstar so change in quantity isn't big so DWL isn't big. Inelastic: small DWL Elastic: big DWL

change in relative prices means ______________ change in real income means ______________

change in relative prices means change in slope (substitution effect, price effect) change in real income means reaching better IC (income effect)

economic growth + how to increase it

economic growth = growth in economic output per person per capita economic output = economic output / total population How to increase it: Decreasing returns to scale & constant returns to scale don't work, you must do increasing returns to scale -- where we double all our inputs + more than double all our outputs

the importance of growth

every country with high living standards today was poor in 1850; we've had a 15-fold increase in average income relative to 1800; the fraction of ppl living in poverty has fallen dramatically WHY? New technologies from Industrial Revolution Agricultural Revolution -- Can produce more & it's more nutritious Dirty technologies replaced with clean technologies to help us avoid negative externalities

inequality vs poverty

inequality: differences in ppl's experiences in economy ex) inequalities in income, assets, food consumption, etcin a totally equal society, there are no differences in ppl's experiences VERSUS poverty: measures the portion of ppl who have insufficient experiences - poverty rate: the portion of ppl who don't have enough income to buy, at available prices, a basket of goods deemed necessary for human flourishing - to measure poverty, don't measure income but measure consumption --> are they consuming more or less than the basket of goods? US is increasingly becoming a high inequality/low poverty society

knowledge and growth

larger population does increase knowledge production b/c knowledge is nonrival, also bc more ppl means more potential interactions which can generate knowledge Brain gain doesn't cause big increase in knowledge production bc too many constraints on knowledge production Economics is about 2 forces: rivalrous competition and fruitful interaction CRUCIAL POINT: As the # of ppl increases, the # of potential interactions between people increases faster than the # of ppl Don't worry about our own share of the pie, worry about making the overall pie bigger

in labor markets, law of demand is implied by..

law of demand is implied by the law of diminishing marginal product diminishing marginal product implies diminishing marginal product of labor

nominal prices vs relative prices

nominal prices: income in dollars/some sort of unit relative prices: ratio of nominal prices If slope of budget constraint is the same, ratio of nominal prices must have stayed the same. If slope of budget constraint changes, ratio of nominal prices changed -- price of only 1 good changed or they changed disproportionately ex) if there's decrease in nominal price of the x-good, the 2nd budget constraint would have a farther out x-intercept. But the nominal price of y stayed constant, since income stayed constant. If income had doubled, nominal price of y would double. The relative price of both goods did change bc slope changed. w/ relative prices it's easy to see breakage in law of demand; more rare for nominal price changes

what is a quota + what happens to supply curve

quantity restriction on # of goods allowed to be sold -- has finite # of certificates for importing Domestic supply curve (upper section) shifts right by the amount of the quota -- therefore we have a new supply curve: Qs + Quota

what does a sales tax do to the 2 equilibrium conditions

A sales tax maintains the first equilibrium condition, no shortage or surplus, so we can equate the market demand and market supply equations. However, it alters the second equilibrium condition, buyers pay what sellers receive, to buyers pay what sellers receive plus tax (PD = PS + tax).

what does a subsidy do to the 2 equilibrium conditions

A subsidy maintains the first equilibrium condition, no shortage or surplus, so we can equate the market demand and market supply equations. However, it alters the second equilibrium condition, sellers receive what buyers pay, to sellers receive what buyers pay plus subsidy.

What is the longest list of equalities that is always true for profit maximizing firms in a competitive market in long-run equilibrium:

ATC = P = AR = MR = MC As explained in #1, Price equals MC, AR, and MR in a competitive market. Additionally, in the long run, there is firm entry and exit that drives economic profit to zero. If profits are not equal to zero, firms will either leave or enter the industry until supply is adjusted to drive profits back to zero; once it is zero, there will be a long-run equilibrium. Therefore, the long-run price will be the price such that the profit-maximizing quantity will leave the firm with 0 profits. If the price is higher than the minimum of the ATC, the firm will be able to choose a quantity such that the price is higher than the minimum of the ATC, thus giving the firm profits. Therefore, if the long-run price must give them firm 0 profits at the profit maximizing quantity, the long-run price must be at the minimum of the ATC. Price, therefore, must equal ATC in this type of market's long-run equilibrium. Thus, the answer is D.

at what quantity is Average Total Cost approximately minimized?

ATC is minimized at the efficient scale (Qefficient), the quantity where the marginal cost curve crosses the ATC curve. Therefore, we can set Marginal Cost (the derivative of Total Cost) equal to Average Total Cost and determine the Qefficient quantity.

why is average fixed cost downward sloping

An average is calculated by dividing a total by the quantity, so Average Fixed Cost is calculated by dividing the total fixed cost by quantity of output. As output increases, the fixed cost (a constant) is spread over more units, so average fixed cost declines, initially quickly and then more slowly. Therefore average fixed cost decreases with the rise in quantity and AFC is a downward sloping curve.

why is average variable cost curve U-shaped

An average is calculated by dividing a total by the quantity, so Average Variable Cost equals the variable cost divided by the quantity of output. Marginal cost rises as the quantity of output produced increases, since more and more inputs are needed for each output because each input is producing less due to the Law of Diminishing Marginal Product, which is true because of congestion on the fixed inputs. Therefore, average variable cost usually rises as output increases because of diminishing marginal product. Therefore, the AVC curve is U-Shaped: first it is downward sloping, it then reaches a minimum point, and then it rises again as it increases at an ever-increasing rate. AVC is increasing because every time you double denominator, you more than double the numerator bc variable cost is increasing at an ever-increasing rate due to Law of DMP

Why do economists believe that the Law of Supply tends to be true?

As the price increases, sellers who were willing to sell at low prices are still willing to sell at high prices, so you cannot lose sellers as the price increases. As the price increases, the price begins to exceed the valuations of sellers with higher valuations, so you might gain sellers. Therefore the quantity of sellers must increase as the price increases. 1) If you're willing to sell at a low price, you're willing to sell at a high price 2) Diversity in sellers' asking prices (valuations)

why is ATC curve U-shaped?

Average total cost is the sum of average fixed cost and average variable cost, so the ATC curve reflects the shapes of both average fixed cost and average variable cost. Therefore, the ATC curve is U-shaped: initially, average total cost is decreasing because average fixed cost is declining rapidly; eventually, as average variable cost starts increasing rapidly, average total cost starts rising. This initial decrease and then rise generates the U-shaped curve.

Why do economists believe that the Law of Supply and Demand tends to be true?

Economists believe these market forces are created by potential traders who have an incentive to trade at a different price, but who cannot trade at the current price.

Which of the following are true? I. monopolist deadweight loss > duopoly deadweight loss > triopoly deadweight loss II. monopolists always produce at the efficient scale III. large fixed costs tend to lead to monopolies

I and III

It takes Russell 3 hours to produce a bushel of corn and 1 hour to wash and polish a car. It takes Wilma 3 hours to produce a bushel of corn and 2 hours to wash and polish a car. Wilma and Russell cannot gain from specialization and trade, since it takes each of them 3 hours to produce 1 bushel of corn.

False

true or false: In a 2-country 2-good exchange model, it is possible for one country to have comparative advantage over the other country in both goods.

False

true or false: Total surplus in a market is consumer surplus minus producer surplus.

False

The fact that smart firms produce at quantities such that MC = P in a competitive market is true because:

Firms maximize profits by setting Mπ = 0 Mπ = MR - MC TR = Price * Quantity Small firms → firm Q unrelated to P A profit-seeking firm keeps expanding production as long as MR > MC. But at the quantity where MR = MC, the firm has achieved the highest possible level of economic profits. Further expanding production when MR < MC only causes losses. Therefore, the profit-maximizing choice for a perfectly competitive firm is where Marginal Revenue = Marginal Cost (i.e. Mπ = 0 → MR = MC which is I and II). Additionally, in a perfectly competitive firm, since Marginal Revenue is the derivative of Total Revenue (Price * Quantity), Marginal Revenue = Price since Price is a constant and is the same regardless of quantity (this is using III and IV). Using all of this, smart firms produce at quantities such that MR = MC = P. Thus the answer is B.

how can a country consume beyond its Production Possibilities Frontier?

Gains from trade If you invest it, PPF shifts out, causing economic growth (this happens with specialization, exchange, investments of gains from trade)

The fact that in the long-run the price settles to a level at which smart firms make zero profits is true because

In the long-run, firms freely enter or exit the market In the long-run, the price settles to a level at which smart firms make zero profits because of free entry and free exit. For any price above the bottom of the ATC, there are many quantities where average revenue exceeds average cost (so average profits are positive) and firms want to enter. For any price below the bottom of the ATC, average revenue is exceeded by average cost (so average profits are negative) and firms want to exit. The long-run equilibrium with no entry or exit is the price exactly at the bottom of the ATC, and this is the only price where maximizing profits means zero economic profit. Smart firms will settle to this level at which they make zero economic profit, and it's due to free entry and exit of many firms, which is explained in V (In the long-run, firms freely enter or exit the market). Therefore, the answer is A.

why is the marginal cost curve increasing? why does it intersect at the minimum of the ATC?

Marginal cost is the derivative of Total Cost, so it's the slope of the Total Cost Curve. Due to the law of diminishing marginal product, Total Cost is increasing at an increasing rate, so the MC curve is increasing. MC also intersects at the minimum of the ATC because the only point the ATC is constant is at its minimum -- when MC is below ATC, the ATC is being brought down, and when MC is above ATC, the ATC is being brought up, so the only point the ATC is constant is when ATC = MC. This takes place at the bottom of the ATC.

Is it possible for both goods to be inferior in a 2 good decision model?

No -- It is not possible for both goods to be inferior in a 2 good decision model. For example, if you theoretically make the x-good very inferior by moving the second budget constraint far left on the x-axis, the y-good must be very normal due to the nature of the graph. Conversely, if you make the y-good very inferior by moving the second budget constraint far down on the y-axis, the x-good must be very normal due to the nature of the graph. Therefore, it's impossible for both to be inferior

continuous double auction model

No set price -- everyone transacts at their own price; the equilibrium transaction is likely to be last -- tend to converge to transactions @ equilibrium price

What is the longest list of equalities that is always true for profit maximizing firms in a competitive market, regardless of whether the market is in long-run equilibrium:

P = AR = MR = MC Price equals AR because AR is Total Revenue/Quantity (to find an average, you divide by quantity). Total Revenue/Quantity equals Price (the Quantity in the numerator cancels out with the Quantity in the denominator) so Price = AR. P = MR because Marginal Revenue is the derivative of Total Revenue (to find a marginal, you take a derivative). The equation of TR is Price * Quantity, so the derivative of TR is price, since price is a constant in perfect competition regardless of quantity. Therefore, Price = MR. Finally, Price = Marginal Cost because the goal of a profit-maximizing firm in a perfectly competitive market is to maximize profit by setting marginal profit equal to zero. That means Marginal Revenue generated must be equal to Marginal Cost. Since Marginal Profit = MR - MC, and Marginal Profit must equal 0, firms must charge the Price equal to MC. Therefore P=MC. Therefore P = AR = MR = MC and the answer is B.

what is the law of demand?

The law of demand says that demand curves slope downward; this means that at lower prices, buyers demand more goods. Quantity demanded of a good falls when its price rises