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Econ test 2
| Question | Answer |
|---|---|
| what is a Negative externality, how could this be eliminated | private cost (supply curve) is less than social cost, could be eliminated by taxing |
| Positive externality, how could this be helped | Private value (demand curve) is less than the social value, could be helped by subsidizing the product |
| Why are efficiency taxes preferred to regulatory policies as methods remedy externalities? | Efficiency taxes allow markets to coordinate optimal resource allocation. |
| In a market economy, government intervention | may improve market outcomes in the presence of externalities. |
| In the absence of externalities, the "invisible hand" leads a market to maximize | total benefit to society from that market |
| The term market failure refers to | a market that fails to allocate resources efficiently |
| Market failure can be caused by | externalities |
| An externality is an example of | a market failure |
| When externalities exist, buyers and sellers | neglect the external effects of their actions, and the market equilibrium is not efficient |
| Will a market tend to undersupply products that produce negative externalities without government intervention | No |
| describe equilibrium quantity and price with the private cost and social cost, and private value and social value | Private cost is the supply curve and private value is the demand curve |
| Government policies may improve the market's allocation of resources when | positive and negative externalities are present |
| A positive externality is an example of | a market failure |
| If the world's price of a product is higher than a country's domestic price without international trade then | has a comparative advantage in textiles. |
| Assume, for the U.S., that the domestic price of beef without international trade is lower than the world price of beef. This suggests that, in the production of beef | the U.S. has a comparative advantage over other countries and the U.S. will export beef |
| When the nation of waffle allows trade and becomes an importer of software residents of Waffle who produce software become ______off; residents of Waffle who buy software become _____ off; and the economic well-being of Waffle ______ | residents of Waffle who produce software become worse off; residents of Waffle who buy software become better off; and the economic well-being of Waffle rises |
| When a country allows trade and becomes an exporter of a good | the gains of the domestic producers of the good exceed the losses of the domestic consumers of the good |
| to measure an export after trade one should | subtract the quantity of the point where the demand curve meets the world price and the quantity at the point which the supply curve meets the world price. |
| In the absence of trade, total surplus would be equal | the area under the demand curve and above the supply curve |
| When a country had comparative advantage and trades this causes | producers of wool become better off and consumers of wool become worse off. |
| International trade will cause | domestic consumers to pay more for the product |
| A price ceiling is binding if | it is set below equilibrium |
| A price floor is binding if | it is set above equilibrium |
| Marginal product of a 3rd (for example) worker | subtract the output associated with the 2nd worker from the output associated with the 3rd worker |
| Suppose that Alyson’s pet sitting service has a fixed cost of $50/month for her cell phone. Each worker costs Alyson $60/day. What is the shape of Alyson’s total cost curve as output increases from 0 and 45 (before diminishing marginal benefit) | Total cost increases but gets flatter |
| Suppose that Alyson’s pet sitting service has a fixed cost of $50/month for her cell phone. Each worker costs Alyson $60/day. What is the shape of Alyson’s total cost curve as output increases from 45 to 70? (after diminishing marginal benefit) | Total cost increases and gets steeper |
| The marginal product of labor is equal to the | increase in output obtained from a one unit increase in labor |
| To find total cost of production | multiply labor $ by number of workers plus cost of production divided by the # of outputs |
| The efficient scale of the firm is the quantity of output that | minimizes average total cost |
| If the government removes a binding price floor from a market, then the price set by sellers will | decrease and the quantity sold in the market will increase. |
| If the government removes a binding price floor from a market, then the price paid by buyers will | decrease and the quantity sold in the market will increase. |
| Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling, | the quantity demanded of physicals increases and the quantity supplied of physicals decreases. |
| If a binding price ceiling is imposed on the computer market, then | the quantity of computers demanded will increase. the quantity of computers supplied will decrease. a shortage of computers will develop. |
| In a competitive market free of government regulation, | price adjusts until quantity demanded equals quantity supplied. |
| What is consumer surplus, and how is it measured? | Consumer surplus measures the benefit to buyers of participating in a market. It is the price a buyer would pay minus what they actually paid. Can also be shown as the area under the demand curve and above the price paid. |
| What is the relationship between the demand curve and the willingness to pay? | Because the demand curve shows the maximum amount buyers are willing to pay for a given market quantity, the price given by the demand curve represents the willingness to pay of the marginal buyer |
| Other things equal, what happens to consumer surplus if the price of a good falls? Why? | When price decreases Cs increases because 1. buyers are paying less 2. numbers of buyers increase |
| What is producer surplus, and how is it measured? | Producer surplus measures the benefit to sellers, and is measured by the amount a seller receives minus the cost of production, shown as the area above the supply curve and below market price |
| Other things equal, what happens to producer surplus when the price of a good rises? | When price rises Ps increases because 1. the price sellers receive is higher, 2. the number of sellers increase |
| 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. |
| Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price for widgets to $6, what would happen to Ps and Cs | any possible increase in producer surplus would be smaller than the loss of consumer surplus. |
| Suppose that the equilibrium price in the market for widgets is $5. If a law reduced the maximum legal price for widgets to $4, | any possible increase in consumer surplus would be smaller than the loss of producer surplus |
| he Coase theorem suggests that efficient solutions to externalities can be determined through bargaining. Under what circumstances will private bargaining fail to produce a solution? | 1. one may decide not to bargain 2. parties may not believe that agreement will be enforced 3. party(ies) may try and hold out for a better deal 4. too many parties bargaining will not work. |
| Midpoint formula | Ed=(Q1-Q2)/((Q1+Q2)/2) divided by (P1-P2)/((P1+P2)/2) |
| You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles, yours would | be positive, and your roommate's would be negative. |
| The mayor proposes to collect half the tax from workers and half the tax from firms. The mayor will be able to successfully divide the burden of the tax equally if the | demand for labor and supply of labor are equally elastic |
| Jane decides to open her own business and earns $50,000 in accounting profit the first year. When deciding to open her own business, she turned down three job offers with annual salaries of $30,000, $40,000, and $45,000. What is Jane's economic profit? | $5,000 |
| What is the marginal product of the second worker? | the output of the 2nd worker minus the output of the 1st worker |
| finding the diminishing marginal productivity with the addition of a certain worker, | find with which worker marginal output decreases |
| Let L represent the number of workers hired by a firm and let Q represent that firm's quantity of output. Assume two points on the firm's production function are (L = 5, Q = 125) and (L = 6, Q = 162). Then the marginal p roduct of the 6th worker is | 37 units of output. |
| only input is labor, Suppose that when the firm hires 4 workers, the firm produces 50 units. If the fixed cost of production is $4, the VC per unit of labor is $20, and the MP of labor for the 5th unit of labor is 2, find the ATC after 5 workers | $2.00 |
| The efficient scale of the firm is the quantity of output that | minimizes average total cost |
| Even when allowed to collude, firms in an oligopoly may choose to cheat on their agreements with the rest of the cartel. Why? | Individual profits can be increased at the expense of group profits if individuals cheat on the cartel's cooperative agreement. |
| What effect does the number of firms in an oligopoly have on the characteristics of the market? | As the number of firms increases, the equilibrium quantity of goods provided increases and price falls; the market begins to resemble a competitive one |
| What is the profit-maximizing level of production for a group of oligopolistic firms that operate as a cartel? 0 $36 200 $33 400 $30 600 $27 800 $24 1000 $21 1200 $18 1400 $15 1600 $12 1800 $ 9 2000 $ 6 2200 $ 3 2400 $ 0 | 1200 |
| Assume that this market is characterized by a duopoly in which collusive agreements are illegal. What market price and quantity will be associated with a Nash equilibrium? | Q = 1600, P = 12 |
| Describe the source of tension between cooperation and self-interest in a market characterized by oligopoly. Use an example of an actual cartel arrangement to demonstrate why this tension creates instability in cartels | The source of the tension exists because total profits are maximized when oligopolists cooperate on price and quantity by operating as a monopolist. However, individual profits can be gained by individuals cheating on their cooperative agreement |
| A distinguishing feature of an oligopolistic industry is the tension between | cooperation and self interest |
| Lisa and Mark, own wells that produce safe drinking water. Each week Lisa and Mark work together to decide how many gallons of water to pump. marginal cost of water equals zero. Demand is shown in the following table | 0 $120 $0 100 110 11,000 200 100 20,000 300 90 27,000 400 80 32,000 500 70 35,000 600 60 36,000 700 50 35,000 800 40 32,000 900 30 27,000 1,000 20 20,000 1,100 10 11,000 1,200 0 0 |
| If the market for water were perfectly competitive instead of monopolistic, how many gallons of water would be produced and sold? | 1,200 |
| Suppose the town enacts new antitrust laws that prohibit Lisa and Mark from operating as a monopoly. How many gallons of water will be produced and sold once Lisa and Mark reach a Nash equilibrium? | 800 |
| dominant strategy | Confess regardless of the partner's decision |
| a firm’s production function exhibits diminishing marginal product when | the output is increasing in smaller amounts as they add workers |
| 1. Suppose that Harry pays each worker $80 per day and that he charges each customer $20 to have his driveway shoveled. What is the value of the marginal product of labor for the second worker? | 200$ |
| value of the marginal product of the third unit of labor? | subtract the output of the third unit of labor with the second |
| Marginal product of labor for a certain worker | take the output of that worker and multiply by the price charged |
| to find how many workers a company should hire to maximize profit | draw table to show #workers, output, value of output. and value of profit ( value of output minus wage) |
| A firm hires labor up to the point where the value of marginal product = the wage. If the firm pays a wage of $700 per week and the marginal product of labor equals 20 units per week, then the marginal cost of producing an additional unit of output is | $35, 700/20 |
| how do you calculate profit | price times quantity minus the quantity of ATC at its lowest point times the corresponding quantity |
| In which of the following markets is economic profit driven to zero in the long run? a. oligopoly b. monopoly c. monopolistic competition d. cartels | c, Monopolistic competition |
| What condition is characteristic of a monopolistically competitive firm in long-run equilibrium? | P > MC and demand = ATC |
| A monopoly is an inefficient way to produce a product because | it produces a smaller level of output than would be produced in a competitive market |
| to maximize surplus | sell at equilibrium of mc and demand |
| What is the marginal productivity of the second worker? what is the total productivity of three workers? | 10, 30 |
| If Lisa and Mark operate as a profit-maximizing monopoly in the market for water,what price will they charge? | c. $60 |
| Suppose the town enacts new antitrust laws that prohibit Lisa and Mark from operating as a monopoly. What will be the price of water once Lisa and Mark reach a Nash equilibrium? | $40 |
| Suppose that Harry pays each worker $80 per day and that he charges each customer $20 to have his driveway shoveled. What is the value of the marginal product of labor for the third worker? | 160 |
| If price elasticity of demand is -0.5, is it inelastic or elastic and what happens to price vs quantity when price is changed | inelastic, a 1% decrease in price leads to a 0.5% increase in quantity demanded |
| In studying oligopolistic markets, economists assume that | each oligopolist cares only about its own profit |
| Suppose that Sonny and Cher are duopolists In January, they agree to work together as a monopoly By February, each singer is considering breaking the agreement. What would you expect to happen next? | Sonny and Cher will each break the agreement. The new equilibrium quantity of songs will increase, and the new equilibrium price will decrease. |
| The first worker he hires can shovel 12 drives/day.Harry hires two workers, they can shovel 22 drives/ day. Harry hires a third worker, he shovels eight driveways in one day |
Created by:
Katherine.Reeves