Economics - Micro Flashcards
Who wrote the Wealth of Nations?
Adam Smith
(considered the Father of Economics)
Economics is Most concerned with the tension between?
wants and resources
Scarcity implies
trade-offs
Opportunity cost could be Best described as the?
value of the next best alternative
Which of the following costs are least likely to be considered part of the cost of college?
tuition, room & board, university fees, foregone labor income, books
room & board
If consumers select the action that produces the greatest benefit, they are said to be
rational
Gains from trade arise most directly from different?
opportunity costs
Sophie can either babysit for $10, mow the lawn for $15, or drive her brother to soccer practice for $12. What is Sophie’s opportunity cost if she chooses to mow the lawn?
$10
The number of items in an average supermarket is Closest to?
30,000
What must be true if two consumers voluntarily trade with each other?
The benefits outweigh the costs for both people
Jasmine went to a movie with her friends instead of taking a shift at work. Which economic concept does this situation involve?
trade-offs
Benjamin received a few tickets to a baseball game. What is his opportunity cost for going to the game?
the time not spent doing something else
Langston is experienced in catching fish, while Brandon bakes exceptional bread. They decide to specialize. Which economic concept does this situation involve?
gains from trade
People who engage in mutually beneficial trade are least likely to have different?
wants
(they will trade because they do have different abilities, interests, resources, and opportunity costs)
Economic analysis least relies on:
theory, speculation, description, observation, measurement
speculation
Economic models could be best described as?
simplistic
Positive economics is most concerned with?
identifying cause-and-effect relationships
Unlike positive economics, normative economics combines economic analysis with?
value judgments
Pareto efficiency requires that
there is no way to improve at least one person’s well-being without reducing another person’s well-being (only way to do it is a redistribution of wealth)
Leticia, Jose, and Maya are sharing a pizza with 9 slices. Which of the following arrangements is NOT Pareto efficient?
Jose eats 2 slices, while Leticia and Maya eat 3 each
Leticia eats all 9 slices
Leticia, Jose, and Maya each eat 3 slices
Maya eats 5 slices, while Jose and Leticia each 2 each
Leticia eats 6 slices and Jose eats 3 slices
Jose eats 2 slices, while Leticia and Maya eat 3 each
Which branch of economics can we use to determine which distribution of goods is best?
Normative economics
Microeconomics is most concerned with?
individual behavior
What would a macroeconomist most likely study?
price of gasoline, gross domestic product, income distribution, municipal regulations, world trade
gross domestic product
Micro and macro economics are most similar in their
assumptions about human behavior
A university has $100,000 in scholarship funds. Which situation is Pareto efficient?
One student receives 40k, another 30k and another 20k
Four students receive 20k
One student receives 40k and two students each get 25k
One student receives 100k
Ten students receive 5k each
One student receives 100k
Which of the following situations would a microeconomist study?
Nike and Adidas competing for customers
Performance of the S&P 500
Monthly readings of the Consumer Price Index
Changes in potential GDP
U.S. trade deficit with China
Nike and Adidas competing for customers
Of what nationality was Vilfredo Pareto?
Italian
(Pareto efficient is named after him)
What is the central topic of microeconomics?
the interaction of supply and demand
A market consists of all
buyers and sellers of a particular good
Which of the following characteristics is NOT present in a perfectly competitive market?
A large number of sellers
Buyers are well informed about the market price
Sellers have market power
No single buyer can influence the price
The good is standardized
Sellers have market power
The best example of a perfectly competitive market is the market for?
Gasoline, cereal, tennis shoes, electricity, cell phones
Gasoline
What is the law of demand?
Quantity demanded falls as a good’s price rises
To which economic concept is the law of demand most directly related?
opportunity cost, rationality, gains from trade, scarcity, Pareto efficiency
opportunity cost
(as price of a good rises, the opportunity cost of consuming that good increases as well)
The table that shows the quantity demanded at each price is called the?
demand schedule
How do we obtain the market demand curve?
adding individual demand curves horizontally
Goods for which quantity demanded falls as income rises are called?
inferior goods
(hot dogs are an inferior good, brats are not; spam is an inferior good, good quality tuna is not)
If the decline in the price of one good causes a decrease in quantity demanded of another good, these goods are considered?
substitute goods
(Great value potato chips is a substitute for Lays potato chips - If the price of Lays potato chips decreases (demand for them will increase), the demand for great value will decrease - because it is a substitute good)
Which of the following pairs of goods are substitutes?
pencils and notebooks
tea and coffee
automobile insurance and cars
movies and popcorn
peanut butter and jelly
tea and coffee
Suppose Steve expects the price of gasoline to increase next month. What can we say about his demand curve today?
It shifts to the right
All of the following would be considered inferior goods Except?
instant ramen, bologna, bus rides, electronics, fast food
Electronics
Changes in all of the following factors would cause the demand curve to shift Except?
price of related goods, tastes, expectations, a good’s own price, income of buyers
Good’s own price
(change in a price of a good causes a movement on the demand curve)
If the price of Coke increases, it is Most likely that the
demand curve for juice shifts to the right
What is the law of supply
Quantity supplied increases as price increases
(Price & quantity move in the same direction for law of supply
Suppliers will stop supplying a good when?
the opportunity cost exceeds the price
How do we obtain the market supply curve?
Adding individual supply curves horizontally
Changes in all of the following factors cause the supply curve to shift Except?
technology, input prices, a good’s price, expectations, number of sellers
A good’s price
(change in the price of a good will cause a movement on the supply curve)
What can be considered inputs costs for gasoline?
real estate costs for the land a gas station is on, labor costs for all the workers, price the gas station pays its suppliers, utilities to operate the station
What are input costs?
anything that goes into making a good/product
The x and y axes of a supply curve, respectively show?
quantity supplied and price
How does the market for calculators change when the price of processor chips, an input, increases?
Quantity supplied decreases
How does the market for cell phones change when a new technology makes production more efficient?
Quantity supplied increases
If suppliers of gasoline expect prices to rise in the future, they are most likely to?
Reduce quantity supplied today
A situation where the quantity supplied of cell phones would NOT increase?
Apple, a major cell phone supplier, decides to close a production facility (quantity supplied will decrease in this situation)
In which of the following scenarios does the supply curve for wine shift to the left?
Price of grapes increases
Price of wine increases
A wine producer develops a new technology to squeeze grapes more efficiently
A wine producer expects the price of wine to decrease in the future
A new vineyard starts producing wine
Price of grapes increases
What type of relationship exists between quantity supplied and input prices?
negative (or opposite)
Quantity supplied refers to the amount of a good?
produced by sellers
Which of the following factors affect both quantity demanded and quantity supplied?
Expectations, technology, prices of related goods, tastes, input prices
Expectations
What happens to the market for football tickets if their price increases?
Quantity supplied increases
The market equilibrium occurs where?
Supply and demand intersect
Suppose the equilibrium price of apples is $4. If the current price of apples is $5, we could most confidently conclude that?
quantity supplied exceeds quantity demanded (this is also known as excess supply)
How would a supplier most likely react in a situation where the current market price is above the equilibrium price?
The supplier would lower its price
Shortages are most associated with?
Excess demand (prices are below equilibrium)
Suppose the equilibrium price of Oreos is $2.50. At which of the following prices would we most likely see excess demand?
$2.50, $2, $5, $2.75, $3.50
$2
Statements that can be used to describe market equilibrium
It results in a stable position.
The market has an automatic tendency to gravitate toward it.
It is the point where the market settles
It is a unique point on a diagram
Suppose the current quantity supplied of grapes is 500. At what level of quantity demanded would sellers have an incentive to lower prices?
600, 1,000, 500, 550, 450
450
Suppose that at the current price of avocados of $2, quantity supplied is 9,000 and quantity demanded is 8,500. The equilibrium price of avocados is most likely?
$1.50, $3, $0.50, $2.50, $2
$1.50
(for the current situation there is a slight excess supply - we can conclude that the equilibrium price is slightly below the current market price)
Suppose the inverse demand function is represented by P = 45 -5Q and the inverse supply function is represented by P = 6 +3Q. What is the equilibrium price?
5, 10, 15, 20, 8
20
(set the two equations equal to each other - then plug the number into either one of the equations to solve)
What is the equilibrium quantity if inverse demand is given by P= 74 - 4Q and inverse supply is given by P = 14 + 6Q?
6, 8, 32, 50, 15
6
(set the two equations equal to each other - then plug the number into either one of the equations to solve)
Suppose the inverse demand function is P = 10 - Q and the inverse supply function is P = 4 + 2Q. At what price would excess demand equal 3?
4, 10, 2, 8, 6
6
(given the functions - remember to set them equal to each other - at a market price of 6, quantity demanded equals 4 and quantity supplied equals 1 - resulting in excess demand of 3)
At how many points do the demand and supply curve intersect?
One
Suppose the inverse demand function is P = 20 - Q and the inverse supply function is P = 5 + 2Q. If the market price is currently $11, it is most likely that?
excess demand equals 6
When the market price of Mickey Mouse ears is lower than the equilibrium price, the market price will increase due to?
Increased demand for Mickey Mouse ears
Competitive markets do NOT?
Allocate resources effectively
Create one-way information flows
Allocate goods to the buyers who value them the most highly
Convey to suppliers the value consumers place on the good
Gravitate toward equilibrium quantity and price
Create one-way information flows
(competitive markets have two-way information flows)
What does the price reveal to consumers in competitive markets?
The opportunity cost of supplying that good
The competitive market equilibrium maximizes?
total surplus
Consumer surplus equals?
willingness to pay minus market price
The market price of Ohio State football tickets is $500. Suppose Jake values the ticket at $600, Yolanda values the ticket at $650, and Emily values the ticket at $400. What is the combined consumer surplus?
250
At any point along a demand curve, the height measures?
buyers’ willingness to pay
Where is consumer surplus located on a price-quantity graph?
Above the market price and below the demand curve
Which of the following situations results in positive producer surplus?
Quantity supplied exceeds quantity demanded.
Suppliers’ willingness to supply exceeds buyers’ willingness to pay.
Marginal cost exceeds market price.
Market price exceeds opportunity cost.
Revenue exceeds consumer surplus.
Market price exceeds opportunity cost
On a price quantity graph, producer surplus is the are
below the market price and above the supply curve
How do market participants determine the value each consumer places on the good in competitive markets?
price signals
What is total surplus?
Consumer surplus plus producer surplus
Miguel is willing to sell iPhones for $500 each, Angel is willing to sell iPhones for $200 each, Jenna is willing to sell iPhones for $800 each, and John is willing to sell iPhones for $600 each. The price of iPhones is $700. What is the total producer surplus?
$1,400, $800, $100, $900, $700
$800
The market price for televisions is $400. If Bob’s benefit is $100, then his willingness to pay is closest to?
300, 200, 400, 500, 100
$500
The market price for MacBooks is $1,200. Suppose Maya, a supplier, has a surplus of $200. At what price is she willing to sell?
200, 1000, 1600, 1200, 1400
1,000
At a quantity less than the equilibrium quantity, it is most likely that?
value to consumers exceeds producers’ cost
An increase in the supply of football tickets causes?
equilibrium price to decrease
Public education campaigns about tobacco affect the cigarette market by?
lowering demand
If input prices to gasoline rise, then?
equilibrium price increases
In which of the following scenarios is the change in producer surplus ambiguous?
a. Consumers’ income decreases.
b. Input prices decrease.
c. The price of a substitute good increases.
d. The price of a complement good increases.
e. The price of a substitute good decreases.
B - Input prices decrease
An increase in the price of laptops causes the market equilibrium for tablets to?
shift up and to the right
The price for blended coffee drinks will increase if?
a. the minimum wage decreases
b. coffee drinkers switch to soda
c. the price of tea decreases
d. dairy prices increase
e. the company opens more locations
dairy prices increase
Suppose consumers AND producers expect the price of gasoline to rise in the future. The MOST likely result is an increase in
Equilibrium price
Which of the following events is LEAST likely to increase producer surplus for video game suppliers?
a. Game developer wages increase.
b. Gamers earn more money.
c. The number of buyers increases.
d. The price of video game consoles decreases.
e. The price of board games increases.
A - Game developer wages increase
What is the effect of an advertising campaign that illustrates the negative health effects of fast food?
a. The price of fast food increases.
b. Demand for fast food decreases.
c. The price of fast food remains unchanged.
d. Fast food restaurants open more stores.
e. Fast food ingredients become more expensive.
B - demand for fast food decreases
Consumer surplus is MOST likely to increase unambiguously if
a. supply decreases and demand increases
b. supply decreases and demand decreases
c. demand increases
d. supply increases
e. demand decreases
D- supply increases
In which of the following scenarios is the effect on equilibrium quantity ambiguous?
a. Demand decreases and supply decreases.
b. Supply increases and demand remains unchanged.
c. Demand increases and supply remains unchanged.
d. Demand decreases and supply remains unchanged.
e. Demand increases and supply decreases.
E - Demand increases and supply decreases
The price of apples decreases when
a. supply decreases
b. supply decreases and demand increases
c. supply and demand decrease
d. supply increases
e. demand increases
Supply increases
In which of the following scenarios does the equilibrium price of Oreos decrease?
a. The price of Chips Ahoy increases.
b. Buyers expect the price of Oreos to increase in the future.
c. The price of milk increases.
d. The price of the creme in the Oreos increases.
e. The supply of Oreos decreases.
The price of milk increases
Price elasticity of demand is calculated as?
percentage change in quantity demanded divided by percentage change in price
For a downward-sloping demand curve, price elasticity of demand is always?
negative
(due to the inverse relationship between demand and price)
What does price elasticity of demand measure?
consumers responsiveness to price fluctuations
Demand is inelastic when a 1% change in price results in a
a. 1% decrease in demand
b. drop in demand to zero
c. 3% decrease in demand
d. 3% increase in demand
e. 0.5% decrease in demand
0.5% decrease in demand
High price sensitivity is most associated with?
a relatively flat demand curve
Which of the following characteristics leads to a higher price elasticity of demand?
a. The good has no close substitutes.
b. The good is defined in terms of a broad market.
c. The good is produced by a monopoly.
d. The good is a necessity.
e. The good is considered a luxury item
The good is considered a luxury item
Which of the following explanations BEST describes why Coke would have a high price elasticity of demand?
a. Coke is produced by a large company.
b. Coke is marketed toward younger audiences.
c. Coke is a necessity.
d. Coke is very cheap.
e. Coke tastes very similar to Pepsi.
Coke tastes very similar to Pepsi
A 10% change in the price of movie tickets results in a 20% change in demand. What is the price elasticity of demand?
a. 10
b. 20
c. 1/2
d. 2
e. 4
2
If quantity demanded does not depend on price at all, we say that the good is?
perfectly inelastic
Why is the supply of airline flights relatively elastic?
ease of entry
Which of the following goods is MOST likely considered to have perfectly inelastic supply?
a. Monet paintings
b. Chevron gasoline
c. Tesla vehicles
d. Disney children’s books
e. De Beers diamonds
Monet paintings
(perfectly inelastic supply = quantity supplied will not change at all as the price changes)
Total revenue equals
Price times quantity
If demand is elastic then
total revenue will increase if price decreases
Why did dairy farmers adopt Bovine Growth Hormone?
a. It imposed a positive externality on other farm products.
b. They were able to charge higher prices.
c. The technology increased farm income.
d. The government subsidized the cost of the technology.
e. They had no choice in a competitive market.
They had no choice in a competitive market
Suppose that quantity supplied of apples increases from 200 to 250 as the price increases from $2 to $3. What is the price elasticity of supply?
a. 50
b. 4
c. 1
d. 5
e. 1/2
1/2
A minimum wage best exemplifies a
price floor
(can’t be below that price)
What must be true in order for a price ceiling to be effective?
It must be set below the equilibrium price
What effect can rent control cause?
producer surplus decreases
Price controls always result in
decreased total surplus
Which of the following statements BEST describes a long-run effect of rent controls?
a. Apartments become rationed by price.
b. Communities undergo gentrification.
c. Landlords increase tenant improvements.
d. Apartments are added to the available housing stock.
e. Low prices attract more residents to the city.
Low prices attract more residents to the city
Price floors are most associated with?
excess supply
Suppose the existing equilibrium price of wheat is $5. An effective price floor would set the price of wheat at
a. $5
b. $0
c. $6
d. $4
e. $3
$6
If the government imposes a $0.10 tax per avocado on consumers, then the
a. demand curve shifts down by $0.10
b. tax revenue equals $0.10 times the original equilibrium quantity
c. new market equilibrium occurs at a higher quantity
d. suppliers do not bear any cost of the tax
e. demand curve becomes more elastic
demand curve shifts down by $0.10
Where can we find the new equilibrium quantity graphically after the government imposes a tax?
a. where demand becomes elastic
b. where producer surplus is reduced by half of the tax
c. where total surplus is reduced by the amount of the tax
d. where the vertical distance between demand and supply equals the tax
e. where the elasticity of demand equals the elasticity of supply
Where the vertical distance between demand and supply equals the tax
During the 1979 oil crisis, the federal government imposed a price ceiling to protect
a. low-income consumers
b. oil refineries
c. tax revenue
d. domestic exporters
e. intermediaries
low-income consumers
Tax revenue always equals
the new equilibrium quantity times the tax
Where is the deadweight loss that results from a government tax located on a supply and demand graph?
a. above the old equilibrium price
b. between the supply curve and the market price
c. below the supply curve
d. to the right of the new equilibrium quantity
e. below the area representing consumer surplus
to the right of the new equilibrium quantity
In which of the following scenarios will a tax LEAST impact the equilibrium quantity?
a. perfectly elastic demand and perfectly inelastic supply
b. perfectly inelastic demand and perfectly elastic supply
c. inelastic demand and inelastic supply
d. elastic demand and inelastic supply
e. elastic demand and elastic supply
inelastic demand and inelastic supply
A production possibilities frontier best illustrates the concept of?
trade-offs
The point at which the production possibility frontier intersects the x-axis represents the?
amount of a good an individual can make if they devote their entire time to producing that good
Coordinates on a production possibility frontier graph are efficient when?
all points on the production possibility frontier (aka those that fall on the line itself)
What does the slope of a production possibility represent
the opportunity cost of producing one good in terms of another
Sophie and Lily are two individuals on Paradise Island. If Sophie has an absolute advantage, then
a. Sophie’s production possibility frontier will have a steeper slope than Lily’s
b. the two production possibility frontiers will overlap
c. the two production possibility frontiers will intersect at a unique point
d. Sophie’s production possibility frontier will be upward sloping
e. Sophie’s production possibility frontier will be above and to the right of Lily’s
Sophie’s production possibility frontier will be above and to the right of Lily’s
What primarily determines the point a producer chooses on their production possibility frontier?
producer’s preference
Two producers will most likely have production possibility frontiers with the same slope if?
they face the same opportunity cost
Gains from trade always exist when?
the two trading partners have different comparative advantages
Which of the following statements BEST describes the effects of free trade?
a. Total surplus increases.
b. Gains from trade decrease as the markets become more extensive.
c. The overall size of the economy shrinks.
d. Everyone is made better off.
e. The costs exceed the benefits.
Total surplus increases
Suppose an isolated economy has an equilibrium price that is less than the world price. If the economy opens to trade, then
the country will become an exporter
If a country is an importer, quantity demanded can be found where the
demand curve intersects the world price
Suppose the U.S. grain prices are higher than world prices when it is isolated. Opening to trade would cause?
decreased producer surplus
Which of the following effects does NOT occur when a country becomes an exporter?
a. Consumer surplus decreases.
b. Deadweight loss increases.
c. Producer surplus increases.
d. Domestic production increases.
e. Social welfare increases.
Deadweight loss increases
What economic actor supplies goods and services in the economy?
the firm
A firm’s goal is to ?
maximize profits
Accounting costs do not include
opportunity costs
(does include input, capital, fixed, and labor costs)
Suppose Jackson is the owner of a local ice cream shop. His economic profit is $100 per day, and he could earn $100 per day working at another store in town. What is Jackson’s accounting profit?
a. $0
b. $1,000
c. $100
d. $500
e. $200
$200
Ursula runs a bread shop. What are some fixed costs?
insurance premiums on the shop, rental cost of her shop, cost of the equipment, opportunity cost of her time
Marginal cost is calculated as?
change in total costs divided by change in quantity produced
Why primarily is it common to see increasing marginal costs as output increases?
In the short run, some factors of production are fixed
Bob’s sandwich shop operates in a perfectly competitive market. What MUST be true?
a. Bob faces a perfectly elastic demand curve.
b. Bob faces increasing returns to scale.
c. Bob’s marginal cost is constant.
d. Bob’s supply curve is downward sloping.
e. Bob’s marginal revenue is decreasing.
Bob faces a perfectly elastic demand curve
A coffee shop faces diminishing returns to scale. If marginal revenue is $6 and marginal cost is $4, the coffee shop should
increase coffee production
An upward sloping supply curve is most associated with?
diminishing returns to scale
Benjamin’s lemonade store operates in a perfectly competitive market. Suppose his marginal revenue is $4 and his marginal cost is $4. It is MOST likely that Benjamin is
a. facing increasing returns to scale
b. producing at the profit-maximizing quantity
c. facing a downward sloping demand curve
d. earning a positive economic profit
e. earning zero accounting profit
producing at the profit-maximizing quantity
Employing more workers at a potato chip factory is an example of?
increasing variable costs
Which of the following conditions is MOST likely true if a firm has negative accounting profit in a competitive market?
a. Total cost exceeds total revenue.
b. Marginal revenue is greater than marginal cost.
c. Marginal cost exceeds total cost.
d. New firms are entering the market.
e. Economic profit is zero.
Total cost exceeds total revenue
Suppose a firm operates in a perfectly competitive market. Which of the following variables is LEAST likely to vary with output?
a. total cost
b. consumer surplus
c. total revenue
d. marginal revenue
e. variable cost
marginal revenue
Suppose when Ursula increases her production from 75 loaves to 100 loaves, her total costs increase from $472 to $622. Of the $622, $250 comes from fixed costs. What is the marginal cost?
a. $2.50
b. $6
c. $7.50
d. $6.22
e. $10
6
(Marginal cost is calculated as the change in total costs divided by the change in quantity produced)
Unlike firms in perfectly competititve markets, firms in imperfectly competitive markets
face a downward sloping demand curve
Market power is best defined as the ability to?
choose mrket prices
What factor enables monopolies to arise?
barriers to entry
(including ownership of a key resource, government created monopolies, and natural monopolies)
How did DeBeers become a monopoly?
It secured ownership of a key resource (diamond mines)
A copyright would most likely protect the product of ?
independent author
(copyrights are a form of a monopoly)
Patents granted to new inventions expire after?
twenty years
Natural monopolies are most associated with?
large fixed costs (think electric and water companies, railroads)
The profit maximizing quantity for monopolies is located at the point at which?
marginal revenue equals marginal cost
The price that monopolies charge in equilibrium is?
greater than marginal revenue
Compared to perfect competition, monopolies supply
a lower quantity at a higher price
NewMedia Co. operates in a monopoly. It is MOST likely that
a. NewMedia experiences decreasing marginal costs
b. NewMedia’s marginal revenue is decreasing
c. NewMedia’s economic profit is zero
d. NewMedia charges a price equal to marginal revenue
e. NewMedia is regulated by the government
NewMedia’s marginal revenue is decreasing
Suppose a monopoly decides to increase output. What MUST be true?
a. Price decreases.
b. Change in revenue equals price times additional demand.
c. Consumer surplus decreases.
d. Barriers to entry decrease.
e. Deadweight loss increases.
Price decreases
A monopoly’s total revenue increases from $4,800 to $7,500 when it lowers prices from $16 to $15. What is the marginal revenue per new customer?
a. $16
b. $13.50
c. $15
d. $11
e. $20
$13.50
Cable television is an example of a
natural monopoly
What company did U.S. antitrust regulators break up in 1984?
AT&T
Microsoft’s bundling of its Internet browser with the Windows operating system could best be described as?
anti-competitive practice
Requiring public oversight agencies to approve utility rates is a form of?
regulation
What entity typically operates local water and sewer services?
municipal governments
A statement that describes a consequence of perfect price discrimination
The marginal revenue curve overlaps market demand
Financial aid for university tuition is an example of?
price discrimination
Price discrimination does not increase
deadweight loss
Industries that resemble oligopolies can produce the following products
aircraft, breakfast cereal, toothpaste, washing machines, cigarettes, vehicles
How are oligopolies different than monopolies?
They must consider the choices of other suppliers (try to outsmart their competition)
An agreement in which suppliers cooperate and behave like a monopolist is called a?
cartel (OPEC is an example)
What is the most common form of imperfect competition?
monopolistic competition
(firms produce similar but differentiated products)
Monopolistic competition best describes markets where firms
produce similar but differentiated products
Unlike a firm in perfect competition, a firm in monopolistic competition
charges a price above marginal revenue
Why does monopolistic competition lead to social inefficiency?
price exceeds marginal cost
Good examples of monopolistic competition include
Restaurants, clothing
How do entrepreneurs earn economic profits
They create barriers to entry
Entrepreneurs do not
exacerbate existing market imperfections
Who coined the term creative destruction?
Joseph Schumpeter
(used to describe how entrepreneurs continue to develop new & improved products)
What catalyzes creative destruction?
economic profits
Which of the following examples would NOT arise from entrepreneurs investing around existing barriers to entry?
a. watch manufacturers copying a Rolex design
b. Uber and Lyft developing alternative forms of transportation to compete with traditional taxis
c. satellite televisions competing with cable television
d. mobile phone manufacturers developing alternative smartphones to compete with Apple’s iPhone
e. new soda flavors targeting different demographics
New soda flavors targeting different demographics
Positive externalities are an example of
Market failure
Which of the following examples would be considered a positive externality?
a. A colony of bees pollinates a nearby farmer’s apple trees.
b. All of the neighbors share ownership of the community pool.
c. The construction of a new football stadium incentivizes a nearby city to build a baseball stadium.
d. A factory dumps pollution into a nearby river.
e. The government provides a rent subsidy to low-income families.
A colony of bees pollinates a nearby farmer’s apple trees.
If two companies produce goods that are complements, it is most likely that they
impose externalities on each other
The firm’s marginal cost plus the cost of treating the pollution it produces is called the?
true social cost of production
Compared to the private market equilibrium, the euilibrium that accounts for a negative externality is
to the left and up
(an upward shift in the supply curve)
How would a graph of a positive externality represent social benefits?
increased demand curve
The Coase Theorem requires
clearly defined property rights
Why PRIMARILY is it unlikely for an oil refinery and a downstream population to reach a negotiated solution?
The costs of negotiation are too high
It is most effective to use taxes to remedy the effects of externalities when?
the value of the externality is measurable
How does the United States Environmental Protection Agency deal with sulfur dioxide emissions?
auctioning off rights to emit sulfur dioxide
How can a group internalize an externality?
making decisions collectively
The tragedy of the commons is most associated with
negative externalities
If a particular good is a rival good, then
one person’s consumption reduces the amount available for others
What factor primarily determines a good’s excludability?
the ability to control who consumes the good
If the same good can be used simultaneously, then it is most likely
non-rival
Several examples of private goods
pizza, gasoline, a polo shirt, haircuts
(satellite radio is not a private good)
Several examples of non-excludable goods
a national militia, a public park, a fireworks display, a city street
(a professional sports game is excludable if you do not have a ticket to get in)
What category of goods suffers most from the tragedy of the commons?
common resources
How are common resources categorized?
high degree of rivalry and low degree of excludability
What category of goods is most prone to natural monopolies?
collective goods
The easiest way to solve the tragedy of the commons
establish property rights
Collective goods are most likely to have
a too high equilibrium
Institutions do what
structure human interaction through formal and informal rules (marriage is an example)
How are organizations most similar to institutions?
they structure human interaction
Institutions require
voluntary cooperation
Someone is most likely to conform to social institutions if
cooperation makes them better off
Pork barrel politics is best defined as the
tendency of legislators to introduce projects that disproportionately benefit their communities
What quality of organizations differentiates them from institutions?
formal rules
Logrolling is most synonymous with
vote trading
U.S. price supports for sugar best exemplify
rent-seeking behavior (firect economic benefits to the producers rather than consumers)
In what way do institutions most differ from government?
their ability to compel action
What policy currently support the U.S. sugar industry?
import controls (U.S. sugar prices are 2x as high as other countries)
