Exam 2

Question 1

Consequences from the imposition of a tariff

Answer 1

Consumer surplus of domestic producers declines Deadweaight loss arises from mutually beneficial transactions not taking place The government generates revenue Rise in price lowers consumer surplus and raises producer surplus

Question 2

Allocating goods from waiting in line

Answer 2

Allocates the good to those with a low opportunity cost of time Allocates the good to people who value it highly Deadweight loss from waiting in line Deadweight loss from mutually beneficial transactions Anytime there is a wait accrues deadweight loss

Question 3

Firm generates accounting profits

Answer 3

The firm covers its explicit costs Implicit - opportunity costs Explicit - Accounting sheet costs

Question 4

Technological advance reduces the marginal cost

Answer 4

Consumer surplus will increase Price will fall from the supply cure shifting right

Question 5

Implement a tax on an item

Answer 5

Item is a source of negative externalities The government wishes to raise tax revenue Negative externalities - too much is being produced

Question 6

Negative externalities exist in markets because

Answer 6

There are additional costs to society that aren’t born by private parties Firms only bear the private costs associated with their production

Question 7

A tax of $x generates a deadweight loss of?

Answer 7

Find a gap between supply and demand equal to x 1/2bh

Question 8

If tax increased from x to y

Answer 8

Deadweight loss will increase Producer surplus will decrease Tax rev = Tax rate x Quantity Consumer/Producer surplus decreases when tax prices go up

Question 9

With no tax a price floor below the equilibrium

Answer 9

A price of equilibrium

Question 10

Contries who export a certain good

Answer 10

Offer it for a higher price than they would in the domestic market Enjoy higher consumer surpluses than they would without trade Have a comparative advantage in the good that they are exporting

Question 11

Shifts in supply and demand

Answer 11

demand and price increase shift in demand curve

Question 12

Coase Theorem

Answer 12

Transaction costs are low The number of parties involved is low Property rights are highly defined

Question 13

Classification of goods

Answer 13

Non-excludable Rival Non-Exc, Rival - Common Exc, Rival - Private Non-Exc, Non-Riv - Public Exc, Non-Riv - Club Good

Question 14

Open harvest of tuna, no release, rival in consumption

Answer 14

Tragedy of the commons Negative externality

Question 15

Firm’s cost structure

Answer 15

Marginal cost always intersects average toatl cost at its minimum Marginal cost always intersects average variable cost at its minimum

Question 16

Competitive firm selling at a price greater than the marginal cost

Answer 16

Increase the output Firms = price taker = Don’t set price Increase output till price = mc

Question 17

Running at a loss of $1 million and continue to operate in the short run

Answer 17

Their fixed costs were greater than $1 million

Question 18

Produce in the short run, but exit in the long run

Answer 18

Firms seek to maximize profits. They recognize that producing in the short run can allow them to cover a part of their fixed costs, but ultimately shut down when given the chance to change their fixed costs

Question 19

Price Ceiling

Answer 19

legal maximum on the price at which a good can be sold

Question 20

Binding Price Ceiling

Answer 20

price ceiling that is set below the equilibrium price Always creates a shortage

Question 21

Price Floor

Answer 21

a legal minimum on the price at which a good can be sold

Question 22

Binding Price Floor

Answer 22

price floor that is set above the equilibrium price

Question 23

Price Controls on a Market

Answer 23

Equilibrium – Intersection of supply and demand Shortage exerts upward pressure on prices A surplus exerts downward pressure on prices

Question 24

Rent Control

Answer 24

Landlords provide less maintenance under rent control Landlords may convert apartments to more profitable uses A shortage of units may leads renters to make under-the-table payments Alternative methods of rationing will emerge

Question 25

Calculating Tax

Answer 25

Per-Unit Tax = Price Consumer Pay – Price Producers Receive

Question 26

Effect of tax on buyers and sellers

Answer 26

Elasticity = ΔQ/ ΔP ΔQ = 100 x (P2-P1) / ((P2+P1)/2) The burden of tax falls more heavily on the less elastic side of the market

Question 27

The Costs of Taxation

Answer 27

consuer Surplus Be - A+B+C Af- A

Producer Surplus Be - D+E+F Af - F

Tax Revenue Be - N/A Af - B+D

Deadweight Loss Be - N/A Af - C+E

Question 28

Taxes and Welfare

Answer 28

Consumer surplus is the difference between the price a buyer is willing to pay and the price the buyer actually pays

Producer surplus is the difference between the price a seller receives and the minimum price the seller would be willing to accept

Question 29

Tax revenues, deadweight loss, and demandelasticity

Answer 29

The more inelstic the demand the higher tax revenues and the lower the deadweight loss associated with a tax increase.

A relatively less elastic demand implies that consumers are not highly responsive to changes in price, a tax on the good does not lead to a large change in quantity demanded

Question 30

The Laffer curve

Answer 30

Deadweight loss can be seen as non lineare in magnitude

Question 31

Welfare effects of free trade in an exporting country

Answer 31

Consumer surplus aboube the equilibrum price

Trade increases producer surplus

Question 32

Winners and losers from free trade

Answer 32

Market price is less then international price import

Question 33

Free-trade benefites

Answer 33

Enhanced flow of ideas
Lower costs through economies of scale
Increased competition
Increased variety of goods

Question 34

Externalities

Answer 34

Externality – A firms activity that affects a third party, neither pays or receives compensation for the effect

Positive Externality – benefit that a third party receives from someone else’s economic activity

Negative Externality - a cost that a third party incurs from someone else’s economic activity

Question 35

Efficiency in the presence of externalities

Answer 35

Market Equilibrium Quantity – The intersection of the private cost curve and the private value curve, private demand

Socially Optimal Quantity – The intersection of the social cost curve and the social value curve

Question 36

The effect of negative externalities on the optimal quantityof consumption

Answer 36

Cost + negative externalities

Pigovian tax - A tax equal to the external cost would cause the socially optimal quantity to be produced

Question 37

Understanding different policy options to correct for negativeexternalities

Answer 37

Command-and-control policy / Regulation – Remedies an externality by legally limiting a specific behavior by a specific entity

Tradable permit system – Remedies an externality by regulating general behavior

Corrective subsidy – Encourages behavior that has positive external effects

Corrective tax / Pigovian Tax – Discourages behavior that has negative external effects

Question 38

The effects of property rights

Answer 38

Coase theorem, which asserts that as long as bargaining costs are low enough assigning property rights to one party will efficiently solve the problem of externalities

Question 39

Private Solutions to Correct for Externalities

Answer 39

Private solutions –
Integration of different types of businesses
Contracts
Charities
Moral codes and social sanctions

Breakdown in Bargaining – One party holds out

Question 40

Categories of goods

Answer 40

Nonexcludable – It is not possible to prevent an individual from using the good

Rival – Consumption of the good by one person decreases the ability of other people to consume the good

Question 41

Contributions toward a public good

Answer 41

Each gain is the sum of the parts.

Question 42

Tragedy of the Commons

Answer 42

occurs when people consume more of a common resource than society would desire

The best known solution to the Tragedy of the Commons is to convert a good from a common resource to a private good by making it excludable

Question 43

Definition of economic costs

Answer 43

Explicit costs refer to all costs that require an outlay of money by the firm

implicit costs refer to all costs the firm incurs in production that do not involve any monetary transactions

Accounting profit = Total Revenue - Total Explicit Costs

Economic Profit = Total Revenue - Total costs

Question 44

Inputs and Outputs

Answer 44

fixed input is a kind of input where the quantity cannot be changed in the short run

Variable input can be changed

marginal product of labor - Change in output when a person is added

Question 45

Various measures of cost

Answer 45

Marginal cost is the cost of producing an additional unit

Fixed costs are costs that do not vary with the quantity of output produced

Total cost equals fixed cost plus variable cost

Average variable cost is equal to variable cost divided by the quantity produced

Average total cost is equal to total cost divided by the quantity produced

Question 46

economies of scale

Answer 46

average total cost falls as it increases production

Question 47

Characteristics of competitive markets

Answer 47

1. There must be many buyers and sellers—a few players can’t dominate the market.
2. Firms must produce an identical product—buyers must regard all sellers’ products as equivalent.
3. Firms and resources must be fully mobile, allowing for free entry into and exit from the industry.

Question 48

Demand cuve of Competitive firm (perfectly Elastic)

Answer 48

Equal to Marginal revenue curve

Average revenue curve

Question 49

Profit maximization

Answer 49

Produce in the short run if the price is greater than the lowest average variable cost

Shutdown if below the avc

Question 50

Deriving the shot-run supply curve

Answer 50

0 quantity if below avc

0 or x if on

x if above

Question 51

Profits

Answer 51

Accounting profit is defined as total revenue minus the sum of all explicit costs

economic profit is defined as total revenue minus the sum of explicit costs and implicit costs

efficient scale - The level of production corresponding to the lowest average total cost

Competitive firms earn 0 economic profit in the long run

Question 52

Monompoly Power

Answer 52

Exclusive Ownership of a Key Resource

Government-Created Monopolies

Economies of Scale

Question 53

Price discrimination

Answer 53

the practice of selling the same good at different prices to different types of customers