Final

Question 1

The rule (optimal level of activity)

Answer 1

Marginal cost = marginal benefit

Question 2

2x2 efficiency table

Answer 2

Government does not intervene/ market works well= efficient outcome
Government intervenes/ market works well = inefficient outcome(loss in total surplus)
Government intervenes/ does not market works well =government con improve market
Government does not intervene / Manet does not work = inefficient outcome

Question 3

Why is a perfect market efficient (under certain assumptions)

Answer 3

Ensures that each firm con produce its goods or services at exactly the same rate and production as another one in the market

Question 4

If firms make profit or (losses) in the short run, what do economic models predict to happen in this market

Answer 4

Profits or losses will continue till adding an additional unit of labor/material will be too much and production will top off

Question 5

Difference between shutting down and exiting a market

Answer 5

Exact moment when a company’s ( marginal) revenue is equal to its marginal cost= shutting down
Long run process of firms reducing production and shutting down in response to industry losses = exiting market.

Question 6

Difference between short run and long run equilibrium

Answer 6

Short run= amount of output demanded is equal to amount of output supplied
Long run =when prices have fully adjusted to production costs and the economy functions at its full potential

Question 7

Difference between economic profit and economic rent

Answer 7

Economic rent= an amount of money earned that exceeds that which is economically or socially necessary
Economic profit = difference between revenue received from the sale of on output and the costs of a inputs used (including opportunity cost)

Question 8

What is the difference between the demand one single perfectly competitive firm faces and the demand
in an entire market (or equivalently, the demand curve a monopolist faces)?

Answer 8

when price = marginal cost the perfectly competitive firm is maximizing quantity
when price is greater than marginal cost this determines the profit maximizing quantity for monopoly

Question 9

Profit Maximizing quanity and profit maximizing price equation(and how to find on a graph)

Answer 9

Profit Maximizing quanity =where MR = MC—or at the last possible point before marginal costs start exceeding marginal revenue.
profit maximizing price=Where price equals marginal cost

Question 10

Does a monopolist always make positive profit?

Answer 10

False. Just because a monopoly faces its own demand curve and can set any price it does not that a monopoly will always earn a profit.

Question 11

How do quantity and price compare between a perfectly competitive market and a monopoly with the
same demand and marginal cost curves?

Answer 11

Perfect competition produces an equilibrium in which the price and quantity of a good is economically efficient. Monopolies produce an equilibrium at which the price of a good is higher, and the quantity lower, than is economically efficient.

Question 12

how to find marginal revenue for a single price monopolist

Answer 12

The marginal revenue curve for the monopoly firm lies below its demand curve.

Question 13

Is a monopoly socially efficient or inefficient, and why?

Answer 13

A monopoly is less efficient in total gains from trade than a competitive market. Monopolies can become inefficient and less innovative over time because they do not have to compete with other producers in a marketplace.

Question 14

What are deadweight loss and total surplus when a monopolist can use perfect price discrimination?

Answer 14

A. there is no deadweight loss to perfect price descrimination
B. Under perfect price descrimination the total surplus is maximized

Question 15

The Hurdle Method

Answer 15

the practice by which a seller offers a discount to all buyers who overcome some obstacle. Quantity sold goes up and total surplus goes up.

Question 16

What are externalities, and what for what kind of externalities is environmental pollution an example?

Answer 16

a side effect or consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved, such as the pollination of surrounding crops by bees kept for honey.

Question 17

In the context of externalities, what are “social marginal benefits” and “social marginal costs”?

Answer 17

Social marginal cost= private marginal costs + external marginal cost

Social marginal benefits = private marginal benefit + external marginal benefits

Question 18

Given marginal benefits and marginal costs from pollution, what is the optimal level of pollution?

Answer 18

ZERO pollution

Question 19

Given external costs and costs of decreasing pollution (think of the Ben-and-Jerry example), what is
socially optimal, keep polluting or decrease pollution

Answer 19

decrease pollution

Question 20

If negotiations between a polluter and a victim of pollutions are possible and costless, will these
negotiations result in the socially optimal outcome?

Answer 20

the result will be socially optimal

Question 21

In what type of situations is the Coase Theorem particularly relevant?

Answer 21

The Coase theorem is applicable in circumstances when one party’s economic activity has a negative impact on the property of another party.

Question 22

how do individuals decide how much to use common resources

Answer 22

ASK

Question 23

What are different policies to deal with negative externalities like pollution

Answer 23

taxing goods and services that generate spillover costs

Question 24

What is the difference between an environmental tax and an environmental permit system? What do
they have in common?

Answer 24

taxes let the market determine the extent of control by individual polluters and the total level of control.Environmental permit systems is bidding off permits to allow pollution

Question 25

What is the relationship between a firm’s willingness-to-pay for a permit to emit a ton of a pollutant
and the firm’s marginal costs of pollution reduction?

Answer 25

A pollution charge gives a profit-maximizing firm an incentive to figure out ways to reduce its emissions—as long as the marginal cost of reducing th

Question 26

When is a good “rival”? “Non-rival”? “Excludable”? “Non-excludable”?

Answer 26

Rival good= if its consumption by one consumer prevents simultaneous consumption by other consumers, or if consumption by one party reduces the ability of another party to consume it.
Non Rival=A good that can be consumed or possessed by multiple users
Non excludable= if one cannot exclude individuals from enjoying its benefits when the good is provided

Question 27

Public Good/Common resource

Answer 27

Public good=refers to a commodity or service that is made available to all members of society
Common resource=resource, such as water or pasture, that provides users with tangible benefits.

Question 28

What is the marginal cost of having an additional consumer of a non-rival good if it is already provided
to somebody else?

Answer 28

ZERO

Question 29

How does one construct a market demand curve for a public good from individual demand curves?

Answer 29

adds the individual demand curves vertically to get the market demand of public goods at all price levels.

Question 30

given a table with individual marginal benefits from a public good and marginal costs of providing the
public good, how can one find the optimal quantity of the public good?

Answer 30

Where Marginal Benefit =Marginal Cost

Question 31

Define Tax Incendence

Answer 31

who bears the relative burden of a new or existing tax

Question 32

When do consumers bear more of a burden from a sales tax than producers

Answer 32

When supply is more elastic then demand

Question 33

What impact do price-elasticities of demand and of supply have on “tax incidence”?

Answer 33

When supply is more elastic than demand, buyers bear most of the tax burden.

Question 34

How much does the equilibrium price in a competitive market with “regular” (= not perfectly price-
inelastic) supply and demand curves increase when a per-unit tax is imposed on the sellers?

Answer 34

The price for the consumer will go up just not as much as the tax (if perfectly elastic pride will go up by amount of tax

Question 35

Does doubling the sales tax on a good with “regular” (= not perfectly price-inelastic) supply and
demand curves double tax revenues?

Answer 35

NO

Question 36

How is the motivation for using a progressive tax (a tax where higher incomes are taxed
overproportionally more than lower incomes) related to the income elasticity of demand for public
goods?

Answer 36

TAX based on income

Question 37

What insight(s) about asymmetric information between sellers and buyers were we supposed to get
from the Moblab “Lemons Market” experiment?

Answer 37

if you don’t have all of the information some of the sales will not happen.