Final Flashcards
The rule (optimal level of activity)
Marginal cost = marginal benefit
2x2 efficiency table
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
Why is a perfect market efficient (under certain assumptions)
Ensures that each firm con produce its goods or services at exactly the same rate and production as another one in the market
If firms make profit or (losses) in the short run, what do economic models predict to happen in this market
Profits or losses will continue till adding an additional unit of labor/material will be too much and production will top off
Difference between shutting down and exiting a market
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.
Difference between short run and long run equilibrium
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
Difference between economic profit and economic rent
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)
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)?
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
Profit Maximizing quanity and profit maximizing price equation(and how to find on a graph)
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
Does a monopolist always make positive profit?
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.
How do quantity and price compare between a perfectly competitive market and a monopoly with the
same demand and marginal cost curves?
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.
how to find marginal revenue for a single price monopolist
The marginal revenue curve for the monopoly firm lies below its demand curve.
Is a monopoly socially efficient or inefficient, and why?
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.
What are deadweight loss and total surplus when a monopolist can use perfect price discrimination?
A. there is no deadweight loss to perfect price descrimination
B. Under perfect price descrimination the total surplus is maximized
The Hurdle Method
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.
What are externalities, and what for what kind of externalities is environmental pollution an example?
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.
In the context of externalities, what are “social marginal benefits” and “social marginal costs”?
Social marginal cost= private marginal costs + external marginal cost
Social marginal benefits = private marginal benefit + external marginal benefits
Given marginal benefits and marginal costs from pollution, what is the optimal level of pollution?
ZERO pollution
Given external costs and costs of decreasing pollution (think of the Ben-and-Jerry example), what is
socially optimal, keep polluting or decrease pollution
decrease pollution
If negotiations between a polluter and a victim of pollutions are possible and costless, will these
negotiations result in the socially optimal outcome?
the result will be socially optimal
In what type of situations is the Coase Theorem particularly relevant?
The Coase theorem is applicable in circumstances when one party’s economic activity has a negative impact on the property of another party.
how do individuals decide how much to use common resources
ASK
What are different policies to deal with negative externalities like pollution
taxing goods and services that generate spillover costs
What is the difference between an environmental tax and an environmental permit system? What do
they have in common?
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
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?
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
When is a good “rival”? “Non-rival”? “Excludable”? “Non-excludable”?
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
Public Good/Common resource
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.
What is the marginal cost of having an additional consumer of a non-rival good if it is already provided
to somebody else?
ZERO
How does one construct a market demand curve for a public good from individual demand curves?
adds the individual demand curves vertically to get the market demand of public goods at all price levels.
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?
Where Marginal Benefit =Marginal Cost
Define Tax Incendence
who bears the relative burden of a new or existing tax
When do consumers bear more of a burden from a sales tax than producers
When supply is more elastic then demand
What impact do price-elasticities of demand and of supply have on “tax incidence”?
When supply is more elastic than demand, buyers bear most of the tax burden.
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?
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
Does doubling the sales tax on a good with “regular” (= not perfectly price-inelastic) supply and
demand curves double tax revenues?
NO
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?
TAX based on income
What insight(s) about asymmetric information between sellers and buyers were we supposed to get
from the Moblab “Lemons Market” experiment?
if you don’t have all of the information some of the sales will not happen.
