Final Exam Flashcards
Consider the market for rental housing illustrated in Figure 6.1.1 when the demand curve is
D0. The equilibrium in an unregulated market is…
At market equilibrium
Suppose a minimum wage of $15 an hour is in force, resulting in unemployment of 10 million
hours. Then the demand for labour increases such that supply and demand curves intersect at a
wage rate of $17 per hour. What will happen in the labour market?
The wage rate is $17 an hour and there will be no unemployment.
Which of the following decrease the deadweight loss from a minimum wage set above the
equilibrium wage?
lowering the minimum wage
The burden of the tax on buyers is greater the more…
inelastic is demand, elastic is supply.
A $10 per-unit tax on game consoles raises the equilibrium price paid by consumers by $5 per
console. The quantity sold before the tax was 5,000 per year. The revenue from the tax is…
positive but less than $50,000 per year
What does a subsidy do for farmers?
raises the price received by farmers.
When an effective production quota is applied in the market for wheat, the quantity produced
________ and the price ________. The marginal social benefit ________ the marginal social
cost.
decreases; rises; exceeds
Consider a market for an illegal good. If the government imposes the cost of breaking the
law on the buyer of the good, then price will be…
Lower and quantity the same compared to imposing the same cost on the seller.
What are the effects of a rent ceiling that is set below the equilibrium rent?
If a rent ceiling is set below the equilibrium rent, the quantity of housing units demanded by
renters exceeds the quantity supplied by landlords. The quantity of housing units rented
equals the quantity supplied. A shortage of housing units arises
What is a minimum wage and what are its effects if it is set above the equilibrium
wage?
When a price floor is applied to a labour market, it is called a minimum wage. A price floor is a
government regulation that makes it illegal to charge a price lower than a specified level. If the
minimum wage is set above the equilibrium wage, it creates a surplus of labour—
unemployment—and decreases workers’ surplus and firms’ surplus.
How does the elasticity of demand influence the incidence of a tax, the tax revenue, and the deadweight loss?
The more elastic the demand for a given supply, the smaller the increase in the price paid by
the buyers and the greater the decrease in the price received by the sellers, which means that
the incidence on buyers is smaller. Additionally, the more elastic the demand, the smaller the
quantity bought when the tax is applied so the smaller the tax revenue and the larger the
deadweight loss
How does the elasticity of supply influence the incidence of a tax, the quantity
bought, the tax revenue, and the deadweight loss?
The more elastic the supply for a given demand the larger the incidence on buyers. The more elastic the supply, the smaller the quantity bought
when the tax is applied, so the smaller the tax revenue and the larger the deadweight loss
What are the two principles of fairness that are applied to tax systems?
The two principles of fairness are the benefits principle and the ability-to-pay principle. The
benefits principle is the proposition that people should pay taxes equal to the benefits they receive from the services provided by government. The ability-to-pay principle is the
proposition that people should pay taxes according to how easily they can bear the burden of
the tax
Summarize the effects of a production quota on the market price and the quantity
produced
A production quota set below the equilibrium quantity raises the price and decreases the
quantity produced.
Summarize the effects of a subsidy on the market price and the quantity
produced.
A subsidy increases the price received by sellers, shifts the supply curve rightward, and
places a wedge between the marginal social benefit and marginal social cost of producing the
good. The subsidy creates a deadweight loss, an increase in the quantity produced, and a
lower price paid by the consumers
How is the gain from imports distributed between consumers and domestic producers?
Consumers gain consumer surplus in a market with imports because the price falls and the
quantity bought increases. Domestic producers lose producer surplus in a market with
imports because the price falls and the quantity produced decreases. The gain by consumers
is greater than the loss of producers
How is the gain from exports distributed between consumers and domestic producers?
Consumers lose consumer surplus in a market with exports because the price rises and the
quantity bought decreases. Domestic producers gain producer surplus in a market with
exports because the price rises and the quantity produced increases. The gain by producers
is greater than the loss by consumers.
Explain the effects of a tariff on domestic production, the quantity bought, and
the price
tariff raises the domestic price of the product. The higher price increases domestic
production and decreases the quantity bought
Tariffs increase the prices of imported goods. Because of this, domestic producers are not forced to reduce their prices from increased competition, and domestic consumers are left paying higher prices as a result.
Explain who gains and who loses from a tariff and why the losses exceed the
gains.
Domestic consumers lose consumer surplus from a tariff. Domestic producers gain producer
surplus from a tariff. The government also gains revenue from a tariff. But the gain in
producer surplus plus the gain in government revenue is less than the loss of consumer
surplus, so a tariff creates a deadweight loss.
Explain the effects of an import quota on domestic production, consumption, and
price
An import quota raises the domestic price of the product. The higher price increases domestic
production and decreases domestic purchases.
Why would Canada move from being an importer of a good to being an exporter of a good?
the world price of the good rose from below Canada’s no-trade price to above Canada’s no-
trade price.
What is rent seeking?
lobbying for special treatment by the government to create economic profit or to divert consumer surplus or producer surplus away from others.
Why is normal profit an opportunity cost?
Normal profit is the profit that an entrepreneur earns on average. Normal profit is an
opportunity cost for the firm because it is the cost of a forgone alternative, which is running
another firm
Distinguish between the short run and the long run.
The short run is a timeframe in which the quantity of at least one factor of production is fixed.
The long run is a timeframe in which the quantities of all factors of production can be varied
What is the shape of the AFC curve and why does it have this shape?
Average fixed cost (AFC) equals total fixed cost divided by total output. As the quantity
produced increases, the fixed costs are spread over a larger and larger quantity of output so
average fixed cost decreases. So the AFC curve slopes downward as the quantity produced
increases.
Why is a firm in perfect competition a price taker?
In a perfectly competitive market, one firm’s output is a perfect substitute for another firm’s
output and each firm is a small part of the market. Each firm is a price taker because one firm
cannot influence the market price because its production is an insignificant part of the total
market
In perfect competition, when market demand increases, explain how the price of
the good and the output and profit of each firm changes in the short run
When market demand increases, the equilibrium price of the good rises, and the equilibrium
quantity increases. Because price equals marginal revenue, the rise in the price means
marginal revenue rises. Each firm moves up its marginal cost curve and increases the
quantity it produces. The firm’s economic profit increases (or its economic loss decreases)
In perfect competition, when market demand decreases, explain how the price of
the good and the output and profit of each firm changes in the short run.
When market demand decreases, the equilibrium price of the good falls, and the equilibrium
quantity decreases. Because price equals marginal revenue, the fall in the price means
marginal revenue falls. Each firm moves down its marginal cost curve and decreases the
quantity it produces. The firm’s economic profit decreases (or its economic loss increases)
A firm’s opportunity cost of production is the sum of the cost of using resources…
bought in the market, owned by the firm, and supplied by the firm’s owner
The implicit rental rate
s the firm’s opportunity cost of using the capital it owns
Normal profit is the ________. Normal profit ________ part of a firm’s opportunity cost.
return that an entrepreneur can expect to receive on average; is
How to calculate TFC?
TC - TVC
Marginal revenue is
the change in total revenue that results from a one-unit increase in the quantity sold
A firm shuts down if price is…
below minimum average variable cost
If price falls below minimum average variable cost, the best a firm can do is
stop production and incur a loss equal to total fixed cost
If a perfectly competitive firm is producing in the short run at an output where price is less
than average total cost, the firm
is incurring an economic loss but will continue to operate as long as price is above minimum
average variable cost
if a profit-maximizing firm in a perfectly competitive market is incurring an economic loss,
then it must be producing a level of output where
average total cost is greater than marginal cost
In a natural monopoly, the long-run average cost curve…
is downward sloping in the relevant range of output levels
What is a natural monopoly?
A natural monopoly: a market in which economies of scale enable one firm to supply the entire market at the lowest possible cost. The firms that deliver gas, water, and electricity to our homes are examples of natural monopolies.
Does a monopoly face any market constraints?
Yes. To sell a larger quantity, the monopoly must set a lower price.
to increase sales from 7 units to 8 units, a single-price monopolist cuts the price from $7 per
unit to $6 per unit. What is marginal revenue from selling the 8th unit?
-1
if the demand for its good or service is elastic, a monopoly’s…
marginal revenue is positive.
Rent seeking…
increases deadweight loss above the original monopoly deadweight loss, but the monopoly
continues to produce the same inefficient quantity
An efficient use of resources in a monopoly occurs when…
a monopoly practices perfect price discrimination.
