FINAL EXAM

Question 1

What is Marginalism?

Answer 1

Focuses on the additional or incremental changes in economic variables (marginal cost, marginal benefit). Decisions are made by weighing marginal benefits against marginal costs.

EXAMPLE - When deciding how many eggs to eat, you consider the marginal benefit of each additional egg. For example, you might eat an extra egg if you have a busy day planned

Question 2

Opportunity Cost

Answer 2

The value of the next best alternative is forgone when a choice is made.

EXAMPLE - If a student spends time and money at the movies the night before an exam, the opportunity cost is the time and money that could have been spent studying

Question 3

Marginalist Principle

Answer 3

Economic decision-making should consider the marginal benefits and marginal costs. A decision is optimal when marginal benefits equal marginal costs.

Question 4

Pareto Efficiency

Answer 4

A state where no individual can be made better off without making someone else worse off. It’s a benchmark for measuring economic efficiency.

Question 5

Deadweight Loss

Answer 5

The loss of economic efficiency that occurs when the equilibrium in a market is not achieved, often due to taxes, subsidies, or price controls.

Question 6

Pareto Improvement

Answer 6

A situation where at least one person is made better off without making anyone worse off.

EXAMPLE - When a student who doesn’t like burgers gives their lunch to a student who does, both students are satisfied with the exchange and no one is worse off

Question 7

Consumer Sovereignty

Answer 7

The idea that consumers determine what goods and services are produced in an economy through their purchasing choices.

Question 8

Individual Sovereignty

Answer 8

Refers to the freedom and autonomy of individuals in economic and political decisions.

Question 9

Economic Freedom

Answer 9

The ability of individuals to make economic choices free from government intervention, typically reflected in policies that promote free markets. The ability of individuals to make economic choices free from government intervention, typically reflected in policies that promote free markets.

Question 10

Four Sources of Market Failure:

Answer 10

o Externalities: Costs or benefits of economic activities not reflected in market prices.

o Market Power: When firms control prices or output, leading to inefficiency.

o Public Goods: Goods that are non-excludable and non-rivalrous, leading to under-provision.

o Incomplete Information: When all parties in a transaction do not have the same information, leading to inefficiencies.

Question 11

Normative Analysis

Answer 11

Examines economic outcomes based on values and judgments (what should be), often focusing on equity and fairness.

Question 12

Asymmetry of Information

Answer 12

A situation where one party in a transaction has more or better information than the other, which can lead to market inefficiencies.

Question 13

Externalities

Answer 13

Occur when a third party is affected by the actions of others (e.g., pollution).

Question 14

Moral Relativism

Answer 14

The idea that ethical judgments are dependent on cultural or societal norms and can vary between societies.

Question 15

Utilitarianism

Answer 15

A theory that suggests the best action is the one that maximizes overall happiness or utility for the greatest number.

Question 16

Rule Utilitarianism

Answer 16

Suggests that the best action is the one that follows rules that generally maximize utility.

Question 17

Kant’s Categorical Imperative

Answer 17

An ethical principle that one should act in a way that their actions could be universally applied to everyone, regardless of personal outcomes.

Question 18

Procedural Fairness and Rights

Answer 18

Focus on fair processes in decision-making, ensuring rights are upheld.

Question 19

Representative Democracy

Answer 19

A system where citizens elect representatives to make decisions on their behalf.

Question 20

Direct Democracy

Answer 20

A system where citizens directly participate in decision-making, such as through referendums.

Question 21

Hotelling’s Theory

Answer 21

A model that explains how firms in a competitive market choose locations (in a spatial sense) to maximize profit, often leading to clustering.

Question 22

Transfer Seeking

Answer 22

The pursuit of government action or policy that benefits a particular group at the expense of others (e.g., subsidies or tariffs).

Question 23

Leviathan Theory of Bureaucracy

Answer 23

A theory suggesting that government bureaucracies tend to grow and expand over time, often beyond what is necessary for efficiency.

Question 24

Market Structures

Answer 24

Includes different forms of market organization (e.g., perfect competition, monopoly, oligopoly) based on the number of firms and barriers to entry.

Question 25

Oligopoly

Answer 25

A market structure dominated by a small number of large firms, often leading to limited competition.

Question 26

Nash Equilibrium

Answer 26

A situation in game theory where no player can improve their outcome by changing their strategy, assuming all other players keep theirs unchanged.

Question 27

The Rule of Law

Answer 27

The principle that all individuals and entities are subject to and accountable under the law, ensuring fairness and justice.

Question 28

The Role of Government

Answer 28

Governments intervene in markets to address failures, protect property rights, and ensure equitable outcomes (e.g., regulation, taxation).

Question 29

Comparative Advantage

Answer 29

The ability of a country to produce a good or service at a lower opportunity cost than another, driving the benefits of trade.

Question 30

Market Structure

Answer 30

Describes the organization of a market, such as monopoly, oligopoly, or perfect competition.

Question 31

Types of Trade Policy

Answer 31

Includes tariffs, quotas, subsidies, and trade agreements designed to manage international trade.

Question 32

Normative Reasons for Trade Policy

Answer 32

Trade policies based on value judgments, such as promoting fairness or protecting domestic jobs.

Question 33

Positive Theory of Trade Policy

Answer 33

Focuses on the practical effects of trade policies, such as economic growth or international relations.

Question 34

Defining Externalities

Answer 34

Negative or positive side effects of economic activities that affect third parties (e.g., pollution or education).

Question 35

Externalities as Market Failure

Answer 35

When externalities are not priced into markets, the resulting inefficiencies lead to market failure.

Question 36

Transaction Costs and Incomplete Property Rights

Answer 36

Transaction costs (the costs of making a deal) and incomplete property rights can hinder efficient market outcomes.

Question 37

The Coase Theorem

Answer 37

Suggests that under certain conditions, private parties can negotiate solutions to externalities without government intervention.

Question 38

Internalizing Externalities

Answer 38

Efforts to incorporate the social cost or benefit of an externality into market decisions, often through taxes or subsidies.

Question 39

Cap and Trade System

Answer 39

A market-based approach to controlling pollution by providing economic incentives for reducing emissions.

Question 40

Management of Renewable Resources

Answer 40

Involves the sustainable use of resources like forests or fisheries to avoid depletion.

Question 41

Open Access Resources

Answer 41

Resources that are not owned by anyone, leading to overuse and depletion (e.g., fisheries).

Question 42

Non-Renewable Resources and Intergenerational Equity

Answer 42

The concept of using non-renewable resources wisely to ensure future generations have access to them.

Question 43

Anti-Competitive Practices

Answer 43

Actions by firms that reduce competition, such as price-fixing, collusion, or monopolistic behavior.

Question 44

Collusion

Answer 44

When firms work together to fix prices, limit production, or otherwise reduce competition.

Question 45

Abuse of Market Power

Answer 45

When a firm uses its dominant position to harm competition or exploit consumers.

Question 46

Deceptive Marketing Practices

Answer 46

Strategies that mislead consumers, such as false advertising or misrepresentation of products.

Question 47

The Lemons Problem

Answer 47

Occurs when sellers have more information about the quality of a product than buyers, leading to market inefficiencies.

Question 48

Natural Monopoly

Answer 48

A market where one firm can produce the entire supply of a good or service at a lower cost than multiple firms (e.g., utilities).

Question 49

Types of Price Regulation

Answer 49

Includes price ceilings, price floors, and rate-of-return regulation to control prices and promote fairness.

Question 50

Capture Hypothesis

Answer 50

The idea that regulatory agencies may be influenced or “captured” by the industries they are supposed to regulate.

Question 51

Agriculture Marketing Boards

Answer 51

Government-created entities that regulate the marketing and price of agricultural products.

Question 52

Public Goods

Answer 52

Goods that are non-excludable and non-rivalrous, meaning one person’s consumption doesn’t reduce availability for others (e.g., street lighting, national defense).

Question 53

The Free Rider Problem

Answer 53

Occurs when individuals benefit from a good or service without paying for it, leading to under-provision of public goods.

Question 54

Market Failure and Innovation

Answer 54

Market failure can hinder innovation, as individuals or firms may not invest in new ideas if they cannot protect their intellectual property.

Question 55

Market Power vs Innovation:

Answer 55

Market power can stifle innovation, as firms with significant market power may lack the incentive to innovate.

Question 56

Can Patents Hinder Innovation?:

Answer 56

Some argue that patents create monopolies that hinder others from using ideas to innovate further.

Question 57

Trade Secrets, Copyrights, Trademarks

Answer 57

Forms of intellectual property protection to encourage innovation and competition by safeguarding ideas, creative works, and brands.

Question 58

Principles of Macroeconomic Stabilization

Answer 58

Policies aimed at stabilizing the economy, such as fiscal policy (government spending and taxation) and monetary policy (control of money supply).

Question 59

Macroeconomic Stabilization and Market Failure

Answer 59

Government intervention is necessary to address macroeconomic failures like recessions or inflation.

Question 60

Long Run Economic Growth

Answer 60

The sustained increase in an economy’s output over time, driven by improvements in technology, capital, and labor productivity.

Question 61

Social Responsibility and Profits

Answer 61

The idea that businesses should operate in a way that benefits society while also making a profit, often linked to corporate social responsibility (CSR).

Question 62

Survival Bias

Answer 62

When analyzing data, focusing only on successful entities, ignoring those that failed, which can lead to misleading conclusions.

Question 63

Doing Well by Doing Good

Answer 63

The notion that businesses can achieve both profitability and positive societal outcomes through ethical practices and social responsibility.

Question 64

Responses to Survival Bias

Answer 64

To avoid survival bias, it’s important to look at the full picture, including unsuccessful firms or projects.