Microeconomics knowledge

Question 1

consequences of price ceilings

Answer 1

protecting low-income workers, shortage, non-price rationing, underground markets, welfare loss

Question 2

price ceiling example

Answer 2

rent controls, food price controls

Question 3

consequences of price floor

Answer 3

supporting producers, surpluses, government measures to dispose of surpluses, welfare loss

Question 4

price floor example

Answer 4

minimum wages

Question 5

reasons for government intervention

Answer 5

earn revenue for the government, provide support to firms, provide support to households on a low income, influence levels of production or consumption by firms or consumers, correct market failure, promote equity

Question 6

negative production externalities market-based policies

Answer 6

indirect taxes, carbon taxes, trade permits

Question 7

negative production externalities non-market-based policies

Answer 7

government legislation and regulation, education, international agreements

Question 8

negative consumption externalities policies

Answer 8

indirect taxes, government legislation, nudges, education

Question 9

positive consumption externalities policies

Answer 9

direct government provision, subsidies, government legislation and regulations, nudges, education

Question 10

positive production externalities policies

Answer 10

direct government provision, subsidies

Question 11

adverse selection

Answer 11

government regulations, government provision of information, licensure

Question 12

non-price determinants of demand

Answer 12

income, preferences of consumers, price of substitute goods, price of complementary goods, number of consumers

Question 13

non-price determinants of supply

Answer 13

costs of factors of production, technology, price of related goods (joint supply or competitive supply), taxes and subsidies, number of firms, firm price expectations

Question 14

rational consumer choice assumptions

Answer 14

consumer rationality, perfect information, utility maximization

Question 15

consumer choice - biases

Answer 15

rules of thumb, anchoring, framing, availability, bounded rationality, bounded self-control, bounded selfishness, imperfect information

Question 16

choice architecture

Answer 16

default choice, restricted choice, mandatory choice

Question 17

rational firm business objective

Answer 17

profit maximization

Question 18

alternative firm business objectives

Answer 18

social corporate responsibility, market share, growth maximization, satisficing

Question 19

determinants of PED

Answer 19

number and closeness of substitutes, necessities vs. luxuries, length of time, proportion of income spent on a good

Question 20

determinants of PES

Answer 20

length of time, mobility of factors of production, spare capacity of firms, ability to store stocks, rate at which marginal costs increase

Question 21

profit-maximizing level of output

Answer 21

MR=MC for all market structures

Question 22

types of profit

Answer 22

abnormal, normal, loss

Question 23

reasons for economies of scale

Answer 23

specialization of labor and management, bulk buying inputs, financing economies (lower interests for large firms)

Question 24

reasons for diseconomies of scale

Answer 24

co-ordination, monitoring, and communication problems, poor worker motivation

Question 25

perfect competition

Answer 25

- large number of firms in the industry - undifferentiated (homogenous) products without brand names - no barriers to entry

Question 26

monopoly

Answer 26

- a single dominant firm in the industry - firm sells unique good or service with no close substitutes - high barriers to entry

Question 27

oligopoly

Answer 27

- small number of large firms in the industry - products may or may not be differentiated - high barriers to entry

Question 28

monopolistic competition

Answer 28

- a fairly large number of small or medium firms in the industry - differentiated products - no barriers to entry

Question 29

perfect competition basic traits

Answer 29

price-taker, perfectly elastic (horizontal demand curve), every firm makes a normal profit in the long run

Question 30

perfect competition other traits

Answer 30

allocative efficiency, low prices for consumers, no inefficient firms due to competition, unrealistic assumptions, lack of product variety, cannot take advantage of economies of scale, limited product development

Question 31

monopoly basic traits

Answer 31

price-maker, downward sloping demand curve, can make an abnormal profit indefinitely in the long run

Question 32

monopoly other traits

Answer 32

allocative inefficiency, high price for consumers, low output, possibly less innovative, negative impacts on the distribution of income, economies of scale

Question 33

barriers to entry

Answer 33

economies of scale, natural monopoly, anti-competitive behaviour, branding, legal barriers (patents, licenses, copyrights, tariffs, or quotas)

Question 34

monopolistic competition basic traits

Answer 34

price-maker, more elastic demand curve than in monopoly, every firm makes a normal profit in the long run

Question 35

monopolistic competition other traits

Answer 35

product differentiation, allocative inefficiency, product variety, both price, and non-price competition

Question 36

product differentiation

Answer 36

physical differences, quality differences, location, services, product image

Question 37

oligopolies basic traits

Answer 37

price-maker, downward sloping demand curve, can make an abnormal profit indefinitely in the long run

Question 38

oligopolies other traits

Answer 38

interdependence (strategic behavior, conflicting incentive- to collude/ to cheat in a collusive agreement), only non-price competition due to prisoner's dilemma, collusion, allocative inefficiency, higher prices for consumers, low output, possibly less innovative, negative impacts on the distribution of income, economies of scale, product variety

Question 39

types of collusion

Answer 39

cartel, informal collusion (price leadership)

Question 40

reasons for collusion

Answer 40

gain market power, increase profits, limit competition

Question 41

non-price competition

Answer 41

product development, branding, advertising, services

Question 42

abuse of market power

Answer 42

unreasonably high prices, artificially low prices...legislation to protect competition (in case of natural monopoly government ownership or government regulations such as average pricing or marginal cost pricing)

Question 43

explanation of the law of demand

Answer 43

income effect (if price of good changes, a consumer's purchasing power increases), substitution effect (if price of a good falls, consumers buys more of now less expensive good)

Question 44

carbon tax advantages

Answer 44

internalising the negative externality, incentivise R&D, source of government revenue, easily and quickly adjustable

Question 45

carbon tax disadvantages

Answer 45

may hurt poor people, can cause bankruptcies, carbon tax is politically unpopular, companies may relocate their production facilities to other countries (unemployment), requires strong institutions, difficulty in estimating the correct tax price

Question 46

subsidies advantages

Answer 46

preventing the long-term decline of industries, lowering prices for consumers (increasing standards of living), increasing employment

Question 47

subsidies disadvantages

Answer 47

burdening government budget, worsening resource allocation, producers can become subsidy dependent

Question 48

implications of inelastic PED

Answer 48

if PED is inelastic then the firm can increase its revenue by increasing the price per unit, government can make large profits from taxing inelastic goods

Question 49

implications of elastic PED

Answer 49

if PED is elastic then the firm can decrease its price to increase revenue, government can significantly decrease consumption of taxed goods even with a lower tax rate

Question 50

short-run

Answer 50

a period of time in which at least one factor of production is fixed

Question 51

long-run

Answer 51

a period of time in which all factors of production are variable