midterm Flashcards
A market is perfectly competitive if:
it has many buyers and many sellers, all of whom are selling identical products, with no barriers to new firms entering the market.
A form of market structure studied by economists is monopoly.
A firm is a monopoly if it can ignore other firms’ prices
In the diagram to the right, illustrating a binding price ceiling at P3, the amount of producer surplus transferred to consumers is represented by area _
and the deadweight loss is equal to areas _____
C
B & D
One of the basic facts of life is that people must make choices as they try to attain their goals. This unavoidable fact comes from a reality an economist calls:
scarcity
An example of a public franchise is
a firm that is the sole, government-designated provider of water
Suppose a firm introduces a significantly different version of an old product. How might that firm us brand management?
to postpone the time when they will no longer be able to earn economic profits.
The distinction between a normal and an inferior good is
when income increases, demand for a normal good increase while demand for an inferior good falls.
Does the market system result in allocative efficiency? In the long run, perfect competition
results in allocative efficiency because firms produce where price equals marginal cost.
Does the market system result in productive efficiency?
firms enter and exit until they break even where price equals minimum average cost.
A firm’s profit-maximizing price and quantity is represented by the
Marginal revenue line and where it crosses the MC curve
Do consumers benefit in any way from monopolistic competition relative to perfect competition?
that is appealing because it is differentiated
What information must economists have to estimate the price elasticity of demand?
the demand curve for a product.
How is the prisoner’s dilemma result changed in a repeated game?
players can employ retaliation strategies
The primary difference between absolute and comparative advantage is
absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.
Market price is determined by
both supply and demand
To have a monopoly, barriers to entering the market must be so high that no other firms can enter. Do network externalities create or remove barriers to entry? Explain.
create barriers to entry because if a firm can attract enough customers initially, it can attract additional customers as its product’s value increases by more people using it, which attracts even more customers.
How is game theory used in economics?
the rules of the game include matters beyond a firm’s control, a strategy is a firm maximizing profits and the payoffs are profits.
Owners and managers control some of the factors that make a firm successful such as:
the firm’s ability to differentiate its product
A(n) ______is someone who operates a business, bringing together the factors of production l— labor, capital, and natural resources —to produce goods and services.
entrepreneur
the study of the economy as a whole, including topics such as inflation, unemployment, and economic is?
Macroeconomics
How might the government affect whether a firm is a monopoly?
grant a firm a public franchise, making it the exclusive legal provider of a good or service.
Market power results in
economic profits that can be spent on research to develop new products.
The basis for trade is_______advantage.
comparative
A typical example of price discrimination over time would be when a company
charges higher prices for flat screen plasma televisions when they are first introduced and lower prices later
Consider the two demand curves illustrated in the figure to the right.
Which of the two is relatively more elastic? ____ is more elastic
D2
If the price of cigarettes increases, then the quantity of cigarettes demanded will:
decrease, and this effect will likely become larger (in absolute value) over time.
Do airlines practice price discrimination?
engage in price discrimination by charging business travelers and leisure travelers different prices.
The loss in efficiency due to market power is
small because firms with substantial market power are rare
In the diagram to the right, when demand decreases a _____ develops at the original price.
Equilibrium price will ____ and equilibrium quantity will _____ as a new equilibrium is established.
Surplus
Fall
Fall
In the diagram to the right, when supply decreases a _______ develops at the original price.
Equilibrium price will ____ and equilibrium quantity will ____ as a new equilibrium is established.
Shortage
rise
fall
In game theory,
rules determine what actions are allowable, players employ strategies to attain their objectives, and payoffs are the results of the interaction among the players’ strategies.
Suppose Wendy’s hamburgers have many close substitutes available. If so, then an increase in the price of Wendy’s hamburgers will likely.
decrease the quantity of Wendy’s hamburgers demanded by a relatively large amount
In the diagram to the right, illustrating a per-unit tax equal to P2 minus P3, tax revenue is represented by the areas _____ and the excess burden of the tax is represented by areas _____
D & F
E & G
The production possibilities frontiers depicted in the diagram to the right illustrate
technological advances in the tank industry.
Economists use the word marginal to mean an extra or additional benefit or cost of a decision. An optimal decision occurs when:
marginal benefit equals marginal cost.
The distinction between substitutes and complements is
substitute goods are used for the same purposes while complementary goods are used together
What is the government’s policy on collusion in the United States? Explain the rationale for this policy.
In the United States
the government makes collusion illegal with antitrust laws because monopolies create deadweight loss
The primary difference between product markets and factor markets is that
product markets are markets for goods, while factor markets are markets for factors of production— labor, capital, natural resources, and entrepreneurial ability.
For many years, the International Nickel Company of Canada essentially operated as a monopoly. What made this company a monopoly?
it had almost exclusive control of the world’s supply of nickel, used to make nickel products.
Which of the following would cause a shift in the demand curve from point A to point B?
All of the Above
A price floor is a legally determined _______ price that sellers may receive.
Minimum
______ is concerned with ‘what is’.
Positive analysis
On the diagram to the right, a movement from A to B represents a
change in quantity demanded
What effect will firms exiting have on the market price?
market supply will decrease, increasing price.
Property rights are
the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.
Which of the following is an expression of profit for a perfectly competitive firm?
Profit = (P - ATC) x Q Where P is price, Q is output and ATC is average total cost.
Opportunity Cost is:
the highest valued alternative that must be given up to engage in an activity.
______ occurs when a good or service is produced at the lowest possible cost.
Productive efficiency
What effect does advertising have on firm profits?
increase profits by shifting the demand curve for the product to the right
Economic surplus in a market is the sum of _____ surplus and _____ surplus. In a competitive market, with many buyers and sellers and no government restrictions, economic surplus is at a _____ when the market is in _____.
consumer surplus
producer surplus
maximum
equilibrium
Economic efficiency is:
A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.
How is the price elasticity of demand measured?
the percentage change in the quantity demanded divided by the percentage change in price
Suppose the price of salt increases by 10 percent and, as a result, the quantity of pepper demanded (holding the price of pepper constant) increases by 7 percent.
The cross-price elasticity of demand between salt and pepper is ___
(Enter your response rounded to two decimal places and include a minus sign if appropriate.)
In this example, salt and pepper are ______
Instead, suppose salt and pepper were compliments. If so, then the cross-price elasticity of demand between salt and pepper would be:
0.7
substitutes
negative
Is price discrimination illegal?
Robinson-Patman Act such that price discrimination is illegal if it reduces competition.
Consumer and producer surplus measures the _____ benefit rather than the _____ benefit.
net
total
A black market is:
a market in which buying and selling take place at prices that violate government price regulations.
Assume the market for oranges is perfectly competitive. If the demand for oranges increases, then the market
will supply additional oranges because producers seek the highest return on their investments.
Producer surplus is the difference between the lowest price a firm would be willing to accept and the price it actually receives. This component of economic surplus is illustrated in the diagram to the right by area
B
The supply curve for a firm in a perfectly competitive market in the short run is:
that firm’s marginal cost curve for prices at or above average variable cost.
What is total revenue at the initial price (at point A)? Revenue is initially $ 224 thousand.
What would total revenue be at the lower price (at point B)?
Revenue would be $216 thousand.
Given this change in total revenue, is demand between these prices elastic or inelastic?
Demand (in this range of prices) is _______
inelastic
Suppose a local McDonald’s hamburger restaurant raises the price of its cheeseburgers from $2.00 to $2.50. What will happen to the quantity of McDonald’s cheeseburgers demanded?
If McDonald’s raises the price of its cheeseburgers, then
some of McDonald’s customers, but not all of them, will still demand McDonald’s cheeseburgers because this restaurant may be closer to them.
A production possibilities frontier (PPF) is
a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.
What determines entry and exit of firms in a perfectly competitive industry in the long run?
new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses.
The Scottish philosopher Adam Smith argued in 1776 that
prices would do a better job of coordinating the activities of buyers and sellers than guilds could.
Deadweight loss is the reduction in economic surplus resulting from a market not being in competitive equilibrium. In the diagram to the right, deadweight loss is equal to the areas
C & E
The diagram in panel b is an example of
a demand curve
When the government imposes price floors or price ceilings,
there is a loss of economic efficiency.
On the diagram to the right, movement along the curve from points A to B to C illustrates
increasing marginal opportunity costs.
”Rent controls, government farm programs, and other price ceilings and price floors are bad.”
This is an example of a:
normative statement. The statement is concerned with what should be.
Tax incidence is
the actual division of the burden of a tax between buyers and sellers in a market.
_______ occurs when production is in accordance with consumer preferences.
Allocative efficiency
A monopoly’s demand curve
is the same as the demand curve for the product.
Consumer surplus is the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. This component of economic surplus is illustrated in the diagram to the right by area ___
A
Perfectly competitive firms should produce the quantity where:
the difference between total revenue and the total cost is as large as possible.
A price ceiling is a legally determined _______ price that sellers may charge.
Maximum
Economics is about ______ which measures the costs and benefits of different courses of action.
Positive analysis
MIT economist Jerry Hausman has estimated the price elasticity of demand for Post Raisin Bran cereal to be - 2.5 and the price elasticity of demand for all types of breakfast cereals to be - 0.9.
The demand for Post Raisin Bran cereal is _____ and the demand for all types of breakfast cereals is ______
Why might the demand for Post Raisin Bran cereal be more elastic than the demand for all types of breakfast cereals?
Post Raisin Bran cereal:
elastic
inelastic
is defined more narrowly
In the diagram to the right, marginal benefit______ marginal cost at output level Q2.
This output level is considered economically _______.
is equal to
efficient
We can use a simple economic model called the_____to see how participants in markets are linked.
circular-flow diagram
An example of price discrimination is
a movie theater charging higher prices for evening showings than for afternoon showings
and
an airline charging higher prices for business travelers than for leisure travelers
The diagram in panel A is an example of
a supply schedule
A society can have a ____ economy in which the government decides how economic resources will be allocated.
centerally planned
In the long run, monopolistically competitive firms
may continue to earn profit by reducing costs
Which are more economically efficient, perfectly competitive markets or monopolies?
more economically efficient because they result in more economic surplus.
One of the great benefits of trade is
makes it possible for society to become better off by increasing its consumption.
Are monopolistically competitive firms efficient in long-run equilibrium?
are not productively efficient because they do not produce at minimum average total cost and they are not allocatively efficient because they produce where price is greater than marginal cost
A firm is likely to be a monopoly if
that firm has control of a key resource necessary to produce a good or service
How does the long-run equilibrium for a monopolistically competitive market differ from the long-run equilibrium for a perfectly competitive market?
One way in which monopolistically competitive markets and perfectly competitive markets differ is that in long-run equilibrium, monopolistically competitive firms
do not produce at minimum average total cost
If the market price for wheat were indeed $4 per bushel, should the wheat farmer exit the industry in the long run?
In the long run, the wheat farmer
should continue to produce wheat because breaking even is as high a return as she could earn elsewhere.
When firms introduce new products, how do they typically determine the price elasticity of demand for those products?
experimenting with different prices.
A free market exists
when the government places few restrictions on how a good or a service can be produced or sold or on how a factor of production can be employed.
The government issues patents
to encourage firms to spend money on the research and development necessary to create new products.
How do firms use marketing?
advertise their product
The relevant market has been identified if
a price increase results in higher profits; otherwise, the market is too narrow.
The production possibilities frontiers depicted in the diagram to the right illustrate
both the labor force and capital stock increasing.
In general, the term “ceteris paribus” means?
All else equal
Compare the demand for sugar with demand for food.
more inelastic because sugar tends to represent a smaller fraction of a consumer’s budget.
A society can have a _____ economy in which the decisions of households and firms interacting in markets allocate economic resources.
Market
How long do patents last?
20 years
Which of the following events would cause the supply curve to increase from S1 to S3
A decrease in the price of inputs
Business travelers have a more ______ demand than leisure travelers so airlines charge business travelers _______ price
inelastic
higher
When the federal government crafts environmental policies that make it less expensive for firms to follow green initiatives:
the polices are consistent with economic incentives
Consider the figure to the right and assume that it is the market for health-care services. When the “baby boomer” generation retires, the number of people who require health care increases by 30%, and, as a result, the number of health-care providers also increases, but by only 25%.
What is the effect on the price of health-care services over time?
It Increases because demand increased by more than supply
_____ is concerned with ‘what ought to be’
Normative Analysis
Suppose the market for cotton is perfectly competitive and that input prices increase as the industry expands. Characterize the industry’s long-run supply curve.
upward sloping because the long-run average cost of production will be increasing.
In the diagram to the right, illustrating a binding price floor at P1, the amount of consumer surplus transferred to producers is represented by area __ and the deadweight loss is equal to areas ____
B
C & E
Compare the demand for water with the demand for wine.
relatively more elastic because wine is a luxury.
________ is the study of the choices people make to attain their goals, given their scare resources.
Economics
