review stuff, midterm 1

Question 1

The size of a firm’s fixed cost of production does not affect the choice ________ but can alter the
choice ________.

Answer 1

. to shut down in the short run; to exit the industry.

Question 2

opportunity cost

Answer 2

what you give up to get an item.

Question 3

opportunity cost

Answer 3

what you give up to get an item.

• always compared to the next best, mutually exclusive alternative.
• don’t include costs that would’ve still been incurred

Reflected in the slope of the PPF.
=units of y sacrificed for 1 or more unit of x

Question 4

Positive Questions/ claims

Answer 4

Descriptive.
Asks or claims how the world functions.
Can be answered by examining facts.
how the world is

Question 5

Normative questions/ claims

Answer 5

Prescriptive.
how/ what the world ought to be.
answer depends on value judgements.

Question 6

PPF:

• Feasible
• Efficient
• Specialized

Answer 6

• Feasible: able to produce that combination with current resources and technology.
• Efficient:
• Specialized:

Question 7

PPF:

• Feasible
• Efficient
• Specialized

Answer 7

• Feasible: able to produce that combination with current resources and technology. on or inside ppf
• Efficient: can’t produce more of one good without producing less of another. on the ppf
• Specialized: producing only one good . on an axis

Question 8

Specialization

Answer 8

International Trade
Caveats:
-Utility: Opp. cost is reduced if you enjoy the process
-Productivity: Opp. cost rises as you do more
-Security: comp. advantage may change

Question 9

Demand will increase when:

population. .
consumers. .
substitute. .
complement. .
income. .
future. .

Answer 9

population increases.
consumers tastes change favorably.
substitutes increase in price. -goods that can replace one another
complement decrease in price. - goods that are more useful when used together.
income increases (for normal goods) inferior good exception.
buyers expect that the goods price will be higher in the future.

Question 10

inferior good

Answer 10

when income falls, demand rises.

when income increases, buyers purchase less of this.

Question 11

Supply increases when:
sellers..
production technology..
price of input..
sellers expect in future..
substitute in production..
complement in production..

Answer 11

more sellers enter the market.
production technology improves.
price of input decreases.
sellers expect the good’s price to fall in future.
substitute in production decreases in price. - goods that compete for the same inputs.
complement in production increases in price. - goods that are produced simultaneously for the same inputs.

Question 12

Shortage (or excess.. )

Answer 12

excess demand. at a given price, qty demand is greater than qty supplied.

Question 13

Surplus (or exces..)

Answer 13

Excess supply.

at a given price, qty supplied is greater than qty demanded.

Question 14

income elasticity of D

Answer 14

% change in Q / % change in income

Question 15

cross-price elasticity of D

Answer 15

% change in Q of good 1 / % change in P of good 2

Question 16

Demand elasticity

• Perfectly inelastic E=
• Perfectly elastic E=
• unit elastic E =

Answer 16

PI E = 0, vertical line
PE E = -infinity, horizontal line.
cant change price.
UE E = -1

Question 17

Supply Elasticity

• Perfectly inelastic E=
• Perfectly elastic E=
• unit elastic E =

Answer 17

PI E = 0, vertical line
PE E = infinity, horizontal line.
cant change price.
UE E = 1

Question 18

Inferior goods
normal goods
luxury goods

Answer 18

Inferior goods: E<0

normal goods: 01

Question 19

Change in qty demanded vs change in demand

Answer 19

• Change in qty demanded: price change, (movement along)

- change in demand: shifts

Question 20

Using elasticity to decide if complement, substitute, or unrelated.

Answer 20

complement: e = -#
substitute: e = +#
unrelated: e = 0

Question 21

Good has more elastic demand when..

Answer 21

Close substitutes are available.
Good is a luxury.
Defined market is rather narrow.
Measured over a larger period of time.
A large fraction of income is spent on that good.

Question 22

Good has more elastic supply when..

Answer 22

Inputs can be used in many goods.
Supply is measured over a long period of time.
market is narrowly defined.

Question 23

Why tax something more inelastic?

Answer 23

less DWL

Question 24

Marginal Cost

Answer 24

the value of everything sacrificed to produce one more unit of the good.
generally expect marginal costs to rise.

Question 25

Total Welfare

Answer 25

CS + PS

Question 26

Price ceiling

Answer 26

can’t go above.
binding when below equilibrium
not binding when above.

Question 27

Price ceiling immediate effects.

Answer 27

• Harms sellers (reduces PS)
• helps some buyers, harms other who can no longer buy. (could raise or lower CS)
• Lowers total welfare.

Question 28

Price ceiling long term consequences.

Answer 28

• Persistent shortages - rationing coupons, waiting in line

- Black markets: charged higher than equilibrium price because of the risk to seller.

Question 29

Price Floor

Answer 29

can’t go below.
binding when above equilibrium
not binding when below.

Question 30

Price floor immediate effects.

Answer 30

• Harms buyers (reduces CS)
• Helps some sellers, harms others who can no longer sell. (could raise of lower PS)
• Lowers total welfare

Question 31

Price floor long term consequences

Answer 31

• Persistent surplus. must be disposed of so..
• “lower the price” giving backdoor discount
• convert it into unrelated good
• gov’t commits to buy any leftovers
• gov’t limits its production.

-Over investment in the industry. high profits for those who successfully sell

Question 32

Tax Incidence

Answer 32

depends on elasticity.

• More elastic demand causes less incidence on the buyer.
• More elastic supply causes less incidence on the seller.

Question 33

elasticity in Demand curve and tax burden

Answer 33

PI: paid entirely by the buyer
More inelastic: tax is paid more by buyers.
More elastic: tax is paid by sellers.

Question 34

What does tax due to DWL

Answer 34

taxes reduce the amount sold, so it always creates some DWL.

more elastic demand or supply created greater DWL.

Question 35

If you want more revenue tax the ______ good; if you want less DWL, tax the _____ good.

Answer 35

If you want more revenue tax the inelastic good; if you want less DWL, tax the inelastic good.

Question 36

Economic Profit

Answer 36

Total Revenue - total Opp cost