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1
Q

?Total utility is best defined by which of the following??

A

The total satisfaction received from consuming a particular amount of a product

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2
Q

Accounting profit

A
  1. Total revenue less explicit costs

2. Accounting profit = TR ? Explicit costs

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3
Q

All Costs of Production

A
  1. Total Cost:
  2. Average fixed cost:
  3. Average variable cost
  4. Average total cost:
    Marginal cost
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4
Q

Average product (AP):

A

Total product / Units of Labor

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5
Q

Benefits

A

The extra satisfaction from the output of more public goods.

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6
Q

Change in Demand

A
  1. Demand will change if there is a change in the determinants of demand, other things equal.
  2. Result:
  3. The demand curve will shift to the right if demand increases.
  4. The demand curve will shift to the left if demand decreases.
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7
Q

Change in Supply

A
  1. Supply will change if there is a change in the determinants of supply, other things equal.
  2. Result:
  3. The supply curve will shift to the right if supply increases.
  4. The supply curve will shift to the left if supply decreases.
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8
Q

Collusive Pricing (Cartel) (Obstacles to Collusion)

A
  1. Cheating
  2. Number of firms
  3. Potential entry
  4. Demand and cost differences
  5. Recession
  6. Legal obstacles (e.g. Antitrust law)
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9
Q

Complementary goods:

A

A decline in the price of one product increases the demand for another good.

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10
Q

Consumer Behavior (Utility)

A
  1. Satisfaction or pleasure
  2. Subjective
  3. Difficult to quantify
  4. Different from usefulness
  5. Two Types: Total Utility and Marginal Utility
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11
Q

Consumer expectations

A

The expectation of a lower future price of housing will reduce current demand.

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12
Q

Consumer Surplus

A
  1. The difference between what a consumer is willing to pay for a good and what the consumer actually pays
  2. The extra benefit from paying less than the maximum price
  3. The area under the demand curve and above the price
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13
Q

Cost of Production: Applications for Successful Start Up Firms

A
  1. Google, Microsoft and Apple have been very successful.
  2. The rapid growth of these firms are attributed to labor specialization, management specialization and more importantly economies of scale.
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14
Q

Cost-Benefit Analysis

A
  1. Cost-benefit analysis helps the government make decisions on which project to pursue.
  2. YES if:
    a. Total benefit > Total cost; and
    b. MB > MC
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15
Q

Costs

A
  1. The public sector vs. the private sector
  2. Resources diverted from private good production.
  3. The opportunity cost of producing more public goods
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16
Q

Costs for Production: Long Run

A
  1. Adjustable plant size and adjustable number of plants

2. Firms can enter and exit.

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17
Q

Costs of Production: Short Run

A
  1. Fixed plant size, land and machinery and fixed number of plants
  2. Firms can vary their output by changing resources used.
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18
Q

Costs of Production: Summary

A
  1. Marginal cost eventually rises with the quantity of output.
  2. The average-total-cost curve is U-shaped.
  3. The marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost.
  4. Many costs are fixed in the short run but variable in the long run.
  5. Economies of scale, diseconomies of scale and constant returns to scale refer to properties of long-run average total cost with respect to the quantity of output of the firms.
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19
Q

Costs of Producton: Average fixed cost (AFC):

A

AFC = TFC/Q

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20
Q

Costs of Producton: Average total cost (ATC)

A

ATC = TC/Q
= TFC/Q + TVC/Q
ATC = AFC+AVC

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21
Q

Costs of Producton: Average variable cost (AVC)

A

AVC = TVC/Q

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22
Q

Costs of Producton: Marginal cost (MC)

A

MC = change in TC/change in Q

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23
Q

Costs of Producton: Total Cost (TC):

A

TC = TFC + TVC

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24
Q

Degree of Concentration

A
  1. Four Firm Concentration Ratio

Herfindahl Index

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25
Q

Demand curve

A

Consumers? full willingness to pay

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26
Q

Demand, Supply and Market Summary

A
  1. Quantity demanded, demand and the law of demand
  2. Demand determinants
  3. Individual demand vs. market demand
  4. Quantity supplied, supply and the law of supply
  5. Supply determinants
  6. Individual supply vs. market supply
  7. Demand, supply & market equilibrium
  8. Shortage and surplus
  9. Changes in demand and supply, and shifts in demand and supply
  10. Government-set prices; namely price ceilings and price floors
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27
Q

Demand:

A

The demand schedule and demand curve show the relationship between the price of a product and the quantity demanded.

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28
Q

Demand-Side Failures & Public Goods

A
  1. For a public good, its demand curve might reflect none of its consumers? willingness to pay.
  2. Demand-side market failures
    Free-rider problem:
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29
Q

Demand-side market failures

A
  1. For example, education: It is not possible for Tom to make the people who get the spill-over benefit from his education pay him.
  2. Underproduction
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30
Q

Determinants of Demand

A
  1. Tastes (Preferences)
  2. Income
  3. Price of related goods
  4. Consumer Expectations
    Number of Buyers
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31
Q

Determinants of Supply

A
  1. Input prices (resource prices) Higher input prices imply higher costs and lower supply.
  2. Technology
  3. Taxes and subsidies
  4. Prices of other goods
  5. Producer expectations
  6. Number of sellers
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32
Q

Dilemma of Regulation: What would you do if you were the government?

A
  1. Allow the monopolist to charge customers at P = ATC; or
  2. Subsidize the losses; or
  3. Allow the monopolist to use price discrimination in order to cover ATC.
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33
Q

Direct Control

A

Laws to limit an activity or set emission standards.

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34
Q

Economic Costs

A
  1. Economic costs or opportunity costs

2. Economic costs = Explicit costs + Implicit costs

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35
Q

Economic Effects of Monopoly

A
  1. Price, output and efficiency
  2. Income transfer
    Cost Complications
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36
Q

Economic Effects of Monopoly: Cost Complications

A
  1. Economies of Scale
  2. X-Inefficiency
  3. Rent Seeking Behavior
    Technological Advance
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37
Q

Economic Effects of Monopoly: Income Transfer

A

The owner of the monopolistic corporation gains at the expense of consumers.

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38
Q

Economic or pure profit

A
  1. Total revenue less economic costs
  2. Economic profit = TR ? Economic costs
  3. Economic profit = TR ? Explicit costs ? Implicit costs
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39
Q

Economic Profit Formula

A

(P ? ATC) x Q =

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40
Q

Economies of Scale

A
  1. How? Long-run ATC decreases as the size of the firm increases.
  2. E.g. Natural monopoly
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41
Q

Economies of Scale

A
  1. You tend to use a product that everybody else does.
  2. Simultaneous consumption
  3. Network effects
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42
Q

Efficient allocation

A
  1. Productive efficiency (Minimized cost)

2. Allocative efficiency (MB = MC)

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43
Q

Excludability

A
  1. A person can consume a product if (s)he is willing and able to pay.
    those unable and unwilling to pay do not have access to the benefits of the product.
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44
Q

Explanations for the Law of Demand

A
  1. Diminishing marginal utility
  2. Income Effect
    Substitution Effect
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45
Q

Explanations for the Law of Supply

A
  1. Revenue Implications

Marginal Cost

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46
Q

Explicit Costs

A

Monetary payments

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47
Q

Externalities

A
  1. Negative externality

2. Positive externality

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48
Q

Externalities

A

A cost or benefit of producing a product is passed onto someone else or spills over to a third party.

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49
Q

Four-firm concentration ratio:

A
  1. Four-firm concentration ratio = Output of four largest firms/Total output
  2. Four-firm concentration ratio = Sales of four largest firms/Total sales
  3. Very low ratio ? pure competition
  4. Less than 40% ? monopolistic competition
  5. 40% or more ? oligopolistic competition
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50
Q

Free-rider problem:

A

People can use public goods without paying for them. In other words consumers can enjoy benefits without paying.

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51
Q

Game Theory & Oligopoly Strategic Behavior

A
  1. Strategic behavior:
  2. Mutual interdependence (Pricing policy)
  3. Collusion (Enhances profit)
  4. Incentive to cheat
    Prisoner?s dilemma
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52
Q

Government Set Prices: Ceilings on Gasoline

A

i. Rationing problem
ii. Ability to pay, first-come first-served or favoritism.
Black markets

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53
Q

Government Set Prices: Price Floor on Wheat

A
  1. Resource allocation is done inefficiently.
  2. Government purchases all surplus, causing tax burden to taxpayers.
  3. Prevention of wheat import can bring about retaliation.
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54
Q

Government Set Prices: Rent Control

A

a. Demand side: (A low rent increases demand for housing.)
b. Supply side: (A low rent makes rental units less attractive to build.)
c. In the short run, landlords convert rental units to condominiums.
d. In the long run, landlords sell rental units to invest in higher return assets.

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55
Q

Government Set Prices: Price ceiling:

A

A price ceiling is a maximum legal price.

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56
Q

Government-Set Prices: Price Floor

A

A price floor is a minimum legal price. (e.g. minimum wage)

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57
Q

Herfindahl Index

A

HHI = (%S1)2 + (%S2)2 + (%S3)2 +?+ (%Sn)2
HHI = Sum of the squared market shares of all firms
? HHI = (100)2 = 10,000 ? What does this mean?
? HHI = (30)2 + (70)2 = 5,800

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58
Q

If a rational consumer is in equilibrium, then:?

A

The marginal utility per last dollar spent is the same for all goods consumed

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59
Q

Implicit Costs

A
  1. Income you would have earned
  2. Value of next best use
  3. Self-owned resources
  4. Self-employed resources
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60
Q

Income

A
  1. Normal goods: As income rises, the demand for a normal good will go up.
  2. Inferior goods: As income rises, the demand for an inferior good will go down.
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61
Q

Indifference Curve Analysis

A
  1. The consumer?s preferences are represented by consumer?s indifference curves.
    The slope of an indifference curve at any point is the consumer?s marginal rate of substitution.
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62
Q

Individual Supply & Market Supply

A

Like market demand, market supply is the sum of all individual supplies for all sellers of a product at a given price.

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63
Q

Law of demand:

A
  1. Other things equal, as price falls the quantity demanded rises.
  2. Other things equal, as price rises the quantity demanded falls.
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64
Q

Law of Demand: Income effect:

A

If the price goes down, purchasing power increases, enabling consumers to buy more

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65
Q

Law of Demand: Substitution effect:

A
  1. If the price goes down, consumers will buy more of that product and fewer of other products.
  2. They substitute a cheaper good for a more expensive good.
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66
Q

Law of Demand: Diminishing marginal utility

A

Additional units yield less and less marginal utility.

67
Q

Law of diminishing marginal utility

A
  1. The more of a good consumers obtain, the less they want.
  2. Each additional unit of a good provides less utility.
  3. The law explains downward sloping demand. Why?
68
Q

Law of Diminishing Returns

A
  1. Add a variable resource to a fixed resource
  2. Output will increase by a smaller and smaller amount
  3. Rationale: If not, the world must have plenty of goods.
  4. Marginal product will decline
  5. Rationale: Each worker has less capital to work with.
69
Q

Law of supply:

A
  1. Other things equal, as price increases the quantity supplied increases.
  2. Other things equal, as price decreases the quantity supplied decreases.
70
Q

Legal Barriers to Entry

A
  1. How? Grants exclusive right to innovators.

2. E.g. Patents & licenses

71
Q

Long Run Production Cost

A
  1. Economies of Scale
    a. Labor specialization
    i. Workers are more efficient if they work on one task.
    b. Managerial specialization
    i. Small firms might have to make their marketing expert work outside his area of expertise.
    c. Efficient capital
    i. Efficient capital might be too expensive for small firms.
  2. Diseconomies of Scale
    a. Large firms often have problems of communication and cooperation
    Constant Returns to Scale
72
Q

Marginal Cost

A

Since the cost of an additional unit of production increases, firms will not produce more unless they receive a higher price.

73
Q

Marginal product (MP):

A

Change in total product / Change in Labor

74
Q

Marginal Product vs. Average Product

A
  1. They have the same trend, but:
  2. MP > AP, AP?
  3. MP = AP, AP is at a maximum.
  4. MP < AP, AP?
  5. Note: MP < AP, adding MP will reduce AP. Why?
75
Q

Marginal utility

A
  1. Extra satisfaction from an additional unit.

2. We obtain less marginal utility from additional units of a good, so we will buy more only if that good is cheaper.

76
Q

Market efficiency

A
  1. Demand & consumers? willingness to pay

No underproduction or overproduction

77
Q

Market Equilibrium

A
  1. Equilibrium price and quantity
  2. Efficient allocation
  3. Surplus and shortage
  4. The rationing function of price
78
Q

Market Failures

A

The market fails to produce the right amount of product.

79
Q

Market for externality rights: Carbon Dioxide Emissions

A
  1. Imposes a carbon tax.
    a. Assigns property rights to pollute.
    b. Sets a cap for the total amount of emissions.
    c. Allows firms to trade the externality rights.
  2. Raises cost of polluting.
  3. Easy to enforce
80
Q

Markets

A
  1. Bring buyers and sellers together.
  2. Buyers demand goods and sellers supply goods.
  3. Their interaction determines the price.
  4. Assumptions: Standardized good and Competitive market
81
Q

Misconceptions

A
  1. Not the highest price
  2. Total, not unit, profit (Maximize (TR ? TC) not (P ? ATC))
  3. Possibility of losses (If preference changes reduce demand or increase costs. )
82
Q

Monopolistic Competition

A
  1. Large number of sellers
  2. Small market shares
  3. Independent actions
  4. Differentiated Products
  5. Brand names and packaging
  6. Some control over price
  7. Easy entry and exit
  8. Need for advertising: Non-price Competition
83
Q

Monopolistic Competition & Efficiency

A
  1. Pure competition
    P = min ATC
    P = MC
2. Monopolistic competition
? P1 > min ATC 
? P1 > MC
? Underproduce
? Q1 < QPC ? Excess capacity
84
Q

Monopoly Demand

A
  1. Face downward-sloping demand (Entire market demand)
  2. Marginal revenue < price (To increase sales, must lower price)
  3. A price maker (Choose P,Q combination)
85
Q

Monopoly is inefficient

A
  1. Charge P>MC
  2. Qm < Qc
  3. Deadweight loss (abc)
86
Q

Negative externality

A
  1. Supply-side failures

2. Over-allocated resources

87
Q

Noncollusive Oligopoly Two Strategies

A
  1. Match price changes
  2. Ignore price changes
  3. Both lead to a kinked-demand curve.
88
Q

Noncollusive Oligopoly: Ignore price changes

A
  1. If A increases the price and its competitors do not, A will lose a lot of customers.
    Result: DA is elastic
89
Q

Noncollusive Oligopoly: Match price changes:

A
  1. If A cuts the price and its competitors match the price, A will not gain that much. Result?
  2. D for product A is inelastic.
90
Q

Nonexcludability

A
  1. Everyone can use them anytime they want.
91
Q

Nonrivalry

A
  1. When a person consumes or uses a public good, other people can use it as well.
92
Q

Normal profit

A

Equal to implicit costs

93
Q

Oligopoly: Kinked-Demand Curve: Model Criticisms

A
  1. How does price get to P0?
  2. Price flexibility
    i. Prices are not that rigid at P0 .
    ii. E.g. OPEC raised price of oil in the 1970s causing changes in price and inflation.
  3. Price wars
94
Q

Ownership or control of essential resources:

A

For example

  1. De Beers owns 55% of the world supply of diamonds.
  2. Canadian Nickel company owns 90% of the world?s nickel reserves.
95
Q

Policy Options

A
  1. Anti-Trust Laws
  2. Natural Monopoly
    Ignore
96
Q

Policy Options: Anti-Trust Laws

A
  1. Divide the firm if it engages in anticompetitive actions.

2. E.g. Microsoft, ?Ma Bell?

97
Q

Policy Options: Ignore

A
  1. Unstable in long run

e. g. Emergence of new technology.

98
Q

Policy Options: Natural Monopoly

A
  1. Regulate price

2. E.g. Utilities.

99
Q

Pollution

A
  1. Since the firm does not include the negative externality into its costs, it produces at MarketQ.
  2. At Market Q,
    i. Total cost (firm?s cost + externality cost) = b
    ii. Total benefit only = c
    iii. Total cost > total benefit
100
Q

Pollution & Tax

A
  1. A tax will shift S to Ssociety and decrease output from MarketQ to OptimalQ.
  2. Q Optimal is produced.
  3. The efficiency loss is eliminated.
101
Q

Positive Externalities & Government Intervention (Subsidies)

A
  1. Look at the government?s subsidies to buyers.
  2. The demand curve will shift from D to Dsociety. As a result:
  3. Q optimal is produced.
  4. The efficiency loss is eliminated.
102
Q

Positive externality

A
  1. Demand-side failures

2. Under-allocated resources

103
Q

Price Discrimination

A
  1. Three forms:
    a. Charge different customers different prices.
    b. Charge each customer their maximum willingness to pay.
    c. Charge one price for first unit and a lower price for subsequent units.
  2. Examples:
    a. Airfares
    b. Electric utilities
    c. Theaters & restaurants
  3. Conditions:
    a. Monopoly power
    b. Market segregation
    c. No resale
104
Q

Price Leadership Model

A

The dominant firm will initiate price changes and all other firms will follow.

105
Q

Price Leadership Model (Tactics)

A
  1. Infrequent price changes
  2. Communications by, e.g., press releases
  3. Limit pricing to block entry
  4. Breakdowns in price leadership:
    i. Price wars (e.g. McDonalds and Burger King)
106
Q

Price of related goods

A
  1. Substitute goods:
  2. Complementary goods:
  3. Unrelated goods:
107
Q

Price, output and efficiency

A
  1. Pure competition is efficient

Monopoly is inefficient

108
Q

Prices of other goods

A
  1. Substitution in production
  2. As the price of pants goes up, the supply of shirts will go down.
  3. As the price of footballs falls, the supply of basketballs will increase.
109
Q

Pricing and other strategic barriers to entry:

A

For example: Microsoft tied their PC operating system to internet explorer.

110
Q

Prisoners dilemma

A

Shows that self-interest can prevent people from maintaining cooperation, even when cooperation is in their mutual self-interest.

111
Q

Private Goods

A
  1. Goods that have rivalry and excludability, private firms can produce and sell the goods for a profit.
  2. Come in units small enough to be afforded by individual buyers.
    Examples: Offered for sale in the market by producers
112
Q

Producer Surplus

A
  1. The difference between the actual price a producer receives and the minimum price they would accept
  2. The extra benefit from receiving a higher price than the acceptance price.
  3. The area above the supply curve and under the price.
113
Q

Profit

A
  1. Accounting Profit
  2. Economic Profit
    Normal Profit
114
Q

Profit Maximization (Two Approaches)

A
  1. Total revenue and total cost approach (Produce where TR-TC is greatest.)
  2. Marginal revenue and marginal cost approach. (Produce where MR=MC.)
115
Q

Profit Maximization in the Long Run

A

Assumptions:

  1. Free entry and exit (Zero economic profit in the long run)
  2. Identical costs: (Same effect on each firm)
  3. Constant-cost industry (The entry and exit of new firms do not affect input prices.)
116
Q

Public goods

A

Demand-side failures

117
Q

Public Goods

A
  1. Nonexcludability
  2. Nonrivalry
  3. Provided by the government.
  4. Offered for free
  5. Common examples: National defense, Public fireworks, Lighthouses, Clean air
  6. For public goods, we do not add quantities demanded at each price as we do when we find the market demand .
  7. To find the demand for a public good we add the total price each individual is willing to pay for the unit rather than summing the quantities at each price.
118
Q

Pure competition is efficient

A
  1. Productive efficiency:
  2. P = min ATC
  3. Allocative efficiency:
  4. P = MC
  5. So, maximizes CS+PS
119
Q

Pure Competition-Summary

A
  1. The four basic market models are pure competition, monopolistic competition, oligopolistic competition and pure monopoly.
  2. A large number of competitive firms sell homogeneous products, therefore they are price takers.
  3. To maximize profit, a firm chooses the quantity of output such that marginal cost equals marginal revenue.
  4. The price of a good in a competitive market is equal to average revenue which is equal to marginal revenue.
  5. In the short-run, a firm will choose to shut down temporarily if the price of its product is less than its average variable cost.
  6. With free entry and exit all competitive firms produce at the efficient scale in the long run and earn zero economic profits.
  7. The firm?s marginal cost curve is its supply curve.
  8. The long-run supply curve of firms can be horizontal, upward sloping or downward sloping.
  9. In the long run pure competition has productive efficiency and allocative efficiency.
120
Q

Pure Monopoly Summary

A
  1. A monopolist is a price maker that sells a unique product. It can use nonprice competition to block entry.
  2. Its demand curve is downward sloping and lies above the marginal revenue curve.
  3. Profit-maximizing for a monopolist is where MR = MC.
  4. A monopolist?s profit-maximizing level of output is below the competitive level.
  5. The economic effects of monopoly are inefficiency in output and price, income transfer, and cost complications.
  6. Price discrimination occurs when a monopolist charges different prices in different markets.
  7. Government regulation is associated with natural monopolies.
121
Q

Pure Monopoly: Barriers to Entry

A
  1. Economies of Scale
  2. Legal Barriers to Entry
  3. Ownership or control of essential resources:
  4. Pricing and other strategic barriers to entry:
122
Q

Quantity demanded

A

The amount a consumer is willing and able to purchase at a given price.

123
Q

Quantity supplied:

A

The amount a seller is willing and able to sell at a given price.

124
Q

Quasi-Public Goods

A
  1. Could be provided by the private sector through the market system.
  2. Exclusion
  3. Positive externalities
  4. Examples: Education, streets, libraries, highways, police and fire protection, museums, preventative medicine, post offices and parks
125
Q

Regulated Monopoly & Natural Monopoly: With Regulation

A
  1. Socially optimum price:
  2. P = MC??????????Socially optimum price
  3. From the graph, Pr = MC so it is social optimum.
  4. But (Pr = MC) < ATC, the monopolist runs losses.
126
Q

Regulated Monopoly & Natural Monopoly: Fair Return Price

A
  1. P = ATC??????????Fair return price
  2. From the graph, Pf = ATC; Qf < Qr (social optimum)
  3. So it is not the social optimum.
127
Q

Regulated Monopoly & Natural Monopoly: Without Regulation

A

The monopolist will charge Pm and produce only Qm.

128
Q

Rent Seeking Behavior

A
  1. The monopolist tries to use all tactics to protect its position.
  2. This leads to an increase in rent-seeking expenditures and X-inefficiency.
129
Q

Revenue Implications

A

The higher the price the greater the revenue and the greater the incentive for a producer to increase the quantity supplied.

130
Q

Rivalry:

A

When a person buys and consumes a product, the product will not be available for others

131
Q

Short Run Profit Maximization: Economic Loss: The firm suffers a loss, it does not produces, if?

A
  1. No, the firm will shut down if the revenue is less than the variable cost of production.
  2. TR < VC
  3. TR/Q < VC/Q
  4. P < AVC
  5. The firm will shut down and incur only fixed cost.
132
Q

Short Run Profit Maximization: Economic Loss: The firm suffers a loss, it still produces, if?

A
  1. Yes if the revenue covers the variable cost or the price exceeds the average variable cost.
  2. TR > VC
  3. TR/Q > VC/Q
  4. P > AVC
  5. The firm will still produce because its loss is less than fixed cost.
133
Q

Short Run: Total Costs

A

Fixed costs plus variable costs

134
Q

Short Run: Fixed Costs

A

Do not vary with output

135
Q

Short Run: Variable Sosts

A

Materials and most labor costs

136
Q

Short-Run Production Costs

A
  1. Fixed Costs
  2. Variable Costs
    Total costs
137
Q

Short-Run Profits, Short-Run Losses & Long-Run Equilibrium

A
  1. Firm?s demand curve: Highly elastic
  2. Short run profit or loss: Produce where MR=MC.
  3. Long run normal profit (0 economic profit): Entry and exit
138
Q

Substitute goods:

A

A decline in the price of one product decreases the demand for another product

139
Q

Substitution in production

A
  1. As the price of pants goes up, the supply of shirts will go down.
  2. As the price of footballs falls, the supply of basketballs will increase.
140
Q

Supply

A
  1. Quantity supplied
  2. Supply:
    Law of supply:
141
Q

Supply curve

A

All the costs of production

142
Q

Supply:

A

The supply schedule and supply curve show the relationship between the price of a product and the quantity supplied.

143
Q

Supply-Side Failures & Negative Externalities

A
  1. Supply side market failures
  2. External costs
  3. A third party
  4. (e.g. Pollution
  5. The firm does not pay the full cost of producing its output.
  6. In the graph: External costs are not internalized and Overproduction
144
Q

Taxes and subsidies

A
  1. Higher taxes imply higher costs and lower supply.

2. What about subsidies?

145
Q

Technological Advance

A
  1. More likely with monopoly?
146
Q

The Budget Line

A
  1. A consumer?s budget constraint shows the combinations of two goods that person can purchase given her income and the prices of the goods.
  2. The slope of the budget line is equal to the relative price of the two goods (PB/PA).
147
Q

The Demand and Supply conditions lead to:

A
  1. Benefits are at least equal to costs (if not greater).

2. Maximized producer surplus and consumer surplus

148
Q

The downward slope of the demand curve for a product is the result of:?

A

Diminishing marginal utility

149
Q

The law of diminishing marginal utility implies that as a person consumes more and more of a given commodity:?

A

Marginal utility will eventually decline

150
Q

The Reallocation Process

A

The government:

  1. Collects taxes.
  2. Provides public goods and quasi-public goods.
151
Q

Theory of Consumer Behavior

A
  1. Rational behavior: (?Get the most for the money?)
  2. Preferences (Know their marginal utility)
  3. Budget constraint (Limit income)
  4. Prices (Choose the most satisfying mix of goods.)
152
Q

Three Oligopoly Models

A
  1. Noncollusive oligopoly (kinked-demand curve)
  2. Collusive pricing (cartel)
  3. Price leadership
153
Q

Total product (TP):

A

Total output produced

154
Q

Total Product vs. Marginal Product

A
  1. TP increases at an increasing rate ? MP is rising.
  2. TP increases at a diminishing rate ? MP is falling but remains positive.
  3. TP is at a maximum ? MP equals zero.
  4. TP declines ? MP is negative.
155
Q

Total utility

A

Total satisfaction from a specific quantity

156
Q

Two causes of market failure

A
  1. Public goods

2. Externalities

157
Q

Two types of government interventions:

A
  1. Direct Control
  2. Specific Taxes
  3. Results:
  4. Both interventions will shift the firm?s supply curve from S to Ssociety. As a result:
  5. The firm produces at Qoptimal.
  6. The efficiency loss is eliminated.
158
Q

Unrelated goods:

A

Independent goods such as shoes and oranges.

159
Q

Utility Summary

A
  1. Marginal utility refers to the extra satisfaction a consumer gets from one additional unit while total utility refers to the total satisfaction from a specific quantity.
  2. Marginal utility is subject to the law of diminishing marginal utility.
  3. The utility-maximizing rule states that the consumer will allocate income in such a way that MU of product A/price of A= MU of product B/price of B = etc.
  4. The theory of consumer choice explains why demand curves can slope upward.
  5. When the price of a good falls, an income effect and a substitution will impact consumer?s choices.
  6. The marginal rate of substitution equals the relative price of two goods where an indifference curve is tangent to the budget line.
160
Q

Which best expresses the law of diminishing marginal utility??

A

The more consumption of a product, the smaller is the marginal utility from consuming an additional unit

161
Q

Which of the following defines marginal utility??

A

The additional satisfaction received from consuming one more unit of a product

162
Q

Why three Oligopoly models?

A
  1. Diversity of oligopolies

2. Complications of interdependence

163
Q

X-Inefficiency

A
  1. Due to entry barriers, the monopolist is sheltered from competition.
  2. Lowest ATC not achieved

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