question
normal good
answer
demand increases when people's incomes start to increase, giving it a positive income elasticity of demand (income up, demand increases)
question
inferior good
answer
purchase when income is low, negative income elasticity (income increases, demand decreases)
question
marginal product of labor
answer
the additional output a firm produces as a result of hiring one more worker (change in quantity/change in labor)
question
value of marginal product of labor
answer
VMPL=P x MPL
question
positive view
answer
A positive statement is one that can establish hypotheses that can be empirically tested
question
normative view
answer
based on subjectivity or opinion (world as it is)
question
inelastic demand
answer
A situation in which an increase or a decrease in price will not significantly affect demand for the product
question
elastic demand
answer
A situation in which consumer demand is sensitive to changes in price
question
marginal product of labor equation
answer
p x MPL = W
question
Law of Diminishing Marginal Returns
answer
As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative (adding variable resources to fixed resources the additional output will decrease)
question
opportunity cost
answer
any decision you make has a cost
question
production possibilities curve
answer
a graph that shows alternative ways to use an economy's productive resources (anything outside the curve is inefficient)
question
absolute advantage
answer
who produces more
question
comparitive advantage
answer
The situation where someone can produce a good at lower opportunity cost than someone else can (who should produce what)
question
subsitution effect
answer
the change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution (consumers switching to cheaper alternatives)
question
income effect
answer
the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve (ex: a consumer may choose to spend less on clothing because their income has dropped.)
question
substitutes
answer
increase in price on one good, increases demand for the other good
question
complements
answer
increase in price on one good, decreases demand for the other good
question
elasticity
answer
how quantity changes when there is a change in price
question
elastic demand
answer
when price goes up a little bit, quantity falls, quantity is sensitive to price, and if price goes down, quantity demanded increases a lot (lots of substitutes, luxury goods, greater than 1)
question
inelastic demand
answer
if price increases, quantity demanded will fall a little
if price decreases, quantity demanded increases a little
(few substitutes, necessities, less than one)
if price decreases, quantity demanded increases a little
(few substitutes, necessities, less than one)
question
elasticity of demand coefficient
answer
(%change in quantity/%change in price)
question
elasticity coefficients
answer
perf elastic (0), relatively inelastic (<1), unit elastic (1), relatively elastic (>1), perfectly elastic (infinity)
question
cross price elasticity
answer
the percentage change in demand for product A that occurs in response to a percentage change in price of product B (positive number = substitute , negative number = complements)
question
income elasticity of demand
answer
shows how sensitive a product is to a change in income q/i
+ normal good
- inferior good
+ normal good
- inferior good
question
consumer and producer surplus
answer
Consumer surplus is the difference between the price paid
for a good or service and the benefit/value of that product/service. Producer surplus is the profit
they make off of selling a product/good or offering a service
for a good or service and the benefit/value of that product/service. Producer surplus is the profit
they make off of selling a product/good or offering a service
question
price controls
answer
legal restrictions on how high or low a market price may go
question
price ceiling
answer
goes below equilibrium is binding, max legal price a seller can charge for a product
question
price floor
answer
above eq, max level a seller can sell a product
question
tax incidence
answer
the division of the burden of a tax between buyers and sellers
perf inelastic tax burden on consumers
perf elastic tax burden on producers
perf inelastic tax burden on consumers
perf elastic tax burden on producers
question
fixed costs
answer
costs for fixed resources that DONT change with the amount produced (ex rent, insurance, managers salaries, etc...)
question
variable costs
answer
costs for variable resources that DO channge as more or less is produced (raw materials, labor, electricity)
question
total costs
answer
fixed costs + variable costs
question
marginal cost
answer
the cost of producing one more unit of a good, as you hire more workers they specialize, so additional costs fall, costs of add units go up
question
ATC
answer
hits mc at minimum, mc pulls it up and down
question
long run
answer
all resources are variable
question
economies of scale and diseconomies of scale
answer
factors that cause a producer's average cost per unit to fall as output rises
question
short run equilibrium
answer
A short run competitive equilibrium is a situation in which, given the firms in the market, the price is such that that total amount the firms wish to supply is equal to the total amount the consumers wish to demand.
question
long run equilibrium
answer
The market is in long-run equilibrium, where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC. No firm has the incentive to enter or leave the market. Let's say that the product's demand increases, and with that, the market price goes up.
question
perfect competition
answer
- many small firms
- identical products (perf subs)
- low barriers, easy for firms to enter and exit the industry
- seller has no need to advertise
- firms are "price takers" they have to take the price by the market
seller has no control over price
- individual firm starts with a horizontal demand curve , the price is set MC
- identical products (perf subs)
- low barriers, easy for firms to enter and exit the industry
- seller has no need to advertise
- firms are "price takers" they have to take the price by the market
seller has no control over price
- individual firm starts with a horizontal demand curve , the price is set MC
question
MR=MC
answer
always produce when MR=MC to max rev
- if u produce when MC > MR you arent maxing profits
- if u produce when MC < MR youre not maxing profit
- if u produce when MC > MR you arent maxing profits
- if u produce when MC < MR youre not maxing profit
question
shut down
answer
If the price falls below the AVC of production, a competitive firm will shut down
MC = supply
MC = supply
question
economic profit
answer
total revenue minus total cost, including both explicit and implicit costs
question
accounting profit
answer
total revenue - explicit costs
question
long run equilibrium in perfectly competitive...
answer
firms earn zero economic profit, and earn positive accounting profit
question
short run to long run
answer
in short run firms jump in, supply shifts to the right, which lowers price back down going into long run
question
monopoly
answer
one firm, unique product, high barriers, price makers
MR less than demand,
MR less than demand,
question
natural monopoly
answer
one firm can produce the socially optimal quantity at the lowest cost due to economies of scales
ATC is falling, produce at lowest cost
ATC is falling, produce at lowest cost
question
breaking even
answer
when price= ATC
question
DWL
answer
when MC hits the demand curve or price
question
price-discriminating monopoly
answer
charging multiple prices, MR becomes demand curve MR becomes MC consumer surplus disappears and DWL disappears
question
oligopoly
answer
- few large producers (less than 10)
- identical or differentiated products
- high barriers to entry
- control over price (price maker)
- identical or differentiated products
- high barriers to entry
- control over price (price maker)
question
nash equilibrium
answer
the optimal outcome that will occur when both firms make decisions simultaneously and have no incentive to change
question
monopolistic competition
answer
-relatively large number of sellers
-differentiated products
-some control over price
- easy entry and exit (low barriers)
- a lot of non price comp
- in LR firms enter so demand goes down, they have to share customers
-differentiated products
-some control over price
- easy entry and exit (low barriers)
- a lot of non price comp
- in LR firms enter so demand goes down, they have to share customers
question
minimum wage
answer
q demanded falls
q supplied increases
unemployment
q supplied increases
unemployment
question
public goods
answer
shared consumption (non rival good)
- one persons consumption of a good does not reduce its usefulness to another
-ex a park
non exclusion
- cannot exclude people from using its benefits, even if they dont pay
ex: national defense
- one persons consumption of a good does not reduce its usefulness to another
-ex a park
non exclusion
- cannot exclude people from using its benefits, even if they dont pay
ex: national defense
question
negative externalities
answer
situation that results in a COST for a different person other than the original decision maker.
the costs "spillover" to other people or society.
MSC to left
use per unit tax to produce less bc bad
the costs "spillover" to other people or society.
MSC to left
use per unit tax to produce less bc bad
question
positive externalities
answer
situations that result in a benefit for someone other than the original decision maker
benefits spill over to society
MSB to right
use a per unit subsidy to produce more because good, and there's DWL
benefits spill over to society
MSB to right
use a per unit subsidy to produce more because good, and there's DWL
question
lorenz curve
answer
distribution curve
gini coefficient
0= perf eq
1= perf inequality
gini coefficient
0= perf eq
1= perf inequality
question
progressive tax
answer
takes a larger share of the income of high-income taxpayers than of low-income taxpayers (take from rich ppl)
question
proportional taxes
answer
takes the same percent of income from all income groups (flat rate, everyone pays same tax)
question
regressive taxes
answer
takes a larger percentage from low income groups (takes more from poor people)
sales tax, consumption tax
sales tax, consumption tax
question
consumer theory
answer
2 extreme cases of Indif curves
1. perf complements left shoe / right shoe
2. perf substitutes nickels / dimes
1. perf complements left shoe / right shoe
2. perf substitutes nickels / dimes
question
MRS (marg rate of substitution)
answer
rate of which you get out of into x and be indifferent
preference
preference
question
budget constraint
answer
how many y's you have to give up to free up enough income to buy another x
prices and income
prices and income
question
MUx/Px = MUy/Py
answer
utility maximizing rule equation
question
In long-run equilibrium in a monopolistically competitive industry:
answer
Average revenue and average total cost are equal
question
If economic profit is negative, accounting profit is _____________
answer
less negative
question
Which of the following statements about oligopoly is FALSE?
A. The more players in the market, the stronger is the cartel and the more likely the industry is to restrict output successfully.
B. Usually, the more firms in an oligopoly, the closer output is to the competitive level.
C. Infinitely played games raise firms' ability to cooperate, relative to finitely played games.
D. Collusion by a cartel is illegal in the United States.
A. The more players in the market, the stronger is the cartel and the more likely the industry is to restrict output successfully.
B. Usually, the more firms in an oligopoly, the closer output is to the competitive level.
C. Infinitely played games raise firms' ability to cooperate, relative to finitely played games.
D. Collusion by a cartel is illegal in the United States.
answer
A. The more players in the market, the stronger is the cartel and the more likely the industry is to restrict output successfully.
question
The market for tennis rackets in Moldavia is characterized by inelastic demand and elastic supply. Which of the following is true?i. Tennis racket consumers bear the larger burden of any per-unit tax levied on them
ii. Tennis racket producers bear the larger burden of any per-unit tax levied on them.
ii. Tennis racket producers bear the larger burden of any per-unit tax levied on them.
answer
i - Tennis racket consumers bear the larger burden of any per-unit tax levied on them.
question
Over the past month, the equilibrium quantity of apples increased but the equilibrium price of apples stayed the same. Three eminent economists attempted to explain this data:
Huey: Supply decreased and demand increased.
Dewey: Supply increased and demand was perfectly inelastic.
Luey: Supply increased and demand was perfectly elastic.
Who of these eminences could be correct?
Huey: Supply decreased and demand increased.
Dewey: Supply increased and demand was perfectly inelastic.
Luey: Supply increased and demand was perfectly elastic.
Who of these eminences could be correct?
answer
luey only
question
Coffee and donuts are complements. Both coffee demand and donut demand are inelastic. An increase in the wages of workers producing donuts will:
answer
Decrease total expenditure on coffee, but increase total expenditure on donuts.
question
Betty and Veronica can both wash a car in twenty minutes. However, Betty can mow a lawn in ten minutes, while it takes Veronica twenty minutes to mow a lawn. According to our theories of trade,
answer
Betty has both absolute and comparative advantage in lawns.
question
A proportional tax system has a(n) ___________ marginal tax rate, while a lump-sum tax system has a(n) ___________ marginal tax rate.
A. Increasing ; decreasing
B. Zero ; decreasing
C. Constant ; zero
D. Decreasing ; constant
A. Increasing ; decreasing
B. Zero ; decreasing
C. Constant ; zero
D. Decreasing ; constant
answer
C. Constant ; zero
question
If a nation that imports a good imposes a tariff, it will increase
A. The quantity imported from abroad.
B. The domestic quantity supplied.
C. Total domestic social surplus.
D. The domestic quantity demanded.
A. The quantity imported from abroad.
B. The domestic quantity supplied.
C. Total domestic social surplus.
D. The domestic quantity demanded.
answer
B. The domestic quantity supplied
question
At its current level of output, a firm has the following cost levels:
MC = 25
ATC = 35
AFC = 10
Which of the following is true?
A. ATC is falling and AVC is not changing.
B. ATC is falling but AVC is rising.
C. ATC and AVC are both falling.
D. ATC and AVC are both rising.
MC = 25
ATC = 35
AFC = 10
Which of the following is true?
A. ATC is falling and AVC is not changing.
B. ATC is falling but AVC is rising.
C. ATC and AVC are both falling.
D. ATC and AVC are both rising.
answer
A. ATC is falling and AVC is not changing.
question
In a perfectly competitive industry, if a profit-maximizing firm producing q* is making losses in the short run, then
A. Marginal revenue is equal to marginal cost and average total cost is increasing at q*.
B. Price is smaller than marginal cost but higher than average variable cost at q*.
C. Price is equal to marginal cost and average total cost is decreasing at q*.
D. Marginal revenue is smaller than marginal cost at q*.
A. Marginal revenue is equal to marginal cost and average total cost is increasing at q*.
B. Price is smaller than marginal cost but higher than average variable cost at q*.
C. Price is equal to marginal cost and average total cost is decreasing at q*.
D. Marginal revenue is smaller than marginal cost at q*.
answer
C. Price is equal to marginal cost and average total cost is decreasing at q*.
question
It is profit-maximizing for a single-price monopolist to maximize revenue if
A. Average total cost always declines as output increases.
B. Total fixed costs are zero.
C. All of these factors apply.
D. Marginal cost is zero.
A. Average total cost always declines as output increases.
B. Total fixed costs are zero.
C. All of these factors apply.
D. Marginal cost is zero.
answer
D. Marginal cost is zero.
question
If the price of rice increases and a utility-maximizing consumer buys more rice, then
A. Rice is an inferior good, and the income effect of this price change dominates its substitution effect.
B. Rice is a normal good, and the income effect of this price change dominates its substitution effect.
C. Rice is an inferior good, and the substitution effect of this price change dominates its income effect.
D. Rice is a normal good, and the substitution effect of this price change dominates its income effect.
A. Rice is an inferior good, and the income effect of this price change dominates its substitution effect.
B. Rice is a normal good, and the income effect of this price change dominates its substitution effect.
C. Rice is an inferior good, and the substitution effect of this price change dominates its income effect.
D. Rice is a normal good, and the substitution effect of this price change dominates its income effect.
answer
A. Rice is an inferior good, and the income effect of this price change dominates its substitution effect.
question
A lump-sum tax on producers will:
A. Distort incentives.
B. All of the above
C. Shift a firm's marginal cost curve.
D. Raise a firm's costs.
A. Distort incentives.
B. All of the above
C. Shift a firm's marginal cost curve.
D. Raise a firm's costs.
answer
D. Raise a firm's costs.
question
Margarine and butter are substitutes. Butter and bread are complements. Which of the following could increase the price of margarine?
I. An increase in the wages of workers who churn butter
II. An increase in the price of flour, a factor input to bread production.
III. An increase in the price of palm oil, a factor input to margarine production
A. I, II, and III
B. II and III only
C. I and III only
D. I only
I. An increase in the wages of workers who churn butter
II. An increase in the price of flour, a factor input to bread production.
III. An increase in the price of palm oil, a factor input to margarine production
A. I, II, and III
B. II and III only
C. I and III only
D. I only
answer
C. I and III only
question
Which of the following is NOT a characteristic of long run equilibrium for any firm in a monopolistically competitive industry? A. P = ATC
B. TR = TC
C. MR = MC
D. MC = ATC
B. TR = TC
C. MR = MC
D. MC = ATC
answer
MC=ATC
question
The price elasticity of demand for a linear demand curve follows which pattern, moving from high prices to low prices?
A. Unit elastic ; inelastic ; elastic
B. Inelastic ; unit elastic ; elastic
C. Elastic ; inelastic ; unit elastic
D. Elastic ; unit elastic ; inelastic
A. Unit elastic ; inelastic ; elastic
B. Inelastic ; unit elastic ; elastic
C. Elastic ; inelastic ; unit elastic
D. Elastic ; unit elastic ; inelastic
answer
D. Elastic ; unit elastic ; inelastic
question
The marginal product of labor is defined as
A. The extra output produced by employing one more unit of labor while allowing capital also to increase by one unit.
B. The extra output produced by employing one more unit of labor while holding other inputs constant.
C. A firm's total output divided by its total labor inputs.
D. The extra output produced by employing one more unit of labor while allowing other factor inputs to vary.
A. The extra output produced by employing one more unit of labor while allowing capital also to increase by one unit.
B. The extra output produced by employing one more unit of labor while holding other inputs constant.
C. A firm's total output divided by its total labor inputs.
D. The extra output produced by employing one more unit of labor while allowing other factor inputs to vary.
answer
B. The extra output produced by employing one more unit of labor while holding other inputs constant.
question
Charlie has standard (bowed in toward the origin) indifference curves for the only two goods he consumes, cereal and orange juice. When the price of cereal falls, Charlie buys more cereal and more orange juice than before. Which of the following must be true?
i. The income effect on cereal outweighs the substitution effect on cereal as a result of this price change.
ii. The income effect on orange juice outweighs the substitution effect on orange juice as a result of this price change.
A. ii. The income effect on orange juice outweighs the substitution effect on orange juice as a result of this price change.
B. i. The income effect on cereal outweighs the substitution effect on cereal as a result of this price change.
C. Both (i) and (ii) are true.
D. Neither (i) nor (ii) is true.
i. The income effect on cereal outweighs the substitution effect on cereal as a result of this price change.
ii. The income effect on orange juice outweighs the substitution effect on orange juice as a result of this price change.
A. ii. The income effect on orange juice outweighs the substitution effect on orange juice as a result of this price change.
B. i. The income effect on cereal outweighs the substitution effect on cereal as a result of this price change.
C. Both (i) and (ii) are true.
D. Neither (i) nor (ii) is true.
answer
A. ii. The income effect on orange juice outweighs the substitution effect on orange juice as a result of this price change.
question
If a consumer views two goods as perfect substitutes, which of the following is true about her preferences for these two goods?
A. The MRS between the two goods will be constant.
B. The demand for one of the two goods will be invariant to changes in the price of the other good.
C. The indifference curves will be upward-sloping.
D. The marginal utilities of the two goods will increase at the same rate.
A. The MRS between the two goods will be constant.
B. The demand for one of the two goods will be invariant to changes in the price of the other good.
C. The indifference curves will be upward-sloping.
D. The marginal utilities of the two goods will increase at the same rate.
answer
A. The MRS between the two goods will be constant
question
Consider the following inequality:
P > MCThis inequality necessarily holds in the long run for the _______________.
I. Perfect Competitor
II. Single-price Monopolist
III. Monopolistic Competitor
A. II only
B. I and III only
C. III only
D. II and III only
P > MCThis inequality necessarily holds in the long run for the _______________.
I. Perfect Competitor
II. Single-price Monopolist
III. Monopolistic Competitor
A. II only
B. I and III only
C. III only
D. II and III only
answer
D. II and III only
question
A perfectly competitive lemonade producer faces the following marginal product of labor
(MPL) function:MPL = 13 - 3*L
Where L is the quantity of labor (in hours) used by this firm. The market price lemonade is $2 / glass, and the market wage is $2 / hour. To maximize profits, this firm should hire:
A. Four hours of work, because the fifth adds more to costs than to revenues.
B. One hour of work, because the second hour is less productive than the first.
C. Zero hours of work, because one labor hour costs as much as the revenue from a single glass of lemonade.
D. Six hours of work, because the seventh has a negative MPL.
(MPL) function:MPL = 13 - 3*L
Where L is the quantity of labor (in hours) used by this firm. The market price lemonade is $2 / glass, and the market wage is $2 / hour. To maximize profits, this firm should hire:
A. Four hours of work, because the fifth adds more to costs than to revenues.
B. One hour of work, because the second hour is less productive than the first.
C. Zero hours of work, because one labor hour costs as much as the revenue from a single glass of lemonade.
D. Six hours of work, because the seventh has a negative MPL.
answer
A. Four hours of work, because the fifth adds more to costs than to revenues.
question
The marginal rate of substitution (MRS) is given by:
A. The slope of an indifference curve.
B. The slope of the production possibilities frontier.
C. The slope of the demand curve.
D. The income elasticity of demand.
A. The slope of an indifference curve.
B. The slope of the production possibilities frontier.
C. The slope of the demand curve.
D. The income elasticity of demand.
answer
A. The slope of an indifference curve.
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