question
What is consumer surplus? (CS)
answer
CS = res. price of buyer - actual price
question
What is producer surplus? (PS)
answer
PS = actual price - res. price of seller
question
Suppose Andrea, a rational artist, recently sold her painting, City #1, for $325. Suppose further that her reservation price for selling the painting was $250. Andrea's producer surplus from this sale was...
answer
$75
question
What is economic surplus?
answer
benefit - cost (aka the benefit beyond the cost)
ES = CS + PS
ES = CS + PS
question
Suppose rational decision-maker Gena was considering purchasing a ticket to see Bruce Springsteen in concert. Suppose further that the price of a Springsteen ticket was $100 and Gena's reservation price for the ticket was $150. Instead of buying the Springsteen ticket, however, Gena chose to go to a free Beth Patterson concert. Everything else held constant, it can be concluded with certainty that Gena's consumer surplus from seeing Beth Patterson was...
answer
greater than or equal to $50
question
Suppose t-shirt buyers, but not sellers, expect the price of t-shirts to decrease next month. Everything else held constant, consumer surplus in the market for t-shirts will _____ today.
answer
be ambiguous
question
Suppose t-shirt buyers, but not sellers, expect the price of t-shirts to decrease next month. Everything else held constant, producer surplus in the market for t-shirts will _____ today.
answer
decrease
question
Suppose t-shirt buyers, but not sellers, expect the price of t-shirts to decrease next month. Everything else held constant, economic surplus in the market for t-shirts will _____ today.
answer
decrease
question
Suppose demand for cigarettes is inelastic and the supply of cigarettes is elastic. Who would bear the larger share of the burden of a tax placed on cigarettes?
answer
the consumer/demander
question
Answer true or false to the following statement:
The difference between the price buyers pay for a good and the price sellers receive from selling it is the amount of the tax.
The difference between the price buyers pay for a good and the price sellers receive from selling it is the amount of the tax.
answer
TRUE
question
Suppose the government imposes an excise tax of $10 on a market. Suppose further that the price elasticity of demand for the good is 0.9 and the price elasticity of supply is 0.3. Everything else held constant, the buyers will bear _____ percent of the burden of the tax.
answer
75%
question
Suppose the government imposes an excise tax of $10 on a market. Suppose further that the price elasticity of demand for the good is 0.9 and the price elasticity of supply is 0.3. Everything else held constant, the sellers will bear _____ percent of the burden of the tax.
answer
25%
question
Buyers will bear the entire burden of an excise tax if supply is perfectly _____.
answer
elastic
question
Whoever is more (elastic/inelastic) will bear the greater tax burden.
answer
inelastic
question
Suppose a profit-maximizing firm is earning positive economic profits at its current level of output. Everything else held constant, the firm's accounting profits are...
1. positive.
2. negative.
3. normal.
4. ambiguous.
1. positive.
2. negative.
3. normal.
4. ambiguous.
answer
positive
question
What is the formula for accounting profit?
answer
accounting profit = TR - explicit cost
question
What is the formula for economic profit?
answer
economic profit = (TR - explicit) - implicit
OR
(accounting profit) - implicit
OR
(accounting profit) - implicit
question
TRUE/FALSE:
Accounting profit will always be greater than economic profit.
Accounting profit will always be greater than economic profit.
answer
TRUE
b/c accounting prof is TR - explicit
and econ prof is (TR-explicit) - implicit
b/c accounting prof is TR - explicit
and econ prof is (TR-explicit) - implicit
question
What is 'normal profit'?
answer
When economic profit is equal to ZERO
question
Suppose you run a baking business. Your economic profit is zero. Should you continue to run your business, or shut down?
answer
continue to run business! means your accounting profit is positive (bc is always greater than economic profit)
question
Suppose Tim owns a hardware store. He pays his employees $150,000 per year and his inventory costs him $75,000 per year. Prior to running his hardware store, Tim hosted a television show and earned $100,000 per year. (Assume these are the only costs Tim faces.) The total revenue of the store per year is $300,000. Tim's explicit cost of running his store for a year is...
answer
$225,000
($150,000 + $75,000)
($150,000 + $75,000)
question
Suppose Tim owns a hardware store. He pays his employees $150,000 per year and his inventory costs him $75,000 per year. Prior to running his hardware store, Tim hosted a television show and earned $100,000 per year. (Assume these are the only costs Tim faces.) The total revenue of the store per year is $300,000. Tim's implicit cost of running his store for a year is...
answer
$100,000 (his old salary that he gave up)
question
Suppose Tim owns a hardware store. He pays his employees $150,000 per year and his inventory costs him $75,000 per year. Prior to running his hardware store, Tim hosted a television show and earned $100,000 per year. (Assume these are the only costs Tim faces.) The total revenue of the store per year is $300,000. Tim's accounting profit from running his store for a year is...
answer
$75,000 (300,000 - 225,000)
question
Suppose Tim owns a hardware store. He pays his employees $150,000 per year and his inventory costs him $75,000 per year. Prior to running his hardware store, Tim hosted a television show and earned $100,000 per year. (Assume these are the only costs Tim faces.) The total revenue of the store per year is $300,000. Tim's economic profit from running his store for a year is...
answer
-25,000
question
What is the formula for profit?
answer
Profit = (P - ATC) x Q
question
What is the formula for Average Total Cost (ATC)?
answer
Total Cost/Quantity
question
What is the formula for Average Fixed Cost (AFC)?
answer
Fixed Cost/Quantity
question
What is the formula for Average Variable Cost (AVC)?
answer
Variable Cost/Quantity
question
What is happening with a firm's costs in the short term?
answer
the firm's fixed costs are greater than zero
question
What is the formula for TC (total cost)?
answer
TC = VC + FC
question
What is happening with a firm's costs in the long term?
answer
a firm's fixed costs become zero (means total costs are exactly equal to variable costs). So it ONLY has variable costs. FC = 0. TC = VC.
question
Suppose a firm producing three units of output has an average variable cost equal to $10 and a total cost equal to $50. In the short run, its fixed cost is equal to...
answer
$20
question
What are the indicators of a perfect competition market?
answer
1. many small buyers + sellers
2. homogenous goods
3. perfect information
4. No barriers to entry/exit
2. homogenous goods
3. perfect information
4. No barriers to entry/exit
question
Which of the following is a characteristic of a perfectly competitive market?
Firms are price makers in the market.
Firms face significant barriers to entering the market.
There are few firms selling the good in the market.
The goods sold in the market are homogeneous.
Firms are price makers in the market.
Firms face significant barriers to entering the market.
There are few firms selling the good in the market.
The goods sold in the market are homogeneous.
answer
The goods sold in the market are homogeneous.
question
List the 2 things that are consistent for ALL firms
answer
Profit: (P - ATC) x Q
Profit-Maximizing Rule: produce Q* where MR = MC
-in perf com: P = MR = MC
-in monopoly: P > MR = MC
Profit-Maximizing Rule: produce Q* where MR = MC
-in perf com: P = MR = MC
-in monopoly: P > MR = MC
question
Firms operating in perfectly competitive markets face _____ demand curves and can sell _____ at the given price.
horizontal; only a limited amount
horizontal; as much as they want
downward sloping; only a limited amount
downward sloping; as much as they want
horizontal; only a limited amount
horizontal; as much as they want
downward sloping; only a limited amount
downward sloping; as much as they want
answer
horizontal; as much as they want
question
Suppose, at a given point in time, Chez Rachel sells ratatouille in a perfectly competitive market (P = MR) and is producing its profit-maximizing level of output (MR = MC). Suppose further that at this level of production Rachel's average total cost of producing ratatouille is $10, her average variable cost is $7, and her marginal revenue is $8. At this moment in time, the price of ratatouille is...
answer
$8 (b/c P = MR)
question
Suppose, at a given point in time, Chez Rachel sells ratatouille in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of production Rachel's average total cost of producing ratatouille is $10, her average variable cost is $7, and her marginal revenue is $8. At this moment in time, Rachel is earning an economic profit _____ zero.
above
below
equal to
above
below
equal to
answer
below (8 - 10 is negative)
question
If price is lower than average variable cost (AVC), should you remain in business or shut down?
answer
SHUT DOWN
question
What can we say with certainty about a firm in a perfectly competitive market in the long run?
answer
it's economic profits are equal to zero
question
What can we say with certainty about a monopolist in the LR?
answer
their profits are zero or greater
question
What are the necessary conditions in a monopoly?
answer
1) firm
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