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Market failure occurs when
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an unrestrained market economy leads to too few or too many resources going to a specific economic activity
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Market failures
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prevent the price system from attaining economic efficiency
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The price system allocates resources efficiently EXCEPT when
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The production of a goof affects parties other than its buyers and sellers
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When market failures occur
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the government can step in to correct the market failure
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When the price system fails to generate an efficient allocation of resources
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Too few or too many goods will be produced
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A situation in which a benefit or a cost associated with an economic activity spills over to the third parties is called
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An externality
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Suppose that one firm produces a product that results in negative external costs to society. This information suggests that
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Resources are over-allocated to the firm
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A negative externality is a situation in which
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A cost associated with an economic activity is borne by a third party
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Which of the following leads to an under allocation of resources to a specific economic activity?
answer
external benefits
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Which of the following often involves positive external benefits?
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Inoculation progress
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Pollution is caused by a market failure, in an industry in which there is
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An over-allocation of resources in production
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Government can correct for negative externalities by
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Increasing taxes or regulation
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Assume the production of a good gives rise to external benefits. The government may increase efficiency by
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Subsiding consumption of the good
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Markets trend to under-allocate resources to the production of a good when
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There are positive externalities
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The imposition of a unit excise tax on beer will
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lower equilibrium quantity and raise equilibrium price in the market
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Unit excise taxes imposed on gasoline, alcohol, and cigarettes are
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Largely paid by consumers because they are not responsive to price changes
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The price elasticity of demand measures
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The consumers' sensitivity to a price change
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The price elasticity of demand shows
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the proportionate amount by which the quantity demanded changes in response to a proportionate change in price
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Relative percentage changes are used in measuring price elasticity of demand, so that
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It does not matter what units are used to measure prices or quantities
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If the absolute value of the price elasticity of demand for a product is -2, and the price of a product increased 10 percent, then the quantity demanded will decline by
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20 percent
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The smaller is the closer to zero (0) price elasticity of demand, the
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Smaller is the responsiveness of quantity demanded to the price change
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To say that demand is elastic means that
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Relatively small changes in price lead to relatively large changes in quantity demanded
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When demand is inelastic
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Quantity demanded is not very responsive to a change in price
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When the price elasticity of demand equals -0.9, demand is
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Inelastic
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Suppose the price change of a good causes no change in quantity demanded, we would say that the item is
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Perfectly inelastic
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We say that a good has elastic demand whenever the value of the elasticity of demand is less than minus one (-1). A one percent change in price therefore causes
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A greater than one percent change in quantity demanded
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When the price of a textbook is $100, 60 copies are demanded; and when the price of that textbook goes up to $120, 30 copies are demanded. In the price range between $100 and $120, the demand for the textbook is
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Elastic
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A firm could lower prices and will increase revenue if
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Demand is elastic
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If the price elasticity of demand of a good is -1.8, then the total revenue will increase if its market price is
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Decreases
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Moving upward along a downward sloping straight-line demand curve, as the price of the product goes up
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The price elasticity of demand goes from being inelastic to being elastic
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If the government places a $0.50 tax on an item for which demand is perfectly elastic
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The entire tax will be paid by the product
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Total revenue is
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Price x Quantity
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When the price of a pound of oranges is $1.00, 7500 pounds of oranges are demanded. When the price of a pound of oranges decreases to $0.80, 10,000 pounds of oranges are demanded, In this price range the demand for oranges is
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Elastic
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An elastic response in the quantity of a good demanded would be caused by
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The availability of many substitutes
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The government raises gasoline taxes as part of the price of gasoline and receives more tax revenues. However, after 5 years, the government discovers that revenues from the gasoline tax have declined. This situation would be most likely to occur if
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The demand for gasoline was inelastic in the short run, but elastic in the long run
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When a household spends over 70% of its monthly income on a good, demand will be
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Elastic
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The longer any price change lasts over time, the
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More quantity demanded will change
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Generally, expenses on toothpaste are a small part of a consumer's budget, so the demand for toothpaste is more likely to be
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Inelastic
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Suppose that the cross-price elasticity of demand between goods Y ands Z equals 1.5. Which of the following is true?
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Goods Y and Z are substitutes because the cross price elasticity is positive
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If two goods are complements
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cross price elasticity will be negative
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The cross-price elasticity of demand is defined as
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The percentage change in the demand for one good (a shift in the demand curve) divided by the percentage change in price of a related good
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Income elasticity of demand reflects
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the responsiveness of demand to changes in income
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If your income rises and, as a result, you buy fewer packages of Ramen Noodles, then Ramen Noodles are a(n)
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Inferior good
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If your income rises by one percent and, as a result, you buy more steak, then steak is a(n)
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Normal good
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In the long run, the supply curve
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is more elastic than it is in the short run
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The price elasticity of supply measures
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The responsiveness of quantity supplied to a change in price
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The most important determinant of price elasticity of supply is
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the time period firms have to adjust to the new price
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The price elasticity of supply is higher when
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The number of producers in the market increases over time
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The shorter the time period that suppliers have to adjust to price changes, the
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Lower will be the price elasticity of supply
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The focus of firm decisions in the short run is primarily on
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Variable inputs
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A basic distinction between the long run and the short run is that
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In the short run, complete adjustment of all inputs is impossible, while in the long run all inputs can be adjusted
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In economics, how long is the long run?
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Whatever time it takes a firm to vary all inputs
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For a firm, we define the short run as a period of time during which
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At least one input cannot be changed
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When El Torito Restaurant is deciding how many waiters to hire for a holiday weekend, it is making a ______ decision.
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Short-run
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The amount of calendar time associated with the long run
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Varies by industry
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The relationship between inputs and outputs is known as
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A production function
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Marginal product is
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The change in total output from using an additional unit of one variable input, holding other inputs constant
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The change in output is caused by a one-unit change in labor is referred to as the
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Marginal product of labor
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The production function illustrates the amount of total product that can be produced with a given set of
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Inputs
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The marginal product of labor may increase rapidly initially as more
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Workers are able to specialize
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What happens at a firm's point of saturation?
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For the first time, hiring an additional worker decreases total product
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The observation that after some point, successive equal size increases in a variable factor of production, such as labor, added to fixed factors of production, will result in smaller increases in output is the
answer
Law of diminishing marginal product
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Suppose the manager of a restaurant notices that when she has too many waiters in the floor for a shift that the waiters get in each other's way and fewer dinners are served. This is an example of
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Diminishing marginal product
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Fixed costs are
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costs that a firm incurs even when output is zero
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Average total cost at a particular level of output equals
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Total cost/quantity (TC/Q)
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Average variable cost at a particular level of output equals
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Total value cost/quantity (TVC/Q)
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The change in total variable cost which accompanies one extra unit of output is
answer
Marginal cost
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Marginal costs are defined as
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the change in total costs due to a one-unit change in production.
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Total fixed cost is
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The cost that does not change as output changes
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MC = AVC and MC = ATC at points at which
(Marginal cost, Average variable cost, Average total cost)
(Marginal cost, Average variable cost, Average total cost)
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The AVC and ATC curves are at their respective minimum
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The typical cost curves are U-Shaped due to the
answer
Law of diminishing marginal product
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If a firm gets so large that management of employees and other resources becomes a costly problem, it will be experiencing
answer
Diseconomies of scale
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A horizontal long-run average cost curves indicates
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Constant returns to scale
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Which of the following physical relationships might generate economies of scale?
answer
Proportionally larger pipes can transport more than a proportional increase in oil
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The main source of diseconomies of scale is
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limits to the efficient functioning of management
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A decrease in the long-run average costs resulting from increasing output is referred to as
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Economies of scale
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When long-run average costs rise as output increases, the firm is experiencing
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Diseconomies of scale
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A single-plant firm truing to select the rate of output consistent with an overall plant size that yields the minimum efficient scale will choose a rate of output for which
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long-run average total cost is lowest at that rate of output
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Minimum efficient scale
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Is the lowest rate of output per unit of time at which long-run average costs reach a minimum for a particular firm
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The perfectly competitive firm cannot influence the market price because
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It's production is too small to affect the market
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Being a price taker essentially means
answer
a firm cannot influence the market price
question
Under perfect competition, a firm that sets its price slightly above the market price would
answer
Lose all of its customers
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The demand curve for a perfectly competitive firm is horizontal because
answer
It's production decisions cannot influence the market price
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The goal of the perfectly competitive firm is to
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maximize total profits
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For a firm in a perfectly competitive industry
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marginal revenue and product price are equal at every level of output
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The marginal revenue curve of a perfectly competitive firm
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Is also the demand curve faced by the firm
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For a perfect competitor, marginal revenue equals
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The market price
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Economic profits are maximized at the point at which
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marginal revenues equal marginal costs
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If there us no output for which product price is sufficient to cover variable costs
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The firm should shut down in the short run
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When a firm has economic profits equal to zero
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the firm is earning a normal rate of return on investment
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In the short run, in a perfectly competitive market, a firm will shut down if
answer
P<AVC for all levels of output
(Price is lower than average variable cost)
(Price is lower than average variable cost)
question
Factors that cause the short-run supply curve to change are factors that affect
answer
Variable costs
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The short-run supply curve for a perfectly competitive firm is the portion of its
answer
MC curve above its AVC curve
(marginal cost, average variable cost)
(marginal cost, average variable cost)
question
A firm is currently producing at the rate of output at which total revenues just cover its total variable costs. If demand falls, the firm should
answer
Shut down
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In the long run when a perfectly competitive firm experiences negative economic profits
answer
Firms exit the industry, the market supply curves shifts leftward, and the market price rises.
question
Consider an industry that is in long-run equilibrium. An increase in demand leads to an increase in the price of the good. We know that this is
answer
An increasing-cost industry
question
If the costs of production do NOT change as output increases in the long run in a perfectly competitive industry, then this is a
answer
Constant-cost industry
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The long-run industry supply curve in a decreasing-cost, perfectly competitive industry is
answer
Negatively sloped
question
In the long run, the perfectly competitive firm
answer
earns only a normal profit
question
For a firm in a perfectly competitive industry
answer
short-run economic profits may be positive, but long-run economic profits must be zero
question
In a perfectly competitive market, a firm in long-run equilibrium will be operating
answer
At the minimum of the long-run average cost curve
question
A firm's long-run position under perfect competition is often said to be
answer
P = MR =MC = ATC
(Price, marginal revenue, marginal cost, average total cost)
(Price, marginal revenue, marginal cost, average total cost)
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