question
Public goods are...
answer
Jointly consumed and non-excludable
question
T/F: A free rider is someone that is forced to pay for a good he or she does not want.
answer
False
question
What are two major functions of government?
answer
Protective and productive
question
When there is a lack of competition, prices tend to be _____ than equilibrium price, while the quantity produced tends to be ____than equilibrium quantity.
answer
Higher, lower
question
When positive externalities are present, the ____curve _____ the total value of the output.
answer
demand, understates
question
When negative externalitites are present, the _____curve_____the total value of the output.
answer
demand, overstates
question
Which of the following is not a market response to markets with poor information?
A) Consumer information publications
B) lower sales taxes
C) brand names and franchises
D) warranties
A) Consumer information publications
B) lower sales taxes
C) brand names and franchises
D) warranties
answer
lower sales taxes
question
T/F: A public good is identified as a public good depending on who produces it.
answer
false
question
Which of the following is necessary for economic efficiency?
A) All activities that provide individuals with more benefits than costs must be undertaken
B) no activities that provide benefits less than costs should be undertaken
C) all publicly provided goods must be made available to everyone
D) all of the above
E) A and B
A) All activities that provide individuals with more benefits than costs must be undertaken
B) no activities that provide benefits less than costs should be undertaken
C) all publicly provided goods must be made available to everyone
D) all of the above
E) A and B
answer
A and B
question
T/F: Anything worth doing is worth doing to the best of your ability.
answer
False
question
When is an industry said to be perfectly competitive?
answer
When each firm has virtually no influence over the price of its product
question
What is marginal cost?
answer
the change in total cost from producing one more unit of output
question
What is profit?
answer
Total revenue minus total cost
question
What does the pursuit of profits in a competitive market minimize?
answer
Total costs
question
To maximize profit, a firm in a competitive market increases output until what?
answer
P=MC
question
Profit can be shown graphically by depicting a firm's costs and revenues, and is determined mathematically by calculating what?
answer
the area of the box that is (price minus average cost) times the quantity
question
Profit is positive whenever price is greater than what?
answer
the average cost
question
They typical average cost curve in a competitive market what shape and why?
answer
u-shaped because the firm's fixed costs are first spread over greater quantities, but then increasingly greater quantities will create production capacity constraints
question
What idea does the elimination principle illustrate?
answer
That above normal profits will be eliminated by the entry of new firms into the industry
question
Suppose there is a large and permanent increase in the demand for a good that is produced in a competitive industry. What should we expect?
answer
We should expect that firms will enter the industry because the market price will rise
question
What happens to average cost when the size of the production is the most efficient?
answer
average cost is at the minimum
question
Whenever marginal cost is greater than the average total cost, what happens to average cost?
answer
average cost is rising
question
When marginal cost is rising, what happens to the average total costs?
answer
average total costs could be rising or falling
question
A firm should exit an industry in the long-run if what?
answer
P-AC < 0 (zero)
question
Stating that TR=TC is equivalent to stating what?
answer
P=AC
question
When a pharmaceutical company discovers a new drug, what does the patent law give the monopoly?
answer
sole ownership of the right to sell the drug for a limited number of years
question
What formula is always true for monopolies?
answer
MR < P
question
What is the profit maximization condition for a monopolist?
answer
MR = MC
question
When comparing a monopoly with a competitive industry, what will the quantity and price be like compared to a competitive firm?
answer
monopoly quantity will be lower, and monopoly price will be higher, that that of a competitive firm
question
Monopoly power is best described as what?
answer
The ability to earn economic profits without causing new firms to enter the market
question
In a graph showing a straight-line market demand curve, the marginal revenue curve looks like what?
answer
A straight line that begins at the same point as the demand curve on the y-axis but with twice the slope
question
How would a firm prefer their product demand curve to be?
answer
inelastic
question
The more a monopolist can raise its price above marginal cost, the more...
answer
inelastic the demand curve
question
In a monopoly market, the lure of above normal profits may give a firm what?
answer
an incentive to develop new products and technologies
question
Modern theories of economic growth emphasize that monopolies what?
answer
may sometimes be necessary for economic growth
question
Which of the following statements are correct?
-Once a patent expires:
A) monopoly profits increase
B) deadweight loss is eliminated
C) generic equivalents appear quickly
-Once a patent expires:
A) monopoly profits increase
B) deadweight loss is eliminated
C) generic equivalents appear quickly
answer
B and C
question
Natural monopolies exist when....
answer
one firm can produce the market output at a lower cot than two or more firms
question
Without competition, there is a tendency for a government-run or regulated monopoly to become what?
answer
to become inefficient by passing higher costs on to consumers
question
What would be a good example of a monopoly?
answer
a sole provider of electrical power in a city
question
Which of the following is not a reason that monopolies arise?
A) patents
B) economies of scale
C) excess competition
D) control of natural resources
A) patents
B) economies of scale
C) excess competition
D) control of natural resources
answer
C) excess competition
question
Price discrimination is defined as selling...
answer
the same product at different prices to different customers
question
To maximize profit, what should the monopolist set?
answer
A higher price in markets with more inelastic demand
question
Price discrimination is used when a seller faces different demand curves in different markets because...
answer
Profits are greater than selling at a single price
question
Why is it important for firms practicing price discrimination to prevent arbitrage of their product?
answer
Arbitrage reduces the profits from price discrimination for firms, and increases profits for smugglers
question
Which of the following lists of products and services would be the most difficult to arbitrage?
A) A computer software, movie tickets, consumer bleach
B) dental root canals, haircuts, and cosmetic surgery
C) Computer hardware, full-service restaurant meals, and novels
D) computer software, computer hardware, and tickets to sporting events
A) A computer software, movie tickets, consumer bleach
B) dental root canals, haircuts, and cosmetic surgery
C) Computer hardware, full-service restaurant meals, and novels
D) computer software, computer hardware, and tickets to sporting events
answer
B) Dental root canals, haircuts, and cosmetic surgery
question
Which of the following is an example of price discrimination?
A) value meals at fast food restaurants
B) senior citizen discounts
C) tax-exempt status for non-profit organizations
D) Holiday sales at retail stores
A) value meals at fast food restaurants
B) senior citizen discounts
C) tax-exempt status for non-profit organizations
D) Holiday sales at retail stores
answer
D) holiday sales at retail stores
question
What is perfect price discrimination?
answer
This occurs when a seller charges each separate consumer an amount that is exactly equal to his or her maximum willingness to pay
question
What does perfect discrimination result in?
answer
Zero dollars of consumer surplus
question
Arbitrage is ____in one market and ____in another market.
answer
neither selling high or low, or buying high or low. The answer is that none of them are correct.
question
What is an important lesson of price discrimination?
answer
Monopolists can increase profits through price discrimination only when the demand curves in two different markets are not the same.
question
Conditions of economic efficiency
answer
1) All activities that provide individuals with more benefits than costs must be undertaken
2) no activities that prove benefits less than costs should be undertaken
-benefits must outweigh the cost
-stop short of perfection
2) no activities that prove benefits less than costs should be undertaken
-benefits must outweigh the cost
-stop short of perfection
question
Marginal benefit curves
answer
-as more resources are used to expand the level of an activity, the marginal benefit of the activity will DECLINE and marginal costs will rise
-must include opportunity cost
-must include opportunity cost
question
Marginal cost curves
answer
-Will rise
-must include opportunity costs
-must include opportunity costs
question
Protective function of government
answer
Protective of individuals and their property against invasions by others
-this is the most fundamental mechanism. We need this threat so if someone does something against us, we can take them to court. (business transactions)
-this is the most fundamental mechanism. We need this threat so if someone does something against us, we can take them to court. (business transactions)
question
Productive function of government
answer
produce goods and services that cannot easily be provided through private markets
-to keep a stable environment (gov controls mail, build roads)
-to keep a stable environment (gov controls mail, build roads)
question
Why will the invisible hand fail?
answer
-Lack of competition
-Externalities
-public goods
-poor information
-Externalities
-public goods
-poor information
question
Lack of competition
answer
-leads to higher prices
-restrict output and raise price
-too few units will be produced
-restrict output and raise price
-too few units will be produced
question
Externalities
answer
-Exists when the market fails to register fully costs and benefits
-Costs:harm property w/o consent
- Costs: property rights are imperfectly defined or enforced
-Costs: units may be produced that are valued less than their cost
-benefit: actions generate benefits for nonparticipating parties
-third party groups, pollution, loud music, vaccination or population
-Costs:harm property w/o consent
- Costs: property rights are imperfectly defined or enforced
-Costs: units may be produced that are valued less than their cost
-benefit: actions generate benefits for nonparticipating parties
-third party groups, pollution, loud music, vaccination or population
question
Public goods
answer
-made available to one, it's simultaneously made available to others
-the CHARACTERISTICS of a public good is what distinguishes it as a public good:
-i.e. national defense, broadcast radio/tv signals, clean air
-public goods can cause a break down in the harmony between self-interest and the public interest
-the CHARACTERISTICS of a public good is what distinguishes it as a public good:
-i.e. national defense, broadcast radio/tv signals, clean air
-public goods can cause a break down in the harmony between self-interest and the public interest
question
Poor information
answer
-May cause inefficient markets
-minimal if the item is purchases regularly
-conflicting interests and unhappy customers can arise if goods are difficult to evaluate on inspection or capable of harmful side effects.
-minimal if the item is purchases regularly
-conflicting interests and unhappy customers can arise if goods are difficult to evaluate on inspection or capable of harmful side effects.
question
Market responses to poor information
answer
-consumers want info publications
-brand names and franchises
-warranties.
-brand names and franchises
-warranties.
question
What conditions does a competitive market operate under?
answer
1) there are many buyers and sellers
2)goods produced are the same
3) there are few or no barriers to entry and exit
-no single buyer/seller has influence on the market price and all firms must sell their output at the same market price
2)goods produced are the same
3) there are few or no barriers to entry and exit
-no single buyer/seller has influence on the market price and all firms must sell their output at the same market price
question
In a competitive market, what happens when a firm prices its product above the market price?
answer
you will lose all of your customers
question
What kind of demand elasticity curve does the competitive firm face?
answer
perfectly elastic demand curve
question
What is the goal of all firms?
answer
To maximize profit
question
What are the two components of total cost?
answer
1) fixed costs are costs that do vary with output
2) variable costs are costs that do vary with output
2) variable costs are costs that do vary with output
question
What does profit maximization depend on?
answer
It only depends on the firm's output decision
question
When does a firm make a profit?
answer
When price equals average cost
-P >AC
-P >AC
question
Firms maximize profits by what?
answer
setting marginal revenue to marginal cost
question
T/F: Maximizing profit and minimizing losses results in the same decision being made
answer
true
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