Microeconomics Amanda Ross Final - Assignment Essays %

question

economists assume that people are rational in the sense that

answer

they use all available information as they take actions intended to achieve their goals

question

scarcity is central to the study of economics because it implies that

answer

every choice involves oppertunity costs

question

economists use the word marginal to mean extra of additional benefit or cost. an optimal decision occurs when

answer

marginal benefit equals marginal cost

question

The three economic questions that every society must answer are

answer

What goods will be produced, how will they be produced, and who will receive the goods?

question

Centrally planned economies allocate resources based on decisions by_______________, while market economies answer these questions through decisions made by______________

answer

government ; households and firms

question

Productive efficiency means that

answer

a good or service is produced at the lowest possible cost

question

Allocative efficiency means that

answer

every good or service is produced up to the point where marginal benefit is equal to marginal cost.

question

What type of economic analysis is concerned with the way things ought to be?

answer

Normative Analysis

question

Macroeconomics is the study of

answer

the economy as a whole, including topics such as inflation, unemployment, and economic growth

question

Microeconomics is the study of

answer

how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

question

The marcroeconomic issue

answer

The level of total investment by firms in new machinery and equipment helps to determine how rapidly the economy grows.

question

the microeconomic issue

answer

However, to understand how much new machinery and equipment firms decide to purchase, one must analyze the incentives individual firms face,

question

A production possibilities frontier:

answer

shows the maximum attainable combinations of two goods that may be produced with available resources.

question

We can show economic efficiency:

answer

with points on the production possibilities frontier.

question

We can show economic inefficiency:

answer

with points inside the production possibilities frontier.

question

The production possibilities frontier will shift outward

answer

if reasources are used to produce capital goods

question

what is absolute advantage

answer

The ability to produce more of a good or service than competitors using the same amount of resources.

question

What is comparative advantage?

answer

The ability to produce a good or service at a lower opportunity cost than other producers.

question

Is it possible for a country to have a comparative advantage in producing a good without also having an absolute advantage? A country without an absolute advantage in producing a good

answer

will have a comparative advantage if it has a lower opportunity cost of producing that good.

question

What is the basis for trade?

answer

comparative advantage

question

How can a country gain from specialization and trade?

answer

A country can specialize in producing that for which it has a comparative advantage and then trade for other needed goods and services.

question

Whether carried out by an individual or a country, production beyond the production possibilities frontier

answer

is not physically possible.

question

With respect to consumption, individuals and countries

answer

can, through trade, consume beyond their production possibilities frontiers.

question

The law of demand is the assertion that

answer

the quantity demanded of a product is inversely related to its price.

question

An increase in the price of a product causes a decrease in quantity demanded because of the income and substitution effects. More specifically,

answer

the substitution effect is the decrease in quantity demanded because the product is more expensive relative to other goods and the income effect is the decrease in quantity demanded owing to the decline in consumers' purchasing power.

question

The difference between a change in supply and a change in the quantity supplied is that the latter is

answer

produced by a change in the products own price while the former is caused by a variety of variables other than the products price

question

What do economists mean by market equilibrium?

answer

A market outcome where quantity supplied is equal to quantity demanded.

question

The formula for the price elasticity of demand is

answer

the percentage change in quantity demanded divided by the percentage change in price.

question

Why isn't elasticity just measured by the slope of the demand curve?

answer

the slope can change dramatically, depending on the units chosen for quantity and price

question

What are the key determinants of the price elasticity of demand for a product?

answer

availability of close substitutes, passage of time, necessities versus luxuries, definition of the market, and share of the good in the consumer's budget.

question

Which determinant is the most important?

answer

the availability of close substitutes

question

The cross-price elasticity of demand is

answer

the percentage change in quantity demanded of one good divided by the percentage change in the price of another good.

question

If the cross-price elasticity of demand is negative, then the products are:

answer

complements, but if it is positive, then the products are substitutes.

question

For a normal good, the income elasticity of demand will be

answer

positive, but for an inferior good, the income elasticity of demand will be negative.

question

Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a necessity?

answer

Yes. If the income elasticity of demand is greater than 1, then the good is a luxury. If the income elasticity of demand is positive but less than 1, then the good is a necessity.

question

The formula for the price elasticity of supply is

answer

the percentage change in quantity supplied divided by the percentage change in price.

question

Consumer surplus is

answer

the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.

question

As the price of a good rises, consumer surplus______, and as the price of a good falls, consumer surplus

answer

decreases; increases

question

Deadweight loss is

answer

the reduction in economic surplus resulting from a market not being in competitive equilibrium.

question

Economic surplus is maximized when

answer

the marginal benefit of consumption is equal to the marginal costs of production.

question

What is an externality?

answer

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

question

Which of the following is an example of a good or service having the effects of a positive externality?

answer

medical research; education

question

Which of the following is an example of a good or service having the effects of a negative externality?

answer

Cigarette smoking.

question

The private cost of producing a good will differ from the social cost

answer

when there is an externality, such as acid rain generated by the production of electricity.

question

When will the private benefit from consuming a good differ from the social benefit?

answer

when there is an externality, such as second-hand smoke generated by the consumption of cigarettes; when there is an externality, such as fewer diseases generated by the consumption of vaccines

question

A Pigovian tax is

answer

a tax to bring about an efficient level of output in the presence of externalities.

question

At what level must a Pigovian tax be set to achieve efficiency? A Pigovian tax must be set equal to

answer

the cost of the externality.

question

Rivalry is the situation that occurs when

answer

one person's consuming a unit of a good means no one else can consume it.

question

Excludability is the situation that occurs when

answer

anyone who does not pay for a good cannot consume it.

question

Private good is

answer

rival and excludable

question

A public good is

answer

nonrivalrous and nonexcludable

question

quasi-public good is

answer

nonrivalroud and excludable

question

A common resource is

answer

rival and nonexcludable

question

What is free riding?

answer

Free riding is benefiting from a good without paying for it.

question

How is free riding related to the tendency of a public good to create market failure? Free riding results in

answer

the market producing a quantity of public goods that is inefficiently low because they are nonexcludable.

question

Tax incidence indicates

answer

the actual division of the burden of a tax.

question

Do the people who are legally required to pay a tax always bear the burden of the tax? Briefly explain.

answer

No. Whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government.

question

Utility is

answer

the enjoyment or satisfaction people receive from consuming goods and services.
NOT MEASURABLE

question

What is the definition of marginal utility?

answer

The change in utility from consuming an additional unit of a good or service.

question

The law of diminishing marginal utility suggests that

answer

consumers experience diminishing additional satisfaction as they consume more of a good or service.

question

Marginal utility is more useful than total utility in consumer decision making because

answer

optimal decisions are made at the margin.

question

A budget constraint:

answer

indicates the limited amount of income available to consumers to spend on goods and services.

question

The rule of equal marginal utility per dollar spent suggests that consumers maximize utility by

answer

equalizing the marginal utility per dollar spent across goods and services.

question

A market demand curve is derived by

answer

adding horizontally the individual demand curves.

question

What is the difference between the short run and the long run?

answer

In the short run, at least one of a firm's inputs is fixed, while in the long run, a firm is able to vary all its inputs and adopt new technology.

question

Is the amount of time that separates the short run from the long run the same for every firm?

answer

question

Any cost that changes as output changes represents a firm's

answer

variable cost.

question

Which of the following is most likely to be a fixed cost for a farmer?

answer

insurance premiums on property

question

Which of the following is most likely to a variable cost for a business firm?

answer

cost of shipping products

question

An implicit cost is

answer

a nonmonetary opportunity cost.

question

How are implicit costs different from explicit costs?

answer

An explicit cost is a cost that involves spending money, while an implicit cost is a nonmonetary cost.

question

The law of diminishing returns states that

answer

adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline.
does not apply in the long run

question

What is the difference between the average cost of production (ATC) and marginal cost of production (MC)?

answer

ATC=TC/Q ; MC=change in TC/ change in Q

question

The marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum because

answer

when the marginal cost of the last unit produced is below the average, it pulls the average down, and when the marginal cost is above the averge, it pulls the average up.

question

For a market to be perfectly competitive, there must be

answer

many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market.

question

A price taker is

answer

a firm that is unable to affect the market price.

question

A firm is likely to be a price taker when

answer

it sells a product that is exactly the same as every other firm

question

Why do single firms in perfectly competitive markets face horizontal demand curves?

answer

With many firms selling an identical product, single firms have no effect on market price.

question

In the short run, a firm's shutdown point is the minimum point on the

answer

average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve.

question

Why are firms willing to accept losses in the short run but not in the long run?

answer

there are sunk costs in the short run but not in the long run.

question

In the short run, a firm's shutdown point is the minimum point on the

answer

average variable cost curve, while in the long run, a firms exit point is the minimum point on the average cost curve

question

Why are firms willing to accept losses in the short run but not in the long run?

answer

There are fixed costs in the short run but not in the long run

question

When are firms likely to enter an industry? When are they likely to exit?

answer

Economic profits attract firms to enter an industry, and economic losses cause firms to exit an industry.

question

Unlike in perfectly competitive markets, in monopolistically competitive markets,

answer

firms face downward-sloping demand curves, and the products competitors sell are differentiated.

question

Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets.

answer

apples and oranges are sold in perfectly competitive markets and Starbucks coffee and gap clothing are sold in monopolistically competitive markets

question

A monopoly is

answer

a firm that is the only seller of a good or service that does not have a close substitute.

question

The four main reasons a firm becomes a monopoly are:

answer

the government blocks entry, control of a key resource, network externalities, and economies of scale.

question

A natural monopoly

answer

develops automatically due to economies of scale.

question

Network externalities

answer

serve as barriers to entry because new products are less useful.

question

An oligopoly is a market structure

answer

where a small number of interdependent firms compete.

question

Three examples of oligopolies in the United States are industries that produce or sell

answer

computers , athletic footware, and cigarettes.

question

Without barriers to entry,

answer

new firms will enter industries where firms are earning economic profits.

question

The most important barriers to entry are

answer

economies of scale, ownership of a key input, and government imposed barriers.

question

Game theory

answer

The study of how people make decisions where attaining goals depends on interactions with others.

question

Cooperative equilibrium

answer

A game outcome in which players seek to increase their mutual payoff.

question

Noncooperative equilibrium

answer

A game outcome in which players pursue their own self-interest.

question

Dominant strategy

answer

A strategy that is the best for a firm, no matter what strategies other firms use.

question

Nash equilibrium

answer

A situation in which each firm chooses the best strategy, given the strategies chosen by other firms

question

Price Leadership

answer

A situation where one firm announces a price change, which is matched by other firms in the industry.

question

Price discrimination is when

answer

firms charge a higher price to consumers whose demand is less elastic and a lower price to consumers whose demand is more elastic; firms change a higher price for a product when it is first introduced and a lowed later; firms charge consumer a different price equal to that consumers willingness to pay

question

Price discrimination is when

answer

some consumers must have greater willingness to pay for the product than others and a firm must know consumer willingness to pay for the product.

question

Perfect price discrimination is

answer

unlikely to occur because firms typically do not know how much each consumer is willing to pay.

question

Perfect price discrimination is economically efficient

answer

efficient because it converts into producer surplus what had been consumer surplus and deadweight loss.

question

Is it possible to price discriminate across time? Briefly explain.

answer

Yes. Firms can charge higher prices at times when consumer demand is less elastic and lower prices at times when consumer demand is more elastic

question

The public choice model

answer

applies economic analysis to government decision making.

question

A marginal tax rate is

answer

the fraction of each additional dollar of income that must be paid in taxes, while the average tax rate is the total tax paid divided by total income.

question

Which is more important in determining the impact of the tax system on economic behavior?

answer

marginal tax rate

question

According to the goal of economic efficiency, governments tend to favor taxes that

answer

create a small excess burden relative to revenue raised.

question

In addition, governments favor taxes that treat people in the same economic situation equally treat people in the same economic situation equally, according to the

answer

horizontal-equity

question

governments favor taxes that place a greater share of the tax burden on those who have a greater ability to pay , according to the

answer

ability-to-pay

question

the benefits - received principle, governments favor taxes that

answer

place greater share of the tax burden on those who receive greater benefits

question

Principal-agent problem

answer

Results from agents pursuing their own interests rather than the interests of the principals who hired them.

question

Adverse selection

answer

Is the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.

question

Asymmetric information

answer

Occurs when one party to an economic transaction has less information than the other party.

question

Moral hazard

answer

Refers to actions people take after they have entered into a transaction that make the other party to the transaction worse off.

question

The "lemons problem" refers to the observation that the presence of asymmetric information in the used car market leads to the problem of______________, causing the cars offered for sale to be predominantly_________, quality

answer

adverse selection; poor

question

in the case of health insurance, a lemons problem exists since those more likely to want health insurance are

answer

sick people

question

Which of the following examples most accurately describes adverse selection and moral hazard in marriage?

answer

Adverse selection because the husband's secret alcoholism comes out after the wedding. Moral hazard because a spouse lets their appearance go after marriage.

1 of 118

question

economists assume that people are rational in the sense that

answer

they use all available information as they take actions intended to achieve their goals

question

scarcity is central to the study of economics because it implies that

answer

every choice involves oppertunity costs

question

economists use the word marginal to mean extra of additional benefit or cost. an optimal decision occurs when

answer

marginal benefit equals marginal cost

question

The three economic questions that every society must answer are

answer

What goods will be produced, how will they be produced, and who will receive the goods?

question

Centrally planned economies allocate resources based on decisions by_______________, while market economies answer these questions through decisions made by______________

answer

government ; households and firms

question

Productive efficiency means that

answer

a good or service is produced at the lowest possible cost

question

Allocative efficiency means that

answer

every good or service is produced up to the point where marginal benefit is equal to marginal cost.

question

What type of economic analysis is concerned with the way things ought to be?

answer

Normative Analysis

question

Macroeconomics is the study of

answer

the economy as a whole, including topics such as inflation, unemployment, and economic growth

question

Microeconomics is the study of

answer

how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

question

The marcroeconomic issue

answer

The level of total investment by firms in new machinery and equipment helps to determine how rapidly the economy grows.

question

the microeconomic issue

answer

However, to understand how much new machinery and equipment firms decide to purchase, one must analyze the incentives individual firms face,

question

A production possibilities frontier:

answer

shows the maximum attainable combinations of two goods that may be produced with available resources.

question

We can show economic efficiency:

answer

with points on the production possibilities frontier.

question

We can show economic inefficiency:

answer

with points inside the production possibilities frontier.

question

The production possibilities frontier will shift outward

answer

if reasources are used to produce capital goods

question

what is absolute advantage

answer

The ability to produce more of a good or service than competitors using the same amount of resources.

question

What is comparative advantage?

answer

The ability to produce a good or service at a lower opportunity cost than other producers.

question

Is it possible for a country to have a comparative advantage in producing a good without also having an absolute advantage? A country without an absolute advantage in producing a good

answer

will have a comparative advantage if it has a lower opportunity cost of producing that good.

question

What is the basis for trade?

answer

comparative advantage

question

How can a country gain from specialization and trade?

answer

A country can specialize in producing that for which it has a comparative advantage and then trade for other needed goods and services.

question

Whether carried out by an individual or a country, production beyond the production possibilities frontier

answer

is not physically possible.

question

With respect to consumption, individuals and countries

answer

can, through trade, consume beyond their production possibilities frontiers.

question

The law of demand is the assertion that

answer

the quantity demanded of a product is inversely related to its price.

question

An increase in the price of a product causes a decrease in quantity demanded because of the income and substitution effects. More specifically,

answer

question

The difference between a change in supply and a change in the quantity supplied is that the latter is

answer

produced by a change in the products own price while the former is caused by a variety of variables other than the products price

question

What do economists mean by market equilibrium?

answer

A market outcome where quantity supplied is equal to quantity demanded.

question

The formula for the price elasticity of demand is

answer

the percentage change in quantity demanded divided by the percentage change in price.

question

Why isn't elasticity just measured by the slope of the demand curve?

answer

the slope can change dramatically, depending on the units chosen for quantity and price

question

What are the key determinants of the price elasticity of demand for a product?

answer

availability of close substitutes, passage of time, necessities versus luxuries, definition of the market, and share of the good in the consumer's budget.

question

Which determinant is the most important?

answer

the availability of close substitutes

question

The cross-price elasticity of demand is

answer

the percentage change in quantity demanded of one good divided by the percentage change in the price of another good.

question

If the cross-price elasticity of demand is negative, then the products are:

answer

complements, but if it is positive, then the products are substitutes.

question

For a normal good, the income elasticity of demand will be

answer

positive, but for an inferior good, the income elasticity of demand will be negative.

question

Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a necessity?

answer

Yes. If the income elasticity of demand is greater than 1, then the good is a luxury. If the income elasticity of demand is positive but less than 1, then the good is a necessity.

question

The formula for the price elasticity of supply is

answer

the percentage change in quantity supplied divided by the percentage change in price.

question

Consumer surplus is

answer

the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.

question

As the price of a good rises, consumer surplus______, and as the price of a good falls, consumer surplus

answer

decreases; increases

question

Deadweight loss is

answer

the reduction in economic surplus resulting from a market not being in competitive equilibrium.

question

Economic surplus is maximized when

answer

the marginal benefit of consumption is equal to the marginal costs of production.

question

What is an externality?

answer

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

question

Which of the following is an example of a good or service having the effects of a positive externality?

answer

medical research; education

question

Which of the following is an example of a good or service having the effects of a negative externality?

answer

Cigarette smoking.

question

The private cost of producing a good will differ from the social cost

answer

when there is an externality, such as acid rain generated by the production of electricity.

question

When will the private benefit from consuming a good differ from the social benefit?

answer

when there is an externality, such as second-hand smoke generated by the consumption of cigarettes; when there is an externality, such as fewer diseases generated by the consumption of vaccines

question

A Pigovian tax is

answer

a tax to bring about an efficient level of output in the presence of externalities.

question

At what level must a Pigovian tax be set to achieve efficiency? A Pigovian tax must be set equal to

answer

the cost of the externality.

question

Rivalry is the situation that occurs when

answer

one person's consuming a unit of a good means no one else can consume it.

question

Excludability is the situation that occurs when

answer

anyone who does not pay for a good cannot consume it.

question

Private good is

answer

rival and excludable

question

A public good is

answer

nonrivalrous and nonexcludable

question

quasi-public good is

answer

nonrivalroud and excludable

question

A common resource is

answer

rival and nonexcludable

question

What is free riding?

answer

Free riding is benefiting from a good without paying for it.

question

How is free riding related to the tendency of a public good to create market failure? Free riding results in

answer

the market producing a quantity of public goods that is inefficiently low because they are nonexcludable.

question

Tax incidence indicates

answer

the actual division of the burden of a tax.

question

Do the people who are legally required to pay a tax always bear the burden of the tax? Briefly explain.

answer

No. Whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government.

question

Utility is

answer

the enjoyment or satisfaction people receive from consuming goods and services.
NOT MEASURABLE

question

What is the definition of marginal utility?

answer

The change in utility from consuming an additional unit of a good or service.

question

The law of diminishing marginal utility suggests that

answer

consumers experience diminishing additional satisfaction as they consume more of a good or service.

question

Marginal utility is more useful than total utility in consumer decision making because

answer

optimal decisions are made at the margin.

question

A budget constraint:

answer

indicates the limited amount of income available to consumers to spend on goods and services.

question

The rule of equal marginal utility per dollar spent suggests that consumers maximize utility by

answer

equalizing the marginal utility per dollar spent across goods and services.

question

A market demand curve is derived by

answer

adding horizontally the individual demand curves.

question

What is the difference between the short run and the long run?

answer

In the short run, at least one of a firm's inputs is fixed, while in the long run, a firm is able to vary all its inputs and adopt new technology.

question

Is the amount of time that separates the short run from the long run the same for every firm?

answer

question

Any cost that changes as output changes represents a firm's

answer

variable cost.

question

Which of the following is most likely to be a fixed cost for a farmer?

answer

insurance premiums on property

question

Which of the following is most likely to a variable cost for a business firm?

answer

cost of shipping products

question

An implicit cost is

answer

a nonmonetary opportunity cost.

question

How are implicit costs different from explicit costs?

answer

An explicit cost is a cost that involves spending money, while an implicit cost is a nonmonetary cost.

question

The law of diminishing returns states that

answer

adding more of a variable input to the same amount of a fixed input will eventually cause the marginal product of the variable input to decline.
does not apply in the long run

question

What is the difference between the average cost of production (ATC) and marginal cost of production (MC)?

answer

ATC=TC/Q ; MC=change in TC/ change in Q

question

The marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum because

answer

when the marginal cost of the last unit produced is below the average, it pulls the average down, and when the marginal cost is above the averge, it pulls the average up.

question

For a market to be perfectly competitive, there must be

answer

many buyers and sellers, with all firms selling identical products, and no barriers to new firms entering the market.

question

A price taker is

answer

a firm that is unable to affect the market price.

question

A firm is likely to be a price taker when

answer

it sells a product that is exactly the same as every other firm

question

Why do single firms in perfectly competitive markets face horizontal demand curves?

answer

With many firms selling an identical product, single firms have no effect on market price.

question

In the short run, a firm's shutdown point is the minimum point on the

answer

average variable cost curve, while in the long run, a firm's exit point is the minimum point on the average total cost curve.

question

Why are firms willing to accept losses in the short run but not in the long run?

answer

there are sunk costs in the short run but not in the long run.

question

In the short run, a firm's shutdown point is the minimum point on the

answer

average variable cost curve, while in the long run, a firms exit point is the minimum point on the average cost curve

question

Why are firms willing to accept losses in the short run but not in the long run?

answer

There are fixed costs in the short run but not in the long run

question

When are firms likely to enter an industry? When are they likely to exit?

answer

Economic profits attract firms to enter an industry, and economic losses cause firms to exit an industry.

question

Unlike in perfectly competitive markets, in monopolistically competitive markets,

answer

firms face downward-sloping demand curves, and the products competitors sell are differentiated.

question

Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets.

answer

apples and oranges are sold in perfectly competitive markets and Starbucks coffee and gap clothing are sold in monopolistically competitive markets

question

A monopoly is

answer

a firm that is the only seller of a good or service that does not have a close substitute.

question

The four main reasons a firm becomes a monopoly are:

answer

the government blocks entry, control of a key resource, network externalities, and economies of scale.

question

A natural monopoly

answer

develops automatically due to economies of scale.

question

Network externalities

answer

serve as barriers to entry because new products are less useful.

question

An oligopoly is a market structure

answer

where a small number of interdependent firms compete.

question

Three examples of oligopolies in the United States are industries that produce or sell

answer

computers , athletic footware, and cigarettes.

question

Without barriers to entry,

answer

new firms will enter industries where firms are earning economic profits.

question

The most important barriers to entry are

answer

economies of scale, ownership of a key input, and government imposed barriers.

question

Game theory

answer

The study of how people make decisions where attaining goals depends on interactions with others.

question

Cooperative equilibrium

answer

A game outcome in which players seek to increase their mutual payoff.

question

Noncooperative equilibrium

answer

A game outcome in which players pursue their own self-interest.

question

Dominant strategy

answer

A strategy that is the best for a firm, no matter what strategies other firms use.

question

Nash equilibrium

answer

A situation in which each firm chooses the best strategy, given the strategies chosen by other firms

question

Price Leadership

answer

A situation where one firm announces a price change, which is matched by other firms in the industry.

question

Price discrimination is when

answer

question

Price discrimination is when

answer

some consumers must have greater willingness to pay for the product than others and a firm must know consumer willingness to pay for the product.

question

Perfect price discrimination is

answer

unlikely to occur because firms typically do not know how much each consumer is willing to pay.

question

Perfect price discrimination is economically efficient

answer

efficient because it converts into producer surplus what had been consumer surplus and deadweight loss.

question

Is it possible to price discriminate across time? Briefly explain.

answer

Yes. Firms can charge higher prices at times when consumer demand is less elastic and lower prices at times when consumer demand is more elastic

question

The public choice model

answer

applies economic analysis to government decision making.

question

A marginal tax rate is

answer

the fraction of each additional dollar of income that must be paid in taxes, while the average tax rate is the total tax paid divided by total income.

question

Which is more important in determining the impact of the tax system on economic behavior?

answer

marginal tax rate

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According to the goal of economic efficiency, governments tend to favor taxes that

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create a small excess burden relative to revenue raised.

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In addition, governments favor taxes that treat people in the same economic situation equally treat people in the same economic situation equally, according to the

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horizontal-equity

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governments favor taxes that place a greater share of the tax burden on those who have a greater ability to pay , according to the

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ability-to-pay

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the benefits - received principle, governments favor taxes that

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place greater share of the tax burden on those who receive greater benefits

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Principal-agent problem

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Results from agents pursuing their own interests rather than the interests of the principals who hired them.

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Adverse selection

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Is the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.

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Asymmetric information

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Occurs when one party to an economic transaction has less information than the other party.

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Moral hazard

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Refers to actions people take after they have entered into a transaction that make the other party to the transaction worse off.

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adverse selection; poor

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in the case of health insurance, a lemons problem exists since those more likely to want health insurance are

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sick people

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Which of the following examples most accurately describes adverse selection and moral hazard in marriage?

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Adverse selection because the husband's secret alcoholism comes out after the wedding. Moral hazard because a spouse lets their appearance go after marriage.

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