Microeconomics Ecn201 - Assignment Essays %

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Suppose the incomes of buyers in a market for a particular normal good decrease and there is also an increase in input prices. What would we expect to occur in this market?

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Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous.

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1. Suppose consumer income decreases. If grass seed is a normal good and the supply of grass seed is perfectly elastic, the equilibrium price of grass seed will

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stay the same, and the quantity sold will decrease.

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You are in charge of the local city-owned aquatic center. You need to increase the revenue generated by the aquatic center to meet expenses. The mayor advises you to increase the price of a day pass. The city manager recommends decreasing the price of a day pass. You realize that

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the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.

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Demand is said to be price elastic if

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buyers respond substantially to changes in the price of the good.

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If the price elasticity of supply is 2.0, and a price increase led to a 4% increase in quantity supplied, then the price increase is about

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2.0%

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Suppose the income of buyers in a market for an inferior good increase and technological advancement occurs also. What would we expect to happen in the market?

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Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.

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Suppose that Amanda receives a pay decrease. We would expect

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Amanda's demand for normal goods to decrease.

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Suppose that 50 ice cream cones are demanded at a particular price. If the price of ice cream cones rises from that price by 4 percent, the number of ice cream cones demanded falls to 46. It follows that the

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demand for ice cream cones in this price range is elastic.

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Which of the following events must cause equilibrium price to fall?

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demand decreases and supply increases

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The discovery of a new hybrid wheat would increase the supply of wheat. As a result, wheat farmers would realize an decrease in total revenue if the

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demand for wheat is inelastic

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If the price elasticity of demand for a good is 2.0, then a 3 percent decrease in price results in a

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6.0 percent increase in the quantity demanded.

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What would happen to the equilibrium price and quantity of lattés if consumers' incomes rise and lattés are a normal good?

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Both the equilibrium price and quantity would increase.

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A competitive market is a market in which

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no individual buyer or seller has any significant impact on the market price.

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When the price of a good or service changes,

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there is a movement along a given demand curve.

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If textbooks and study guides are complements, then an increase in the price of textbooks will result in

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fewer study guides being sold.

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This economy cannot produce at which point(s)?

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Q and S

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The opportunity cost of obtaining 20 additional dryers by moving from point D to point A is

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0 washers

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Which of the following trade-offs does the production possibilities frontier illustrate?

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Once an economy has reached the efficient points on its production possibilities frontier, the only way of getting more of one good is to get less of the other.

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Chile's opportunity cost of one pound of coffee is

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3/4 pound of soybeans and Colombia's opportunity cost of one pound of coffee is 1/2 pound of soybeans

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Barb and Jim run a business that sets up and tests computers. The following table applies. Assume that Barb and Jim can switch between setting up and testing computers at a constant rate. Barb's opportunity cost of setting up one computer is testing

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1 computer and Jim's opportunity cost of setting up one computer is testing 1/2 computer.

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testing computers and a comparative advantage in testing computers.

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Which of the following is not correct?

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The gains from specialization and trade are based not on comparative advantage but on absolute advantage.

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Ken and Traci are two woodworkers whom both make tables and chairs. In one month, Ken can make 3 tables or 18 chairs, whereas Traci can make 8 tables or 24 chairs. Given this, we know that

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Traci has an absolute advantage in chairs

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If Chile and Colombia switch from each country dividing its time equally between the production of coffee and soybeans to each country spending all of its time producing the good in which it has a comparative advantage, then total production of soybeans will increase by

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3 pounds.

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Suppose consumer income decreases. If grass seed is a normal good and the supply of grass seed is perfectly elastic, the equilibrium price of grass seed will

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stay the same, and the quantity sold will decrease.

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This figure shows the market demand and market supply curves for good X. Which of the following statements is not correct?

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A price ceiling set at $3.50 would result in a surplus.

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The incidence of a tax falls more heavily on

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consumers than producers if demand is more inelastic than supply.

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Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling,

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there is shortage of physicals.
the quantity of physicals supplied decreases.
the quantity of physicals demanded increases.

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The equilibrium price in the market after the tax is imposed is

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$5.00.

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When a binding price ceiling is imposed on a market to benefit buyers,

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some buyers benefit, and some buyers are harmed.

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Sellers pay how much of the tax per unit

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$0.50

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If the government adds a binding price floor to a market, then the price received by sellers will

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increase, and the quantity sold in the market will decrease.

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Consumer surplus is

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the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

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Total surplus in a market will increase when the government

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removes a binding price floor from that market

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Which area represents the increase in producer surplus when the price rises from P1 to P2?

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AHGB

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Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book?

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Which area represents producer surplus when the price is P1?

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BCG

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Consumer surplus in a market can be represented by the

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area below the demand curve and above the price.

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Abraham drinks Mountain Dew. He can buy as many cans of Mountain Dew as he wishes at a price of $0.55 per can. On a particular day, he is willing to pay $0.95 for the first can, $0.80 for the second can, $0.60 for the third can, and $0.40 for the fourth can. Assume Abraham is rational in deciding how many cans to buy. His consumer surplus is

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$0.70

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If the market price is $105, and consumers can choose whether to purchase or not,

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Sam's consumer surplus is $30 and total consumer surplus for all four consumers is $90.

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The change in total surplus in this market because of trade is

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and this area represents a gain in total surplus.

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For any country, if the world price of copper is lower than the domestic price of copper without trade, that country should

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import copper.

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When a tax of size 10 is imposed, the tax causes producer surplus to decrease by the area

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D + F

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Domestic producer surplus plus domestic consumer surplus in this market after trade is

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A + B + C + D.

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Producer surplus in this market after trade is

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When a tax of size 10 is imposed, the decrease in consumer surplus that becomes tax revenue is the area

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When a country allows trade and becomes an exporter of a good,

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domestic producers gain and domestic consumers lose.

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When a tax of size 5 is imposed, the loss of producer surplus as a result of the tax is

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$3.

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Suppose that a tax is placed on books. If the seller's tax burden is the majority of the tax, then we know that the

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supply is more inelastic than the demand.

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Taxes cause deadweight losses because they

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reduce incentives for buyers and sellers to trade with one another.
reduce the gains from trade in the market for good which is taxed.
lead to losses in surplus for consumers and for producers that, when taken together, exceed tax revenue collected by the government.

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Abe owns a dog; the dog's barking annoys Abe's neighbor, Jenny. Suppose that the benefit of owning the dog is worth $200 to Abe and that Jenny bears a cost of $400 from the barking. Assuming Abe has the legal right to keep the dog, a possible private solution to this problem is that

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Jenny pays Abe $300 to give the dog to his parents who live on an isolated farm.

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Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the railroad is not liable for any damage caused to the crops. Assume that there are no transaction costs. Which of the following characterizes a negotiated private solution to the problem?

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The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.

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Tradable pollution permits

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will be more valuable to firms that can reduce pollution only at high costs.

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Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other?

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$3,500

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Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution. The government requires each firm to reduce pollution from 50 to 20. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. What is the total cost of reducing pollution in this way?

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$4,500

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Suppose that the production of plastic creates a social cost which is depicted in the graph below.

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This negative externality can be corrected with a tax of 4 per unit.

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With pollution permits, the supply curve for pollution rights is

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perfectly inelastic.

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A free rider is a person who

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receives the benefit of a good but avoids paying for it.

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Producers have little incentive to produce a public good because

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there is a free-rider problem

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Which of the following statements about private goods and public goods is correct?

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Private goods are rival in consumption and public goods are not excludable.

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The overuse of a common resource relative to its economically efficient use is called

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the Tragedy of the Commons.

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Consider the town of Springfield with only three residents, Sophia, Amber, and Cedric. The three residents are trying to determine how large, in acres, they should build the public park. The table below shows each resident's marginal benefit for each acre of the park. Suppose the cost to build the park is $21 per acre. If each resident is charged $7 for each acre the park contains, how many acres would the majority of residents vote for?

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2 acres

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Goods that are rival in consumption and nonexcludable would be considered

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common resources.

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Consider the town of Springfield with only three residents, Sophia, Amber, and Cedric. The three residents are trying to determine how large, in acres, they should build the public park. The table below shows each resident's marginal benefit for each acre of the park. Suppose the cost to build the park is $21 per acre. How many acres should the park be to be socially optimal and to maximize total surplus from the park in Springfield?

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3 acres

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A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000,

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average fixed cost is 50 cents.

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The average fixed cost curve

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always declines with increased levels of output

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Jessica makes photo frames. She spends $5 on the materials for each photo frame. She can create one photo frame in an hour. If she is not making photo frames she can earn $20 per hour at a part-time job at the local coffee shop. She can sell a photo frame for $30 each. An economist would calculate the total cost for one photo frame to be

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$25.

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Which worker is the first where marginal product begins to diminish?

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What is the total output from four workers?

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260

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What is the fixed cost of production for this firm?

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$10

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What is the total cost of producing 6 units of output for this firm?

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$110

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What is the total variable cost of producing 5 units of output for this firm?

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$80

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Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber bands rises above the minimum of its average variable cost, but still lies below the minimum of average total cost, in the short run the firm will

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experience losses but will continue to produce rubber bands.

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A firm in a competitive market has the cost structure below. If the market price is $4, this firm will

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produce 3 units in the short run and exit in the long run.

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Profit-maximizing firms exit a competitive market when firms in that market have

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average total costs that are more than market price.

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Suppose a firm operating in a competitive market has the following cost curves:
When price is equal to 10, the firm's profit is

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The accountants hired by the Brookside Racquet Club have determined total fixed cost to be $75,000, total variable cost to be $130,000, and total revenue to be $145,000. Because of this information, in the short run, the Brookside Racquet Club should

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stay open because shutting down would lead to even larger losses.

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Suppose the long-run industry supply curve for a good is upward-sloping. The upward slope could be explained by

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increases in production costs resulting from more firms coming into the market.

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Suppose a firm operating in a competitive market has the following cost curves:
The price of this product in long run equilibrium is

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If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then

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decreasing output would increase the firm's profit.

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Suppose that a firm in a competitive market faces the revenues and costs given below. If the firm's marginal cost is $11, it should

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reduce production to increase profit

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What is the socially efficient/perfectly competitive price and quantity in this market?

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price = B; quantity = Y

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What is the monopoly price and quantity in this market?

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price = A; quantity = X

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In the following diagram, what price will the monopolist charge?

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Tanya has the following demand curve for selling taffy. Assume that Tanya has a marginal cost of $3 per unit. How many unit of taffy would Tanya sell to maximize profit?

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Which area in this figure represents the profit earned by the monopoly?

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C + F

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In the following diagram, the deadweight loss caused by a profit-maximizing monopoly amounts to

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$225

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In the following diagram, the consumer surplus at the monopolist's profit-maximizing price is

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$450.

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Which of the following statements is true?

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(ii) and (iii) only

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Which area in this figure represents the consumer surplus under monopoly

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A + B

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Which area in this figure represents the loss in consumer surplus when going from perfect competition to monopoly?

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C + F + G

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A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following?

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average revenue exceeds marginal revenue.
marginal revenue equals marginal cost.
price exceeds marginal cost.

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Monopolistic competition is considered inefficient because

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price exceeds marginal cost.

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Each firm in a monopolistically competitive industry faces a downward-sloping demand curve because

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the firm's product is slightly different from those offered by other firms in the market.

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Which of the following conditions is characteristic of a monopolistically competitive firm in long-run equilibrium?

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P > MC and AR = ATC

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A dominant strategy is one that

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is best for the player, regardless of what strategies other players follow.

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The Chicken Game is named for a contest in which drivers test their courage by driving straight at each other. John and Paul have a common interest to avoid crashing into each other, but they also have a personal, competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff table for this situation is provided below. The payoffs are shown as (John, Paul). What is (are) the Nash equilibrium (equilibria) in this Chicken game?

answer

John: Turn, Paul: Drive Straight
John: Drive Straight, Paul: Turn

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The prisoners' dilemma game

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has a Nash equilibrium, but the Nash equilibrium outcome is not the outcome the players would agree to if they could cooperate with each other.

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This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide how much output (Q) to produce: 10 units or 12 units. The profit for each firm is given in the table as (Profit for Firm A, Profit for Firm B). The dominant strategy For Firm A is to produce

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12 units and the dominant strategy for Firm B is to produce 12 units.

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This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide how much output (Q) to produce: 2 units or 3 units. The profit for each firm is given in the table as (Profit for Firm A, Profit for Firm B). Which of the following outcomes represent the Nash equilibrium in this game?

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Q=3 for Firm A and Q=2 for Firm B.

Q=2 for Firm A and Q=3 for Firm B

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In the prisoners' dilemma game, self-interest leads

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to an outcome that is not particularly good for either prisoner.
to a breakdown of any agreement that the prisoners might have made before being questioned.
each prisoner to confess.

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Q=2 for Firm A and Q=2 for Firm B

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This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B). If player B chooses Right, player A should choose

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Middle and earn a payoff of 5

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This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B). Which of the following statements regarding this game is true?

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Neither player has a dominant strategy.

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This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B). Which of the following outcomes represents a Nash equilibrium in the game?

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Middle-Right

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Given the following production information, what is the marginal product of the second worker?

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Given the following production information and that the firm pays its workers $50 per day and each unit of output sells for $20, how many days of labor should the firm hire?

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Harry owns a snow-removal business. He hires workers to shovel driveways for him during the winter. The first worker he hires can shovel twelve driveways in one day. When Harry hires two workers, they can shovel a total of 22 driveways in one day. When Harry hires a third worker, he shovels an additional eight driveways in one day. Suppose that Harry pays each worker $80 per day and that he charges each customer $20 to have his driveway shoveled. What is the value of the marginal product of labor for the second worker?

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$200

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If your wage increases from $10 per hour to $15 per hour, then your

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opportunity cost of an hour of leisure increases by $5 per hour.

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Factor markets are different from product markets in an important way because

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the demand for a factor of production is a derived demand.

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Tony is the owner of Tony's Taqueria. Tony is a profit-maximizing owner whose firm operates in a competitive market. An additional worker costs Tony $200 and has a marginal productivity of 40 tacos. Assuming no other variable costs, what is the marginal cost of a taco?

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Chuckie's Pizza Palace produces gourmet pizzas that sell for $20 each. Assume that labor is the only input that varies for the firm. If Chuckie hires 10 workers, he can produce and sell 600 pizzas per week. If he hires 11 workers, he can produce and sell 650 pizzas per week. Chuckie pays each of his workers $400 per week. Which of the following is correct?

answer

For the 11th worker, the marginal revenue product is $1,000.

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The following table shows the production function for a particular business. The numbers represent the various labor and output combinations the firm may choose for its output on a daily basis. Suppose this firm charges a price of $5 per unit of output and pays workers a wage equal to $160 per day. How many workers should this firm hire to maximize its profit?

answer

2 workers

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Rational people

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people who systematically and purposefully do the best they can to achieve their objectives

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market economy

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an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

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circular-flow diagram

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a visual model of the economy that shows how dollars flow through markets among households and firms

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Microeconomics

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Definition:the study of how households and firms make decisions and how they interact in markets

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production possibilities frontier

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a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

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opportunity cost

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whatever must be given up to obtain some item

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absolute advantage

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the ability to produce a good using fewer inputs than another producer

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comparative advantage

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the ability to produce a good at a lower opportunity cost than another producer

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competitive market

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a market in which there are many buyers and many sellers so that each has a negligible impact on the market price

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inferior good

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a good for which, other things being equal, an increase in income leads to a decrease in demand

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law of supply

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the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises

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law of supply and demand

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the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

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price elasticity of demand

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a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

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cross-price elasticity of demand

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a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good

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tax incidence

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the manner in which the burden of a tax is shared among participants in a market

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deadweight loss

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the fall in total surplus that results from a market distortion, such as a tax

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corrective tax

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a tax designed to induce private decision makers to take into account the social costs that arise from a negative externality

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Coase theorem

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the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

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Club goods

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goods that are excludable but not rival in consumption

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Tragedy of the Commons

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a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

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lump-sum tax

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a tax that is the same amount for every person

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Vertical equity

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the idea that taxpayers with a greater ability to pay taxes should pay larger amounts

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Horizontal equity

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the idea that taxpayers with similar abilities to pay taxes should pay the same amount

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regressive

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a tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers

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proportional

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a tax for which high-income and low-income taxpayers pay the same fraction of income

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progressive

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a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers

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explicit costs

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input costs that require an outlay of money by the firm

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economies of scale

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the property whereby long-run average total cost falls as the quantity of output increases

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diseconomies of scale

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the property whereby long-run average total cost rises as the quantity of output increases

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Nash equilibrium

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a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

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game theory

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the study of how people behave in strategic situations

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collusion

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an agreement among firms in a market about quantities to produce or prices to charge

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cartel

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a group of firms acting in unison

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prisoners' dilemma

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a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

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monopolistic competition

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a market structure in which many firms sell products that are similar but not identical

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monopoly

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a firm that is the sole seller of a product without any close substitutes

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natural monopoly

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a type of monopoly that arises because a single firm can supply a good or service to an entire market at a lower cost than could two or more firms

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price discrimination

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the business practice of selling the same good at different prices to different customers

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sunk cost

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Definition:a cost that has already been committed and cannot be recovered

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Marginal cost =

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wage*marginal product of labor

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Wage =

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price*marginal product of labor

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Price =

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marginal cost (price*marginal product of labor)

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average revenue =

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total revenue/quantity

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total revenue =

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Price * Quantity

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profit =

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(Price-Average total cost)*Quantity

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accounting profit =

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total revenue - explicit costs

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economic profit =

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total revenue - (explicit costs + implicit costs)

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average total cost =

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total cost/quantity

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average variable cost =

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variable cost/quantity

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average fixed cost =

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fixed cost/quantity

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Total surplus=

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(value to buyers - amount paid by buyers) + (amount received by sellers - cost to sellers)

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price elasticity of demand = (equation)

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percentage change in quantity demanded / percentage change in price

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price elasticity of demand = (equation 2)

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{(q2-q1)/[(q2+q1)/2]} / {(p2-p1)/[(p2+p1)/2]}

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income elasticity of demand =

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percentage change in quantity demanded/percentage change in income

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cross-price elasticity of demand = (equation)

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percentage change in quantity demanded of good1 / percentage change in the price of good2

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price elasticity of supply =

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percentage change in quantity supplied/percentage change in price

1 of 169

question

Suppose the incomes of buyers in a market for a particular normal good decrease and there is also an increase in input prices. What would we expect to occur in this market?

answer

Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous.

question

1. Suppose consumer income decreases. If grass seed is a normal good and the supply of grass seed is perfectly elastic, the equilibrium price of grass seed will

answer

stay the same, and the quantity sold will decrease.

question

answer

the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.

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Demand is said to be price elastic if

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buyers respond substantially to changes in the price of the good.

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If the price elasticity of supply is 2.0, and a price increase led to a 4% increase in quantity supplied, then the price increase is about

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2.0%

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Suppose the income of buyers in a market for an inferior good increase and technological advancement occurs also. What would we expect to happen in the market?

answer

Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.

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Suppose that Amanda receives a pay decrease. We would expect

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Amanda's demand for normal goods to decrease.

question

answer

demand for ice cream cones in this price range is elastic.

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Which of the following events must cause equilibrium price to fall?

answer

demand decreases and supply increases

question

The discovery of a new hybrid wheat would increase the supply of wheat. As a result, wheat farmers would realize an decrease in total revenue if the

answer

demand for wheat is inelastic

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If the price elasticity of demand for a good is 2.0, then a 3 percent decrease in price results in a

answer

6.0 percent increase in the quantity demanded.

question

What would happen to the equilibrium price and quantity of lattés if consumers' incomes rise and lattés are a normal good?

answer

Both the equilibrium price and quantity would increase.

question

A competitive market is a market in which

answer

no individual buyer or seller has any significant impact on the market price.

question

When the price of a good or service changes,

answer

there is a movement along a given demand curve.

question

If textbooks and study guides are complements, then an increase in the price of textbooks will result in

answer

fewer study guides being sold.

question

This economy cannot produce at which point(s)?

answer

Q and S

question

The opportunity cost of obtaining 20 additional dryers by moving from point D to point A is

answer

0 washers

question

Which of the following trade-offs does the production possibilities frontier illustrate?

answer

Once an economy has reached the efficient points on its production possibilities frontier, the only way of getting more of one good is to get less of the other.

question

Chile's opportunity cost of one pound of coffee is

answer

3/4 pound of soybeans and Colombia's opportunity cost of one pound of coffee is 1/2 pound of soybeans

question

answer

1 computer and Jim's opportunity cost of setting up one computer is testing 1/2 computer.

question

answer

testing computers and a comparative advantage in testing computers.

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Which of the following is not correct?

answer

The gains from specialization and trade are based not on comparative advantage but on absolute advantage.

question

Ken and Traci are two woodworkers whom both make tables and chairs. In one month, Ken can make 3 tables or 18 chairs, whereas Traci can make 8 tables or 24 chairs. Given this, we know that

answer

Traci has an absolute advantage in chairs

question

answer

3 pounds.

question

Suppose consumer income decreases. If grass seed is a normal good and the supply of grass seed is perfectly elastic, the equilibrium price of grass seed will

answer

stay the same, and the quantity sold will decrease.

question

This figure shows the market demand and market supply curves for good X. Which of the following statements is not correct?

answer

A price ceiling set at $3.50 would result in a surplus.

question

The incidence of a tax falls more heavily on

answer

consumers than producers if demand is more inelastic than supply.

question

Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling,

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there is shortage of physicals.
the quantity of physicals supplied decreases.
the quantity of physicals demanded increases.

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The equilibrium price in the market after the tax is imposed is

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$5.00.

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When a binding price ceiling is imposed on a market to benefit buyers,

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some buyers benefit, and some buyers are harmed.

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Sellers pay how much of the tax per unit

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$0.50

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If the government adds a binding price floor to a market, then the price received by sellers will

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increase, and the quantity sold in the market will decrease.

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Consumer surplus is

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the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

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Total surplus in a market will increase when the government

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removes a binding price floor from that market

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Which area represents the increase in producer surplus when the price rises from P1 to P2?

answer

AHGB

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Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book?

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Which area represents producer surplus when the price is P1?

answer

BCG

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Consumer surplus in a market can be represented by the

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area below the demand curve and above the price.

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answer

$0.70

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If the market price is $105, and consumers can choose whether to purchase or not,

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Sam's consumer surplus is $30 and total consumer surplus for all four consumers is $90.

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The change in total surplus in this market because of trade is

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and this area represents a gain in total surplus.

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For any country, if the world price of copper is lower than the domestic price of copper without trade, that country should

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import copper.

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When a tax of size 10 is imposed, the tax causes producer surplus to decrease by the area

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D + F

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Domestic producer surplus plus domestic consumer surplus in this market after trade is

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A + B + C + D.

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Producer surplus in this market after trade is

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When a tax of size 10 is imposed, the decrease in consumer surplus that becomes tax revenue is the area

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When a country allows trade and becomes an exporter of a good,

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domestic producers gain and domestic consumers lose.

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When a tax of size 5 is imposed, the loss of producer surplus as a result of the tax is

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$3.

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Suppose that a tax is placed on books. If the seller's tax burden is the majority of the tax, then we know that the

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supply is more inelastic than the demand.

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Taxes cause deadweight losses because they

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question

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Jenny pays Abe $300 to give the dog to his parents who live on an isolated farm.

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The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.

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Tradable pollution permits

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will be more valuable to firms that can reduce pollution only at high costs.

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answer

$3,500

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answer

$4,500

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Suppose that the production of plastic creates a social cost which is depicted in the graph below.

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This negative externality can be corrected with a tax of 4 per unit.

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With pollution permits, the supply curve for pollution rights is

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perfectly inelastic.

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A free rider is a person who

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receives the benefit of a good but avoids paying for it.

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Producers have little incentive to produce a public good because

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there is a free-rider problem

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Which of the following statements about private goods and public goods is correct?

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Private goods are rival in consumption and public goods are not excludable.

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The overuse of a common resource relative to its economically efficient use is called

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the Tragedy of the Commons.

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answer

2 acres

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Goods that are rival in consumption and nonexcludable would be considered

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common resources.

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Consider the town of Springfield with only three residents, Sophia, Amber, and Cedric. The three residents are trying to determine how large, in acres, they should build the public park. The table below shows each resident's marginal benefit for each acre of the park. Suppose the cost to build the park is $21 per acre. How many acres should the park be to be socially optimal and to maximize total surplus from the park in Springfield?

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3 acres

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A firm produces 400 units of output at a total cost of $1,200. If total variable costs are $1,000,

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average fixed cost is 50 cents.

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The average fixed cost curve

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always declines with increased levels of output

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answer

$25.

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Which worker is the first where marginal product begins to diminish?

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What is the total output from four workers?

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260

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What is the fixed cost of production for this firm?

answer

$10

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What is the total cost of producing 6 units of output for this firm?

answer

$110

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What is the total variable cost of producing 5 units of output for this firm?

answer

$80

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answer

experience losses but will continue to produce rubber bands.

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A firm in a competitive market has the cost structure below. If the market price is $4, this firm will

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produce 3 units in the short run and exit in the long run.

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Profit-maximizing firms exit a competitive market when firms in that market have

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average total costs that are more than market price.

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Suppose a firm operating in a competitive market has the following cost curves:
When price is equal to 10, the firm's profit is

answer

question

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stay open because shutting down would lead to even larger losses.

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Suppose the long-run industry supply curve for a good is upward-sloping. The upward slope could be explained by

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increases in production costs resulting from more firms coming into the market.

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Suppose a firm operating in a competitive market has the following cost curves:
The price of this product in long run equilibrium is

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If a competitive firm is currently producing a level of output at which marginal cost exceeds marginal revenue, then

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decreasing output would increase the firm's profit.

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Suppose that a firm in a competitive market faces the revenues and costs given below. If the firm's marginal cost is $11, it should

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reduce production to increase profit

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What is the socially efficient/perfectly competitive price and quantity in this market?

answer

price = B; quantity = Y

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What is the monopoly price and quantity in this market?

answer

price = A; quantity = X

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In the following diagram, what price will the monopolist charge?

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Tanya has the following demand curve for selling taffy. Assume that Tanya has a marginal cost of $3 per unit. How many unit of taffy would Tanya sell to maximize profit?

answer

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Which area in this figure represents the profit earned by the monopoly?

answer

C + F

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In the following diagram, the deadweight loss caused by a profit-maximizing monopoly amounts to

answer

$225

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In the following diagram, the consumer surplus at the monopolist's profit-maximizing price is

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$450.

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Which of the following statements is true?

answer

(ii) and (iii) only

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Which area in this figure represents the consumer surplus under monopoly

answer

A + B

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Which area in this figure represents the loss in consumer surplus when going from perfect competition to monopoly?

answer

C + F + G

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A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following?

answer

average revenue exceeds marginal revenue.
marginal revenue equals marginal cost.
price exceeds marginal cost.

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Monopolistic competition is considered inefficient because

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price exceeds marginal cost.

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Each firm in a monopolistically competitive industry faces a downward-sloping demand curve because

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the firm's product is slightly different from those offered by other firms in the market.

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Which of the following conditions is characteristic of a monopolistically competitive firm in long-run equilibrium?

answer

P > MC and AR = ATC

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A dominant strategy is one that

answer

is best for the player, regardless of what strategies other players follow.

question

answer

John: Turn, Paul: Drive Straight
John: Drive Straight, Paul: Turn

question

The prisoners' dilemma game

answer

has a Nash equilibrium, but the Nash equilibrium outcome is not the outcome the players would agree to if they could cooperate with each other.

question

answer

12 units and the dominant strategy for Firm B is to produce 12 units.

question

answer

Q=3 for Firm A and Q=2 for Firm B.

Q=2 for Firm A and Q=3 for Firm B

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In the prisoners' dilemma game, self-interest leads

answer

to an outcome that is not particularly good for either prisoner.
to a breakdown of any agreement that the prisoners might have made before being questioned.
each prisoner to confess.

question

answer

Q=2 for Firm A and Q=2 for Firm B

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This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B). If player B chooses Right, player A should choose

answer

Middle and earn a payoff of 5

question

This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B). Which of the following statements regarding this game is true?

answer

Neither player has a dominant strategy.

question

answer

Middle-Right

question

Given the following production information, what is the marginal product of the second worker?

answer

question

Given the following production information and that the firm pays its workers $50 per day and each unit of output sells for $20, how many days of labor should the firm hire?

answer

question

answer

$200

question

If your wage increases from $10 per hour to $15 per hour, then your

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opportunity cost of an hour of leisure increases by $5 per hour.

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Factor markets are different from product markets in an important way because

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the demand for a factor of production is a derived demand.

question

answer

question

answer

For the 11th worker, the marginal revenue product is $1,000.

question

answer

2 workers

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Rational people

answer

people who systematically and purposefully do the best they can to achieve their objectives

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market economy

answer

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

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circular-flow diagram

answer

a visual model of the economy that shows how dollars flow through markets among households and firms

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Microeconomics

answer

Definition:the study of how households and firms make decisions and how they interact in markets

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production possibilities frontier

answer

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

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opportunity cost

answer

whatever must be given up to obtain some item

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absolute advantage

answer

the ability to produce a good using fewer inputs than another producer

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comparative advantage

answer

the ability to produce a good at a lower opportunity cost than another producer

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competitive market

answer

a market in which there are many buyers and many sellers so that each has a negligible impact on the market price

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inferior good

answer

a good for which, other things being equal, an increase in income leads to a decrease in demand

question

law of supply

answer

the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises

question

law of supply and demand

answer

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

question

price elasticity of demand

answer

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

question

cross-price elasticity of demand

answer

question

tax incidence

answer

the manner in which the burden of a tax is shared among participants in a market

question

deadweight loss

answer

the fall in total surplus that results from a market distortion, such as a tax

question

corrective tax

answer

a tax designed to induce private decision makers to take into account the social costs that arise from a negative externality

question

Coase theorem

answer

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

question

Club goods

answer

goods that are excludable but not rival in consumption

question

Tragedy of the Commons

answer

a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole

question

lump-sum tax

answer

a tax that is the same amount for every person

question

Vertical equity

answer

the idea that taxpayers with a greater ability to pay taxes should pay larger amounts

question

Horizontal equity

answer

the idea that taxpayers with similar abilities to pay taxes should pay the same amount

question

regressive

answer

a tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers

question

proportional

answer

a tax for which high-income and low-income taxpayers pay the same fraction of income

question

progressive

answer

a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers

question

explicit costs

answer

input costs that require an outlay of money by the firm

question

economies of scale

answer

the property whereby long-run average total cost falls as the quantity of output increases

question

diseconomies of scale

answer

the property whereby long-run average total cost rises as the quantity of output increases

question

Nash equilibrium

answer

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

question

game theory

answer

the study of how people behave in strategic situations

question

collusion

answer

an agreement among firms in a market about quantities to produce or prices to charge

question

cartel

answer

a group of firms acting in unison

question

prisoners' dilemma

answer

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

question

monopolistic competition

answer

a market structure in which many firms sell products that are similar but not identical

question

monopoly

answer

a firm that is the sole seller of a product without any close substitutes

question

natural monopoly

answer

a type of monopoly that arises because a single firm can supply a good or service to an entire market at a lower cost than could two or more firms

question

price discrimination

answer

the business practice of selling the same good at different prices to different customers

question

sunk cost

answer

Definition:a cost that has already been committed and cannot be recovered

question

Marginal cost =

answer

wage*marginal product of labor

question

Wage =

answer

price*marginal product of labor

question

Price =

answer

marginal cost (price*marginal product of labor)

question

average revenue =

answer

total revenue/quantity

question

total revenue =

answer

Price * Quantity

question

profit =

answer

(Price-Average total cost)*Quantity

question

accounting profit =

answer

total revenue - explicit costs

question

economic profit =

answer

total revenue - (explicit costs + implicit costs)

question

average total cost =

answer

total cost/quantity

question

average variable cost =

answer

variable cost/quantity

question

average fixed cost =

answer

fixed cost/quantity

question

Total surplus=

answer

(value to buyers - amount paid by buyers) + (amount received by sellers - cost to sellers)

question

price elasticity of demand = (equation)

answer

percentage change in quantity demanded / percentage change in price

question

price elasticity of demand = (equation 2)

answer

{(q2-q1)/[(q2+q1)/2]} / {(p2-p1)/[(p2+p1)/2]}

question

income elasticity of demand =

answer

percentage change in quantity demanded/percentage change in income

question

cross-price elasticity of demand = (equation)

answer

percentage change in quantity demanded of good1 / percentage change in the price of good2

question

price elasticity of supply =

answer

percentage change in quantity supplied/percentage change in price

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