Definitions and Concepts
A Little Math and Some Graphs
Cause and Effect
Biz Behavior
Government and the Market
100
Define "economics"
The study of choosing among alternative ways of satisfying unlimited human wants with limited resources.
100
What is the main difference between the graph of an industry and the graph of a perfectly competitive firm?
the demand curve for the industry is downsloping, but the firm's demand curve is perfectly elastic (horizontal)
100
If a hard freeze destroys Florida's orange crop, what will happen to the price and quantity of orange juice in the US and why (name the determinant)?
price will rise, quantity will fall (higher input price)
100
What will happen to economic profits in a purely competitive industry in the long run, and why?
They will disappear, as more firms enter the industry in search of economic profits.
100
Give three examples of market failure.
1. failure to provide public goods 2. failure to prevent negative externalities or capture positive externalities 3. information failures (moral hazard) 4. failure to prevent formation of monopolies
200
Define "price elasticity of demand"
the responsiveness of consumer demand to changes in price of a product, measured by the % change in quantity demanded compared to the % change in price
200
What kind of income elasticity coefficient will an inferior good have (what kind of number will it be)?
a negative number
200
If coffee becomes more popular in China at the same time as there is a huge world harvest of coffee, what will happen to the price and quantity of coffee in China, and why (determinants)?
price is indeterminate, quantity will rise (change in consumer tastes, change in number of suppliers)
200
If an oligopoly firm lowers the price of its product, what are its competitors likely to do, and why?
They are likely to lower their prices as well, in order to prevent the loss of their market share, resulting in a price war.
200
What is a pure public good?
a good/service which is non-excludable and non-rivalrous, and thus will never be provided by a private firm
300
Define "consumer surplus"
the difference between the maximum price a consumer is willing to pay for an additional unit of a product and its market price; the triangular area below the demand curve and above the market price
300
If the cross-elasticity of product A and product B is strongly positive, what is their relationship to each other?
substitutes
300
How will a minimum wage law affect employment and salaries of unskilled workers?
employment of unskilled workers will decrease, salaries of those still employed will increase [price floor]
300
What three conditions must hold for a firm to be able to engage in price discrimination?
1. some degree of market power (imperfect competition) 2. able to separate customers by their elasticity of demand for the product 3. able to prevent resale of the good/service
300
What are merit and demerit goods?
a merit good is a good whose production or consumption provides a positive externality, while a demerit good is one whose production or consumption provides a negative externality
400
Explain the Law of Diminishing Marginal Returns
the principle that as successive increments of a variable resource are added to a fixed resource, the marginal product (extra production) of each additional unit of variable resource will eventually decrease
400
When the price of a shirt is $8, you sell 100. When the price drops to $6, you sell 150. What is the coefficient of PED?
1.4 [.4 / .285]
400
If an industry composed of purely competitive firms becomes a monopoly, what will happen to the price and quantity of the product is supplies?
price will rise, quantity supplied will fall
400
In the long run, what kind of profit and what kind of efficiency will be achieved by a firm in monopolistic competition?
only normal profit; neither productive nor allocative efficiency
400
Explain THREE ways a government might discourage production of a demerit good?
1. tax on the good 2. limitation on its production 3. creation of a market for externality rights 4. negative publicity
500
Name and explain TWO reasons for why the demand curve is downsloping
1. Law of Diminishing Marginal Utility 2. income effect 3. substitution effect
500
In pure monopoly, what is the relationship between a firm's MR and D, and why?
MR is below D, because as the firm sells one more unit, it will have to decrease the price (of all units it sells), and therefore the addition to its revenue will be less than the price of the additional unit (lowered prices for all units sold cuts into the previous total revenue).
500
If the government puts an excise tax on a product with an inelastic supply, who is likely to bear the greatest incidence of that tax, consumers or producers?
producers
500
What are the two types of price a regulated monopoly might be required to charge, and how are they determined (refer to graph or formula)?
fair-return or cost-of-service price [p=minimum ATC] socially optimal or marginal-cost price [p=MC]
500
What are progressive, regressive, and proportional taxes, and give an example of each?
progressive: tax rate rises as income rises; regressive: tax rate falls as income rises; proportional: tax rate remains the same as income rises progressive: income or luxury tax; regressive: excise tax on most goods, sales tax, property tax, tariffs; proportional: income tax
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