Definitions and Concepts
A Little Math and Some Graphs
Cause and Effect
Marginal 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 are the 3 curves that should appear on a graph of a good whose production causes negative externalities?
Marginal Social Cost, Marginal Private Cost, and Marginal (Social or Private) Benefit
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 marginal utility as a person consumes more of a certain product?
It will decrease with the consumption of each extra unit.
100
What is the incidence of a tax?
Where the tax burden falls; that is, who ultimately pays the tax
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
Explain how a society should decide how much pollution to clean up in a given river or area.
Keep cleaning up until Marginal Cost is equal to Marginal Benefit.
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 is the Utility Maximizing Rule for determining the optimal combination for a consumer to buy?
MUx/px = MUy/py
300
Name and explain all four types 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
400
Explain either "moral hazard" or "adverse selection"
Moral hazard: market failure arising when an imperfectly monitored person engages in dishonest or otherwise undesirable behavior Adverse selection: market failure from the tendency of the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party
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 the market price for a good rises, what will happen to producer surplus in that market?
It will rise, as there will be a greater area between the supply curve and the new market price.
400
Why is a nation's production possibilities curve/margin/frontier curved outward?
Because resources are generally more efficiently applied to the production of certain goods and not others, and therefore opportunity cost (trade-off) between most goods will be increasing (not constant).
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
Draw and explain the curves which will show Mr. Turner's optimal consumption of books and magazines (axes and curves must be correctly labeled)
Budget constraint and indifference curve tangent to each other; axes will be "books" and "magazines"
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 definitions and formulas for productive and allocative efficiency?
Productive: making a good in the least wasteful, most efficient way; price = lowest average cost Allocative: making the right number of goods desired by consumers; price = marginal cost
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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