Perfect Competition
In the long run, why do perfectly competitive firms earn zero economic profit?
Because firms enter or exit until all the firms still in the market are earning zero economic profit.
Why do public goods require government provision?
Because of the free-rider problem
If Country X places a tariff on imported steel, how will this affect the price of steel in the domestic market, the amount of steel imported, and the domestic steel production?
Price of steel in the domestic market: Increases.
Amount of steel imported: Decreases.
Domestic steel production: Increases
Why are monopolies inefficient?
Monopolies produce at a quantity that results in deadweight loss
What is the opportunity cost of holding money?
The interest that could be earned on interest-bearing assets
What is the shape of the demand curve faced by an individual firm in perfect competition, and why?
It is perfectly elastic.
This is because the firm is a price taker: it can sell as much as it wants at the market price but nothing at a higher price, since identical substitutes are readily available.
Why is a lump-sum tax considered efficient?
It does not change incentives since it does not shift the market
The exchange rate between Mexican pesos and USD was 20 pesos per USD, and is now 30 pesos per USD. Which currency has appreciated relative to each other: the USD or the peso?
The USD has appreciated relative to the peso.
Who makes more in the long run: a firm in monopolistic competition or a firm part of an oligopoly?
Oligopoly
What is M1 comprised of?
Currency and demand deposits
What is the profit maximizing or loss minimizing rule for firms in a market that is in perfect competition?
MR=MC
What is the difference between the budget deficit and the national debt?
Budget deficit is one year's shortfall; the national debt is the total of all deficits
If Country 1 has a comparative advantage in producing Good B over Good A, and Country 2 has a comparative advantage in producing Good A over Good B, but Country 2 has an absolute advantage in producing both goods, which goods should each country specialize in producing?
Country 1 will focus on Good B. Country 2 will focus on Good A.
Why is the marginal revenue curve for a monopoly always below the demand curve?
To sell an additional unit, the monopoly has to lower the price on all units sold, reducing marginal revenue
If the Federal Reserve purchases government bonds, what happens to the nominal interest rate?
The nominal interest rate decreases
A perfectly competitive firm is producing 100 units of output. The market price is $10.
At this level of output:
Average Variable Cost (AVC) = $12
Should the firm shut down in the short run?
Yes, P<AVC. That is the general shutdown rule. 10<12, time to shutdown.
What is the effect of imposing a minimum wage in the labor market?
Unemployment
Country A can produce 10 units of Good X or 20 units of Good Y, while Country B can produce 12 units of Good X or 20 units of Good Y. Which country has the comparative advantage in producing each good?
Country A has the comparative advantage in producing Good Y.
Country B has the comparative advantage in producing Good X.
What government regulation helps reduce inefficiency in a monopoly?
Price ceilings
What is "crowding out" and from what fiscal policy is it a result of?
Government borrowing increases the demand of lonable funds, raising interest rates, making it more expensive for private investment; Expansionary Fiscal Policy
Consider a firm in perfect competition that’s currently earning normal profit. If its fixed costs increase, what happens to its output decision in the short run and long run?
Short run:
Output stays the same
Firm incurs a loss due to higher fixed costs
Long run:
Some firms exit
Market price rises
Firm's output may change
Long-run equilibrium is restored with zero economic profit
What is the purpose of transfer payments (e.g. Social Security, food stamps)?
Redistribute income to reduce inequality
Country A's economy undergoes an unexpected increase in inflation. What will happen to the value of its currency?
Goes down
Name an antitrust law that aims to prevent monopolistic behavior in oligopolies in the United States
Sherman Act, Clayton Act, FTC Act
Explain how does a decrease in interest rates affect aggregate demand
It increases investment which increases aggregate demand