Market Types
Why can’t firms in a perfectly competitive set their own prices?
Firms are price takers since there are many sellers offering identical products. Therefore, each firm must accept the market price.
If country A produces 10 lbs of wheat and country B produces 25 lbs of wheat, which country has an absolute advantage in the production of wheat?
Country B
Assuming no government intervention, if a boom in entrepreneurial activity in a nation spurs consumer spending, what is the effect on real GDP and the price level in the short run? The long run?
In the short run, both real GDP and price level will increase. In the long run, the price level will increase and real GDP will remain unchanged.
If, for every unit of a particular good produced, the production processes attached to making the good pollute the environment, is the market for the good currently overproducing or underproducing?
The market is overproducing the good because the market produces where Demand (or in this case, MPC) equals MPC, even though MSC>MPC.
If a firm engages in perfect price discrimination, what happens to consumer surplus? Does it increase, decrease, or remain the same?
Consumer surplus is reduced to zero.
What is a Nash equilibrium?
A Nash equilibrium is a situation in which each player in a game chooses the best strategy they can, given the strategies chosen by the other players, and no one can gain by changing their strategy. Even if players don’t have dominant strategies, they are doing the best they can given what others do.
If the US buys cars from China, what is true about where China’s current account and financial account will move toward?
China’s current account will move towards a surplus because it is exporting goods and China’s financial account will move towards a deficit due to the balance of payments.
What is the key assumption that allows the modeling of the macroeconomic supply curve?
Wages and input costs are sticky in the short run.
If the government imposes a binding price floor, would suppliers or consumers lose?
The price of the good increases, leading to a decline in consumer surplus and an increase in producer surplus, consumers lose.
In a market with highly elastic demand, who bears the larger burden of a per-unit tax, producers or consumers?
Producers
In a monopolistically competitive market, what happens to a firm’s demand curve and economic profits in the long run if it is incurring losses in the short run, and why does this happen?
Some firms will exit the market, reducing competition. As a result, the remaining firms see their demand curves shift right until they are tangent to ATC and return to zero economic profit in the long run.
If Norway engages in world trade of steel, and the world price of steel is higher than the domestic price of steel in Norway, will Norway be an exporter or an importer? Will producers or consumers in Norway benefit? What effect would a tariff on steel imports have in Norway?
Norway will be an exporter of steel and producers in Norway will benefit at the expense of consumers. There would be no effect of an import tariff as Norway is exporters of steel.
In order to curb unemployment, a nation’s central bank purchases bonds from commercial banks on the open market. What happens to the nation’s real output and price level in the short run? What happens to the price of bonds?
In the short run, the nation’s real output and price level both increase. Due to the rise of nominal interest rates due to the open market operation-induced money supply expansion, bond prices fall.
If, in the market for cherry tomatoes, demand is perfectly inelastic and supply is relatively elastic, what happens to the equilibrium price and quantity if the government imposes an excise tax on cherry tomatoes? Who bears the burden of the tax?
The equilibrium price increases while the quantity remains the same. Consumers bear the full burden of the tax.
A city installs a large fireworks display for New Year’s Eve. Spectators must pay to watch, but one person’s viewing doesn't reduce another’s ability to enjoy it. Based on these characteristics, is this a public good, a private good, or neither?
This good is neither a public or private good as it is excludable, but non-rival, meaning that it is an artificially scarce good.
Why are monopolies considered allocatively inefficient?
Monopolies have a marginal revenue curve which is half as steep as the market demand it faces, leading a monopoly to produce less and charge a higher price than they would at the socially efficient quantity – in other words, they produce where P > MC, rather than where P = MC.
If the Japanese government increases its budget deficit through increased government spending, will the Japanese yen appreciate or depreciate, and what effect will it have on Japanese net exports?
The yen will appreciate due to higher real interest rates which will also cause a decrease in Japanese net exports.
A nation’s consumers have a marginal propensity to save of 0.50. If the government of that nation increases transfer payments by $5000 and personal income taxes by $5000, what will be the change in the nation’s real GDP?
The nation’s real GDP will increase by $5000.
The United States is an importer in the market for potatoes. If the government imposes a tariff on imported potatoes, do consumers or producers gain? Are United States producers and consumers of potatoes collectively better or worse off?
The tariff benefits producers at the expense of consumers. On the whole, US producers and consumers of potatoes are worse off after the tariff due to the reduction of total surplus and creation of deadweight loss.
In a monopsonistic labor market, does the firm hire the same, fewer, or more workers than in a perfectly competitive labor market?
Fewer
Why is a natural monopolies’ ATC curve downward sloping over its relevant range of demand?
A natural monopoly faces high fixed costs and low variable costs, leading it to operate in economies of scale range of production. This leads the ATC to decrease as output increases.
If the Indian rupee appreciates against the yen by 8% while the price level in India decreases by 10%, and if there is no change in price level in Japan, will the price of Indian goods become relatively more expensive or relatively cheaper to goods made in Japan?
Indian goods become relatively cheaper compared to goods made in Japan because Indian goods appreciate by 8%, but their goods also become cheaper by 10%, resulting in a net effect of the goods becoming relatively cheaper by 2%.
The Nepalese government aims to fund ambitious infrastructure development in its striking mountain ranges. To do so, the government must spend at a deficit. If the government aims to do so while keeping inflation constant, what action should it take, assuming it is operating in the horizontal region of demand in the reserve market?
It should raise the interest rate it pays Nepalese commercial banks on their held reserves.
A firm operates as a monopsony in the market for textile laborers. Currently, the firm hires at a quantity of 8 textile workers and a wage of $15 per hour. What must be true about the firms MFC and MRP at a quantity of 8 textile workers? If the firm lost its competitive advantage in hiring textile workers and the market for textile laborers became perfectly competitive, would the firm hire more or less than 8 textile workers? At a wage of greater or less than $15 per hour?
At a quantity of 8 textile workers, the firm’s MFC must equal its MRP. If the firm is suddenly hiring in a perfectly competitive market, they will hire more than 8 textile workers at an hourly wage of less than $15.
In a monopoly, if the firm receives a per unit subsidy, how is marginal cost affected and what happens to the profit maximizing quantity and price?
Marginal cost shifts downward, leading the profit maximizing quantity to increase and the profit maximizing price to decrease.