Econ Exam #3 Flashcards
(149 cards)
1
Q
t/f social welfare can be enhanced by allowing firms to trade their rights to pollute
A
true
2
Q
t/f the social cost of pollution includes the private costs of the producers plus the costs to those bystanders adversely affected by the pollution
A
true
3
Q
t/f to determine the optimal level of output in a market with negative externalities, a benevolent social planner would look for the next level of output at which private cost equals private value
A
false
4
Q
government subsidized scholarships are an example of a government policy aimed at correcting negative externalities associated with with education
A
false
5
Q
t/f according to the Coase theorem, whatever the initial distribution of rights, the interested parties can bargain to an efficient outcome
A
true
6
Q
t/f in a market characterized by externalities, the market equilibrium fails to maximize the total benefit to society as a whole
A
true
7
Q
t/f corrective taxes cause deadweight losses, reducing economic efficiency
A
false
8
Q
t/f most economists prefer regulation to taxation because regulation corrects market inefficiencies at a lower cost than taxation does
A
false
9
Q
t/f government can be used to solve externality problems that are too costly for private parties to solve
A
true
10
Q
t/f according to the Coase theorem, individuals can always work out a mutually beneficial agreement to solve the problems of externalities even when high transaction costs are involved
A
false
11
Q
most taxes distort incentives and move the allocation of resources away from the social optimum. Why do corrective taxes avoid the disadvantages of most other taxes
A
because corrective taxes correct for market externalities, they take into consideration the well-being of bystanders
12
Q
what is the difference of command and control policies and market based policies toward externalities?
A
command and control policies regulate behavior directly, whereas market based policies provide incentives for private decision makers to change their behavior
13
Q
what do tradable pollution permits do
A
reduce pollution in a cost effective way
reduce carbon emissions
reduce sulfur dioxide emissions
14
Q
t/f free goods are usually efficiently allocated without government intervention
A
false
15
Q
t/f a good that is excludable but not rival is known as a club good
A
true
16
Q
t/d concerts in arenas are not excludable because it is virtually impossible to prevent someone from seeing the show
A
false
17
Q
t/f a pair of jeans is rival but not excludable
A
false
18
Q
t/f roads can be considered either public goods or common resources, depending on how congested they are
A
true
19
Q
t/f you and your friends eat potato chips in your bedroom. For you and your friends, the potato chips are rival in consumption
A
true
20
Q
t/f when free riders are present in a market, the market generally fails to provide an efficient outcome
A
true
21
Q
t/f advocates of antipoverty programs claim that fighting poverty is a public good
A
true
22
Q
t/f one person’s use of a common resource does not reduce the enjoyment other people receive from the resource
A
false
23
Q
t/f tolls are not effective in altering people’s incentives to drive during rush hour
A
false
24
Q
the idea that externalities arise because something of value has no price attached to it is associated with…
A
both public goods and common resources
25
what is a good example of a good that isn't private
cable TV
26
an AM radio transmission of a baseball game is...
not excludable and not rival in consumption
27
because public goods are not excludable...
people have an incentive to be free riders
28
what is not a characteristic of a public good
because it is a free good, there is not opportunity cost
29
on holiday weekends thousands of people picnic in state parks. Some picnic areas become so overcrowded the benefit or value of picnicking diminishes due to zero. This is an example of...
a tragedy of the commons
30
the commercial value of ivory is a threat to the elephant, but the commercial value of beef is a guardian of the cow. this is because
cows are private goods, while elephants tend to roam freely without owners
31
on hot summer days, electricity generating capacity is sometimes stretched to the limit. At these times, electric companies may ask people to voluntarily cut back on their use of electricity. An economist would suggest that
it would be more efficient if the electric company raised its rates for electricity at peak times
32
Pollution is a...
negative externality that can be viewed as a common resource problem
33
externality
the uncompensated impact of one person's actions on the well being of a bystander
34
internalizing the externality
altering incentives so that people take account of the external effects of their actions
35
corrective tax
a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality
36
Coase Theorem
the proposition that if private parties can bargain allocation of the resources they can solve the problem of externalities on their own
37
transaction costs
the costs that parties incur in the process of agreeing to and following through on a bargain (ex: guy in restaurant tipping waiter)
38
excludability
the property of a good whereby a person can be prevented from using it
39
rivalry in consumption
the property of a good whereby one person's use diminishes other people's use
40
private goods
goods that are both excludable and rival in consumption
41
public goods
goods that are neither excludable nor rival in consumption
42
common resources
goods that are rival but not excludable
43
club goods
goods that are excludable but not rival (natural monopolies)
44
free rider
a person who receives the benefit of a good but avoids paying for it
45
cost-benefit analysis
a study that compares the costs and benefits to society of providing a public good
46
Tragedy of the commons
a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole
47
t/f diminishing marginal product exists when the production function becomes flatter as inputs increase
true
48
t/f an example of an explicit cost for the owner of a tattoo parlor would be the wages that she could earn if she worked as a graphic artist for an advertising agency
false
49
t/f in the short run, if a firm produces nothing, total costs are zero
false
50
t/f marginal costs are costs that do not vary with the quantity of output produced
false
51
t/f when average total cost rises if a producer either increases or decreases production, then the firm is said to be operating at efficient scale
true
52
t/f an example of an explicit cost would be the wages that a business owner pays her employees
true
53
t/f the average-fixed-cost curve is constant
false
54
t/f if the marginal cost of producing the tenth unit of output is $2.50, and if the average total cost of producing the tenth unit of output is $3, then at ten units of output, average total cost is rising
false
55
t/f in some cases, specialization allows larger factories to produce goods at a lower average cost than smaller factories
true
56
t/f fixed costs are those costs that remain fixed no matter how long the time horizon is
false
57
t/f economies of scale often arise because higher production levels allow specialization among workers
true
58
t/f there is general agreement among economists that the long-run time period exceeds one year
false
59
t/f average variable cost is equal to total variable cost divided by quantity of output
true
60
t/f for a firm operating in a perfectly competitive industry, marginal revenue and average revenue are equal
true
61
t/f when an individual firm in a competitive market decreases its production, it is likely that the market price will rise
false
62
t/f in a competitive market, firms are unable to differentiate their product from that of other producers
true
63
t/f firms operating in perfectly competitive markets try to maximize profits
true
64
t/f a firm is currently producing 100 units of output per day. The manager reports to the owner that producing the 100th unit costs the firm $5. The firm can sell the unit for $6. The firm should produce more then 100 units in order to maximize its profits.
true
65
t/f in the short run, a firm should exit the industry if its marginal cost exceeds its marginal revenue
false
66
t/f a firm operating in a competitive market will stay in business in the short run so long as the market price exceeds the firm's average total cost; otherwise, the firm will shut down
false
67
t/f in the long run, when price is greater than average total cost, some firms in a competitive market will choose to enter the market
true
68
t/f a firm operating in a perfectly competitive industry will continue to operate if it earns zero economic profits because it is likely to be earning positive accounting profits
true
69
t/f the stable, long-run equilibrium in a competitive market occurs when the market price equals the lowest point on a firm's average total cost curve
true
70
t/f the short-run supply curve in a competitive market must be more elastic than the long-run supply curve
false
71
what is a good example of an almost perfectly competitive firm
a hot dog vendor
72
changes in the output of perfectly competitive firm, without any change in the price of the product, will change the firms...
total revenue
73
when a profit-maximizing firm's fixed costs are considered sunk in the short run, then the firm...
can safely ignore fixed costs when deciding how much output is produced
74
which of the following represents the firm's long-run condition for exiting a market?
exit of P
75
the assumption of a fixed number of firms is appropriate for analysis of...
the short run but not the long run
76
in a perfectly competitive market, the process of entry and exit will end when firms face...
marginal revenue equal to long-run average total cost
77
in a long-run equilibrium, the marginal firm has...
total revenue equal to total cost
78
suppose that firms in a competitive industry are earning positive economic profits. All else equal, in the long run, we would expect the number of firms in the industry to...
increase
79
in the long run the market supply...
could be upward sloping if the cost of production rises as new firms enter the market
80
total revenue
the amount a firm receives for the sale of its output P times Q
81
total cost
the market value of the inputs a firm uses in production
82
profit
total revenue minus total cost
| TR-TC
83
explicit costs
input costs that require an outlay of money by the firm, wage, rent, land, and materials
84
implicit costs
input costs that do not require an outlay of money by the firm, opportunity costs
85
economic profit
total revenue minus total cost, including both explicit and implicit
86
accounting profit
total revenue minus total explicit cost normally higher than economic profit
87
production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
88
economic profit
total revenue minus total cost, including both explicit and implicit costs
89
marginal product
the increase in output that arises from an additional unit of input change in quantity over change in labor
decreases as input increases
90
diminishing marginal product
the property whereby the marginal product of an input declines as the quantity of the input increases
91
fixed costs
costs that do not vary with the quantity of output produced
92
variable costs
costs that vary with the quantity of output produced
93
average total cost
total cost divided by the quantity of output
| TC/Q or FC/Q-VC/Q
94
average fixed cost
fixed cost divided by quantity
| FC/Q
95
average variable cost
variable cost divided by quantity
| VC/Q
96
marginal cost
the increase in total cost that arises from an extra unit of production
change in total cost over change in quantity
usually increases as Q increases
97
efficient scale
the quantity of output that minimizes average total cost
98
economies of scale
the property whereby long-run average total costs fall as the quantity of output increases
ATC falls as Q increases
occurs with specialization
99
diseconomies of scale
the property whereby long-run average total cost rises as the quantity of output increases
ATC rise as Q increases
occurs due to coordination problems
100
constant returns to scale
the property whereby long-run average total cost stays the same as the quantity of output changes
ATC stays the same as Q increases
101
competitive market
a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
102
average revenue
total revenue divided by the quantity sold
103
marginal revenue
the change in total revenue from an additional unit sold change in total revenue of change in quantity
104
sunk cost
a cost that has already been committed and cannot be recovered
FC is an example of this
105
what is supply curve and demand curve when talking about externalities
```
supply= private cost
demand= private value
```
106
what does social cost equal
private+ external cost (value of negative impact on bystanders)
107
what is social optimal for negative externalities and positive externalities
negative: where D intersects social cost
positive: where D intersects social value
108
what happens if you raise and lower Q in positive externalities
raise: the cost of the last unit exceeds its social value
lower: the social value of additional units exceed their cost
109
characteristics of negative externalities
supply curve
market quantity larger than socially desirable
fixed with taxes (external cost)
110
characteristics of positive externalities
demand curve
market quantity smaller than socially desirable
fixed with subsidies (external benefit)
111
command and control policies
regulate behavior directly
| limits on pollution
112
market based policies
provide incentives so that private decision makers will choose to solve the problem on their own (tradable pollution permits)
113
What are corrective taxes also called
Pigouvian taxes after Arthur Pigou
114
how is total surplus maximized
when buyers who value a product most buy and sellers with lowest cost sell in equilibrium
115
How do we prevent overconsumption
regulate use of resources
impose corrective tax
Auction off permits
convert land to private good
116
Output
F(K,L)
117
Whats the difference between costs in short run and long run
short run: fixed costs and variable costs
| long run: all costs variable
118
Why is ATC usually U shaped
initially falling AFC pulls ATC down but then rising AVC pulls ATC up
MCATC, ATC is rising
119
what does MR equal in a competitive firm
P
120
What happens if we increase Q by one unit in a competitive market
revenue rises by MR and cost rises by MC
121
what should we do to increase profit if MR>MC
| what about MR
increase Q
| lower Q
122
What kind of curve is MC and what kind of curve is MR
```
MC= supply
MR= horizontal line for price
```
123
Shutdown
short run decision cost= TR, benefit=VC (firm must still pay FC) shutdown if TR
124
Exiting the market
long run decision cost=TR, benefit=TC firm exits if TR
125
Entering the market
TR>TC
| or P>ATC
126
what happens if existing firms are earning positive economic profit
new firms enter the market and short run supply shifts right
P falls reducing profits and slowing entry
127
what happens if existing firms incur losses
some firm exit and Sr supply shifts left
| Prices rise to reducing remaining firms losses
128
when does zero economic profit occur and why do companies still stay open
when P=ATC
P=MR=MC
P=MC=ATC
their accounting profit is still positive and they make enough revenue to cover their losses
129
What are the conditions for LR supply curve to be horizontal
all firms have identical costs
| costs do not change as other firms enter or exit the market
130
what cause LR supply curve to slope upwards
firms have different costs (as p rises firms with lower cost enter market before firms with higher costs)
cost rises as firms enter the market (limited supply)
131
Profit maximization
Perfect competition
competition equilibrium
MC=MR
P=MR
P=MC, maximizes total surplus
132
t/f a market for pollution can efficiently allocate the right to pollute by using the forces of supply and demand
true
133
t/f the social cost of pollution includes the private costs of the producers plus the costs to those bystanders adversely affected by the pollution
true
134
t/f a popular resort restaurant will maximize profits if it chooses to stay open during the less crowded off season when its total revenue exceeds its variable cost
true
135
t/f the stable long run equilibrium in a competitive market occurs when the market price equals the lowest point on a firm's average total cost curve
true
136
t/f on solution to the tragedy of the commons is to turn common resources into private goods
true
137
t/f government subsidized scholarships are an example of a government policy aimed at correcting negative externalities associated with education
false, positive
138
t/f diminishing marginal productivity implies decreasing total product
false, marginal
139
t/f if Dave and Jesse are the only two fishermen in town and neither is bothered by the other's fishing, the lake they fish in is not a common resource
true
140
t/f a firm operating in a perfectly competitive market may earn positive, negative, or zero economic profit in the long run
false, only zero
141
t/f when average total cost is above marginal cost, average total cost is rising
false, falling
142
t/f for a firm operating in a perfectly competitive industry, total revenue, marginal revenue, and average revenue are all equal
false, price, marginal revenue, and average revenue
143
why is national defense provided by the government
free riders
144
a firm will shut down in the short run if the total revenue that it would get from producing and selling its output is less that its....
variable costs
145
At what three things does the marginal cost curve cross the average total cost curve
the efficient scale
the minimum point on the average total cost curve
a point where the marginal cost curve is rising
146
according to the Coase theorem, private markets will solve externality problems and allocate resources efficiently as long as...
private parties can bargain with sufficiently low transaction fees
147
Dick owns a dog whose barking annoys Dick's neighbor Jane. Dick receives personal benefit from owning a dog and Jane bares the cost of Dick's ownership of the dog. Assuming Jane has the legal right to peace and quiet who will pay?
Dick will pay to keep his dog if his benefit exceeds Jane's cost
148
what happens to supply when new firms enter a perfectly competitive market
the short run supply curve shifts right
149
Suppose a competitive market has a horizontal long run supply curve and is in long run equilibrium. If demand decreases, we can be certain that in the short run...
price will fall below average total cost for some firms
