Exam 2; 11/14

Question 1

Elastic demand curves have…

Answer 1

An absolute value that is greater than one, requiring prices to be lowered

Question 2

Inelastic demand curves have…

Answer 2

an absolute value that is less than one, requiring prices to be raised

Question 3

Substitute goods will have…

Answer 3

Positive value

Question 4

Complementary goods will have…

Answer 4

Negative value

Question 5

Normal goods will have…

Answer 5

Positive value

Question 6

Inferior goods will have…

Answer 6

Negative value

Question 7

Statutory Burden:

Answer 7

Determines which curve shifts and in what direction depending on who is assigned to pay the tax/subsidy

Question 8

Economic Burden:

Answer 8

The monetary burden created by the change in after-tax price for buyers and sellers

Question 9

Tax Incidence:

Answer 9

Tax paid by buyers over(divided by) total tax, determined by price elasticity.

Question 10

The more inelastic party bears ____ of the tax/subsidy

Answer 10

More

Question 11

Price ceiling:

Answer 11

Maximum price sellers are allowed to charge

Question 12

Binding price ceiling

Answer 12

price ceiling that occurs below the market equilibrium price

Question 13

Price Floor

Answer 13

Minimum price sellers are allowed to charge

Question 14

Binding price floor

Answer 14

Price floor that occurs above the market equilibrium price

Question 15

Mandate

Answer 15

Minimum quantity that must be bought or sold

Question 16

Binding Mandate

Answer 16

Mandate that occurs to the right of the equilibrium quantity

Question 17

Quota

Answer 17

Maximum quantity that can be bought or sold

Question 18

Binding quota

Answer 18

Quota that occurs to the left of the equilibrium quantity

Question 19

Positive Analysis

Answer 19

Describes what is happening, explaining why or predicting what will happen, forecasting effects

Question 20

Normative Analysis

Answer 20

Prescribes what should happen, involves value judgements

Question 21

Optimal/Efficient Outcome

Answer 21

Outcome yielding the most economic surplus

Question 22

Consumer Surplus

Answer 22

Marginal benefit minus price

Question 23

Producer surplus

Answer 23

Price minus marginal cost

Question 24

Deadweight loss

Answer 24

Economic surplus at efficient outcome minus actual economic surplus

Question 25

5 Main Sources of Market Failure

Answer 25

1. Market Power 2. Externalities 3. Information Problems 4. Irrationality 5. Government Regulations

Question 26

Externality

Answer 26

A side effect(NOT a price change) of an activity that affects bystanders whose interests are not taken into account

Question 27

Private interests

Answer 27

Costs and benefits you personally incur

Question 28

Social interests

Answer 28

includes all costs and benefits

Question 29

Marginal Private Cost (MPC)

Answer 29

The extra costs paid by the seller from producing one extra unit

Question 30

Marginal External Cost (MEC)

Answer 30

The extra cost imposed on bystanders from producing one extra unit

Question 31

Marginal Social Cost (MSC)

Answer 31

All marginal costs (MPC + MEC)

Question 32

Marginal Private Benefit (MPB)

Answer 32

The extra enjoyment for the buyer from purchasing one extra unit

Question 33

Marginal External Benefit (MEB)

Answer 33

The extra benefit accruing to bystanders from one extra unit

Question 34

Marginal Social Benefit (MSB)

Answer 34

All marginal benefits (MPB + MEB)

Question 35

Rational Rule for Society

Answer 35

Produce more of an item as long as its marginal social benefit is at least as large as the marginal social cost

Question 36

Coase Theorem

Answer 36

If bargaining is costless and property rights are clearly established & enforced, then externality problems can be solved by private bargains

Question 37

Excludable & Rival?

Answer 37

Private Goods ex. Cars, cupcakes, airline seats, can of coke

Question 38

Excludable & Nonrival?

Answer 38

Club Goods ex. email, cable tv, satellite radio

Question 39

Non-excludable & Rival?

Answer 39

Common Resources ex. fish in the ocean, national parks, highways

Question 40

Non-excludable & Non-rival?

Answer 40

Public Goods ex. national defense, Public broadcasting, public education

Question 41

Private/Asymmetric information

Answer 41

When one party to a transaction knows something the other doesn't

Question 42

Adverse selection of sellers

Answer 42

The tendency for the mix of goods to be skewed toward more low-quality goods when buyers are at informative disadvantage

Question 43

Adverse selection of buyers

Answer 43

The tendency for the mix of buyers to be skewed toward more high cost buyers when sellers are at informative disadvantage

Question 44

Moral Hazard

Answer 44

The actions you take because they are not fully observable and you are partially insulated from their consequences

Question 45

Principal agent problem

Answer 45

The problems that arise when a principal hires an agent to do something on their behalf, but the principal cannot perfectly observe the agents actions

Question 46

If negative externality...

Answer 46

Use corrective tax, supply curve shifts

Question 47

If positive externality...

Answer 47

Use corrective subsidy, demand curve shifts