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Final Exam Flashcards

1
Q

Consider the market for rental housing illustrated in Figure 6.1.1 when the demand curve is
D0. The equilibrium in an unregulated market is…

A

At market equilibrium

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2
Q

Suppose a minimum wage of $15 an hour is in force, resulting in unemployment of 10 million
hours. Then the demand for labour increases such that supply and demand curves intersect at a
wage rate of $17 per hour. What will happen in the labour market?

A

The wage rate is $17 an hour and there will be no unemployment.

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3
Q

Which of the following decrease the deadweight loss from a minimum wage set above the
equilibrium wage?

A

lowering the minimum wage

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4
Q

The burden of the tax on buyers is greater the more…

A

inelastic is demand, elastic is supply.

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5
Q

A $10 per-unit tax on game consoles raises the equilibrium price paid by consumers by $5 per
console. The quantity sold before the tax was 5,000 per year. The revenue from the tax is…

A

positive but less than $50,000 per year

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6
Q

What does a subsidy do for farmers?

A

raises the price received by farmers.

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7
Q

When an effective production quota is applied in the market for wheat, the quantity produced
________ and the price ________. The marginal social benefit ________ the marginal social
cost.

A

decreases; rises; exceeds

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8
Q

Consider a market for an illegal good. If the government imposes the cost of breaking the
law on the buyer of the good, then price will be…

A

Lower and quantity the same compared to imposing the same cost on the seller.

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9
Q

What are the effects of a rent ceiling that is set below the equilibrium rent?

A

If a rent ceiling is set below the equilibrium rent, the quantity of housing units demanded by
renters exceeds the quantity supplied by landlords. The quantity of housing units rented
equals the quantity supplied. A shortage of housing units arises

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10
Q

What is a minimum wage and what are its effects if it is set above the equilibrium
wage?

A

When a price floor is applied to a labour market, it is called a minimum wage. A price floor is a
government regulation that makes it illegal to charge a price lower than a specified level. If the
minimum wage is set above the equilibrium wage, it creates a surplus of labour—
unemployment—and decreases workers’ surplus and firms’ surplus.

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11
Q

How does the elasticity of demand influence the incidence of a tax, the tax revenue, and the deadweight loss?

A

The more elastic the demand for a given supply, the smaller the increase in the price paid by
the buyers and the greater the decrease in the price received by the sellers, which means that
the incidence on buyers is smaller. Additionally, the more elastic the demand, the smaller the
quantity bought when the tax is applied so the smaller the tax revenue and the larger the
deadweight loss

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12
Q

How does the elasticity of supply influence the incidence of a tax, the quantity
bought, the tax revenue, and the deadweight loss?

A

The more elastic the supply for a given demand the larger the incidence on buyers. The more elastic the supply, the smaller the quantity bought
when the tax is applied, so the smaller the tax revenue and the larger the deadweight loss

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13
Q

What are the two principles of fairness that are applied to tax systems?

A

The two principles of fairness are the benefits principle and the ability-to-pay principle. The
benefits principle is the proposition that people should pay taxes equal to the benefits they receive from the services provided by government. The ability-to-pay principle is the
proposition that people should pay taxes according to how easily they can bear the burden of
the tax

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14
Q

Summarize the effects of a production quota on the market price and the quantity
produced

A

A production quota set below the equilibrium quantity raises the price and decreases the
quantity produced.

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15
Q

Summarize the effects of a subsidy on the market price and the quantity
produced.

A

A subsidy increases the price received by sellers, shifts the supply curve rightward, and
places a wedge between the marginal social benefit and marginal social cost of producing the
good. The subsidy creates a deadweight loss, an increase in the quantity produced, and a
lower price paid by the consumers

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16
Q

How is the gain from imports distributed between consumers and domestic producers?

A

Consumers gain consumer surplus in a market with imports because the price falls and the
quantity bought increases. Domestic producers lose producer surplus in a market with
imports because the price falls and the quantity produced decreases. The gain by consumers
is greater than the loss of producers

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17
Q

How is the gain from exports distributed between consumers and domestic producers?

A

Consumers lose consumer surplus in a market with exports because the price rises and the
quantity bought decreases. Domestic producers gain producer surplus in a market with
exports because the price rises and the quantity produced increases. The gain by producers
is greater than the loss by consumers.

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18
Q

Explain the effects of a tariff on domestic production, the quantity bought, and
the price

A

tariff raises the domestic price of the product. The higher price increases domestic
production and decreases the quantity bought

Tariffs increase the prices of imported goods. Because of this, domestic producers are not forced to reduce their prices from increased competition, and domestic consumers are left paying higher prices as a result.

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19
Q

Explain who gains and who loses from a tariff and why the losses exceed the
gains.

A

Domestic consumers lose consumer surplus from a tariff. Domestic producers gain producer
surplus from a tariff. The government also gains revenue from a tariff. But the gain in
producer surplus plus the gain in government revenue is less than the loss of consumer
surplus, so a tariff creates a deadweight loss.

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20
Q

Explain the effects of an import quota on domestic production, consumption, and
price

A

An import quota raises the domestic price of the product. The higher price increases domestic
production and decreases domestic purchases.

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21
Q

Why would Canada move from being an importer of a good to being an exporter of a good?

A

the world price of the good rose from below Canada’s no-trade price to above Canada’s no-
trade price.

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22
Q

What is rent seeking?

A

lobbying for special treatment by the government to create economic profit or to divert consumer surplus or producer surplus away from others.

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23
Q

Why is normal profit an opportunity cost?

A

Normal profit is the profit that an entrepreneur earns on average. Normal profit is an
opportunity cost for the firm because it is the cost of a forgone alternative, which is running
another firm

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24
Q

Distinguish between the short run and the long run.

A

The short run is a timeframe in which the quantity of at least one factor of production is fixed.
The long run is a timeframe in which the quantities of all factors of production can be varied

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25
What is the shape of the AFC curve and why does it have this shape?
Average fixed cost (AFC) equals total fixed cost divided by total output. As the quantity produced increases, the fixed costs are spread over a larger and larger quantity of output so average fixed cost decreases. So the AFC curve slopes downward as the quantity produced increases.
26
Why is a firm in perfect competition a price taker?
In a perfectly competitive market, one firm’s output is a perfect substitute for another firm’s output and each firm is a small part of the market. Each firm is a price taker because one firm cannot influence the market price because its production is an insignificant part of the total market
27
In perfect competition, when market demand increases, explain how the price of the good and the output and profit of each firm changes in the short run
When market demand increases, the equilibrium price of the good rises, and the equilibrium quantity increases. Because price equals marginal revenue, the rise in the price means marginal revenue rises. Each firm moves up its marginal cost curve and increases the quantity it produces. The firm’s economic profit increases (or its economic loss decreases)
28
In perfect competition, when market demand decreases, explain how the price of the good and the output and profit of each firm changes in the short run.
When market demand decreases, the equilibrium price of the good falls, and the equilibrium quantity decreases. Because price equals marginal revenue, the fall in the price means marginal revenue falls. Each firm moves down its marginal cost curve and decreases the quantity it produces. The firm’s economic profit decreases (or its economic loss increases)
29
A firm's opportunity cost of production is the sum of the cost of using resources...
bought in the market, owned by the firm, and supplied by the firm's owner
30
The implicit rental rate
s the firm's opportunity cost of using the capital it owns
31
Normal profit is the ________. Normal profit ________ part of a firm's opportunity cost.
return that an entrepreneur can expect to receive on average; is
32
How to calculate TFC?
TC - TVC
33
Marginal revenue is
the change in total revenue that results from a one-unit increase in the quantity sold
34
A firm shuts down if price is...
below minimum average variable cost
35
If price falls below minimum average variable cost, the best a firm can do is
stop production and incur a loss equal to total fixed cost
36
If a perfectly competitive firm is producing in the short run at an output where price is less than average total cost, the firm
is incurring an economic loss but will continue to operate as long as price is above minimum average variable cost
37
if a profit-maximizing firm in a perfectly competitive market is incurring an economic loss, then it must be producing a level of output where
average total cost is greater than marginal cost
38
In a natural monopoly, the long-run average cost curve...
is downward sloping in the relevant range of output levels
39
What is a natural monopoly?
A natural monopoly: a market in which economies of scale enable one firm to supply the entire market at the lowest possible cost. The firms that deliver gas, water, and electricity to our homes are examples of natural monopolies.
40
Does a monopoly face any market constraints?
Yes. To sell a larger quantity, the monopoly must set a lower price.
41
to increase sales from 7 units to 8 units, a single-price monopolist cuts the price from $7 per unit to $6 per unit. What is marginal revenue from selling the 8th unit?
-1
42
if the demand for its good or service is elastic, a monopoly's...
marginal revenue is positive.
43
Rent seeking...
increases deadweight loss above the original monopoly deadweight loss, but the monopoly continues to produce the same inefficient quantity
44
An efficient use of resources in a monopoly occurs when...
a monopoly practices perfect price discrimination.
45
Rate of return regulation can end up serving the self-interest of the firm if...
the regulated firm overstates its costs of production
46
Regulation of a natural monopoly will maximize the sum of consumer surplus and producer surplus if the firm is regulated with...
a marginal cost pricing rule
47
What is a price ceiling?
A government regulation that makes it illegal to charge a price higher than a specified level
48
What effect does a price ceiling set below equilibrium have? (4)
Price ceiling below the equilibrium has effects on the market: * When applied to housing - rent ceiling * A rent ceiling set below equilibrium results in: a housing shortage, increased search activity, and a black market * The shortage is the difference between quantity supplied and quantity demanded * People will pay a bribe for house in a shortage
49
What is a black market?
an illegal market in which the equilibrium price exceeds the price ceiling.
50
What is the inefficiency of a rent ceiling?
The marginal social benefit of housing exceeds its marginal social cost, which creates a deadweight loss. Both the consumer surplus and the producer surplus from housing shrink. Because the quantity of housing supplied (the quantity available) is less than the efficient quantity, a deadweight loss is created.
51
Are rent ceilings fair (rules vs results fairness)?
The rules aren’t fair - blocks voluntary exchange, there are people who would like to pay a little more to get at intersection supply and demand The results aren’t fair - may not benefit the poor, the ones who will get the housing are the ones who can afford a bribe for example.
52
What is a price floor?
A government regulation that makes it illegal to charge a price lower than a specified level
53
What is the effect a price floor set above equilibrium?
When a price floor is applied to a labour market, it's called minimum wage A minimum wage that is above the equilibrium wage creates unemployment Wage above the equilibrium wage, the quantity of labour supplied exceeds the quantity demanded - surplus of labour This book is against minimum wage
54
Who is supply and demand in a minimum wage graph?
the suppliers is us, firms are the demanders They (firms) make decision on how much is hired The surplus is unemployment
55
what is tax incidence?
the division of the burden of a tax between buyers and sellers
56
What is the benefits principle?
the proposition that people should pay taxes equal to the benefits they receive from the services provided by government
57
what is the ability to pay principle?
the proposition that people should pay taxes according to how easily they can bear the burden of the tax
58
what is a production quota?
an upper limit to the quantity of a good that may be produced in a specified period.
59
what is an import quota?
restriction that limits the quantity of a good that may be imported in a given period.
60
what is an export subsidy?
a payment by the government to the producer of an exported good. Export subsidies are illegal under a number of international agreements, including the earlier North American Free Trade Agreement (NAFTA), the USMCA agreement that replaces NAFTA, and the rules of the World Trade Organization (WTO).
61
what is economic profit?
equal to total revenue minus total cost
62
What is total cost?
the opportunity cost of production. OC is the sum of resources bought, resources owned, and resources supplied by the firms owner
63
what is average cost?
cost/Q ATC = AFC + AVC ATC = TC/Q
64
What causes shifts in short run cost curves?
Technology change * Shifts product curves upward and the cost curves downward * If technology uses less labour, fixed costs increase and variable costs decrease * ATC curve shifts down Prices of factors of production (capital and labour) * Increase in price increases costs * Increase in fixed costs: ATC shifts upwards, MC does not shift * Increase in variable costs: ATC and MC shift upward
65
at what point does a firm maximise profits?
MR =MC
66
What can we discern from marginal analysis?
As output increases, marginal revenue is constant and marginal cost eventually increases If MR > MC, revenue from selling one more unit = increase in output, increase in economic profit If MR
67
what is a temporary shut down decision?
If the firm expects the loss to be permanent, it goes out of business. But if it expects the loss to be temporary, the firm must decide whether to shut down temporarily and produce no output, or to keep producing. To make this decision, the firm compares the loss from shutting down with the loss from producing and takes the action that minimises its loss.
68
How to calculate economic loss?
TC -TR
69
What is the shutdown point?
the price and quantity at which it is indifferent between producing and shutting down. at minimum AVC Or where the MC curve intersects the AVC curve
70
How to calculate total cost?
Go up from market Q till you hit ATC curve TC = Q x ATC(Q)
71
how to discern economic profit in the short run of a firm?
If price equals average total cost, a firm breaks even—the entrepreneur makes normal profit. If price exceeds average total cost, a firm makes an economic profit. If price is less than average total cost, a firm incurs an economic loss.
72
what causes entry and exit of firms?
Entry occurs in a market when new firms come into the market and the number of firms increases. Exit occurs when existing firms leave a market and the number of firms decreases Firms exit a market in which they are incurring an economic loss. Entry results in an increase in market output, but each firm’s output decreases. Because the price falls, each firm moves down its supply curve and produces less. Because the number of firms increases, the market produces more.
73
What is an ownership monopoly?
A monopoly can arise in a market in which competition and entry are restricted by a concentration of ownership. For example, the global wholesale market in sunglasses is controlled by Luxottica, an Italian firm that almost certainly made your glasses, regardless of the brand. Can buy up the competitors
74
what are the three kinds of monopolies?
natural, ownership, legal
75
what is a legal monopoly?
a market in which competition and entry are restricted by the granting of a public franchise, government licence, patent, or copyright.
76
What is price discrimination in a monopoly?
When a firm practises price discrimination, it sells different units of a good or service for different prices. Many firms price discriminate. Microsoft sells its Windows and Office software at different prices to different buyers. Computer manufacturers who install the software on new machines, students and teachers, governments, and businesses all pay different prices. Pizza producers offer a second pizza for a lower price than the first one.
77
How are MR and demand curves different in a monopoly?
Price is found by going up to the demand curve Total cost is Q all the way up to ATC MR=MC is where they maximise profits The difference is how much the monopoly is benefitting from this price
78
how is marginal revenue affected by elasticity?
A single-price monopoly’s marginal revenue is related to the elasticity of demand for its good. If demand is elastic, a fall in the price brings an increase in total revenue—the revenue gain from the increase in quantity sold outweighs the revenue loss from the lower price—and marginal revenue is positive. If demand is inelastic, a fall in the price brings a decrease in total revenue—the revenue gain from the increase in quantity sold is outweighed by the revenue loss from the lower price—and marginal revenue is negative. If demand is unit elastic, total revenue does not change—the revenue gain from the increase in the quantity sold offsets the revenue loss from the lower price—and marginal revenue is zero. In a monopoly, demand is always elastic
79
what is perfect price discrimination?
The more consumer surplus a firm is able to capture, the closer it gets to the extreme case called perfect price discrimination, which occurs if a firm can sell each unit of output for the highest price someone is willing to pay for it. In this extreme (hypothetical) case, consumer surplus is eliminated and captured as producer surplus. the market demand curve becomes the marginal revenue curve. So for the perfect price discriminator, marginal revenue equals price and the market demand curve becomes the monopoly’s marginal revenue curve.
80
what is monopoly regulation and deregulation/
Regulation: rules administered by a government agency to influence prices, quantities, entry, and other aspects of economic activity in a firm or industry—is a possible solution to this dilemma. Deregulation: the process of removing regulation of prices, quantities, entry, and other aspects of economic activity in a firm or industry.
81
social interest theory
the political and regulatory process relentlessly seeks out inefficiency and introduces regulation that eliminates deadweight loss and allocates resources efficiently.
82
what is capture theory?
regulation serving the self-interest of the producer, who captures the regulator and maximizes economic profit. No individual consumer has an incentive to oppose the regulation, but the producer has a big incentive to lobby for it.
83
what is average cost pricing?
sets price equal to average total cost. With this rule, the firm produces the quantity at which the average total cost curve cuts the demand curve
84
what is a government subsidy?
A government subsidy is a direct payment to the firm equal to its economic loss. To pay a subsidy, the government must raise the revenue by taxing some other activity.
85
what is rate of return regulation?
a firm must justify its price by showing that its return on capital doesn’t exceed a specified target rate.
86
what is price cap regulation?
a price ceiling—a rule that specifies the highest price the firm is permitted to set. This type of regulation gives a firm an incentive to operate efficiently and keep costs under control.
87
How does elasticity affect tax incidence?
When supply is more elastic than demand, buyers bear most of the tax burden. When demand is more elastic than supply, producers bear most of the cost of the tax. Tax revenue is larger the more inelastic the demand and supply are.
88
A private cost of production is a cost that is borne by the ________ of a good or service. A social cost of production is a cost that is ________.
producer; borne by the producer and by everyone else on whom the cost falls
89
What is Coase thereom?
if property rights exist, and the transactions costs of enforcing them are low, then private transactions are efficient and it doesn't matter who has the property rights
90
What is a true statement about cap-and-trade?
Market forces determine the demand for marketable permits, and the government determines their supply
91
How will the private market determine price and quantity?
Where MSC = Demand (not MSB) | in a monopoly
92
Three ways governments can encourage production of goods with external benefits are
private subsidies, vouchers, and intellectual property rights
93
A public good is...
nonrival and nonexcludable.
94
A good that is nonrival and excludable is a...
club good (netflix)
95
A common resource is
rival and nonexcludable
96
What is the distinction between private cost and social cost?
A private cost of production is a cost that is borne by the producer of a good or service. A social cost of production includes the private costs of production as well as the external costs of production borne by people other than the producer
97
How do external costs prevent a competitive market from allocating resources efficiently?
With an external cost, MSC > MC. When the firm produces a good or service with an external cost, it chooses to produce the quantity at which marginal private cost equals marginal social benefit, MC = MSB. Too much of the good or service is produced, resulting in an inefficient allocation of resources
98
How can external costs be eliminated by assigning property rights?
The Coase theorem states that assigning a property right to either the group generating the externality or the group bearing the externality will eliminate the inefficient allocation of resources. Establishing property rights confronts producers with the costs of their actions and provides incentives that allocate resources efficiently
99
How do taxes reduce emissions?
An emissions tax or pollution charge on the producers of the activities that generate pollution or other negative externality will force these producers to take account of the external costs they impose on society. Producers' costs increase and, in response, they decrease their production, which decreases pollution emissions.
100
How does cap-and-trade reduce emissions?
A government that uses cap-and-trade first estimates the efficient quantity of pollution and sets the overall cap at that level. The cap must then be allocated to individual firms. Cap-and- trade avoids the need to know each firm’s cost by allowing them to trade in a market for pollution permits
101
How might governments use public provision, private subsidies, and vouchers to achieve an efficient amount of education?
Governments can use public provision, private subsidies, or vouchers to achieve efficiency in the market for education.
102
What is a public provision (education)?
With public production, a good or service is produced by a public authority that receives its revenue from the government. The education services produced by public universities and colleges and public schools are examples of public production. Tuition is set equal to the marginal private benefit at the efficient quantity, and the rest of the cost is borne by the taxpayers.
103
What is a private subsidy (education)?
A subsidy is a payment by the government to private producers. By making the subsidy depend on the level of output, the government can induce private decision makers to consider external benefits when they make choices to make the outcome efficient
104
What is a voucher (education)?
A voucher is a token that the government provides to households, which they can use to buy specified goods or services. If the government estimates the value of the external benefit correctly and makes the value of the voucher equal the marginal external benefit, the outcome from the voucher scheme is efficient.
105
What is the free-rider problem? Why do free riders make the private provision of a public good inefficient?
If a firm were to provide a public good, it would suffer from the free-rider problem, which arises when non-paying consumers consume the public good without paying, enjoying a “free ride.” Public goods are, in part, characterized by inability to exclude nonpaying consumers. A private firm would not receive a sufficient level of revenue to provide the efficient level of the public good.
106
How is short-run profit calculated?
Profit = Q x (P-ATC)
107
Glasses, Inc. is a typical firm producing drinking glasses in a perfectly competitive industry. Like other firms in this industry, it's currently making negative economic profits. What will happen to the number of firms in the market and the price of this good when this industry returns to long-run equilibrium?
the number of firms decreases, price increases
108
What happens to DWL when a monopoly can price discriminate?
there is no DWL
109
A perfectly competitive firm is producing at the point at which marginal cost equals marginal revenue. If the firm increases production, total revenue ________ and economic profit ________.
increases; decreases
110
If a profit-maximizing firm in a perfectly competitive market is incurring an economic loss, then it must be producing a level of output where
average total cost is greater than marginal cost.

Micro and Macro (4 decks)

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