FInal Exam Review

Question 1

Absolute advantage

Answer 1

refers to a country’s ability to produce a certain good more efficiently than another country.

Question 2

Comparative advantage

Answer 2

refers to a country’s ability to produce a particular good with a lower opportunity cost than another country.

Question 3

Law of Diminishing Marginal Utility

Answer 3

The more of a good a consumer already has, the lower the extra (marginal) utility (satisfaction) provided by each extra unit.

Question 4

Why the demand curve slopes downward

Answer 4

The Law of Diminishing Marginal
Utility
Income Effect—a lower price has the effect of increasing money income⇒buy more of other things
Substitution Effect—a lower price cause people to switch to the purchase of the “better deal”
Common sense—buy more if price is lower

Question 5

Elasticity & Total Revenue Test

Answer 5

Elastic >1 ifP↓⇒TR↑ (opposites)
Unit Elastic =1 if ∆P⇒no ∆TR
Inelastic <1 if P↓⇒TR↓ (same direction

Question 6

Consumers’ surplus

Answer 6

is the difference between that paid (Pe) and what one would have paid based on utility (Phi)

Question 7

Producers’ surplus

Answer 7

is the difference in the
price charged (Pe) and the price a seller could sell for based on costs (Plo).

Question 8

Efficiency Loss = Dead Weight Loss

Answer 8

Govt. taxes or regulations or monopoly power reduce consumer and/or producer surpluses below society’s allocative efficiency.

Question 9

Government Price Floor

Answer 9

Surplus

Question 10

Government Price Ceiling

Answer 10

Shortage

Question 11

Law of Diminishing Returns

Answer 11

As extra units of a variable resource/input (labor) are added to fixed resources (capital,land), output (product, quantity) will decline at the same point

Question 12

Short Run Production Costs

Answer 12

TC=FC+VC
ATC=AFC+AVC
TC/Q=ATC VC/Q=AVC FC/Q=AFC
Fixed costs can’t change in the short run.
Variable costs can change in the short run.

Question 13

Marginal Costs:

Answer 13

MC is the cost of producing one more unit of output

Question 14

Perfect Competition – The Firm

Answer 14

Characteristics

**Very large number of firms **Standardized products
**Price takers **Easy entry into and easy exit from market **No non-price competition (advertising)
Profit Maximization Rule MR=MC

Question 15

Monopoly – THEORY OF FIRM

Answer 15

Characteristics

*One firm=industry
**Unique product with no close substitutes
**Price maker
**Many barriers, entry blocked **Little advertising except for public relations
Profit Maximizing Rule MR=MC

Question 16

Price Discrimination

Answer 16

The practice of selling a product at more than one price not justified by cost differences. Due to *monopoly power, *Ed segregates market, *buyers can’t resell product. Examples: airlines, movies
P varies; MR=D

Question 17

Monopolistic Competition – Theory of the Firm

Answer 17

Characteristics

• *Many firms
• *Differentiated products
• *Limited control over price
• *Few entry barriers
• *Much non-price competition— many ads,brands
• *Ex: retail trade, clothing, restaurants

Question 18

Oligopoly

Answer 18

**Few firms
**Standardized or differentiated **Interdependence limits price control unless collusion
**Many barriers to entry
**Non-price competition high with product differentiation—ads
**Ex: Aircraft, tires
Collusion=Cooperation

Question 19

Strategic Behavior

Answer 19

A firm consider reactions of other firms to its actions.

Question 20

Concentration Ratio

Answer 20

% of market controlled by largest firms

Question 21

Dominant Strategy

Answer 21

best for a player no

matter what other does— Both runs ad’s even though it is an inferior position.

Question 22

Payoff Matrix

Answer 22

Payoff or profit to each party for each combination of choices

Question 23

Negative Externality

Answer 23

Private costs born by society/3rd party

Question 24

Positive Externality

Answer 24

Social benefits to 3rd parties born by private firms

Question 25

Public Goods

Answer 25

Govt. provides the goods/service * Paid by tax revenues Difficult to exclude non- payers ⇒ freeriders Shared consumption of good, service ⇒ no rivalry for good/service

Question 26

Lorenz Curve—Income Inequality

Answer 26

Distance between 0e and Lorenz Curve shows degree of inequality

Question 27

explicit costs

Answer 27

input costs that require a direct outlay of money by the firm

Question 28

implicit costs

Answer 28

input costs that don't require a direct outlay of money

Question 29

MC

Answer 29

Change in total cost/change in quantity

Question 30

symmetric information

Answer 30

assumes all buyers have all the information

Question 31

perfect information

Answer 31

consumers know prices and available substitutes | producers know costs of production

Question 32

potential market failures

Answer 32

asymmetric info adverse selection moral hazard

Question 33

asymmetric info

Answer 33

buyers/sellers have different info on a good in the market

Question 34

adverse selection

Answer 34

when the uninformed side of the market chooses a less than optimal good/service

Question 35

moral hazard

Answer 35

individual or group has incentive to play in something that will hurt someone else

Question 36

payroll taxes

Answer 36

tax on the wages that a firm pays its workers

Question 37

social insurance taxes

Answer 37

taxes on wages that is emabarked to pay for social security medicare

Question 38

excise taxes

Answer 38

taxes on specific goods like gasoline, cigarettes, and alcoholic bevergaes

Question 39

lump-sum tax

Answer 39

tax that is the same amount for every person

Question 40

benefits principle

Answer 40

the idea that people should pay taxes based on the benefits they receive from government services

Question 41

ability to pay principle

Answer 41

the idea that taxes should be levied on a person according to how well that person can shoulder the burden

Question 42

vertical equity

Answer 42

idea that taxpayers with a greater ability to pay taxes should pay larger amounts

Question 43

proportional tax

Answer 43

high-income and low-income pay the same fraction of income

Question 44

regressive tax

Answer 44

high-income pay a smaller fraction of their income than do low-income tax payers

Question 45

progressive tax

Answer 45

high-income taxpayers pay a larger fraction of their income than do low-income taxpayers

Question 46

horizontal equity

Answer 46

idea that taxpayers with similar ability to pay taxes should pay the same amounts

Question 47

tax on inelastic demand

Answer 47

buyers lose more

Question 48

tax on elastic demand

Answer 48

producers lose less

Question 49

price elasticity of demand

Answer 49

(% change in Q demanded)/(%change in $)

Question 50

Demand elasticity

Answer 50

The larger the number of close substitutes If the good is a luxury The more narrowly defined the market The longer the time period