Textbook keywords

Question 1

Price ceiling

Answer 1

A legal maximum on the price at which a good can be sold

Question 2

Price floor

Answer 2

A legal minimum on the price at which a good can be sold

Question 3

tax incidence

Answer 3

The manner in which the burden of tax is shared among the participants in a market

Question 4

Welfare economics

Answer 4

The study of how the allocation of resources affects economic well being

Question 5

Willingness to pay

Answer 5

The max amount the buyer will pay for that good and measures how much that buyer values the good

Question 6

Consumer surplus

Answer 6

measures the benefits participating in the market
the amount a buyer is willing to pay minus the amount the buyer pays for it

Question 7

The consumer surplus represents

Answer 7

The area below the demand curve and above the price level

Question 8

Producer surplus

Answer 8

measures the benefits sellers receive from participating in a market
amount a seller is paid minus the cost of production

Question 9

total surplus

Answer 9

consumer surplus plus producer surplus, a measure of society’s economic well being

Question 10

cost

Answer 10

value of everything a seller must give up to produce a good

Question 11

efficiency

Answer 11

maximising the total surplus/ getting the max amt of benefits from the scarce resources

Question 12

equality

Answer 12

shows how the resources are divided among the members of a society

Question 13

Internalizing the externality

Answer 13

altering incentives so that people take into account the external effects of their actions

Question 14

Market based policy:

Answer 14

Corrective taxes and subsidies
Tradable pollution permits

Question 15

Corrective taxes

Answer 15

taxes enacted to deal with the effects of externalities (an ideal one = external benefit/ cost)

Question 16

Corrective tax is better than regulations due to ____________

Answer 16

a lower cost to the society

Question 17

How are corrective taxes diff from other taxes?

Answer 17

They do not distort incentives and move the allocation of resources away from the social optimum. In fact, they move the allocation of resources closer to the social optimum, raising revenue for the govt, enhance economic efficiency

Question 18

Why is gasoline taxed so heavily ?

Answer 18

Congestion/ accidents and pollution

Question 19

Using corrective tax, the supply curve

Answer 19

is perfectly elastic as firms can pollute as much as they want by paying tax

Question 20

Using pollution permits, the supply curve is

Answer 20

perfectly inelastic as the quantity of pollution is fixed by the number of permits

Question 21

The types of private solutions to solve externalities

Answer 21

1. moral codes and social sanctions
2. charities
3. involve in multiple types of business
4. get the interested parties to enter into a contract
5. merge businesses together

Question 22

Transaction costs

Answer 22

costs that parties incur in the process of agreeing to and following thru on a bargain

Question 23

Why private solutions don’t work?

Answer 23

1. Bargaining simply breaks down
2. the num of interested parties is too large, and coordinating becomes costly
3. transaction costs occur

Question 24

Common resources

Answer 24

are rival in consumption but not excludable (e.g. fish in ocean)

Question 25

Club goods

Answer 25

are excludable but not rival in consumption (e.g. satellite TV)

Question 26

Free rider

Answer 26

a person who receives the benefit of a good without paying for it

Question 27

some important public goods

Answer 27

national defense, basic research, fighting poverty

Question 28

Cost-benefit analysis

Answer 28

an estimation to measure the total costs and benefits of the project to society as a whole

Question 29

some important common resources

Answer 29

clean air and water congested roads fish, whales and other wildlife

Question 30

toll

Answer 30

a corrective tax on the externality of congestion

Question 31

Markets work best for which type of goods

Answer 31

Private goods

Question 32

How to limit the use of common resources ?

Answer 32

use regulations and corrective tax

Question 33

Total revenue

Answer 33

The amount that the firm receives for the sale of its output

Question 34

Total cost

Answer 34

The amount that firm pays to buy inputs

Question 35

Profit

Answer 35

total revenue- total cost

Question 36

explicit cost

Answer 36

costs that require firm to pay out some money

Question 37

implicit cost

Answer 37

costs that do not require a cash outlay

Question 38

Economic profit

Answer 38

total revenue - (implicit and explicit cost)

Question 39

Accounting profit

Answer 39

total revenue- explicit cost

Question 40

Economic profit is always __________ than accounting profit

Answer 40

smaller

Question 41

As the number of workers increases, the marginal product ___________

Answer 41

declines

Question 42

Diminishing marginal product

Answer 42

The marginal product of an input declines as the quantity of that input increases The production function getting flatter, total cost curve getting steeper

Question 43

Fixed costs

Answer 43

do not vary with the quantity of output produced

Question 44

Variable costs

Answer 44

changes as the firms alters the quantity of output produced

Question 45

Marginal cost

Answer 45

The increase in total cost that arises from an extra unit of production

Question 46

Many costs are _________ in the short run but ___________ in the long run.

Answer 46

fixed, variable

Question 47

Economies of scale

Answer 47

long run average total cost rises as output increases

Question 48

Diseconomies of scale

Answer 48

long run average total cost declines as output increases

Question 49

Constant returns to scale

Answer 49

Long run average total cost does not vary with the level of output

Question 50

Efficient scale

Answer 50

The quantity of output that minimizes average total cost

Question 51

Asymmetric information

Answer 51

some people are better informed than others

Question 52

moral hazard

Answer 52

tendency of a person who is imperfectly monitored to engage in dishonest/ undesirable behavior

Question 53

adverse selection

Answer 53

problem arising when sellers know more compared to buyers. Thus buyers run a risk of being sold a good of low qty

Question 54

Ways used to tackle asymmetric information

Answer 54

signalling and screening

Question 55

How are people not rational at times?

Answer 55

overconfidence, give too much weight to a small num of vivid observations, reluctance to change minds (confirmation bias)

Question 55

How are people not rational at times?

Answer 55

overconfidence, give too much weight to a small num of vivid observations, reluctance to change minds (confirmation bias)

Question 56

Are economic models meant to replicate reality ?

Answer 56

False, instead showing the essence of the problem at hand