Tips

Question 1

Do something if…

Answer 1

Do something if the Marginal benefits > Marginal Cost

Question 2

Stop doing something if…

Answer 2

Stop doing something when the marginal benefits = marginal costs of doing it

Question 3

Never do something when the…

Answer 3

Never do something when the marginal benefits < marginal cost of doing it

Question 4

The slope of the curve, 2 in our case, measures the opportunity cost of the good on the x-axis

Answer 4

The inverse of the slope, 1 ⁄2 in our case, measures the opportunity cost of the good on the y axis.

Question 5

The law of demand predicts a downward- (or negative) sloping demand curve (Figure 6.1). If the price moves from $1 to $1.25 and all other factors are held constant

Answer 5

we observe a decrease in the quantity demanded from 60 to 40 cups. It is important to place special emphasis on “quantity demanded.” If the price of the good changes and all other factors remain constant, the demand curve is held constant and we simply observe the consumer moving along the fixed demand curve. If one of the external factors change, the entire demand curve shifts to the left or right.

Question 6

As suppliers increase the quantity supplied of a good

Answer 6

they face rising marginal costs

Question 7

As suppliers increase the quantity supplied of a good, they face rising marginal costs….

As a result, they only increase the quantity supplied of that good if the price received is

Answer 7

high enough to at least cover the higher marginal cost.

Question 8

When both demand and supply are changing

Answer 8

one of the equilibrium outcomes (price or quantity) is predictable and one is ambiguou

Question 9

Before combining the two shifting curves

Answer 9

predict changes in price and quantity for each shift, by itself

Question 10

The variable that is rising in one case and falling in the other case is

Answer 10

your ambiguous prediction.

Question 11

The area under the demand curve and above the market price is equal

Answer 11

to total consumer surplus.

Question 12

The area above the supply curve and below the market price is equal

Answer 12

to total producer surplus.

Question 13

When describing or calculating elasticity measures,

Answer 13

you must use percentage changes

Question 14

• In general, the more vertical a good’s demand curve (D0)

Answer 14

the more inelastic the demand for that good.

Question 15

The more horizontal a good’s demand curve (D1)

Answer 15

, the more elastic the demand for that good.

Question 16

Despite this generalization, be careful;

Answer 16

elasticity and slope are not equivalent measures.

Question 17

Inelastic demand Ed < 1: % DQd < % DP,

(D = Change)

Answer 17

so total revenue increases with a price increase.

Question 18

• Elastic demand Ed > 1: % DQd > % DP,

Answer 18

so total revenue decreases with a price increase.

Question 19

Unit elastic demand Ed = 1: % DQd = % DP

(D = Change)

Answer 19

so total revenue remains the same.

Question 20

If EI > 1, the good is

Answer 20

normal and income elastic (a luxury).

Question 21

If 1 > EI > 0, the good is

Answer 21

normal but income inelastic (a necessity)

Question 22

If EI < 0

Answer 22

the good is inferior.

Question 23

• A cross-price elasticity of demand less than zero identifies

Answer 23

complementary goods.

Question 24

A cross-price elasticity of demand greater than zero identifies

Answer 24

substitute goods.

Question 25

Taxes create lost efficiency by

Answer 25

moving away from the equilibrium market quantity where MB = MC to society

Question 26

The area of deadweight loss (triangle DWL) increases as the

Answer 26

quantity moves further from the competitive market equilibrium quantity.

Question 27

A price floor is installed when producers

Answer 27

feel the market equilibrium price is “too low.”

Question 28

A price floor creates a

Answer 28

permanent surplus at a price above equilibrium.

Question 29

• If the government purchases the surplus

Answer 29

taxpayers eventually pay the bill.

Question 30

The more price elastic the demand and supply curves,

Answer 30

s, the greater the surplus and the greater the government spending to purchase the surplus.

Question 31

• The price floor reduces net benefit by

Answer 31

overallocating resources to the production of the good.

Question 32

A price ceiling is installed when consumers feel

Answer 32

the market equilibrium price is “too high.”

Question 33

A price ceiling creates a

Answer 33

permanent shortage at a price below equilibrium

Question 34

The more price elastic the demand and supply curves,

Answer 34

the greater the shortage

Question 35

• The price ceiling reduces net benefit by

Answer 35

underallocating resources to the production of the good.

Question 36

Economic Effects of the Tariffs • Consumers pay....

Answer 36

higher prices and consume less steel. If you are building airplanes or door hinges, you have seen an increase in your costs.

Question 37

Economic Effects of the Tariff • Consumer surplus...

Answer 37

s has been lost.

Question 38

Economic Effects of the Tariff • Domestic producers...

Answer 38

increase output. Domestic steel firms are not subject to the tariff, so they can sell more steel at the price of $90 than they could at $80.

Question 39

Economic Effects of the Tariff Declining imports

Answer 39

Fewer tons of imported steel arrive in the United States.

Question 40

Economic Effects of the Tariff Tariff revenue.

Answer 40

The government collects $10 ¥ 2 million = $20 million in tariff revenue as seen in the shaded box in Figure 7.17. This is a transfer from consumers of steel to the government, not an increase in the total well-being of the nation.

Question 41

Economic Effects of the Tariff Inefficiency.

Answer 41

There was a reason the world price was lower than the domestic price. It was more efficient to produce steel abroad and export it to the United States. By taxing this efficiency, the United States promotes the inefficient domestic industry and stunts the efficient foreign sector. As a result, resources are diverted from the efficient to the inefficient sector

Question 42

Economic Effects of the Tariff Deadweight loss...

Answer 42

now exists

Question 43

utility maximizing rule is expressed

Answer 43

MUx /Px = MUy/Py or MUx /MUy = Px /Py

Question 44

If MPL \> APL:

Answer 44

APL is rising.

Question 45

If MPL \< APL

Answer 45

APL is falling.

Question 46

If MPL = APL

Answer 46

APL is at the peak.

Question 47

• As MPL is falling (diminishing marginal returns),

Answer 47

MC is rising

Question 48

As MPL is rising (increasing marginal returns),

Answer 48

MC is falling.

Question 49

When MPL is highest,

Answer 49

MC is lowest.

Question 50

As APL is falling

Answer 50

AVC is rising.

Question 51

• As APL is rising,

Answer 51

AVC is falling

Question 52

When APL is highest,

Answer 52

AVC is lowest.

Question 53

Since the only decision to be made by the perfectly competitive firm is to choose the optimal level of output, the firm’s rule is as follows:

Answer 53

Choose the level of output where MR = MC.

Question 54

• If P \> ATC

Answer 54

P \> 0.

Question 55

If P \< ATC

Answer 55

P \< 0.

Question 56

If P = ATC,

Answer 56

, P = 0

Question 57

If TR ≥ TVC

Answer 57

the firm produces qe where MR = MC.

Question 58

If TR \< TVC,

Answer 58

the firm shuts down and q = 0.

Question 59

If P ≥ AVC,

Answer 59

the firm produces qe where MR = MC

Question 60

If P \< AVC

Answer 60

the firm shuts down and q = 0.

Question 61

Demand is horizontal,

Answer 61

and P = MR in perfect competition.

Question 62

Demand is downward sloping,

Answer 62

and P \> MR in monopoly

Question 63

The monopolist operates in

Answer 63

the elastic (or upper) range of demand.

Question 64

• Find Qm where MR = MC

Answer 64

Once you have found Q m, never leave it

Question 65

Find Pm vertically from the demand curve above

Answer 65

MR = MC

Question 66

Find ATC vertically at Qm.

Answer 66

If you move downward, P \> 0. If you move upward, P \< 0

Question 67

Move horizontally from ATC to the y axis to

Answer 67

complete the rectangle and clearly label it as positive or negative.

Question 68

In competitive markets, MRP

Answer 68

L is the firm’s labor demand curve.

Question 69

In competitive markets,

Answer 69

wage is the firm’s labor supply curve

Question 70

MPL/PL = MPK/PK

Answer 70

or equivalently, MPL/MPK = PL/PK

Question 71

Under monopsony, employers hire

Answer 71

Lm \< Lc.

Question 72

Monopsony firms pay

Answer 72

Wm \< Wc = MRPL.

Question 73

The existence of spillover costs in a market results in

Answer 73

an overallocation of resources in that market. In other words, there is too much of a bad thing.

Question 74

The closer the Gini ratio gets to zero,

Answer 74

the more equal the distribution of income

Question 75

The closer the Gini ratio gets to one,

Answer 75

the more unequal the distribution of income.

Question 76

TIP 1:

Answer 76

On graphing problems, you can lose a point for not indicating which variables lie on each graphical axis. In this case, it would be as simple as a $ and a Q.

Question 77

TIP 2:

Answer 77

When asked to identify equilibrium price and quantity, do these in some way. Dashed lines from the intersection to the axes are enough, or label the intersection E1.

Question 78

TIP 3:

Answer 78

Draw your graphs large enough for you to clearly identify the area of profit/loss. If your graph is the size of a postage stamp, it becomes more difficult for you to identify all relevant parts. It is also very tough for the reader to find all of the points.