Total Revenue = price x quantity
Total Revenue = price x quantity
Total revenue test
P
P
P
P
and TR
and TR
and TR
and TR
then demand elastic
then demand inelastic
then demand elastic
then demand inelastic
Average Revenue =
TR
Q output
Marginal Revenue =
.TR
. Q output
Coefficient of price elasticity of demand:
TR @ maximum when MR goes negative
% ∆ quantity demanded
% ∆ price
Coefficient > 1 = elastic demand
Coefficient < 1 = inelastic demand
Coefficient = 1 = unit elastic demand
Coefficient = ∞ = perfectly elastic demand
Coefficient = 0 = perfectly inelastic demand
In perfect competition, MR = price (demand)
for individual sellers
In perfect competition, individual seller
price = market price (price taker)
In imperfect competition, MR < price (Demand)
In imperfect competition, individual seller IS
THE MARKET (price maker)
Cross elasticity of demand: comparing 2 items:
% ∆ quantity of 1st item
% ∆ price of 2nd item
Total Cost = Total fixed cost + Total average cost
Cross elasticity coefficient positive = items
substitute for each other
Cross elasticity coefficient negative = items
complement each other
Total Cost = unit cost x quantity output
Income elasticity of demand:
Average variable cost =
% ∆ quantity
% ∆ income
Income elasticity coefficient positive = normal
good
Income elasticity coefficient negative = inferior
good
Supply elasticity: % ∆ quantity supplied
% ∆ price
Tax Revenue = (Price w/tax – price seller
receives) x Quantity
Average fixed cost =
Average total cost =
Marginal Utility of Good A
Unit cost of A
=
Marginal Utility of Good B
Unit cost of B
TVC
Q output
TC
Q output
Average total cost = AFC + AVC
Marginal cost =
∆ TC
∆ Q output
!
Average product
Utility maximization rule
TFC
Q output
"
=
Marginal product =
Total product
Q
∆ TP
∆Q
TP @ maximum when MP goes negative
In perfect competition market supply = ∑ individual
seller cost curves or S = ∑ mc’s
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%&'
#
()
*+
Profit maximization rule for all markets:
Marginal Revenue = Marginal Cost or MR = MC
Market Equilibrium
MPC = MPB
Marginal Private Cost = Marginal Private Benefit
Total cost + total profit = total revenue
TR = Price x quantity
Total cost = unit cost x quantity
Total profit = unit profit x quantity
Negative production externality (overallocation):
Social cost > private cost
Example: pollution
Fix: taxes, regulations
$
Marginal revenue product
=
Marginal resource cost
=
∆ TR
∆ Q of resource
∆ T resource C
∆ Q of resource
Profit maximization rule when purchasing a single
resource:
Marginal Revenue Product = Marginal Resource Cost
or MRP = MRC
Positive production externality (underallocation):
Social cost < private cost
Example: technology
Fix: subsidies, regulations
Negative consumption externality (overallocation):
Social benefit < private benefit
Examples: cigarettes, alcohol, gambling
Fix: taxes, regulations
Positive consumption externality (underallocation):
Social benefit > private benefit
Examples: education, vaccines, smoke alarms
Fix: taxes, subsidies or regulations
In perfect competition market demand for labor = ∑
demand of all individual purchasers of labor or D =
∑ mrp’s
In perfect competition, MRP = product price x
marginal product
In imperfect competition, MRP = product price x
marginal product MINUS price change on
previous units sold
In perfect competition, market wage = individual
firms MRC (wage taker)
In imperfect competition (monopsony), wage is
MRP = MRC @ labor supply curve (wage
maker) /MRC lies above S curve
Least Cost Rule
Marginal product of labor
=
Unit price of labor
Marginal product of capital
Unit price of capital
Profit maximization rule for purchasing
multiple resources
Marginal product of labor
Unit price of labor
=
Marginal product of capital = 1
Unit price of capital
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Essential Graphs for Microeconomics cheat sheet
Basic Economic Concepts
 Production Possibilities Curve
Good X
A
Concepts:
B
Points on the curve-efficient
Points inside the curve-inefficient
Points outside the curve-unattainable
with available resources
Gains in technology or resources
favoring one good both not other.
W
C
D
F
E
Good Y
Nature & Functions of Product Markets
 Demand and Supply: Market clearing equilibrium
P
S
Variations:
Shifts in demand and supply caused by
changes in determinants
Changes in slope caused by changes in
elasticity
Effect of Quotas and Tariffs
Pe
D
Qe
Q
Floors and Ceilings
P
P
S
S
Pe
Pe
D
QD
Qe
Floor
QS
D
Q
QS
Qe
Ceiling
• Creates surplus
• Qd<Qs
QD
Q
• Creates shortage
• Qd>Qs
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Consumer and Producer Surplus
P
S
Consumer
surplus
Pe
Producer
surplus
D
Qe
Q
Effect of Taxes
A tax imposed on the SELLER-supply
curve moves left
elasticity determines whether buyer
or seller bears incidence of tax
shaded area is amount of tax
connect the dots to find the triangle
of deadweight or efficiency loss.
A tax imposed on the BUYER-demand
curve moves left
elasticity determines whether buyer or
seller bears incidence of tax
shaded area is amount of tax
connect the dots to find the triangle
of deadweight or efficiency loss.
Price
buyers
pay
Price
buyers
pay
P
S2
P
S
Price
w/o
tax
Price
w/o
tax
D1
Price
sellers
receive
S1
Price
sellers
receive
D2
Q
D1
Q
Theory of the Firm
Short Run Cost
P/C
MC
ATC
AVC
AFC
Q
AFC declines as output increases
AVC and ATC declines initially, then
reaches a minimum then increases (Ushaped)
MC declines sharply, reaches a
minimum, the rises sharply
MC intersects with AVC and ATC at
minimum points
When MC> ATC, ATC is falling
When MC< ATC, ATC is rising
There is no relationship between MC and
AFC
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Long Run Cost
ATC
Economies
of Scale
Diseconomies
of Scale
Constant
Returns
to Scale
Q
Perfectly Competitive Product Market Structure
Long run equilibrium for the market and firm-price takers
Allocative and productive efficiency at P=MR=MC=min ATC
P
MC
P
S
Pe
y
MR=D=AR=P
Pe
D
Qe
Q
Qe
Q
Variations:
Short run profits, losses and shutdown cases caused by shifts in market demand and
supply.
Imperfectly Competitive Product Market Structure: Pure Monopoly
Single price monopolist
(price maker)
Earning economic profit
P
Natural Regulated Monopoly
Selling at Fair return ( Qfr at Pfr)
MC
MC
ATC
P
Pm
ATC
PFR
D
PSO
D
Q
Q
MR
QFR QSO
Qm
MR
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Q
Imperfectly Competitive Product Market Structure: Monopolistically
Competitive
Long run equilibrium where P=AC at MR=MC output
MC
P
ATC
Variations:
PMC
Short run profits, losses and
shutdown cases caused by
shifts in market demand and
supply.
D
Qmc
MR
Q
Factor Market
Perfectly Competitive Resource Market Structure
Perfectly Competitive Labor Market – Wage takers
Firm wage comes from market so changes in labor demand do not raise wages.
Labor Market
Individual Firm
S
Wage
Rate
Wage
Rate
S = MRC
Wc
Wc
D = ∑ mrp’s
Qc
Quantity
DL=mrp
qc
Quantity
Variations:
Changes in market demand and supply factors can influence the firm’s wage and number
of workers hired.
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Imperfectly Competitive Resource Market Structure
Imperfectly Competitive Labor Market – Wage makers
Quantity derived from MRC=MRP (Qm)
Wage (Wm) comes from that point downward to Supply curve.
MRC
Wage
Rate
S
b
Wc
a
Wm
MRP
c
Qm
Qc
Q
Market Failures - Externalities
MSC
Overallocation of resources when external costs are
P
present and suppliers are shifting some of their costs onto
MPC
the community, making their marginal costs lower. The
supply does not capture all the costs with the S curve
understating total production costs. This means resources
D
are overallocated to the production of this product. By
shifting costs to the consumer, the firm enjoys S1 curve
Qo
Qe
Spillover Costs
P
Q
and Qe., (optimum output ).
Underallocation of resources when external
S
benefits are present and the market demand
curve reflects only the private benefits understating
the total benefits. Market demand curve (D) and
MSB
than Qo shown by the intersection of D1 and S with
MPB
Qe Qo
Spillover Benefits
market supply curve yield Qe. This output will be less
Q
resources being underallocated to this use.
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Thinking on the Margin…
Allocative Efficiency: Marginal Cost (MC) = Marginal Benefit (MB)
Definition: Allocative efficiency means that a good’s output is expanded until its
marginal benefit and marginal cost are equal. No resources beyond that point
should be allocated to production.
Theory: Resources are efficiently allocated to any product when the MB and MC are
equal.
Essential Graph:
MC
MC
The point where MC=MB is
allocative efficiency since
neither underallocation or
overallocation of resources
occurs.
&
MB
MB
Q
Application: External Costs and External Benefits
External Costs and Benefits occur when some of the costs or the benefits of the
good or service are passed on to parties other than the immediate buyer or seller.
MSC
External Cost
P
P
MC
External
Benefits
MPC
MB
MPB
Qo
Qe
Q
External costs
production or consumption
costs inflicted on a third party
without compensation
pollution of air, water are
examples
Supply moves to right
producing a larger output that
is socially desirable—over
allocation of resources
Legislation to stop/limit
pollution and specific taxes
(fines) are ways to correct
Qe Qo
MSB
Q
External benefits
production or consumption costs
conferred on a third party or
community at large without their
compensating the producer
education, vaccinations are examples
Market Demand, reflecting only private
benefits moves to left producing a
smaller output that society would like—
under allocation of resources
Legislation to subsidize consumers
and/or suppliers and direct production
by government are ways to correct
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Diminishing Marginal Utility
Definition: As a consumer increases consumption of a good or service, the additional
usefulness or satisfaction derived from each additional unit of the good or service
decreases.
Utility is want-satisfying power— it is the satisfaction or pleasure one gets from
consuming a good or service. This is subjective notion.
Total Utility is the total amount of satisfaction or pleasure a person derives from
consuming some quantity.
Marginal Utility is the extra satisfaction a consumer realizes from an additional
unit of that product.
Theory: Law of Diminishing Marginal Utility can be stated as the more a specific
product consumer obtain, the less they will want more units of the same product. It
helps to explain the downward-sloping demand curve.
Essential Graph:
Total Utility increases at a
diminishing rate, reaches a
maximum and then
declines.
Total
Utility
TU
Unit
Marginal
Utility
Marginal Utility diminishes with
increased consumption, becomes
zero where total utility is at a
maximum, and is negative when
Total Utility declines.
Unit
MU
When Total Utility is at its peak, Marginal Utility is becomes zero. Marginal Utility
reflects the change in total utility so it is negative when Total Utility declines.
Teaching Suggestion: begin lesson with a quick ―starter‖ by tempting a student with
how many candy bars (or whatever) he/she can eat before negative marginal utility
sets in when he/she gets sick!
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Law of Diminishing Returns
Definitions:
Total Product: total quantity or total output of a good produced
Marginal Product: extra output or added product associated with adding a unit
of a variable resource
MP =
change in total product
D TP
=
D Linput
change in labor input
Average Product: the output per unit of input, also called labor productivity
AP =
total product TP
=
units of labor
L
Theory: Diminishing Marginal Product …a s successive units of a variable resource are
added to a fixed resource beyond some point the extra or the marginal product will
decline; if more workers are added to a constant amount of capital equipment,
output will eventually rise by smaller and smaller amount.
Essential Graph:
TP
TP
Note that the marginal
product intersects the
average product at its
maximum average
product.
Quantity of Labor
Increasing
Marginal
Returns
Negative
Marginal
When the TP has reached it
maximum, the MP is at zero.
As TP declines, MP is negative.
Diminishing
Marginal
Returns
Quantity of Labor
MP
Teaching Suggestion: Use a game by creating a production factory (square off some
desks). Start with a stapler, paper and one student. Add students and record the ―marginal
product‖. Comment on the constant level of capital and the variable students workers.
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Short Run Costs
Definitions:
Fixed Cost: costs which in total do not vary with changes in the output; costs
which must be paid regardless of output; constant over the output
examples—interest, rent, depreciation, insurance, management salary
Variable Cost: costs which change with the level of output; increases in variable
costs are not consistent with unit increase in output; law of diminishing returns will
mean more output from additional inputs at first, then more and more additional
inputs are needed to add to output; easier to control these types of costs
examples—material, fuel, power, transport services, most labor
Total Cost: are the sum of fixed and variable. Most opportunity costs will be fixed
costs.
Average Costs (Per Unit Cost): can be used to compare to product price
AFC =
TFC
Q
AVC =
TVC
Q
ATC =
TC
(or AFC + AVC)
Q
Marginal Costs: the extra or additional cost of producing one more unit of
output; these are the costs in which the firm exercises the most control
MC =
D TC
DQ
Essential Graph:
P/C
AFC declines as output increases
AVC declines initially then
reaches a minimum, then
increases (a U-shaped curve)
ATC will be U-shaped as well
MC declines sharply reaches, a
minimum, and then rises sharply.
MC intersects with AVC and ATC
at minimum points
MC
ATC
AVC
AFC
Q
When MC < ATC, ATC is falling
When MC > ATC, ATC is rising
There is no relationship between MC and AFC
Teaching Suggestion:
Let students draw this diagram many times. Pay attention
to the position of the ATC and AVC and the minimum point of each. Reinforce that
the MC passes through these minimums, but observe that the minimum position of
ATC is to the right of AVC.
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Marginal Revenue = Marginal Cost
Definitions:
Marginal Revenue is the change in total revenue from an additional unit sold.
Marginal Cost is the change in total costs from the production of another unit.
Theory: Competitive Firms determine their profit-maximizing (or loss-minimizing)
output by equating the marginal revenue and the marginal cost. The MR=MC rule will
determine the profit maximizing output.
Essential Graph:
In the long run for a perfectly
competitive firm, after all the
changes in the market (more
demand for the product, firms
entering in search of profit, and
then firms exiting because
economic profits are gone), long
run equilibrium is established. In
the long run, a purely
competitive firm earns only
normal profit since MR=P=D=MC
at the lowest ATC. This condition
is both Allocative and Productive
Efficient.
MC
ATC
P
Pe
P=D=MR=AR
Qe
Q
P
MC
ATC
P
Unit
Cost
MR=MC
For a single price
monopolist, the output
is determined at the
MR=MC intersection
and the price is
determined where that
output meets the
demand curve.
D
Q
MR
Q
Teaching Suggestion: Be sure to allow students to practice the drawing of the shortrun graphs as the lead in to the understanding of the long-run equilibrium in
competitive firms and its meaning. Always begin with this lesson by showing why the
Demand curve and the MR curve are the same since a perfectly competitive seller
earns the price each time another unit is sold.
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Marginal Revenue Product = Marginal Resource Cost
Definition:
MRP is the increase in total revenue resulting from the use of each additional
variable input (like labor). The MRP curve is the resource demand curve.
Location of curve depends on the productivity and the price of the product.
MRP=MP x P
MRC is the increase in total cost resulting from the employment of each
additional unit of a resource; so for labor, the MRC is the wage rate.
Theory: It will be profitable for a firm to hire additional units of a resource up to the
point at which that resource’s MRP is equal to its MRC.
Essential Graphs:
In a purely competitive market:
large number of firms hiring a specific type of labor
numerous qualified, independent workers with identical skills
Wage taker behavior—no ability to control wage on either side
In a perfectly competitive resource market like labor, the resource price is
given to the firm by the market for labor, so their MRC is constant and is equal
to the wage rate. Each new worker adds his wage rate to the total wage
cost. Finding MRC=MRP for the firm will determine how many workers the firm
will hire.
Labor Market
Individual Firm
S
Wage
Rate
Wage
Rate
S = MRC
Wc
Wc
D = ∑ mrp’s
Qc
DL=mrp
qc
Quantity
Quantity
In a monopsonistic market, an employer of resources has monopolistic buying
(hiring) power. One major employer or several acting like a single monopsonist in
a labor market. In this market:
single buyer of a specific type of labor
labor is relatively immobile—geography or skill-wise
firm is ―wage maker‖ —wage rate paid varies directly with the # of workers
hired
MRC
Wage
Rate
S
b
Wc
Wm
a
MRP
c
Qm
Qc
The employer’s MRC curve lies
above the labor S curve since it
must pay all workers the higher
wage when it hires the next worker
the high rate to obtain his services.
Equating MRC with MRP at point b,
the monopsonist will hire Qm workers
and pay wage rate Wm.
Q
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ECON 101: Principles of Microeconomics (Fall 2013)
Review Sheet (also known as “The Giant Flash Card”) for Topics Covered in Midterm 21
DO NOT BRING THIS REVIEW SHEET TO THE EXAM!
The following topics have been covered in lectures and discussion sections after Midterm 1 and will be asked
in Midterm 2. You are expected to know these and be able to solve the problems WITH ACCURACY and
SPEED. Furthermore, you are expected to know the material covered for Midterm 1 (e.g. percentage change,
equation of a line, demand curve, solving for equilibrium) as we will frequently use to solve the problems.
Again, there will be 30 questions in 75 minutes, so you should average out 2.5 minutes per question. Even if
some questions might take you less than 30 seconds, others might take as long as 5 minutes, spare your time
accordingly. Rule of thumb: if the additional (marginal) benefit is greater than additional (marginal) cost,
do it! Otherwise, don’t! (In fact, this is the main idea of every economic concepts!) You are maximizing the
probability of getting the questions right, subject to the time constraint – if the additional time cost needed to
get them right is higher the additional benefit, then you should do other questions!
Topics studied so far are inter-related, you should expect something to cross-over with each other, e.g.
production and cost will show up in perfect competition problem.
Demand and Supply – The International Trade and Intervention
• With international trade, what is the effect to the domestic demand/supply? What is the world price?
What happen if world price is lower/higher than autarky equilibrium? What is the new supply or new
demand curve? What is the new equilibrium? How to find the amount consumed? How to find the
amount produced domestically?
• With import tariff, what is the new demand/supply curve? How to solve for the new equilibrium?
How to find the amount consumed? How to find the amount produced domestically? How to find
government revenue? What is the deadweight loss? What is prohibitive import tariff?
• With import quota, what is the new demand/supply curve? How to solve for the new equilibrium?
How to find the amount consumed? How to find the amount produced domestically? How to find
government revenue? What is the deadweight loss? Is the import quota binding?
Real and Nominal Variables
• Some Formulae:
Real Price
=
CPI
=
Nominal Price
× Scale Factor
CPI
Market Basket Price of Year t
× Scale Factor
Market Basket Price of Base Year
• What is the market basket? How to find the market basket? What is the base year? What is CPI?
How to calculate CPI? (Be careful with scale factor!) What is inflation? (Inflation is simply percentage
change in CPI.) How to change the base year and re-calculate CPI and inflation? (By now you should
know some trick about inflation when you change the base year.) More importantly, how to back out
the information from the given data? (As you know, we won’t give you all the information needed!)
• What is nominal price? What is real price? What is the percentage change in nominal price? What
is the percentage change in real price? What would happen to nominal price and real price when the
base year is changed? How can you take the price and go back and forth in time?
1 Prepared by Kanit Kuevibulvanich. (https://mywebspace.wisc.edu/kuevibulvani/web) This version: November 14, 2013.
Disclaimer: Although summarized from textbook, homework and lectures, this note does not constitute as the official guidelines
for the course, comments welcomed.
1
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Elasticities and Total Revenue
• What is regular percentage change? What is arc percentage change?
• In general, what is elasticity? It is simply the ratio of percentage change of the cause (x) to percentage
%∆y
change of the effect (y), i.e. εyx = %∆x
. So whatever you have in the world as cause and effect, you can
measure in terms of elasticity. Hence, think about the price of a good causes the change in quantity
demanded for that good (own-price elasticity of demand), to the quantity demanded for the other good
(cross-price elasticity of demand), or to the quantity supplied for that good (price elasticity of supply).
How about income causes change to quantity demanded (income elasticity of demand)?
• The three formulation of elasticities: slope form, point elasticity, arc (midpoint) elasticity. Take the
own-price elasticity of demand, clearly price of good x (p) causes the change in quantity demanded of
good x (q), so we have the following formulation:
(Slope form)
εdp =
%∆q
=
%∆p
(Regular percentage elasticity)
εdp =
%∆q
=
%∆p
(Arc percentage elasticity)
εdp =
%∆q
=
%∆p
∆q
q
∆p
p
∆q
q
∆p
p
∆q
q
∆p
p
=
=
=
∆q p
1
p
· =
·
∆p q
slope of demand curve q
q2 −q1
q1
p2 −p1
p1
q2 −q1
2
)
( q1 +q
2
p2 −p1
2
)
( p1 +p
2
Note that point elasticity and midpoint elasticity are different by the base you use as the divisor (i.e.
the base) – point method uses initial condition, arc method uses the average. The slope form means
that, what is the elasticity instantenously at (p, q), while the other two means the change from situation
1 (p1 , q1 ) to situation 2 (p2 , q2 ).
• In calculating cross-price and income elasticity of demand, we will use only regular percentage change
in this class.
• If you have demand curve/demand function, supply curve/supply function, you should be able to find
and calculate the elasticities. Similarly, you should also be able to back out the demand curve/demand
function, supply curve/supply function!
• Hence, you can derive the formula for all elasticities we have studied.
• Which elasticity you can take the absolute value (i.e. neglect the negative sign)? Why and why
not? What is the meaning of each elasticity? Why is it normal good, inferior good, substitute and
complement? Can you interpret the elasticities?
• What is elasticity on the demand curve? Is it always the same throughout the demand curve? How is
it changing? What is the point where revenue is maximized? The midpoint of demand curve is not the
same as midpoint elasticity, but the elasticity of the midpoint of demand curve.
Excise Tax and the Relationship to Elasticities
• Which side of the market that the tax has been imposed? What is the effect of excise tax on demand
or supply curve? How does each curve shift? How to find the quantity traded with tax, the price that
consumer pays and producer receives? What is consumer surplus and producer surplus after the tax?
What are the consumer tax incidence and producer tax incidence? What is the government revenue?
What is the deadweight loss?
• How are elasticities represented on the slope of demand and supply curves? What is the effect of
elasticities of both consumer and producer on taxation? Which side of the market bears more of the
burden? What is the fraction of burden born on each side of the market – slope of demand curve
2
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shortcut? What about the special cases of perfectly inelastic and perfectly elastic of demand and
supply curve? (By now you should know why I always insist on whether the curves are shifted up-down
or right-left!)
Consumer Theory
• If you draw graphs in these type of problems, always be precise and label everything.
• What is budget line? What are the components of budget line? What is the meaning of the budget
line, the meaning of endpoints of budget line? When price changes, what happen to the budget line?
When income changes, what happen to the budget line? What is tax on consumption good considered
as on the budget line? What is income tax considered as on the budget line?
• What is utility? What is marginal utility? What is indifference curve? What is the meaning of the
slope of indifference curve? What is marginal rate of substitution and the meaning? Why is it convex
to the origin (bending towards the origin)? What about the special cases of the indifference curves
(perfect complements, perfect substitutes, neuters) – how do they look like?
• Consumer utility maximization problem (UMP) – the optimality (solution of consumer) consists of budget line and
⇣ indifference⌘ curve. What is the optimal condition for consumer choosing the consumption
MU
bundle? MPUx x = Py y What does it mean? (Last dollar spent on good x gives the same marginal
utility utility from good x as the last dollar spend on good y gives the same marginal utility from good
y. Clearly, if the last dollar you have gives you higher additional utility from good x than good y, you
should spend it on good x.) How to find/calculate the optimal consumption bundle? What happen to
the optimal consumption bundle if price changes or income changes? Can you derive the demand curve
of a good? Can you analyze the substitution of a good when price changes?
• How to find the optimal consumption bundle when the preference is such
⌘ are perfect
⇣ that two goods
M Uy
M Ux
here! How to
complements or perfect substitutes? Clearly you cannot use the formula Px = Py
characterize the optimal consumption bundle? Is it always one-to-one unit of each good in the case of
perfect complements? Does the consumer always consume only one good in case of perfect substitutes?
• Application: how to analyze the effect of tax on consumption good and tax on income, using the budget
lines and indifference curves?
• How to decompose the effect of price change? What are substitution effect and income effect? How to
draw the hypothetical budget line? What is the meaning of hypothetical budget line? Can we say that
a good is normal or inferior? How do substitution and income effects look like when a good is normal
or inferior? What about the special cases of indifference curves?
Production and Cost
• Make sure you don’t get tangled with the spaghetti of cost curves! Total cost (TC), total fixed cost
(TFC), total variable cost (TVC), average total cost (ATC), average fixed cost (AFC), average variable
cost (AVC), marginal cost (MC) - how to find each one? Where should the curves of MC goes through
the ATC and AVC? What is the gap between AFC and ATC, the gap between AVC and ATC? How
do they look like?
• What is production function? (How much you put in as input gives how many output?) What is the
marginal product? What is average product? Why does the production function take some particular
shape?
• If you don’t have functional form, you have the table of costs, how to fill in? How about the production?
Variable cost depends on quantity, fixed cost does not.
• Can you relate to the amount produced and cost of production? (Can you relate production function
to/from cost function?)
3
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• What are short run and long run? How are they defined? Do you have fixed cost in the long run? Make
sure you distinguish inefficiencies between short run (law of diminishing marginal return) and long run
(return to scale). What are they? How are they defined?
Perfect Competition
• What is perfectly competitive market? What are the characteristics of this market type? Why do you
have perfectly elastic demand (thus, p = M R) for product of a firm? What does it have to do with
market demand and market supply? Should firm still produce even if it makes zero economic profit or
negative profit?
• Short run - The spaghetti of MC, AVC and ATC shows up here. Where is the optimal production
(profit maximization) of a firm in short run? How much should it produce? What is the revenue, cost
and profit? How many firms in the short run equilibrium?
• Long run - The spaghetti of MC and AC shows up here. Where is the optimal production (profit
maximization) of a firm in long run? How much should it produce? What is the revenue, cost and
profit? How many firms in the long run equilibrium?
• What happen when there is entry/exit to the market? What happen when there are outside shifts of
demand and supply curves? What is the break-even price? What is the shut-down price? What is the
exit price?
• Short run and long run - Where is the supply curve in the short run and in the long run? What is the
difference between shutdown and exit? What is the criterion that a firm uses to determine whether it
wants to shutdown or exit and why?
Monopoly
• What is the demand curve facing the firm? Why is it different from the case firms in perfectly competitive market? What is marginal revenue? How to find marginal revenue?
• What is the profit maximizing rule for a monopolist? What does it mean? At such quantity, what is
the cost to monopolist? What is the price charged to consumers? What is the total revenue? What is
the profit? Should monopolist produce in the short-run or shutdown? Should monopolist exit in the
long-run? Why? (Be sure you don’t get tangled in the spaghetti of curves!)
• Why does monopolist not exist in the inelastic portion of demand curve?
• What is the consumer surplus? What is producer surplus? (This is clearly different from the profit!
How and why?) What is the deadweight loss?
• Why are there deadweight losses? (Monopolist, in the effort to maximize profit, do what?) What is
allocative efficiency? Why there is none of the efficiency? How to restore efficiencies? What is the
social optimum? How to achieve such social optimum? Is it possible to sustain social optimum?
, Good Luck for Your Midterm 2 Exam! ,
4
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Microeconomics cheat sheet
Basic Economic Concepts
 Production Possibilities Curve
Good X
A
Concepts:
B
Points on the curve-efficient
Points inside the curve-inefficient
Points outside the curve-unattainable
with available resources
Gains in technology or resources
favoring one good both not other.
W
C
D
F
E
Good Y
Nature & Functions of Product Markets
 Demand and Supply: Market clearing equilibrium
P
S
Variations:
Shifts in demand and supply caused by
changes in determinants
Changes in slope caused by changes in
elasticity
Effect of Quotas and Tariffs
Pe
D
Qe
Q
Floors and Ceilings
P
P
S
S
Pe
Pe
D
QD
Qe
Floor
QS
D
Q
QS
Qe
Ceiling
• Creates surplus
• Qd<Qs
QD
Q
• Creates shortage
• Qd>Qs
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Consumer and Producer Surplus
P
S
Consumer
surplus
Pe
Producer
surplus
D
Qe
Q
Effect of Taxes
A tax imposed on the SELLER-supply
curve moves left
elasticity determines whether buyer
or seller bears incidence of tax
shaded area is amount of tax
connect the dots to find the triangle
of deadweight or efficiency loss.
A tax imposed on the BUYER-demand
curve moves left
elasticity determines whether buyer or
seller bears incidence of tax
shaded area is amount of tax
connect the dots to find the triangle
of deadweight or efficiency loss.
Price
buyers
pay
Price
buyers
pay
P
S2
P
S
Price
w/o
tax
Price
w/o
tax
D1
Price
sellers
receive
S1
Price
sellers
receive
D2
Q
D1
Q
Theory of the Firm
Short Run Cost
P/C
MC
ATC
AVC
AFC
Q
AFC declines as output increases
AVC and ATC declines initially, then
reaches a minimum then increases (Ushaped)
MC declines sharply, reaches a
minimum, the rises sharply
MC intersects with AVC and ATC at
minimum points
When MC> ATC, ATC is falling
When MC< ATC, ATC is rising
There is no relationship between MC and
AFC
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Long Run Cost
ATC
Economies
of Scale
Diseconomies
of Scale
Constant
Returns
to Scale
Q
Perfectly Competitive Product Market Structure
Long run equilibrium for the market and firm-price takers
Allocative and productive efficiency at P=MR=MC=min ATC
P
MC
P
S
Pe
y
MR=D=AR=P
Pe
D
Qe
Q
Qe
Q
Variations:
Short run profits, losses and shutdown cases caused by shifts in market demand and
supply.
Imperfectly Competitive Product Market Structure: Pure Monopoly
Single price monopolist
(price maker)
Earning economic profit
P
Natural Regulated Monopoly
Selling at Fair return ( Qfr at Pfr)
MC
MC
ATC
P
Pm
ATC
PFR
D
PSO
D
Q
Q
MR
QFR QSO
Qm
MR
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Q
Imperfectly Competitive Product Market Structure: Monopolistically
Competitive
Long run equilibrium where P=AC at MR=MC output
MC
P
ATC
Variations:
PMC
Short run profits, losses and
shutdown cases caused by
shifts in market demand and
supply.
D
Qmc
MR
Q
Factor Market
Perfectly Competitive Resource Market Structure
Perfectly Competitive Labor Market – Wage takers
Firm wage comes from market so changes in labor demand do not raise wages.
Labor Market
Individual Firm
S
Wage
Rate
Wage
Rate
S = MRC
Wc
Wc
D = ∑ mrp’s
Qc
Quantity
DL=mrp
qc
Quantity
Variations:
Changes in market demand and supply factors can influence the firm’s wage and number
of workers hired.
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Imperfectly Competitive Resource Market Structure
Imperfectly Competitive Labor Market – Wage makers
Quantity derived from MRC=MRP (Qm)
Wage (Wm) comes from that point downward to Supply curve.
MRC
Wage
Rate
S
b
Wc
a
Wm
MRP
c
Qm
Qc
Q
Market Failures - Externalities
MSC
Overallocation of resources when external costs are
P
present and suppliers are shifting some of their costs onto
MPC
the community, making their marginal costs lower. The
supply does not capture all the costs with the S curve
understating total production costs. This means resources
D
are overallocated to the production of this product. By
shifting costs to the consumer, the firm enjoys S1 curve
Qo
Qe
Spillover Costs
P
Q
and Qe., (optimum output ).
Underallocation of resources when external
S
benefits are present and the market demand
curve reflects only the private benefits understating
the total benefits. Market demand curve (D) and
MSB
than Qo shown by the intersection of D1 and S with
MPB
Qe Qo
Spillover Benefits
market supply curve yield Qe. This output will be less
Q
resources being underallocated to this use.
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Thinking on the Margin…
Allocative Efficiency: Marginal Cost (MC) = Marginal Benefit (MB)
Definition: Allocative efficiency means that a good’s output is expanded until its
marginal benefit and marginal cost are equal. No resources beyond that point
should be allocated to production.
Theory: Resources are efficiently allocated to any product when the MB and MC are
equal.
Essential Graph:
MC
MC
The point where MC=MB is
allocative efficiency since
neither underallocation or
overallocation of resources
occurs.
&
MB
MB
Q
Application: External Costs and External Benefits
External Costs and Benefits occur when some of the costs or the benefits of the
good or service are passed on to parties other than the immediate buyer or seller.
MSC
External Cost
P
P
MC
External
Benefits
MPC
MB
MPB
Qo
Qe
Q
External costs
production or consumption
costs inflicted on a third party
without compensation
pollution of air, water are
examples
Supply moves to right
producing a larger output that
is socially desirable—over
allocation of resources
Legislation to stop/limit
pollution and specific taxes
(fines) are ways to correct
Qe Qo
MSB
Q
External benefits
production or consumption costs
conferred on a third party or
community at large without their
compensating the producer
education, vaccinations are examples
Market Demand, reflecting only private
benefits moves to left producing a
smaller output that society would like—
under allocation of resources
Legislation to subsidize consumers
and/or suppliers and direct production
by government are ways to correct
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Diminishing Marginal Utility
Definition: As a consumer increases consumption of a good or service, the additional
usefulness or satisfaction derived from each additional unit of the good or service
decreases.
Utility is want-satisfying power— it is the satisfaction or pleasure one gets from
consuming a good or service. This is subjective notion.
Total Utility is the total amount of satisfaction or pleasure a person derives from
consuming some quantity.
Marginal Utility is the extra satisfaction a consumer realizes from an additional
unit of that product.
Theory: Law of Diminishing Marginal Utility can be stated as the more a specific
product consumer obtain, the less they will want more units of the same product. It
helps to explain the downward-sloping demand curve.
Essential Graph:
Total Utility increases at a
diminishing rate, reaches a
maximum and then
declines.
Total
Utility
TU
Unit
Marginal
Utility
Marginal Utility diminishes with
increased consumption, becomes
zero where total utility is at a
maximum, and is negative when
Total Utility declines.
Unit
MU
When Total Utility is at its peak, Marginal Utility is becomes zero. Marginal Utility
reflects the change in total utility so it is negative when Total Utility declines.
Teaching Suggestion: begin lesson with a quick ―starter‖ by tempting a student with
how many candy bars (or whatever) he/she can eat before negative marginal utility
sets in when he/she gets sick!
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Law of Diminishing Returns
Definitions:
Total Product: total quantity or total output of a good produced
Marginal Product: extra output or added product associated with adding a unit
of a variable resource
MP =
change in total product
D TP
=
D Linput
change in labor input
Average Product: the output per unit of input, also called labor productivity
AP =
total product TP
=
units of labor
L
Theory: Diminishing Marginal Product …a s successive units of a variable resource are
added to a fixed resource beyond some point the extra or the marginal product will
decline; if more workers are added to a constant amount of capital equipment,
output will eventually rise by smaller and smaller amount.
Essential Graph:
TP
TP
Note that the marginal
product intersects the
average product at its
maximum average
product.
Quantity of Labor
Increasing
Marginal
Returns
Negative
Marginal
When the TP has reached it
maximum, the MP is at zero.
As TP declines, MP is negative.
Diminishing
Marginal
Returns
Quantity of Labor
MP
Teaching Suggestion: Use a game by creating a production factory (square off some
desks). Start with a stapler, paper and one student. Add students and record the ―marginal
product‖. Comment on the constant level of capital and the variable students workers.
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Short Run Costs
Definitions:
Fixed Cost: costs which in total do not vary with changes in the output; costs
which must be paid regardless of output; constant over the output
examples—interest, rent, depreciation, insurance, management salary
Variable Cost: costs which change with the level of output; increases in variable
costs are not consistent with unit increase in output; law of diminishing returns will
mean more output from additional inputs at first, then more and more additional
inputs are needed to add to output; easier to control these types of costs
examples—material, fuel, power, transport services, most labor
Total Cost: are the sum of fixed and variable. Most opportunity costs will be fixed
costs.
Average Costs (Per Unit Cost): can be used to compare to product price
AFC =
TFC
Q
AVC =
TVC
Q
ATC =
TC
(or AFC + AVC)
Q
Marginal Costs: the extra or additional cost of producing one more unit of
output; these are the costs in which the firm exercises the most control
MC =
D TC
DQ
Essential Graph:
P/C
AFC declines as output increases
AVC declines initially then
reaches a minimum, then
increases (a U-shaped curve)
ATC will be U-shaped as well
MC declines sharply reaches, a
minimum, and then rises sharply.
MC intersects with AVC and ATC
at minimum points
MC
ATC
AVC
AFC
Q
When MC < ATC, ATC is falling
When MC > ATC, ATC is rising
There is no relationship between MC and AFC
Teaching Suggestion:
Let students draw this diagram many times. Pay attention
to the position of the ATC and AVC and the minimum point of each. Reinforce that
the MC passes through these minimums, but observe that the minimum position of
ATC is to the right of AVC.
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Marginal Revenue = Marginal Cost
Definitions:
Marginal Revenue is the change in total revenue from an additional unit sold.
Marginal Cost is the change in total costs from the production of another unit.
Theory: Competitive Firms determine their profit-maximizing (or loss-minimizing)
output by equating the marginal revenue and the marginal cost. The MR=MC rule will
determine the profit maximizing output.
Essential Graph:
In the long run for a perfectly
competitive firm, after all the
changes in the market (more
demand for the product, firms
entering in search of profit, and
then firms exiting because
economic profits are gone), long
run equilibrium is established. In
the long run, a purely
competitive firm earns only
normal profit since MR=P=D=MC
at the lowest ATC. This condition
is both Allocative and Productive
Efficient.
MC
ATC
P
Pe
P=D=MR=AR
Qe
Q
P
MC
ATC
P
Unit
Cost
MR=MC
For a single price
monopolist, the output
is determined at the
MR=MC intersection
and the price is
determined where that
output meets the
demand curve.
D
Q
MR
Q
Teaching Suggestion: Be sure to allow students to practice the drawing of the shortrun graphs as the lead in to the understanding of the long-run equilibrium in
competitive firms and its meaning. Always begin with this lesson by showing why the
Demand curve and the MR curve are the same since a perfectly competitive seller
earns the price each time another unit is sold.
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Marginal Revenue Product = Marginal Resource Cost
Definition:
MRP is the increase in total revenue resulting from the use of each additional
variable input (like labor). The MRP curve is the resource demand curve.
Location of curve depends on the productivity and the price of the product.
MRP=MP x P
MRC is the increase in total cost resulting from the employment of each
additional unit of a resource; so for labor, the MRC is the wage rate.
Theory: It will be profitable for a firm to hire additional units of a resource up to the
point at which that resource’s MRP is equal to its MRC.
Essential Graphs:
In a purely competitive market:
large number of firms hiring a specific type of labor
numerous qualified, independent workers with identical skills
Wage taker behavior—no ability to control wage on either side
In a perfectly competitive resource market like labor, the resource price is
given to the firm by the market for labor, so their MRC is constant and is equal
to the wage rate. Each new worker adds his wage rate to the total wage
cost. Finding MRC=MRP for the firm will determine how many workers the firm
will hire.
Labor Market
Individual Firm
S
Wage
Rate
Wage
Rate
S = MRC
Wc
Wc
D = ∑ mrp’s
Qc
DL=mrp
qc
Quantity
Quantity
In a monopsonistic market, an employer of resources has monopolistic buying
(hiring) power. One major employer or several acting like a single monopsonist in
a labor market. In this market:
single buyer of a specific type of labor
labor is relatively immobile—geography or skill-wise
firm is ―wage maker‖ —wage rate paid varies directly with the # of workers
hired
MRC
Wage
Rate
S
b
Wc
Wm
a
MRP
c
Qm
Qc
The employer’s MRC curve lies
above the labor S curve since it
must pay all workers the higher
wage when it hires the next worker
the high rate to obtain his services.
Equating MRC with MRP at point b,
the monopsonist will hire Qm workers
and pay wage rate Wm.
Q
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TERM 1
DEFINITION 1
Definition: Scarcity is the fundamental economic problem of
having seemingly unlimited human needs and wants, in a
Scarcity
Principle
world of limited resources. -Makes Trade-offs necessary a.k.a. the no-free-lunch principle -More of one Good thing
usually means less of another Good thing. Examples: Time,
energy, money, etc.
TERM 2
DEFINITION 2
Economics
TERM 3
The study of how people make choices under conditions of
scarcity and of the results of those choices for society.
DEFINITION 3
Cost-Benefit
Principle
TERM 4
An individual (or a firm or a society) should take an action if,
and only if, the extra benefits from taking the action are at
least as great as the extra costs.
DEFINITION 4
Incentive
Principle
TERM 5
More Likely to take an action if the extra benefits of doing
something increase, or the extra costs of doing so decrease
Ex: Work Force issue, customer issue
DEFINITION 5
Rational
Thinking
Makes the best choice possible -Subject to information and
constraints
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TERM 6
DEFINITION 6
Payoff = Value - Price (all measured in dollars) -comparing
prices and "satisfaction" -Always compare to next best
Payoff
alternative *Value of a good may vary over time* -Look for
the payoff-maximizing choices Total Payoff = Total benefit Total cost
TERM 7
DEFINITION 7
Simplification of reality focused on relevant details -Does not
mean people calculate values explicitly--It just adds structure
Models
on how one might compare choices. Vb and Vs for "Values"
Pb and Ps for "Prices" ex: buy burger rather than sandwich if
Vb-Pb > Vs-Ps.
TERM 8
DEFINITION 8
What you must give up for the choice actually made. Explicit
cost + implicit cost ex: OC = Burger Price + Sandwich Payoff
Opportunity cost
$11 = $6 + ($13 - $8) ex: Payoffs: $12 - $6 (< or >) $13 - $8
$12 (< or >) $6 + ($13 - $8) *Best choices are when Value >
Opportunity cost*
TERM 9
DEFINITION 9
Implicit cost
TERM 10
Payoff of best foregone alternative
DEFINITION 10
Best Choices
Value > Opportunity Cost Economic Surplus > 0
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TERM 11
DEFINITION 11
Difference between choice's value and opportunity cost -It is
a choice's "Value Added" Surplus = Payoff - Next-Best Payoff
Economic Surplus
Ex: Burger Surplus = $12 - {$6 + ($13 - $80} = 1 Sandwich
Surplus = $13 - {$8 + ($12 - $6)} = -1 Best Choice is when
Economic Surplus > 0 -Means value outweighs opportunity
cost
TERM 12
DEFINITION 12
Marginal benefit
TERM 13
Change in total benefit from small change in amount of
activity
DEFINITION 13
Marginal cost
TERM 14
Change in total cost from small change in amount of activity
DEFINITION 14
Once paid, cannot be gotten back. ex: R&D and Advertising
Sunk cost
$$ are usually sunk costs -Subtracted from payoff regardless
of the action taken
TERM 15
DEFINITION 15
#'s used to argue for more units/trips/events per time period
Average benefit / Average cost
(to add value for less price) ex: total cost 4 flights/year =
$20B ..... avg cost $5B / flight *Says NOTHING about MB and
MC*
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TERM 16
DEFINITION 16
Production Possibilities curve
TERM 17
A curve which illustrates that with given resources, how
much can be produced. Slope = Opportunity cost
DEFINITION 17
Attainable points
TERM 18
Output combinations that are feasible.
DEFINITION 18
Unattainable points
TERM 19
Output combinations that are not feasible.
DEFINITION 19
Efficient points
TERM 20
Output combinations ON the PPC
DEFINITION 20
Inefficient points
Output combinations INSIDE the PPC
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TERM 21
DEFINITION 21
Gains from Trade
TERM 22
Reallocation of efforts and increase outputs
DEFINITION 22
Absolute
advantage
When compared to another person, one can produce more
total units of one of their products than the other can.
TERM 23
DEFINITION 23
A person does best by concentrating on activities for which
they have the lowest opportunity costs. -You have a
Comparative
advantage
comparative advantage if your opportunity cost is lower.
TERM 24
DEFINITION 24
Principle of Increasing Opportunity Cost
Use most productive resources first, then lesser -"Most
productive" means lowest opportunity cost -A.k.a. LowHanging Fruit Principle
TERM 25
DEFINITION 25
Demand
Relationship between price of a product and the quantity that
buyers want.
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TERM 26
DEFINITION 26
The Price that makes economic surplus = 0 -A.k.a. buyer's
Maximum willingness to pay
(WTP)
"reservation price" -Highest point on the Demand curve V - P
>or= Payoff of Next Best V - Payoff_NB > or = P Consumers
differ if: 1. their underlying values for the product differ 2.
their next-best alternatives' payoffs differ
TERM 27
DEFINITION 27
Relationship between price of a product and the quantity that
Supply
sellers want to provide.
TERM 28
DEFINITION 28
Minimum willingness to accept (WTA)
TERM 29
Lowest price that covers seller's opportunity costs -A.k.a.
seller's "reservation price" -Height of the Supply curve
DEFINITION 29
Market in equilibrium exploits all individual gains, but maybe
Equilibrium
Principle
not all gains from collective action. -Gives both buyers and
sellers a positive surplus.
TERM 30
DEFINITION 30
Social welfare
Economic surplus of society, not just market participants. Efficient -Pursuing self-interest maximizes group welfare
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TERM 31
DEFINITION 31
Costs/Benefits outside the market created by doing
Externalities
something inside the market. ex: getting a flu shot is
beneficial to those around you. Pollution from chemical
plants harms downstream
TERM 32
DEFINITION 32
Efficiency
Principle
Efficiency an important social goal: a bigger economic pie
means everyone can have more
TERM 33
DEFINITION 33
Price floors / Price ceuilings
TERM 34
Minimum allowable prices Maximum allowable prices
DEFINITION 34
Controls BIND if price differs from equilibrium
TERM 35
Controls "bind" if price differs from equilibrium
DEFINITION 35
Substitution effect
As good gets more expensive, switch to other goods
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TERM 36
DEFINITION 36
Income effect
TERM 37
As good gets more expensive, total purchasing power
declines
DEFINITION 37
Comparative statics
TERM 38
How changes in environment affect outcomes
DEFINITION 38
Inverse Demand Curve
TERM 39
Price as a function of Quantity Demanded
DEFINITION 39
Inverse Supply curve
Price as a function of Quantity Supplied ex: P = 20 + Q
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Midterm Examination 1, Fall 2011, B. Modjtahedi
Question 1
What is the correct definition of microeconomics?
A. Microeconomics studies the decisions made by one individual decision making unit and
economic conditions prevailing in one particular market or industry.
B. Microeconomics studies the decisions made by consumers and economic conditions
prevailing in the economy.
C. Microeconomics studies the decisions made by producers and economic conditions
prevailing in the economy.
D. Microeconomics studies the decisions made by the government.
E. None of the above.
Question 2
Which of the following is a normative statement?
A.
B.
C.
D.
E.
Most Americans do not have health insurance.
The unemployment rate is 9.1%.
The majority of economists in the U.S. have PhDs.
The current unemployment rate is way too high.
None of the above.
Question 3
When does a society achieve allocative efficiency?
A. When the marginal social benefits of producing all the goods and services exceed their
marginal social costs.
B. When the marginal social costs of producing all the goods and services exceed their
marginal social benefits.
C. When the marginal social benefits of producing all the goods and services just equal their
marginal social costs.
D. All of the above.
E. None of the above.
Question 4
You are thinking of installing a solar panel on your rooftop to reduce your monthly electric bill.
You look around and find a solar panel that, if installed, will reduce your monthly electric bill by
$50. The solar panel will last for 10 years. Since you don’t have cash, you call your bank to take
out a loan. The bank offers you a 10-year loan with a principal and interest payment of $40 per
month. What is the marginal benefit of installing the solar panel?
A.
B.
C.
D.
E.
$50
$40
$10
$90
None of the above.
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Question 5
For a seller of a product, the marginal cost of a unit of the product is
A. The amount of money that if received, will leave him no better of or no worse off than
before.
B. The minimum amount of money or other goods she will accept for it.
C. The opportunity cost of producing or acquiring it.
D. All of the above.
E. None of the above.
A
B
P
P
Q
Q
C
D
P
P
Q
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Q
Question 6
Consider the linear supply-demand functions in the graph above. A dashed line indicates the new
demand or supply function after the original one has shifted in the direction of the arrow. Which
figure shows the effect of adopting more efficient watering techniques by farmers in the market for
strawberries, all else the same?
A.
B.
C.
D.
E.
Figure A
Figure B
Figure C
Figure D
None of the above.
Question 7
Consider the linear supply-demand functions in the graph above. A dashed line indicates the new
demand or supply function after the original one has shifted in the direction of the arrow. Which
figure shows the effect of income growth in China, India, and Middle East in the global market for
crude oil, all else the same?
A.
B.
C.
D.
E.
Figure A
Figure B
Figure C
Figure D
None of the above.
Question 8
Consider the linear supply-demand functions in the graph above. A dashed line indicates the new
demand or supply function after the original one has shifted in the direction of the arrow. Which
figure shows the effect of an increase in the price of imported memory board (a component of
computers) from China in the market for computers in the United States, all else the same?
A.
B.
C.
D.
E.
Figure A
Figure B
Figure C
Figure D
None of the above.
Question 9
Consider the linear supply-demand functions in the graph above. A dashed line indicates the new
demand or supply function after the original one has shifted in the direction of the arrow. Which
figure shows the effect of an increase in gasoline prices in the market for tires, all else the same?
A.
B.
C.
D.
E.
Figure A
Figure B
Figure C
Figure D
None of the above.
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A
B
P
P
Q
Q
C
D
P
P
Q
Q
Question 10
Consider the linear supply-demand functions in the graph above. A dashed line indicates the new
demand or supply function after the original one has shifted in the direction of the arrow. The
government levies a tax on the sale of cigarettes and at the same time it publicizes the adverse
health effects of smoking. Which figure shows the effect of these two events in the market for
cigarettes, all else the same?
A.
B.
C.
D.
E.
Figure A
Figure B
Figure C
Figure D
None of the above.
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Question 11
What will happen if demand for cell phones decreases and the supply of cell phones increases?
A.
B.
C.
D.
E.
Equilibrium price will increase, equilibrium quantity will increase
Equilibrium price will increase, equilibrium quantity may increase of decrease
Equilibrium price will decrease, equilibrium quantity may increase or decrease
Equilibrium price may increase or decrease, equilibrium quantity will decrease
None of the above.
Question 12
Consider the market for soybeans with linear supply and demand functions. From 2007 to 2008
the equilibrium price has increased but the equilibrium quantity has decreased. Which of the
following events could produce the above empirical observation?
A.
B.
C.
D.
E.
Supply has decreased by 50,000 tons; demand has decreased by 30,000 tons.
Supply has decreased by 50,000 tons; demand has decreased by 70,000 tons.
Supply has decreased by 50,000 tons; demand has increased by 70,000 tons.
Supply has increased by 50,000 tons; demand has decreased by 70,000 tons.
None of the above.
Question 13
During the cold war many socialist countries decided to produce large amounts of military goods
instead of consumer products. This is an example of responding to which of the following
economic questions?
A.
B.
C.
D.
E.
What?
How?
For whom?
All of the above.
None of the above.
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110
100
F
B
90
80
C
70
Y 60
50
A
40
D
30
20
10
E
0
0
1
2
3
4
5
X
Question 14
Consider the PPF above. If the economy gets out of a recession and employment starts
increasing,
A.
B.
C.
D.
E.
The economy will move from a point like B to a point like C.
The economy will move from a point like C to a point like F.
The economy will move from a point like E to a point like C.
The economy will move from a point like A to a point like E.
None of the above.
Question 15
Which of the following statements is true for sure about the PPF above?
A.
B.
C.
D.
E.
Point E cannot be economically efficient.
Point A can be Pareto efficient.
At point A we have unemployment.
Point F is allocatively efficient.
None of the above.
Question 16
Consider the PPF above. What can you claim for sure to be the reason why this PPF is concave
to the origin?
A.
B.
C.
D.
E.
Both industries exhibit increasing returns to labor.
Both industries exhibit diminishing returns to labor.
Both industries exhibit constant returns to labor.
At least one of industries exhibits diminishing returns to labor.
None of the above.
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Question 17
Consider the PPF above. In the absence of any externalities, the marginal social cost of
increasing the production of X from 3 to 4 units equals:
A.
B.
C.
D.
E.
90 units of Y
70 units of Y
40 units of Y
20
None of the above.
Question 18
Consider the PPF above. Suppose that point C is allocatively efficient and there are no
externalities. Then:
A.
B.
C.
D.
E.
At point B the marginal social cost of X exceeds its marginal social benefit.
At point D the marginal social benefit of X exceeds its marginal social cost.
At point E the marginal social benefit of X exceeds its marginal social cost.
At point B the marginal social benefit of X exceeds its marginal social cost.
None of the above.
Question 19
Which of the following statements is true?
A. If we can produce more of one good without having to produce less of another, then we
have achieved Pareto efficiency.
B. If we can make at least one person better off without hurting any one else, then we have
achieved productive efficiency.
C. If we can make at least one person better off without hurting any one else, then we have
achieved Pareto efficiency.
D. If we can make at least one person better off without hurting any one else, then we have
not achieved Pareto efficiency.
E. None of the above.
Question 20
The demand for which of the following products is expected to have the greatest substitution
effect?
A.
B.
C.
D.
E.
Toyota Corolla
Toyota in general
Cars in general
All means of transportation.
None of the above.
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Question 21
Which of the following statements is correct?
A.
B.
C.
D.
E.
If demand is price-elastic and the price falls, total revenue will decrease.
If demand is price-elastic and the price rises, total revenue will increase.
If demand is price-inelastic and the price falls, total revenue will decrease.
If demand is price-inelastic and the price falls, total revenue will increase.
None of the above.
$55
$50
$45
$40
$35
P
$30
$25
$20
$15
$10
$5
$0
0
1
2
3
4
5
6
7
8
9
10
11
q
Question 22
The figure above shows a consumer’s demand function for a product. What is the total
willingness to pay of this consumer for four units? (Use geometric formulas to calculate)
A.
B.
C.
D.
E.
$150
$160
$170
$180
None of the above.
Question 23
The figure above shows a consumer’s demand function for a product. What will be the change in
the consumer surplus if the price drops from $30 to $20? (Use geometric formulas to calculate)
A.
B.
C.
D.
E.
$40
$50
$60
$70
None of the above.
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Question 24
In the Retirement Consumption Puzzle, why did the food expenditures decline after retirement?
A.
B.
C.
D.
E.
Marginal cost of time decreased after retirement.
Marginal cost of time increased after retirement.
Government subsidies of food for retirees reduced food expenditures
Retirees reduced the quantity of food consumed after retirement
None of the above.
$50
$45
$40
$35
$30
P
$25
$20
$15
$10
$5
$0
0
1
2
3
4
5
6
7
8
9
10
q
Question 25
The figure above shows a consumer’s demand function for a normal good. Suppose that the price
falls from $25 to $20. How much should we pay to the consumer or take away from her to
eliminate the income effect of this price change?
A.
B.
C.
D.
E.
Give her $20
Give her $10
Take away from her $10
Take away from her $20
None of the above.
Question 26
The figure above shows a consumer’s demand function for a normal good. Suppose that the price
falls from $35 to $25. What will be the arc-elasticity of demand for this price change?
A.
B.
C.
D.
E.
|e| = 2.25
|e| = 2.00
|e| = 0.80
|e| = 0.50
None of the above.
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Question 27
An electric utility company replaces all the electrical appliances owned by a household by new
ones that use half as much electricity. How will this appliance replacement program affect the
price elasticity of demand for electricity by this household, and for the reason given, all else the
same?
A. The share of electricity in the household’s budget will decrease. Consequently a price
change will have a larger income effect. As a result demand will become less elastic.
B. The share of electricity in the household’s budget will decrease. Consequently a price
change will have a smaller income effect. As a result demand will become less elastic.
C. The share of electricity in the household’s budget will decrease. Consequently a price
change will have a larger substitution effect. As a result demand will become less elastic.
D. The share of electricity in the household’s budget will decrease. Consequently a price
change will have a smaller substitution effect. As a result demand will become less
elastic.
E. None of the above.
P
$5
2009
$2
2010
Q
1,000
Question 28
The figure above shows two equilibrium points in the market for a product in the United States in
2009 and 2010. What has happened in this market for sure between these two years, all else the
same?
A.
B.
C.
D.
E.
Supply has increased, demand has decreased.
Supply has increased, demand has not changed.
Demand has decreased, supply has not changed.
Any of the above could be a correct answer.
None of the above.
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P
20
Q
800
Question 29
Consider the above market demand function for a product. In which of the following scenarios will
the producers’ total revenue most likely increase following a price change?
A.
B.
C.
D.
E.
The price increases from $15 per unit to $16 per unit.
The price decreases from $17 per unit to $16 per unit.
The price decreases from $5 per unit to $4 per unit.
The price increases from $9 per unit to $11 per unit.
None of the above.
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TR
C
B
D
A
Q
800
Question 30
Consider the above total revenue function for a product. For which of the following movements
along this revenue function would the corresponding demand function exhibit the greatest (arc)
price elasticity (in absolute value)?
A.
B.
C.
D.
E.
Point A to point B.
Point B to point C.
Point B to point D.
Point C to point D.
None of the above.
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