Exam 2 Review
1. Explain the origin of both consumer surplus and producer surplus; and explain how properly
functioning markets maximize their sum; total surplus; while optimally allocating resources.
2. Describe free riding and public goods; and illustrate why private firms cannot normally
produce public goods.
3. Explain how positive and negative externalities cause under- and overallocations of resources
.
4. Show why we normally wont want to pay what it would cost to eliminate every last bit of a
negative externality such as air pollution.
5. Describe how governments power to coerce can be economically beneficial and list some of
the difficulties associated with managing and directing the government.
6. Discuss "government failure" and explain why it happens.
7. (Appendix) Explain the difficulties of conveying economic preferences through majority
voting.
8. Discuss price elasticity of demand and how it is calculated.
9. List the factors that affect price elasticity of demand and describe some applications of price
elasticity of demand.
10. Describe price elasticity of supply, its’ application and how to calculate it
11. Apply cross elasticity of demand and income elasticity of demand and how it is calculated
12. Define and explain the relationship between total utility; marginal utility; and the law of
diminishing marginal utility.
13. Describe how rational consumers maximize utility by comparing the marginal utility-toprice ratios of all the products they could possibly purchase.
14. Give examples of several realworld phenomena that can be explained by applying the theory of consumer behavior.
15. (Appendix) Relate how the indifference curve model of consumer behavior derives demand
curves from budget lines; indifference curves; and utility maximization.
16. Be able to calculate consumer surplus and producer surplus
17. Be able to identify efficiency loss when there is over production and underproduction using a
graph
18. Read your “consider this” article in the book and be able to analyze it
19. Lastly, review all the problems that was assigned in class