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Microeconomics Chapter 1: The Art and Science of Economic Analysis The Economic Problem Wants, desires: unlimited Resources: scarce Not freely available Economic choice Economics How people use scarce resources to satisfy unlimited wants Resources Inputs; factors of production Used to produce goods and services Goods and services are scarce because resources are scarce Labor Capital Natural resources Entrepreneurial ability *Labor -Physical and mental effort used to produce goods and services -We allocate our time to different uses -Payment: Wage Capital Buildings, equipment, and human skills used to produce goods and services Physical capital Human creations used to produce goods and services Human capital Knowledge and skill people acquire to increase their productivity Payment: Interest Natural resources All gifts of nature Renewable resource Can be drawn on indefinitely if used conservatively Exhaustible resource Does not renew itself Available in a limited amount Payment: Rent *Entrepreneurial ability -Imagination required to develop a new product or process -Skill needed to organize production -Willingness to take the risk of profit or loss -Payment: Profit Entrepreneur Profit-seeking decision maker who starts with an idea Organizes an enterprise to bring that idea to life Assumes the risk of the operation Goods and Services Good Tangible product used to satisfy human wants Service Activity, or intangible product, used to satisfy human wants Scarcity When the amount people desire exceeds the amount available at a zero price *Scarce good/service -The amount people desire exceeds the amount available at a zero price *Choice -Give up some goods and services Bads We want none of them; not even at a zero price Free goods and services “There is no such thing as a free lunch” Involve a cost to someone Economic Decision Makers Households Consumers Demand goods and services Resource owners Supply resources Firms, Governments, Rest of the World Demand resources Produce goods and services Markets Market Set of arrangements by which buyers and sellers carry out exchange at mutually agreeable terms Product markets Goods and services are bought and sold Resource markets Resources are bought and sold A Simple Circular-Flow Model Flow of Resources Products Income Revenue Among economic decision makers Interaction Households Firms The simple circular-flow model for households and firms *Households earn income by supplying resources to the resource market, as shown in the lower portion of the model. Firms demand these resources to produce goods and services, which they supply to the product market, as shown in the upper portion of the model. Households spend their income to demand these goods and services. This spending flows through the product market as revenue to firms. Rational Self-Interest Individuals are rational Make the best choice Given the available information Maximize expected benefit With a given cost Minimize expected cost For a given benefit The lower the personal cost of helping others, the more help we offer Choice Requires Time & Information Time and information Scarce Valuable Rational decision makers Willing to pay for information Improve choices Acquire information: Additional benefit expected exceeds the additional cost Economic Analysis Is Marginal Analysis Comparison Expected marginal benefit Expected marginal cost Marginal Incremental, additional, extra Rational decision maker: Change the status quo if expected marginal benefit exceeds expected marginal cost Microeconomics & Macroeconomics Microeconomics Study of the economic behavior in particular markets Individual economic choices Markets coordinate the choices of economic decision makers Individual pieces of the puzzle Macroeconomics -Study of the economic behavior of entire economies -Performance of the economy as a whole -Economic fluctuations -Rise and fall of economic activity -Relative to the long-term growth trend of the economy -Business cycles The Science of Economic Analysis Economic theory / model Simplification of economic reality Make predictions about cause and effect in the real world Good theory Guide Sort, save, understand information The Scientific Method Identify the question and define relevant variables Specify assumptions Other-things-constant Behavioral assumptions Formulate the hypothesis Key variables relate to each other Test the hypothesis - evidence Variable -A measure that can take on different values at different times -Other-things-constant assumption -Other variables remain unchanged -Ceteris paribus Behavioral assumption Describes the expected behavior of economic decision makers, what motivates them Hypothesis Theory about how key variables relate The Scientific Method: Step by Step The steps of the scientific method are designed to develop and test hypotheses about how the world works. The objective is a theory that predicts outcomes more accurately than the best alternative theory. A hypothesis is rejected if it does not predict as accurately as the best alternative. A rejected hypothesis can be modified or reworked in light of the test results. Normative Versus Positive Positive economic statement Can be proved or disproved by reference to facts ‘What is’ Normative economic statement Reflects an opinion, which cannot be proved or disproved by reference to the facts ‘What should be’ Predicting Average Behavior Individual behavior Difficult to predict Random actions of individuals Offset one another Average behavior of groups Predicted more accurately Pitfalls of Faulty Economic Analysis Fallacy = incorrect idea / belief The fallacy that association is causation If two variables are associated in time, one must necessarily cause the other The fallacy of composition What is true for the individual, or part, must necessarily be true for the group, or the whole -The mistake of ignoring the secondary effects -Unintended consequences -Secondary effects -Unintended consequences of economic actions that may develop slowly over time as people react to events Median Annual Pay by College Major Understanding Graphs Origin Horizontal axis Vertical axis Graph Functional relation The value of the dependent variable depends on the value of the independent variable Basics of a graph Any point on a graph represents a combination of particular values of two variables. Here point a represents the combination of 5 units of variable x (measured on the horizontal axis) and 15 units of variable y (measured on the vertical axis). Point b represents 10 units of x and 5 units of y. U.S. Unemployment rate since 1900 A time-series graph depicts the behavior of some economic variable over time. Shown here are U.S. unemployment rates since 1900. Drawing Graphs Types of relations between variables Positive; direct As one variable increases, the other increases Negative; inverse As one variable increases, the other decreases Independent; unrelated As one variable increases, the other remains unchanged Schedule Relating Distance Traveled to Hours Driven The distance traveled per day depends on the number of hours driven per day, assuming an average speed of 50 miles per hour. This table shows combinations of hours driven and distance traveled. These combinations are shown as points in Exhibit 7. Graph Relating Distance Traveled to Hours Driven Points a through e depict different combinations of hours driven per day and the corresponding distances traveled. Connecting these points creates a graph. Slopes of Straight Lines Slope Change in vertical variable For a given increase in horizontal variable Slope = Change in the vertical distance/ Increase in the horizontal distance Slope of a straight line The same value along the line Alternative slopes for straight lines The slope of a line indicates how much the vertically measured variable changes for a given increase in the variable measured along the horizontal axis. Panel (a) shows a positive relation between two variables; the slope is 0.5, a positive number. Panel (b) depicts a negative, or inverse, relation. When the x variable increases, the y variable decreases; the slope is 0.7, a negative number. Panels (c) and (d) represent situations in which two variables are unrelated. In panel (c), the y variable always takes on the same value; the slope is 0. In panel (d), the x variable always takes on the same value; the slope is mathematically undefined but we simplify by assuming the slope is infinite. Slopes Value of slope Depends on units of measurement Measures marginal effects Slope of a curved line Differs along the curve Slope of a curved line at one point Slope of the tangent Slope depends on the unit of measure The value of the slope depends on the units of measure. In panel (a), output is measured in feet of copper tubing; in panel (b), output is measured in yards. Although the cost is $1 per foot in each panel, the slope is different in the two panels because copper tubing is measured using different units. Slope at different points on a curved line The slope of a curved line varies from point to point. At a given point, such as a or b, the slope of the curve is equal to the slope of the straight line that is tangent to the curve at the point. Some curves have both positive and negative slopes. The hill-shaped curve (in red) has a positive slope to the left of point a, a slope of 0 at point a, and a negative slope to the right of that point. The U-shaped curve (in blue) starts off with a negative slope, has a slope of 0 at point b, and has a positive slope to the right of that point. Line Shifts Change in the assumption Changes the relationship between variables Expressed by a line shift Shift of line relating distance traveled to hours driven Line T appeared originally in Exhibit 7 to show the relation between hours driven and distance traveled per day, assuming an average speed of 50 miles per hour. If the average speed is only 40 miles per hour, the entire relation shifts to the right to T, indicating that any given distance traveled requires more driving time. For example, 200 miles traveled takes 4 hours of driving at 50 miles per hour but 5 hours at 40 miles per hour. This figure shows how a change in assumptions, in this case, the average speed assumed, can shift the entire relationship between two variables. Chapter 2: Economic Tools and Economic Systems Choice and Opportunity Cost Scarcity Make a choice Pass up another opportunity Opportunity cost The value of the best alternative forgone when an item or activity is chosen Opportunity lost Monetary aspect Non-monetary aspect Opportunity Cost Opportunity cost is subjective ‘the road not taken’ Calculating opportunity cost Requires time and information Time: the ultimate constraint Opportunity cost varies with circumstance Depends on the alternative Sunk Cost and Choice Sunk cost Has already been incurred Cannot be recovered Irrelevant for present and future economic decisions Economic decision makers Relevant: costs affected by the choice Irrelevant: sunk costs Law of Comparative Advantage Specialize in the task that you do better Law of comparative advantage The individual, firm, region, or country With the lowest opportunity cost of producing a particular good Should specialize in that good Specialization and exchange Better off *Absolute advantage -Ability to make something -Using fewer resources than other producers use *Comparative advantage -Ability to make something -At a lower opportunity cost than other producers face Specialization and Exchange Barter Direct exchange of one product for another without using money Simple economies Few goods, little specialization Money facilitates exchange Degree of specialization Limited by the extent of the market Division of Labor Division of labor Breaking down the production of a good into separate tasks Increased productivity Downside: Repetitive Tedious Routine tasks – robots *Specialization of labor -Takes advantage of individual preferences and natural abilities -Allows workers to develop more experience at a particular task -Reduces the need to shift between different tasks -Permits the introduction of labor-saving machinery Efficiency and the PPF Production Possibilities Frontier (PPF) Assumptions Output: consumer and capital goods Production: 1 year Fixed resources (quantity, quality) Fixed technology Fixed ‘rules of the game’ Resources - scarce for the economy Economy’s production options PPF A curve showing alternative combinations of goods That can be produced when available resources are used efficiently A boundary line between inefficient and unattainable combinations *Efficiency -When there is no way resources can be reallocated to increase the production of one good without decreasing the production of another -Getting the most from available resources *Inefficient combinations *Unattainable combinations The Economy’s Production Possibilities Frontier If the economy uses its available resources and technology efficiently to produce consumer goods and capital goods, that economy is on the production possibilities frontier, AF. The PPF is bowed out to reflect the law of increasing opportunity cost; the economy must sacrifice more and more units of consumer goods to produce an additional increment of capital goods. Note that more consumer goods must be given up in moving from E to F than in moving from A to B, although in each case the gain in capital goods is 10 million units. Points inside the PPF, such as I, represent inefficient use of resources. Points outside the PPF, such as U, represent unattainable combinations. The Shape of the PPF Movement down along PPF Give up some consumer goods to get more capital goods Law of increasing opportunity costs To produce more of one good, a successively larger amount of the other good must be sacrificed Slope of PPF Opportunity cost of 1 unit capital good What Can Shift the PPF? Economic growth An increase in the economy’s ability to produce goods and services Outward shift of the economy’s PPF Changes in resource availability Outward shift of PPF – increase in: Size, health of labor force Skills of labor force Availability of other resources Shifts of the Economy’s Production Possibilities Frontier When the resources available to an economy change, the PPF shifts. If more resources become available, if technology improves, or if the rules of the game improve, the PPF shifts outward, as in panel (a), indicating that more output can be produced. A decrease in available resources causes the PPF to shift inward, as in panel (b). Panel (c) shows a change affecting consumer goods production. More consumer goods can now be produced at any given level of capital goods. Panel (d) shows a change affecting capital goods production. Best 10 & worst 10 (183 countries): ease of doing business What We Learn from the PPF? Efficiency Scarcity Opportunity cost Law of increasing opportunity cost Economic growth Choice Costs Benefits Economic Systems Three questions What? How? For whom? Economic system Set of mechanisms and institutions That resolve the what, how, and for whom questions Criteria Ownership of resources Allocation of resources Incentives Range from Pure capitalism, to Pure command system Pure Capitalism Private property rights An owner’s right to use, rent, or sell resources or property Unregulated markets Answer the three questions Resources – most productive use Goods and services – most valued Voluntary buying and selling Adam Smith (1723–1790) Market forces allocate resources as if by an “invisible hand” Unseen force that harnesses the pursuit of self-interest To direct resources where they earn the greatest reward Although each individual pursues his or her self-interest “Invisible hand” promotes general welfare Pure Capitalism: Flaws No central authority People with no resources could starve Monopoly Side effects for people not involved No public goods Pure Command System Public/communal ownership of property Government planners Central plans Direct resources Coordinate production Answer the three questions Communism Pure Command System: Flaws Resources Used inefficiently Wasted (no incentives) Preferences of planners Limited variety of products Less freedom of economic choice Mixed and Transitional Economies Increasing role of government In capitalist economies Increasing role of markets In command economies Government Economic activity Regulates the private sector Economies based on Custom or Religion association-iscausation fallacy The incorrect idea that if two variables are associated in time, one must necessarily cause the other behavioral assumption An assumption that describes the expected behavior of economic decision makers, what motivates them Capital The buildings, equipment, and human skills used to produce goods and services circular-flow model A diagram that traces the flow of resources, products, income, and revenue among economic decision makers dependent variable a variable whose value depends on that of the independent variable economic fluctuations The rise and fall of economic activity relative to the long-term growth trend of the economy; also called business cycles economic theory, or economic model A simplification of reality used to make predictions about cause and effect in the real world Economics The study of how people use their scarce resources to satisfy their unlimited wants entrepreneur A profit-seeking decision maker who starts with an idea, organizes an enterprise to bring that idea to life, and assumes the risk of the operation entrepreneurial ability The imagination required to develop a new product or process, the skill needed to organize production, and the willingness to take the risk of profit or loss fallacy of composition The incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or the whole good A tangible product used to satisfy human wants graph a picture showing how variables relate in two dimensional space; one variable is measured along the horizontal axis and the other along the vertical axis horizontal axis line on a graph that begins at the origin and goes to the right and left; sometimes called the x axis hypothesis A theory about how key variables relate independent variable a variable whose value determines that of the dependent variable interest Payment to resource owners for the use of their capital Labor The physical and mental effort used to produce goods and services macroeconomics The study of the economic behavior of entire economies, as measured, for example, by total production and employment marginal Incremental, additional, or extra; used to describe a change in an economic variable market A set of arrangements by which buyers and sellers carry out exchange at mutually agreeable terms microeconomics The study of the economic behavior in particular markets, such as that for computers or unskilled labor natural resources All gifts of nature used to produce goods and services; includes renewable and exhaustible resources negative relation (inverse relation) occurs when two variables move in opposite directions; when one increases, the other decreases normative economic statement A statement that reflects an opinion, which cannot be proved or disproved by reference to the facts origin on a graph depicting two-dimensional space, the zero point other-things constant assumption The assumption, when focusing on the relation among key economic variables, that other variables remain unchanged; in Latin, ceteris paribus positive economic statement A statement that can be proved or disproved by reference to facts positive relation (direct relation) occurs when two variables increase or decrease together; the two variables move in the same direction product market A market in which a good or service is bought and sold profit Reward for entrepreneurial ability; sales revenue minus resource cost rational self-interest Each individual tries to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit rent Payment to resource owners for the use of their natural resources resource market A market in which a resource is bought and sold Resources The inputs, or factors of production, used to produce the goods and services that people want; resources consist of labor, capital, natural resources, and entrepreneurial ability scarcity Occurs when the amount people desire exceeds the amount available at a zero price secondary effects Unintended consequences of economic actions that may develop slowly over time as people react to events service An activity, or intangible product, used to satisfy human wants slope of a line a measure of how much the vertical variable changes for a given increase in the horizontal variable; the vertical change between two points divided by the horizontal increase tangent a straight line that touches a curve at a point but does not cut or cross the curve; used to measure the slope of a curve at a point variable A measure, such as price or quantity, that can take on different values at different times vertical axis line on a graph that begins at the origin and goes up and down; sometimes called the y axis wages Payment to resource owners for their labor Chapter 2: absolute advantage The ability to make something using fewer resources than other producers use barter The direct exchange of one product for another without using money comparative advantage The ability to make something at a lower opportunity cost than division of labor Breaking down the production of a good into separate tasks economic growth An increase in the economy’s ability to produce goods and services; reflected by an outward shift of the economy’s production possibilities frontier economic system The set of mechanisms and institutions that resolve the what, how, and for whom questions efficiency The condition that exists when there is no way resources can be reallocated to increase the production of one good without decreasing the production of another; getting the most from available resources law of comparative advantage The individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good law of increasing opportunity cost To produce more of one good, a successively larger amount of the other good must be sacrificed mixed system An economic system characterized by the private ownership of some resources and the public ownership of other resources; some markets are regulated by government opportunity cost The value of the best alternative forgone when an item or activity is chosen private property rights An owner’s right to use, rent, or sell resources or property Production possibilities frontier (PPF) A curve showing alternative combinations of goods that can be produced when available resources are used efficiently; a boundary line between inefficient and unattainable combinations pure capitalism An economic system characterized by the private ownership of resources and the use of prices to coordinate economic activity in unregulated markets pure command system An economic system characterized by the public ownership of resources and centralized planning specialization of labor Focusing work effort on a particular product or a single task sunk cost A cost that has already been incurred, cannot be recovered, and thus is irrelevant for present and future economic decisions Chapter 1 Economics is the study of how people choose to use their scarce resources to produce, exchange, and consume goods and services in an attempt to satisfy unlimited wants. The economic problem arises from the conflict between scarce resources and unlimited wants. If wants were limited or if resources were not scarce, there would be no need to study economics. Economic resources are combined in a variety of ways to produce goods and services. Major categories of resources include labor, capital, natural resources, and entrepreneurial ability. Because economic resources are scarce, only a limited number of goods and services can be produced with them. Therefore, goods and services are also scarce, so choices must be made.Microeconomics focuses on choices made in households, firms, and governments and how these choices affect particular markets, such as the market for used cars. Choice is guided by rational selfinterest. Choice typically requires time and information, both of which are scarce and valuable. Whereas microeconomics examines the individual pieces of the puzzle, macroeconomics steps back to consider the big picture—the performance of the economy as a whole as reflected by such measures as total production, employment, the price level, and economic growth. Economists use theories, or models, to help understand the effects of an economic change, such as a change in price or income, on individual choices and how these choices affect particular markets and the economy as a whole. Economists employ the scientific method to study an economic problem by (a) formulating the question and isolating relevant variables, (b) specifying the assumptions under which the theory operates, (c) developing a theory, or hypothesis, about how the variables relate, and (d) testing that theory by comparing its predictions with the evidence. A theory might not work perfectly, but it is useful as long as it predicts better than competing theories do. Positive economics aims to discover how the economy works. Normative economics is concerned more with how, in someone’s opinion, the economy should work. Those who are not careful can fall victim to the fallacy that association is causation, to the fallacy of composition, and to the mistake of ignoring secondary effects. Chapter 2 Resources are scarce, but human wants are unlimited. Because you cannot satisfy all your wants, you must choose, and whenever you choose, you must forgo some option. Choice involves an opportunity cost. The opportunity cost of the selected option is the value of the best alternative forgone. The law of comparative advantage says that the individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in that good. Specialization according to the law of comparative advantage promotes the most efficient use of resources. The specialization of labor increases efficiency by (a) taking advantage of individual preferences and natural abilities, (b) allowing each worker to develop expertise and experience at a particular task, (c) reducing the need to shift between different tasks, and (d) allowing for the introduction of more specialized machines and large-scale production techniques. The production possibilities frontier, or PPF, shows the productive capabilities of an economy when all resources are used efficiently. The frontier’s bowed-out shape reflects the law of increasing opportunity cost, which arises because some resources are not perfectly adaptable to the production of different goods. Over time, the frontier can shift in or out as a result of changes in the availability of resources, in technology, or in the rules of the game. The frontier demonstrates several economic concepts, including efficiency, scarcity, opportunity cost, the law of increasing opportunity cost, economic growth, and the need for choice. All economic systems, regardless of their decisionmaking processes, must answer three basic questions: What is to be produced? How is it to be produced? And for whom is it to be produced? Economies answer the questions differently, depending on who owns the resources and how economic activity is coordinated. Economies can be directed by market forces, by the central plans of government, or, in most cases, by a mix of the two. Chapter 3 Most household income arises from the sale of labor, and most household income is spent on personal consumption, primarily services. Household members once built their own homes, made their own clothes and furniture, grew their own food, and supplied their own entertainment. Over time, however, the efficiency arising from comparative advantage resulted in a greater specialization among resource suppliers. Firms bring together specialized resources and in the process reduce the transaction costs of bargaining with all these resource providers. U.S. firms can be organized in three different ways: as sole proprietorships, partnerships, or corporations. Because corporations are typically large, they account for the bulk of sales. When private markets yield undesirable results, government may intervene to address these market failures. Government programs are designed to (a) protect private property ad enforce contracts; (b) promote competition; (c) regulate natural monopolies; (d) provide public goods; (e) discourage negative externalities and encourage positive externalities; (f) promote a more even distribution of income; and (g) promote full employment, price stability, and economic growth. In the United States, the federal government has primary responsibility for providing national defense, ensuring market competition, and promoting stability of the economy. State governments provide public higher education, prisons, and—with aid from the federal government—highways and welfare. And local governments provide police and fire protection, and, with help from the state, local schools. The federal government relies primarily on the personal income tax, states rely on income and sales taxes, and localities rely on the property tax. A tax is often justified based on (a) the individual’s ability to pay or (b) the benefits the taxpayer receives from the activities financed by the tax. The rest of the world is also populated by households, firms, and governments. International trade creates gains that arise from comparative advantage. The balance of payments summarizes transactions between the residents of one country and the residents of the rest of the world. Although consumers gain from comparative advantage, nearly all countries impose trade restrictions to protect specific domestic industries. Chapter 4 Demand is a relationship between the price of a product and the quantity consumers are willing and able to buy per period, other things constant. According to the law of demand, quantity demanded varies negatively, or inversely, with the price, so the demand curve slopes downward. A demand curve slopes downward for two reasons. A price decrease makes consumers (a) more willing to substitute this good for other goods and (b) more able to buy the good because the lower price increases real income. Assumed to remain constant along a demand curve are (a) money income, (b) prices of other goods, (c) consumer expectations, (d) the number or composition of consumers in the market, and (e) consumer tastes. A change in any of these will shift, or change, the demand curve. Supply is a relationship between the price of a good and the quantity producers are willing and able to sell per period, other things constant. According to the law of supply, price and quantity supplied are usually positive, or directly, related, so the supply curve typically slopes upward.The supply curve slopes upward because higher prices make producers (a) more willing to supply this good rather than supply other goods that use the same resources and (b) more able to cover the higher marginal cost associated with greater output rates. Assumed to remain constant along a supply curve are (a) the state of technology, (b) the prices of resources used to produce the good, (c) the prices of other goods that could be produced with these resources, (d) supplier expectations, and (e) the number of producers in this market. A change in any of these will shift, or change, the supply curve. Demand and supply come together in the market for the good. A market provides information about the price, quantity, and quality of the good. In doing so, a market reduces the transaction costs of exchange—the costs of time and information required for buyers and sellers to make a deal. The interaction of demand and supply guides resources and products to their highest-valued use. Impersonal market forces reconcile the personal and independent plans of buyers and sellers. Market equilibrium, once established, will continue unless there is a change in a determinant that shapes demand or supply. Disequilibrium is usually temporary while markets seek equilibrium, but sometimes disequilibrium lasts a while, such as when government regulates the price. A price floor is the minimum legal price below which a particular good r service cannot be sold. The federal government imposes price floors on some agricultural products to help farmers achieve a higher and more stable income than would be possible with freer markets. If the floor price is set above the market clearing price, quantity supplied exceeds quantity demanded. Policy makers must figure out some way to prevent this surplus from pushing the price down. A price ceiling is a maximum legal price above which a particular good or service cannot be sold. Governments sometimes impose price ceilings to reduce the price of some consumer goods such as rental housing. If the ceiling price is below the market clearing price, quantity demanded exceeds the quantity supplied, creating a shortage. Because the price system is not allowed to clear the market, other mechanisms arise to ration the product among demanders. Chapter 5 The price elasticities of demand and supply show how responsive buyers and sellers are to changes in the price of a good. More elastic means more responsive. When the percentage change in quantity demanded exceeds the percentage change in price, demand is price elastic. If demand is price elastic, a price increase reduces total revenue and a price decrease increases total revenue. When the percentage change in quantity demanded is less than the percentage change in price, demand is price inelastic. If demand is price inelastic, a higher price increases total revenue, and a lower price reduces total revenue. When the percentage change in quantity demanded equals the percentage change in price, demand is unit elastic; a price change does not affect total revenue. Along a straight-lined, downward-sloping demand curve, the elasticity of demand declines steadily as the price falls. A constant-elasticity demand curve has the same elasticity everywhere. Demand is more elastic (a) the greater the availability of substitutes, (b) the more narrowly the good is defined, (c) the larger the share of the consumer’s budget spent on the good; and (d) the longer the time period consumers have to adjust to a change in price. The price elasticity of supply measures the responsiveness of quantity supplied to price changes. Price elasticity of supply depends on how much the marginal cost of production changes as output changes. If marginal cost rises sharply as output expands, quantity supplied is less responsive to price increases and is thus less elastic. Also, the longer the time period producers have to adjust to price changes, the more elastic the supply. Income elasticity of demand measures the responsiveness of demand to changes in consumer income. Income elasticity is positive for normal goods and negative for inferior goods. The cross-price elasticity of demand measures the impact of a change in the price of one good on the demand for another good. Two goods are defined as substitutes, complements, or unrelated, depending on whether their cross-price elasticity of demand is positive, negative, or zero, respectively. Chapter 6 Utility is the sense of pleasure or satisfaction that comes from consumption; it is the want-satisfying power of goods, services, and activities. The utility you get from consuming a particular good depends on your tastes. The law of diminishing marginal utility says that the more of a particular good you consume per period, other things constant, the smaller the gain in total utility received from each additional unit consumed. The total utility derived from consuming a good is the sum of the marginal utilities derived from each additional unit of the good. At some point, additional consumption could reduce total utility. Utility is subjective. Each consumer makes a personal assessment of the want-satisfying power of consumption. By translating an individual’s subjective measure of satisfaction into units of utility, we can predict the quantity demanded at a given price as well as the effect of a change in price on quantity demanded. The consumer’s objective is to maximize utility within the limits imposed by income and prices. In a world without scarcity, utility is maximized by consuming a good until its marginal utility reaches zero. In the real world—a world shaped by scarcity as reflected by prices—utility is maximized when the budget is exhausted and the marginal utility of the final unit consumed divided by that good’s price is identical for each different good. Utility analysis can be used to construct an individual consumer’s demand curve. By observing the effects of a change in price on consumption, we can generate points that trace a demand curve. Consumers typically receive a surplus, or a bonus, from consumption. Consumer surplus is the difference between the maximum amount consumers would pay for a given quantity of the good and the amount they actually pay. Consumer surplus increases as the price declines. Consumption involves a money price and a time price. People are willing to pay a higher money price for products that save time. The Appendix to this chapter provides many of the same insights into demand and utility maximization using indifference curves. This method allows one to estimate the relative sizes of the income and substitution effects, which are described in Chapter 3 as the reasons for the negative slope of the demand curve. Chapter 7 Explicit costs are opportunity costs of resources employed by a firm that take the form of cash payments. Implicit costs are the opportunity costs of using resources owned by the firm. A firm earns a normal profit when total revenue covers all implicit and explicit costs. Economic profit equals total revenue minus both explicit and implicit costs. Resources that can be varied quickly to increase or decrease output are called variable resources. In the short run, at least one resource is fixed. In the long run, all resources are variable. A firm may initially experience increased marginal returns as it takes advantage of increased specialization of the variable resource. But the law of diminishing marginal returns indicates that the firm eventually reaches a point where additional units of the variable resource yield an ever-smaller marginal product. The law of diminishing marginal returns from the variable resource is the most important feature of production in the short run and explains why marginal cost and average cost eventually increase as output expands. In the long run, all inputs under the firm’s control are variable, so there is no fixed cost. The firm’s long-run average cost curve, also called its planning curve, is an envelope formed by a series of short-run average total cost curves. The long run is best thought of as a planning horizon. A firm’s long-run average cost curve, like its short-run average cost curve, is U-shaped. As output expands, average cost at first declines because of economies of scale—a larger plant size allows for bigger and more specialized machinery and a more extensive division of labor. Eventually, average cost stops falling. Average cost may be constant over some range. If output expands still further, the plant may experience diseconomies of scale as the cost of coordinating resources grows. Economies and diseconomies of scale can occur at the plant level and at the firm level. In the long run, a firm selects the most efficient size for the desired rate of output. Once the firm’s size is chosen, some resources become fixed, so the firm is back operating in the short run. Thus, the firm plans for the long run but produces in the short run. Chapter 8 Market structures describe important features of the economic environment in which firms operate. These features include the number of buyers and sellers in the market, the ease or difficulty of entering the market, differences in the product across firms, and the forms of competition among firms. A perfectly competitive market is characterized by (a) a large number of buyers and sellers, each too small to influence market price; (b) firms in the market supply a commodity, which is a product undifferentiated across producers; (c) buyers and sellers possess full information about the availability and prices of all resources, goods, and technologies; and (d) firms and resources are freely mobile in the long run. The market price in perfect competition is determined by the intersection of the market demand and market supply curves. Each firm then faces a demand curve that is a horizontal line at the market price. The firm’s demand curve also indicates the average revenue and marginal revenue received at each rate of output. Firms in perfect competition are said to be price takers because no firm can influence the market price. Each firm can vary only the amount it supplies at that price. Exam 1 1. Question : Student Answer: The U.S. economy is best characterized as pure capitalist pure communist pure socialist Points Received: mixed capitalist 8 of 8 Comments: Question 2.Question : The most common form of business organization in the United States is the corporation Student True Answer: Points Received: False 8 of 8 Comments: Question 3.Question : Student True Answer: Points Received: The fastest-growing component of U.S. personal consumption is manufactured goods. False 8 of 8 Comments: Question 4.Question : Student Answer: Which of the following is most likely to be an inferior good? a luxury car air ticket used cloth Points Received: diamond 8 of 8 Comments: Question 5.Question : Student True Answer: Points Received: If supply increases and demand decreases, the supply and demand model predicts that equilibrium price will fall. False 8 of 8 Comments: Question 6.Question : Student True Answer: Points Received: A major advantage of the partnership form of business organization is the limited personal liability of the owners. False 8 of 8 Comments: Question 7.Question : A new hormone will increase the amount of milk each cow produces. If this hormone is adopted by many dairies, what will be the effect on the milk market? Student Answer: an increase in supply, higher equilibrium price, and lower equilibrium quantity a decrease in supply, higher equilibrium price, and lower equilibrium quantity an increase in supply, lower equilibrium price, and higher equilibrium quantity an increase in supply, higher equilibrium price, and higher equilibrium quantity Points Received: 8 of 8 Comments: Question 8.Question : Student True Answer: Points Received: Based on an analysis of opportunity cost, everyone must go to college because opportunity cost is objective concept, in other words, it is the same for everyone. False 8 of 8 Comments: Question 9.Question : Student True Answer: Points Received: A price floor set above the equilibrium price will result in a surplus. False 8 of 8 Comments: Question 10.Question : Student Answer: A change in quantity demanded is caused by a change in income population taste or preferences Points Received: price of the product 8 of 8 Comments: Question 11.Question : Student Answer: True Households demand in the goods markets but supply resources in the resources markets such as labor skills. False Points Received: 8 of 8 Comments: Question 12.Question : Student True Answer: Points Received: The primary source of revenue for the federal government is the corporate business tax. False 8 of 8 Comments: Question 13.Question : Student Answer: In economics, parking lot structure is considered as physical capital human capital labor Points Received: land 8 of 8 Comments: Question 14.Question : Student True Answer: Points Received: The fundamental problem in economics is to have unlimited resources and very limited wants. False 8 of 8 Comments: Question 15.Question : Student True Answer: Points Received: The typical concave (i.e., bowed-out) shape of the production possibilities frontier reflects the law of increasing opportunity cost False 8 of 8 Comments: Question 16.Question : Sugar and honey are viewed as substitutes for each other in many cooking applications. If the price of sugar rises, we would expect Student Answer: the demand for honey to increase the demand for honey to decrease the quantity demanded for honey to increase Points Received: the quantity demanded for honey to decrease 8 of 8 Comments: Question 17.Question : Student True Answer: Points Received: A production possibilities frontier will shift outward if there is an decrease in resources such as labor and capital. False 0 of 8 Comments: Question 18.Question : Student True Answer: Points Received: In economics, money is an example of physical or real capital. False 8 of 8 Comments: Question 19.Question : The effect of an increase in consumer income on equilibrium price and quantity of Florida orange juice (a normal good) is Student Answer: to decrease equilibrium price and quantity to increase equilibrium price and quantity to increase equilibrium price and decrease equilibrium quantity Points Received: to decrease equilibrium price and increase equilibrium quantity 8 of 8 Comments: Question 20.Question : Student True Answer: Points Received: In the circular-flow diagram, households are buyers in the markets for goods and services. False 8 of 8 Comments: Question 21.Question : A public good is available to all regardless of who pays for it and who does not. Student True Answer: Points Received: False 8 of 8 Comments: Question 22.Question : Student Answer: Price ceilings result in surplus shortage inflation Points Received: budget deficit 8 of 8 Comments: Question 23.Question : Student True Answer: Points Received: A leftward (inward) shift of a supply curve represents a decrease in supply False 8 of 8 Comments: Question 24.Question : Student True Answer: Points Received: If a certain type of clothing becomes more fashionable (more demand), we would expect that its price will increase. False 8 of 8 Comments: Question 25.Question : Which of the following best describes the invisible-hand concepty explained by Adam Smith? Student Answer: The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest The nonsubstitutability of resources creates a conflict between private and public interests and calls for government intervention The market system is the best system for overcoming the scarce resources-unlimited wants problem Points Received: Central direction by the government will improve resource allocation in a capitalistic economy 8 of 8 Comments: Question 26.Question : Student True Answer: Points Received: An example of a positive economic statement is, "An increase in the price of a product causes consumers to purchase more of that product." False 8 of 8 Comments: Question 27.Question : Student True Answer: Points Received: Inflation Rate in the US is an example of microeconomics concept. False 8 of 8 Comments: Question 28.Question : Student Answer: In 2006, the price of oil increased, which in turn caused the price of natural gas to rise. This can best be explained by saying that oil and natural gas are: complementary goods and the higher price for oil increased the demand for natural gas substitute goods and the higher price for oil increased the demand for natural gas complementary goods and the higher price for oil decreased the supply of natural gas Points Received: substitute goods and the higher price for oil decreased the supply of natural gas 8 of 8 Comments: Question 29.Question : If people specialize in producing those goods for which they possess a comparative advantage, then the economy as a whole can produce a greater quantity of goods Student True Answer: Points Received: False 8 of 8 Comments: Question 30.Question : Student True Answer: Points Received: Profit is the payment made for land resources. False 0 of 8 Comments: Discussion Topic #1 Hey Class, I look forward to reading what everyone has to say in these discussion posts! I personally feel that our society has become compromised of several distressed and needy countries because of the way our civilization is being regulated. Our society appears to be permitting individuals the opportunity to use their personal aptitudes to generate currency. Depending where each individual is born and what existence they’re born into can distress the opportunities they have while ensuing financially. A person who’s brought into an existence with additional opportunities over someone else who was brought into an existence with limited opportunities, doesn’t essentially assure them achievement. The readiness of each individual regulates whether they’re capable of working their way out of bankruptcy or bypass from becoming needy. The individuals who have the readiness and inspiration to prosper and take advantage of their own circumstances will more likely end up sophisticated in the striking demand of our civilization. With everyone having authority in civilization also means that there are individuals who aren’t as privileged to be in a healthier, superior condition. Take Brazil for example; a nation that has a generous quantity of natural resources is exploited by nations that have additional inspiration and authority then Brazil once had. Brazil generates and harvests abundant quantities of agricultural goods that are dispersed all over the world. For instance; sugarcane, corn and rice are imported to more manufacturing nations, such as the United States of America. However, capitals aren’t being dispersed correspondingly which permits more powerful and parsimoniously nations like the United States to exploit Brazil’s capitals. Therefore, with nations that aren’t as privileged as those who’re more controlling, this takes away financial opportunities from individuals who live in a reduced amount of privileged circumstances. Thanks for reading and best of luck to you all in this class! -Jared Taplin Discussion Topic #2 Some economists argue that the government intervention makes the economic outcome even worse. Some argue that there are important economic roles of the government. What is your opinion? Does the government do good or bad? Hey Class, In regards to this particular question, I personally feel there’s quite a few of each. While the government starts to interfere in essential methods, it can eventually do a whole lot of upright. For instance, administrative action to deliver public goods is critical as well as valuable; however, as soon as the administration starts becoming excessively invasive, it can indeed do destruction. An example of this situation could be determined by our complex tax system as it makes it too easy to evade taxes which essentially provide tax breaks to businesses with the finest clients. Additionally, there’s also the case of either being good or bad, relying completely on what the government prepares. This sequential must be determined by a specific group of individuals, for instance; the associates of the Federal Reserve in addition to the Fed chairman. They use a certain quantity of control over the movement of currency within our economic system. Overall, there is an assured quantity of presumption involved in making these conclusions, so sometimes it will work out whereas other times, it just doesn’t. Therefore, the issue, obviously, is mainly focusing on which government involvement is required and which is excessively invasive. Thanks for reading! -Jared Taplin Discussion Topic #3 What is the best way to prevent and reduce smoking? Briefly discuss. Please read the article below to have a general idea about the topic. Case Study: Deterring Young Smokers As the U.S. Surgeon General warns on each pack of cigarettes, smoking can be hazardous to your health. Researchers estimate that smoking kills 440,000 Americans a year—10 times the fatalities from traffic accidents. Smoking is the overwhelming cause of lung cancer, which is the top cancer killer among women. Four of five people with lung cancer die within three years. Smoking is also the leading cause of heart disease, emphysema, and stroke. Thus, smoking imposes major health and economic costs. Policy makers try to reduce these costs by discouraging smoking, especiallly among young people. About one in four U.S. high school students were smokers in 2005, the same rate as in 2003. Each day, about 3,000 U.S. teens under 18 become regular smokers. Worldwide, an estimated 100,000 teens become regular smokers each day. One way to reduce youth smoking is to prohibit the sale of cigarettes to minors. A second way is to raise the price through higher cigarette taxes. The amount by which a given price hike reduces teen smoking depends on the price elasticity of demand. This elasticity is higher for teens than for adults. Why are teenagers more sensitive to price changes than adults? First, recall that one factor affecting elasticity is the importance of the item in the consumer’s budget. Because teen income is relatively low, the share spent on cigarettes usually exceeds the share spent by adult smokers. Second, peer pressure shapes a young person’s decision to smoke more than an adult’s decision to continue smoking (if anything, adults face negative peer pressure for smoking). Thus, the effect of a higher price gets magnified among young smokers because that higher price also reduces smoking by peers. With fewer peers smoking, teens face less pressure to smoke. And, third, young people not yet addicted to nicotine are more sensitive to price increases than are adult smokers, who are more likely to be already hooked. The experience from other countries supports the effectiveness of higher cigarette taxes in reducing teen smoking. For example, a large tax increase on cigarettes in Canada cut youth smoking by two-thirds. Another way to reduce smoking is to change consumer tastes through health warnings on packages. In Canada, these warning include photos showing the how smoking can affect the brain, teeth, and gums, and a wilted cigarette depicts male impotence. In Australia, labels show gangrenous limbs, underweight babies, cancerous mouths, and blind eyes. Belgium adds corpses to the picture. In California, a combination of higher cigarette taxes and an ambitious awareness program contributed to a 5 percent decline in lung cancer among women, even as it rose 13 percent in the rest of the country. (As of 2007, state taxes varied from a low of 7 cents per pack in South Carolina to a high of $2.58 in New Jersey.) More generally, the message about the dangers of smoking along with the higher cost of cigarettes has had an effect over time. Only about 20 percent of American adults now smoke, down from more than half in the 1960s. According to the U.S. Centers for Disease Control and Prevention, each pack of cigarettes sold in the United States costs society $7.18 in higher health care costs and in lost worker productivity. The added cost exceeds $150 billion a year, which works out to be about $3,400 per smoker per year. SOURCES Hutchinson, “Smoke Signals: Adolescent Smoking and School Continuation,” NBER Working Paper 12462, (August 2006); and Hana Ross and Frank Chaloupka, “The Effects of Public Policies and Prices on Youth Smoking,” : John Tauras, “An Empirical Analysis of Adult Cigerette Demand,” Eastern Economic Journal, Vol. 31, No. 3 (Summer 2005): pp. 361–375 Hey Class, After reading this article, I’ve come to the conclusion that it’s tremendously informative to learn and gather material from. I personally have never touched a cigarette in my life ever since my dad laid hands on his first cigarette at age 16. Furthermore, I know several individuals who’ve appeared to have been pressured into obsession during my years attending middle and high school. It’s an unhealthy alternative when dealing with stress along with pressure, therefore, making it extremely impossible to quit the addiction. I have to somewhat show some kind of gratitude towards those methods in particular in which are adapted to decreasing smoking addictions in the youth seen throughout our society today. Although it can become problematic to reach out to try and urge adults to make a better choice for a healthier lifestyle over bad habits of cigarette smoking, it makes the situation even worse while persuading the individual to change their mind. However, while relating towards the younger generation of citizens, they generally have a much better opportunity to obtain a healthier and happier lifestyle minus those chimney smokers. With that being said, I personally feel that concentrating more towards the younger age bracket is considered to become the best method to inspire modifications in the world. It was interesting to read how we precisely mark their monetary circumstances with the intention of discouraging those who’re incapable of disbursing for such expenses; though, my only distress towards this situation is that by increasing the value for a pack of cigarettes, teens will eventually turn around and use their currency for merchandise that could become even more harmful than the effects of what cigarette smoke causes to your body. Therefore, I believe that the most active alternative method to daunt such terrible addictions is to surge more awareness of how much harm it can tremendously cause to your body. By combining philosophies of contempt for smoking used throughout television shows, movie flicks and commercial advertisements, optimistically teenagers will eventually keep an eye on their television role models and discard the elements, too! Thanks for reading! -Jared Taplin For a firm to produce in the short run, rather than shut down, the market price must at least cover the firm’s average variable cost. If price is below average variable cost, the firm shuts down. That portion of the marginal cost curve at or rising above the average variable cost curve becomes the perfectly competitive firm’s short-run supply curve. The horizontal sum of each firm’s supply curve forms the market supply curve. As long as price covers average variable cost, each perfectly competitive firm maximizes profit or minimizes loss by producing where marginal revenue equals marginal cost. Because firms are not free to enter or leave the market in the short run, economic profit or loss is possible. In the long run, however, firms enter or leave the market and otherwise adjust their scale of operation until any economic profit or loss is eliminated. Competition drives each firm in the long run to produce at the lowest point on its long-run average cost curve. At this rate of output, marginal revenue equals marginal cost and each also equals the price and average cost. Firms that fail to produce at this least-cost combination do not survive in the long run. In the short run, a firm’s change in quantity supplied is shown by moving up or down its marginal cost, or supply, curve. In the long run, firms enter or leave the market and existing firms may change their scale of operation until firms still in the industry earn just a normal profit. As the industry expands or contracts in the long run, the long-run industry supply curve has a shape that reflects either constant costs or increasing costs. Perfectly competitive markets exhibit both productive efficiency (because output is produced using the most efficient combination of resources available) and allocative efficiency (because the goods produced are those most valued by consumers). In equilibrium, a perfectly competitive market allocates goods so that the marginal cost of the final unit produced equals the marginal value that consumers attach to that final unit. In the long run, market pressure minimizes the average cost of production. Voluntary exchange in competitive markets maximizes the sum of consumer surplus and producer surplus, thus maximizing social welfare. 1. Question : Student Answer: Suppose Ernie gives up his job as financial advisor for P.E.T.S., at which he earned $30,000 per year, to open up a store selling spot remover to Dalmatians. He invested $10,000 in the store, which had been in savings earning 5 percent interest. This year's revenues in the new business were $50,000, and explicit costs were $10,000. Calculate Ernie's economic profit. 10,000 10,500 9,500 Points Received: 40,000 8 of 8 Comments: Question 2.Question : Along a straight-line downward-sloping demand curve, elasticity is greater at higher prices. Student True Answer: Points Received: False 8 of 8 Comments: Question 3.Question : Student True Answer: Points Received: At McDonald's, economies of scale at the firm level occur over the range of output for which the firm's total cost curve is upward sloping False 8 of 8 Comments: Question 4.Question : Student Answer: Which of the following markets best approximates the perfectly competitive market structure? Coca Cola Apple Google Points Received: A small wheat farmer 8 of 8 Comments: Question 5.Question : Student True Answer: Points Received: Total Utility is maximum when marginal utility is zero. False 8 of 8 Comments: Question 6.Question : Student True Answer: Points Received: A perfectly competitive firm's short run supply curve is the entire MC curve. False 0 of 8 Comments: Question 7.Question : Student Answer: All of the following are true of a perfectly competitive firm in longrun equilibrium except one. Which is the exception? P=MC MR=MC ATC is at its minimum Points Received: MC at its minimum 8 of 8 Comments: Question 8.Question : Student True Answer: Points Received: Claude's Copper Clappers sells clappers for $65 each in a perfectly competitive market. At its present rate of output, Claude's marginal cost is $65, average variable cost is $45, and average total cost is $67. To maximize his profit or minimize his loss, Claude should shut down False 8 of 8 Comments: Question 9.Question : Student True Answer: Points Received: Diamond has more value because its total utility is greater than its marginal utility. Water, on the other hand, has less value because its marginal utility is greater than its total utility. False 0 of 8 Comments: Question 10.Question : Student Answer: Which one of the followings is a good example of fixed cost? rent utility labor Points Received: raw materials 8 of 8 Comments: Question 11.Question : Student True Answer: Points Received: Comments: Diamond has more value because its total utility is greater than its marginal utility. Water, on the other hand, has less value because its marginal utility is greater than its total utility. False 8 of 8 Question 12.Question : Student True Answer: Points Received: If the cross-price elasticity of demand between two goods is positive, then the goods may go well together in consumption (they are complements). False 0 of 8 Comments: Question 13.Question : Student Answer: For which of the following is demand most likely to be perfectly inelastic? airline ticket Pepsi Cola Insulin medicine Points Received: a BMW car 8 of 8 Comments: Question 14.Question : Student True Answer: Points Received: In Connecticut, the apple market is perfectly competitive. Suppose that consumer tastes change so that the market demand for apples increases. In that case, the demand curves faced by individual firms will not change. False 8 of 8 Comments: Question 15.Question : Student True Answer: Points Received: General Motors Company undertook a massive restructuring program to decentralize into six smaller decision-making groups. The reason would be reducing diseconomies of scale. False 8 of 8 Comments: Question 16.Question : Student Answer: One group of people uses New York City subways only during rush hour to travel to and from work. Another group uses them only in midday for leisure activity. If New York City wants to increase transit fares with the smallest possible reduction in revenue, for which group should it increase the fare? The rush-hour group because its demand for subway service is more elastic than that of the midday group The rush-hour group because its demand for subway service is less elastic than that of the midday group The midday group because its demand for subway service is more elastic than that of the rush-hour group Points Received: The midday group because its demand for subway service is less elastic than that of the rush-hour group 8 of 8 Comments: Question 17.Question : Student True Answer: Points Received: Wheat farmers in Kansas would benefit from a devastating crop failure in North Dakota (another major wheat-producing state) if the U.S. demand for wheat is elastic. False 0 of 8 Comments: Question 18.Question : Student True Answer: Points Received: In the long run, all of a firm's inputs are variable False 8 of 8 Comments: Question 19.Question : Student Answer: Suppose Toyota produces 100,000 cars per year at its California plant at an average cost of $6,000 and it doubles output and total costs by building an identical plant in Kentucky. Toyota has exhibited constant cost increasing cost decreasing cost Points Received: economies of scale 8 of 8 Comments: Question 20.Question : Student Answer: True If a firm's economic profit is positive, its accounting profit must also be positive. False Points Received: 8 of 8 Comments: Question 21.Question : Student True Answer: Points Received: The availability of substitutes makes the demand for a good less elastic False 8 of 8 Comments: Question 22.Question : Student Answer: If the price of Pepsi-Cola increases from 40 cents to 50 cents per can and the quantity demanded decreases from 100 cans to 50 cans, then, according to the midpoint formula, the value of price elasticity of demand for Pepsi-Cola is 0 -1 -2 Points Received: -3 8 of 8 Comments: Question 23.Question : Student True Answer: Points Received: The long-run average cost curve is also known as the firm's planning curve False 8 of 8 Comments: Question 24.Question : Student True Answer: Points Received: The market or industry demand curve is the sum of individual quantities demanded at each price. False 8 of 8 Comments: Question 25.Question : Student Answer: Another word for elasticity is utility price profit Points Received: responsiveness 8 of 8 Comments: Question 26.Question : Student True Answer: Points Received: The law of diminishing marginal utility implies it is possible that the marginal utility of my tenth pistachio nut is less than the marginal utility of my third pistachio nut, other things constant False 8 of 8 Comments: Question 27.Question : Student True Answer: Points Received: If a perfectly competitive firm's ATC is less than price, the firm will shut down immediately. False 0 of 8 Comments: Question 28.Question : Student Answer: The monopolist maximizes its profit when P=ATC MR=ATC MR=MC Points Received: MC=AVC 8 of 8 Comments: Question 29.Question : Student True Answer: Points Received: The U.S. Postal Service has as much monopoly power now as it had 100 years ago False 8 of 8 Comments: Question 30.Question : Student True Answer: Points Received: The demand curve facing a monopolist lies below its marginal revenue curve False 0 of 8 Comments: 1. Question : Student True Answer: Points Received: A technological breakthrough that increases the marginal productivity of capital would increase the demand for loanable funds, leading to a lower equilibrium market interest rate False 9 of 9 Comments: Question 2.Question : Student True Answer: Points Received: Since the 1930s, competition in the United States have increased among industries. False 0 of 9 Comments: Question 3.Question : Student Answer: If the government wishes to provide a natural monopolist with a "fair" rate of return, it will force the firm to set MR=MC P=MC P=ATC Points Received: P=MR 0 of 9 Comments: Question 4.Question : Student True Answer: Points Received: The McDonald's restaurants in Russia grow their own potatoes to guarantee that they are grown correctly. Growing potatoes is very different from running a fast-food restaurant. One could say of McDonald's decision to grow its own potatoes for the Russian franchise that the bounded rationality criterion is outweighed by the need for quality control False 9 of 9 Comments: Question 5.Question : There is an inverse relationship between the present value of a future amount and the interest rate used for discounting. Student True Answer: Points Received: False 9 of 9 Comments: Question 6.Question : Student Answer: Which of the following is not a principal-agent relationship? Adam and Gloria get married Payless, Getless, Inc., hires a salesperson Dixie hires a lawyer Points Received: Citizens elect a state senator 9 of 9 Comments: Question 7.Question : Student True Answer: Points Received: As concentration in an industry increases, the value of the Herfindahl index falls. False 9 of 9 Comments: Question 8.Question : Student True Answer: Points Received: Government controls of price, output, entry of new firms, and quality of service in industries where monopoly appears desirable are known as social regulation. False 9 of 9 Comments: Question 9.Question : Student Answer: There are five firms in the cresset industry. The market shares of the five firms are 60 percent, 15 percent, 15 percent, 6 percent, and 4 percent. The Herfindahl index is 96 4,102 9,640 Points Received: Comments: 10,000 9 of 9 Question 10.Question : Student True Answer: Points Received: The Sherman Act created FTC. False 9 of 9 Comments: Question 11.Question : Student True Answer: Points Received: Screening is the attempt by the uninformed side of the market to uncover the relevant but hidden characteristics of the informed party. False 9 of 9 Comments: Question 12.Question : Student Answer: A firm's marginal rate of return on investment curve shows the amount saved by the firm at each alternative interest rate invested by the firm at each alternative interest rate saved by the firm at each alternative rate of time preference invested by the firm at each alternative marginal resource cost Points Received: 9 of 9 Comments: Question 13.Question : Student True Answer: Points Received: One of the major reasons for interest rates to differ is risk False 9 of 9 Comments: Question 14.Question : Student True Answer: Points Received: Vertical integration has no effect on the internal organization of a firm; it only affects the outside markets. False 9 of 9 Comments: Question 15.Question : Student Answer: You expect to rent out a vacation home on Sanibel Island for $800 a month as an investment. Upkeep is estimated at $3,000 a year. If the current market interest rate is 5 percent, you are willing to pay __________ for the house. 132,000 122,000 142,000 Points Received: 152,000 9 of 9 Comments: Question 16.Question : Student True Answer: Points Received: Suppose Sally buys a Volvo because they are safe and, as a result, drives faster and pays less attention to other cars on the road. This is an example of adverse selection. False 9 of 9 Comments: Question 17.Question : Student True Answer: Points Received: Interest rate tends to rise as risk is higher False 0 of 9 Comments: Question 18.Question : Student Answer: If a seller knows more about the good than the buyer does, there exists optimal search asymmetric information an externality Points Received: profit maximization 9 of 9 Comments: Question 19.Question : Student True Answer: Points Received: The Clayton Act passed in 1914 False 9 of 9 Comments: Question 20.Question : Student Answer: True The tendency for the poorest risks to buy health insurance and the tendency of the insured to take more risks with their health are known as moral hazard and adverse selection, respectively. False Points Received: 9 of 9 Comments: Question 21.Question : Student Answer: Consider two resource markets in which the demand curves slope downward. In market A, the supply curve is horizontal, equilibrium price is $6, and 100 units of the resource are hired. In market B, the supply curve is vertical, equilibrium price is $20, and 30 units of the resource are hired. Which of the following is true? Total resource earnings are the same in both markets Total resource earnings are greater in market A Total resource earnings are greater in market B Points Received: There is more economic rent in market A 9 of 9 Comments: Question 22.Question : Student True Answer: Points Received: If a monopolistically competitive firm is in long-run equilibrium and average cost equals $150, then the market price must be $150. False 9 of 9 Comments: Question 23.Question : Student True Answer: Points Received: If the supply of oceanfront lots is fixed and perfectly inelastic, the demand for the resource determines its price and the level of economic rent False 9 of 9 Comments: Question 24.Question : Student Answer: Which of the following is the best example of monopolistically competitive market? wheat crude oil dry cleaning in Santa Monica microsoft Points Received: 9 of 9 Comments: Question 25.Question : Student True Answer: Points Received: Work is an attractive use of your time if the utility of consumption made possible by work exceeds the disutility of work itself. False 9 of 9 Comments: Question 26.Question : Student True Answer: Points Received: Suppose the only professional hockey team within 500 miles is the Salt Lake City Slappers team. If the State of Utah imposes a profits tax on sports teams, the Slappers will maintain ticket prices and suffer a loss and shut down. False 9 of 9 Comments: Question 27.Question : Student Answer: If a firm hires a resource in a perfectly competitive resource market it must also be a price taker in the product market it must also be a price maker in the product market it faces a horizontal marginal resource cost curve Points Received: it faces a vertical marginal resource cost curve 9 of 9 Comments: Question 28.Question : Student True Answer: Points Received: An increase in the price of a resource will cause a rightward shift of its supply curve. False 9 of 9 Comments: Question 29.Question : Student True Answer: Points Received: Monopolistically competitive firms will have excess capacity in the long run False 9 of 9 Comments: Question 30.Question : Student Answer: Suppose that the demand for my new book, Spatulas From Around the World, is such that the demand curve lies everywhere below the average variable cost of producing it. To maximize profits or minimize losses, I should lower the price raise the price earn economic profit Points Received: shut down 9 of 9 Comments: Question 31.Question : Student True Answer: Points Received: If ten cases of pretzels are sold at a price of $8 each and the marginal product of the last unit of labor is 5, the firm's total revenue is $13. False 9 of 9 Comments: Question 32.Question : Student True Answer: Points Received: Resource price differentials that trigger the reallocation of resources so as to equalize payments for similar resources are known as reallocation differentials. False 9 of 9 Comments: Question 33.Question : Student Answer: A game show host who gave up his job as a teacher brags about his salary, saying "the rest is pure gravy." Here, "the rest" refers to economic rent interest explicit cost Points Received: profit 9 of 9 Comments: Question 34.Question : Game Theory is used to explain perfect competition. Student True Answer: Points Received: False 0 of 9 Comments: Question 35.Question : Student True Answer: Points Received: Derived demand refers to demand for good and services False 0 of 9 Comments: Question 36.Question : Student Answer: There is an excess capacity in the long run under oligopoly monopoly monopolistic competition Points Received: perfect competition 9 of 9 Comments: Question 37.Question : Student True Answer: Points Received: Union membership has increased in US since 1950s False 9 of 9 Comments: Question 38.Question : Student True Answer: Points Received: Monopoly is a price taker False 9 of 9 Comments: Question 39.Question : Student Answer: Tacit collusion occurs in industries that are oligopoly monopoly perfect competition Points Received: monopolistic competition 9 of 9 Comments: Question 40.Question : Student True Answer: Points Received: Comments: Under monopolistic competition, P=MR. False 0 of 9
