AP Microeconomics Chapter 5 Outline
|
|
- Marylou Wade
- 7 years ago
- Views:
Transcription
1 I. Learning Objectives In this chapter students should learn: A. How to differentiate demand side market failures and supply side market failures. B. The origin of consumer surplus and producer surplus, and how properly functioning markets maximize their sum and total surplus, while optimally allocating resources. C. Why free riding occurs with public goods, and illustrate why private firms cannot normally produce public goods. D. How positive and negative externalities cause under and over allocations of resources. E. Why we normally won t want to pay what it would cost to eliminate every last bit of a negative externality such as air pollution. II. Market Failure A. Market failure occurs when the competitive market system produces the wrong amounts of certain goods or services or fails to provide any at all. B. Demand side market failures happen when demand curves do not reflect consumers full willingness to pay for a good or service. C. Supply side market failures occur when supply curves do not reflect the full cost of producing a good or service. III. Efficiently Functioning Markets A. Consumer Surplus 1. Definition the difference between the maximum price a consumer is willing to pay for a product and the actual price. 2. The surplus, measurable in dollar terms, reflects the extra utility gained from paying a lower price than what is required to obtain the good. 3. Consumer surplus can be measured by calculating the difference between the maximum willingness to pay and the actual price for each consumer, and then summing those differences. 4. Consumer surplus is measured and represented graphically by the area under the demand curve and above the equilibrium price (Figure 5.1).
2 Use the formula for calculating the area of a triangle (1/2 base times height) to find the area of consumer surplus. 5. Consumer surplus and price are inversely related all else equal, a higher price reduces consumer surplus. B. Producer Surplus 1. Definition the difference between the actual price a producer receives and the minimum acceptable price. 2. Producer surplus can be measured by calculating the difference between the minimum acceptable price and the actual price for each unit sold, and then summing those differences. 3. Producer surplus is measured and represented graphically by the area above the supply curve and below the equilibrium price (Figure 5.2). Use the formula for calculating a triangle (1/2 base times height) to find the area of producer surplus. 4. Producer surplus and price are directly related all else equal, a higher price increases producer surplus. IV. Efficiency Revisited and Efficiency (Deadweight) Losses A. Efficiency is attained at equilibrium, where the combined consumer and producer surplus is maximized (Figure 5.3).
3 1. Consumers receive utility up to their maximum willingness to pay, but only have to pay the equilibrium price. 2. Producers receive the equilibrium price for each unit, but it only costs the minimum acceptable price to produce. 3. Productive efficiency occurs at equilibrium, because competition forces firms to produce at the lowest cost per unit. 4. Allocative efficiency occurs at the quantity where three conditions exist: a. Marginal Benefit = Marginal Cost b. Maximum willingness to pay = minimum acceptable price c. Combined consumer and producer surplus is at a maximum B. Efficiency (Deadweight) Losses 1. Underproduction reduces both consumer and producer surplus, and efficiency is lost because both buyers and sellers would be willing to exchange a higher quantity (Figure 5.4a).
4 2. Overproduction causes inefficiency because at quantities greater than the equilibrium quantity, it costs society more to produce the good than it is worth to the consumer in terms of willingness to pay (Figure 5.4b). V. Public Goods A. Private goods are produced and sold in competitive markets and have two characteristics: 1. Rivalry in consumption when one person buys and consumes a good, it is not available to others. 2. Excludability sellers can keep people who do not pay for a product from obtaining its benefits. B. Market demand for private goods is found by horizontally summing the individual demand schedules. C. Private markets allocate goods and resources efficiently; those willing to pay to obtain goods get them. Sellers produce goods to satisfy consumer wants, and consumer behavior tells them whether to produce more or less of any particular good. D. Unlike private goods, public goods are those goods that are nonrival and nonexcludable. 1. National defense is a good example of a public good. Increased national security is there for all to enjoy whether or not they paid for it. 2. Other examples include flood control and public health. 3. Public goods suffer from the free rider problem, where a consumer can enjoy the benefit of the good without having to pay for it. As a result, firms cannot profitably provide public goods, and the market fails. E. The demand for public goods differs from the market demand for private goods. 1. It is a phantom demand, because consumers will not be making individual purchases.
5 3. To find the collective demand schedule for a public good, we add the prices people collectively are willing to pay for the last unit of the public good at each quantity demanded (Table 5.3). 4. Figure 5.5 is a graphical illustration of this table. A collective demand curve is the vertical sum of the individual demand curves for the public who want that good. (Recall that the market demand for a private good was a horizontal summation of the individual demand curves.)
6 F. The supply curve for any good is its marginal cost curve. As with private goods, the law of diminishing returns applies to the supply of public goods. G. The optimal quantity of a public good is at the intersection of the collective demand (marginal benefit) curve and the supply (marginal cost) curve. It can also be found where marginal benefit equals marginal cost on the supply and demand schedules. H. Cost benefit analysis is a technique for decision making in the public sector. 1. The concept involves comparing the benefit of providing incremental units of public goods with the costs of providing these additional units. Note that the comparison is a marginal one (i.e., the comparison is made between the costs and benefits of additional amounts of a public good or service). 2. Table 5.4 illustrates this concept in determining the scope of a national highway construction project. Four possible phases of projects are considered, with costs and benefits compared. By comparing the marginal costs and benefits as one moves from the least expensive phase to the most expensive phase, you see Plan C is the optimal choice. 3. The rule for this decision making technique is to use the marginal benefit = marginal cost rule; if the marginal cost exceeds the marginal benefit, that part of the project should not be included. 4. The problem with this technique is the difficulty in measuring costs and benefits. Benefits are particularly difficult to estimate, because there are many related aspects that are not easily calculated. Nevertheless, the method is widely used. 5. Government provides public goods and quasi public goods and services. a. Private producers are not able to find enough paying buyers for public goods because of the free rider problem. Therefore, public goods are not produced voluntarily through the market, but must be provided by the public sector and financed by compulsory taxes. b. Quasi public goods are those that have large positive externalities, so government sponsors their provision. Otherwise, they would be underproduced. Medical care, education, and public housing are examples. c. Resources are reallocated from private to public use by levying taxes on households and businesses, thus reducing their purchasing power and using the proceeds to purchase public and quasi public goods. This can bring about a significant change in the composition of the economy s total output.
7 I. Consider This Street Entertainers 1. Street entertainers regularly appear in popular tourist areas in major cities. Even though some people pay when the hat is passed, many benefit from the shows without contributing to pay for the cost (free riding). 2. Some street entertainers involve audience members or use pay for performance in an attempt to reduce the free rider problem, but the problem continues to exist. VI. Externalities Figure 5.6 A. Externalities occur when some of the benefits or costs of production are not fully reflected in market demand or supply schedules. Some of the benefits or costs of a good may spill over to third parties. B. Negative externalities are supply side market failures, which occur when producers do not take into account the costs that their negative externalities impose on others. 1. An example of a negative externality (or external cost) is pollution, which allows polluters to enjoy lower production costs because the firm is passing along the cost of pollution damage or cleanup to society. Because the firm does not bear the entire cost, it will overallocate resources to the production of goods (Figure 5.7a).
8 2. Correcting for negative externalities requires that government get producers to internalize these costs (Figure 5.7b). a. Direct controls place limits on the amount of the offensive activity that can occur. Clean air and water legislation are examples. The effect is to force the offenders to incur costs associated with pollution control. This should shift the product supply curve leftward and reduce the equilibrium quantity. Therefore, it should reduce the resource allocation in a socially optimal way. b. Specific taxes can be levied on polluters. The tax payment will increase costs to the producer, shifting the product supply curve leftward, and reducing resource allocation to this type of production.
9 C. Positive externalities are demand side market failures, which occur when market demand fails to include the willingness to pay of third parties who receive benefits caused by the positive externality. 1. Examples of positive externalities include public health vaccinations and education. Because some of the benefits accrue to others, individuals will demand too little for themselves, and resources will be underallocated by the market (Figure 5.8a). 2. Correcting for positive externalities requires that the government somehow increase demand or supply to increase benefits to socially desirable amounts. a. Buyers can be subsidized. This increases the demand and the quantity produced, eliminating the underallocation of resources (Figure 5.8b). b. Producers can be subsidized. This reduces the producers costs of production, increasing the supply and eliminating the underallocation of resources (Figure 5.8c). c. The government could provide the product as a public good where spillover benefits are extremely large. An example would be administering free vaccines to all children in India to end smallpox. D. Table 5.5 reviews the methods for correcting externalities.
10 E. Society s optimal amount of externality reduction is not necessarily total elimination. 1. The cost of reducing spillover costs increases with each additional unit of reduction. The benefit received from each additional unit of reduction decreases due to diminishing marginal utility. 2. In general, the marginal benefit of reducing the next unit of pollution should equal the marginal cost of reducing that unit of pollution. At this point, society has found its optimal amount of pollution abatement (Figure 5.9). 3. In reality, it is difficult to measure benefits as well as costs, but this analysis demonstrates that some degree of pollution may be socially efficient. F. Another approach to reducing the externality or misallocation problem is the market approach of individual bargaining. 1. The Coase theorem, named after Nobel prize winning economist Ronald Coase, suggests that government may not be needed to remedy external costs and benefits when property rights are clearly defined, few people are involved, and bargaining costs are negligible. 2. The Coase theorem has limitations, because many externalities affect large numbers of people and bargaining is too costly and inefficient to find solutions effectively. G. Another corrective approach is the development of markets for externality rights, known as cap and trade systems. This is the latest policy innovation for dealing with pollution abatement. 1. A pollution control agency decides the acceptable amount of pollution in a particular region and creates permits that firms can purchase to allow them to pollute. Each permit allows a certain amount of pollution. The total supply of permits is perfectly inelastic.
11 2. The demand for permits should be downward sloping. At high prices, polluters will either stop polluting or pollute less by acquiring pollution abatement equipment, which is more attractive when the permits are more expensive. 3. With the given supply and demand for permits, an equilibrium price will be established for each permit to pollute. 4. The advantage to a cap and trade system is that it reduces society s costs because pollution rights can be bought and sold. Some firms will find it cheaper to buy the rights than to acquire abatement equipment; other firms can sell their rights because they may be able to reduce pollution at a lower cost. In both situations, the firms reduce their cost below what the cost would have been under direct controls. 5. The disadvantages are the costs of monitoring all firms, the level of cheating that has occurred in existing programs, and the ability of politically connected polluters to gain exemptions and free permits. As a result, many economists have concluded that a cap and trade system would not be the most effective system for reducing CO2 emissions in the United States. VII. Government s Role in the Economy A. Government carries out its economic functions within a political context (and the constraints on activity that come with that). B. In attempting to balance and satisfy both political and economic objectives, government may end up over or under regulating, or over or under providing public goods.
Market Failure. presented by: Dr. Ellen Sewell esewell@uncc.edu
Market Failure presented by: Dr. Ellen Sewell esewell@uncc.edu In general, a system of competitive markets will produce a socially optimal allocation of resources. What does this mean? When does a market
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that
More informationUnit 9: Utility, Externalities, and Factor Markets Lesson 4: Externalities
Unit 9: Utility, Externalities, and Factor Markets Lesson 4: Externalities Objectives: - Define externality - Draw negative and positive externality graphs. - Explain the remedies for positive and negative
More informationI. Introduction to Taxation
University of Pacific-Economics 53 Lecture Notes #17 I. Introduction to Taxation Government plays an important role in most modern economies. In the United States, the role of the government extends from
More informationChapter 27: Taxation. 27.1: Introduction. 27.2: The Two Prices with a Tax. 27.2: The Pre-Tax Position
Chapter 27: Taxation 27.1: Introduction We consider the effect of taxation on some good on the market for that good. We ask the questions: who pays the tax? what effect does it have on the equilibrium
More informationPre Test Chapter 3. 8.. DVD players and DVDs are: A. complementary goods. B. substitute goods. C. independent goods. D. inferior goods.
1. Graphically, the market demand curve is: A. steeper than any individual demand curve that is part of it. B. greater than the sum of the individual demand curves. C. the horizontal sum of individual
More information1. Supply and demand are the most important concepts in economics.
Page 1 1. Supply and demand are the most important concepts in economics. 2. Markets and Competition a. Market is a group of buyers and sellers of a particular good or service. P. 66. b. These individuals
More informationchapter >> Consumer and Producer Surplus Section 3: Consumer Surplus, Producer Surplus, and the Gains from Trade
chapter 6 >> Consumer and Producer Surplus Section 3: Consumer Surplus, Producer Surplus, and the Gains from Trade One of the nine core principles of economics we introduced in Chapter 1 is that markets
More informationMidterm Exam #1 - Answers
Page 1 of 9 Midterm Exam #1 Answers Instructions: Answer all questions directly on these sheets. Points for each part of each question are indicated, and there are 1 points total. Budget your time. 1.
More informationChapter 6 Competitive Markets
Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a
More informationExternalities: Problems and Solutions. 131 Undergraduate Public Economics Emmanuel Saez UC Berkeley
Externalities: Problems and Solutions 131 Undergraduate Public Economics Emmanuel Saez UC Berkeley 1 OUTLINE Chapter 5 5.1 Externality Theory 5.2 Private-Sector Solutions to Negative Externalities 5.3
More informationECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS
ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 23 Chapter 8 WRITE [4] Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot
More informationManagerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay. Lecture - 13 Consumer Behaviour (Contd )
(Refer Slide Time: 00:28) Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay Lecture - 13 Consumer Behaviour (Contd ) We will continue our discussion
More informationSolution to Exercise 7 on Multisource Pollution
Peter J. Wilcoxen Economics 437 The Maxwell School Syracuse University Solution to Exercise 7 on Multisource Pollution 1 Finding the Efficient Amounts of Abatement There are two ways to find the efficient
More informationEcon 202 Exam 2 Practice Problems
Econ 202 Exam 2 Practice Problems Principles of Microeconomics Dr. Phillip Miller Multiple Choice Identify the choice that best completes the statement or answers the question. Chapter 6 1. If a binding
More informationPublic Goods & Externalities
Market Failure Public Goods & Externalities Spring 09 UC Berkeley Traeger 2 Efficiency 26 Climate change as a market failure Environmental economics is for a large part about market failures: goods (or
More informationChapter 3. The Concept of Elasticity and Consumer and Producer Surplus. Chapter Objectives. Chapter Outline
Chapter 3 The Concept of Elasticity and Consumer and roducer Surplus Chapter Objectives After reading this chapter you should be able to Understand that elasticity, the responsiveness of quantity to changes
More informationThe formula to measure the rice elastici coefficient is Percentage change in quantity demanded E= Percentage change in price
a CHAPTER 6: ELASTICITY, CONSUMER SURPLUS, AND PRODUCER SURPLUS Introduction Consumer responses to changes in prices, incomes, and prices of related products can be explained by the concept of elasticity.
More informationA. a change in demand. B. a change in quantity demanded. C. a change in quantity supplied. D. unit elasticity. E. a change in average variable cost.
1. The supply of gasoline changes, causing the price of gasoline to change. The resulting movement from one point to another along the demand curve for gasoline is called A. a change in demand. B. a change
More informationTheoretical Tools of Public Economics. Part-2
Theoretical Tools of Public Economics Part-2 Previous Lecture Definitions and Properties Utility functions Marginal utility: positive (negative) if x is a good ( bad ) Diminishing marginal utility Indifferences
More informationThe Free Market Approach. The Health Care Market. Sellers of Health Care. The Free Market Approach. Real Income
The Health Care Market Who are the buyers and sellers? Everyone is a potential buyer (consumer) of health care At any moment a buyer would be anybody who is ill or wanted preventive treatment such as a
More informationChapter. Perfect Competition CHAPTER IN PERSPECTIVE
Perfect Competition Chapter 10 CHAPTER IN PERSPECTIVE In Chapter 10 we study perfect competition, the market that arises when the demand for a product is large relative to the output of a single producer.
More informationDEMAND FORECASTING. Demand. Law of Demand. Definition of Law of Demand
DEMAND FORECASTING http://www.tutorialspoint.com/managerial_economics/demand_forecasting.htm Copyright tutorialspoint.com Demand Demand is a widely used term, and in common is considered synonymous with
More informationQuantity of trips supplied (millions)
Taxes chapter: 7 1. The United tates imposes an excise tax on the sale of domestic airline tickets. Let s assume that in 2010 the total excise tax was $6.10 per airline ticket (consisting of the $3.60
More informationDemand, Supply, and Market Equilibrium
3 Demand, Supply, and Market Equilibrium The price of vanilla is bouncing. A kilogram (2.2 pounds) of vanilla beans sold for $50 in 2000, but by 2003 the price had risen to $500 per kilogram. The price
More informationMonopolistic Competition
In this chapter, look for the answers to these questions: How is similar to perfect? How is it similar to monopoly? How do ally competitive firms choose price and? Do they earn economic profit? In what
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Chapter 11 Perfect Competition - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Perfect competition is an industry with A) a
More informationNotes - Gruber, Public Finance Chapter 20.3 A calculation that finds the optimal income tax in a simple model: Gruber and Saez (2002).
Notes - Gruber, Public Finance Chapter 20.3 A calculation that finds the optimal income tax in a simple model: Gruber and Saez (2002). Description of the model. This is a special case of a Mirrlees model.
More informationElasticity. I. What is Elasticity?
Elasticity I. What is Elasticity? The purpose of this section is to develop some general rules about elasticity, which may them be applied to the four different specific types of elasticity discussed in
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Chapter 11 Monopoly practice Davidson spring2007 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly industry is characterized by 1) A)
More informationSUPPLY AND DEMAND : HOW MARKETS WORK
SUPPLY AND DEMAND : HOW MARKETS WORK Chapter 4 : The Market Forces of and and demand are the two words that economists use most often. and demand are the forces that make market economies work. Modern
More informationMarket Failure. EC4004 Lecture 9
Market Failure EC4004 Lecture 9 Today. Online Exam. Quantity Demanded, Quantity Supplied at each price 10 9 8 7 6 5 4 3 2 1 Supply at each Price, S(p) t Demand at each Price, D(p) 1 2 3 4 5 6 7 8 9 10
More informationExam Prep Questions and Answers
Exam Prep Questions and Answers Instructions: You will have 75 minutes for the exam. Do not cheat. Raise your hand if you have a question, but continue to work on the exam while waiting for your question
More informationChapter 14 Monopoly. 14.1 Monopoly and How It Arises
Chapter 14 Monopoly 14.1 Monopoly and How It Arises 1) One of the requirements for a monopoly is that A) products are high priced. B) there are several close substitutes for the product. C) there is a
More informationPrinciples of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9
Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9 print name on the line above as your signature INSTRUCTIONS: 1. This Exam #2 must be completed within the allocated time (i.e., between
More informationLab 17: Consumer and Producer Surplus
Lab 17: Consumer and Producer Surplus Who benefits from rent controls? Who loses with price controls? How do taxes and subsidies affect the economy? Some of these questions can be analyzed using the concepts
More informationChapter 03 The Concept of Elasticity and Consumer and
Chapter 03 The Concept of Elasticity and Consumer and Multiple Choice Questions Use the following Figure 3.1 to answer questions 1-4: Figure 3.1 1. In Figure 3.1, if demand is considered perfectly elastic,
More informationchapter >> Consumer and Producer Surplus Section 1: Consumer Surplus and the Demand Curve
chapter 6 A consumer s willingness to pay for a good is the maximum price at which he or she would buy that good. >> Consumer and Producer Surplus Section 1: Consumer Surplus and the Demand Curve The market
More informationEconomic Efficiency, Government Price Setting, and Taxes
CHAPTER 4 Economic Efficiency, Government Price Setting, and Taxes Modified by: Changwoo Nam 1 Economic Efficiency, Government Price Setting, and Taxes A legally determined maximum price that sellers may
More informationThe Efficiency of Markets. What is the best quantity to be produced from society s standpoint, in the sense of maximizing the net benefit to society?
The Efficiency of Markets What is the best quantity to be produced from society s standpoint, in the sense of maximizing the net benefit to society? We need to look at the benefits to consumers and producers.
More informationConsumers face constraints on their choices because they have limited incomes.
Consumer Choice: the Demand Side of the Market Consumers face constraints on their choices because they have limited incomes. Wealthy and poor individuals have limited budgets relative to their desires.
More informationSupply and Demand CHAPTER 4. Thomas Carlyle. Teach a parrot the terms supply and demand and you ve got an economist. Supply and Demand 4
CHAPTER 4 Supply and Demand Teach a parrot the terms supply and demand and you ve got an economist. Thomas Carlyle McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
More informationSupplement Unit 1. Demand, Supply, and Adjustments to Dynamic Change
1 Supplement Unit 1. Demand, Supply, and Adjustments to Dynamic Change Introduction This supplemental highlights how markets work and their impact on the allocation of resources. This feature will investigate
More informationChapter 17. The Economics of Pollution Control
Chapter 17 The Economics of Pollution Control Economic Rationale for Regulating Pollution Pollution as an Externality -pollution problems are classic cases of a negative externality -the MSC of production
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Chapter 6 - Markets in Action - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The short-run impact of the San Francisco earthquake
More information6. Which of the following is likely to be the price elasticity of demand for food? a. 5.2 b. 2.6 c. 1.8 d. 0.3
Exercise 2 Multiple Choice Questions. Choose the best answer. 1. If a change in the price of a good causes no change in total revenue a. the demand for the good must be elastic. b. the demand for the good
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron.
Principles of Microeconomics Fall 2007, Quiz #6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. 1) A monopoly is
More informationLABOR UNIONS. Appendix. Key Concepts
Appendix LABOR UNION Key Concepts Market Power in the Labor Market A labor union is an organized group of workers that aims to increase wages and influence other job conditions. Craft union a group of
More informationManagerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets
Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets I. Perfect Competition Overview Characteristics and profit outlook. Effect
More informationSection B. Some Basic Economic Concepts
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License. Your use of this material constitutes acceptance of that license and the conditions of use of materials on this
More informationnonrivalry => individual demand curves are summed vertically to get the aggregate demand curve for the public good.
Public Goods Public Goods have two distinct characteristics: non-rivalry: several individuals can consume the same good without diminishing its value non-excludability: an individual cannot be prevented
More informationManagement Accounting 243 Pricing Decision Analysis
Management Accounting 243 Pricing Decision Analysis The setting of a price for a product is one of the most important decisions and certainly one of the more complex. A change in price not only directly
More information4 THE MARKET FORCES OF SUPPLY AND DEMAND
4 THE MARKET FORCES OF SUPPLY AND DEMAND IN THIS CHAPTER YOU WILL Learn what a competitive market is Examine what determines the demand for a good in a competitive market Chapter Overview Examine what
More informationEconomics and Economic Evaluation
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License. Your use of this material constitutes acceptance of that license and the conditions of use of materials on this
More informationMaximising Consumer Surplus and Producer Surplus: How do airlines and mobile companies do it?
Maximising onsumer Surplus and Producer Surplus: How do airlines and mobile companies do it? This is a topic that has many powerful applications in understanding economic policy applications: (a) the impact
More informationChapter 7 Monopoly, Oligopoly and Strategy
Chapter 7 Monopoly, Oligopoly and Strategy After reading Chapter 7, MONOPOLY, OLIGOPOLY AND STRATEGY, you should be able to: Define the characteristics of Monopoly and Oligopoly, and explain why the are
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Firms that survive in the long run are usually those that A) remain small. B) strive for the largest
More informationEquilibrium of a firm under perfect competition in the short-run. A firm is under equilibrium at that point where it maximizes its profits.
Equilibrium of a firm under perfect competition in the short-run. A firm is under equilibrium at that point where it maximizes its profits. Profit depends upon two factors Revenue Structure Cost Structure
More informationEconomics 103h Fall l 2012: Review Questions for Midterm 2
Economics 103h Fall l 2012: Review Questions for Midterm 2 Essay/Graphing questions 1, Explain the shape of the budget line. 2. What shifts the budget line and why? Give an example in words and demonstrate
More informationCHAPTER 7: CONSUMER BEHAVIOR
CHAPTER 7: CONSUMER BEHAVIOR Introduction The consumer is central to a market economy, and understanding how consumers make their purchasing decisions is the key to understanding demand. Chapter 7 explains
More informationName Eco200: Practice Test 2 Covering Chapters 10 through 15
Name Eco200: Practice Test 2 Covering Chapters 10 through 15 1. Four roommates are planning to spend the weekend in their dorm room watching old movies, and they are debating how many to watch. Here is
More informationPre-Test Chapter 18 ed17
Pre-Test Chapter 18 ed17 Multiple Choice Questions 1. (Consider This) Elastic demand is analogous to a and inelastic demand to a. A. normal wrench; socket wrench B. Ace bandage; firm rubber tie-down C.
More informationCHAPTER 14 EXTERNALITIES, MARKET FAILURE, AND PUBLIC CHOICE
CHAPTER 14 EXTERNALITIES, MARKET FAILURE, AND PUBLIC CHOICE Chapter in a Nutshell So far, this book has described consumption and production of goods where all of the costs and benefits are borne directly
More informationPricing and Output Decisions: i Perfect. Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young
Chapter 9 Pricing and Output Decisions: i Perfect Competition and Monopoly M i l E i E i Managerial Economics: Economic Tools for Today s Decision Makers, 4/e By Paul Keat and Philip Young Pricing and
More informationMarket Structure: Perfect Competition and Monopoly
WSG8 7/7/03 4:34 PM Page 113 8 Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit
More informationFinal Exam (Version 1) Answers
Final Exam Economics 101 Fall 2003 Wallace Final Exam (Version 1) Answers 1. The marginal revenue product equals A) total revenue divided by total product (output). B) marginal revenue divided by marginal
More informationor, put slightly differently, the profit maximizing condition is for marginal revenue to equal marginal cost:
Chapter 9 Lecture Notes 1 Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter 9: Profit Maximization Profit Maximization The basic assumption here is that firms are profit maximizing.
More informationModule 49 Consumer and Producer Surplus
What you will learn in this Module: The meaning of consumer surplus and its relationship to the demand curve The meaning of producer surplus and its relationship to the supply curve Module 49 Consumer
More informationMath 1526 Consumer and Producer Surplus
Math 156 Consumer and Producer Surplus Scenario: In the grocery store, I find that two-liter sodas are on sale for 89. This is good news for me, because I was prepared to pay $1.9 for them. The store manager
More informationPractice Multiple Choice Questions Answers are bolded. Explanations to come soon!!
Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!! For more, please visit: http://courses.missouristate.edu/reedolsen/courses/eco165/qeq.htm Market Equilibrium and Applications
More informationLearning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly
Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision
More informationHow To Calculate Profit Maximization In A Competitive Dairy Firm
Microeconomic FRQ s 2005 1. Bestmilk, a typical profit-maximizing dairy firm, is operating in a constant-cost, perfectly competitive industry that is in long-run equilibrium. a. Draw correctly-labeled
More informationEcon 101: Principles of Microeconomics
Econ 101: Principles of Microeconomics Chapter 14 - Monopoly Fall 2010 Herriges (ISU) Ch. 14 Monopoly Fall 2010 1 / 35 Outline 1 Monopolies What Monopolies Do 2 Profit Maximization for the Monopolist 3
More informationEmployment and Pricing of Inputs
Employment and Pricing of Inputs Previously we studied the factors that determine the output and price of goods. In chapters 16 and 17, we will focus on the factors that determine the employment level
More informationTHE MARKET OF FACTORS OF PRODUCTION
THE MARKET OF FACTORS OF PRODUCTION The basis of the economy is the production of goods and services. Economics distinguishes between 3 factors of production which are used in the production of goods:
More informationMonopoly WHY MONOPOLIES ARISE
In this chapter, look for the answers to these questions: Why do monopolies arise? Why is MR < P for a monopolist? How do monopolies choose their P and Q? How do monopolies affect society s well-being?
More informationECON 1100 Global Economics (Fall 2013) Surplus, Efficiency, and Deadweight Loss
ECON 11 Global Economics (Fall 213) Surplus, Efficiency, and Deadweight Loss Relevant Readings from the Required Textbooks: Economics Chapter 5, Surplus, Efficiency, and Deadweight Loss Definitions and
More information3.3 Applications of Linear Functions
3.3 Applications of Linear Functions A function f is a linear function if The graph of a linear function is a line with slope m and y-intercept b. The rate of change of a linear function is the slope m.
More informationProfit Maximization. 2. product homogeneity
Perfectly Competitive Markets It is essentially a market in which there is enough competition that it doesn t make sense to identify your rivals. There are so many competitors that you cannot single out
More informationCHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION
CHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION Chapter in a Nutshell Now that we understand the characteristics of different market structures, we ask the question
More informationOligopoly and Strategic Pricing
R.E.Marks 1998 Oligopoly 1 R.E.Marks 1998 Oligopoly Oligopoly and Strategic Pricing In this section we consider how firms compete when there are few sellers an oligopolistic market (from the Greek). Small
More informationPractice Questions Week 8 Day 1
Practice Questions Week 8 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The characteristics of a market that influence the behavior of market participants
More informationChapter 5 Efficiency and Equity Test Bank MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Chapter 5 Efficiency and Equity Test Bank MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) All of the following statements about marginal benefit
More informationchapter >> Consumer and Producer Surplus Section 4: Applying Consumer and Producer Surplus: The Efficiency Costs of a Tax
chapter 6 >> Consumer and Producer urplus ection 4: Applying Consumer and Producer urplus: The fficiency Costs of a Tax The concepts of consumer and producer surplus are extremely useful in many economic
More informationCOMPETITIVE MARKETS: 10APPLICATIONS
COMPETITIVE MARKETS: 10APPLICATIONS 10.1 THE INVISIBLE HAND, EXCISE TAXES, AND SUBSIDIES APPLICATION 10.1 Taxes Gallons and Dollars: Gasoline 10.2 PRICE CEILINGS AND FLOORS 10.3 PRODUCTION QUOTAS APPLICATION
More informationTable of Contents MICRO ECONOMICS
economicsentrance.weebly.com Basic Exercises Micro Economics AKG 09 Table of Contents MICRO ECONOMICS Budget Constraint... 4 Practice problems... 4 Answers... 4 Supply and Demand... 7 Practice Problems...
More informationGov t Intervention: Price Floors & Price Ceilings / Taxes & Subsidies
Gov t Intervention: Price Floors & Price Ceilings / Taxes & Subsidies Price Floor: Regulated price, cannot charge below this price. A price floor will be binding if it is set above the true equilibrium
More informationPaper 1 (SL and HL) markschemes
Paper 1 (SL and HL) markschemes Examples of markschemes for Exam practice: paper 1 in the Economics for the IB Diploma CD-ROM are provided below. Paper 1 section A: Microeconomics Chapter 2 Competitive
More informationPOTENTIAL OUTPUT and LONG RUN AGGREGATE SUPPLY
POTENTIAL OUTPUT and LONG RUN AGGREGATE SUPPLY Aggregate Supply represents the ability of an economy to produce goods and services. In the Long-run this ability to produce is based on the level of production
More informationMICROECONOMIC PRINCIPLES SPRING 2001 MIDTERM ONE -- Answers. February 16, 2001. Table One Labor Hours Needed to Make 1 Pounds Produced in 20 Hours
MICROECONOMIC PRINCIPLES SPRING 1 MIDTERM ONE -- Answers February 1, 1 Multiple Choice. ( points each) Circle the correct response and write one or two sentences to explain your choice. Use graphs as appropriate.
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Chap 13 Monopolistic Competition and Oligopoly These questions may include topics that were not covered in class and may not be on the exam. MULTIPLE CHOICE. Choose the one alternative that best completes
More informationPractice Questions Week 3 Day 1
Practice Questions Week 3 Day 1 Figure 4-1 Quantity Demanded $ 2 18 3 $ 4 14 4 $ 6 10 5 $ 8 6 6 $10 2 8 Price Per Pair Quantity Supplied 1. Figure 4-1 shows the supply and demand for socks. If a price
More informationCarbon Emissions Trading and Carbon Taxes
Carbon Emissions Trading and Carbon Taxes EU Environmental Policy The challenge reaching towards a low carbon economy 1 This presentation covers Can carbon markets be part of the answer in controlling
More informationMarginal cost. Average cost. Marginal revenue 10 20 40
Economics 101 Fall 2011 Homework #6 Due: 12/13/2010 in lecture Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework
More informationChapter 9: Perfect Competition
Chapter 9: Perfect Competition Perfect Competition Law of One Price Short-Run Equilibrium Long-Run Equilibrium Maximize Profit Market Equilibrium Constant- Cost Industry Increasing- Cost Industry Decreasing-
More informationQuantity Tax Incidence Subsidy Welfare Effects Case Study. Equilibrium Chapter 16
Equilibrium Chapter 16 Competitive Equilibrium: Motivating Questions Firms are price-takers in competitive markets, but how is the market price (and quantity) determined? competitive equilibrium What happens
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The law of demand states that, other things remaining the same, the lower the price of a good,
More informationProblems: Table 1: Quilt Dress Quilts Dresses Helen 50 10 1.8 9 Carolyn 90 45 1 2
Problems: Table 1: Labor Hours needed to make one Amount produced in 90 hours: Quilt Dress Quilts Dresses Helen 50 10 1.8 9 Carolyn 90 45 1 2 1. Refer to Table 1. For Carolyn, the opportunity cost of 1
More informationCHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition
CHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition Chapter Summary Now that you understand the model of a perfectly competitive market, this chapter complicates
More information