Economics 2005 Final Exam Review
Economics 2005 Final Exam Review ECON 2005
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This 5 page Study Guide was uploaded by Tim Reynolds on Tuesday May 10, 2016. The Study Guide belongs to ECON 2005 at Virginia Polytechnic Institute and State University taught by Steve Trost in Spring 2016. Since its upload, it has received 27 views. For similar materials see Principles of Economics in Economcs at Virginia Polytechnic Institute and State University.
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Date Created: 05/10/16
Economics Final Exam Review Important Concepts and Situations Concepts from Exam 1 A decrease in price along the elastic segment of a demand curve will result in increased total utility, consumer surplus, and total revenue and decreased marginal utility. If there is a shortage in the market for a product, then the price for that product should begin to rise. Many people argue against increasing the minimum wage because they believe the result would be increased unemployment. A higher minimum wage would increase th quantity supplied of labor while decreasing the quantity demanded of labor. An expectation of a future price decline would cause the demand curve to shift to the left. A change in the price of a product will not shift its demand curve. Total utility is maximized when marginal utility of A/price of A = marginal utility of B/price of B. If a firm raises the price of its product, the total revenue will increase only if demand is price inelastic. In a circular flow model, households supply natural resources, entrepreneurial ability, capital, and labor. A production possibilities frontier can shift inward if there are factors in a business such as a mandatory retirement at a certain age (anything that can negatively impact production). If the cross-price elasticity of demand is -3, then the goods are compliments. If it is 0, they are unrelated. If it is greater than 1, they are substitutes. Demand is more elastic for goods with many substitutes than for goods with only a few. A normative economic statement is a statement of what ought to be, not what is. A positive statement is fact-based. Equilibrium price and quantity will rise when supply increases by a little and demand increases greatly. Negative marginal utility is when total utility decreases as additional units are consumed. The law of comparative advantage states that a person who should produce a good is the person who has the lowest opportunity cost of producing that good. Someone who commits the fallacy of composition is likely to assume that what is true for the individual I also true for the group. When supply and demand both increase, or decrease, the effect on the equilibrium price will be indeterminate. As producers have more time to adjust to a price change, price elasticity pf supply increases. If the price of a good doubles and the quantity supplied triples, supply is elastic. Concepts from Exam 2 o A natural monopoly results when a firm has decreasing average costs over the range of market demand. o When a monopolist practices perfect price discrimination, consumers receive no consumer surplus. o As new monopolistically competitive firms enter the market, the demand for each firm’s product decreases, causing the price charged by each firm to fall. In the long run, each firm will earn on average, 0 economic profit. o As output rises, marginal product eventually diminishes and, as a result marginal cost increases. o Economies of scale occur where long-run average cost falls as one firm expands plant size. o The term “product efficiency” refers to the production of a good at the lowest long-run average cost. o If a monopolistically competitive firm raises its price, it loses some, but not all of its customers. o The main reason a monopolist can earn long-run economic profit, whereas a perfectly competitive firm cannot, is that there are no barriers for entry in perfect competition. o When compared to firms in perfect competition, monopolists tend to charge higher prices and offer lower quantities of output. o Accounting profit equals economic profit plus implicit costs. o A perfectly competitive firm’s profit per unit of output equals price minus average total cost. o In the short-run, a firm will always shut down when total variable cost is greater than total revenue at all output levels. o If a firm shuts down in the short-run and produces no output, its total cost will be equal to total fixed cost. o An oligopoly model that describes formal collusion is the cartel model. o Unlike other market structures, an oligopoly involves interdependence among firms in the industry. o The short run is a period of time during which at least one resource is fixed. o Monopolistic competition is different from perfect competition because monopolistic competitors produce differentiated products. Concepts from Exam 3 Understand the difference between situations involving hidden characteristics, adverse selection, hidden actions and moral hazard (All are self-explanatory and can be easily distinguished). A wage offer that is above the market wage, intended to avoid the adverse selection problem is called an efficiency wage. The distribution of income n the US is more unequal than the distribution of income in other developed countries throughout the world. In a repeated game, the tit-for-tat strategy is most consistent with cooperation on the part of the players. Social Security payments to a retiree is not means-tested. Income assistance programs, Food stamp program, Earned income tax credit and TANF are all means-tested. As the Lorenz Curve moves away from the 45-degree line of equality the Gini coefficient must be rising. In the US, the individual income tax is best described as a progressive tax. If consuming a good creates positive externality, marginal social benefits exceed marginal private benefits. Many eligible voters do not vote. However some do even though they do not know much about the candidates. This is known as rational ignorance. A requirement that buyers of one service also purchase another service from the same seller is called a tying contract. The economic efficiency to emission control gives firms an option to reduce emissions or buy additional permits at prices determined by the market. If the government is interested n generating a large revenue from placing a tax on the consumption of a particular good, it should choose a good for which the demand is price inelastic. For public goods, the “free rider” problem refers to the idea that once a public good is produced, it is impossible to prevent people from using it even if they did not pay for it. If demand is less elastic than supply, the indicence of a sales tax will largely be borne by consumers. The common pool problem is one in which resources to which access is unrestricted will tend to be overused. Special-interest legislation usually has concentrated benefits but widespread costs. Medicaid is an example of an in-kind transfer payment. Payment in something other than cash. “Rawlsian Justice” focuses on the “worst off” member of society. A good that is rival but nonexclusive is called an open access or common resource good. If the government regulators force a natural monopoly to produce where price equals marginal cost, the monopoly will earn negative economic profit. Taxes collected on the basis of the benefits-received principle require those who benefit from the tax to pay more. If a negative externality is present, social cost is equal to marginal private cost plus marginal external cost. The capture theory of regulation asserts that producers “capture” regulatory agencies so that regulation favors producers. Concepts from Taxes and International Trade Derived demand is when the demand for a resource is derived from the demand for what it can produce. The demand curve for labor is the same as the firm’s marginal revenue product of labor curve. If the price of the firm’s output increases, the demand for labor curve will shift rightward. As the wage rate rises, the quantity of labor an individual supplies initially increases at low wage rates and then may decrease at high wage rates. A country has a trade deficit when its imports exceeds its exports. The advantage in the production of a product enjoyed by one country over another when it uses fewer resources to produce that product than the other country does is the same as an absolute advantage. If the slopes of the production possibilities frontiers involving two products are equal, specialization does not benefit either country. The terms of trade refers to the ratio at which one country trades a domestic product for an imported product. The quantity and quality of labor, land, and natural resources of a company are its factor endowments. A tariff is a tax on imports. Tariffs on imports generate government revenue as long as the domestic price is larger than the world price plus the tariff. The case for free trade is based on the theory of comparative advantage. GOOD LUCK!!!
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