Water flows over a dam as illustrated in Fig. P7.8. Assume the flowrate, q, per unit length along the dam depends on the head, H, width, b, acceleration of gravity, g, fluid density, r, and fluid viscosity, . Develop a suitable set of dimensionless parametersfor this problem using b, g, and as repeating variables.
ECON116ExamIIStudyGuide1 ECON251ExamIIStudyGuide: Chapter7: KeyPoints: 1. Describetheeffectsofsalestaxesandexcisetaxes,determinewhopaysthesetaxes,and explainwhytaxescreateinefficiencies • Asalestaxoranexcisetaxraisesthepriceofthegoodorservicethatistaxedbut usuallybylessthanthetax—thebuyerpaysonlypartofthetax • Thelesselasticdemandandthemoreelasticsupply,thegreateristhepriceincrease, thesmalleristhequantitydecrease,andthelargeristheshareofthetacpaidbythe buyer • Ifdemandisperfectlyelasticorsupplyisperfectlyinelastic,thesellerpaysallofthetax. Andifdemandisperfectlyinelasticorsupplyisperfectlyelastic,thebuyerpaysallofthe tax • Taxescreateinefficiencybydrivingawedgebetweenmarginalbenefitandmarginal costandcreatingadeadweightloss 2. Describetheeffectsofincometaxesandsocialsecuritytaxes,determinewhopaysthese taxes,andexplainwhichtaxescreatethegreatestinefficiency • Taxescanbeprogressive(theaveragetaxrateriseswithincome),proportional(the averagetaxrateisconstant),orregressive(theaveragetacratefallswithincome • TheU.S.incometaxisprogressive • Thesharesoftheincometaxpaidbythefirmsandhousehold’s,dependontheelasticity ofdemandandtheelasticityofsupplyofthefactorsofproduction • Theelasticitiesofdemandandsupply,notCongress,determinewhopaystheincome taxandwhopaysthesocialsecuritytax • Themoreelasticiseitherdemandorsupply,thegreateristheexcessburdenofatax 3. Reviewideasaboutthefairnessofthetaxsystem • Thetwomainprinciplesoffairnessoftaxes—thebenefitsprincipleandtheability-to- payprinciple—donotdeliveruniversallyacceptedstandardsoffairness,andvertical equityandhorizontalequitycancomeintoconflict KeyTerms: • ability-to-payprinciple=propositionthatpeopleshouldpaytaxesaccordingtohow easilytheycanbeartheburden • averagetaxrate=thepercentageofincomethatispaidintax—lessthanthemarginal taxrate • benefitsprinciple=propositionthatpeopleshouldpaytaxesequaltothebenefitsthey receivefrompublicservices • excessburden=thedeadweightlossthatarisesfromtax • horizontalequity=iftaxesarebasedontheabilitytopay,taxpayerswiththesame abilitytopayshouldpaythesametaxes • marginaltaxrate=thepercentageofanadditionaldollarofincomethatispaidintax ECON116ExamIIStudyGuide2 • payrolltax=ataxonemployersbasedonthewagestheypaytheirworkers • progressivetax=whentheaveragetaxrateincreasesasincomeincreases;thepersonal incometax • proportionaltax=sameaveragetaxrateatallincomelevels • regressivetax=decreasingaveragetaxrateasincomedecreases • taxableincome=thetotalincomeminusapersonalexemptionanastandarddeduction • taxincidence=thedivisionoftheburdenofataxbetweenthebuyerandtheseller • verticalequity=therequirementthattaxpayerswithagreaterabilitytopaybeara greatershareofthetaxes Chapter9: KeyPoints: 1. HouseholdConsumptionChoices • Ahousehold’schoicesaredeterminedbyitsconsumptionpossibilitiesandpreferences • Ahousehold’sconsumptionpossibilitiesareconstrainedbyitsincomeandbytheprices ofthegoodsandservices.Somecombinationofgoodsandservicesareaffordable,and somearenotaffordable • Ahousehold’spreferencescanbedescribedbymarginalutility • Thekeyassumptionofmarginalutilitytheoryisthatthemarginalutilityofagoodor servicedecreasesastheconsumptionofthegoodorserviceincreases • Themarginalutilitytheoryassumesthatpeoplebuytheaffordablecombinationof goodsandservicesthatmaximizestheirtotalutility 2. MaximizingUtility • Totalutilityismaximizedwithalltheavailableincomeisspentandwhenthemarginal utilityperdollarspendoneachgoodisequal • IfthemarginalutilityperdollarspendongoodAexceedsthatongoodB,totalutility increasesifthequantitypurchasedofgoodAincreasesandthequantityofgoodB decreases 3. PredictionsofMarginalUtilityTheory • Marginalutilitytheorypredictsthelawofdemand.Thatis,otherthingsremainthe same,thehigherthepriceofagood,thesmalleristhequantitydemandedofthatgood • Marginalutilitytheoryalsopredictsthatotherthingsremainingthesame,thelargerthe consumer’sincome,thelargeristhequantitydemandedofanormalgood • Themarketdemandcurveisfoundbysumminghorizontallyalltheindividualdemand curves 4. Efficiency,Price,andValue • Whenaconsumermaximizesutility,heorsheisusingresourcesefficiently • Marginalutilitytheoryresolvestheparadoxofvalue • Whenwetalklooselyaboutvalue,wearethinkingoftotalutilityorconsumersurplus. Butpriceisrelatedtomarginalutility ECON116ExamIIStudyGuide3 • Water,whichweconsumeinlargeamounts,hasahightotalutilityandalarge consumersurplus,butthepriceofwaterislowandthemarginalutilityfromwateris low • Diamonds,whichweconsumeinsmallamounts,havealowtotalutilityandasmall consumersurplus,butthepriceofadiamondishighandthemarginalutilityfrom diamondsishigh KeyTerms: • Budgetline=describesthelimitstoitsconsumptionchoices • consumerequilibrium=situationinwhichaconsumerhasallocatedallofhisorher availableincomeinthewaythat,giventhepriceofgoodsandservices,maximizeshisor hertotalutility • diminishingmarginalutility=decreaseinmarginalutilityasthequantityofthegood consumedincreases • marginalutility=thechangeintotalutilitythatresultsfromaone-unitinthequantityof agoodconsumed • marginalutilityperdollarspent=themarginalutilityfromagooddividedbyitsprice • marketdemand=therelationshipbetweenthetotalquantitydemandedofagoodand itsprice • realincome=thehousehold’sincomeexpressedasaquantityofgoodsthehousehold canaffordtobuy • relativeprice=thepriceofonegooddividedbythepriceofanother • totalutility=thetotalbenefitthatapersongetsfromtheconsumptionofgoodsand services • utility=thebenefitorsatisfactionthatapersongetsfromtheconsumptionofagoodor service Chapter10: KeyPoints: 1. Theshortrunversusthelongrunfromafirm’sperspective • Theshortrunforafrimistheperiodduringwhichatleaseoneinput,suchasplantsize, cannotbealtered • Inputsthatcannotbechangedintheshortrunarefixedinputs,whereasfactorsof productionmaybeadjustedintheshortrunarevariableinputs • Thelongrunisaperiodoftimeinwhichafirmmayvaryallfactorsofproduction 2. Thelawofdiminishingmarginalreturns • Theproductionfunctionistherelationshipbetweeninputsandthemaximumphysical output,orthetotalproduct,thatafirmcanproduce • Typically,afirmsmarginalphysicalproduct—thephysicaloutputresultingfromthe additionofonemoreunitofavariablefactorofproductionthatitemploys • Eventually,asthefirmaddsmoreandmoreunitsofthevariableinput,themarginal physicalproductbeginstodecline—thelawofdiminishingreturns ECON116ExamIIStudyGuide4 3. Afirm’sshort-runcostcurves • Theexpensesforafirm’sfixedinputsareitsfixedcosts,andtheexpensesforits variableinputsarevariablecosts • Thetotalcostsofafirmarethesumofitsfixedcostsandvariablecosts • Dividingfixedcostsbyvariouspossibleoutputlevelstracesoutthefirm’saveragefixed costcurve,whichslopesdownwardbecausedividedfixedcostsbyalardertotalproduct yieldsaloweraveragefixedcost • Averagevariablecostequalstotalvariablecostdividedbytotalproduct • Averagetotalcostequalstotalcostdividedbytotalproduct • ComputingaveragevariableandaveragetotalcostyieldsU-shapedcurves • Marginalcostisthechangeintotalcostresultingfromaone-unitchangeinproduction • Afirm’smarginalcoststypicallydeclineasthefirmproducesthefirstfewunitsof output,butatthepointofdiminishingmarginalreturns,themarginalcostcurvealso intereststheminimumpointsoftheaveragevariablecostcurveandaveragetotalcost curve 4. Afirm’slong-runcostcurves • Overafirm’slong-runorplanning,horizon,itcanchooseallfactorsofproduction, includingplantsize—thuscanchoosealong-runaveragecostcurve • ThelongrunaveragecostcurveisU-shapedandtracedoutbytheshort-runaverage costcurvescorrespondingtovariousplantsizes 5. EconomiesandDiseconomiesofscaleandafirm’sminimumefficientscale • Alongthedownward-slopingrangeofafirm’slong-runaveragecostcurve,thefirm experienceseconomiesofscale,meaningthatitslong-runproductioncostsdeclineasit increasesitsplantsizeandtherebyraisesitsoutputscale • Incontrast,alongtheupward-slopingportionoflongrunaveragecostcurve,thefirm encountersdiseconomiesofscale,sothatitslong-runcostsofproductionriseasit increasesitsoutputscale • Theminimumpointofthelong-runaveragecostcurveoccursatthefirm’sminimum efficientscale—whichisthelowestrateofoutputatwhichthefirmcanachieve minimumlong-runcost KeyTerms: • averagefixedcosts=totalfixedcostsdividedbythenumberofunitsproduced • averagephysicalproduct=totalproductdividedbythevariableinput • averagetotalcosts=totalcostsdividedbythenumberofunitsproduced—sometimes calledaverageper-unittotalcosts • averagevariablecosts=totalvariablecostsdividedbythenumberofunitsproduced • constantreturnstoscale=thelong-runaveragecostcurveisatitsminimumpoint,such thatanincreaseinscaleandproductiondoesnotchangeunitcosts—otherwisethereis nochangeinlong-runaveragecostswhenoutputincreases • diseconomiesofscale=wherethelong-runaveragecostcurveslopesupward • economiesofscale=wherethelong-runaveragecostcurveslopesdownward ECON116ExamIIStudyGuide5 • fixedcosts=coststhatdonotvarywithoutput;includethingssuchasrentona building—thesecostsarefixedforacertainperiodoftime;inthelongruntheyare variable • lawofdiminishing(marginal)returns=theobservationthataftersomepoint,successive equalsizedincreasesinavariablefactorofproduction,suchaslabor,addedtofixed factorsofproduction,willresultinsmallerincreasesinoutput • longrun=thetimeperiodduringwhichallfactorsofproductioncanbevaried • long-runaveragecostcurve=thelocalpointsrepresentingtheminimumunitcostof producinganygivenrateofoutput,givencurrenttechnologyandresourceprices • marginalcosts=thechangeintotalcostsduetoaone-unitchangeinproductionrate • marginalphysicalproduct=thephysicaloutputthatisduetotheadditionofonemore unitofavariablefactorofproduction—thechangeintotalproductoccurringwhena variableinputisincreasedandallotherinputsareheldconstant;alsocalledmarginal productormarginalreturn • minimumefficientscale(MES)=theoutputratewheneconomiesofscaleandconstant economiesofscalestart—thelowestrateofoutputperunittimeatwhichlong0run averagecostsforaparticularfirmareataminimum • planningcurve=thevariousaveragecostsattainableattheplanningstageoffirm’s decisionmaking—otherwiseknownasthelong-runaveragecostcurve • planninghorizon=thelongrun,duringwhichallinputsarevariable—alsoknownasthe long-runcurve • plantsize=thephysicalsizeofthefactoriesthatafirmownsandoperatestoproduce itsoutput—plantsizecanbedefinedbysquarefootage,maximumphysicalcapacity, andotherphysicalmeasures • production=anyactivitythatresultsintheconversionofresourcesintoproductsthat canbeusedinconsumption • productionfunction=therelationshipbetweeninputsandmaximumphysicaloutput—a productionfunctionisatechnological,notaneconomic,relationship • shortrun=thetimeperiodduringwhichatleastoneinput,suchasplantsize,cannotbe changed • totalcosts=thesumoftotalfixedcostsandtotalvariablecosts • variablecosts=coststhatvarywiththerateofproduction—theyincludewagespaidto workersandpurchasesofmaterials Chapter11: KeyPoints: 1. Explainaperfectlycompetitivefirm’sprofit-maximizingchoicesandderiveitssupplycurve • Aperfectlycompetitivefirmisapricetaker • Marginalrevenueequalsprice • Thefirmproducestheoutputatwhichpriceequalsmarginalcost • Ifthepriceislessthanminimumaveragevariablecost,thefirmtemporarilyshutsdown ECON116ExamIIStudyGuide6 • Afirm’ssupplycurveistheupward-slopingpartofitsmarginalcostcurveabove minimumaveragevariablecostandtheverticalaxisatallpricesbelowminimum averagevariablecost 2. Explainhowoutput,price,andprofitaredeterminedintheshortrun • Marketdemandandmarketsupplydetermineprice • Firmschoosethequantitytoproducethatmaximizesprofit,whichisthequantityat whichmarginalcostequalsprice • Inshort-runequilibrium,afirmcanmakeaneconomicprofitorincuraneconomicloss 3. Explainhowoutput,price,andprofitaredeterminedintheshortrun • Economicprofitinducesentry,whichincreasessupplyandlowerspriceandprofit— economiclossinducesexit,whichdecreasessupplyraisesprice,andlowersthelosses • Inthelongrun,economicprofitiszeroandthereisnoentryorexit • Thelong-runeffectofapermanentincreaseindemandonpricedependsonwhether thereareexternaleconomies(pricefalls)orexternaldiseconomies(priceremains constant) • Newtechnologiesincreasesupplyandinthelongrunlowerthepriceandincreasethe quantity KeyTerms: • externaldiseconomies=factorsbeyondthecontrolofanindividualfirmthatlowerits costsasthemarketoutputincreases • externaleconomies=factorsoutsidethecontrolofafirmthatraisethefirm’scostsas marketoutputincreases • long-runmarketsupplycurve=acurvethatshowstherelationshipbetweenthe quantitysuppliedandthepricewhenthenumberoffirmschangessothateachfirm earnszeroeconomicprofit • marginalrevenue=thechangeintotalrevenuethatresultsfromaone-unitincreasein thequantitysold • monopolisticcompetition=amarketinwhichalargenumberoffirmscompeteby makingsimilarbutslightlydifferentproducts • monopoly=amarketforagoodorservicethathasnoclosesubstitutesandinwhich thereisonesupplierthatisprotectedfromcompetitionbyabarrierpreventingthe entryofnewfirms • oligopoly=amarketinwhichasmallnumberoffirmscompete • perfectcompetition=amarketinwhichtherearemanyfirms,eachsellinganidentical product—manybuyers,norestrictionsontheentryofnewfirmsintotheindustry,no advantagetoestablishedfirms,andbuyersandsellersarewellinformedaboutprices • pricetaker=afirmthatcannotinfluencethepriceofthegoodorservicethatit produces • shutdownpoint=theoutputandpriceatwhichthefirmjustcoversitstotalvariable cost Chapter12: ECON116ExamIIStudyGuide7 KeyPoints: 1. Explainhowmonopolyarisesanddistinguishbetweensingle-pricemonopolyandprice- discriminatingmonopoly • Amonopolyisamarketwithasinglysupplieroragoodorservicethathasnoclose substitutesandinwhichlegalornaturalbarrierstoentrypreventcompetition • Amonopolycanpricediscriminatewhenthereisnoresalepossibility • Whereresaleispossible,firmchargesasingleprice 2. Explainhowasingle-pricemonopolydeterminesitsoutputandprice • Thedemandforamonopoly’soutputisthemarketdemand,andasingleprice monopoly’smarginalrevenueislessthanprice • Amonopolymaximizesprofitbyproducingtheoutputatwhichmarginalrevenueequals marginalcostandbychargingthemaximumpricethatconsumersarewillingtopayfor thatoutput 3. Comparetheperformanceofasingle-pricemonopolywiththatofperfectcompetition • Asingle-pricemonopolychargesahigherpriceandproducesasmallerquantitythan doesaperfectlycompetitivemarketandcreatesadeadweightloss • Monopolyimposesalossonsocietythatequalsitsdeadweightlossplusthecostofthe resourcesdevotedtorentseeking 4. Explainhowpricediscriminationincreasesprofit • Perfectpricediscriminationchargesadifferentpriceforeachunitsold,obtainsthe maximumpricethateachconsumeriswillingtopayforeachunit,andredistributesthe entireconsumersurplustothemonopoly • Withperfectpricediscrimination,themonopolyproducesthesameoutputaswoulda perfectlycompetitivemarket,butrentseekingusessomepfthesurplus 5. Explainhowmonopolyregulationinfluencesoutput,price,economicprofit,andefficiency • Naturalmonopoliescanproduceatalowerpricethancompetitivefirmscan,and monopoliesmightbemoreinnovativethancompetitivefirms • Efficientregulationrequiresthatpriceequalmarginalcost,butforanaturalmonopoly, suchapriceislessthanaveragecost • Averagecostpricingisarulethatcoversafirm’scostsandprovidesanormalprofitbut isinefficient KeyTerms: • averagecostpricingrule=apriceruleforanaturalmonopolythatsetsthepriceequal toaveragecostandenablesthefirmtocoveritscostsandearnanormalprofit • barriertoentry=anaturalorlegalconstraintthatprotectsafirmfromcompetitors • legalmonopoly=amarketinwhichcompetitionandentryarerestrictedby concentrationofownershipofanaturalresourceorbygrantingofpublicfranchise, governmentlicense,patentorcopyright • marginalcostpricingrule=apricerulefornaturalmonopolythatsetspriceequalto marginalcost • naturalmonopoly=amonopolythatarisesbecauseonefirmcanmeettheentire marketdemandatalowerpricethantwoormorefirmscould ECON116ExamIIStudyGuide8 • perfectpricediscrimination=pricediscriminationthatextractstheentireconsumer surplusbychargingthehighestpricethatconsumersarewillingtopayforeachunit • price=discriminatingmonopoly=amonopolythatisabletoselldifferentunitsofagood orservicefordifferentprices • rentseeking=theactofobtainingspecialtreatmentbythegovernmenttocreate economicprofitortodivertconsumersurplusorproducersurplusawayfromothers • single-pricemonopoly=amonopolythatisabletoselldifferentunitsofagoodor servicefordifferentprices EquationstorememberforExamII: Lecture12: Income=PxQx+PyQy;PxQy=spendingongoodx,PyQy=spe ndingongoody Marginalutility(mu)perdollarspent=Mu/p Lecture13: Consumerequilibrium: Mux/Px=Muy/Py Marginalbenefit=y-coordinateofdemand Marginalrateofsubstitution=theamountofgoodyyouarewillingtogiveupfor onemoreunitofgoodx;theabsolutevalueoftheslope Lecture14: MRS=Mux/MuyßmaximumutilitywherebudgetlinecrossesIndifference Curve ECON116ExamIIStudyGuide9 Lecture15: Accountingprofit=revenue–explicitcosts Economicprofit=revenue-explicitcosts–implicitcosts MarginalProduct(MP)= ∆Q/∆L Averageproduct=MP /totalresourcLs =Q/L Totalcost(TC)=FixedCost(FC)+VariableCost(VC) Averagefixedcost(AFC)=FC/Q Averagevariablecost(AVC)=VC/Q Averagetotalcost(ATC)=TC/Q Lecture16: MarginalCost(MC)=∆TC/∆Q =∆VC/∆Q =wage/MP L concentrationratio=percentofsalesaccountedforbythefourlargestfirmsin theindustry Herfindahl-HirschmanIndex(HHI)=sumofsquaredmarketsharesoftop50firms Lecture17: Profit=TR–TC =q(P–ATC) Marginalrevenue=∆TR/∆q E =|%∆Q |/|%∆P| Lecture18: ConsumerSurplus=areabelowdemandandabovetheprice ProducerSurplus=areabelowthepriceandabovethesupply
