ECON 1101 notes - Playconomics questions PDF

Preview

Summary

CHAPTER 2 If a perfectly competitive firm faces a price that is lower than its average total cost and higher than its average variable cost then a. The firm will operate in the short run and exit the market in the long run (Elasticity of supply: calculated [11]) An increase in price will increase th...

Description

CHAPTER 2 1. If a perfectly competitive firm faces a price that is lower than its average total cost and higher than its average variable cost then a. The firm will operate in the short run and exit the market in the long run 2. (Elasticity of supply: calculated [11]) An increase in price will increase the price elasticity of supply if a. None are correct

3. At the equilibrium price P=70 a. Both a and b, consumers spend max amount of money (all are correct)

4. (cost curves and markets [) At a price of $5 a competitive form will be indifferent between exiting the market or continuing to operate in the market. Assume that the firm is operating in the long run. Which of the following must also equal $5 a. Both a & b 5. (Measurement of elasticity[4]) Which of the following factors will affect the price elasticity of supply for fish (by affecting the slope of the supply curve) a. A decrease in the availability of fuel used by fishing boats 6. Supply for fish: shift! Which of the following changes will cause the supply curve for fish to shift? a. The expectation that the market price of fish will increase in the future 7. Elasticity of supply: calculated [21] An increase in price will increase the total production cost if a. All are correct

1. Cost curves and markets [2] At a price of $5 a competitive firm will be indifferent between shutting down production or producing some goods which of the following must also equal $5 a. Firms minimum average variable cost 2. Which one of the following is not a characteristic of a perfectly competitive market a. Consumption generates an external benefit 3. Cost curves and markets [8] a. None are correct 4. Elasticity of supply calculated [11] an increase in price will increase the price elasticity of supply if a. None are correct 5. Marginal cost and oc

CHAPTER 3 1. (Measurements of Elasticity) A government agency calculates the price elasticity of demand for fish using the dollar amount per unit of fish (price) and how many units of fish are produced each week (quantity). Suddenly, it decides to use the dollar amount per unit of tuna fish (price) and how many units of tuna fish are produced each day (quantity) instead. This change will: a. None are correct 2. Demand for fish: what makes it shift? Which of the following will cause the demand curve for fish to shift a. All correct 3. Inferior Goods [2] When the price of an inferior good decreases, the income effect will cause a. None are correct 4. Demand for fish: shift! Which of the following will not cause the demand curve for fish to shift? a. None will cause the demand curve to shift 5. Inferior goods / when the price of an inferior good rises, the income effect will cause a. None are correct 6. Elasticity of demand for bus tickets [1] Research provided to the manager of a bus company suggests that the absolute value of price-elasticity of demand for its bus

tickets is 0.8. this implies that if the bus company wanted to decrease the number of bus tickets sold by 1.6% then a. Price increase by 20% 7. (Demand shit: fish and meat) Which of the following changes will cause the demand curve for fish to shift? Assume that meat is a substitute for fish a. All are correct 8. Elasticity for bus tickets) which of the following statements are likely to be correct? a. The value of price elasticity of demand for bus tickets is -0.25 9. Demand shift: fish and meat [2] Which of the following changes will cause the demand curve for fish to shift? Assume that meat is a substitute for fish a. An increase in the price of meat 10. Normal goods) when the price of a normal good rises, the substitution effect will cause a. Quantity demand decrease because substitutes are cheaper 11. Substitutes in consumption [2] Suppose that Coke and Pepsi are substitutes in consumption. An increase in the price of coke will most likely cause a __ in the price and ___ in the quantity sold of Pepsi a. Increase;increase 12. Complements/substitutes in consumption [8] Suppose that bread and butter are complements in complements in consumption. Also assume that bread is a giffen good. An increase in the price of bread will most likely cause a___ in the price and a __ in the quantity sold of butter a. Increase;increase 13. Elasticity for bus tickets [2] which of the following statements are likely to be incorrect? a. All are correct 14. Elasticity of demand: calculated [11] An increase in price will increase the total amount of money consumers spend it a. demand is currently inelastic 15. Measure of elasticity [3] Which of the following factors will affect the price elasticity of demand for fish (by affecting the slope of the demand curve) a. Increase in the income of consumers of fish 16. Demand shift: fish and meat [2] Which of the following changes will cause the demand curve for fish to shift? Assume that meat is a substitute for fish a. Increase in the price of meat 17. Elasticity of demand: calculated [7] demand is elastic at the following point of the demand curve a. A&b 18. Measurement of elasticity 2 increase the price elasticity of demand 19. Decreasing marginal utility) decreasing marginal utility implies that the utility from consuming an extra unit of a given good decreases with the number of units that have been previously consumed. An example of a good that violate this rule is a. An addictive drug 20. Substitutes in consumption a. Decrease;decrease

CHAPTER 4 1. Perfect competition: equilibrium price) Assuming that the market is perfectly competitive, which of the following is not true of equilibrium price? a. Fair and equitable price 2. Calculating equilibrium and surplus) Suppose that the demand curve is given by Od=7 -IP and the supply curve is given by Qs=IP-1. The equilibrium price is __ and the equilibrium quantity is __. The total consumer surplus is __ and the total producer surplus is __. a. 4,3,4.5,4.5 3. Shift of demand and supply a. rise, fall or unchanged 4. Market equilibrium and total surplus a. Total surplus is maximised 5. Quantity demanded and supplied a. 1;17 6. Long run decision a. Firms will exit this market with zero profit 7. Buyer & Seller reservation price a. 1;1 8. Deadweight loss a. All are correct i. The deadweight loss is the loss in economic surplus due to the fact that the perfectly competitive market is prevented from reaching the equilibrium price and quantity where society’s marginal benefit (captured by the demand curve) keep in mind that (i) the supply and demand curves capture the reservation price of buyers and sellers (so at the market equilibrium the consumers’ reservation price of the marginal unit equals the producers’ reservation price of the marginal unit) and (ii) the quantitiy demanded equals the quantitiy supplied at the market equilibrium 9. Interpreting the supply and demand curve a. Marginal cost of producing the product and the consumers reservation pric 10. Interpreting the market equilibrium point a. Point where there is neither excess supply nor demand 11. Invisible hand principle a. If the firms market is perfectly competitive 12. Long run equilibrium price a. Minimum average total cost 13. Long run supply curve a. Perfectly elastic 14. Marginal benefit and marginal cost a. 3;1 15. Market equilibrium and total surplus a. Total surplus is maximised i. A perfectly competitive market equilibrium is pareto efficient. Pareto efficiency is a situation in which it is impossible to make any individual better off without making at least one other individual worse off. In

other words, a situation is pareto efficient if there is no transaction that can be arranged that would make someone better off without harming someone else. This kind of transaction is called a pareto improving transaction. The perfectly competitive market equilibrium is pareto efficient because any attempt to move the price from its equilibrium level results in a reduction of the total surplus, hence someone must be left worse 16. Perfect competition: equilibrium price a. It is always a fair and equitable price 17. Shift of demand and supply a. Fall, remain, rise

CHAPTER 5 1. Best tax a. All are correct 2. Failure of price ceiling a. The price ceiling is higher than the equilibrium market price 3. Taxation (3) a. All the answers are correct i. From the perspective of a supplier, the effect of this tax is similar to an increase in the production cost for each unit by exactly the amount of the tax. In other words, the marginal cost increases by exactly the tax amount. Recall that the supply curve for a single firm is given by its marginal cost curve. To be more precise the supply curve is given by the portion of the marginal cost curve above the minimum average variable cost (short run) or the minimum average cost (long run) depending on the time frame considered. Hence the introduction of a tax induces a shift of the supply curve to the left, where the vertical distance between the original curve and the shifted one is constant and equal to the tax amount. 4. Taxation (1) a. Generates tax revenues 5. Price floor & equilibrium a. 0;0 6. Taxation (2) a. The relative responsiveness of demand and supply to changes in the price i. It does not matter whether the tax is levied on producers or consumers. It is not important who ultimately pays the tax to the government. What is important in determining who bears the cost of taxation is the relative responsiveness of demand and supply to changes in price (die to the tax) 7. Taxation (4) a. Supply curve inelastic, demand curve elastic 8. Effectiveness of a price floor a. The outcome depends on whether the price floor is above or below the initial market price

9. Failure of price floor a. Price floor is lower than market equilibrium price i. A price floor is essentially the opposite of a price ceiling. If the price floor is set below the market price, it will have no effect --- the market will naturally tend to push the price above the price floor until it reaches the equilibrium level where demand equals supply. Instead if a government imposes a price floor above the equilibrium price the market will be forced to settle at the price level dictated by the price floor. 10. Policy: price ceiling a. 300;70000 11. Price ceiling defined a. Max allowable price by goc 12. Subsidy and deadweight a. CHAPTER 6 1. Tariffs and quotas (4) a. Domestic consumers i. Domestic consumers will lose because they buy less at a higher price. Domestic producers gain because they sell more at a higher price. There is no government revenues. Instead there is a ‘bonus’ that anyone lucky enough to be an importing agent will receive: they pay a relatively low price to the international producers, but they can change a high price to the domestic consumers. Overall, consumers lose more than what the producers and government gain – this is the deadweight loss of the tariff. 2. Winners and losers from trade (1) a. Domestic producers who have a relatively low marginal cost of production compared with the international producers 3. Winners and losers from trade (5) a. Because the gains from importing are often thinly spread over many consumers but the losses are felt strongly by a small group of producers i. The total surplus is higher with trade than without, but domestic consumers lose surplus when their country starts to export the good in question and domestic producers lose surplus when their country starts to import. If the consumer in the first case or the producers in the second are big and powerful enough they may be able to organsie themselves to lobby the government to restric free trade. Because the gains from trade are often thinly spread over many consumers but the losses are felt strongly by a small group of producers, in practice the lobbying is done by domestic producers wanting to restrict imports. This is what we see in part from Australia banana farmers and car manufactures 4. The upside of a tarrif a. B&c 5. Winners and losers from trade (4)

a. domestic producers who have a relatively high marginal cost of production compared with the international producers. 6. Winners and losers from trade (3) a. Consumers willing to pay more 7. Winners and losers from trade 2 a. Consumers willing to pay less 8. Tariffs and quota 1 a. Tax on imported goods or services 9. Tariffs and quotas 2 a. Domestic consumers i. Lose because they buy less at a higher price 10. Tariffs and quotas 3 a. A quantity limit on the amount of goods or services permitted to be imported. 11. Gains from trade: exporters a. International customers who have a relatively high willingness to pay 12. Gains from trade: importers a. International producers who have a high relatively low marginal cost of production 13. Small open economy (defined) a. Does not affect world price i. A small open economy is an economy that participates in international markets for goods and services, but its production or consumption is small enough compared to the rest of the world that is supply or demand does not affect the world place 14. Small open economy: price taking a. All answers are correct

CHAPTER 7 1. Firm profit maximising a. Firm will shut down in the long run 2. Monopolist optimal quantity a. It will supply 6 units 3. Monopoly: price discrimination (1) a. 3rd degree i. Keep in mind that first degree price discrimination describes a situation in which the monopolist knows the reservation price of each consumer and is able to charge each consumer his marginal benefit (or reservation price) ii. Second degree price discrimination occurs when the monopolist charges different prices depending on the quantity demanded by each consumer. If a consumer buys a large quantity of the good, the unit price is lower compared to the unit price for a consumer that demands a smaller quantity. This essentially works as a bulk discount. By offering discounts the monopolist manages to distinguish between consumers with high and low reservation price, without having to know that information in

4. 5. 6.

7. 8.

advance. Airlines’ habit to offer different seat classes is also a form of second degree price discrimination based on quality. It allows the airlines to discriminate between consumers with high and low reservation price and to charge different prices to different groups – wit the final objective of capturing more consumer surplus. If you have ever felt uncomfortable in your economy seat, know that your miserable condition was no accident. Making economy seats uncomfortable is a way to push richer consumers to buy business or first class iii. 3rd degree price discrimination occurs when the monopolist charges different prices depending on observable consumers attributes such as age and location Natural monopoly: example a. A public utility Monopoly: price discrimination a. Not all the potential economic surplus is realised (there is a deadweight loss) Monopoly: price discrimination (2) a. If the monopolist engages in first degree price discrimination, it will set a price and quantity such that the total surplus is maximised. i. One of the reasons why the monopolist does not produce enough – produce less than what would be socially optimal – is that it needs to set the same price for all consumers. What if the monopolist could set a different price for different consumers? Assume for example that the monopolist knows the maximum price (or reservation price) that every consumer is willing to pay and can charge each consumer exactly his reservation price. This is called first degree price discrimination. In this case the monopolist’s marginal revenue is equal to the consumer’s reservation price (or the consumers marginal benefit). The cost benefit principle suggests that the monopolist will then expand production until the marginal revenue is equal to the marginal cost. It is striking to note that this is the quantity that would be sold in a perfectly competitive market. Hence, a monopolist that can engage in first degree price discrimination is actually selling the socially optimal quantity – or in other words the quantity that maximises social surplus. However, albeit social surplus is maximised, the distribution of surplus within the society is very uneven: the monopolist charges the consumers exactly their marginal benefit (reservation price) and so leaves them with zero surplus. The monopolist is the one who accured all the surplus available in the market. A monopolist decreases its price a. Sell a larger quantity Increasing returns to scale a. Decreases with the amount of the good produced. i. Increasing returns to scale is one of the most important barriers to entry. It has the potential to hinder the ability of new firms to enter the market and compete. This occurs because a single firm producing a large quantity of the good can do so more efficiently than a large number of firms each producing small quantities. For this reason, industries

featuring increasing returns to scale tend to be dominated by a small number of large firms 9. Monopoly: Demand curve a. A horizontal line, which is set at the market equilibrium price; the market demand curve i. In a perfectly competitive market the individual firm is a price taker. Hence the individual firm demand curve is perfectly elastic (a horizontal line) with the y-intercept being equal to the prevailing market price. A monopoly is different. It is the only firm in the market. Hence, the monopolist’s individual demand curve is the verall market demand itself. The monopolist is a price maker by changing the quantity produced it affects the market price directly. 10. Monopoly: price discrimination 3 a. All the economic surplus is accrued to the monopolist 11. Natural monopoly: example a. Public utilities – such as water supply, electricity and gas are good examples of natural monopolies because they require costly infrastructure to operate and therefore feature increasing returns to scale. 12. Policy: average cost pricing a. A policy where through which the government forces the monopolist to set the price and quantity at the intersection of the average total cost and the demand curve i. A simple way of solving the inefficiencies associated with a monopoly is to stimulate competition by encouraging new firms to enter the market. Governments around the world achieve this by establishing competition laws, which are intended to foster market competition by regulating anticompetitive conduct by firms. The final objective of this type of legislation is to ensure that consumers are charged the lowest possible prices. ii. However, in the case of a natural monopoly where there are increasing returns to scale, this government intervention might create its own inefficiencies because a single firm producing a large quantity of the good can do so more efficiently than a large number of firms each producing small quantities. In order to increase the total surplus in the presence of a natural monopoly, governments often regulate the price at the which the monopolist is allowed to sell its products. One such policy is the so called average cost pricing. By using this policy, the government sets the price and quantity at the intersection of the average total cost curve and the demand curve. This eliminates any positive profit accrued to the monopolist. This looks like a simple way to eliminate all the inefficiencies due to the presence of a monopolist, while retaining all the advantages coming from the increasing returns to scale. However, average cost pricing is hard to implement because, 1. Government does not know the ATC it can only estimate them 2. Once this policy is in place, firms have no incentive to invest in new technology to lower their production costs – they make zero profit either way

3. When the government uses average cost pricing, the firms output is allocatively inefficient; a firms output is said to be allocatively inefficient if the price asked for the good produced exceeds their marginal cost. This is dee to the fact that the price usually exceeds the marginal cost. Recall that a perfectly competitive market is allocatively efficient precisely because in equilibrium the price equals the marginal cost 4. In order to solve this problem the government could set a price ceiling equal to the margina...