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PSU ECON 102 NEW FINAL WITH ALL QUESTIONS AND CORRECT ANSWERS 100% VERIFIED
Which of the following statements best describes perfect competition? -Theoretically understand the concept of perfect competition, there are few real life ANSWER examples of PC Which of the following is the best example of a homogenous product?a) candy bars b) laundry detergentc) cucumbers d) cold medicine - ANSWER c) Cucumbers Which of the above would NOT be a characteristic of perfectly competitive markets?ANSWER consumers have brand preference ( since it is PC they are all the same)
Which of the following is true about economic profit in the long run in a perfectlycompetitive industry? - ANSWER Firms will breakeven ( aka earn zero profit)
Which of the following would be a point of profit maximization for a business? -ANSWER MR = MC Economics study of how people and societies use limited resources to satisfy unlimitedwants; the management of scarcity and choice
Resources 1. Land: anything provided by nature2. Labor: Mental and physical efforts of humans
- Capitol: anything that is provided which in turn is used to produce other goods andservices
Microeconomics -economic agents (households, firms) ANSWER The study of decision making undertaken by individual
Macroeconomics - ANSWER The study of the economy as a whole 3 main economic questions -who gets it? ANSWER What will we produce? how will we produce?
How to answer 3 basic economic questions -authority ex. Queen ANSWER 1. Command Economy: control
- Market Economy: buyers and sellers come together3. Mixed Economy: has elements of both 1 and 2
Ceteris Paribus - ANSWER "Other things being equal" post hoc ergos propter hoc - ANSWER "before this therefore because of this" Fallacy of composition -of the part is automatically true of the whole ANSWER Arguing, without additional support, that what is true
Positive economics - ANSWER The study of "what is" in economics. Normative economics -should work ANSWER makes prescriptions about the way the economy
Opportunity Cost -as a result of a decision ANSWER The value of the next best alternative that must be forgone
Production Possibility Curve -economy could use resources ANSWER representation of the possible ways an
Change in Quantity Demand -the quantity of the product bought which has shifted because of the variation in price. ANSWER movement on the demand curve that reflects
Change in Demand - ANSWER a shift of the entire demand curve What causes a change in Demand -2. Change in income ANSWER 1. Change in preferences -normal goods: increase in income-increase in demand-inferior goods: increase in income-decrease in demand
- Change in the Price of Related goods -Complements: increase in price of 1-decrease in demand of other-Substitute: increase in price of 1-increase in demand of other
- Change in expectations
- Changes in the number of consumers in the market6. Government Policies
- Advertising Market Demand - ANSWER the total demand of all consumers for a product or service Firms - ANSWER institutions that organize the production of goods and services Quantity Supplied -and able to supply at a specific price at a specific time ANSWER the amount of a good or service that a producer is willing
Supply Curve -the quantity supplied ANSWER a graph of the relationship between the price of a good and
Law of Supply -suppliers increase their quantity supplied for that good ANSWER Holding all else equal, when the price of a good rises,
Change in Quantity Supply -in response to a change in price ANSWER A movement along the supply curve that occurs
Change in supply - ANSWER shift of the supply curve What causes a change in Supply - ANSWER 1. Change in the cost of production -increase in production cost causes decrease in supply2. A change in the number of firms in the market
- Weather Equilibrium Price -price that clears the market ANSWER price where quantity supplied equals quantity demanded;
When will a shortage occur in the market -price equilibrium ANSWER When the market price is less than
Simultaneous Shifts - ANSWER Price floor --price floor above p* causes a surplus ANSWER lowest legal price that can be charged for a product -price floor below p* causes no impact Price Ceiling - ANSWER A legal maximum on the price at which a good can be sold -ceiling below p* causes a shortage consumer surplus -minus what the buyer actually pays for the good. ANSWER The amount that a buyer is willing to pay for a good
-in short run Average Fixed/Variable cost - ANSWER FC/Q or VC/Q Marginal Cost -production. ANSWER The change of total cost for producing one additional unit of
Marginal vs Average -Class average of HW grade is Average ANSWER Think of HW example: personal HW grade is marginal,
Assumptions of Perfect Competition -2. firms are price takers ANSWER 1. Many buyers and sellers
- identical products
- easy exit and entry5. full information
- no transaction costs
- no government interference What do firms do when MR>MC - ANSWER increase output to increase profit What do firms do when MR<MC - ANSWER decrease output to increase profit What happens when Market Price > Breakeven Price -positive economic profit, ANSWER Firms are earning attracts entry from other firms,decreases the Market Price what is marginal profit? -additional unit of a good ANSWER The additional profit gained from selling one
A firm's optimal output level is when. - ANSWER MR = MC What is marginal cost pricing? - ANSWER when the P value is equal to MC What are the three decisions all firms must make? -Shutdown, Output level ANSWER Enter the market,
If P > AVC the firm should. - ANSWER keep operating This would represent the part of the MC curve above the AVC curve, which is the acompetiive firm's. ANS supply curve in the short-run
In the long run the expected profit for a firm is. ANS Zero What market is the opposite of perfect competition? ANS Monopoly What two barriers allow monopolies to exist? ANS Legal, economic Define legal barriers -supplier of a good/service (USPostalService), or through patents ANSWER The government can make a specific supplier the only
Define economic barriers -make a profit (market size, tech advantage, ownership of natural resources) ANSWER factors that make it difficult for an entrant to
What is an infra-marginal unit? -marginal unit ANSWER all units of a product that come before the
The optimal output level of a monopoly is. -intersect MR=MC warned that this will be on the final ANSWER where the MR and MC curves
anticipation of how other firms will react to their output level What does the Bertrand model predict? -second-lowest marginal cost of all firms in equilibrium ANSWER the market price will be equal to the
What is a cartel? -(OPEC) ANSWER A group of firms working together to maximize profits
What happens when Market Price < Breakeven Price - ANSWER Firms make negativeeconomic profit, firms will exit the industry,decrease in market supply, increase in market price What happens when you raise the price of an inelastic good - ANSWER total revenue willincrease
What happens when you raise the price of an elastic good - ANSWER Total revenue willdecrease
Perfectly Inelastic - ANSWER |E|= Perfectly Elastic - ANSWER |E|=Infinity Inelastic - ANSWER 0 < |E| < 1 Elastic - ANSWER 1 < |E| < Infinity Midpoint Formula - ANSWER When given Formula like Q=60-4P,
"find the |E| between $8 and $9"
- Plug prices in to equation to find Q1 and Q
- Plug P1, P2, Q1, Q2 into midpoint formula Monopolist Production -competitive firm ANSWER Generally less output and higher price than perfectly -never moves down inelastic part of demand curve Pareto Efficiency -without making someone else worse off. ANSWER the situation where one person cannot be better off
Price Discrimination -different prices ANSWER selling the same products to different buyers at Necessary Conditions:1. Must face downward sloping demand curve
- Must be able to identify 2+ groups of consumers with different |E|
- It must be difficult for consumers to sell the good -Whichever type of consumer has the higher |E| is charged the lower price Oligopoly - ANSWER An industry with a few dominant firms ex. cell phone companies -modeled using game theory Game theory -a set of strategies for each player, ANSWER Has a set of players, and a payoff function that assigns a payoff for each player for all possible strategycombinations Assumes:
external cost of production or consumption What happens when a negative externality is not corrected -activity will take place for social efficiency ANSWER too much of the
What happens if a positive externality is not corrected -activity will take place for social efficiency ANSWER too little of the
Corrections for negative externality -causing the externality ANSWER 1. Impose a tax on the agent that is
- Regulate the activity ex. Cap and Trade (pollution permits) Coase Theorem -property rights are clearly defined. ANSWER If there are few people involved, no transaction costs, and then the parties can solve the externality problem in the least cost cost effective way non-rival goods -consumption by others ANSWER a good whose consumption by one person does not prevent
non-excludible goods -from using the good ANSWER once the good is produced, no one can be excluded
Free Rider problem -reap the benefits of interest group action without actually joining, participating in, or ANSWER the problem faced by interest groups when citizens can contributing money to such groups. Drop in the bucket problem -person thinks the project will happen even without their contribution ANSWER Everyone's contribution is so small that each
asymmetric Information - ANS A situation in which one party in a transaction has moreor superior information relative to another.
ex. Market for Lemons Market for lemons - ANS buyers perceive there is a 50% chance of a lemon and 50% fora plum -buyers are risk neutral
- (cost of lemon) x (probability of getting a lemon) + (cost of a plum) x (probability ofgetting a plum)=price sellers offer for unknown car
Adverse Selection -the market with less info has the largest inferior choices from which to choose from ANSWER occurs in markets with asymmetric info where the side of ex. person with bad health is more likely to buy health insurance Moral Hazard - ANSWER occurs when a party that is protected from risk behavesdifferently from the way it would behave if it were fully exposed to the risk -when there are 2 parties to a contract and one party passes the cost of its behavioronto the other party
Excise Tax -alcohol, cigarettes, gasoline, and airline ANSWER government levies a tax on certain goods and services such as
Legal incidence of a tax - ANSWER legal liability to pay the tax falls on whom Economic incidence of a tax - ANSWER who ACTUALLY pays the tax Which of the following does MR equal in perfect competition? -price --> since price is constant in perfect competition MR and price equal the same ANSWER The market thing A farmer in a perfectly competitive industry has decided not to produce anything thisyear. He rents the land he farms and he will have to pay the rent on that land whether he produces or not. Which of the following must be true if the farmer is making a profitabledecision? ANSWER AVC > P
Which of the following best describes the MR curve for a single price monopolist? -ANSWER It is below the average revenue curve for a monopolist --> Remember that average revenue curve = demand curve for a monopolist The Average revenue curve for a monopolist is the same thing as its what? -demand curve ANSWER
A single price monopolist is currently producing an output where MR is less than MC.What can this firm do to increase profits? - ANSWER Reduce output and raise price ( the monopolist should reduce output/raise price until MR=MC) When will the economic profit of a firm be negative? -greater than price, where MR=MC ANSWER when the ATC is
At what level will a monopolist earn a positive economic profit? -price is greater than its ATC ANSWER When its
Where does a single price monopolist maximize its REVENUE? - ANSWER when MR = 0 An aluminum company at one point owned 90% of the world's supply of bauxite which isthe key ingredient to make aluminum. What type of barrier to entry did this company use to try to establish a monopoly? ANSWER Ownership of resources, that do not have closesubstitutes
What is a positive effect of price discrimination for a monopolist? -discrimination will provide the monopolist with higher profits, than a single price for all ANSWER Price customers. ( this is due to more variation in price) Does one see price discrimination more often employed with services or goods? -ANSWER Services because it is easier to arbitrage goods than services arbitrage = buy something at a cheap price, and then sell it for a higher price Which of the following is true about the economic profit when it is positive? - ANSWER
this is when price is greater than ATC at the point where MR=MC Which of the following does NOT have to be true about monopolies?a) there is a single seller b) monopolies always make a profitc) there are no substitutes d) there are high barriers to entry - ANSWER b) monopolies always make a profit What is a characteristic of a firm that price discriminates? -identifies 2 or more groups and charges them different prices ( ex: PSU football tickets -- ANSWER The firm students tickets vs. regular season tickets) Which of the above methods of regulation would result in producers being LEASTconcerned with minimizing costs? - ANSWER Rate of return regulation -- this is because firms using the "ROR" regulation method, have virtually no incentive tominimize costs
Profit maximizing quantity can be found how? - ANSWER where MR=MC Profit maximizing price can be found how? -MR=MC, and then we go up to the demand curve ANSWER to find price we must find where
The profit of a firm is positive when the price is greater than what? - ANSWER the ATC Name 3 ways in which a government regulation can create a monopoly? -patents, tariffs, and regulations ANSWER
Which of the following best describes perfect price discrimination? -economically efficient and desirable for producers --> price discrimination is ANSWER It is economically efficient because there is no DWL
Which of the following best describes a major difference between a monopoly andperfect competition? Suppose perfectly competitive firms all have the the same costs. - ANSWER Only monopolists can earn a positive profit in the long run ( can not earn aprofit in long run with perfect competition)
Of the two market structures is a Monopolistic competition or oligopoly morecompetitive? - ANSWER Monopolistic Competition
In an oligopolistic market, firms are mutually what? ANSWER interdependent Which of the following is a characteristic of a monopolistically competitive market?ANSWER Each firm faces a downward sloping demand curve
How do monopolistically competitive firms maximize profit in the short run?They set MR=MC ANSWER
The essential coordinating mechanism of a free-market economy is what?The price system ANSWER
Which of the following best describes an oligopolistic market? -high barriers to entry and firms interact strategically with each other ANSWER There are
Which of the following would be described as the point of production where ATC is thelowest for a particular firm? - ANSWER Minimum efficient scale
Which of the following is not one of the factors necessary to have pure competition? -ANSWER A small number of firms in the market
At what point of the following would we want to shut down our business? -when AVC > P. here the cost to produce the good is greater than the profit that can be ANSWER made
Who will charge a higher price a monopolist or a perfect competitor? -Monopolist -- no substitutes available so consumers are not sensitive to changes in price ANSWER
What would be a (close) example to a perfect competitor? -company ANSWER Local lawn care
What is the combination of all the producer and consumer surplus from a sale called? -ANSWER Economic welfare
Which of the following would be caused by a binding price ceiling imposed on a marketin equilibrium? - ANSWER Shortage
Which of the following would be caused by a non-binding price ceiling imposed on amarket in equilibrium? - ANSWER No effect
Which of the following describes how to find producer surplus? -area above the supply curve and below the price for all units purchased ANSWER It is the
A perfectly competitive firm's short-run supply curve is the firm's MC curve above theMC curves intersect with with what? - ANSWER the AVC
Profit= - ANSWER (P-ATC)(Q) When are economies of scale likely to be a barrier to entry? -scale production can lower the average cost of production-- this means that in order to ANSWER Only large get the lowest cost per unit you have to produce large outputs of it If a firm is able to use perfect price discrimination it will produce all of the way to thepoint where P=MC which is also known as where what two curves intersect? - ANSWER the MC and DC curve
