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Microeconomics Final Exam
Microeconomics (SS 242)
Fashion Institute of Technology
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Microeconomics Final Exam
Thursday December 12 2019 Question: 62
Supply and Demand: 8 questions Production and Costs: 5 questions Competition: 17 questions (including diagrams) Monopoly/Pricing Strategy: 9 questions Monopolistic Competition: 14 questions (including diagrams) Oligopoly: 7 questions
Chapter 1 & 2: Microeconomics Definitions:
● Absolute Advantage is the ability to produce more of a good or service than competitors using the same resources ● Allocative Efficiency is when production is in accordance with consumer preferences ● Comparative Advantage is the ability to produce a good or service at a lower opportunity cost than competitors (basis for trade) ● Centrally Planned Economy- the government decides how economic resources will be allocated ● Economics is the study of the choices consumers, business managers and government officials make to attain their goals ○ People are rational (use all available information) ○ People respond to economics incentives ○ Optimal decisions are made at the margin (marginal benefit=marginal cost) ● Equity is the fair distribution of economic benefits ● Free Market does not control the production of goods ● Macroeconomics is the study of the economy as a whole ● Market Economy- decisions of households and firms interacting in markets allocate economic resources ● Factors of Production are ○ Labor ○ Capital ○ Natural Resources ○ Entrepreneurial Ability ● Microeconomics is the study of how households and firms make choices ● Mixed Economy- similar to market economy, but the government plays a
significant role ● Opportunity Cost is the highest valued alternative to be given up to engage in an activity ● Positive Analysis- a true statement “what is” -VS- normative analysis- what is morally right “what ought to be” ● Productive Efficiency is when a good or service is at the lowest possible cost ● Production Possibilities Frontier (PPF) is a curve showing the maximum attainable combinations of 2 goods that can be produced with available resources. It is used to illustrate the trade-offs that arise from scarcity ● Property Rights are covered by the 5th and 14th Amendments
Chapter 3 : Supply and Demand:
Supply and demand only applies to perfectly competitive markets
Shifts to the
Increase
Shifts to the Decrease
Supply Side of the Market
● Quantity Supplied is the amount of a good that a firm is willing and able to supply at a given price ● Supply Curve is a curve that shows the relationship between the price of a product and the quantity of the product supplied ● Supply Schedule is a table that shows the relationship between the price of the product supplied and the quantity of a product supplied ●
Important Supply Concepts:
** When the price of a product rises, producing the product is more profitable, and a greater amount is supplied **
The Law of Supply:
Quantity Supplied when Price
Quantity Supplied when Price Factors that Affect the Demand Curve Factors that Affect the Supply Curve
Market Equilibrium on Supply and
** The Demand curve is also the Marginal Benefit curve** ** The Supply curve is also the Marginal Cost curve ** ** Economic Efficiency is when Marginal Cost=Marginal Benefit ** ** Price Floors and Ceilings reduce Economic Surplus **
● Black Market- when buying and selling take place at prices that violate government price regulations (caused by price floors and ceilings) ● Consumer Surplus is the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays ● Deadweight Loss is due to a market not being in competitive equilibrium from a reduction in economic surplus ● Economic Surplus is the sum of consumer surplus and producer surplus ● Economic Efficiency is the market outcome in which the marginal benefit to consumers from the last unit produced is equal to marginal cost of production, and which the sum of consumer surplus and producer surplus is at a maximum ● Marginal Benefit is the additional benefit to a consumer from consuming one more of a product or service ● Marginal Cost is the additional cost to a firm willing to produce one more of a good or service ● Price Ceiling is the legally determined maximum price that sellers may charge ● Price Floor is the legally determined minimum price that sellers may receive. They increase consumer surplus, reduce producer surplus and cause a deadweight loss ● Tax Incidence- the actual division of the burden of a tax. Most taxes result in a loss of consumer surplus, a loss of producer surplus and a deadweight loss
Chapter 5 :
Externalities:
** If externalities exist in production or consumption, the market will not produce the optimal level of a good or service, resulting in a market failure ** ** Externalities arise when property rights do not exist or cannot be legally enforced** ** When an externality exists and the efficient quantity of a good is not being produced, the total cost of reducing the externality is usually less than the total benefit ** **According to case theorem, if these costs are low, private bargaining will result in an efficient solution to the problem of externalities **
● Command and Control Approach involves the government imposing quantitative limits on the amount of pollution allowed or requiring firms to install specific pollution control devices ● Externality is a benefit or cost to parties who are not involved in a transaction. If one exists, private cost and social cost are equal) ● Private Benefit is received by the consumer ● Private Cost- borne by the producer of a good or service ● Social benefit includes any external benefit. Marginal social benefit is the demand curve ● Social Cost includes any external cost. Marginal social cost is the supply curve. (Ex: the cost of pollution) ● Transaction Costs are the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services ● Tragedy of Commons refers to the tendency for a common resource to be overused. It results from clearly defined property rights
** Taxes are sometimes imposed by the government to deal with a negative externality** **Subsidies or payments, equal to the externality are given by the government for positive externalities ** ** Optimal Quantity for a public good occurs when the demand curve meets the marginal cost of supply curve. The demand curve is found by adding vertically the price each consumer is willing to pay for the good **
Rival means that mean one personal consumes a unit of a good, no one else can consume that unit
Excludable means that anyone who does not pay for a good cannot consume the good
Free-Riding involves benefiting from a good without paying for it
Public Good: Private Goods: Common Resources:
** Perfectly inelastic demand curves are vertical lines ** ** Perfectly elastic demand curves are horizontal lines ** ** Relatively few products have perfectly elastic or perfectly inelastic demand curves **
● Elasticity measures how much one economic variable responds to change in another economic variable ● Price Elasticity of Demand measures how responsive the quantity demanded is to a change in price ● Total Revenue is the total amount of funds received by a seller of a good or service. When demand is inelastic, a decrease in price reduces revenue. When demand is elastic, an increase in price decreases total revenue. When demand is unit elastic an increase or decrease in price leaves the total revenue unchanged
Main Determinants of Price Elasticity for Demand: ❏ Availability of close substitutes ❏ Passage of time ❏ Whether the good is a necessity or luxury ❏ How narrowly defined the market for the good is ❏ The share of the food in the consumer’s budget
● Constant Returns Scale (after minimum efficient scale)- when their long run average cost curve is flat ● Diseconomies of Scale when the long run average cost curve turns up after high levels of output ● Economies of Scale- long run ATC falls when output increases ● Explicit Cost is a cost that involves spending money ● Fixed Costs are costs that remain constant as output changes ● Implicit Cost is a nonmonetary opportunity cost ● Law of Diminishing Returns causes the marginal product of labor to decline ● Long Run- a firm is able to adopt new technology and increase or decrease the size of the physical plant ● Long Run Average Cost Curve shows the lowest cost at which a firm is able to produce a given level of output in the long run ● Marginal Cost is the increase in total cost that results from producing another unit of output ● Marginal Product of Labor is the additional output produced by a firm as a result of hiring one more worker ● Minimum Efficient Scale is the level of output at which all economies of scale have been exhausted ● Opportunity Cost is the highest-valued alternative that must be given up to engage in an activity ● Short Run- a firm’s technology and the size of it’s factory are fixed ● Technology is the way a firm turns inputs into outputs ● Technological Change refers to the change in ability a firm has to produce a given level of output with a given quantity of input ● Total Cost is the cost of all the inputs a firm uses in production ● Variable Costs are the costs that change as output changes
Marginal Cost: The Marginal Cost Curve is “U” shaped because when marginal product of labor is rising, the marginal cost of output is falling. Therefore ATC is also “U” shaped ❏ When marginal cost less than ATC/AFV, ATC falls ❏ When marginal cost is greater than ATC, ATC rises ❏ MC=AVC/ATC, they are at their minimum points
Average Fixed/Variable/Total Cost: ❏ Average Fixed Cost= Fixed Cost/Quantity ❏ Average Variable Cost= Variable Cost/Quantity (“U” shaped) ❏ Average Total Cost= Total Cost/Quantity (“U” shaped) ❏ ATC=AFC+AVC
➔ As output increases, AFC decreases ➔ As output increases, the difference between ATC and AVC decreases
Average Product of Labor= Total amount of output produced by a firm Quantity of workers hired
** When the marginal product of labor is less than the average product of labor, average product of labor decreases **
Chapter 12 : Perfectly Competitive Markets:
A perfectly competitive industry is unable to control the price of the products they sell or earn an economic profit in the long run because product is identical and no barriers for entry
Profit per Unit= Price-ATC Average Revenue= Total Revenue/Quantity Sold Marginal Revenue= change in TR/change in Q
Total Revenue=Price x Quantity Total Cost=Cost x Quantity
Rules: ➔ P>ATC.... Profit ➔ P =ATC .. Even ➔ P<ATC.... Loss ➔ MC=MR.. Maximized
Chapter 13 : Monopolistic Competition:
-Monopolistic Competitions cut the price so it sells more units, but must accept a lower price on units it could have sold at a higher price -Downwards sloping demand curve and marginal revenue curve -Price is greater than MR for a monopolistic competitive firm Every firm that has the ability to affect the price of a good or service will have a MR curve below the demand curve -Does not achieve allocative or productive efficiency -Consumers face a trade-off by buying a product that is priced higher than MR
Scenarios: -If economic efficiency is achieved in the short run, entry of new firms will eliminate the profit in the long run -If suffering economic loss in the short run, existing firms eliminate to the loss in the long run
Maximizes profit when MR=MC Produces where P>MC
Monopolistic competitive market must: ❖ Have many firms ❖ Barriers to entry are low ❖ Differentiated product
Definitions: ● Output Effect is selling one more of a unit ● Price Effect is when the price decreases
Chapter 14 :Oligopoly:
Oligopoly is a market structure in which smaller number of interdependent firms compete
Oligopoly must have: ❖ Few firms ❖ Concentration ratio above 40% ❖ Difficult to enter
Barriers to Entry: ● Economies of Scale- exist when a firm’s long run average curve falls as it increases output (more economies of scale, less firms) ● Ownership of key input ● Government barriers- patents, licenses and barriers to international trade ○ Patent is the exclusive right to a product for 20 years after filing
Game Theory: -The study of how the decisions of firms in industries where the profits of each firm depends on its interactions with other firms (Rules, Strategies and Payoffs)
● Business Strategy refers to actions taken by a firm to achieve a goal, such as profit ● Cartel is a group of firms that collude by agreeing to restrict output to increase prices and profits ● Collusion is an agreement among firms to charge the same price or to otherwise not compete (Illegal) ● Cooperative Equilibrium is when firms cooperate to increase their mutual payoff (greater incentive and is increased by a repeated game) ● Dominant Strategy is a strategy that is best for the firm, no matter what the other firms choose ● Nash equilibrium is a situation in which each firm chooses the best strategies, given the strategies chosen by other firms ● Non-Cooperative Equilibrium is when firms no do cooperate but pursue self interest ● Pay-off Matrix is a table that shows the payoff that each firm earns from every combination of strategies by the firms ● Price Leadership is implicit collusion (legal) ● Prisoner’s Dilemma is a situation where pursuing a dominant strategy results in non-cooperation and leaves everyone worse off
Microeconomics Final Exam
Course: Microeconomics (SS 242)
University: Fashion Institute of Technology
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