Econ 201 Unit 3 – Flashcards
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In a market economy, government intervention
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may improve market outcomes in the presence of externalities
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Market failure can be caused by
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externalities
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A negative externality arises when a person engages in an activity that has
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an adverse effect on a bystander who is not compensated by the person who causes the effect
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Which of the following represents a way that a government can help the private market to internalize an externality?
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taxing goods that have negative externalities subsidizing goods that have positive externalities
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Markets are often inefficient when negative externalities are present because
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social costs exceed private costs at the private market solution
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A positive externality occurs when
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Jack receives a benefit from John's consumption of a certain good
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Which of the following best defines the situation where one firm's research yields knowledge that is used by society as a whole?
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technology spillover
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In many cases selling pollution permits is a better method for reducing pollution than imposing a corrective tax because
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it is hard to estimate the market demand curve and thus charge the "right" corrective tax
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Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of
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a transaction cost
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The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own, is called
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the Coase theorem
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For private goods allocated in markets,
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prices guide the decisions of buyers and sellers and these decisions lead to an efficient allocation of resources
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When a good is excludable,
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people can be prevented from using the good.
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Goods that are rival in consumption and excludable would be considered
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private goods.
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As with many public goods, determining the appropriate level of government support for the production of general knowledge is difficult because
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benefits are hard to measure.
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Which parable describes the problem of wild animals that are hunted to the point of extinction?
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The Tragedy of the Commons
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A free-rider problem exists for any good that is not
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excludable.
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Economists normally assume that the goal of a firm is to (i) sell as much of its product as possible. (ii) set the price of the product as high as possible. (iii) maximize profit.
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(iii) only
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The amount of money that a firm receives from the sale of its output is called
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total revenue.
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Total revenue equals
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Price times quantity.
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The Carolina Christmas Tree Corporation grows and sells 500 Christmas trees. The average cost of production per tree is $50. Each tree sells for a price of $65. The Carolina Christmas Tree Corporation's total revenues are
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$32,500
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Total cost is the
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market value of the inputs a firm uses in production.
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Profit is defined as total revenue
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minus total cost.
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Marcus sells 300 candy bars at $0.50 each. His total costs are $125. His profits are
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$25
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A difference between explicit and implicit costs is that
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implicit costs do not require a direct monetary outlay by the firm, whereas explicit costs do.
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Pete owns a shoe-shine business. Which of the following costs would be implicit costs? (i) shoe polish (ii) rent on the shoe stand (iii) wages Pete could earn delivering newspapers (iv) interest that Pete's money was earning before he spent his savings to set up the shoeshine business
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(iii) and (iv) only
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When calculating a firm's profit, an economist will subtract only
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the opportunity costs from total revenue because these include both the implicit and explicit costs of the firm.
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Which of these assumptions is often realistic for a firm in the short run?
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The firm can vary the number of workers it employs but not the size of its factory.
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Suppose that a "doggie day care" firm uses only two inputs: hourly workers (labor) and a building (capital). In the short run, the firm most likely considers
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labor to be variable and capital to be fixed.
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A production function describes
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how a firm turns inputs into output.
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Bubba is a shrimp fisherman who can catch 4,000 pounds of shrimp per year. Bubba is considering hiring his cousin Bobby to work for him. Bobby can catch 3,000 pounds of shrimp per year. If Bubba hires Bobby, what will be the total output of his shrimp business?
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7,000 pounds
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The marginal product of labor is equal to the
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increase in output obtained from a one unit increase in labor.
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Suppose a firm currently produces 325 units of output per day with 15 workers. The firm is able to produce 340 units of output with a 16th worker. What is the marginal product of the 16th worker?
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15 units of output
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A total-cost curve shows the relationship between the
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quantity of output produced and the total cost of production.
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One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing firm is that in the short run,
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the size of the factory is fixed.
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The length of the short run
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is different for different types of firms.
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The total cost to the firm of producing zero units of output is
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its fixed cost in the short run and zero in the long run.
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In the long run,
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inputs that were fixed in the short run become variable.
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Which of the following explains why long-run average cost at first decreases as output increases?
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gains from specialization of inputs (economies of scale)
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Economies of scale occur when
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long-run average total costs fall as output increases.
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At low levels of production, the firm
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benefits from increased size because it can take advantage of greater specialization. has the potential for economies of scale. is unlikely to experiences acute problems with coordination.
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Firms may experience diseconomies of scale when
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large management structures are bureaucratic and inefficient.
