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Terms in this set (57)
government intervention in the free market which changes equillibrium
Effects of price ceiling
shortages, reductions in product quality, wasteful lines and other search costs, a loss of gains from trade, a misallocation of resources
effects of price floors
surplus, lost gains from trade (dwl), wasteful increase in quality, misallocation or resources
(graph) Price ceilings
(graph) price floor
Why are price floors/ceilings inefficient?
Prevents a market from adjusting to its equillibrium price and quantity, creating inefficient outcome. Also transfer some consumer surplus to producers or producer surplus to consumers.
external cost (negative externality)
a cost paid by people other than the consumer or the producer trading in the market.
External benefit (positive externality)
a benefit received by people other than the consumers or producers trading in the market.
Positive externalities examples
walking to work
negative externality examples
pollution and smoking
the cost to everyone: the private cost plus the external cost.
social value curve
above the demand curve
the sum of consumer surplus and producer surplus
maximum legal price that can be charged for a product
A legal minimum on the price at which a good can be sold
Deadweight loss (DWL)
the total of lost consumer and producer surplus when not all mutually profitable gains from trade are exploited.
a cost paid by the consumer or the producer
has a higher payoff than any other strategy no matter what the other player does.
group of suppliers who try to act as if they were a monopoly.
a market with a large number of firms selling similar but not identical products.
Price ceilings would create all of the following effects EXCEPT:
maximum gains from trade.
Shortages occur when prices are held below the market price, causing the quantity demanded to exceed the quantity supplied. This is a result of price:
A deadweight loss is the total of:
lost consumer and producer surplus when all mutually profitable gains from trade are not exploited.
Which of the following statements is TRUE? Price floors set above the equilibrium price cause:
surpluses. deadweight losses.
A price floor is:
a minimum price allowed by law.
A private cost is:
a cost paid by the consumer or the producer trading in the market.
An external cost:
is a cost paid by people other than the producer or consumer trading in the market
The social cost is:
the cost to everyone.
Social surplus is consumer surplus:
plus producer surplus plus everyone else's surplus.
true or false An external cost is built into the market price of a good and thus paid by the consumers.
When there are significant external costs associated with its production, the market produces ______ of that good.
Products that create external benefits are:
underconsumed because consumers only consider the private benefits of consumption.
If a market solution provides greater marginal social costs than marginal social benefits, then:
a negative externality is present.
All of the following would be government solutions to externality problems EXCEPT: public sector charities.
taxes and subsidies.command and control.tradable allowances.
public sector charities.
In a perfectly competitive market, firm level demand is:
To maximize profit, firms should keep producing as long as marginal revenue is:
greater than marginal cost.
Firms are profitable when price is:
greater than average cost.
Profit is defined as:
total revenue minus total cost.
The change in total revenue from selling an additional unit is called:
Total cost incorporates:
implicit and explicit cost
In their calculation of profit, accountants typically do not take into account:
A firm earning zero economic profits:
is earning just "normal profits."
When price is less than a firm's average cost,:
it may be more profitable to continue to operate if revenues at least cover the firm's variable costs.
t/f A monopoly can be defined as a single firm in a given market.
The power to raise price above marginal cost without fear that other firms will enter the market is:
t/f When a monopolist faces downward-sloping demand, marginal revenue is less than the price.
What is the profit maximization condition for a monopolist?
MR = MC
t/f A monopolistic industry will have lower output and higher prices than a competitive industry.
t/f A monopolist maximizes profits where marginal revenue equals marginal cost.
Monopolistic competition in a market is characterized by:
many firms, downward-sloping demand curves, and zero economic profit in the long run.
Which of the following is NOT an example of product differentiation?Shell versus Chevron
Coca-Cola versus Pepsi
Levi's versus American Eagle
a small oil well
a small oil well
t/f Both perfectly competitive markets and monopolistically competitive markets feature product differentiation.
What is the main difference between a perfectly competitive industry and a monopolistically competitive firm?
A cartel is a:
group of suppliers that tries to act as if they were a monopoly.
Cartels in the United States were outlawed with the passage of the:
Sherman Antitrust Act of 1890.
Prices in an oligopolistic market are likely to be:
lower than that of a monopoly market.
A dominant strategy is a strategy that:
has a higher payoff than any other strategy, no matter what the other player does.
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