Question 3

  • The intention of the government in creating the price floor is to assist the producers of the good.

    In panel (a), the government imposes a price ceiling of $4. Because the price ceiling is above the equilibrium price of $3, the price ceiling has no effect, and the market can reach the equilibrium of supply and demand. In this equilibrium, quantity supplied and quantity demanded both equal 100 cones. In panel (b), the government imposes a price ceiling of $2. Because the price ceiling is below the equilibrium price of $3, the market price equals $2. At this price, 125 cones are demanded and only 75 are supplied, so there is a shortage of FIGURE 1 A Market with a Price Ceiling 50 cones. Price of Ice-Cream Cone Equilibrium pnce (a) A Price Ceiling That Is Not Binding Price of Ice-Cream Cone Equilibrium price 53 (b) A Price Ceiling That Is Binding Supply IOO Equilibrium quantity Supply Price ceiling Demand Quantity of Ice-Cream Cones Shonage 75 Quantity supplied Quantity demanded Price ceiling Demand Quantity of Ice-Cream Cones

Question 5

  • Consumer surplus: the difference between the buyer's willingness to pay versus what he actually pays

Question 15

  • The source of inequality

    • Discrimination in employment

    • Differences in personal motivation

    • Differences in educational level attained

    • Differences in abilities

  • Progressive income taxes are a way to correct income inequality

Question 38

Concepts and Measures of Cost FC/Q AVC- VC/Q Short run Short run and long run Long run Measurement Fixed cost Average fixed cost Variable cost Average variable cost Total cost Average total cost (average cost) Marginal cost Long-run average total cost Definition Cost that does not depend on the quantity of output produced Fixed cost per unit of output Cost that depends on the quantity of output produced Variable cost per unit of output The sum of fixed cost (short run) and variable cost Total cost per unit of output The change in total cost generated by producing one more unit of output Average total cost when fixed cost has been chosen to minimize average total cost for each level of output Mathematical term FC vc TC- FC (short run) ATC- TC/Q MC = ATC/AQ LRATC

  • There are economies of scale when long-run average total cost declines as output increases.

  • There are diseconomies of scale when long-run average total cost increases as output increases.

  • There are increasing returns to scale when output increases more than in proportion to an increase in all inputs.

  • There are decreasing returns to scale when output increases less than in proportion to an increase in all inputs.

  • There are constant returns to scale when output increases directly in proportion to an increase in all inputs.

Question 57

  • No economic profit in the long run for Perfect Competition and Monopolistic Competition

    Product Market Characteristics 1. Numbers of Sellers 2. Availability of Substitutes 3. Degree of Elasticity 4. Similarity of Products 5. Pricing Policy/ Strategy High value 6. Barriers to Entry/Exit 7. Efficiency/\* Rent-Seeking 8. Eco. Profits\* 9. P, MC\* 10. p MR Many (they are pricetakers from the market). One product type available (fully substitutable) available from atl sellers. Perfectly elastic. Homogeneous products from all sellers. No pricing policy or strategy. Price at market price, price- takers. No barriers to entry/exit. Efficient. Each seller prices at cost. No rents. Only transfer earnings. Zero economic profits. Price = Minimum AC. Ideal sociai pricing P = MC p = MR Fewer than perfect competition, more than oligopoly/ monopoly (some price-makers). Imperfect substitutions. Imperfect elasticity. Depends on degree of innovation. Heterogeneous. Mostly non-price competition; some independent pricing. Weak barriers to entry/exit. Inefficiency, excess capacity since P = AC (but not at minimum). p = AC; tendency for LR zero economic profits. P \> MC idop\&ly Few sellers who have some control of market share; interdependence. Fewer substitutes available = market pricing power. Varies. Greater elasticity at high prices. Lower elasticity at lower prices. Some markets— homogeneous for specialty products. Other markets heterogeneous products. Much interdepen- dence in pricing. Some evidence of monopoly pricing • poli Formidable barriers to entry/exit. Monopoly pricing power leads to waste/inefficiency. Some economies of scale. Tendency for existence of LR economic profits, p \> MC One seller for whom there are no close substitutes. No close substitutes available. Generally inelastic but still elastic at higher prices. FolEows from \#1—3 above. Heterogeneous since there are no close substitutes. Monopoly pricing power. High value to ratio: P-MC Complete barriers to entry by definition. Dead-weight loss of monop- oly (loss to society beyond monopoly profits and reduced consumer surplus). Empirical evi- dence of LR economic profits. P \> MC Long run tendencies at equilibrium.

Question 58

  • MRP = P * MPL

  • MRP: Marginal Revenue Product

  • MPL: Marginal Product of Labor

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