Term
| Explain how (if at all) each of the following events affects the location of a country’s production possibilities curve. |
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Definition
(a)The quality of education increases-the curve would shift outward
(b)The number of unemployed workers increases-this should not affect the location of the curve
(c)A new technique improves the efficiency of extracting copper from ore-the curve would shift outward
(d)A devastating earthquake destroys numerous production facilities-the curve would shift inward |
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Term
| Suppose that, on the basis of a nation’s production possibilities curve, an economy must sacrifice 10,000 pizzas domestically to get the 1 additional industrial robot it desires but that it can get the robot from another country in exchange for 9000 pizzas. Relate this information to the following statement: “Through international specialization and trade, a nation can reduce its opportunity cost of obtaining goods and thus move outside its production possibilities curve? |
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Definition
| Every nation is limited by combinations of outputs which are indicated by the production possibilities curve. When international specialization occurs domestic resources are directed to output that a nation produces. International trade is exchanging of goods produced by one nation with other goods that are produced abroad. Output gains from a greater international specialization and trade present economic growth. |
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Term
| Briefly explain the use of graphs as a way to represent economic relationships. What is an inverse relationship? How does it graph? What is a direct relationship? How does it graph? |
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Definition
| Graphs are a visual representation of the relationship between two variables or sets of data. An inverse relationship is when two variables change in opposite directions causing a negative relationship. An inverse relationship is graphed with a downward slope. A direct relationship is the positive relationship between two variables that change in the same direction. A direct relationship always graph as an upward slope. |
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Term
| In the 1990s thousands of “dot-com” companies emerged with great fanfare to take advantage if the internet and new information technologies. A few like Google, eBay, and Amazon have generally thrived and prospered, but many others struggled and eventually failed. Explain these varied outcomes in terms of how the market system answers the question “What goods and services will be produced?” |
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Definition
| Many firms were lured into the dot-com industry with the expectation of economic profits. Because of the overflow of firms and lack of information, many of the firms failed because they were not earning economic profits. When firms like Google, Ebay and Amazon realized that they could not produce profits in the dot-com industry they removed themselves from industry and they industry declined. Because so many firms were competing to establish themselves in the market, economic costs could not be covered because of higher prices. |
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Term
| What effect will each of the following have on supply of auto tires? |
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Definition
(a)A technological advance in the method of producing tires-supply will increase
(b)A decline in the number of firms in the tire company-supply will decrease
(c)An increase in the price of rubber used in the production of tires-supply will decrease
(d)The expectation that the equilibrium price of auto tires will be lower in the future than currently-supply will increase
(e)A decline in the price of the large tires used for semi-trucks and earth-hauling rigs(with no change in price of auto tires)-supply will increase
(f)The levying of a per-unit tax on each auto tire sold-supply will decrease
(g)The granting of a 50 cent per unit subsidy for each auto tire produced-supply will increase |
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Term
| In 2001 an outbreak of hoof and mouth disease in Europe led to the burning of millions of cattle carcasses. What impact do you think this had on the supply of cattle hide prices, the supply of leather goods and the price of leather goods? |
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Definition
| Supply of cattle hide decreased, hide prices increased, supply of leather goods decreased and price of leather goods increased |
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Term
| Critically evaluate: “In comparing the two equilibrium positions in Figure 3.7a, I note that a larger amount is actually demanded at a higher price. This refutes the law o demand. |
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Definition
| The second equilibrium occurs after demand has decreased. The decrease has shifted because of a change in determinants, which caused a decrease in demand. Each equilibrium price refers to a different demand situation. The fact that less is purchased as a lower price when demand decreases doesn’t refute the law of demand |
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Term
| Suppose the total demand for wheat and the total supply of wheat per month in the Kansas City grain market are as shown in the table below. Suppose that the government establishes a price ceiling of $3.70 for wheat. What might prompt the government to establish this price ceiling? Explain carefully the main effects. Demonstrate your answer graphically. Next, suppose that the government establishes a price floor of $4.60 for wheat. What will be the main effects of this price floor? Demonstrate your answer graphically. |
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Definition
The shortage of wheat will cause the government to establish a price ceiling. The ceiling prevents the price of wheat from rising in order to encourage greater production, discourage consumption, and relieve the shortage.
The surplus of wheat will cause a price floor to be established. The floor prevents the price from falling to eliminate the surplus. |
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Term
What effect would a rule stating that university students must live in university dormitories have on the price elasticity of demand for dormitory space?
What impact might this in turn have on room rates? |
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Definition
Having this rule would make the price elasticity of demand more inelastic. Especially if there are no other universities nearby that the students could transfer to.
If this rule was in place, then universities would be able to raise their dormitory prices and not have to worry about students moving to find cheaper housing elsewhere. |
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Term
| You are chairperson of a state tax commission responsible for establishing a program to raise new revenue through excise taxes. Why would elasticity of demand be important to you in determining the products on which the taxes should be levied? |
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Definition
| Elasticity would be very important. The key would be selecting goods that are inelastic. The decrease in quantity demanded of a product as a result of the price increase caused by the excise tax will be less than the increase price yet still in proportion. This will cause tax revenue to increase. |
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Term
| Because of a legal settlement over state health care claims, in 1994 the US tobacco companies had to raise the average price of a pack of cigarettes from $1.95 to $2.45. The decline in cigarette sales was estimated to 8 percent. What does this imply for the elasticity of demand for cigarettes? Explain. |
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Definition
| The price of elasticity of demand for cigarettes was inelastic. The percentage change in quantity demanded was 8 percent while the percentage change in price was 22.7 percent. The percentage change in price was still not enough to make those addicted to smoking quit smoking. |
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Term
| The income elasticities of demand for movies, dental services and clothing have been estimated to be +3.4, +1, +.5, respectively. Interpret these coefficients. What does it mean if an income elasticity coefficient is negative? |
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Definition
| Since all of these are considered to be normal goods, the income and quantity demanded move in the same direction. If there is an increase in income then there will be an increase in the quantity of movies demanded by 3.4%, the demand for dental services will increase by 1%, and the demand for clothing will increase by .5%. If the coefficient would have been negative then the goods would be inferior and the income and quantity demanded would move in the opposite direction and decrease. |
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Term
Distinguish between explicit and implicit costs, giving examples of each
What are some explicit and implicit costs of attending college? |
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Definition
Explicit costs are monetary payments a firm must make to an outsider to obtain a resource (Ex. Payment to employees). Implicit costs are monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market; equal to what the resource could have earned in the best-paying alternative employment; includes a normal profit (Ex. Money spent by owner of the firm to run the business).
Some explicit costs of attending college are the cost of books and tuition and some implicit costs of attending college are the cost of studying and the income that is not earned from working because you are attending college. |
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Term
| Which of the following are short-run and which are long-run adjustments? |
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Definition
a. Wendy’s builds a new restaurant—long-run
b. Harley-Davidson Corporation hires 200 more production workers—Short-run
c. A farmer increases the amount of fertilizer used on his corn crop – Short-run
d. An Alcoa aluminum plant adds a third shift of workers -- Short-run |
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Term
Complete the following table by calculating marginal product and average product from the data given:
Explain why marginal product eventually declines and ultimately becomes negative. What bearing does the law of diminishing returns have on marginal costs? Be specific. |
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Definition
InputsLabor Total Product MP AP
0 0 0 0
1 15 15 15
2 34 19 17
3 51 17 17
4 65 14 16.25
5 74 9 14.8
6 80 6 13.33
7 83 3 11.86
8 82 -1 10.25
Marginal Product eventually declines and ultimately becomes negative because as more and more labor is added total output falls. When marginal product is rising, marginal cost is falling and when marginal product is diminishing, marginal cost is rising. |
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Term
Why can the distinction between fixed costs and variable costs be made in the short run?
Classify the following as fixed or variable costs: |
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Definition
Because there are some costs that do not vary with total output
advertising expenditures – variable costs
fuel – variable costs
interest in company-issued bonds – fixed costs
shipping charges – variable costs
payments for raw materials – variable costs
real estate taxes – fixed costs
executive salaries – fixed costs
insurance premiums – fixed costs
wage payments – variable costs
sales taxes – variable costs
rental property payments on leased office machinery – fixed costs |
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Term
| Briefly state the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications does each of the following most accurately fit? In each case, justify your classification. |
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Definition
Pure competition involves a very large number of firms producing a standardized product. New firms can enter or exit the industry very easily.
Pure monopoly is a market structure in which one firm is the sole seller of a product or service for which there is no good substitute. Since the entry of additional firms is blocked, one firm constitutes the entire industry. The pure monopolist produces a single unique product, so product differentiation is not an issue.
Monopolistic competition is characterized by a relatively large number of sellers producing differentiated products. Present in this model is widespread nonprice competition, a selling strategy in which one firm tries to distinguish its product or service from all competing products on the basis of attributes such as design and workmanship. Either entry to or exit from monopolistically competitive industries us quite easy.
Oligopoly involves only a few sellers of a standardized or differentiated product, so each firm is affected by the decisions of its rivals and must take those decisions into account in determining its own price and output.
(a) a supermarket in your hometown-this could be oligopoly or monopolistic competition depending on the area because there are a few supermarkets in one area. Depending on the size of the supermarket it may be difficult for new entries to take place. The price competition within the market can make this monopolistic.
(b) the steel industry-oligopoly-there are very few steel industries, they have standardized products and the size of industry can make it difficult for new entries to take place.
(c) a Kansas wheat farm-pure competition-There are a lot of farms like this. The product is standardized, prices rise and fall leisurely so there is no price control. New entry may be a hassle because of the price of land that is needed to start a wheat farm
(d) the commercial bank in which you or your family has had an account-depending on population of the area this could be monopolistic competition, oligopoly, or monopoly-There are a lot of banks, new entry is easy, there is control over price, elevated advertising
(e) the automobile industry-oligopoly-There are only a few automakers so products are differentiated, the size of the firms make it hard for new entry, and competition is increased because of importation of products. Nonprice competition is high while true price competition is minimal. |
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Term
| Even if a firm is losing money, it may be better to stay in business in the short run. Is this statement ever true? Under what condition? |
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Definition
| Yes this statement can be true if the loss is less that the fixed cost it would incur in the short run if it shut down. |
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Term
| Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures? Explain why price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive. |
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Definition
| If the last unit produced adds more to costs than to revenue, its production must reduce profits or increase losses. However, profits must increase or losses decrease as long as the last unit produced (the marginal unit) is adding more to revenue than to costs. As long as MR is greater than MC the production of one more marginal unit must be adding to profits or reducing losses. Because the price is constant regardless of the quantity demanded and marginal revenue is equal to price. Therefore, price can be substituted for the marginal revenue in the MR=MC rule. |
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Term
| Explain: “The short-run rule for operating or shutting down P >AVC, operate, P+ ATC, continue; P< ATC, exit.” |
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Definition
| In the short run, a firm pays its fixed costs whether it is operating or not. If a firm can cover its variables costs and some of its fixed cost (P > AVC), they will lose less by operating rather than by shutting down. In the long run all costs are variable, therefore, if all costs (P < ATC) cannot be covered by the firm, then the firm would be better off leaving the market which will reduce its loss to zero. |
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Term
| Discuss the major barriers to entry into an industry. Explain how each barrier can foster either monopoly or oligopoly. Which barriers, if any, do you feel give rise to monopoly that is socially justifiable? |
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Definition
| Because new businesses need to start with a big bang in order to achieve low production cost, economies of scale can be a barrier. Having two businesses marketing the same item at different costs can be costly. Patents and licenses are justifiable legal barriers. If a company does not copyright and protect their inventions then their ideas can be stolen and used by other industries as their own. The hope of gaining a monopoly of raw materials is a barrier as well as unfair competition of allowing companies to price-cut in order to bankrupt another company which is illegal |
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Term
| US pharmaceutical companies charge different prices for prescription drugs to buyers in different nations depending on elasticity of demand and government imposed price ceiling. Explain why these companies, for profit reasons, oppose laws allowing reimportation of their drugs back into the United States. |
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Definition
| The different elasticities of demand by nations cause price discriminating by US pharmaceutical companies. Reimportation allows the reselling of the goods which makes it more difficult to price discriminate. They could still charge different prices to a certain extent however the difference in the prices will need to be small enough so reimportation would not be profitable. Not allowing reimportation would allow pharmaceutical companies to charge profit-maximizing price in every nation without being afraid of being undercut in the US by those nations. |
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Term
How was De Beers able to control the world price of diamonds over the past several decades even though it produced only 45% of the diamonds?
What factors ended its monopoly?
What is its new profit strategy? |
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Definition
Because they produce 50% of all rough cut diamonds but they buy a large portion of the diamonds produced by other mines. This resulted in them being able to market over 81% of the world’s diamonds
New diamonds were discovered and mined in Angola, Canada, and Australia and leaked into the world market. Russia was also allowed to sell a portion of its diamond stock directly into the world market.
To transform itself into a firm selling premium diamonds and other luxury goods. They will be using an advertising campaign in order to accomplish this. |
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Term
| Under what law and on what basis did the Federal District Court find Microsoft guilty of violating the Sherman Act? What was the initial district court’s remedy? How did Microsoft fare with its appeal to the court of appeals? What was the final negotiated remedy? |
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Definition
| The court ruled that Microsoft had taken unlawful actions to maintain its Windows monopoly by trying the Internet Explorer to Windows at no charge. Microsoft developed Windows-related Java software that Sun’s own software incompatible with Windows under license from Sun. The district court’s remedy was to break Microsoft into two companies that were prohibited from entering into joint venture. The court of appeals upheld the lower court ruling that Microsoft had violated Section 2 of the Sharman Act but altered the remedy. The final remedy that was decided upon is behavioral since Microsoft is not required to split into two companies, but they must alter business practices. |
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Term
| Monopolistic competition is monopolistic up to the point at which consumers become willing to buy close-substitute products and competitive beyond that point. Explain. |
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Definition
| If a customer has a preference of a product, no matter the price, the seller of the product is a monopolist. There are many other companies producing similar products and when the preferred product’s price rises too high customers will look for and buy substitute products. This is when companies enter the competition zone unwillingly and companies start to look for ways to change their products. |
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Term
| Why do oligopolies exist? List five or six oligopolists whose products you own or regularly purchase. What distinguishes oligopoly from monopolistic competition? |
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Definition
| The main reason that oligopolies exist is because of economies of scale. A few oligopolists whose products I use are Dell, GMC, Samsung, Apple, UPS, and BP. Oligopoly is distinguished from monopolistic competition in that oligopoly is composed of a few businesses and they have differentiated or homogeneous products and also entry is a barrier. |
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Term
Why is there so much advertising in monopolistic competition and oligopoly?
How does such advertising help consumers and promote efficiency?
Why might it be excessive at times? |
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Definition
Because advertising helps companies maintain economic profits.
Advertising gives the customer information on current and new products and may also increase competition in the industry
It may be excessive in order to create entry barriers for the industry which makes it harder for new companies to gain entry into the industry. |
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Term
What firm dominates the beer industry?
What demand and supply factors have contributed to fewness in the industry? |
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Definition
Anheuser-Busch
Demand-Tastes began to change in the 1970s. People began to prefer lighter drier beers that were produced by larger brewers. There is also more home consumption as well. Supply-There have been advancements made in the bottling industry which allows more cans of beer to be produced and distributed. Advertising is also an advantage for companies. Product differentiation exists which help with company expansions. |
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Term
| Quantitatively, how important is international trade to the United States relative to its important to other nations? What country is the US' most important trading partner, quantitatively? With what country does the US have the largest current trade deficit? |
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Definition
| Our exports of goods and services are about 13 percent of GDP, which is small relative to the proportion in many other industrialized nations. For example, the percentage is 92 percent in Belgium, 77 percent in the Netherlands, 29 percent in the United Kingdom, 32 percent in New Zealand, and 37 percent in Canada. Canada is the United States’ most important trading partner quantitatively. In 2009, about 20 percent of U.S. exported goods were sold to Canadians, who in turn provided 15 percent of the U.S. imports of goods. The United States has a sizable trade deficit with China (largest trade deficit for the United States). In 2009, it was $220 billion. |
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Term
| If the European euro were to depreciate relative to the US dollar in the foreign exchange market, would it be easier or harder for the French to sell their wine in the US? Suppose you were planning a trip to Paris. How would depreciation of the euro change the dollar cost of your trip? |
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Definition
| If the European euro declines in value, it means that Americans can receive more euros for each dollar. Therefore, they do not need as many dollars to pay the euro price of a bottle of French wine, so the quantity demanded would rise and it should be easier to sell French wine in the United States. Likewise, the euro depreciation would make it less costly for Americans to travel in France, since the dollar would now buy more euros (assuming that prices inside France have not risen to entirely offset the depreciation of the euro). |
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Term
| What measures do governments take to promote exports and restrict imports? Who benefits and who loses from protectionist policies? What us the net outcome for society? |
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Definition
| Governments promote exports by providing subsidies to export producers, which effectively lowers their costs and enables them to sell their products at lower prices on world markets. Subsidies enable export firms or industries to compete against other nations, but the fact the subsidy was necessary for this competition means that the most efficient use of resources is not taking place. Restriction of imports can be accomplished by tariffs, by import quotas, and by nontariff barriers such as licensing requirements, unreasonable quality standards, and unnecessary import procedures. The benefits of protectionist policies accrue to the industry that has to compete on world markets either with its exports or against imports. Even this may be a short-run benefit because industries that are protected may become so inefficient and outmoded that they are unable to stay afloat even with the protection in the long run. There may also be some political benefits as those protected groups have a strong self-interest in this protection and are vocal opponents of free trade for their industries, whereas the benefits of free trade are more diffuse and the benefits to any single group of voters is less noticeable. The costs of protectionist policies are more widespread. The costs of protectionist policies arise because resources are not being used as efficiently as they might be under free trade. This raises the cost of production and raises prices, and means the total quantity of world output produced and consumed is not as great as it could be without such barriers. Consumers lose since they must pay higher prices, but worldwide producers also lose because productivity is not as high as it could be. The net outcome to society is negative. Costs outweigh the benefits for the reasons stated above. |
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Term
| Explain: "Free-trade zones such as the EU and NAFTA lead a double life: They can promote free trade among members but they pose serious trade obstacles for nonmembers." Do you think the net effects of trade blocs are good or bad for world trade? Why? How do efforts of the WTO relate to these trade blocs? |
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Definition
| Free-trade zones increase the efficient use of resources within the zones by eliminating trade barriers and allowing for the free movement of resources across international borders among the member nations. On the other hand, if trade barriers are retained against imports from nations outside the zone, this results in a less efficient allocation of resources in the larger global economy. The evidence seems to point to the net effect of trade blocs as being good for world trade. They seem to be a first step in breaking down trade barriers as can be seen from the expansion of the original European Economic Community to today’s 27-member European Union, and the expansion of the U.S.-Canada free trade agreement to NAFTA. Also, the attraction of the large consumer markets within each trade zone makes other trade blocs more likely to conclude agreements between blocs that would further lower trade barriers. Some might argue that such blocs are bad for world trade because the unity and self-sufficiency gained inside the trade zone may inhibit further overtures for trade expansion outside the bloc, but so far this does not seem to have been the case. The WTO provides a forum for the trade blocs to meet and negotiate further reductions in trade barriers among the trade blocs. |
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