ECON EXAM 2 (Multiple Choice)

According to Friedman, ______ encourage risk/innovation while ________ encourage prudence

Profits; losses

Which business practices are not considered prudent strategies?

• Discriminating against certain groups of customers

• Refusing to refund customers for malfunctioning products

• Misleading customers about the benefits of your product.

In our Model, Profits equal:

TR - TC

We also measure Total Costs in terms of

Fixed and Variable Costs

How is short- vs. long-run determined?

Short-run is how long you are bound to capital or land contracts

In the production of physical goods (in the short run), Marginal Costs generally:

Rise, because of “having too many cooks in the kitchen.”

Which of the following likely has a higher marginal cost?

Painting a new original work of art.

Which of the following likely has a higher opportunity cost?

Painting a new original work of art.

On the economic decision, not the artistic one:

Where should new artists focus their time/effort if they want to increase their hopes of making a living creating art?

Creating value and selling prints on Etsy.

The “granddaddy” graph depicts costs in the short- or long-run?

Short-run

Which is not an assumption of perfect competition?

Free to set any price

Per-unit profit is which of the following?

p-ATC

Profits are maximized when,

MR = MC

I should open the shop for breakfast if:

• p >= AVC

• MR = MC

I should proceed to enter into the business (or continue doing it) if:

• p >=ATC

• MR = MC

What information do I need to calculate profits?

• q*

• p*

• ATC

I collect data on apple sales and prices at the farmer’s market. I see that the quantity purchased has recently risen. Why?

Not enough information

For the relationship between the number of goods purchased (q_d) and price (p), a change in one/both of these variables while keeping other relevant variables constant, results in a:

Movement along the demand curve

For the relationship between the number of goods purchased (q_d) and price (p), changing a 3rd relevant variable results in:

Shift of the demand curve

An increase in income that changes q_d is modeled as a:

Shift of the demand curve

For my cupcake firm, when demand grew for cupcakes, prices:

Rose

An increase in price that changes q_d is modeled as a:

Movement along the demand curve

An increase in the number of buyers that changes q_d is modeled as a:

Shift of the demand curve

Almost always, the relationship between prices (p) and the quantity produced/supplied q_s is:

Increasing

I responded to this price rise by doing what with the number of cupcakes I produced/supplied q_s

Increased q_s

An increase in the number of sellers that changes q_s is modeled as a:

Shift of the supply curve

An increase in the price that changes q_s is modeled as a:

Movement along the supply curve

Buyers, sellers, and prices respond to a surplus in a way that leads prices to:

Fall

In the case the q_s > q_d, we have:

A surplus

In the case the q_s < q_d, we have:

A shortage

What is Prudence?

like having a really good “smart decision brain” that helps you choose the right thing to do in each situation (the little voice that helps you stop and think “What’s the best choice right now?””

What was Adam Smith’s view?

• Prudence helps individuals

• But society benefits more from:

  • Humanity

  • Justice

  • Generosity

  • Public spirit

What is rent-seeking?

making money without creating real value for society

What is Monopoly rents?

They make extra money NOT because they’re better, but because they’re the only option

Why this is bad:

• Higher prices for customers 😞

• Less motivation to improve

What is Information asymmetry?

One person knows more than the other—and uses that to cheat

Example:

• A seller says a drink will make you super strong 💪 (but it doesn’t)

• The buyer doesn’t know the truth

Why this is bad:

• Customers get tricked

• People waste money on bad products

What is Political capture

This is when businesses get the government to help them unfairly

Now they win NOT because they’re better—but because of special treatment

Why this is bad:

• Less competition

• Worse or more expensive products for customers

Who is Martin Shkreli?

raised the price of a life-saving drug massively through his company Turing Pharmaceuticals.

Mostly from monopoly rents

• They controlled the drug (little/no competition)

• So they could raise the price a lot

Rent-seeking occurs when

firms earn profits through monopoly power, misinformation, or political/market advantages rather than creating real value, often harming consumers and reducing innovation.

Total Revenue (TR) =

Price (P) × Quantity sold (Q)

What are Explicit Costs?

the direct costs that go into starting and running a business

What are Implicit Costs?

The opportunity cost of your time/resources

• What you could earn if you did something else

• Example: putting your money in the bank instead of starting a business

Accounting Profit =

TR - Explicit Cost

Economic Profit =

TR - Explicit Cost - Implicit Cost

What is Opportunity Costs?

the potential benefit or profit lost when choosing one alternative over another

According to Ariely, whenever you plan to buy something, you should ask yourself…

"What am I giving up?”

What are Fixed Costs?

Costs that stay the same no matter, for ex; how many cupcakes you make

What are Variable Costs?

the costs that change with the amount a firm produces.

• More production → higher variable costs

• Less production → lower variable costs

What is Production Function?

This tells us: how many for ex; cupcakes we can make if we add more workers

When you have too many cooks in the kitchen, Economists call this

diminishing marginal product / diminishing returns

Short Run:

stuck with current shop size

• Your shop size, ovens, and equipment are fixed

• You can only add variable inputs (workers, ingredients)

• Some costs (fixed costs) cannot change immediately

Long run:

can expand, change everything

• You can expand the shop, buy more ovens, hire more managers

• All costs can be adjusted

• You can avoid the diminishing returns by adding more capital

Efficiency Scale

The quantity of output where average total costs are minimized

Identical Product

All firms sell the same thing

Price Takers

Firms cannot set their own price

If MR > MC…..

extra cupcake adds profit → make more

• Ex: You make a cupcake → cost = $0.80, sell for $1.10 → good, make more!

If MR < MC….

extra cupcake loses money → make less

• Ex: You make another → cost = $1.50, sell for $1.10 → bad, stop

Short-Run Decision: Open or Close Temporarily

• Open if p* > AVC

• Close if p* < AVC

Basically:

• If selling cupcakes covers just the variable costs (ingredients, wages), open!

• If selling cupcakes doesn’t even cover ingredients & wages, stay closed → save money

Long-Run Decision: Enter or Exit Market

• Enter/stay in the market if p* > ATC

• Exit market if p* < ATC

Basically:

• If selling cupcakes covers all costs (fixed + variable), stay in business

• If selling cupcakes doesn’t cover total costs, exit → start something else

Demand

• How much people want to buy at different prices.

• Rule: People buy more when prices are low and less when prices are high.

Supply

• How much sellers are willing to make and sell at different prices.

• Rule: Sellers make more when prices are high and less when prices are low.

Movement along the demand curve:

price changes, quantity demanded changes.

Shift of the demand curve:

caused by other factors, like income, tastes, or new info.

Movement along the supply curve:

price changes, quantity supplied changes.

Surplus =

quantity supplied − quantity demanded → price falls.

Shortage =

quantity demanded − quantity supplied → price rises

Income Effects of Normal goods

demand rises as income rises

• Income ↑ → Demand ↑ (right shift)

• Income ↓ → Demand ↓ (left shift)

Income Effects of Inferior goods

demand falls as income rises

• Income ↑ → Demand ↓ (left shift)

• Income ↓ → Demand ↑ (right shift)

Substitutes

goods you can replace with another

• Price of substitute ↑ → Demand ↑ (people switch)

• Price of substitute ↓ → Demand ↓

Complements

goods you use together (e.g., hamburger + fries)

• Price of complement ↓ → Demand ↑ (cheaper meal)

• Price of complement ↑ → Demand ↓