AP Microecon

Good is a complement if…

• A decrease in price of A → increase in demand for B

• Increase in the supply of A → increase in P and Q of B

When demand is inelastic

△P > △Q so decrease in P → decrease in TR

If firm is perfectly competitive,

MR is constant

If firm is imperfectly competitive,

MR decreases as more output

A linear production possibilities curve is

constant and the OC is constant

In profit maximizing monopoly, economic profit is

at the minimum of ATC

Socially Optimal at

MC=MB

To minimize costs

MP on the last dollar spent on labor = MP on the last dollar spent on capital

If P > AVC then

there’s no profit maximizing outputs

At optimal level of employment,

firm pays a wage rate lower than the competitive market wage rate

In negative externalities

MSC > MPC and MSB=MPC

When MP goes up,

Average Product also goes up but less than MP

What causes a perfectly competitive industry to make zero economic profit

If there is no barriers to entry or exit

If supply of job A is low relative to supply of job B

then A will have higher starting salaries

If P=ATC

it’s zero economic profit

Allocatively efficient is

No DWL and is at P=MC

Elastic demand

%△Q_d > %△P

Inelastic demand

%△Q_d < %△P

Unit Elastic demand

%△Q_d = %△P

If MR is negative then

it’s inelastic

what will happen to total revenue if price increases

If it’s elastic demand (>1), then TR drops. If it’s inelastic, TR goes up and if it’s unit elastic TR stays same

in a natural monopoly, a normal profit (zero economic profit) is at

P (D) =ATC

Price doesn’t change

supply or demand only the Q supplied or demanded

What does consumers being more affected by tax mean

They are less responsive to price changes so the demand is less elastic than supply

beyond a certain level of output, short run MC will rise because

at least one input is fixed and diminishing returns will happen

total revenue maximization happens at

MR=0

in externalities what is the total expenditure on government subsidy to achieve the socially optimal quantity

the difference between MSB at MPC (MSC) and MPB at MPC

In a externality subsidy equals

the marginal benefit

A lorenz curve that coincides with the line of perfect equality would have

a gini coefficient of 0

Lower barrier to entry decreases

Price and improves allocative efficiency

In a centrally planned economy who decides on resource allocation

government

whats the impact of lump sum tax on a firm's output level?

Nothing

increase in productivity of a resource increases

demand

how are lump sum taxes and lump sum subsidies similar

Both do not change the output level

what can cause an increase in supply

a subsidy

When a government corrects an externality, what happens to economic surplus

increases because there’s no more DWL

If ATC > P

negative economic profit