AP Microeconomics Unit 6

1. What is allocative efficiency?

Marginal Benefit equals Marginal Cost (MB=MC) OR the Marginal Benefit of producing the next unit of a good is equal to the Marginal Cost to produce the next unit. Resources allocated efficiently.

2. In a socially efficient market, which of the following is true?

Marginal Private Cost will equal Marginal Social Cost (MPC = MSC) Marginal Private Benefit will equal Marginal Social Benefit (MPB = MSB) Total economic surplus is maximized where Marginal Social Benefit is equal to Marginal Social Cost (MSB = MSC)

3. Which of the following is NOT a cause of market failure?

Causes of market failure:

• Market Power: Monopoly, Oligopoly, Monopolistic Competition

• Asymmetric Information: Lack of information provided by sellers and buyers

• Private Costs/Benefits Only: Negative and Positive Externalities in Production and Consumption

• Insufficient Production of Public Goods: Goods and services provided by the government

4. What is a characteristic of deadweight loss?

• Taxes and Trade Barriers

• Price Floors/Ceilings

• Imperfect Competition

• Asymmetric Information

• Externalities

• Public Goods

5. How does a tariff create deadweight loss?

• Government will throw on a tariff to help domestic producers resulting in a higher price.

• The size of the tax is the difference between the tax and the world price.

• Not all of the surplus is transferred over to consumer or producer or is part of government revenue and results in DWL.

6. What happens when a negative externality exists in a market?

• The actions of a party indirectly imposes a cost on another party.

• Shift the Marginal Social Cost Curves to the left making them higher than the Marginal Private Cost resulting in the socially optimal output becoming less than the market equilibrium Results in an overallocation of resources (producing more than what is socially optimal)

7. What is the Coase Theorem primarily concerned with?

• Describes the economic efficiency of an economic allocation or outcome in the presence of externalities

• Bargaining between individuals or groups (normally over property rights) will lead to an optimal and efficient outcome (low or zero transaction costs)

• If true: It is possible for private individuals to make strategic choices that can solve the problem of market externalities WITHOUT assistance from the government

8. Which characteristic is NOT associated with public goods?

Characteristics of public goods: Non-exclusion, shared consumption.

9. What is the primary cause of the free rider problem?

• Non-excludable: once provided it can't be portioned out between those who paid and those who didn't

• Use of the good doesn't lessen the amount that others might receive (No incentives for non-payers to become payers)

Someone will get for less (or free) something that others pay more for and individuals are unwilling to pay their fair share for things that others pay more for

10. The tragedy of the commons occurs when:

• A common resource is provided (such as water or land) with tangible benefits but which no one has an exclusive claim

• Individuals all act in their own best interest and end up over-consuming to the detriment of all since demand outweighs supply and the resource becomes unavailable for the whole

11. In what situation can government intervention through taxes create efficiency?

Imperfectly competitive markets.

12. What does asymmetric information primarily refer to?

When one party to an economic transaction possesses greater material knowledge than the other party.

13. Which type of regulation aims to ensure fair competition?

Anti-Trust Policies

14. What does the Lorenz curve measure?

A graphical representation of income or wealth inequality

Plots percentiles of the population on the horizontal axis according to income (or wealth) and plots CUMULATIVE income or wealth on the vertical axis

15. What does a Gini coefficient of 0 represent?

Perfect Equality

16. Which of the following is NOT a source of income inequality?

Sources of income inequality:

• Supply and Demand in labor markets

• Marginal revenue product of the worker

• Human capital

• Social capital or social mobility

• Inheritance

• Access to financial markets

• Discrimination

• Bargaining power

17. How does human capital affect worker wages?

Human capital is the skills, knowledge and experience an individual possesses

Affects MRP (more educated worker normally means a more productive worker)

Affects SL in specific markets (specialized requirements lead to higher wages for those who qualify)

18. What percentage of US wealth approximately comes from inheritance?

35%

19. Which market inefficiency occurs when sellers have more product knowledge than buyers?

Adverse selection (when sellers know more about the quality of their product than buyers)

20. What is the primary role of non-price regulation?

Rules instituted by the government that can generate a cost for producers to ensure:

• fair competition

• environmental protection

• general health and safety