ECON 201 Final (copy)
1. Would an economist consider clean air a scarce resource? Explain.
2. List and briefly describe the three (main) factors of production.
3. Positive economic analysis answers what question?
4. Normative economic analysis answers what question?
5. True or False: Positive relationships are also referred to as inverse relationships.
6. What is an opportunity cost?
7. What are explicit costs and implicit costs?
8. Suppose that you lend $5,000 to a friend who pays you back $5,400 the next year. Suppose that prices that year rose by six percent and the real rate of return in the stock market was five percent. Your friend says that he or she was being more than fair by giving you more than the rate of inflation as a return. What do you think?
9. What is a marginal cost?
10. What is a marginal benefit?
11. When a firm hired its tenth worker, its factory output increased by four units per month. Would you expect the firm's output to increase by eight more units per month if the firm hired two more workers?
12. Consider a firm that is trying to determine how many hours to remain open in a day. How would the firm make this decision?
13. Different people eat different amounts of food when they go to buffet restaurants, even though they all pay the same price. Explain how this relates to the marginal principle.
14. Use the marginal principle to explain why government mandated safety features in automobiles during the 1960s and 1970s resulted in an increase in collisions between automobiles and bicycles.
15. Explain the concept of diminishing returns.
16. You are running a small yard maintenance business for the summer. What do you expect to happen to the number of yards you can maintain in a day as you add workers if you don't purchase more capital equipment (like mowers and leaf blowers)?
17. Explain the real-nominal principle.
18. How would an increase in prices in retail stores change the real value of the money you earn as wages?
19. If your salary increases at a slower rate than prices are increasing, what would happen to your buying power?
20. Explain why an increase in a person in debt who experiences a wage increase that is exactly equal to the inflation rate may make them better-off.
Supply & Demand
21. True or False: As the price of a product falls, the demand for the product increases, ceteris paribus.
22. The law of supply states that there is a positive relationship between price and quantity supplied, ceteris paribus.
23. True or False: Governments sometime create an excess demand for a product by setting a maximum price that is less than the equilibrium price, resulting in an excess demand for the product. This is known as a price floor.
24. Explain the difference between a change in quantity demanded and a change in demand.
25. Describe the changes in the variables that will cause the demand for a product to decrease, shifting the demand curve to the left.
26. Draw a graph to illustrate the effect of higher gasoline prices on the demand for large SUVs. What is the relationship between gasoline and SUVs?
27. Explain the difference between a change in quantity supplied and a change in supply.
28. Describe the changes in the variables that will cause supply for a product to decrease, shifting the supply curve up and to the left.
29. Using a graph, illustrate the effect that an increase in production costs will have on the equilibrium price and quantity of a good.
30. Explain what would happen to the equilibrium price and quantity of oranges if the supply of oranges increased while the demand for oranges decreased.
31. When the demand and the supply for bread increases simultaneously, will we able determine their effects on the equilibrium price?
32. What is consumer surplus and how is it calculated?
33. What is "willingness to accept"?
34. What is producer surplus?
Elasticity
35. Gloria works for a museum in a large city with many other museums. Her boss proposes that the museum should raise the price of admission to increase revenues. Gloria was a good student in her economics principles course. How should she advise her boss?
36. Hotdogs are very cheap at the grocery store—about $2 for a package of 8, or 25 cents each. At a baseball game they cost $3 each. Use the concept of price elasticity of demand to explain why.
37. Explain why the demand for a particular brand of fast food tends to be more elastic than demand for all fast food.
38. Why do you think that the demand for coffee is less elastic than the demand for restaurant meals?
39. Is demand for electricity more price elastic when measured over a short period of time or a long period of time? Explain.
40. If demand elasticity of airline tickets is 3, what percentage change in quantity would the airlines expect from a 10% increase in price?
41. What is total revenue for a firm?
42. What is the relationship between price elasticity of demand and total revenue for the firm?
43. How do you interpret the value of income elasticity?
44. How do you interpret the value of cross-price elasticity?
45. Put the following products in order from lowest to highest based on their cross-price elasticity of demand with peanut butter: bread, bologna, floppy disks. Justify your answer.
46. Suppose that last year the Loyola University men's basketball team, the Ramblers, won the NCAA tournament. As a result, attendance at basketball games has increased dramatically. Explain the difference between the supply of seats for games in the short-run and in the long-run. How would you describe the elasticity of supply of seats in the long-run?
47. What will make a change in demand cause a large change in price?
Government
48. What is a price ceiling and why must it be below the equilibrium price to be effective?
49. When do consumers bear the larger share of a tax?
50. What is a deadweight loss or excess burden associated with a tax?
Market Failures
Externalities
51. Explain what is meant by "internalizing an externality," and describe three methods by which this can be done.
52. True or False: Coase bargaining works best in a situation with a large number of affected parties and the transactions costs of bargaining are relatively low.
53. What is the purpose of a pollution tax?
54. How does a pollution tax work?
55. What are the sources of external costs from automobiles?
Public Goods
56. Suppose that your local government provides drinking water and charges a 10 cent per gallon fee. Explain whether or not the drinking water is a public good.
57. Provide an intuitive explanation of the free-rider problem.
58. Global warming has become a major international environmental issue. Using the concept of externality, explain why countries around the world seldom reach an agreement to reduce the use of fossil fuels.
Industrial Organization
Firms, Costs, Revenue, Profit, and Technology
59. What are the differences between economic cost and accounting cost?
60. What is marginal revenue?
61. What is economic profit?
62. Explain the difference between the short-run and the long-run.
63. Explain the relationship between average fixed cost and marginal cost.
64. Explain the difference between fixed costs in the short-run and in the long-run.
65. Assuming that labor is the only variable input with a fixed production facility, explain the relationship between the marginal product of labor and the marginal production cost.
66. Explain why the marginal cost curve intersects average total cost at the point of minimum average total cost.
67. Can a firm experience diminishing returns in the long-run?
68. Draw a graph showing the long-run average cost curve for a firm that experiences economies of scale.
69. Explain why some firms may suffer diseconomies of scale.
Perfect Competition
70. What are the characteristics of perfect competition?
71. Suppose that a firm maximizes its profits by producing a quantity of 20 units. The market price is $5. The firm's variable costs are $70 and its fixed costs are $40. What should the firm do in the short run? In the long run?
72. Explain why a firm's shut-down decision does not incorporate the fixed costs of the production facility.
73. Consider a perfectly competitive market. What do you expect to happen to the number of firms and firm profitability in the short-run and long-run if demand for the product falls?
74. Explain why perfectly competitive firms make zero economic profit in the long-run.
Monopoly & Antitrust
75. Why do barriers to entry create market power?
76. What is a network externality?
77. Why does monopoly necessarily reduce consumer surplus compared to perfect competition?
78. What is a patent?
79. Why does the government grant patents to companies that research new drugs?
80. Why does the government grant patents universally rather than just to those products that would not be developed without a patent?
