Economics Exam: Key Concepts

• The exam is 90 minutes long and worth 60 marks.
• Answers must be transferred to the bubble sheet to be graded.
• The bubble sheet must include the student's name, number, and version number.
• Only pencils can be used and no aids of any kind are allowed.
• Exam material is the property of the Department of Economics.

Version of Question Booklet

• The exam version on top of the bubble sheet is required for grading.

Economic Profit Calculation

• Nada's economic profit: $40,000 (revenues) - $1,000 (writing materials) - $10,000 (rent) - $20,000 (opportunity cost) = $9,000.

Price Impact

• A fall in price occurs when there is a surplus of the product.

Demand Curve Shift

• A rightward shift in the demand curve for electric cars can be due to increased consumer income and electric cars being a normal good.

Price Elasticity of Demand

• Gasoline price increase of 10% leads to a 5% demand decline, meaning the price elasticity of demand is -0.5, which is price inelastic.

Price Discrimination

• Special Discount : Buy one box of Oreo and get the other 50% off is not an example of price discrimination.

Profit Maximization

• To maximize the firm generates marginal revenue.
• Incur marginal cost.

Variable Costs

• Variable costs vary with the quantity of output.

Free Markets

• Free markets maximize welfare only when certain conditions are satisfied, like the absence of externalities.

Tax Incidence

• With elastic supply and inelastic demand for car parts, the tax on oil is mostly paid by buyers.

Price Controls

• When fees paid to doctors are set above the equilibrium price, a surplus of services arises.

Public Provision

• Too few students using anti-virus software can be addressed through public provision like that of York University offering free anti-virus software.

Oligopoly Demand

• Oligopolies exhibit demand which is more inelastic than monopolies.

Pollution Tax

• To achieve efficiency where marginal private benefits equal marginal social benefit, a tax of $60 per ton can be imposed.

Implicit Costs

• Gina's implicit cost of operating her own business is $50,000, based on forgone salary.

Rising Interest Rates

• Rising the interest rates, the present value of future money decreases.

Market Supply

• With 10 businesses each supplying 70 units at a price of $50, the market supply is 700 units.

Progressive Tax System

• An increase in marginal tax rate as income increases defines a progressive income tax.

Price Ceilings

• Maximum price for gasoline set below market-clearing price causes long lineups at the pumps.

Negative Economic Profits

• Timber producers earning negative economic profits, economists predict that prices will increase in the long run.

Decreasing Output

• Firms should decrease output when marginal cost exceeds marginal revenue.

Diamond-Water Paradox

• The diamond/water paradox is explained by distinguishing between total benefits and marginal benefit.

Subsidies

• Government subsidizing is required for schools to get the efficient social outcome in the education market.

Price Ceilings Removed

• Removing price ceilings on rental units improve market efficiency.

Natural Monopolies

• Government regulation promoting competitive behavior in natural monopolies leads to lower prices.

Housing Subsidies

• Government housing subsidies are preferred over rent controls since market-clearing prices coordinate landlords and renters' choices.

Price Discrimination Conditions

• To price discriminate, museums must prevent tourists from reselling tickets to locals.

Marginal Revenue Curve

• For a price-making business, the marginal revenue curve has a slope twice as steep as the demand curve.

Income Elasticity

• The income elasticity of demand for a necessity is greater than zero but less than 1.

Positive Externality

• Education creates a positive externality because it creates external benefits for other people.

Pollution

• The production of chemical fertilizer creates pollution.
• If the market is unregulated, then it produces 4 tonnes more than the efficient social outcome.

Game Theory

• If companies A and B cooperate, company A makes economic profits of $20.

Smart Consumers

• As the price of energy from solar power falls, smart consumers buy the same amount of energy from coal power.

Food Price Caps

• Food price caps' failure in Hungary was since retailers compensated losses by raising other prices.

Technological Advancements

• A tech change lowering smartphone production costs shifts the supply curve to the right.

Zero-Sum Game

• In a zero-sum game, a player's gain is at another's expense.

Superstar Hiring

• Cost to hire a superstar is determined by demand only; inelastic.

Perfectly Competitive

• Competitive firms should charge same price.

Increasing Revenue

• Increasing prices leads to increased revenue if demand is price-inelastic.

Informed Decisions

• A smart decision involves calculating the additional revenue she expects to generate in the extra hour.
• Considering what else she would do with the hour if she does not stay.

Sports Shoe Competition

• After Nike Air's success, Puma developed a new technology.

Income and Wealth

• Income is what you earn and wealth is what you own.

Fixed Costs

• Building cellular networks with high fixed costs and low marginal costs exhibits large economies of scale and are natural monopolies.

Anti-Trust Laws

• Anti-combines, or anti-trust, laws prevents monopolies.

Price elasticity of Demand

• If and increase in price increases total revenue then price elasticity of demand is greater than zero but less than one.

Digital Streaming

• Digital streaming replacing DVDs is an example of creative destruction.

Marginal Revenue Product

• Marginal revenue product calculation is for the 4th worker producing at $5 a unit.
• Here the extra workers goes from creating 30 to 35 units. So that one worker creates 5 units
• The value of the extra units is $25.

Nash Equilibrium

• In the Nash equilibrium, Company A makes economic profits of $2.

Produce More

• Yes, produce the third unit. The additional costs from the third unit are smaller than the additional revenue generated.

Profit Maximization

• Mia should charge $12 to maximize profits.

Positive Statement

• Positive statement is when a price ceiling falls, quantities will adjust.

Market Evolution

• Before Starbucks, the market for coffe was perfectly competitive.
• The market changed to monopolistic competition.

Canadian Telecom

• Canadian Telecom firms setup physical infrastructure, that is required, is too high, and is a major barrier to entry.

Marketable Permits

• LightUp College solves its smoking problem by giving each student five smoking permits a day, and allowing students to trade their permits and is an example of marketable permits.

Production

• In the short run, when a business doubles all of its variable inputs while keeping fixed inputs constant, output will: less than double.

Tutorial Video

• Complements is lower prices, more sales, higher profits, and happier customers.

Equilibrium Price

• Investors want to create the greatest price .
• An investor expects the demand for gold to increase and the supply for gold to decrease.
• That investor believes the new equilibrium price will be higher.

Price Ceiling

• A price ceiling for Christmas trees set above the equilibrium price of Christmas.
• Results in Christmas trees being sold at the equilibrium price.

Normative Statement

• Governments should intervene to correct market failure.

Normal Profits

• When a business is earning normal profits, accounting profit is positive, economic profit is zero, total revenue equals total opportunity cost

Perfect Competition

• In perfect competition, businesses are price takers.