Economics Midterm Review Chapters 10-29
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Questions and Answers

In a long-run monopolistically competitive market, what is the expected profit level?

  • Positive accounting profits.
  • Zero economic profits. (correct)
  • Negative profits.
  • Economic profits are maximized.

What distinguishes an oligopoly from perfect competition?

  • Free entry and exit in the market.
  • Zero profit in the long run.
  • Few firms in the market versus many. (correct)
  • Homogeneous products in both structures.

What occurs when firms in an oligopoly decide to collude?

  • They decrease the welfare of consumers.
  • They ensure higher prices for all competitors.
  • They increase competition among themselves.
  • They behave similarly to a monopoly. (correct)

Which condition applies to both perfect competition and monopolistic competition?

<p>Many buyers and sellers. (C)</p> Signup and view all the answers

Which of the following statements is true regarding barriers to entry?

<p>Oligopoly typically has significant barriers to entry. (B)</p> Signup and view all the answers

What is a characteristic shared by monopolistic competition and oligopoly?

<p>Price-maker firms. (B)</p> Signup and view all the answers

Which factors can lead to a government's failure in addressing externalities?

<p>Insufficient information about the market. (A)</p> Signup and view all the answers

What differentiates real GDP from nominal GDP?

<p>Real GDP is adjusted for inflation. (D)</p> Signup and view all the answers

Which of the following scenarios would not be classified as a negative externality?

<p>You have an adverse reaction to a medicine your doctor prescribed you (D)</p> Signup and view all the answers

In the presence of positive externalities, which measure is effective for improving efficiency?

<p>Subsidies (D)</p> Signup and view all the answers

What is the most appropriate government intervention in the presence of negative externalities?

<p>Pigouvian taxes (C)</p> Signup and view all the answers

Which of the following factors is NOT a requirement for Coase Bargaining to be effective?

<p>High transaction costs (C)</p> Signup and view all the answers

In a situation where a railroad causes $1,500 in crop damages to a farmer, what would be the efficient outcome if the railroad could purchase a mitigating solution for $1,300?

<p>The railroad buys the solution but pays nothing to the farmer (A)</p> Signup and view all the answers

Which of the following is NOT considered a method of government intervention in market failures due to externalities?

<p>Price floors (A)</p> Signup and view all the answers

Which scenario exemplifies a party that possesses property rights but might not be held liable for external damages?

<p>A railroad passing through agricultural land causing environmental harm (A)</p> Signup and view all the answers

What could potentially improve market outcomes in the presence of negative externalities?

<p>Implementation of cap and trade systems (A)</p> Signup and view all the answers

Which of the following characterizes the efficient outcome regarding the farmer and the railroad?

<p>The railroad will purchase the grease for $1300 and pay the farmer nothing because no crop damage will occur (A)</p> Signup and view all the answers

A good that is non-rival is inefficiently provided by the free market because:

<p>The marginal value of the good exceeds people’s contribution to the good (B)</p> Signup and view all the answers

Which of the following best describes adverse selection?

<p>A mismatch occurs due to information asymmetry in a transaction (D)</p> Signup and view all the answers

What is a consequence of moral hazard in a business environment?

<p>Employees may take excessive risks since they do not bear the full cost (D)</p> Signup and view all the answers

In the context of public goods, why do free riders threaten the efficient provision of services?

<p>They can still enjoy the good without contributing financially (D)</p> Signup and view all the answers

Which scenario best exemplifies the concept of asymmetric information?

<p>A seller knows more about a product’s quality than the buyer (A)</p> Signup and view all the answers

Why is it difficult for firms to estimate the true demand for non-excludable goods?

<p>Due to free riders benefiting without contributing (A)</p> Signup and view all the answers

Which of the following situations illustrates the concept of a hidden action related to moral hazard?

<p>An employee chooses the most expensive travel options without penalty (D)</p> Signup and view all the answers

What is the correct formula for calculating nominal GDP?

<p>Nominal GDP = (Price1 x Quantity1) + (Price2 x Quantity2)... using prices from that year (D)</p> Signup and view all the answers

Which of the following factors contributes to the biases of CPI?

<p>Quality changes of goods (C)</p> Signup and view all the answers

If the CPI for a year is 120, what does this indicate about inflation compared to the base year?

<p>Prices have increased by 20% since the base year. (C)</p> Signup and view all the answers

How is the inflation rate calculated?

<p>Inflation Rate = ((CPI2 - CPI1) / CPI1) x 100 (B)</p> Signup and view all the answers

Which of the following best defines Real GDP?

<p>It is GDP measured using prices from the base year. (A)</p> Signup and view all the answers

What issue does substitution bias in CPI represent?

<p>Consumer preferences change due to prices of goods. (D)</p> Signup and view all the answers

In the context of the provided economic scenario, what does the significant rise in oil prices likely indicate?

<p>A need for alternative fuels as a response to inflation. (A)</p> Signup and view all the answers

What would a GDP deflator of 150 suggest about the economy?

<p>Nominal GDP is 50% higher than Real GDP. (D)</p> Signup and view all the answers

What is the formula for calculating the unemployment rate?

<p>u/(e + u) (D)</p> Signup and view all the answers

If a large number of previously working fathers quit their jobs to become stay-at-home dads, which of the following is most likely to happen?

<p>The labor force participation rate will decrease. (B)</p> Signup and view all the answers

What type of unemployment occurs when individuals take longer to find jobs suitable for their skills?

<p>Frictional unemployment (A)</p> Signup and view all the answers

Which of the following factors does NOT lead to structural unemployment?

<p>A high demand for labor (C)</p> Signup and view all the answers

Which function of money allows for the maintenance of value over time?

<p>Store of value (D)</p> Signup and view all the answers

What is an effect of policies aimed at reducing structural unemployment?

<p>Improvement in job matching (B)</p> Signup and view all the answers

In the context of the Nephite money system, which aspect best describes the 'medium of exchange' function of money?

<p>The capability to facilitate trade without bartering (D)</p> Signup and view all the answers

Which of the following most accurately describes the relationship between unemployment and the labor force participation rate?

<p>A decrease in labor force participation can occur without affecting the unemployment rate. (D)</p> Signup and view all the answers

Which scenario best represents the trade of false testimony as a part of the Nephite money system?

<p>Zeezrom offered to trade 6 ontis for Amulek to give a false testimony (A)</p> Signup and view all the answers

What does the reserve requirement indicate about the money supply when it is increased?

<p>The money supply will decrease as banks have to hold more reserves (D)</p> Signup and view all the answers

How is the money multiplier calculated when the reserve ratio is given?

<p>Money multiplier = (1/rr) (D)</p> Signup and view all the answers

Which action by the Fed will definitively lead to a decrease in the money supply?

<p>The Fed raises the reserve requirement (D)</p> Signup and view all the answers

What effect does selling bonds have on the money supply?

<p>The money supply decreases as money flows out of the banking system (C)</p> Signup and view all the answers

If the reserve ratio is 33% and the federal reserve sells $30 million in bonds, what is the resulting change in money supply?

<p>Decrease by $90 million (C)</p> Signup and view all the answers

Which of the following best defines 'hiding treasures in the earth' in the context of money usage?

<p>Storing wealth in non-liquid forms (A)</p> Signup and view all the answers

What is the relationship between the discount rate and the money supply?

<p>Lowering the discount rate increases the money supply (B)</p> Signup and view all the answers

Flashcards

Monopolistic Competition Profit in Long Run

Zero profit in the long run due to free entry and exit of firms.

Oligopoly Collusion

Oligopolies acting like monopolies if they collude, affecting price, quantity, and deadweight loss.

Oligopoly Price War

Oligopolies acting like perfectly competitive firms if engaged in a price war, affecting price, quantity, and deadweight loss.

Market Structure and Profit

Markets with free entry/exit will always result in zero profit in the long run.

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Monopoly Regulation: Average cost

A type of regulation that sets price equal to average cost.

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Monopoly Regulation: Marginal cost

A type of regulation that sets price equal to marginal cost.

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Perfect vs Monopolistic Competition

Both have free entry/exit and many buyers/sellers, but monopolistic competition has differentiated products while perfect competition has homogeneous products.

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Oligopoly Market Structure

A market with few firms, no free entry, and characterized by the possibility of collusion or price wars.

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Negative Externality

An action that imposes a cost on a third party not directly involved.

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Positive Externality

An action that benefits a third party not directly involved.

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Pigouvian Taxes

Taxes designed to correct externalities by internalizing them.

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Pigouvian Subsidies

Subsidies used to correct externalities by encouraging activities with positive externalities.

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Coase Theorem

If transaction costs are low, private bargaining can lead to efficient outcomes even in the presence of externalities.

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Transaction Costs

Costs associated with negotiation and enforcement of agreements.

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Property Rights

Clear ownership of resources, enabling parties to negotiate and resolve disputes over externalities.

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Efficient Outcome

The best possible outcome that maximizes overall well-being.

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Nominal GDP

The total value of goods and services produced in a country, calculated using current-year prices.

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Real GDP

The total value of goods and services produced in a country, calculated using prices from a base year.

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GDP Deflator

A measure of the overall price level in an economy, calculated as the ratio of nominal GDP to real GDP multiplied by 100.

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CPI

A measure of the average change in prices paid by urban consumers for a basket of consumer goods and services.

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Inflation Rate

The percentage change in the CPI over a period of time, reflecting the rate at which prices are rising.

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Introduction of New Goods Bias

The CPI may underestimate the true rate of inflation because it doesn't account for new products that weren't in the original basket.

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Unmeasured Quality Change Bias

The CPI can be inaccurate if it doesn't fully reflect changes in the quality of products, as some goods might improve or worsen.

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Substitution Bias

The CPI may overestimate inflation if it doesn't account for consumers substituting to cheaper alternatives when prices rise.

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Externality (railroad sparks)

Unintended consequence of an action on a third party; railroad sparks damage farmer's crops.

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Efficient outcome (railroad sparks)

The best solution for all parties, considering costs and benefits. In this case, preventing damage is the best option.

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Non-rival good

A good where one person's consumption doesn't reduce another's ability to consume; for instance, a lighthouse or a song.

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Non-excludable good

A good that is difficult or costly to prevent people from consuming, even if they haven't paid.

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Free rider problem

People taking advantage of a good or service without paying for it; common with non-excludable goods.

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Moral Hazard

Taking more risks when someone else is paying, because their actions don't bear the full cost.

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Adverse Selection

When one party has more information than the other, leading to an uneven bargaining outcome.

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Asymmetric information

A difference in knowledge between parties in a transaction. One party knows more than the other, which poses a challenge to fairness.

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Unemployment Rate

The percentage of the labor force that is unemployed, calculated as the number of unemployed people divided by the total labor force (employed + unemployed).

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Labor Force Participation Rate

The percentage of the population aged 16 and over who are either employed or actively seeking work. It's calculated as (employed + unemployed) divided by the total population aged 16 and over.

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Frictional Unemployment

A type of unemployment that occurs when workers take time to find a job that matches their skills and preferences, even when jobs are available.

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Structural Unemployment

A type of unemployment that occurs when the skills of workers in a labor market don't match the skills that employers are looking for, caused by factors like minimum wage, unions, or efficiency wages.

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Store of Value

One of the functions of money, meaning it can be saved and holds its value over time.

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Unit of Account

One of the functions of money, meaning it serves as a common measure of value, allowing comparison of the prices of different goods and services.

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Medium of Exchange

One of the functions of money, meaning it can be used to make payments for goods and services.

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Money Supply

The total amount of money in circulation within an economy.

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Federal Reserve Actions to Decrease Money Supply

The Federal Reserve can decrease the money supply by increasing the discount rate, raising the reserve requirement, or selling bonds.

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Reserve Ratio

The percentage of a bank's deposits that it must keep in reserve, unable to lend.

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Money Multiplier

A factor that amplifies the impact of changes in the money supply, calculated as 1/reserve ratio.

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Impact of Bond Sales on Money Supply

When the Federal Reserve sells bonds, it takes money out of circulation, reducing the money supply.

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Reserve Requirement and Money Supply

An increase in the reserve requirement reduces the money supply by limiting banks' ability to lend.

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Discount Rate and Money Supply

An increase in the discount rate discourages banks from borrowing from the Fed, indirectly reducing the money supply.

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Study Notes

Midterm 3 Review Topics

  • Chapters 16/17: Monopolistic Competition, Oligopoly, Market comparisons, Regulation of monopolies
  • Chapters 10/11/12: Externalities, Coase theorem, Public goods, Asymmetric information, Government failures
  • Chapter 23: GDP, Real vs. Nominal GDP, GDP Deflator
  • Chapter 24: CPI, CPI vs. GDP deflator, Real and nominal interest rates
  • Chapter 28: Unemployment rate, Types of unemployment
  • Chapter 29: Functions of money, Tools of the central bank, Money multiplier

Chapter 16/17 Details

  • Monopolistic Competition: Zero profit in the long run, Price > minimum of ATC, Product differentiation
  • Oligopoly: Few firms in the market, No free entry/exit, Two options: Collude/form a cartel (act like a monopoly), Price war (act like perfect competition)

Chapter 10/11/12 Details

  • Externalities: Mismatch of information between buyers and sellers

  • Coase Theorem: Optimal outcome is always reached, Party with property rights will never have to pay. Requires low transaction costs, and well-defined property rights, few parties involved.

  • Public Goods: Non-rival (one person's consumption doesn't reduce another's ability to consume), Non-excludable, Firms cannot estimate true demand due to free riders, Marginal cost is 0

Chapter 23 Details

  • GDP Definition: The market value of all final goods and services produced within a country in a given time period.
  • GDP Equation: GDP = C + I + G + NX (Consumption + Investment + Government Spending + Net Exports)

Chapter 24 Details

  • CPI (Consumer Price Index) Definition: The cost of a basket of goods and services relative to the cost of the same basket in the base year. CPI = (Current cost of basket / Base year cost of basket) * 100
  • CPI is NOT the cost of the basket

Chapter 28 Details

  • Unemployment Rate: u/(e + u) (unemployed / labor force)
  • Labor Force: # of employed people + # of unemployed people

Chapter 29 Details

  • Functions of Money: Store of value (maintain value over time), Unit of account (compare prices), Medium of exchange (payment)
  • Tools of Central Bank: Buying/selling bonds (buying increases money supply, selling decreases money supply), Reserve requirement (lowering increases money supply, raising decreases money supply), Discount rate (lowering increases money supply, raising decreases money supply)

Additional Concepts

  • Money Multiplier: The amount that money (added or taken out of the economy) is multiplied. Money Multiplier = 1/reserve ratio.

  • Government Failures: Restriction on choice, Rent-seeking, Bureaucracy, Limited information.

Practice Questions - Specific Examples

  • Externality: Example: A factory polluting the air.

  • Coase Theorem: Example: A railroad causing damage to a farmer's crops. The efficient outcome is the railroad buying grease to prevent the sparks and causing damage.

  • Public Goods: Example: National defense (non-rival, non-excludable).

  • GDP: Example: A US citizen buying a Chinese-made phone – part of the Imports part of GDP

  • CPI: Example Given 2018 is base year and a consumer's typical basket consists of 20 boxes of cereal and 12 gallons of milk... CPI for 2017 calculation & inflation rate.

  • Unemployment rate: Example: Stay at home dads... Impact on unemployment rate & labor participation rate!

  • Money Multiplier: The reserve ratio is 33%. If the Federal reserve sells $30 million worth of bonds, money supply decreases by $90 million.

  • Policy and choice: Example: Government failures... restricting choice – examples.

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Midterm 3 Review PDF

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Prepare for your economics midterm with a comprehensive review of key concepts from chapters 10 to 29. This quiz covers monopolistic competition, oligopolies, externalities, GDP, unemployment rates, and the functions of money. Test your understanding and ensure you're ready to tackle a variety of economic topics!

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