Economics Question Pool Answers PDF

**Economics -- Question Pool** **Friendly Match I**: **Answering and Filling Gaps** 1. **How can we define the market?**\ A market is a system or arrangement in which buyers and sellers interact to exchange goods, services, or resources at agreed prices. 2. **Why would labor be treated...

**Economics -- Question Pool** **Friendly Match I**: **Answering and Filling Gaps** 1. **How can we define the market?**\ A market is a system or arrangement in which buyers and sellers interact to exchange goods, services, or resources at agreed prices. 2. **Why would labor be treated as a variable cost?**\ Labor is treated as a variable cost because it typically fluctuates with production levels; hiring more workers increases costs, while reducing workers decreases costs. 3. **In the short run, adding workers will at some point result in a:**\ **Diminishing marginal product.** 4. **A rising marginal cost curve follows directly from:**\ **The law of diminishing returns.** 5. **A firm in a competitive market is about to cease operations in the short term; it must be true that:**\ **Its revenue cannot cover variable costs.** 6. **Variable costs include all of the costs of production that increase with the quantity produced.** 7. **Diminishing marginal returns occur when the marginal gain in output diminishes as each additional unit of input is added.** 8. **In order to determine the average variable cost, the firm\'s variable costs are divided by the quantity of output.** 9. **The term marginal cost is used to describe the additional cost of producing one more unit.** 10. **Total revenue is calculated by taking the quantity of everything that is sold and multiplying it by the sale price.** 11. **If a solar panel manufacturer wants to look at its total costs of production in the short run, which of the following would provide a useful starting point?**\ Fixed and variable costs. 12. **Small "Mom and Pop firms," like inner city grocery stores, sometimes exist even though they do not earn economic profits. How can you explain this?**\ They may continue operations to cover fixed costs, maintain personal satisfaction, or serve a community need, even without economic profits. 13. **Briefly explain what is meant by the term \"variable costs\" and provide three examples of the same.**\ Variable costs are expenses that change directly with the level of output. Examples include raw materials, wages for hourly labor, and utility costs for production. 14. **In the short run, if you see the output changing, at what variable would you look for an explanation?**\ Changes in variable inputs, like labor or raw materials. 15. **Briefly explain what is meant by the term \"fixed costs\" and provide three examples of the same. What determines a firm\'s level of fixed costs?**\ Fixed costs are expenses that do not change with output levels. Examples: rent, insurance, and salaries of permanent staff. Fixed costs are determined by the firm\'s operational scale and long-term commitments. 16. **What are explicit and implicit costs?**\ Explicit costs involve direct monetary payments (e.g., rent, wages). Implicit costs represent opportunity costs, like the foregone income from using personal assets. 17. **What is the difference between accounting and economic profit?**\ Accounting profit = Total Revenue - Explicit Costs.\ Economic profit = Total Revenue - (Explicit Costs + Implicit Costs). 18. **What is a production function?**\ A production function is a mathematical representation of the relationship between inputs (like labor and capital) and the resulting output. 19. **What shapes would you generally expect a total product curve and a marginal product curve to have?**\ The total product curve typically shows increasing output at a decreasing rate. The marginal product curve initially rises and then declines due to diminishing marginal returns. 20. **What are the factor payments for land, labor, and capital?**\ Land: Rent, Labor: Wages, Capital: Interest. 21. **What is the relationship between marginal product and marginal cost? Why do you suppose that is? Is this relationship the same in the long run as in the short run?**\ Marginal product and marginal cost are inversely related: when marginal product decreases, marginal cost increases. This relationship holds in both the short and long run but is more pronounced in the short run due to fixed inputs. **Graph-Related Questions** 22. ??? 23. **The graph above illustrates the total cost function for GoodieCookie Co. The changing slope of the total cost curve reflects this company\'s:**\ Increasing marginal costs as production increases. 24. **How are the company\'s fixed costs represented in this graph?**\ Fixed costs are the y-intercept of the total cost curve. 25. **Refer to the graph shown above. Based on the information illustrated in the graph, which of the following is correct?**\ **(Graph-dependent)** -- Typically, the graph would indicate that as output rises, variable costs increase, impacting the total cost. 26. **Based on the information illustrated in the graph, which of the following is correct?**\ **(Graph-dependent)** -- Usually, the curve reflects economies or diseconomies of scale depending on the slope. Here are the graphs: A screenshot of a graph Description automatically generated 1. **Total Product Curve**: - Shows the output level as labor input increases. - Initially, the output increases at an increasing rate, but eventually, it grows at a decreasing rate due to diminishing marginal returns. 2. **Marginal Product Curve**: - Represents the additional output produced by an extra unit of labor. - Starts high and decreases as labor input increases, reflecting the diminishing marginal product. **Friendly Match II:** **Questions and Answers** 27. **Why does quantity demanded tend to fall as price rises?**\ Due to the **law of demand**, higher prices make goods less affordable for consumers, reducing quantity demanded. Additionally, substitutes become relatively more attractive. 28. **Which of these is NOT a key difference between monopolistic competition and oligopoly?**\ **(Specific options required)** Generally, oligopolies are characterized by fewer firms with mutual interdependence, while monopolistic competition has many firms with product differentiation. 29. **A big difference between monopolistic competition and perfect competition is:**\ Monopolistic competition involves **differentiated products**, while perfect competition involves **homogeneous products**. 30. **Which type of market is most likely to recognize the mutual interdependence of the firms within it?**\ **Oligopoly.** 31. **Where do regulators usually set price in the case of natural monopolies?**\ Regulators set the price at the point where the average total cost (ATC) intersects demand, ensuring a fair price without profit maximization. 32. **With a monopoly industry:**\ The firm maximizes profits where **marginal revenue equals marginal cost** (MR = MC). 33. **A Nash Equilibrium describes:**\ A situation where no player can improve their outcome by changing their strategy, assuming others' strategies remain unchanged. 34. **Why is there scarcity?**\ Scarcity exists because **resources are limited** while human wants are **unlimited**. 35. **Scarcity implies that:**\ Choices must be made, leading to opportunity costs. 36. **Marginal thinking is best demonstrated by:**\ Considering whether the additional benefit of one more unit exceeds its cost. 37. **The term marginal utility refers to the additional utility provided by one additional unit of consumption.** 38. **Economic theory offers predictions about the full range of possible events and responses, which can prevent uncertainty about how households will respond to changes in prices or incomes.** 39. **As a general rule, utility-maximizing choices between consumption goods occur where the:**\ **Marginal utility per dollar spent is equal for all goods** (MU/P for each good is equal). 40. **An inferior good is a product:**\ For which demand decreases as income increases (e.g., instant noodles). 41. **During a severe recession, the government issued food stamps\... The budget constraint line shifts:**\ Outward in the direction of the food axis, as the food budget effectively increases. 42. **Which of the following is most unlikely to present a barrier to entry into a market?**\ **(Specific options required)** Common barriers include high fixed costs, patents, or government regulations. 43. **Which of the following is most likely to be a monopoly?**\ Examples: **Public utilities** or firms controlling unique resources. 44. **A monopolist is able to maximize its profits by:**\ Producing where **MR = MC** and setting the price based on the demand curve. 45. **The slope of the demand curve for a monopoly firm is:**\ **Downward-sloping**, reflecting its market power. 46. **The branch of mathematics that analyzes situations in which players must make decisions and then receive payoffs is:**\ **Game theory.** 47. **In a monopolistic competitive industry, firms can try to differentiate their products by:**\ Branding, advertising, quality, or unique features. 48. **Collusion arises when firms act together to reduce output and keep prices high.** 49. **Perfect competition and monopoly stand at opposite ends of the spectrum of competition.** 50. **As the name monopolistic competition implies, a firm's decisions in this setting will in certain ways resemble perfect competition and in other ways resemble monopoly.** - The **Demand Curve** (blue) represents the price consumers are willing to pay at different quantities. - The **Marginal Revenue Curve** (green) is steeper, reflecting the monopolist\'s pricing power. - The **Marginal Cost** (orange dashed line) intersects with Marginal Revenue at the profit-maximizing quantity (red dashed vertical line). - The **Profit-Maximizing Price** (red dot) is determined from the demand curve at this quantity. - A simple 2x2 payoff matrix shows the potential payoffs for two players with two strategies. - The entries indicate the payoffs for Player 1 (rows) and Player 2 (columns) under different strategic combinations. Highlighting Nash Equilibria typically requires analysis of dominant strategies. **Question 51** **When economists analyze how individuals make choices, they divide the decision process into two steps. Define these two steps and label the resultant model:** **Steps:** 1. **Constrained Utility Maximization:**\ Individuals aim to maximize their satisfaction (utility) given their limited income and resources. 2. **Trade-offs and Opportunity Costs:**\ Decisions involve comparing the benefits of one choice against the next best alternative foregone. **Resultant Model:** This process is represented by the **Budget Constraint Framework**, where consumers allocate income between goods to reach the highest possible indifference curve without exceeding their budget. **Question 52** **When most people want to know the cost of an item or service, they look for a price tag. When economists want to determine cost, they go one step further. They use the idea of opportunity cost. Explain the concept of opportunity cost and illustrate with an example:** **Concept of Opportunity Cost:** Opportunity cost is the value of the next best alternative foregone when a choice is made. **Example:** If a student spends \$10 on a movie ticket, the opportunity cost is the benefit they could have received from spending that \$10 on something else, like a book or a meal. **Question 53** **Briefly discuss how greater consumption of a good affects utility:** **Marginal Utility:** As consumption of a good increases, **marginal utility** (additional satisfaction from each extra unit) typically decreases, according to the **law of diminishing marginal utility**. **Total Utility:** - **Initially:** Total utility increases as more units are consumed. - **Eventually:** Total utility increases at a slower rate and may plateau or decrease if consumption leads to dissatisfaction (negative utility). **Question 54** **What does the budget constraint framework suggest when income rises?** When income rises: 1. **Budget Constraint Shifts Outward:**\ Consumers can afford more of both goods, allowing higher levels of consumption. 2. **Increased Utility:**\ Consumers move to higher indifference curves, reflecting greater satisfaction. 3. **Substitution Effect:**\ Consumers might reallocate spending between goods, depending on preferences and relative prices. **Question 55** **Briefly describe how a monopolist will select the profit-maximizing level of output and price:** A monopolist maximizes profit by producing the quantity where: Marginal Revenue (MR) = Marginal Cost (MC)\\text{Marginal Revenue (MR) = Marginal Cost (MC)} **Steps:** 1. Determine the MR and MC curves. 2. Find the output level where MR = MC. 3. Set the price based on the demand curve at the profit-maximizing quantity. **Question 56** **Briefly explain how a natural monopoly arises:** A **natural monopoly** occurs when a single firm can supply the market more efficiently than multiple firms due to: 1. **High Fixed Costs:** Significant upfront costs (e.g., infrastructure) create barriers for competitors. 2. **Economies of Scale:** Average costs decrease as output increases, favoring one large producer over several smaller ones. Examples: Utilities like electricity and water supply. **Question 57** **Briefly compare and contrast the perceived demand curve for a monopolistic competitor and a monopolist:** **Aspect** **Monopolistic Competitor** **Monopolist** ---------------------- ------------------------------------------------------ ---------------------------------------------------------- **Demand Curve** Downward-sloping, but elastic due to substitutes. Downward-sloping, less elastic due to fewer substitutes. **Pricing Power** Limited by competition. Greater due to market control. **Output and Price** Firms compete on non-price factors (e.g., branding). Price and output set to maximize profit. **Question 58** **Briefly describe what an oligopoly is, as well as the circumstances that could allow oligopolists to earn their highest profits:** **Oligopoly:** A market structure with: - Few dominant firms. - High barriers to entry. - Interdependence among firms. **Circumstances for Maximum Profit:** 1. **Collusion:** Firms agree to restrict output and set higher prices (e.g., cartels). 2. **Mutual Interdependence:** Firms avoid price wars, focusing on non-price competition like advertising or product differentiation. **Semester Questions:**\ **Questions and Answers** 59. **Where to look when the total cost curve shifts upwards/downwards? What could cause a shift in the demand curve? What could be the cause of a shift in the supply curve?** - **Total Cost Curve Shift**: Look at changes in input prices (e.g., labor, raw materials) or technology. - **Demand Curve Shift Causes**: Changes in income, tastes, population, prices of substitutes/complements, or expectations. - **Supply Curve Shift Causes**: Changes in input prices, technology, taxes, subsidies, or natural events. 60. **If you see an improvement in production, what would be the cause of that?**\ Improved production is likely due to advances in technology, better management, or increased efficiency of resources. 61. **Why is there a change in the relationship between output and labor?**\ This occurs due to the **law of diminishing marginal returns**, where additional labor initially increases output significantly but eventually yields smaller increments. 62. **Why cannot utility curves cross? What is the indifference curve?** - **Utility Curves Cannot Cross**: Crossing would imply inconsistent preferences, violating the assumption of rationality. - **Indifference Curve**: A graph showing combinations of two goods that give the same level of satisfaction. 63. **How would one convert a bad to a good with regard to utility curves?**\ This is achieved by compensating the individual, such as offering a subsidy or providing complementary goods to offset the \"bad.\" 64. **Variable costs include all of the costs of production that increase with the quantity produced.** 65. **Diminishing marginal returns occur when the marginal gain in output diminishes as each additional unit of input is added. What is the law of diminishing returns?**\ This law states that as more of a variable input (e.g., labor) is added to a fixed input (e.g., capital), the additional output eventually decreases. 66. **In order to determine the average variable cost, the firm\'s variable costs are divided by the quantity of output/product.** 67. **The term marginal cost is used to describe the additional cost of producing one more unit.** 68. **Total revenue is calculated by taking the quantity of everything that is sold and multiplying it by the sale price.** 69. **Where do Regulators usually set Price in the case of Natural Monopolies?**\ At the point where the **average total cost (ATC)** intersects the demand curve to prevent excessive profits while ensuring affordability.  **Diminishing Returns**: - The **Total Product Curve** (blue) shows output increasing as labor input increases, but at a decreasing rate due to diminishing marginal returns. - The **Marginal Product Curve** (green) declines as more labor is added, illustrating diminishing gains from additional inputs.  **Indifference Curve**: - Represents combinations of two goods (X and Y) that provide the same level of utility. The curve's slope (marginal rate of substitution) decreases as more of Good X is consumed, reflecting the trade-off between the goods. **Cost Curves**: - **Total Cost** (red): Includes both fixed and variable costs. - **Variable Cost** (orange): Increases proportionally with output. - **Fixed Cost** (blue, dashed): Constant regardless of output level. **Lecture's Choice:\ Questions and Answers** 70. **What is economics?**\ Economics is the study of how individuals, firms, and societies allocate scarce resources to satisfy unlimited wants and needs. 71. **How many market types are there? (4 types with graph)**\ The four main market types are: - **Perfect Competition**: Many firms, homogeneous products. - **Monopolistic Competition**: Many firms, differentiated products. - **Oligopoly**: Few firms, interdependent decision-making. - **Monopoly**: One firm, unique product. 72. **What is the marginal rate of substitution (MRS)?**\ MRS is the rate at which a consumer is willing to give up one good in exchange for another while maintaining the same level of utility. 73. **What are the factors of production?**\ The factors are: - **Land**: Natural resources. - **Labor**: Human effort. - **Capital**: Tools, machinery, and infrastructure. - **Entrepreneurship**: Organizational and risk-taking ability. 74. **What is the difference between individual and market demand?** - **Individual Demand**: The quantity of a good a single consumer is willing to buy at various prices. - **Market Demand**: The total demand from all consumers for a good at various prices. 75. **Why does the supply curve for production have a downward slope at some point?**\ For labor, it may slope downward due to the **income effect** outweighing the substitution effect. For firms, economies of scale can reduce marginal costs. 76. **What is the difference between short- and long-term cost curves?** - **Short-Term Cost Curves**: Some inputs are fixed, leading to diminishing returns. - **Long-Term Cost Curves**: All inputs are variable, and firms experience economies or diseconomies of scale. 77. **What are explicit and implicit production costs?** - **Explicit Costs**: Out-of-pocket expenses (e.g., wages, rent). - **Implicit Costs**: Opportunity costs of resources (e.g., foregone salary). 78. **Where and why is there consumer and producer surplus? What is deadweight loss, and where can it be found?** - **Consumer Surplus**: The area above the price line and below the demand curve, representing the benefit consumers get by paying less than their willingness to pay. - **Producer Surplus**: The area below the price line and above the supply curve, representing the benefit producers get by selling above their cost. - **Deadweight Loss**: The lost efficiency when markets are not at equilibrium, found between the supply and demand curves where transactions are restricted. 79. **Assuming a perfectly competitive labor market, why would there be unemployment when the government sets a new minimum wage? What are the general assumptions for perfect competition?** - **Unemployment**: If the minimum wage is set above the equilibrium wage, demand for labor decreases while supply increases, causing surplus (unemployment). - **Perfect Competition Assumptions**: Many buyers/sellers, homogeneous products, free entry/exit, perfect information. 80. **What are aspects that define a monopoly? Why doesn\'t a monopoly have a supply curve? What happens if marginal costs increase in a monopoly? Is there deadweight loss in a monopoly?** - **Monopoly Aspects**: Single seller, price maker, high entry barriers. - **No Supply Curve**: Price is determined by demand and marginal cost, not a fixed relationship between price and quantity supplied. - **Marginal Costs Increase**: Price rises, and output decreases. - **Deadweight Loss**: Yes, due to restricted output and higher prices compared to perfect competition. 81. **What is an oligopoly? What are its main characteristics?**\ An oligopoly is a market with a few large firms that dominate. - Characteristics: - Few firms, interdependent strategies. - Barriers to entry. - Potential for collusion or competitive rivalry. 82. **What is the substitution effect? What is the income effect?** - **Substitution Effect**: As prices change, consumers substitute cheaper goods for more expensive ones. - **Income Effect**: Changes in price affect consumers' purchasing power, altering consumption patterns. **Question 83** **Gomer decides to spend an hour playing basketball rather than studying. His opportunity cost is:**\ The value of the next best alternative, which is the benefit he would have gained from studying during that hour. **Question 84** **The opportunity cost of an action:**\ Is the value of the next best alternative foregone as a result of the action. **Question 85** **Which of the following occurs simultaneously with an income effect?**\ The **substitution effect** occurs simultaneously, where changes in relative prices affect consumption choices. **Question 86** **As a general rule, utility-maximizing choices between consumption goods occur where the:**\ Marginal rate of substitution (MRS) equals the ratio of the prices of the two goods:\ MRS=PxPy\\text{MRS} = \\frac{P\_x}{P\_y} **Question 87** **Substitution and income effects of a change in price of a good may be used to explain the:**\ Downward-sloping demand curve, as the substitution effect leads to increased consumption of the cheaper good, while the income effect adjusts overall purchasing power. **Question 88** **According to the definition of profit, if a profit-maximizing firm will always attempt to produce its desired level of output at the lowest possible cost, then it will:**\ Optimize production processes and input combinations to minimize costs while ensuring maximum revenue. **Question 89**  **The graph above illustrates the electricity market. Consider market competition between firms where price is based on AR and select the most appropriate answer.**\ Clarify assumptions or details for accurate interpretation. Likely outcomes include market equilibrium based on average revenue (AR). **Question 90** **Economics is the study of:**\ How individuals, businesses, governments, and societies allocate scarce resources to meet unlimited wants and needs. **Question 91** **An economic model is defined as:**\ A simplified representation of reality used to understand, explain, and predict economic behaviors and outcomes. **Question 92** **An economy facilitates which of the following?**\ The allocation of resources, production of goods and services, and distribution among members of society. **Question 93** **Which of the following is not a standard assumption in economics?**\ Examples include rational behavior, perfect information, and utility maximization. Specify options for clarification. **Question 94** **If Jim cannot increase production of Good X without decreasing the production of any other good, then Jim:**\ Is operating on the production possibility frontier (PPF), indicating efficient resource allocation. **Question 95** **If a nation has unemployment, it must be the case that it is operating (clue: PPF):**\ Inside the production possibility frontier, indicating underutilized resources. **Question 96** **If demand decreases and supply decreases, then in the short-run:\ The effect on equilibrium price depends on the relative magnitude of the shifts:** - **If demand decreases more than supply, price decreases.** - **If supply decreases more than demand, price increases.** - **The equilibrium quantity decreases in both cases.** **Question 97** **The law of supply states that:\ As the price of a good increases, the quantity supplied also increases, ceteris paribus (holding other factors constant).** **Question 98** **A normal good is one where:\ Demand increases as consumer income increases, and demand decreases as income decreases.** **Question 99** **Which of the following would not permanently affect demand?\ Temporary factors, such as seasonal changes or short-term trends, do not have a permanent impact on demand. For example:** - **A limited-time advertising campaign.** **Question 100** **Suppose we observe a decrease in the price of oranges. Which of the following is not a possible cause?\ A decrease in demand for oranges would not cause a price decrease unless accompanied by a larger increase in supply.** **Possible causes include:** - **An increase in the supply of oranges (e.g., a good harvest).** - **A decrease in production costs for orange growers.** **Question 101** **If population increases and the number of firms decreases, what would one expect to see happening to equilibrium price and quantity?** - **Equilibrium Price: Likely increases due to higher demand and reduced supply.** - **Equilibrium Quantity: Could increase or decrease depending on the magnitude of demand increase relative to supply reduction.** **Question 102** **Price floors are typically favored by:** - **Producers: They ensure a minimum price for goods, protecting producers from excessively low prices.** - **Labor Unions: In the case of minimum wages, ensuring fair earnings for workers.** **Question 103** **Which of the following is a result of a price ceiling?\ Price ceilings often result in:** - **Shortages: Quantity demanded exceeds quantity supplied.** - **Inefficiencies: Black markets and reduced product quality may emerge.** **Question 104** **Minimum wage laws are an example of what kind of market control?\ Minimum wage laws are an example of a price floor, which sets a legal minimum price for labor.** **Graph Analysis Questions** **Question 105** **Figure depicts two market equilibria. Equilibrium A is the original equilibrium, and Equilibrium B is the new equilibrium. Which of the following is a possible explanation for the change?**\ Possible explanations could include: - A shift in demand (e.g., increased preference for the good). - A shift in supply (e.g., production cost changes). Graphically: - Equilibrium A is determined by the initial demand (D1) and supply (S1). - Equilibrium B results from the intersection of D2 and S2 (shifts depending on changes). **Question 106** **The government proposes to impose a \$2.00 per unit tax. What will be the impact on the quantity sold in the market?** - The tax will shift the supply curve upward by \$2.00, reducing equilibrium quantity. - Graph: New supply curve (S\_tax) intersects demand at a lower quantity. **Question 107** **What will happen to consumer surplus if the demand for a product increases?** - Consumer surplus increases due to greater willingness to pay, shifting the demand curve outward. - Graph: The area under the demand curve above price expands. **Question 108** **What will happen to the consumer surplus if the supply for a product decreases?** - Consumer surplus decreases as higher prices reduce the area between demand curve and market price. - Graph: Shifts in supply curve inward reduce the surplus area. **Question 109** **When a price floor is instituted in a market, what happens to consumer surplus relative to the free market equilibrium?**\ When a price floor is instituted above the market equilibrium price, consumer surplus decreases because consumers are forced to pay a higher price, reducing the quantity they can afford. The area of surplus lost becomes part of producer surplus or results in deadweight loss. **Question 110** **Using figure below, the quantity quota increases consumer surplus?**\ No, a quantity quota typically reduces consumer surplus because it limits the available quantity of a good, causing prices to rise. This decrease in consumer welfare results in lost surplus. **Question 111** **The quantity quota increases producer surplus?** \ It depends. A quantity quota can increase producer surplus if the reduced quantity leads to higher prices, benefiting producers. However, some producers may be excluded from the market, limiting the overall increase in surplus. **Question 112** **The marginal rate of substitution is defined as:**\ The rate at which a consumer is willing to give up one good in exchange for another while maintaining the same level of utility. **Question 113** **The benefit or satisfaction that a person receives from the consumption of goods and services is called:**\ Utility. **Question 114** **If the price of gasoline increases, what happens to the average household's income?**\ The average household\'s real income effectively decreases because they can purchase less of other goods with the same nominal income. **Question 115** **If a household wins the lottery, what will happen to the household's income constraint?**\ The income constraint will shift outward, allowing the household to afford a greater combination of goods and services. **Question 116** **At the point of equilibrium for the firm, which of the following is true?**\ Marginal revenue equals marginal cost (MR = MC), maximizing the firm's profit. **Question 117** **The difference between fixed costs and variable costs is that:**\ Fixed costs remain constant regardless of output, while variable costs change with the level of production. **Question 118** **A firm's cost constraint can shift outward due to which of the following:**\ An increase in resources, technological advancement, or a reduction in input costs. **Question 119** **The Average Total Cost curve can shift due to all of the following except:**\ Changes in the fixed cost allocation over short-term production adjustments do not shift the ATC curve. **Question 120** **At profit maximization (consider marginal revenue and marginal cost):**\ The firm produces at the quantity where MR = MC, ensuring maximum profit or minimal loss. **Question 121** **Using figure below, which point is both technologically and allocatively efficient?**\ The point where the production possibilities curve (PPC) is tangent to the highest possible indifference curve. **Question 122** **Which points are allocatively inefficient?**\ Any points within the production possibilities curve or those where resources are misallocated relative to consumer preferences. **Question 123** **What must happen to make Point D feasible?** \ An increase in available resources or technological advancement to expand the production possibilities frontier. **Question 124** **A firm will temporarily (or keep producing in the short-run) shut-down when:**\ Price falls below the average variable cost (AVC), as continuing production results in greater losses than ceasing operations. **Question 125** **If a competitive firm finds that it can produce additional output for less than the market price, the firm should:**\ Increase production until marginal cost equals the market price. **Question 126** **If a firm earns positive profits in a perfectly competitive environment, it can expect:**\ New firms to enter the market, increasing supply and driving down prices until profits normalize to zero. **Question 127** **Using figure below, the firm is making:**\ Provide additional details about the figure for specific interpretation (e.g., profit, loss, or break-even). **Question 128** **The firm in the figure can expect:**\ Further clarification required based on the figure's context (e.g., adjustments in production or pricing). **Question 129** **The consumers in the figure can expect:**\ Further clarification required based on the figure's context (e.g., changes in surplus or price). **Question 130** **A hydroelectricity producing power plant is an example of:**\ A natural monopoly, due to high fixed costs and economies of scale that make a single provider most efficient. **Question 131** **The long-run equilibrium in a monopolistic market is characterized by:**\ Zero economic profits, as entry and exit of firms ensure price equals average total cost (P = ATC). **Question 132** **A monopolist is different from a competitive firm in that:**\ A monopolist sets prices based on demand and marginal revenue, while a competitive firm is a price taker. **Question 133** **In order for a cartel arrangement to be beneficial to its members:**\ All members must restrict output and agree on pricing, avoiding incentives to cheat. **Question 134** **The major threat to a cartel is:**\ Members cheating by secretly undercutting prices or increasing output. **Question 135** **Price in a monopoly is determined by:**\ The point on the demand curve corresponding to the quantity where marginal cost equals marginal revenue (MC = MR). **Question 136\ The definition of deadweight loss is:**\ The loss of total surplus due to inefficiency, typically caused by market distortions like monopolies or taxes. **Question 137** **Assume that each firm in a monopolistically competitive industry incurs short-run losses. In the long run:**\ Firms exit the market, reducing supply and driving prices up until firms earn normal profits (zero economic profits). **Question 138** **Monopolies and monopolistic competitors confront both a:**\ Downward-sloping demand curve and the need to consider marginal revenue in pricing. **Question 139** **In oligopolies compared to other market structures, one can expect that:**\ Firms recognize interdependence and may engage in strategic behavior like collusion or price wars. **Question 140** **A union that organizes labor in an industry with only two firms is likely:**\ To have significant bargaining power due to the limited number of employers. **Question 141** **What does a downward-sloping demand curve mean about how buyers in a market will react to a higher price? Explain on a graphic; will demand curves be perceived by producers in the same exact shape in all markets? If not, how will they differ? Present the difference graphically and explain briefly:**\ A downward-sloping demand curve indicates that buyers purchase less as price increases. In different markets: - Perfect competition: Firms face a horizontal demand curve (perfectly elastic). - Monopolistic/oligopolistic markets: Firms face a downward-sloping curve, with price-setting power. Graphically: - Competitive markets show flat demand at market price. - Monopolistic demand curves slope downward, reflecting differentiated products or pricing power. **Analyses:** **Question 1** **In a study of demand by Juliet Schor, she found that under certain circumstances, consumers' behavior contradicts the usual assumptions of economics. Concretely, contrary to what theory predicts, she found that the demanded quantity of lipsticks reacts positively to price increases. Briefly explain:**\ This phenomenon can occur due to the **Veblen effect**, where higher prices signal greater status or quality, making the good more desirable. **Question 2** **Which could be possible explanations for that empirical observation?** 1. **Veblen goods:** Higher prices increase the perceived value or prestige of the good. 2. **Snob effect:** Consumers value exclusivity, which higher prices may signal. 3. **Quality signaling:** Price increases may indicate superior quality to consumers. **Question 3** **What is the name of such a consumer behavior?**\ This behavior is called the **Veblen effect**, named after the economist Thorstein Veblen. **Question 4** **Imagine you have to explain how Schor's observations translate in:** **5. Demand and Supply Graph** A Veblen good\'s demand curve slopes upward in specific price ranges (demand increases as price increases). **6. Utility and Budget Constraint** Graphically: - A standard budget constraint shows decreased consumption as price rises. - However, for Veblen goods, a unique region of higher utility corresponds to higher-priced goods. **Question 7** **Depict the relevant graphs and explain them:** - For a **demand curve**, show upward-sloping sections for Veblen goods. - For **budget constraints**, demonstrate higher utility levels linked to increased spending on the good. **Question 8** **Briefly explain the relationship between both:**\ Schor's observation highlights that standard demand models (where higher prices lower demand) may not always apply. Utility gained from perceived value or status influences demand in such cases. **9 ???** **Question 10** **How does Schor propose to influence consumers to consume in a more socially responsible way? Depict the graph and explain:**\ Schor suggests promoting values that emphasize sustainability and intrinsic satisfaction over consumption.\ Graph: Shift the demand curve leftward for socially harmful goods, reflecting reduced consumption. **Question 11** **It has been found that some people consciously decide to change their lifestyle and earn less. Explain:**\ This decision reflects a shift in priorities toward non-monetary goals, such as increased leisure, better work-life balance, or pursuit of meaningful activities. By earning less, individuals may value their time more highly and seek utility beyond material wealth. **Question 12** **What are the choices a consumer has in that situation? Draw the relevant utility map:** **Choices:** 1. **Work more and earn more:** Maximize income at the cost of reduced leisure. 2. **Work less and earn less:** Maximize leisure at the cost of reduced income. 3. **Hybrid:** Strike a balance between income and leisure to achieve personal satisfaction. **Utility Map:** - **X-axis:** Leisure time. - **Y-axis:** Income. - Indifference curves show combinations of leisure and income that provide equal utility. - A budget constraint represents the trade-off between leisure and income, where work hours determine income levels. - A steeper indifference curve may represent higher value placed on leisure. **Question 13** **If a consumer consciously decides to work less, how does that translate to her income? Depict the relevant utility map and budget constraint map and explain:** **Impact on Income:** - Working fewer hours reduces earned income. - The budget constraint shifts inward, limiting the consumer's ability to purchase goods and services. **Utility and Budget Constraint Map:** 1. **Budget Constraint:** - **X-axis:** Leisure. - **Y-axis:** Goods/services or income. - A reduced slope reflects a smaller budget due to fewer work hours. 2. **Utility Curve:** - Indifference curves shift to prioritize leisure over material consumption. - The consumer selects a new equilibrium point where marginal utility of leisure outweighs the utility of income. **Question 14** **It has been found that many blood donors take pleasure from the idea of giving blood, but when they are offered a monetary sum for it, the shift from contribution to transaction ruins their pleasure of giving. Explain that choice on a utility map:** **Explanation:** - Altruistic behavior provides intrinsic utility (pleasure from helping). - Introducing money transforms the act into a transactional exchange, reducing intrinsic satisfaction. **Utility Map:** - **X-axis:** Quantity of blood donated. - **Y-axis:** Utility derived. - Two curves: 1. **Without monetary incentive:** Steeper and higher utility due to intrinsic motivation. 2. **With monetary incentive:** Flatter curve with lower utility, as external rewards diminish intrinsic value. **Individual's Supply Curve of Blood:** - Initially upward-sloping as altruistic motivations increase donations. - Flattens or declines when monetary incentives replace intrinsic satisfaction. **Question 15** **Explain the interaction between the factors of production and depict relevant graphs in the short run and long run:** **Short Run** - Capital is fixed; output varies based on labor input (diminishing marginal returns). - Graph: Total product curve flattens as more labor is added. **Long Run** - All inputs are variable; firms optimize combinations of labor and capital. - Graph: Isoquants showing efficient input combinations. **Question 16** **What is the relevant change of meaning in how we conceive labor today compared to the Industrial Revolution?**\ Labor has shifted from being purely physical/manual to being skill-intensive and creative, reflecting technological advancements and knowledge-based economies. **Question 17** **Making the relevant assumptions, briefly explain: The market society feeds off profits, and profits accrue only if prices remain above costs. Three forces lead to prices falling below that level:** **Forces:** 1. Competition: - New entrants in the market increase supply, driving prices downward. 2. Technological Advancements: - Efficiency gains lower production costs, forcing competitors to reduce prices further. 3. Market Saturation: - Excess supply with stagnant or declining demand reduces prices below profitability levels. Graph: - X-axis: Quantity. - Y-axis: Price and Costs. - Show market price initially above cost, but competition and saturation shift supply outward, lowering prices below cost. - Result: Firms unable to produce below market price experience losses and may exit. **Question 18** **What forces cause prices to fall below levels where a firm can make economic profits?** 1. **Competition:** Increased supply reduces prices. 2. **Technological progress:** Lowers production costs and prices. 3. **Market saturation:** Demand stagnates as supply grows. **What happens to a firm that cannot produce at an average cost below market prices?**\ It incurs losses and exits the market in the long run.\ Graph: Show ATC above price, leading to negative economic profit. **Question 19** **Explain why automation may lead to loss of profit or crisis for profit-hungry employers:**\ Overautomation can reduce the workforce, decreasing consumer demand (as workers lose income), leading to reduced profitability and economic downturns. **Question 20** **Explain using a utility map how a POW might decide how much coffee or tea to trade (Situation during 2^nd^ World War):**\ The utility map would show indifference curves where the marginal rate of substitution (MRS) reflects the willingness to trade coffee for tea. **How would the demand curve look like?**\ It would be downward-sloping for normal goods. For traded items, quantities would adjust based on preferences and relative availability. **Question 21** **Briefly explain why a POW camp can become a market but not a market society:**\ A POW camp has trade (e.g., exchanging surplus goods), but lacks broader market institutions like property rights and legal enforcement that define a market society. **Question 22** **Explain why OPEC has managed to collude successfully despite challenges:**\ Non-economic factors like shared geopolitical interests, limited substitutes for oil, and mutual reliance on oil revenues have sustained the cartel. **Question 23** **Predict the effects of the following events on the oil market (equilibrium price and quantity):** **(a) Cars becoming more fuel efficient** **Effect:** Demand decreases; equilibrium price and quantity fall. **(b) Exceptionally cold winter** **Effect:** Increased demand for heating oil; equilibrium price and quantity rise. **(c) Major oil discovery off Norway** **Effect:** Supply increases; equilibrium price falls, quantity rises. **(d) Slowing economies in oil-using nations** **Effect:** Demand decreases; equilibrium price and quantity fall. **(e) War in the Middle East disrupts oil production** **Effect:** Supply decreases; equilibrium price rises, quantity falls. **(f) Additional insulation in buildings** **Effect:** Demand decreases; equilibrium price and quantity fall. **(g) Falling solar energy prices** **Effect:** Substitution reduces oil demand; equilibrium price and quantity fall. **(h) New plastic made from oil** **Effect:** Demand for oil increases; equilibrium price and quantity rise.