BUSC 1B Final Microeconomics Study Guide PDF

Principles of Microeconomics Final Exam Study Guide The final exam is cumulative. As you prepare for the exam, you should review the following topics. The exam material will cover, but is not limited to, the following: Chapter 1: While you do not have to state any...

Principles of Microeconomics Final Exam Study Guide The final exam is cumulative. As you prepare for the exam, you should review the following topics. The exam material will cover, but is not limited to, the following: Chapter 1: While you do not have to state any of the definitions, you should have a conceptual understanding of each key term and key concept. For example, how are marginal benefits and marginal costs related to making decisions at the margin? How can we compare marginal benefits and marginal costs to determine efficiency? What is an unintended effect? What does “ceteris paribus” thinking mean? Chapter 2: Which points on the production possibilities frontier illustrate production that is efficient? How does the PPF illustrate the principle that people face tradeoffs? Between two producers, how do you determine who has the comparative advantage, and how do you calculate it using opportunity costs? Chapter 3: What factors shift the supply curve? What factors shift the demand curve? What is the difference between a change in demand and a change in quantity demanded? Given an event that shifts either the supply curve or demand curve or both, be able to determine how price and quantity change in the new equilibrium. Chapter 4: What is a price ceiling? What is a price floor? When is a price ceiling or a price floor binding? Give examples of each. Know why government policies may result in outcomes less optimal than outcomes from free market allocations (surpluses/shortages). Chapter 6: What are the factors that determine the price elasticity of demand? What are the factors that determine the price elasticity of supply? Know what elastic vs. inelastic means when you’re graphing supply and demand diagrams. How is the slope related to the price elasticity equations? How is total revenue related to elasticity of demand? Know how elasticity determines tax incidence (how burden of a tax is distributed). How is the cross elasticity of demand used to determine whether two goods are substitutes or complements? How is the income elasticity of demand used to determine whether a good is a normal good or an inferior good? Chapter 7: What is the Law of Diminishing Marginal Utility? Given two goods, what is the relationship between marginal utility and price in a consumer equilibrium? Is utility maximization consistent with studies in behavioral economics (e.g. paying to reduce others’ incomes)? Appendix C: What is a budget constraint? What is an indifference curve? What are the properties of an indifference curve? Given a budget constraint and an indifference curve, how do you determine what the optimal consumption bundle is? What is an income effect? What is a substitution effect? How does a change in price or a change in income affect the optimal consumption bundle? For example, if the substitution effect outweighs the income effect, how does the optimal consumption bundle change? Chapter 8: Why do firms exist? What is shirking? What is the difference between an explicit cost and an implicit cost? How does economic profit differ from accounting profit? What does diminishing marginal product mean? What is marginal cost? What is the relationship between marginal cost and marginal product? Why is the average total cost curve usually U-shaped? How does the marginal cost curve relate to the average total cost curve? Chapter 9: What is the definition of a competitive market? What is the average revenue for a competitive firm? What is the marginal revenue for a competitive firm? When is profit maximized? Given revenues and costs, know how to determine the profit-maximizing level of output (the quantity that yields the highest profit amount). How is the firm’s supply curve derived? When does a firm decide to shut down in the short run? When does a firm exit a market in the long run? What is a sunk cost? Should a firm produce in the short run if the price is greater than average variable cost but less than average total cost? What are the three conditions of a long run competitive equilibrium? What does resource allocative efficiency mean? What does productive efficiency mean? Is a competitive firm resource allocative efficient? Is it productive efficient? Chapter 10: What is a monopoly? What are some reasons monopolies exist? What does a demand curve look like for a monopolistic good? What does a demand curve look like for a good in a perfectly competitive market? How is the marginal revenue different for a monopoly relative to the marginal revenue for a competitive firm? Graphically, how do you determine the monopoly price, given a marginal cost curve, and marginal revenue curve, and a demand curve? In a graph, how do you find the firm’s profit region? Know how monopolization leads to deadweight loss. What are the three types of price discrimination? Why might a monopolist want to price discriminate? Chapter 11: What are the characteristics of a monopolistic competitor and which of these are similar to perfectly competitive firms and which are similar to monopolies (e.g. number of sellers, the products sold, and barriers to entry). What does the demand curve look like for a monopolistic competitor and how does the price compare to marginal revenue? Do these firms earn profits in the long run? What does the excess capacity theorem suggest about the quantity of output produced by firms in each type of market structure: perfect competition, monopoly, and monopolistic competition? Which are resource allocative efficient? Which are productive efficient? What is the key characteristic for an oligopoly? Are there barriers to entry? What is a cartel and how does it behave in attempts to increase joint profits? How does the prisoner’s dilemma and game theory relate to firms’ incentive to cheat after making agreements to form a cartel? Chapter 12: What is the purpose of antitrust law? What are some of the criticisms of the Sherman Act and the Robinson-Patman Act? What are some of the points of antitrust policy that are still unclear (e.g. definition of market and concentration ratios)? Why might the Herfindahl Index be a better measure of competition in an industry than the four-firm concentration ratio? In a concentrated market, a proposed merger would most likely be blocked if the transaction increases the Herfindahl index by how many points? What are the three types of mergers and which merger would most likely change the degree of concentration in an industry? What is a network good and how may this lead to a monopoly? How does economies of scale lead to the formation of natural monopolies? How may natural monopolies be regulated and what are some difficulties in regulation? For industries that are not natural monopolies, what are some of the theories of regulation (e.g. Capture Theory of Regulation, Public Interest Theory of Regulation, and Public Choice Theory of Regulation)? Post Midterm II: Chapter 13: What are factor markets? What does derived demand refer to? What is marginal revenue product and how does it relate to factor demand? What is value marginal product? How is the marginal revenue product related to the value marginal product for a perfectly competitive firm? For a monopoly? What is marginal factor cost? How can marginal revenue product and marginal factor cost be used to determine the optimal factor quantity? What is the least cost rule and how is it related to a consumer equilibrium, given price and marginal utility? What factors shift a firm’s factor demand (marginal revenue product) curve? What is the elasticity of demand for labor? What are the three main determinants of elasticity of demand for labor? What do the substitution effect and income effect suggest about the quantity of labor supply given wage increases? What factors can shift the supply curve for labor? Why do wage rates differ? Chapter 14: What are the objectives of labor unions? What is the wage-employment trade off? How do unions try to meet to objectives by influencing the elasticity of demand for labor, the demand for labor, and the supply of union labor? How can unions affect wages directly by collective bargaining? How does the labor supply curve change if a union strikes or if the threat of a strike is successful? What are the effects of labor unions on wage rates? For a monopsonist, how is the marginal factor cost and wage related? How do higher union wages affect nonunion wages? Chapter 15: What are quintiles and how are they used to illustrate the distribution of income? How have quintiles changed in recent decades? What is the Lorenz curve and how is the Gini coefficient calculated to measure income equality? As the Gini coefficient becomes larger, is there greater income equality or inequality? What are some reasons income inequality exists? What is poverty? What are some limitations of poverty income statistics? Chapter 16: Why do interest rates differ? Using the loanable funds market model, know how changes in the expected inflation rate affect the real interest rate. Be able to calculate the present value and future value and compare sums of money from different time periods. Chapter 17: What is an externality? When does a positive (or negative) externality exist? How do externalities affect market output from the socially optimal output? How can externalities be adjusted? What is the Coase Theorem? How is pollution related to externalities and what are some ideas for controlling/limiting pollution? What is a public good? What is asymmetric information? When does adverse selection exist? When does moral hazard exist? Chapter 18: What is the median voter model? What is rational ignorance in the context of voting? What are special interest groups? Why is rent seeking socially wasteful? What is logrolling?