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Microeconomics 11. Public Goods and Externalities

  1. Name five ways in which government intervenes in the free market.
  2. Contrast private versus public goods.
  3. Describe the free rider problem. Provide several examples.
  4. On what does the economic difference between public goods and private goods rest?
  5. The market demand curve for private goods is what sum? How does this differ from the market demand for a public good.
  6. Illustrate the optimal quantity of a public good.
  7. What is the benefit-cost decision rule.?
  8. The best way to make government more efficient is to always reduce government spending. Agree or disagree?
  9. What is the idea behind externalities?
  10. Provide a negative externality example. Illustrate the problem and indicate where equilibrium is in a free market. Is this optimal?
  11. Provide a positive externality example. Illustrate the problem.
  12. Explain the Coase Theorem and its implications for government intervention into the market.
  13. What is the importance of assigning property rights in the Coase Theorem?
  14. How might the Coase Theorem break down?
  15. A second approach to internalizing externalities relies upon a legal framework of liability laws. Describe this framework.
  16. Illustrate how direct controls can force new firms to incur costs associated with pollution control.
  17. Explain and illustrate how Pigouvian taxes can be used to internalize externalities.
  18. Illustrate how Pigovian subsidies can be used to internalize positive externalities.
  19. Why does the U.S. provide free vaccines to children?
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Microeconomics – 10. The Capital Market, Interest, and Profits

  1. On a personal level, what kinds of questions can capital analysis help us answer?
  2. At a professional level, capital analysis can help business executives answer what kinds of questions?
  3. What are the three categories of capital goods?
  4. What do we mean by loanable funds? What is the price paid for the use of loanable funds?
  5. Suppose a company buys a used car for $10,000, rents it out for $2,500 per year and earns a net rental of $1200 each year after expenses. What is the rate of return?
  6. Define depreciation.
  7. The theory of loanable funds is based on what assumption? The upward sloping supply curve of loanable funds reflects what idea?
  8. The market interest rate serves what two functions?
  9. Suppose the Federal government significantly expands the Social Security retirement program to cover more fully the costs of hospitalization and retirement. What is this likely to do to the supply curve for loanable funds and the market rate of interest?
  10. Suppose the economy had been in a deep recession, but is moving now towards full employment. What will happen to the interest rate, and why?
  11. How do you evaluate an investment when your capital outlay occurs today but the benefits from that investment come in the form of a revenue stream over many years?
  12. How is net present value defined and measured? What lump sum of money today would make you at least as well off as the stream of rental payments that you would get over the life of the building?
  13. What is a perpetuity? Write the formula to evaluate a perpetuity.
  14. Write the general formula for calculating net present value.
  15. Suppose you have a choice between a new, energy-efficient refrigerator which costs $750 or the cheaper model at $500. If you buy the energy-efficient refrigerator, your electricity bill will be $120 a year less over the 5-year life of the refrigerator. Assuming an interest rate of 8 percent, which refrigerator should you buy?
  16. To what does the “term structure of interest rates” refer?
  17. How do risk premium, length of maturity, loan size, and taxability each affect the interest rate?
  18. Show how, by sacrificing current consumption and building capital goods today, societies can increase their consumption in the future.
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Microeconomics 9. The Labor Market and Wage Determination

  1. Explain why the demand for labor and other factors of production is a derived demand.
  2. The derived nature of resource demand implies that the strength of the demand for a factor such as labor will depend on what two things?
  3. As the units of labor increase, the total product increases but the marginal product of labor decreases. What law is responsible for this?
  4. What is the marginal revenue product?
  5. State the Marginal Productivity Theory of resource demand.
  6. Define marginal resource cost.
  7. State the rule for employing factor resources.
  8. What is the MRC equal to under the assumption that the labor market is perfectly competitive?
  9. State the complete rule for profit maximization under perfect competition.
  10. Why does the MR.P schedule constitute the firm’s demand for labor?
  11. Illustrate the backward-bending curve.
  12. Explain the income effect.
  13. Explain the substitution effect.
  14. How does immigration affect wages? Why?
  15. What happens to wages at the level of employment under monopsony relative to a perfectly competitive labor market? Why?
  16. Illustrate a typical equilibrium in a unionized labor market. Are wages high or low? What about employment?
  17. What other factors may account for wage differentials among people in different occupations.
  18. What do compensating differentials measure?
  19. What does human capital refer to?
  20. Name three immobilities that are sources of wage differentials.
  21. What are non-competing groups and how do they affect wages?
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Microeconomics – 8. Land and rent

  1. Name the three major factors of production.
  2. Discuss four reasons to study factor pricing.
  3. Which of the three major factors of production has the largest share and which has the smallest?
  4. What makes land different from most other factors of production?
  5. Define pure economic rent.
  6. Illustrate how rent is determined in the market.
  7. Illustrate the Corn War debate. What was David Ricardo’s explanation for rapidly rising grain prices?
  8. Explain why Henry George advocated a single tax on land.
  9. Prove that a tax on pure economic rent will result in no distortions or allocative inefficiencies.
  10. What is tax incidence analysis?
  11. What are the major criticisms of Georgist Theory?
  12. Why does an acre of farmland in Iowa cost so much more than an acre of farmland in New Mexico?
  13. Illustrate the rent differentials that might arise from differences in the quality of land and its productivity.
  14. Illustrate the concept of quasi-rents.
  15. What is rent seeking? Provide an example from public policy.
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Microeconomics – 7. Oligopoly and Strategic Behavior

  1. Define oligopoly. Illustrate scale-economy barriers to entry.
  2. Explain the entry dilemma in oligopolistic industries.
  3. What kinds of industries are characterized by large capital requirements barriers to entry?
  4. Identify three sources of absolute-cost barriers to entry.
  5. How can product differentiation be a barrier to entry?
  6. Why are concentration ratios so important in the study of oligopoly?
  7. Distinguish between cooperative versus non-cooperative behavior.
  8. What is the difference between explicit versus tacit collusion? Which one is illegal in the United States?
  9. What are some ways that executives tacitly collude?
  10. Describe the Cartel Model and explain the pricing rule.
  11. Explain and provide examples of the Price Leadership model.
  12. Illustrate the Kinked Demand Curve model.
  13. What is the guiding philosophy of game theory?
  14. What does the Prisoner’s Dilemma game demonstrate? Explain how it works.
  15. Apply the Prisoner’s Dilemma to the case of duopoly.
  16. What is a Nash Equilibrium? Why is this concept important?
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Microeconomics – 6. Monopoly and Monopolistic Competition

  1. What is a cartel? Are cartels legal in the United States?
  2. When does a monopoly exist? What is the pricing rule for a monopoly?
  3. Illustrate the dead weight loss of a monopoly.
  4. What is characterized by a natural monopoly?
  5. Why is breaking up a natural monopoly a bad idea?
  6. When the government regulates monopolies, where is price usually set?
  7. Illustrate X-inefficiency. Why is this concept important?
  8. What does dynamic efficiency measure? What is the implication of dynamic efficiency for monopolies?
  9. What are the defining characteristics of monopolistic competition?
  10. Explain the three key differences between oligopoly and monopolistic competition.
  11. Define the four-firm concentration ratio. Why are concentration ratios so important in studying market structure?
  12. Discuss the concepts of strategic interaction and mutual interdependence.
  13. What can we say about the difference between monopolistic competition and perfect competition?
  14. Discuss the relationship between product differentiation and nonprice competition.
  15. Identify four sources of product differentiation.
  16. From the economist’s point of view, product differentiation in general and advertising in particular have what two goals?
  17. For what two reasons is monopolistic competition sometimes called noncollusive oligopoly?
  18. What will profits be for monopolistic competition in the short and long run?
  19. Illustrate the short and long run implications of monopolistic competition for market performance.
  20. Some economists argue that monopolistic competition leads to both excessive advertising and needless brand proliferation. Why?
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Microeconomics – 5. Perfect Competition

  1. To what does industry structure refer? What are the major types of industry structures?
  2. What is the central concept driving the structure-conduct-performance paradigm?
  3. Identify several types of market conduct.
  4. How is market performance measured?
  5. What is the most important requirement of perfect competition?
  6. Illustrate the price taker concept.
  7. Define marginal revenue.
  8. What is the relationship between the industry market price and the firm’s marginal revenue in a perfectly competitive industry?
  9. Define a homogenous product.
  10. What does free entry and exit mean? Why is this assumption important?
  11. What does perfect or complete information mean? What does this assumption ensure?
  12. Explain the externalities problem.
  13. Explain the public goods problem.
  14. Why is the market failure concept so important?
  15. Given a market structure of perfect competition, what kind of conduct with respect to pricing can we expect? What is the profit-maximizing rule?
  16. If the profit-maximizing firm always sets its output at a level where marginal cost equals marginal revenue, then what must be true about the firm’s supply curve?
  17. Explain the shutdown condition or shutdown rule.
  18. Illustrate long run equilibrium for the competitive firm. What does price equal and how much economic profits does it earn?
  19. What is the difference between accounting and economic profits?
  20. What is the relationship between price and average total cost in the long run equilibrium?
  21. What is the difference between allocative and productive efficiency?
  22. Explain Pareto Optimality.
  23. Illustrate consumer and producer surplus and the dead weight loss.
  24. A perfectly competitive market yields the most efficient use and allocation of resources, as embodied in productive and allocative efficiency. Yet still, there are several problems. Describe two.
  25. What is the difference between positive versus normative analysis?
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Microeconomics – Lecture 4. Supply and Production Theory

  1. Illustrate the production function algebraically and explain its components.
  2. What does the production function specify?
  3. Define the short run. Define the long run.
  4. What is the difference between fixed versus variable costs? Provide several examples of each.
  5. Explain the difference between the short and long run.
  6. Define marginal cost.
  7. Explain the law of diminishing returns.
  8. Define marginal product.
  9. Define and illustrate average fixed cost, variable cost and total cost.
  10. The long run average cost curve is the envelope of what? Illustrate this.
  11. Explain the difference between economies of scale, diseconomies of scale and constant returns to scale. Illustrate each with the appropriate cost curve.
  12. Economies of scale may be traced to what factors?
  13. An industry characterized by increasing returns to scale is called what?
  14. Define minimum efficient scale.
  15. Define both the law of supply and the price elasticity of supply.
  16. What is the difference between economic versus accounting profits? Explain why this difference is important.
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Microeconomics – 3. Demand and Consumer Behavior

  1. Consumer choice boils down to what three things?
  2. What is the difference between a cardinal and ordinal measure of utility?
  3. What is the difference between total versus marginal utility?
  4. Explain the law of diminishing marginal utility.
  5. State the utility-maximizing rule or the equimarginal principle.
  6. When is utility maximized?
  7. What is the difference between real and nominal income?
  8. What does the price elasticity of demand measure? Write out the formula.
  9. Why do we use percentages rather than absolute amounts in measuring consumer responsiveness?
  10. Define and illustrate elastic and inelastic demand.
  11. What are the four major determinants of price elasticity of demand? Explain how each affects demand elasticity.
  12. Suppose your business sells widgets and demand for your product is relatively price elastic. What would you do to raise your total revenues?
  13. Why do many airlines offer fare discounts to people who stay over on a Saturday night?
  14. Why don’t most new cars sell at their sticker price?
  15. Why do many farmers go bankrupt when crops are plentiful?
  16. If the government imposes a sales tax on a product that is highly elastic, what will happen to total tax revenues?
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Microeconomics – 2. Supply, Demand and Equilibrium

  1. Why does quantity demanded tend to fall as price rises?
  2. Suppose the average income of consumers rises. What happens to the demand curve?
  3. Suppose you are analyzing the market for beef and the price of chicken rises. What do you think will happen to the beef demand curve?
  4. Explain the difference between a change in demand versus a change in the quantity demanded.
  5. The market demand curve is the horizontal sum of what?
  6. Explain the Law of Supply.
  7. Name three shift factors influencing the supply curve.
  8. Suppose your company comes up with a new cost-saving, computerized process for making corn flakes. What do you think will happen to the supply curve?
  9. Suppose the price of labor or raw materials increases for corn flakes manufacturers. What happens to the supply curve?
  10. Illustrate a shortage, a surplus, and equilibrium using supply and demand curves.
  11. Illustrate a price floor for milk.
  12. Illustrate a price ceiling for wheat.
  13. Explain how the market mechanism answers these three questions: What goods are produced? For whom are goods produced? How are goods produced?
  14. Provide several examples of how the supply and demand framework can help you save or make money in your professional or personal life.