Econ Comp Review

  1. 1. TFU : When no one country has any market power on world markets, eliminating barriers to trade international trade increases the welfare of consumers by more than it does the incomes of producers.
  2. TFU: It is well known that the value of an artist's paintings rises after he dies. TFU the increase in the value of an artists paintings will tend to be larger if he dies in an airplane crash than in a nursing home.
    Uncertain: The publicity due to the crash could increase the demand for his work. Also assuming that the artist would have lived on past the crash and painted more paintings, there might be fewer paintings painted in his lifetime when his life is cut short by the crash.
  3. TFU: a wage subsidy is always preferable to a binding minimum wage as a way to increase the incomes of the working poor.
    ? True: A minimum wage means that individuals will not be hired unless their marginal product is higher than the minimum wage. Therefore large numbers of low skilled people will be unemployed. Under a subsidy, some will find employment at a wage below the minimum and thus would have the base salary as well as the subsidy. Therefore the low wage working poor should be better of with a subsidy.
  4. TFU: Economies of scale occur if and only if fixed costs are a non-trivial share of total costs.
  5. TFU: If a competitive industy's supply curve is upward sloping, then that industry's production technology must exhibit decreasing returns to scale.
  6. TFU: Assume that labor and capital each account for 50% of the costs in a perfectly competitive, constant returns to scale industry. Assume further that capital is in perfectly elastic supply to this industry, while the supply curve of labor to this industry is upward sloping. TFU: a ten percent increase in the supply price of capital will increase the price of the final product of this industry by less than five percent.
  7. TFU: What we obtain too cheap, we esteem too lightly; it is dearness only that gives everything its value. -Thomas Paine.
  8. TFU: A penny saved is a penny earned. - Benjamin Franklin
  9. TFU: If competitive firms have decreasing returns to scale in their production processes, industry supply must be positively sloped.
  10. TFU: Open borders for the US are good because even if wages fall, the returns to capital and land outweigh the losses to labor. Assuming capital and land are owned domestically, the income of the average US worker increases.
  11. TFU: Recent changes in US airport security have lead to more checked baggage and more lost checked baggage due to the airlines. TFU: In the short run, the percentage of all baggage that is lost will be no different than it was before the security restrictions were imposed.
  12. TFU: How would you expect the presence of long run economies (or diseconomies) of scale in the handling of checked baggage to affect the number of and proportion of bags lost in the new equilibrium in the aftermath of the security restrictions? Explain.
  13. TFU: A goverment advertising campaign that is effective in getting American's to "Buy American" will raise real income in the US.
  14. TFU: If widgets are the only variable input used in the production of blivets, then if the price of widgets increases by some amount, say W, then the perfectly competitive blivet industry's inverse supply curve will shift up vertically by the same amount W.
  15. TFU: Competitive firms earn no profits in the Long run.
  16. TFU: New car rebates (price discounts offered by auto makers) are self defeating, because they reduce the resale value of auto-maker's products.
  17. TFU: If all consumers are identical, two-part pricing by a monopolist is the same as first degree price discrimination.
  18. TFU: High lump sum lease fees paid for the right to extract oil from public lands tends to motivate the lessee to get back his fees through early production. This is, of course, less true when fees are low.
  19. TFU: Price controls reduce the costs for consumers.
  20. TFU: Firms seeking protection from foreign competition should be indifferent between a tariff and a quota, as long as they each yield the same market price for the good they purchase.
  21. TFU: The choice problem faced by the firm is identical to that faced by the consumer; one only need to relabel the variables appropriately.
    False: utility is not observable, production is.
  22. TFU: If the gasoline refining industry were competitive, then when the price of crude oil increased by 20%, the price of gasoline should increase by 20%
  23. TFU: Although the output supply elasticity of a perfectly competitive industry is affected by the supply elasticities of the inputs used by that industry, the demand elasticity of one input is unaffected by the supply elasticity of another.
  24. TFU: A profit maximizing firm will never operate in a region of decreasing returns to scale.
  25. TFU: Suppose that the island of Orange is populated entirely by households with identical preferences and incomes for whom rice is a Giffen good. Assume further that Orange is a small, open economy that produces no rice domestically. TFU: If orange imposed an import duty on rice, and if the revenue from that tariff were distributed randomly among all households in the nation, then the quantity of rice consumed in Orange will increase.
  26. TFU: If all firms in the horseshoe industry have the same production function and there is free entry into the industry, then the long-run supply curves of horseshoes is perfectly elastic.
  27. TFU: If we observe that the price of roses triple on valentine's day compared to the rest of the year while the price of candy stays about the same, we can conclude that many more people give roses than candy as Valentine's Day presents.
  28. TFU: Assume that the long-run demand elasticity of sporks is -1, the long-run supply elasticity of supply of sporks is +10, and the spork industry is perfectly competitive. TFU: If an innovation in the spork production enables any firm to produce 20% more output with the same inputs, then the quantity of sporks consumed will increase by more than 20% in the long run.
  29. TFU: Only 2 firms in the world produce widgets. Both firms have identical (constand) marginal costs of production, the meand for widgets is linear, and consumers consider the widgets produced by each firm to be identical. TFU: If the demand curve for widgets shifted to the right by 10% at any price, the quantity of widgets produced would increase by 10% whether the two firms have Cournot or Bertrand conjectures.
  30. TFU: Whales are a renewable natural resource while crude oil is an exhaustible natural resource. Therefore it is likely that the world will run out of oil long before it runs out of whales.
  31. TFU: Supermarkets in France for consumers to "rent" shopping carts by inserting a coin to unlock them. Consumers are refunded their "rent" when they return their carts to a common location. Of course, consumers can leave their carts anywhere, also leaving the deposited coin as payment. This french system is superior to the common American practice of free carts because it directly charges consumers for cart service.
  32. TFU: Futures contracts are an agreement in which the seller promises to deliver a good at a distant point in time at a price specified by the contract. If the observed average rate of return on these future contracts are negative, then the market particitpants are not fully rational.
    ?? False, could be risk averse.
  33. TFU: Children impose an externality on people outside of their family. This results from the fact that when children are born, their existence makes resources more scarce.
  34. TFU: Mandatory liability insurance requires government regulation of insurance companies.
  35. TFU: Assume that there are only two types of people in the world, Gas guzzlers and enviroNuts. Gas guzzlers are rich and Enviro-nuts are poor. Further assume that there are only two goods, gasoline, and everything else. Rationing gasoline use to that Gas guzzlers are not allowed to consume as much gasoline as they would like will not improve the welfare of Enviro-nuts as much as a direct income transfer from Gas guzzlers to Environuts.
  36. TFU: The deterrent effect of capital punishment should have the least impact in armed robbery situations.
  37. TFU: Monopoly in one sector of the economy is inefficient for 2 reasons. First because it raises prices and lowers output in the monopolized sector, and second because it induces too much production in the competitive sector of the economy.
  38. TFU: If a firm produces the same product at two different locations, it should equalize the rate of capacity utilization between the two locations in order to minimize costs.
    False: it should equalize the marginal costs between the 2 locations in order to minimize costs.
  39. TFU: We can conclude that transaction costs are too high for Coasian bargaining to take place when we observe pollutants being dumped into rivers and streams.
    Uncertain: it could be high bargaining costs or an absense of clear property rights.
  40. TFU: The US imports about 8% of its crude oil from Iraq. Attacks on pipelines have recently reduced Iraq's crude oil exports by about 50%. TFU: If the short-run elasticity of demand in the US for oil is -0.2, then the recent reductions in Iraq's oil exports alone could be responsible for a 20% increase in the price of oil within the US.
  41. TFU: If a newly developed strain of wheat yields 30% more output than before from the same amount of all other inputs, if the new stain of wheat costs the same to sow as the old strain, and if the long-run elasticity of demand for wheat is -0.6, then the price of wheat would fall by 50% in the long run.
  42. TFU: If kumquats are an inferior good, the demand curve for kumquats has a postitive slope.
    False. Inferior means that as income increases a lower proportion of the income is spent on those goods. Only giffen goods (if they exist) show a positively sloped demand curve.
  43. TFU: Suppose supermart builds a new store next to the town of central. Also suppose that the result is to make all land in central more valuable in commercial (business) uses than before, but to make all land in central less valuable in residential uses. TFU: As a result of the new supermart, residents of central will devote fewer resources to maintaining their homes (e.g. they will paint them less often, are less likely to repair broken gutters or windows etc.).
  44. TFU: The greater number of middlemen within a supply chain, the higher will be the final cost of a consumer good.
  45. TFU: If a competitive firm has the production function X=AL^b, then the elasticity of the firm's demand for labor is equal to 1/b.
  46. TFU: Suppose Octopus Manufacturing has two plants, A and B. For any given level of output, costs are lower if the output is produced at plant A. TFU: Octopus will operate only plant A.
    Uncertain. Octopus M. will operate plant A as long as the marginal costs of producing the next unit are lower at plant A than plant B.
  47. TFU: Because all costs can be avoided in the long run but not the short run, long run marginal costs can never be higher than short run marginal costs.
  48. TFU: Surveys of individuals tend to find low or no correlation between income and self-reported happiness. TFU: these findings suggest that it is incorrect to model consumer utility maximizers upon whom budget constraints are binding.
  49. TFU: Because traffic lights at intersections reduce driver's choice sets, they must reduce driver's utility.
    False: they could increase utility if they produce fewer accidents which drivers could prefer.
  50. TFU: If consumers have Cobb-Douglas preferences, all compensated demand curves are inelastic.
  51. TFU: If negotiation is costless and rights are well-specified and enforced, then the allocation of resources will be identical, whatever the initial allocation of legal rights.
    False: the Coase theorem states that the allocation will be efficient, not identical. Whomever owns the rights initially would benefit from an increase in wealth. The person who values the resources the most will end up with the rights to the resources.
  52. TFU: Constant returns to scale industries have perfectly elastic long-run supply curves.
    False. CRS implies that to make double the amount of units it requires double the amount of inputs. Perfectly elastic supply means that at the given price the firm could supply an almost infinite amount of the good. The supply curve will still be downward sloping, not flat.
  53. TFU: A price discriminating monopolist will produce more output than a single price monopolist.
    True: Monopolies maximize total profits by operating like any other firm where MC=MR. If the monopolist can price discriminate, then they can sell their goods to a certain section of consumers (who wouldn't have purchased before) at a lower price than they would have been able to before. Therefore they can increase their profits and their ouput.
  54. TFU: Given two students with identical intellectual abilities but different preferences, a student specializing in humanitites (a relatively low paying field) is likely to take longer to finish his education than a student specializing in economics (a relatively high paying field).
    True: the opportunity costs for the economics student are higher.
  55. TFU: If firms in more highly concentrated industries tend to be more profitable on average than firms in less concentrated industries, we can conclude that, the more concentrated an industry is, the less competitive it is.
    ??? True by definition
  56. TFU: If nonsmokers are bothered by "second hand smoke" by an amount greater than the value smokers place on smoking, and if it is prohibitively costly for nonsmokers to bargain with smokers in restaurant or bars, then a ban on smoking in such establishments would be a Hicks-Kaldor efficient relative to the unregulated equilibrium.
    True: Pareto efficiency requires that someone be better off and no one be made worse off. Hicks-Kaldor only requires that the winners could compensate the losers and there still be an increase in the total welfare.
  57. TFU: If widgets are an input to the production of gadgets, and if both Amalgamated Gadget and International Widget are monopolists, Amalgamated would reduce its costs of producing gadgets by acquiring International.
    True: Since monopolists price set price where MC=MR, and this is above the P=MC rule that a pefectly competivie firm would choose (in PC price=MC. A monopolist could reduce his costs by aquiring a production input monopolist.
  58. TFU: A monopolist will never choose to operate where the demand curve is inelastic.
    True: For elasticities (e) < 1, then 1/e >1, and MR is negative so it can't possibly equal MC. If e<1, then reducing ouput will increase revenues, and reducing ouput must reduce total cost, so profits have to increase. Thus e<1 cannot be a profit maximizing point for a monopolist, because it could increase it's profits by producing less ouput. Profit max can only occur where e>1. Also true for PC firms.
  59. TFU: at the typical university, professors' salaries are the single largest component of total cost. It follows that in the higher-education industry the demand for professors is more elastic than the demand for clerical and custodial staff.
    True: elasticity measures the response to price changes. It would seem to be the case that highly sensitive price consumers would be in better bargaining position (if you lower my price i'll go somewhere else). Therefore the demand for professors should be fairly elastic.
  60. TFU: In a two good model if one good is an inferior good the other must be a luxury good.
    True: the weighted average of income elasticities must be 1, so if one good has a negative income elasticity, the other good must have an elasticitiy greater than 1 to get the average to be 1.
  61. TFU: In an infinitely repeated prisoners' dilemma game, "tit for tat" is a dominant strategy.
    False: tit for tat is a equilibrium of the repeated prisoner's dilemma game. However it is not a dominate strategy, because either player could do better by cooperating if the other cooperates.
  62. What does homogenous of degree one mean?
    It means that if you double all inputs you double the output of the production function.
  63. A price reduction will increase total revenue iff?
  64. A price increase will increase total revenue only if
    Elasticity of demand<1
  65. What is the general formula for unit elasticity of demand?
    Ax^b, for A/=0
  66. A monopolist will maximize profits when
  67. TFU: situations may exist where costs of production cannot be covered unless there is price discrimination?
    True: discriminatory prices do yield a larger revenue than a single price system but are inefficient.
  68. When a monopolist has two different groups of consumers, how does he get the total demand curve?
    Adds the curves up horizontally. If the demand for market A is 10-.5p with 100 consumers and the demand for market B is 20-2p with 50 consumers, you multiply each market by the number of consumers and then add them horizontally. Market A= 1600-100p, Market B=1000-100p, Total demand=1600-100p + 1000-100p=2600-200p=13-.005Q
  69. In order to max profits a monopolist of two markets will also equate the ...
    Marginal revenues in each market. However this only holds if the markets are independent. I.e. The demand curve for one market does not depend on the price set in the other.
  70. Requirements for price discrimination (3)
    1. There are at least two different groups of consumers (with different EODs) who can be identified2. They can be seperated at a reasonable cost.3. Resale can be prohibited.
  71. TFU: price equality means there is no price discrimination.
    False: if a college charges he same tuition for a large class taught by instructor, and a small one taught by professor, it is clearly discriminating.
  72. TFU: price differences mean price discrimination is taking place.
    False: other factors can be responsible. Wholesalers buy in bulk, some buyers pay more promptly, sometimes there are different costs associated with servicing two different groups (large borrowers vs small)
  73. The primary purpose of advertising is to shift the demand curve ...
    Up and to the right
  74. TFU: A monopolist prefers a less elastic demand curve because he can raise the price without a large reduction in sales.
    Uncertain. He prefers this only up to the quantity (to the left) where the two curves cross, after this point he prefers the more elastic curve.
  75. What does a completely inelastic demand curve look like?
    A vertical line. The consumers demand the same amount regardless of price.
  76. What does a completely elastic demand curve look like?
    A horizontal line. At the price given consumers demand an infinite amount of goods. The case of 1 price.
  77. What are Leontief preferences?
    More of one good, same amount of another.
  78. What is a vertical summation? And how is it used?
    If one good supplies two other goods (one cow=1 beef + 1 hide) assume the quantities are the same and add up the price people will pay for each good.
  79. What is a horizontal summation? How is it used?
    Assume prices are the same and add up he quantities. Summing up demand curves for different markets.
  80. What does homogeneity of degree zero mean?
    If you double all prices and income, nothing is changed. When Europe switched to the Euro from their own currencies, everyone new the price was just in a different currency but not any different in real terms.
  81. What does homogeneity of degree one mean?
    If all inputs are doubled then the output is also doubled.
  82. TFU: a firm that discriminates in its hiring practices will have higher costs of production than it would if it did not discriminate.
    Uncertain: Assuming that for some non-zero part of the population, the minority has a higher MPL than the non-minority population; then yes. People are paid according to their Marginal product of labor. If labor and capital are perfect substitutes then the firm could shift production away from the labor towards capital. If they are not perfect substitutes then capital would be inefficently favored leading to higher production costs than otherwise.
  83. TFU: If tractors and labor are used to produce potatoes, and if the price of tractors is greater than the price of labor, it is possible for the government to lower the equilibrium price of potatoes by requiring firms to decrease the tractor-labor ratio they use.
    False: tractors (capital) are used up to the point that their marginal product = price. If 1 hour of tractor use = 4 hours of labor, then we would expect the rental price of a tractor to be 4x the price of an hour of labor. By forcing farmers to use fewer tractors and more labor than is efficient, the price of potatoes would probably increase, but certainly not decrease.
  84. Historically, many people who work in the underground turqoise mining industry have died prematurely of "blue lung disease," cause by the turqoise dust. Now a brand new technology filters out 100% of the dust that is produced while mining. TFU: Because most workers already suffer from the disease, the new safer technology will not lead immediately to any reduction in the compensating wage differential associated with the hazards of the blue lung disease.
    False: since the workers are already being paid a hazard pay to compensate them for the increased danger, the introduction of the new technology would eliminate the need for this extra pay. Those workers who already have the disease would be replaced by workers who aren't infected and would wear the new gear. These workers would be paid their MPL, which would not include hazard pay.
  85. TFU: an income tax distorts the choice between labor and leisure, while a general sales tax distorts the choice between consumption and saving.
  86. Q3-4. Suppose the government wants to buy a tenth of the national product y=k^1/4 L^3/4 and factor supplies are K~ and L~. What tax rate (computed on the net-of-tax price) would it use in the following cases:
    1. The tax is a product tax.
    2. The tax is a tax on capital.
    3. The tax is at an equal rate on labor and capital.
  87. Q3-5. TFU: A subsidy to capital will encourage the use of capital-intensive methods of production, even if the supply of capital is fixed.
    False, unless there are income effects on the composition of demand for products, or on the supply of other factors.
  88. TFU: A given tax will raise the buyer's price more (and reduce the seller's price less), the less elastic the demand and the more elastic the supply of the commondity.
    True: Layard and Walters p.86
  89. TFU: The efficiency cost of a given per-unit tax on a commodity is greater the more elastic the demand and supply of the taxed commodity.
    True: Layard and Walters p.88
  90. TFU: A general tax levied at an equal proportional rate on all products has effects identical to a tax at the same rate on all factors.
    True: Layard and Walters p.91.
  91. TFU: an excise tax on a labor-intensive product will normally make labor worse off and may or may not make capital worse off.
    True: Layard and Walters p.96
  92. TFU: When a country is opened to foreign trade, it experiences a potential pareto improvement whether world relative prices are high than domestic no trade prices, lower, or the same.
    False: there will only be a gain if the prices are different, but they can be higher or lower.
  93. TFU: If there is already a tax at the proportional rate T(y) on the consumption of y, a new tariff at the same rate on x will restore Pareto optimality.
    False: the tariff will eliminate the distortion in the consumption. Since T(x)=T(y), the consumption of both goods is taxed equally and MRS=px/py. But the tariff introduces a new production distortion since MRT=MRTf(1+T(x)>MRTf. An equal tax on the consumption of x (rather than a tariff) would have eliminated the distortion.
  94. TFU: an export subsidy has a different effect from an import subsidy because the latter affects domestic prices, while the former does not.
    False: If world prices are given, the export subsidy raises the domestic price of the export good until producers are indifferent between exporting and supplying home consumers.
  95. TFU: A country is opened to trade, but a prohibitive tariff is put on L-intensive X (i.e. so high that no X is imported). TFU: this will raise the income of L above its original levels.
    False: a prohibitive tariff leaves the economy at its no-trade production point.
  96. Suppose the offer curves of two countries are
    Country A y=Ax^b, 0<b<1, A>0
    Country B y=Cx^d, d>1, B>0
    1. Find for each country the relation between x and px/py. Which country imports x.
    2. Find the equilibrium world price and quantities of x and y.
    • 1. From the budget identity. PxX=PyY, so px/py = y/x = Ax^b-1 in country A. or = Cx^d-1 in country B. A is the importer of x since, when px/py rises, x falls (b<1). The reverse is true of y.
    • 2. Ax^b-1=Cx^d-1 so, x=(A/B)^(d-b)-1
    • px/py=A(A/B)^(d-b)-1(b-1), y=A(A/B)^(d-b)-1b.
  97. What is the weak version of the Heckscher-Ohlin theorem?
    Under free trade, the capital-rich country will produce relatively more of the capital intensive good and vice versa.
  98. What is the stronger version of the Heckscher-Ohlin theorem?
    Given free trade and identical homothetic tastes in both countries the capital-rich country will export the capital intensive good and vice versa.
  99. The substitution effect is always postitve or negative?
    Negative. If p1 rises and income is simultaneous adjusted in order to keep utility constant, x1 falls.
  100. TFU: income effects must add up
    True: Demand law 2. The weighted average of income elasticities of demand is 1, the weights being the relative shares of each good in total expenditures.
  101. What is the range of a normal good's elasticitiy?
    Normal good has an income elasticity from 0 to 1.
  102. What is the elasticity of an inferior good?
  103. What is the elasticity of a luxury good?
Card Set
Econ Comp Review
Review cards for the graduate comprehensive exam in microeconomics