ECON 262 - End of Section Questions
READ: These questions are not designed to take the place of studying your notes and the reading assignments. Do not e-mail me and ask me to answer all or some of these questions for you. If you have missed class, it is your responsibility to get the notes from another student. Once you have answered these questions yourself, if you are unsure of any of your answers, let me know and I will tell you if you are correct or not. Don't be afraid to ask me questions, I just want you to try to answer the questions yourself first.
Can You Answer These Questions Regarding this Section of the Introduction Notes – What is Economics?
What is economics? Why is economics a social science?
What axiom do most economists assume to be true about human behavior? How do incentives fit in with this assumption?
What does “self-interest” mean to an economist?
What two basic questions or problems do economists address? Explain what the problems are and why they exist.
What is scarcity? Are there any goods or services that are not scarce? What are they called?
Give an example of knowledge of “individual time and circumstances” and explain why that knowledge is important (this has to do with the coordination problem).
Can You Answer These Questions Regarding this Section of the Introduction Notes – Rules/Institutions and The R-I-A-O Model?
In an attempt to address the two basic economic problems, economists use what basic model?
Given our discussion, how would you answer the question: Which rules are best?
Make sure you know the difference between the rules (institutions) and the outcomes of the rules (i.e., a change in the rules leads to a change in the incentives, then to a change in action or behavior, and this leads to a change in outcomes).
Can you use the model to analyze an economic policy (rule, law, regulation)?
What are the two ways rules come about? What are the differences between these with respect to possible unintended outcomes? See Important Concept Reading 5.
Why do rules need to be predictable and steady to be followed and useful? Explain. See Important Concept Reading 5.
Can You Answer These Questions Regarding this Section of the Introduction Notes – Wealth, Efficiency and Trade?
What does marginal mean? Think about this in terms of costs and benefits.
What is the difference between normative and positive economics? Give examples of each.
What is wealth (as defined in this class)? Given this definition, what is economic growth?
How are wealth and efficiency (or productivity) related to subjective value?
What three things must we examine in order to determine if someone is being efficient or more efficient than someone else?
What are internal costs? Give an example. How is efficiency related to internal costs?
What are external costs? Give an example. How is efficiency related to external costs?
What is a model? What does ceteris paribus mean? Why do economists have to develop models in order to study the economy? When has a model become useless to our understanding of social reality?
What is the difference between a pattern prediction and a specific prediction? Give an example of each.
What is the fallacy of composition? What is the post hoc fallacy?
What is the broken window fallacy? Can you describe a situation where it might take place (besides those discussed in class)?
What does opportunity cost mean?
How does the broken window fallacy relate to the concept of opportunity cost?
What does the seen and the unseen mean with respect to economic analysis?
Why do economists say "action reveals preferences" or "words are cheap" or "easier said than done"? Relate this to the concept of opportunity cost.
Why do economists view exchange or trade as being mutually beneficial at the time of trade in the absence of force and/or fraud? What is being assumed?
When people trade, they trade their productivity for someone else’s productivity. Explain what Say meant by this by explaining Say's Law.
Can You Answer These Questions Regarding the Notes on Demand?
What is the law of demand? What is the demand curve or function (can you derive one)?
You should be able to explain all three theories that help explain the law of demand.
What is the difference between a relative price difference and an absolute price difference?
What does utility mean to an economist?
Explain the law of diminishing marginal utility. How does this theory help explain the law of demand? Example?
What is the difference between nominal and real income?
Explain the difference between an individual’s demand curve and the market demand curve. Derive the market demand curve from individual demand curves.
What are complements? Example?
What are substitutes? Example?
What is an inferior good? Example?
What is a normal good? Example?
What are the variables in the demand function and how do they change quantity demanded or demand graphically and in words? Be able to show these changes on a graph.
Can You Answer These Questions Regarding the Notes on Demand Elasticities?
1. Explain the concept of price elasticity of demand. Be able to determine if demand is elastic, unitary elastic or inelastic from a change in price and quantity demanded. Know the formula and how to use it.
2. What would a demand curve look like if it had a range of prices that were perfectly inelastic?
3. What are the three factors that influence the price elasticity of demand for a good? Explain each.
4. Explain the relationship between the price elasticity of demand and total revenue. How would a business person use this information?
5. Explain the concept of the cross price elasticity of demand. Know how to determine it. What does the sign tell you? Know the formula and how to use it.
6. How would a business person use information about the cross price elasticity of demand?
7. Explain the concept of income elasticity of demand. Know how to determine it. What does the sign tell you? Know the formula and how to use it.
8. How would a business person use information about the income elasticity of demand?
9. We also discussed the advertising expenditure elasticity of demand. What is this concept? Know the formula and how to use it.
10. Make sure you know the concept of elasticity such that you can come up with your own application!
Note: Students often confuse the price elasticity of demand, the cross price elasticity of demand and the income elasticity of demand - usually because they are trying to memorize formulas, etc. without understanding the concept of each elasticity. Remember -- you are asking how responsive something is to a change in something else -- just keep in mind what it is you are changing and what follows from that change. What concept are you analyzing?
Can You Answer These Questions Regarding the Notes on Supply?
1. What are sunk costs? Explain why they should be irrelevant to a business decision (ceteris paribus).
2. Explain why a firm’s production costs are derived from the opportunity cost of the resources used by the firm. How do consumers fit into your explanation? Can you provide an example?
3. What is the law of supply?
4. Explain the two theories behind the law of supply. Make sure you understand how opportunity cost (increasing marginal opportunity cost) relates to the law of supply.
5. What is the supply curve?
6. Explain the difference between an individual firm supply curve and the market supply curve. Derive the market supply curve from individual firm supply curves.
7. What are the variables in the supply function and how do they change quantity supplied or supply? Be able to show these changes on a graph.
8. What are complements in production? Example?
9. What are substitutes in production? Example?
10. Explain the concept of price elasticity of supply. Be able to determine if the supply is elastic, unitary elastic or inelastic from a change in price and quantity supplied. Know the formula and how to use it.
11. What are the factors that influence the price elasticity of supply of a good or service?
Can You Answer These Questions Regarding the Notes on Markets -Supply and Demand?
1. What do markets do? Make sure you have read this handout and understand it. What does economic calculation mean? How do prices and profits/losses relate to economic calculation? What knowledge is utilized in markets (prices, etc.) in order to direct resource allocation? What assumption is made about how resources should (value judgment) be allocated?
2. How do the rules of the game relate to the market process? Is there cooperation in markets? Explain.
3. What does the market clearing price or the "satisfactory inventory level" mean in the demand and supply model? Relate this to inventory levels in general, i.e., what does it mean when a supplier is happy or satisfied with his/her inventory level? How is this shown on a supply and demand graph?
4. What is a shortage? Show this on a graph. What happens in a market when there is a shortage and why? Explain the human action - what do suppliers do?
5. What is a surplus? Show this on a graph. What happens in a market when there is a surplus and why? Explain the human action - what do suppliers do?
6. Make sure you can do a problem similar to this one: Assume the market clearing price is $10.00 for deli sandwiches and the amount of exchange that would take place at that price is 300 deli sandwiches per day. You, however, don't have this information and have just opened your deli. You decide to price your sandwiches at $12.00 and are willing and able to sell 350 sandwiches per day at that price. When you do this, you notice you sell 150 sandwiches per day. Draw this situation on a graph and then explain what will happen in this market -- i.e., if there is a shortage or surplus, show this on the graph and then explain what the shortage or surplus will cause to happen in the market. Make sure you talk about inventories in your answer.
7. What is a price control? Price floor? Price ceiling?
8. With respect to shortages and surpluses, what will happen when a price floor is set below the market clearing price? Explain.
9. With respect to shortages and surpluses, what will happen when a price ceiling is set above the market clearing price? Explain.
10. What is the intended consequence of minimum wage laws? Is the minimum wage a price floor or ceiling?
11. According to economists, minimum wage laws often hurt the very people they are designed to help -- what unintended consequences does the supply and demand model predict will occur with minimum wage laws and why do they occur? Explain both graphically and in words.
12. What is the intended consequence of rent control? Is rent control a price ceiling or a price floor?
13. According to economists, rent control will often hurt the very people it is designed to help - what unintended consequences does the supply and demand model predict will occur with rent control? Explain both graphically and in words.
14. Be able to graph changes in demand and/or supply in a market and determine how market clearing price and quantity and resource allocation have changed. If you haven't worked through all of the practice problems on supply and demand -- I suggest you do so now!!
Can You Answer These Questions Regarding the Notes on Taxes?
1. What is a tax?
2. What are the three reasons (we discussed in class) as to why taxes exist?
3. What does it mean when a tax is levied by the government?
4. What is meant by the tax incidence?
5. What is the difference between the statutory incidence of a tax and the economic incidence of a tax?
6. What is meant by tax shifting? Give an example.
7. What is an "earmarked" tax?
8. What is a progressive tax? Example?
9. What is a regressive tax? Example?
10.What is a flat or proportional tax? Example?
11. What is a tariff?
12. What is an income tax? What does it tax?
13. What is a sales tax? What does it tax? Why is it considered a "general" tax?
14. What is an excise tax?
15. What are consumer and producer surplus? Graphically and in words, explain.
16. What do consumer and producer surplus represent in the supply and demand model?
17. You should be able to graph the analysis of an excise tax. On your graph, be able to identify the total tax revenue, the total tax revenue the consumer pays, the total tax revenue the producer pays.
18. You should be able to determine the following from a graph depicting an excise tax: per unit tax, total tax revenue, total tax revenue paid by the consumer, total tax revenue paid by the producer or retailer.
19. What is the deadweight loss in this analysis? Where is it on the graph?
20. Why does the deadweight loss take place?
21. How would all of the above (in the previous question) change if demand is perfectly inelastic?
22. What determines the incidence of an excise tax?
23. What is the characteristic that the government looks for when levying an excise tax and why? (this question relates to the last question - think like an economist).
24. Graphically and in words explain what happens when a domestic market opens up to international trade. Show domestic production and imports on the graph.
25. Who benefits from international trade and why? Who loses and why?
26. Why would the prices of U.S. produced goods and services be higher when tariffs are "protecting" those markets?
27. Graphically and in words explain what happens when a tariff is put upon imports. Show domestic production and imports on the graph (how have they changed with the tariff)?
28. Who benefits from a tariff and why? Who loses and why?
29. How does your answer to the above question change if you are discussing a quota instead of a tariff?
Can You Answer These Questions Regarding the Notes on Political Economy?
1. What do public choice economists assume about people who work in or for the government?
2. What are two basic ways by which scarce resources are allocated?
3. What differences are there between the market and politics with respect to wealth- defined as productivity of goods and services in this case (i.e., the pie)?
4. Explain the following public choice theories regarding democracy:
a. rational ignorance;
b. logrolling (what is pork barrel spending; what is a boondoggle);
c. fiscal illusion;
d. special interest rent seeking.
5. What is economic rent?
6. What is rent seeking? Give an example.
7. Explain why rent seeking is wasteful.
8. How does rent seeking change the political outcomes in democracy? Relate to special interest groups.
Can You Answer These Questions Regarding the Notes on The Theory of the Firm - Why Do Firms Exist and Economic vs. Accounting Profit?
1. What is a firm (what does a firm do)?
2. What are transactions costs?
3. What is internalization? What is the make or buy decision?
4. What is Ronald Coase's theory as to why firms exist?
5. What are implicit costs? What are explicit costs? Examples of each?
6. Explain the difference between accounting profit and economic profit (and between accounting cost and economic cost).
7. What does zero economic profit mean with respect to opportunity cost?
8. Another sample problem: Answers are below. Try to do the problem before you look at the answers.
Assume Matt only cares about making money and is trying to decide if he should continue being a teacher or open his own business selling plants. He is making $45,000 per year as a teacher and also tutors in the evenings sometimes and makes an additional $5,000 doing this. He also owns a van that he often rents out to his friends for camping and pulls in $8,500 per year from his friends. He has figured out the following information for his plant business: his total revenue for a year would be $115,000. He would have to start using his van for his business and couldn't rent it out anymore. It would cost him $38,000 to grow the plants he sells and the rest of his expenses would be $12,000 per year. He would also hire a part-time worker to help him out once in a while - he would pay her $10,000 for the year.
What is the total revenue from his plant business: $115,000 (given)
What are his explicit costs from his plant business: $38,000 + $12,000 + $10,000 = $60,000
What is his accounting profit or loss: $115,000 - $60,000 = $55,000
What are his implicit costs: $45,000 + $5,000 + $8,500 = $58,500
What is his economic profit or loss: $55,000 - $58,500 = <$3,500>
Should he teach or run his plant business (if he only cares about making money)? Explain. Since he has a negative economic profit (an economic loss), that means that he would make $3,500 less operating his plant business than he would as a teacher. If all he cares about is money -- he should keep teaching.
Can You Answer These Questions Regarding the Notes on The Theory of the Firm - Cost/Revenue/Product Concepts?
1. What are total costs (TC) made up of?
2. What are variable costs (VC) and fixed costs (FC)? What are variable inputs and fixed inputs? Give an example of each.
3. What are average total costs (ATC), average variable costs (AVC), average fixed costs (AFC)?
4. What are marginal costs (MC)?
5. How are each of the above costs calculated? Be able to find MC from changes in TC.
6. What is total product (TP)?
7. What are average product (AP) and marginal product (MP)? How are they calculated?
8. Explain the law of decreasing marginal returns (or product). What causes the returns to decline?
9. What is marginal revenue product (MRP)? How is it calculated? Explain when a firm should hire a worker and when it should not hire a worker (assume that the only cost to hiring a worker is the wage paid to the worker).
10. What is total revenue (TR)? How is it calculated?
11. What is average revenue (AR)? How is it calculated?
12. What is marginal revenue (MR)? How is it calculated?
13. At what level of output (Q) will a firm choose to operate to maximize profit (or minimize loss) and why? Show this on a graph.
14. What will economic profit induce some firms to do in an industry?
15. What will economic loss induce some firms to do in an industry?
16. Explain why entrepreneurs will look at economic profit or loss and not just accounting profit or loss when deciding how to utilize resources.
17. Can you show this (economic profit, loss or zero econ profit) on a graph? Here's a practice problem: Graphically show a firm with a zero economic profit - when they sell every good for $20 and they max profit or min loss at Q = 500. Make sure you have P, MR, MC, AR, and ATC on your graph. Explain why you have a zero economic profit? What does that mean?
18. How do economists define the short run? The long run?
19. What does economies of scale mean? What causes it?
20. What does diseconomies of scale mean? What causes it?
21. What does economies of scope mean? What causes it? Example? (What does "synergy" mean with respect to production? Example?)
22. What does diseconomies of scope mean?
Can You Answer These Questions Regarding the Notes on Competition and Monopoly?
1. What is a monopoly? Oligopoly? Duopoly? Monopsony? (as defined in this class -- no other definitions please)!
2. What is the "structure" of an industry?
3. What is the most competitive structure according to the structuralist view and what is the least competitive structure?
4. What are some relevant barriers to entry according to the structuralist view?
5. What is the policy recommendation of the structuralist view (are antitrust laws seen as increasing competition and why)?
6. What is the "public interest" view of government regulation? Does the structuralist view believe in this? Explain. (This relates to the previous question)
7. How does the process or rivalry view of competition define competition (there are two parts)?
8. What does it mean to say that competition can be viewed as a “discovery procedure or process”? Whose theory is this (name of the economist)?
9. Is a monopolist always anti-competitive or does it depend upon the definition of competition you use? Explain why the process view says monopolies can be competitive under certain conditions (what conditions?)
10. How does the process view of competition define efficiency?
11. What barriers to entry are relevant under the process view? Examples?
12. Why are the antitrust laws seen as causing a decrease in competition under the process view?
Can You Answer These Questions Regarding the Notes on Cartels and Collusion?
1. What is a cartel?
2. Distinguish between a cartel and collusion.
3. What requirements are more or less conducive to successful cartels?
4. Even if these criteria (from the above question) are met, what are three reasons cartels will still have problems being successful? Explain.
5. Provide an example of how government has helped cartels in the past.
6. Provide some examples of real world cartels.
7. What did Nash add to Adam Smith's theory regarding human behavior?
8. Using a pay-off matrix, explain why cartels break down. Make sure you explain two incentives (offensive and defensive) that firms have to cheat on the cartel (in other words, what sets up the prisoner's dilemma with respect to cartels)?
Can You Answer These Questions Regarding the Notes on Environmental Economics: The Environment and Economic Growth?
1. Economists emphasize what kind of solutions (over conflict) with respect to environmental issues? Example?
2. What basic principles do economists follow when studying environmental economics?
3. What is the Environmental Kuznets Curve (what relationship does it demonstrate - graph)
4. What are the theories that support the Kuznets Curve?
5. What are some criticisms of the theories that support the Kuznets Curve?
6. Criticize the critics.
7. Discuss some evidence for and against the theory. Is there evidence that there is a correlation between environmental quality and economic growth? Between economic freedom and environmental quality?
Extra Questions on Environmental Economics
3. What is an externality? Positive? Negative? In production? In consumption? Give examples of both positive and negative externalities in production and consumption.
4. Give examples of both positive and negative externalities in production and consumption.
5. What does it mean to "internalize" an externality?
6. Explain some "private solutions" to an externality (ways to internalize, etc.) and problems with each.
7. Explain three government policies towards externalities and problems with each.
8. Thinking question: how might the size of the population impact the ability to internalize an externality?
9. What is a common resource or common property? Example?
10. What is the free rider problem with respect to common property?
11. What is the tragedy of the commons? This relates to the question above.
12. As an example of the tragedy of the commons, why does common property in animals often lead to extinction? Give an example.
13. What is a possible solution to the tragedy of the commons that economists discuss?
14. Property rights often come about on their own (not legislated by government) - why? Examples?