Study Questions For The Final Exam
ECON 365
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.
Those questions below highlighted in yellow are not on the exam!
Topic: The Theory of the Firm - Production - The Mainstream Theory
What is production?
What are the four factors of production?
What is the short run production function?
What are fixed and variable inputs?
What is the short run? Long run?
Graph the short run production function (or total product curve). Why is it shaped the way it is shaped?
Why would the total product curve shift up?
Explain why division and specialization of labor increases marginal productivity?
Explain the law of diminishing marginal returns? Example?
What is marginal product?
When marginal product is at its peak (starts to decrease) -- what is happening with total product?
Know the relationship between average and marginal product. Where does the marginal product curve intersect the average product curve? Why?
We should allocate inputs across production processes in a firm according to what rule? Why?
What is an isoquant curve? Graph?
What is the marginal rate of technical substitution? How does it relate to the isoquant curve?
Why isn't the isoquant curve a straight line?
Draw an isoquant curve for perfect substitutes? Graph? Example?
Draw an isoquant curve for perfect complements? Graph? Example?
What is increasing returns to scale? Why is it a long run concept?
What is decreasing returns to scale? Why is it a long run concept?
What is constant returns to scale? Why is it a long run concept?
Graphs for 19 - 20 above?
Topic: The Theory of the Firm - Costs - The Mainstream Theory
What are variable costs? Fixed costs? Total costs? Graph? Shapes?
What are average variable costs? Average fixed costs? Average total costs? Graphs? Shapes?
What are marginal costs? Graph? Shape?
What is the relationship between average total costs and marginal costs?
With two production processes available to produce the same good, how do you decide which process to use? Be able to do a problem.
What is an isocost line?
Using isocost lines and isoquant curves, find the maximum output for a given expenditure in the short run. Explain. Graph?
How does the isocost line change with changes in factor prices?
What does capital and labor intensive mean? How would you show this with isocost lines and isoquant curves?
In the long run the size of the firm can change. Show this using an output expansion path.
Derive a long run average total cost curve from short run average total cost curves.
Graph increasing, constant and decreasing returns to scale (using the long run ATC curve).
What is a natural monopoly? Graph?
Criticize the natural monopoly theory.
Topic: The Model of Perfect Competition (all of these questions assume we are in this model)
What is the difference between accounting and economic profit?
What are the four conditions for the model of perfect competition? Understand what they mean.
What is the short run condition for profit maximization for a firm? Why? Graph (there are two ways of demonstrating and graphing this).
What is the short run shut down decision?
Derive the short run supply curve for the firm. Make sure you can explain exactly why and how it is derived. Graph?
Derive the industry supply curve. Graph?
What is the short run competitive equilibrium for a firm? Explain? Graph?
Be able to graph economic profit and loss on a graph. Be able to calculate economic profit or loss from the graph.
In the long run, what will happen if firms are experiencing economic profit? Explain. Graphs?
In the long run, what will happen if firms are experiencing economic loss? Explain. Graphs?
How does this model define efficiency? Why is long run equilibrium considered efficient or "perfect" in this model?
Topic: Monopoly - The Mainstream Model
What is market structure mean? Why is it so important in the mainstream model of monopoly?
What is a monopoly?
What is the structure - conduct - performance model?
How is monopoly "power" measured in the mainstream view (market share -- how is that determined?). Explain the measure.
What are the sources of monopoly under the mainstream view and why are they considered sources?
Along a demand curve, there are points of elasticity, unitary elasticity, and inelasticity -- explain.
Where will a monopolist operate to maximize profit or minimize loss - in terms of output level? What about in terms of where they will operate along the demand curve? Will the monopolist operate in the elastic portion - why or why not?
Where will the MR curve lie with respect to the demand curve in this model? Why?
Graphically demonstrate economic profit for a monopolist? Economic loss?
Explain the monopolists short run shut down decision.
True or False - the monopolists MC curve is their short run supply curve?
Explain why, in the long run, a monopolist can continue to make an economic profit (whereas in the perfectly competitive model -- firms can't continue to make an economic profit)?
Is a monopoly efficient (as defined by the mainstream)? Explain.
Compare and contrast graphically and in words the perfectly competitive firm and the monopolist in terms of price, output, welfare or efficiency.
Explain what the "welfare loss" is (where it comes from) due to a monopoly.
Explain what rent seeking is and how it relates to the "welfare loss" of a monopolist.
What is price discrimination? There are two ways firms can do it -- what are they?
What conditions must be met for a firm to price discriminate?
Provide examples of price discrimination in the real world.
Explain first, second and third degree price discrimination - both graphically and in words.
Make sure you can explain why block booking might be more profitable and why it is considered price discrimination.
What is the "hurdle" model of price discrimination - give an example?
Explain some public (government) policies towards monopoly.
Topic: A Critique of the Mainstream Theory
How and why do non-economists criticize mainstream economics (particularly the model of perfect competition)?
How might Marx criticize the "rational choice" model in mainstream economics? Explain.
What is the main difference between mainstream and Austrian economists?
Austrian methodology comes from their emphasis on individual action, subjectivism, process or change and uncertainty. Explain.
What is the "main problem" with the model of perfect competition from a process perspective?
How would the process economists (Hayek, etc.) define competition?
What are the five consequences of defining competition as you discussed in the question above (that Hayek discusses)?
Does structure matter to the process economists?
With respect to the concept of monopoly -- how do the process economists discuss it? Is there a "monopoly price?" - Why or why not?
Discuss the time element as it relates to your answer in the above question.
When would a monopoly not be considered competitive in the process view -- and why?
Discuss the concept of efficiency from: a. utilitarian or mainstream view, b. means/ends view, and c. Rothbard's "ethics" view
Make sure you look over the homework assignments, in class exercises, practice quizzes, and, of course, the reading assignments.
It has been fun - have a great
break and Happy Holidays!
The topics below are not on the final exam - we didn't have time.
Topic: Externalities
What is an externality? Positive? Negative? Production? Consumption?
Be able to graph each case above (4 cases) and show why and how the externality causes an "inefficient" outcome with respect to the welfare economist's efficiency criteria (Social MB = Social MC)
What is a network externality?
What is a inframarginal externality? Graph? Why is considered irrelevant by welfare economists? Example.
What is a pecuniary externality? Why is it considered irrelevant by welfare economists? Example.
What is the tragedy of the commons and a possible solution?
Explain the reciprocal nature of externalities.
Explain the Coase Theorem. What are the conditions of the theorem?
What are the five private solutions to controlling externalities mentioned in class. Give an example of each. Why might they not work (with respect to dealing with an externality)?
What are the two broad types of government policies towards externalities (i.e., in one case the government gets involved, in the other the government gets out of the way)?
Explain the government policies towards externalities we discussed in class. What are the problems with implementing the policies?
Why do most economists prefer tradable permits to quantity or technology standards? Explain.
Topic: Public Goods
What is the economist's technical definition of a public good?
What does non-rival mean?
What does non-exclusive or non-excludable mean?
Using the standard welfare economist's definition of efficiency (MC = MB), how much public good should be provided?
What's the rational behind the idea that markets will not provide the efficient amount of a public good?
Explain the prisoner's dilemma as it relates to a private party not providing a public good even if everyone would be better off if it were provided.
Under what conditions would a pure public good be provided by a private party (or parties)? What does this depend upon?
Does the number of people living in the community matter (with respect to the question above)? Explain.
What are the (related) problems with the government providing public goods?