ECON 2106 STUDY GUIDE EXAM 2CHAPTER 5 & 19 1. Define externalities, explain why they occur, and provide examples of them.Externality: A consequence of an economic activity that spills over to affect third parties. (EX: Pollution)Lack of clearly assigned property rights prevents market prices from reflecting all the costs created by activities that generate spillovers onto third parties.2. Given a scenario, explain, both verbally and graphically, how the allocation of resources is impacted by external benefits (positive externalities). VERBALLY: The demand curve shifts to the right. Equilibrium quantity and equilibrium price increased. GRAPHICALLY:3) Given a scenario, explain, both verbally and graphically, how the allocation of resources is impacted by external costs (negative externalities).VERBALLY: Supply curve shifts left, equilibrium quantity decreases and equilibrium price increases. GRAPHICALLY:4) Define, characterize, and provide examples of public goods.Public goods: Goods for which the principle of rival consumption does not apply and for which exclusion of nonpaying consumers is too costly to be feasible. They can be jointly consumed by many individuals simultaneously at no additional cost and with no reduction in quality or quantity. No one who fails to help pay for the good can be denied the benefit of the good.Characteristics: 1. Public goods can be used by more and more people at no additional opportunity cost and without depriving others of any of the services of the goods.2. It is difficult to design a collection system for a public good on the basis of how much individuals use it.EXAMPLES: Musical concerts, national defense, police protection, public education5) Explain the role of government in providing public goods and how doing so changes the definition of amarket economy to a mixed economy.6) Define elasticity of demand, both verbally and mathematically (in terms of the values for the coefficient of elasticity).Price Elasticity of Demand: The responsiveness of the quantity demanded of a commodity to changes in its price; defined as the percentage change in quantity demanded divided by the percentage change in price. Ep=percentage change∈quantity demandedpercentage change∈ priceEp=change ∈quantity∑of quantities/2÷change∈ price∑of prices /27) Define elasticity of supply, both verbally and mathematically (in terms of the values for the coefficientof elasticity).Price elasticity of supply: The responsiveness of the quantity supplied of a commodity to a change in its price–the percentage change in quantity supplied divided by the percentage change in price.Es=percentage change∈quantity suppliedpercentage change∈ price8) Given a scenario and some data, determine if demand or supply is elastic, inelastic, or unit elastic.Elastic demand: >1 (GREATER THAN 1)Unit elasticity of demand: 1=1Inelastic demand: <1 (LESS THAN 1)CHAPTER 20 & 21 1) Explain the determinants of Total Utility. 2) Define Marginal Utility (MU).Marginal Utility: The change in total utility due to a one-unit change in the quantity of a good or service consumed. 3) Given some data, calculate Marginal Utility (MU).Marginal utility=change∈total utilitychange∈number of unitsconsumed.4) Explain the Law of Diminishing Marginal Utility and how it relates to the Law of Demand.Law of Diminishing Marginal Utility: As an individual consumes more of a particular commodity, the total level of utility, or satisfaction, derived from that consumption usually increases. Eventually, however, the rate at which it increases diminishes as more is consumed.5) Explain the relationship between Marginal Utility and Total Utility.6) Define the Substitution Effect.Substitution effect: The tendency of people to substitute cheaper commodities for more expensive commodities. 7) Define the Real Income Effect.Real Income Effect: The change in people’s purchasing power that occurs when, other things being constant, the price of one good that they purchase changes. When that price goes up, real income, or purchasing power, falls, and when that price goes down, real income increases. 8) Given some Marginal Utility data, calculate Total Utility.9) Given a scenario, determine the utility maximizing combination of two goods available to a consumer.10) Define Indifference Curve.11) Given a scenario, identify economic rent.12) Explain the difference between explicit costs and implicit costs.13) Given some data or a scenario containing data, calculate accounting profit and economic profit.14) Given a dollar figure payable in a specified number of years, calculate the present value of that dollar figure.15) Explain verbally and show mathematically the difference between the nominal interest rate and the real interest rate.16) Define the Random Walk Theory.17) Recognize characteristics of stock markets.18) Define Preferred Stock.19) Define Common Stock.20) Explain the meaning of a Price/Earnings ratio