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ECON 201: Final
Price Elasticity of Demand
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Price Elasticity of Demand
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Marginal Cost
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ΔTC ÷ ΔQ
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Average Total Cost
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TC ÷ Q
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Many
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Number of firms in Perfect Competition
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One
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Number of firms in a Monopoly
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Many
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Number of firms in Monopolistic Competition
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Few
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Number of firms in an Oligopoly
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Low
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Barriers to entry in a perfectly competitive market
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High
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Barriers to entry in a Monopoly
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Low
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Barriers to entry in a monopolistic competitive market
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Moderate
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Barriers to entry in an Oligopoly
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Standardized
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Perfect Competition products are
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Unique
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Monopoly products are
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Differentiated
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Monopolistic Competition products are
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Standardized/Differentiated
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Oligopoly products are
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Price-taker
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Pricing in a perfectly competitive market
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Price-maker
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Pricing in a Monopoly
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Some independence
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Pricing in monopolistic competitive markets
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Interdependence
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Pricing in an Oligopoly
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No
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Price discrimination in Perfect Competition?
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Yes
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Price discrimination in monopolies?
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Yes
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Price discrimination in Monopolistic Competition?
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Yes
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Price discrimination in Oligopolies?
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Zero
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Long-run profits in Perfect Competition
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Positive
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Long-run profits in Monopolies
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Zero
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Long-run profits in Monopolistic Competitions
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Positive
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Long-run profits in Oligopoly
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Pollution, Public goods, Imperfect information, Imperfect competition
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Four sources of market failures
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Remedying market failures
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Main Rationale for Government Involvement in Markets
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Non-rival / Non-excludable
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Public goods are
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Free-Rider Problem
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The market fails due to Public Goods, resulting in
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Externalities
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Something that effects you but if outside of your control
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We are not accurately pricing things that reflect external costs & benefits, which results in the government subsidizing positive externalities & taxing negative externalities
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Why do externalities cause market failures?
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Tax-Shifting Problem
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The more elastic a good is, the less a tax burden gets shifted onto you. If a good is elastic for the consumer, when the price increases significantly due to tax, their consumptions DRASTICALLY decreases
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Public Choice Economics
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Uses rational choice models from economics to explain how decisions are made in the public sector
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Median-Voter Rule
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The choice made by the government will match the preferences of the median voter
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Self-Interest Theory
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Explains why voters sometimes approve explicit limits on taxes and government spending. For example, limitations on taxes and spending are necessary safeguards against politicians and bureaucrats who benefit from larger budgets
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Special-Interest Theory
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Explains how whenever benefits are concentrated on a few citizens but costs are spread out over many, we expect the formation of special-interest groups.
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Lobbyists
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Special interest groups often use who to express their view to government officials and policymakers?
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Private Cost of Production
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The production cost borne by a producer, which typically includes the costs of labor, capital, and materials
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Social 'Full' Cost
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Private Cost + External Cost
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Pollution Tax
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A tax or charge equal to the external cost per unit of pollution
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Optimal Level of Pollution
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Where marginal benefit of abatement = marginal cost
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Site Cleanups
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The government estimates the costs and benefits of the pollution then makes the company pay for the cleanup necessary
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Marketable Pollution Permits
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A system under which the government picks a target pollution level for a particular area, issues just enough pollution permits to meet the pollution target, and allows firms to buy & sell the permits; also known as the cap-and-trade system
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Thin Market
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A market in which some HQ goods will be sold, but less than would if there were perfect information in the market
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Paying Efficiency Wages
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Paying a higher wage to increase the average productivity of the workforce
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Shirking
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When workers put in less than full effort
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Adverse Selection
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Lower-quality goods drive out high quality goods, so the uniformed side of the market must choose from an undesirable / adverse selection of goods
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Moral Hazard
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People increase their risk-taking behaviors when they are insured
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Substitution Effect for Leisure Demand
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When the opportunity cost of leisure time increases, less leisure time is demanded
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Income Effect for Leisure Demand
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As real wage increases, leisure time demanded will increase, assuming that it is a normal good
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Hours worked per employee
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When a firm/market increases wage, we cannot predict the change in
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Occupational choice
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If the wage of one occupation increases, people will switch their
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Migration
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If wages in your profession increase in Florence, we can expect what to occur?
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Wage
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In the short-run, there is a set _________, which does NOT change
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Output Effect
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In the long-run, an increase in wage, increases price, which results in producers selling less, less inputs are needed, less labor is needed, less workers will be hired
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Input-substitution Effect
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In the long-run, an increase in wage decreases the labor demanded because technological advancements, such as machines & whatnot, can substitute the jobs that LQ workers were previously hired for
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Marginal Product of Labor
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The change in output from one additional unit of labor
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Marginal-Revenue Product of Labor
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(Price of output) x (Marginal Product of Labor)
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Hourly Wage
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The marginal cost of labor is equivalent to
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When labor costs are the majority of production costs
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When will the output effect be relatively large?
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Economic Rent
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The extra money earned, outside the cost needed to bring that factor into production; The difference between the price and the seller's willingness-to-accept curve
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Comparative advantage
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The ability of a nation to produce a good at a lower absolute cost than that of another nation
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Terms of trade
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Rate at which units of one product can be exchanged for units of another product via Comparative Advantage
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Infant Industry
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Arguments for Trade Policy: A country's new industry will have higher costs (ATC) than established rivals whose scale is larger and costs lower. A tariff can be used to compensate for the cost difference as illustrated in class with an early example from US history
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Once given protection, firms do not want to give it up; promotes rent-seeking behavior
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Critique of the Infant Industry argument for Trade Policy
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National Security
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Arguments for Trade Policy: Protect domestic firms so that their production is available in case of military necessity. This has been used to protect all sorts of industries, from those needed for weapons (like the chemical industry) to those needed for supplies (mohair) like blankets
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Over time, the meaning of necessity gets blurry as products like castor oil used this argument
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Critique of the National Security argument for Trade Policy
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Protecting Jobs
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If the US imposes a $5 tariff on foreign steel, US producers increase Q from 100 to 150 & the extra output will generate jobs for domestic workers
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Net welfare loss/jobs saved is high
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Critique of Protecting Jobs argument for Trade Policy
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Anti-dumping
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Arguments for Trade Policy: When foreign firms are dumping they might drive out US firms and eventually increase their market power so a tariff imposed can compensate for the price difference
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Predatory intent hard to prove and tariff results in net welfare loss
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Critique of Anti-dumping argument for Trade Policy
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Embargo, Tariff, Quota
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3 Trade Restrictions
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Embargo
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Total ban on all trade; usually politically motivated and a very serious thing to do
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Tariff
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A tax on imports; this is how many countries collect tax revenues & is especially politically popular because then countries don't have to tax citizens as much
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Quota
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Limits the number of imports to some set amount
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