ECON 101 Final Review: Consumer Choice, Market Structures, Labor, Inequality and Market Failures

Terms in this set (30)

1. What is diminishing marginal utility?Each additional unit of a good consumed adds less extra satisfaction than the one before. It helps explain why demand curves slope downward.
2. State the utility-maximizing rule for two goods.Spend your budget so that MU_x/P_x = MU_y/P_y: the last dollar spent on each good gives the same extra utility. If one ratio is higher, shift spending toward that good.
3. What is the slope of a budget constraint with good X on the horizontal axis?−Px/Py, the rate at which the market lets you trade Y for X. A change in income shifts the line in parallel; a change in one price rotates it.
4. Income effect vs substitution effect of a price dropSubstitution effect: the good is now relatively cheaper, so you buy more of it. Income effect: your purchasing power rises, so you buy more if it is normal and less if it is inferior.
5. What output rule maximizes profit for any firm?Produce where marginal revenue equals marginal cost (MR = MC), as long as price covers average variable cost.
6. Key features of perfect competition, and why P = MRMany buyers and sellers, identical products, free entry and exit, full information. Each firm is a price taker, so selling one more unit always adds exactly the market price to revenue.
7. When should a competitive firm shut down in the short run?When price falls below minimum average variable cost. Fixed costs must be paid either way, so the firm keeps producing as long as revenue covers variable costs.
8. Describe long-run equilibrium in a perfectly competitive market.Economic profits attract entry and losses cause exit until P = minimum ATC. Firms earn zero economic profit and produce at the efficient scale.
9. What is a sunk cost, and how should it affect decisions?A cost that has already been incurred and cannot be recovered. It should be ignored in decisions about what to do next, since only marginal costs and benefits matter.
10. How does a monopolist choose price and quantity?It produces where MR = MC, then charges the highest price buyers will pay for that quantity (read from the demand curve). Because MR < P, it produces less than the efficient quantity, creating deadweight loss.
11. Mini-problem: Demand is P = 100 − 2Q and MC = 20. Find the monopoly quantity and price.MR = 100 − 4Q. Set MR = MC: 100 − 4Q = 20, so Q = 20. Price from demand: P = 100 − 2(20) = 60.
12. What is a natural monopoly?An industry where one firm can supply the whole market at lower average cost than two or more firms, typically due to large fixed costs, such as water or power distribution.
13. What is perfect (first-degree) price discrimination and its welfare effect?Charging each buyer exactly their willingness to pay. Output reaches the efficient level, so there is no deadweight loss, but the firm captures all the surplus and consumer surplus is zero.
14. Long-run equilibrium in monopolistic competitionEntry drives economic profit to zero (P = ATC), but each firm's demand slopes down, so P > MC and firms produce below efficient scale (excess capacity).
15. What is a Nash equilibrium?A set of strategies in which each player's choice is the best response to the others' choices, so no player can gain by changing strategy alone.
16. What is a dominant strategy?A strategy that gives a player a better payoff than any alternative no matter what the other players do.
17. Explain the prisoner's dilemma and its link to oligopoly.Each player has a dominant strategy to defect, but mutual defection leaves both worse off than mutual cooperation. Oligopolists face the same pull to cut price or raise output rather than keep a collusive agreement.
18. Why are cartels hard to sustain?Each member can profit by secretly producing more than its quota at the high cartel price. When many members cheat, output rises and price falls toward the competitive level.
19. How does a competitive firm decide how many workers to hire?It hires until the wage equals the value of the marginal product of labor: W = VMPL = P × MPL. The VMPL curve is the firm's labor demand curve.
20. What is a compensating differential?A wage difference that offsets nonmonetary features of a job. Dangerous, unpleasant or night-shift jobs tend to pay more than otherwise similar jobs.
21. What do the Lorenz curve and Gini coefficient measure?The Lorenz curve plots the cumulative share of income against the cumulative share of households. The Gini coefficient runs from 0 (perfect equality) to 1 (one household has everything); bigger gaps from the 45° line mean more inequality.
22. Progressive vs regressive tax, and marginal vs average tax rateProgressive: higher-income people pay a larger share of income. Regressive: they pay a smaller share. The marginal rate applies to the next dollar earned; the average rate is total tax ÷ total income.
23. Mini-problem: Tax is 10% on the first $10,000 of income and 20% on income above that. For $30,000, find total tax, average rate and marginal rate.Tax = $1,000 + 0.20 × $20,000 = $5,000. Average rate = 5,000/30,000 ≈ 16.7%. Marginal rate = 20%.
24. Carbon tax vs cap-and-tradeA carbon tax fixes the price of emissions and lets quantity adjust; cap-and-trade fixes the total quantity of permits and lets the permit price adjust. Both cut pollution at low cost because firms with cheap abatement cut the most.
25. Positive externality: market outcome and policy fixWhen an activity benefits third parties (like vaccination or education), the market produces less than the social optimum. A subsidy equal to the external benefit can move output to the efficient level.
26. Adverse selection vs moral hazardAdverse selection: hidden information before a transaction (people likely to get sick buy more insurance). Moral hazard: hidden action after a transaction (insured people take fewer precautions).
27. What is Pareto efficiency?An allocation where no one can be made better off without making someone else worse off. It says nothing about fairness, so an efficient outcome can be very unequal.
28. Tariff vs import quotaBoth raise the domestic price, help domestic producers and hurt consumers with a deadweight loss. A tariff gives the government revenue; a quota gives the price difference to whoever holds the import licenses.
29. When a country opens to trade and the world price is above its domestic price, who gains and who loses?The country exports. Domestic producers gain, domestic consumers lose because they now pay the higher world price, and total surplus rises.
30. What is the efficiency-equity tradeoff?Policies that redistribute income, such as taxes and transfers, can reduce incentives to work and invest, shrinking total surplus. Societies balance a bigger pie against a fairer division of it.

More ECON 101 flashcards

• ECON 10135 terms ECON 101 Exam Review: Supply and Demand, Elasticity, Costs and Market StructuresUniversity of Alberta · by @studyboardWhat is opportunity cost? · What does a production possibilities frontier (PPF) that bows outward imply? ·…
• ECON 10130 terms ECON 101 Final Review: Consumer Choice, Market Equilibrium, Welfare and Market PowerUniversity of British Columbia · by @studyboardWhat is opportunity cost? · Movement along a demand curve vs a shift of the curve · List the main factors…

See all ECON 101 flashcards