microeconomics II

Card Set Information

Author:
mignab
ID:
18234
Filename:
microeconomics II
Updated:
2010-05-07 16:40:58
Tags:
econ
Folders:

Description:
final exam prep
Show Answers:

Home > Flashcards > Print Preview

The flashcards below were created by user mignab on FreezingBlue Flashcards. What would you like to do?


  1. Briefly describe the difference between an economic profit and an economic rent.
    economic profit is the difference between a firm's total revenues and its total economic costs. economic costs is the amount required to keep an input in its present use; the amount that it would be worth in its next best alternative use.

    economic rent is long run profits earned by owners of low cost firms. May be capitalized into the prices of these firms' inputs.
  2. Describe briefly why the principal of setting quantity produced and consumed where
    marginal social benefit equals marginal social cost results in an outcome that
    is socially efficient.
  3. Describe the private costs of a commuter crossing the George Washington
    Bridge during the morning
    rush hour.
  4. Explain the idea of a congestion externality (i.e., why private costs don’t equal
    social costs).
  5. Explain how a flexible toll schedule reduces the congestion externality (i.e., flexible
    with respect to time of day).
  6. The cost and quality of cell phones has dropped dramatically over the past 6 years.
    Using ideas from class, predict the effect cell phones have had on waiting
    times to cross the bridge into New
    York during the morning rush hour.
  7. Briefly compare and contrast the following three mechanisms for treating pollution
    externalities when the costs and benefits of abatement are uncertain: (a) an
    emissions fee, (b) an emissions standard, and (c) a system of transferable
    emissions permits.
    an emissions fee,

    an emissions standard

    a system of transferableemissions permits.
  8. Explain the difference between systematic and unsystematic risk. Why do investors who
    hold well diversified portfolios of assets not need to be concerned with
    unsystematic risk?
  9. Farm State Insurance Company offers flood
    insurance that fully reimburses claimants for all flood-related losses.

    a. Explain
    the concept of adverse selection and give an example relevant to this
    situation.
  10. Explain the concept of moral hazard and give an example relevant to this situation.v
  11. Suppose Farm State offers policies that only cover 80% of flood-related losses. Is the moral hazard problem solved?
  12. Suppose Farm State now offers two policies: one that covers 50% of losses and has a low price and one that covers 90% of losses but has a
    high price. Explain why this may help solve the adverse selection problem.
  13. It is often alleged that firms could produce
    infinitely-lived light bulbs if they wanted to.
    The fact that they do not is simply evidence that consumers are at
    firms' mercy, and they produce short-lived light bulbs to keep us coming
    back. Suppose markets are competitive
    with no externalities, etc.
    a. Explain briefly what it means for a firm to be a price-taker.
    price-taker a firm or individual whose decisions regarding buying or selling have no effect on the prevailing market price of a good.
  14. Explain why it might not be efficient to produce
    infinitely-lived light bulbs versus a lightbulb that lasts, say, exactly two
    years.
  15. Develop a simple theory that predicts how a
    competitive market will choose the most efficient lifespan of a lightbulb.
  16. What should happen to lightbulb life if the
    interest rate falls and stays at its new, lower level forever?
  17. Who should demand light bulbs with the longest
    life: New Yorkers, five of whom it takes
    to change a lightbulb, or Pennsylvanians, only three of whom it takes to change
    a lightbulb? Assume that the price of a
    lightbulb is identical in both states.
  18. Assume that Liechtenstein and Andorra, with
    equal (and very few) resources, can produce the following (in addition to
    postage stamps):



    Wine
    OR Navajo
    blankets

    Leichtenstein 100,000 cases 100,000 blankets

    Andorra 50,000 cases 100,000 blankets
  19. Define comparative and absolute advantage.
    comparative is when one country or firm has an advantage over another in producing a good because the cost of producing the good in 1, relative to the cost of producing other goods in 1, is lower than the cost of producing the good in 2, relative to the cost of producing other goods in 2.

    absolute advantage is when one country or firm has an advantage over the second in producing a good because the cost of producing the good in 1 is lower than the cost of producing it in 2.

    trade in comparative advantage allows firms/countries to consume outside of its production possibilities frontier.
  20. Who has the comparative advantage in producing grapes? wool?
    Wine OR Navajo blankets
    Leichtenstein 100,000 cases 100,000 blankets
    Andorra 50,000 cases 100,000 blankets
    Liechtenstein has the comparative advantage in grapes. No one has the comparative advantage in wool.
  21. Before trade, Liechtenstein produces 50,000 cases of wine and 50,000 blankets, and Andorra
    produces 25,000 cases of wine and 50,000 blankets. Show that trade between Liechtenstein
    and Andorra has the potential of increasing total consumption for the two countries.
  22. After the trauma of Micro, you
    decide to pursue a PhD in Sociology and need to invest in a good pair of
    sandals. Let the demand and supply
    curves for sandals be given by Qd = 20 - P and Qs = P. As a good Sociologist, you believe the market
    is oppressive and advocate a price cap of $5 on each pair.

    a. (3
    points) Graph supply and demand and solve for equilibrium price and quantity
    before the price cap.
  23. What is the price and quantity after the price cap is
    imposed? How big is the shortage?
  24. Explain the concept of consumer surplus. Calculate consumer surplus before and after
    the price cap, and illustrate using a graph.
  25. Calculate the total welfare change to society of this
    policy. Illustrate its components on a
    graph.
  26. Are there any transfers involved
    with this new policy? What are they and
    how much are they?









  27. State


    Stock A


    Stock B












    Poor


    5%


    16%












    Average


    10%


    -2%












    Good


    15%


    16%


    Briefly, what are the advantages to
    diversification? Mention the relative benefits if the two
    stocks have positive, negative, or zero covariance.
  28. Calculate the expected return and the standard
    deviation (sometimes called the volatility) for each security.
  29. Calculate
    the covariance of the two securities.
  30. Your investment advisor tells you to put all of your savings into Stock A because it
    has less risk than Stock B and offers and the same return as Stock B. Do you agree?
    Prove your advisor wrong by constructing a portfolio in which you put
    80% of your wealth into Stock A and the remainder into Stock B.

What would you like to do?

Home > Flashcards > Print Preview