Download Economics 102 Part III

Economics 102
Tentative Schedule
Spring 2000
Week #1: The Nature of Economics
Introduction to the Course
1. Name the "factors of production" (inputs) and define each.
2. What is meant by "capitalism"? by "socialism"?
3. What is meant by "entrepreneurship"?
3. What is "scarcity"?
4. What are the questions that every society must answer?
5. What is meant by "opportunity cost"? Give some examples. For example, what is the
opportunity cost to you of attending this college?
5. What is meant by an "economy"?
7. What is a "market economy"? What is a "command economy"?
8. What is meant by "allocative efficiency"? by "productive efficiency"? by "equity"?
9. What is "positive economics"? What is "normative economics"? Give examples of
each.
10. What is meant by "rational behavior"? Explain the procedure by which rational decisions
are made. Give some examples. What does "marginal benefit" mean? What does
"marginal cost" mean?
(Reading: Pages 1 - 21 and 33 - 37. Also Review Pages 38 - 44 on Graphing)
Week #2: Comparative Advantage; Demand
1. What is meant by "specialization" and "division of labor"?
2. Explain why, if one person has an absolute advantage in one activity, and a second person
has an absolute advantage in a different activity, they are better-off by specializing and
exchanging.
3. Explain why, even if one person has an absolute advantage in both activities, they are better
off by specializing and exchanging if their comparative advantages are different. How is
comparative advantage determined?
4. What is the "law of comparative advantage"?
5. What determines a person's comparative advantage?
6. Name some problems that might result from people specializing and trading with each other.
Quiz #1: Covers the Material From the Beginning of the Course
7. What is meant by "demand"?
What is the "law of demand"?
8. What is a demand curve? Draw the demand curve.
9. What will cause a movement along the demand curve?
10. What is the "price elasticity of demand"?
11. What is meant by "inelastic demand"? by "elastic demand"? by "unit elastic
demand"? by "perfectly inelastic demand"? by "perfectly elastic demand"? Do NOT
remember the formula.
12. Show the graph that would represent each of the types of elasticity
13. Define "total revenue". What is the relation between the price elasticity of demand and the
revenue received or the total expenditure (if there is an increase in the price of the product)?
14. What are three the factors that determine whether the demand for a product is relatively
elastic or relatively inelastic?
(Reading: Pages 29 - 36; 45 - 52; 439 - 451)
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Week #3: Demand and Supply
1. Name six reasons the demand curve might shift to the right and six reasons that it might shift
to the left.
2. Define "substitute" and "complement".
3. What is the "cross elasticity of demand"? How is it interpreted?
4. What is the "income elasticity of demand"?
5. Define "normal good" and "inferior good".
Quiz #2: Cover the Material Since the Previous Quiz
6. Define "supply". What is the "law of supply"?
7. What is the "supply curve"? Draw it.
8. What will cause a movement along the supply curve? What will cause a shift in the supply
curve?
9. What is the "price elasticity of supply"? What is meant by "relatively inelastic supply"?
by "relatively elastic supply"? by "perfectly inelastic supply"? by "perfectly elastic supply"?
Draw a graph of each.
10. What are the factors that determine whether the price elasticity of supply is elastic or
inelastic?
11. What are the four factors that will cause a shift in supply to the right? What are the four
factors that will cause a shift in supply to the left?
12. What is meant by "equilibrium"? How are the equilibrium price and quantity determined?
13. If the price is above equilibrium, what will result? If the price is below equilibrium, what
will result?
14. Explain what will happen to the price and the quantity in each of the following cases (as well
as why this will happen):
a. there is an increase in demand or a decrease in demand
b. there is an increase in supply or a decrease in supply
15. Explain what will happen to the price and the quantity in each of the following cases, as well
as why it will happen:
a. both demand and supply rise c. demand rises and supply falls
b. both demand and supply fall d. demand falls and supply rises
(On an examination, you will be given a case. You will need to interpret the case as a change
in demand, a change in supply, or both. You will then need to show the appropriate changes on
the graph and analyze the results.)
(Reading: Pages 52-80 and 453-456)
Week #4: Demand and Supply
1. What is meant by "tax incidence"?
2. Use the concept of elasticity to analyze the incidence of a gasoline tax , a sales tax, or health
care costs.
3. Use demand-supply analysis plus the concept of elasticities to explain why farmers have
faced consistently falling prices and profits.
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Quiz #3: Covers the Material Since Quiz #2
4. What is a price floor? Use the example of agricultural price supports to analyze the results
of price floors?
5. What is a price ceiling? Use the cases of rent controls, gasoline, health care, etc. to analyze
the results of a price ceiling?
6 In the philosophy of the market system, what is assumed to be the goal of the economy?*
7 Describe the process of the "invisible hand"? In this process, how does an economy
respond to a change in consumers' tastes? How does it respond to a change in the relative
scarcity of the factors of production?*
8 In the process of the "invisible hand", what are the functions of the price? How does it
happen that people acting in their own self-interests also act in the interest of society as a
whole?*
(Reading: Pages 80 - 93; 116 - 118 + Possible Handouts)
Week #5: Philosophy of the Market
Examination #1
Covers all material from the beginning of the course. The exam is all written. Paper will be
provided; bring only pen or pencil.
Review Examination #1
1 What is meant by "laissez faire"? by "private property rights"?
2 What are "anti-trust laws"?
3 What is a "public good"? How does it differ from a "private good"? Why must public
goods be provided by government? What is a "free rider"?
4 What are "externalities"? Give some examples of both positive and negative
externalities.
5 What private goods are publicly provided? (These are called "merit goods".)
6 In the philosophy of the market system, how are incomes determined?
( Summary Question: in a system of "laissez faire", what are the appropriate functions of
government?)
(Reading: Pages 94 - 103 Plus Possible Handouts)
Economics 102
Part II
Week #5: Philosophy of the Market
Examination #1
Covers all material from the beginning of the course. The exam is all written. Paper will be
provided; bring only pen or pencil.
Review Examination #1
1 What is meant by "laissez faire"?
2. What is meant by "private property"? by "state property"? by "common property"?
3. What are the rights that go with private property rights?
4. To bring about socially desirable results, what are the characteristics that property rights need
5. What are the problems that result from common property (or "open access resources")?
6. Explain how improper specification of property rights has contributed to water problems
in the West or to problems of depletion of fish stocks.
7. What are "anti-trust laws"?
8. What is a "public good"? How does it differ from a "private good"? Why must public
goods be provided by government? What is a "free rider"?
9. What are "externalities"? Give some examples of both positive and negative
externalities.
10. What private goods are publicly provided? (These are called "merit goods".)
11. In the philosophy of the market system, how are incomes determined?
( Summary Question: in a system of "laissez faire", what are the appropriate functions of
government?)
(Reading: Pages 94 - 103 Plus Possible Handouts)
Week #6: Public Choice Theory ; Utility Theory; The Nature of the Business
1.
2.
3.
4.
What is meant by "rational abstention"? by "rational ignorance"? Why do they occur?
What is the "special interest effect"? Why does it occur?
What is the "shortsightedness effect"? Why does it occur?
What is a "Bureaucracy"? What problems that result from it? Apply your answer to the
Forest service or any other bureaucracy with which you are familiar.
5. What criticisms can be made of Public Choice Theory?
6. What is meant by "utility"? by "marginal utility"?
7. What is the "law of diminishing marginal utility"?
8. Use the law of diminishing marginal utility to explain why water, which is essential to life, is
virtually free while diamond, which has limited usefulness, is expensive.
9. Use the law of diminishing marginal utility to explain the argument for a progressive income
tax. (This point is not covered in the text.)
10. Explain how a dollar value is placed on utility. Use this to explain how a value can be
placed on scenic beauty, bio-diversity, and other environmental amenities.
Reading: Miller, Pages 711 – 727; 413 – 419; 423 - 427
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11. What is meant by “production”? What is meant by a “plant”?
What is an “industry”?
12. What is a “sole proprietorship”? What are the main advantages and disadvantages of this
organization?
What is meant by a “partnership”? What are the main advantages and
disadvantages of this organization? What is meant by a “corporation”? What are the main
advantages and disadvantages of this organization?
13. What is the difference between a “public corporation” and a “private corporation”?
14. What is a “dividend” and “retained earnings”? What determines the value of a
corporation? What is “common stock”? What is an “Investment Banker” and “Venture
Capital”?
15. What is the “principal – agent problem”? Give examples.
16. What is a “producers’ cooperative”? What is a “consumers’ cooperative”? What is a
“diversified company”? What is a “conglomerate”?
17. What is a “horizontally integrated firm”? What is a “vertically integrated firm”?
Under what conditions are firms likely to become vertically integrated?
18. What are “transactions costs”? What is “opportunism”? What is “asset specificity”?
19. Why have firms become more “vertically disintegrated” recently?
20. What is meant by “merger”?
21. What are the advantages and the disadvantages of large companies? What is meant by
“economies of scale”? What is meant by “economies of scope”?
22. What is meant by “shirking”?
Reading: Handout + Miller, Pages 461 - 477
Week #7: Costs of Production
Quiz #4: Covers All of the Material Since Examination #1
1.
Define "cost". What is an "explicit cost"? What is an "implicit cost"?
2.
Define the following: "normal profit"; "economic profit"; "economic loss". What is
the difference between "accounting profit" and "economic profit"?
3.
What is a "fixed input"? What is a "variable input"? a "fixed cost"? What is a
"variable cost"?
4.
What is the "short-run"? What is the "long-run"? What is meant by "marginal cost"?
5.
What is meant by the "production function"?
6.
What is "total (physical) product"? What is "average (physical) product"? What is
"marginal (physical) product"? Draw the graph of each.
7.
What are "increasing marginal returns"? Why do they occur?
8.
What is the "law of diminishing (marginal) returns"? Why is it true?
9.
What are "negative marginal returns"?
10. What is "marginal cost"? What is the relation between the marginal physical product
and the marginal cost? Why?
Reading: Miller, Pages 481 - 490
Page 3
1. Define "average fixed cost". "average variable cost". "average total cost".
2. Given a set of numbers (such as the one on page 153), calculate each of the variables in
question 1. Also calculate marginal cost. Then, draw each one on a graph.
3. For each of the four graphs drawn in the last class, explain why it has the shape that it does.
4. What is the relation between the marginal cost and the average total cost? What is the
relation between the marginal cost and the average variable cost? In each case, explain why.
Reading: Miller, Pages 490 - 498
Week #8: Costs of Production/Market Structures
1.
2.
3.
4.
5.
6.
7.
Define "long-run". What is the long-run average total cost? How is it derived?
What is meant by "economies of scale"? Why do they exist?
What are dynamic increasing returns to scale?
What is meant by "diseconomies of scale"? Why do they exist?
What is meant by "constant returns to scale"?
What is meant by "minimum efficient scale"? What is happening to it over time?
What is meant by “economies of scope”?
(Reading: Handout + Miller, Pages 498 - 504)
Quiz #5: Covers the Material Since Quiz #4
1. What are the characteristics of “perfect competition”? "pure monopoly"?
"monopolistic competition"?
2. What is meant by "oligopoly"? by a "cartel"? by a "contestable market"?
3. In perfect competition, what is the demand curve facing the seller? Why? Draw the
graph.
4. Define "marginal revenue".
5. Using the procedures for rational decision-making, explain why a company that is a price
taker will produce up to the quantity at which the marginal revenue equals the marginal cost.
6. What should a company do if the marginal revenue is greater than the marginal cost? Why?
What should a company do if the marginal revenue is less than the marginal cost? Why?
7. On the graph, show the marginal revenue, marginal cost, and average total cost. Show the
profit-maximizing quantity and the economic profit.
(Reading: Handout + Miller, Pages 508 - 515)
Week #9: Perfect Competition
1. Explain the shutdown rule. That is, if a company is making economic losses, in the
short-run, when should it continue to produce and when should it temporarily shut-down? Give
examples.
2. Explain why grocery stores and restaurants are open late at night, when there are few
customers.
3. From the principles of rational decision-making and the shutdown rule, what is the supply
curve of one seller? (Remember: this is the curve which tells how much the seller will
produce at any given price.)
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4. From the supply curve of one seller, how does one derive the market supply curve?
5. Explain how purely competitive companies adjust in the long-run when they are making
economic profits and economic losses. Show this on the graph. What is meant by "long-run
equilibrium"?
Examination #2
Covers all of the material Since Examination #1. The procedures are the same as those of the
first examination.
Economics 102
Part III
Week #10: Perfect Competition/Monopoly
Review Examination #2
1. Explain how perfectly competitive companies will adjust in the short-run and in the long-run
if there is a change in demand. (Consider both an increase & decrease in demand.) Show the
adjustment on the graph.
2. What is the long-run industry supply curve? What is a constant-cost industry? Why is
its long-run industry supply curve horizontal (perfectly elastic)?
3. Explain how perfectly competitive companies adjust in the short-run and in the long-run
when there is a change in a fixed cost (consider both an increase and a decrease in a fixed cost).
Show on the graphs.
4. Explain how perfectly competitive companies adjust in both the short-run and in the long-run
if there is a change in a variable cost. Show the adjustment on the graph.
(Reading, Handout + Miller, Pages 521 - 530)
5. What are the benefits of a perfectly competitive industry? Consider the following (and
define all technical terms):
a. economic profits (both short-run and long-run
b. productive efficiency (both short-run and long-run)
c. improvements in productive efficiency over time – called “dynamic efficiency”
d. "improvements" in products
e. allocative efficiency (the relation of price and marginal cost)
6. What is meant by "monopoly"? by "market (monopoly) power"?
7. Name some of the barriers to entry that may exist.
8. For a monopoly seller, what is the demand curve facing the company? What is the relation
between the price and the marginal revenue? Why?
9. Given data representing the demand schedule for a monopoly seller, calculate the marginal
revenue.
10. How does a monopoly seller decide on the quantity to produce and the price to charge?
11. What is wrong with the statement: "Because a company is a monopoly, it can charge any
price that it wants."?
12. On the monopoly graph, show the quantity produced (to maximize profits), the price
charged, and the economic profits or losses. Consider both the short-run and the long-run.
Reading: Handout + Miller, Pages 533 - 547
Week #11: Monopoly/ Monopolistic Competition
1. What are the effects on a monopolist's decisions if there is a change in: (consider both an
increase and a decrease)
a.
the demand for the product
b. a fixed cost of production
c. a variable cost of production
2. Compare pure monopoly to perfect competition in terms of the social benefits considered in
Week 10
Page 2
(Week #11 Continued)
3. What is meant by "price discrimination"? Why is it practiced? Give some examples.
4. What conditions are necessary to practice price discrimination?
5. If price discrimination occurs, which segment of the market gets the higher price? Why?
6. What is a "natural monopoly"? Why does it exist?
(Reading: Handouts + Miller, Pages 548 – 553; 535 – 536; and 584 - 596)
Quiz #6: Covers the Material Since Examination #2
7. In what manner have natural monopolies been regulated? Who regulates them?
8. What is "average cost pricing" (also called "rate of return regulation")? What is meant by
the "rate base"?
9. Using SDG&E as an example, what problems result from average cost pricing for public
utilities?
10. What changes have been occurring recently in the regulation of public utilities? Why?
11. Explain how a company in monopolistic competition would determine the
profit-maximizing quantity and price. Show the graph.
12. Explain what will result in monopolistic competition if a company is earning economic
profits or losses. Show this on the graph. Consider both the short-run and the long-run.
13. On the graph, show long-run equilibrium for a company in monopolistic competition.
Reading: Handouts + Miller, Pages 584 – 586 and 557 – 564
Week #12: Monopolistic Competition/ Oligopoly and Cartels/Antitrust
1. Explain what will result in the short-run and then in the long-run to a company in
monopolistic competition if there is a:
a. change in the demand for the product
b. change in a fixed cost of production
c. change in a variable cost of production
2. Compare monopolistic competition to perfect competition and also to pure monopoly on the
basis of the following:
a. economic profits (both short-run and long-run
b. productive efficiency (both short-run and long-run)
c. improvements in productive efficiency over time – called “dynamic efficiency”
d. "improvements" in products
e. allocative efficiency (the relation of price and marginal cost)
3. Why do monopolistically competitive companies have "excess capacity" in the long-run?
4. Define "oligopoly". Define "contestable market" (Review)
5. What is the concentration ratio? How is it interpreted?
6. What is the Herfindahl Index? How is it calculated? How is it interpreted? Compare it
to the concentration ratio.
7. What are the necessary steps to form an effective cartel?
8. What is meant by "price leadership"?
9. Explain why cartels are unstable (i.e., tend to break-apart). Give some example of the ways
by which the stability problem is overcome.
(Reading: Miller, Pages 563 – 568 and 574 – 579 + Handouts)
Page 3
Week #12 Continued
10. Apply the analysis of cartels to the case of OPEC or DeBeers.
11. What is meant by the "antitrust laws"? Who administers them?
12. What are the provisions of the Sherman Act and the Clayton Act?
13. What is a "horizontal merger"? a "vertical merger"? a "conglomerate merger"?
14. What is the Herfindahl Index? Explain the current Merger Guidelines.
15. Briefly explain the cases against Standard Oil and AT&T.
16. Explain the arguments in the case against Microsoft. What are the charges against
Microsoft? What are the defenses that Microsoft is using?
Reading: Miller, Pages 594 – 599 + Handouts
Week #13: Labor Markets
Quiz #7: Covers the Material Since Quiz #6
1. What is a "resource market"?
2. What are the characteristics of a perfectly competitive resource market?
3. What is the marginal product of labor? What is the law of diminishing returns? (Review)
4. What is the "marginal revenue product"
What is the "marginal resource cost"?
5. Explain how a profit-maximizing employer would choose the number of workers to hire.
Show the situation on the relevant graph.
6. Why is the marginal revenue product curve the same as the demand curve for labor?
7. From the demand for labor by one employer, how is the total demand for labor determined?
8. Draw the demand curve for labor. What will cause a movement along it?
9. What is the "wage elasticity of demand" for labor?
10. What are the factors that will determine if the demand for labor is relatively elastic or
inelastic? Name four and explain each.
11. Use the answer to question 10 to analyze the effects of a minimum wage law or a
comparable worth law.
Reading: Pages 605 – 613 + Handouts
12. What are the factors that will affect the marginal revenue product of a worker? (In
particular, what will cause this curve to shift?) Use this answer to explain why different people
earn different wages in a market (for example, why do men earn more than women?).
13. What is meant by “human capital”? by "general training"? By "specific training"?
What effect does each have on wage determination?
14. What is "statistical discrimination"? What effect does it have?
15. Summarize this section by giving some hypotheses as to why men earn more than women
and why whites earn more than minorities.
Reading: Miller, Pages 613 – 617 and 672 – 676 + Handout
Week #14: Labor Markets
Examination #3
Covers the Material of Since Examination #2. The procedures are the same as those of the first
two examinations.
Economics 102
Part IV
Week#14: Labor Markets
Review Examination #3
1. Show the effects on the labor market of each of the following:
a. a change in the demand for the product
b. a change in a fixed cost of production
c. a change in a variable cost of production
2. What is the supply of labor to an employer? Why is this supply of labor is perfectly elastic?
3. What is the supply of labor to a type of employment? How does it relate to the wage?
4. What is the labor force participation rate?
5. Draw the labor supply curve for an individual and explain its shape.
6. What is the "substitution effect"? the "income effect"?
7. Why might a labor supply curve be "backward bending"?
8. Use the concepts of the substitution effect and the income effect (among others) to
explain:
a. the decline in the average workweek
b. the falling labor force participation rate of males over age 60
Reading: Miller, Pages 615 – 617 + Handout
Week #15: Labor Markets
1. Use the concepts of the substitution effect and the income effect (among others) to explain
the rising labor force participation rate of married women & teens
2. What is a labor union? What is "collective bargaining"?
3. What are the three levels of union organization?
4. What is the difference between a craft union and an industrial union? Give examples of
each. What is the AFL-CIO?
5. What conditions are necessary for unions to have a significant ability to raise wages?
(Analyze unions using the theory of cartels.)
Reading: Miller, Pages 628 – 838 + Handouts
Final Examination Materials will be Distributed.
6. What is a "closed shop"? an "open shop"? a "union shop"? an "agency shop"?
7. What is a "right-to-work law"? Use the theory of public goods to explain why labor
unions would oppose these laws. (Not in Text)
8. What are the main goals of labor unions? Explain how a labor union might try to achieve its
goals.
9. What have been the effects of unions on the wages of their members?
10. What have been the effects of unions on the wages of non-union workers?
11. What have been the effects of unions on productivity? Why?
12. What have been the effects of unions on profits?
13. What has been happening to the proportion of workers belonging to unions? WHY?
(Again relate this to the theory of cartels.)
(Reading: Miller, Pages 628 – 638 + Handout)
Page 2
Week #16: Income Distribution
Quiz #8: Covers all Material since Examination #3
1. Describe the distribution of income in the United States. How has it changed over time?
How does it compare to other countries? How does it compare to the distribution of wealth?
2. What are the effects of taxes and transfers on the distribution of income in the United States?
3. What is a Lorenz Curve? What is a Gini Index? (not in the text)
4. Who are the super-rich? How does one get to be “super-rich”?
5. How is poverty measured? What is "absolute poverty"? What is "relative poverty"?
(not in text)
6. Describe the composition of the poor by race, by age, and by family structure.
7. What has been the trend of the official poverty rate over the past three decades.
8. What are the arguments as to whether equality is desirable?
9. What are the main social insurance programs in the United States?
10. What are the main public assistance programs in the United States?
11. Describe the welfare reforms of 1997. (Not in the Text)
(Reading: Miller, Pages 666 – 682 + Handouts)
If Time Permits: Environment
12. What is a "market failure"?
13. What is an "external cost" (or "negative externality")? What is an "external benefit" (or
"positive externality")? What is "marginal external cost" and "marginal external benefit"?
14. What is the difference between "marginal private cost" and "marginal social cost"?
What is the difference between "marginal private benefit" and "marginal social benefit"?
15. Explain how negative externalities and positive externalities prevent allocative efficiency.
16. What does "internalizing an externality" mean?
17. How would a "corrective tax" be used to internalize an externality? Show using the
appropriate graph. Do the same for a "corrective subsidy" being used to internalize a positive
externality.
18. Explain why social well-being is maximized if the marginal social benefit equals the
marginal social cost.
19. How does one calculate the "efficient level of pollution"? Show on the appropriate
graph. Why would it not be desirable to remove all pollutants from air or water? What are the
social benefits of pollution control? What are the social costs?
20. What is meant by "common property" ("commons")? What are resources that are
common property likely to be over-utilized?
21. What are "emission standards" ("command and control regulation")? What
disadvantages result from them? What are "emission charges"?
22. What is a "tradable waste discharge permit"? Describe new policies concerning these
permits. What advantages do emission charges and tradable waste discharge permits have over
command and control regulation?
(Reading: Miller, Pages 694 – 709 + Handouts)
Class #35: Discrimination
1. How is "discrimination" defined?
2. Why is it argued that competition will reduce discrimination in the labor market? Why
might this not occur?
3. In what way is discrimination similar to a cartel?
Page 10
4. What is meant by "occupational segregation"? How extensive is it?
5. What is the Index of Segregation?
6. Describe the "Overcrowding Model".
7. What are "comparable worth policies? What arguments can be made for and against them?
8. What federal anti-discrimination policies exist? Under laissez faire, how can these be
justified? How effective have these policies been?
(Reading: Pages 424-435 Plus Study Guide, Pages 195-196)
Class #38: The Business Firm
1. What is a "business firm"? What is meant by "vertical integration"?
2. What is a sole proprietorship? a partnership? a corporation?
3. What are the main characteristics of a corporation? What are its advantages and
disadvantages?
4. What is a "dividend"? What are "retained earnings"?
5. What determines whether firms buy inputs in the market or have them produced within the
firm? What are "transactions costs"?
6. What are the advantages of larger, vertically integrated firms? What are their disadvantages.
7. Define the following: "opportunism"; "bounded rationality"; "asset specificity";
"principal-agent problem".
8. What are "friendly" & "unfriendly" takeovers? What is a "leveraged buyout" and a "junk
bond"? Why do unfriendly takeovers occur?
(Reading: Pages 291-310 Plus Study Guide, Chapter 12)