Download Econ 2 Final Exam What Is Covered An Outline of Topics Covered In

What Is Covered
Econ 2 Final Exam
Where: Price Center Theatre
Date: Friday March 24
Time: 8:00-11:00 a.m.
• Final is cumulative
• Heavier emphasis on chapters (14&15)
not covered on earlier midterms
• Format: multiple choice and fill in the
blank/short answer questions
• Format similar to midterms
• Length roughly equal to the two previous
midterms combined
The Big Concepts
• Chapter 7
An Outline of Topics Covered
In Econ 2
• Chapter 9
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Definitions: total/marginal revenue/cost
Calculation and graphing of the above
Relationship of the above to elasticities
Distinction between a firm and an industry’s
demand/supply curves
– Perfect competition: firm ignores impact of quantity
sold on price because it is negligible
– Imperfect competition: firm considers impact of
quantity sold on price so it acts as if marginal revenue
curve is different from the demand curve
– Demand and supply Curves
– Determining consumer and producer surplus
– Efficiency in market occurs where sum of consumer
and producer surplus is maximized
– Impact of [price ceiling, quantity restriction, tax,
subsidy] on consumer and producer surplus and
concept of deadweight loss
– Influence on demand and supply elasticities on the
above
– How markets adjust to achieve an equilibrium normally
and in the case of constraints [e.g., price ceiling]
– Conditions need for markets to be efficient: buyers &
sellers well-informed, markets competitive, all relevant
benefits and costs included in supply/demand curves
– Forms of imperfect competition: monopoly, cartel,
duopoly, oligopoly, monopolistic competition
– Profit maximization at MR=MC
– Price, output, and surpluses under a monopoly
• Firm versus society perspective
• Comparison to pure competition
– Price discrimination
– Characteristics of a natural monopoly
– Characteristics of a cartel (OPEC as example)
– Sources of market power
– Government regulations against market power
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• Chapter 10
– Three characteristics of an economic game
• Players/agents
• Possible actions/strategies
• Payoffs
– Decision tree
– Credible threat
– Dominant strategy
– Nash equilibrium
– Repeated game
– Prisoner’s dilemma game
– Ultimatum game
• Characteristics of a commons
• Commons as an externality
• Private versus public/societal
maximization in a commons
– Why is it called the “tragedy of the commons”
• Global examples of commons
• Chapter 11
– Definition of positive and negative externalities
– Implications of a divergence between private
and social benefits (or cost)
• Price, quantity, surpluses
– Correcting externalities: tax/subsidy
– Correcting externalities: regulation in the form
of (individual firm) quantity restrictions
– Correcting externalities: marketable permits
and an aggregate quantity restriction
– Coase theorem: definition, implications, limits
• San Diego Airport
– As the number of projected passengers
increases what is the scare resource?
• Slots (takeoff and landing) in particular time periods
– Nature of the problem
• Slots essentially have a zero price
– Solution: make slots costly and slots at more
desirable times more costly
• Congestion (peak time) pricing
• Auction off particular slots (marketable permits)
• Chapter 12
– How is information valued?
• Maximum willingness to pay for it (buy)
• Minimum willingness to accept compensation (sell)
– Examples of information providers
• Stock markets
• Real estate brokers
• Ebay
– Information and the free rider problem
• Calculation of expected value
• Risk: adverse, neutral, loving
• Implication of asymmetric information
– Lemons problem
– Moral hazard
– Adverse Selection
• Signaling
– Advertising
– Education
– Warranties
• Insurance markets with asymmetric information
– Adverse selection, moral hazard, statistical discrimination
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• Chapter 13
– Labor supply as a derived demand
• Marginal (physical) product of labor
• Value of marginal product of labor=labor demand
• Employment of labor by profit maximizing firm
– VMP=wage
– Special case of MB(=VMP) = MC(=wage)
– Diminishing returns to labor
– Difference between firm, industry, economy
wide labor supply
– Substitution and income effects with respect
to the above
• Income distribution
– Needed corrections
• Taxes paid (particularly important for top)
• Transfers payments (particularly important for bottom)
• Top 20% get 46% of income; bottom 20% gets 5%
– Importance of college-high school grade wage gap in
explaining income inequality
– Importance of falling (real) minimum wage in explaining
income inequality
– Implications of increasing minimum wage
– Implications of means testing transfer payments
– Desirable properties of a negative income tax
– Nature of the efficiency versus equity tradeoff
– Generic difficulties in doing a benefit-cost analysis
– Approaches to measuring benefits and costs
– Determining optimal level of safety
• Value to workers
• Cost of technological solution
• Why is it not desirable to eliminate all risks
– Why government intervention is sometimes (not) desirable
in mandating safety levels
– Value of a statistical life
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Definition
How can it be determined
Typical range of values used
Types of government decisions used in
• Wage determination
– All jobs alike, all people alike, all interests alike
• Wages same for all people
– Differences in human capital
– Compensating wage differentials
• Restrictions on labor markets
– Minimum wages
– Labor unions
• Discrimination in labor markets
– Need to control for human capital and working
condition preferences (e.g., number of hours)
– Why “pure” discrimination is not profit maximizing
– Other possible reasons for discrimination
• Chapter 14
– Definitions: consumer sovereignty, Pareto
improvement, potential Pareto improvement,
benefit-cost ratio, net benefits
– Difference between voting and potential
Pareto criteria
– Benefit-cost analysis and net present value
formula
• Role of the discount rate
– Maximizing net present value versus
benefit/cost ratio > 1
• Implications of pollution as a negative
externality
• Why efficient pollution control requires
setting marginal abatement cost to be the
same for all firms
– Why standard regulations fail at this
– Why a pollution tax succeed
– Why marketable pollution permits succeed
• Auctioning off pollution permits
– Crime as an expected value calculation/ways in which the
cost of criminal activity can be increases
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• Health
– List of market imperfections
• Growth in health care cost in the U.S. over time
fraction of GDP and possible reasons
• Organ transplants as an example of market
failure
• Why health insurance causes problems with the
usual benefit-cost calculation people make
before making purchases
• Importance of technological change (particularly
cost of hospital stays) in explaining rise in health
care spending
• Chapter 15
– Definition of a (pure) public good
• Non-rival (no congestion externality)
• Non-excludable (cannot keep from using good)
– Classic examples (air quality, defense)
– Commons, collective, and private goods
– Value/demand for good
• Private (horizontal summation WTP)
• Public (vertical summation of WTP)
• Show graphically
• U.S. system of health insurance
– Private
• Employer provided
• Individually purchased
– Public
• Elderly
• Poor
• Veterans
– Uninsured
• Why are employers involved rather than the
government as is the case in most countries?
• Why public goods are underprovided
• Ways to get them provided
– Creating excludability (collective goods but still under
provision)
– Bundling/by-products (e.g., TV ads)
• Ways to measure WTP
• Fundamental Problem With Taxes
– Creates distortionary incentives
• Matching tax incidence to WTP
– Income and use
• Tax incidence as function of income
– Regressive
– Proportional
– Progressive
– Optimal level of provision for a public good
Types of Taxes
• Objectives of a good tax system
– Raise sufficient revenue for desired public goods
– Minimize side (adverse) effects of taxes
• Raising taxes
– Taxing “bads”
– Taxing goods with an inelastic demands
– Problem: insufficient revenue from first two
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Head tax
Income tax
Wage tax
Consumption tax
User fees
Transactions tax
Property tax
Profit tax
Value added tax
Externality taxes
Import/export tariff
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Political Economy
• Pork barrel legislation
• Logrolling
• Rent Seeking
THE END
• Good luck!
• I will have office hours Tuesday 21st from
2pm-3pm
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