Download Review Sheet #3

Review Sheet
Review Sheet #3 (Note: the questions in red italics will not be on the exam)
Chapter 14
1. What are the key characteristics of a monopoly?
2. Be able to define the terms natural monopoly, patent, copyright, and government franchise. How can
control of a key input result in a market being monopolized?
3. Be able to show graphically the profit-maximizing level of output of a monopolist and the area
representing the monopolist's profits (you will need to draw demand, MR, MC, and ATC).
4. What is the shutdown rule for a monopolist in the short run (hint: it's the same as the shutdown rule for a
competitive firm)? Would you expect a monopolist to earn losses in the long run? Explain.
5. In what way does a monopolist impose a welfare loss on society? Do the economic profits of the
monopolist impose a welfare loss? Be able to explain your responses.
6. Graphically, what area represents the deadweight loss created by a monopolist? Define the term
deadweight loss.
7. What is the purpose of antitrust laws? What was the significance of the Sherman Act and the CellarKefauver Act? What role does the Federal Trade Commission play in mergers?
8. What is the argument for regulating natural monopolies?
Chapter 15
1. What is the law of one price? What is arbitrage, and why should it eliminate differences in prices? What
are transaction costs, and why would they reduce the potential for arbitrage?
2. What is price discrimination? What requirements must be met for price discrimination to occur? Be able
to give some examples of price discrimination.
3. What is perfect price discrimination?
4. How does price discrimination increase efficiency?
Chapter 16
1. What is the difference between an input (or factor) market and an output (or product) market? Be able to
explain who are the buyers and who are the sellers in each market. Is the market for heating oil an input
market, an output market, or potentially both? Explain.
2. What are the characteristics of a purely competitive labor market? Is the labor market for secretaries in
Youngstown an example of a purely competitive labor market? Why or why not? What about the labor
market for nurses? College faculty?
3. Be able to define the term derived demand.
4. Why are firms in a competitive labor market wage takers? What is a wage taker?
5. What does marginal revenue product measure? Why would we expect that MRP will begin to decline at
some point?
6. What is the profit-maximizing level of employment? If MRP < W, what should the firm do? Be able to
show the profit-maximizing level of employment graphically.
7. What factors will cause MRP to change? Be able to explain why each of those factors will alter MRP
and in which direction they will move MRP.
8. Why are individual firms in a competitive labor market wage takers?
9. Define the term reservation wage.
10 If the wage rate rises would an individual want to work more or fewer hours? Explain using the terms
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Review Sheet
10. If the wage rate rises, would an individual want to work more or fewer hours? Explain using the terms
income and substitution effect. Why can't we predict what will happen?
11. The total number of hours worked by all individuals in the economy is relatively insensitive to a change
in the wage rate. However, the supply curve to each an individual labor market is upward sloping.
How do we reconcile these two facts?
12. What factors will cause the labor supply curve to shift? Be able to explain why each of these factors will
shift the labor supply curve and in which direction the curve will move.
13. How does the long-run labor supply curve differ from the short-run labor supply curve? Is the long-run
curve more elastic or inelastic?
14. What is meant by the term compensating differentials? What are some examples of compensating
differentials?
15. What are some barriers to entry into a labor market? How do barriers to entry affect the wages in a
market?
16. Explain the difference between a craft union and industrial union. How do craft unions seek to increase
wages? Show graphically. How do industrial unions seek to increase wages? How does wage-setting by
industrial unions affect the wages of non-union workers?
17. What is the definition of labor market discrimination?
18. How does employer discrimination alter labor market outcomes? How will competition discourage
employer discrimination?
19. How will employee and customer discrimination alter labor market outcomes? Will competition
discourage discrimination in this case?
20. What is statistical discrimination? Will competition eliminate it?
Chapter 18
1. What has happened to the distribution of income over the last 30 years? What are some of the
explanations for the changes in the distribution of income?
2. Be able to discuss the study on income mobility described on page 571 of the text.
3. What is meant by defining poverty in an absolute sense versus defining poverty in a relative sense? How
is poverty defined in the United States?
4. Which groups have the highest rate of poverty? Why has the poverty rate of the elderly declined since
the 1950’s?
5. What are the primary differences between Aid to Families with Dependent Children (AFDC, the
original form of welfare) and Temporary Assistance to Needy Families (TANF)?
6. What has happened to the worldwide percentage of people living in poverty? What is responsible for the
decline?
7. What is the difference between a progressive tax and a regressive tax? Is the federal income tax
progressive? How could the lowest income quintile pay negative taxes?
Chapter 5
1. What is meant by the term externality? If the production of a good results in a negative externality, will
an efficient quantity of the good be produced? Why not? What can the government do to correct for a
negative externality? Be able to show graphically.
2. What is a public good (as the term is used by economists)? What are the two key characteristics of a
public good? Will a competitive market provide an efficient level of output of a public good? Explain.
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