ECO 105
Study Guide
for Exam 2
International Trade
This is an application topic. Economists use the concepts of comparative advantage
and consumer and producer surplus to evaluate the prospective gains from trade.
- Given price data on two goods from two economies, how can we determine which
country has a comparative advantage in which good?
- In terms of consumer and producer surplus, how does free trade affect total
surplus for the cases of
- How (in a demand/supply diagram) are imports affected by the imposition
of a tariff or a quota?
- What are the effects on consumer, producer, and total surpluses resulting
from the imposition of a tariff or a quota?
Elasticity
This is one of the most important concepts of this part of
the course - perhaps the most important concept. You can
expect to see nine or ten questions on the exam that make some
use of elasticity.
- Define price elasticity of demand and price elasticity of supply.
- What is the formula for price elasticity of demand at a particular point?
- How can you use data on elasticity to determine the maximum total revenue
that can be earned by selling a product?
- Why is total revenue maximized when the price elasticity of demand
is 1?
- What factors determine the price elasticity of demand?
- How do price elasticities of demand and supply determine whether buyers
or sellers pay most (or all) of a sales tax (tax incidence)?
- Who pays most (or is it all?) of a sales tax when demand is relatively
elastic and supply is relatively inelastic?
- Who pays most (or is it all?) of a sales tax when demand is relatively
inelastic and supply is relatively elastic?
- How does price elasticity of demand affect the outcomes of government policies
such as agricultural set-aside programs or drug interdiction programs?
Costs of Production
Here begins the analysis of firm behavior. You need to know
some new terminology and to be able to calculate the value of
some new variables. Definitions you will need to know include
- total revenue
- total cost (as opportunity cost)
- profit
- production function
- diminishing marginal productivity
- fixed cost
- variable cost
- average fixed cost (AFC)
- average variable cost (AVC)
- average total cost (ATC)
- marginal cost (MC).
- efficient scale of output.
Given the appropriate data, how do you calculate
Having calculated these variables, you should be able to plot
them on a diagram or read the data from a diagram.
- Why, in a diagram showing cost curves, does marginal cost cut both the ATC
and the AVC curves at their minimum cost levels?
Profit Maximization
Economists assume that the managers of firms attempt to maximize
profits.
- What is the formula for profit maximization? How is it used?
- Why would a firm in a competitive market not be likely to survive in the
long run if its managers did not attempt to maximize profits?
Market Conditions and Elasticity of Demand
Price-Taking Firms
You should be able to answer the following questions:
- What does a price-taking firm's demand curve look like?
- What does a price-taking firm's marginal revenue curve look like?
- How is the profit-maximizing level of output for a price-taking firm determined?
- How do you derive a price-taking firm's short-run and long-run supply curves?
- What are the shut-down and exit prices for price-taking firms?
- What is the efficient scale of operation for a price-taking firm?
- How is the market supply curve derived in a price-taking market?
- What is the dynamic reaction of a competitive market to the existence of
positive economic profits?
- What is the dynamic reaction of a competitive market to the existence of
economic losses?
- What is the long-run equilibrium position of a price-taking firm?
- What is productive efficiency?
- What is allocative efficiency?
Price-Searching Firms
We'll rely on Prof.
Carlson's study guide for this section. Check out Chapter 8.
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