Microeconomics Principles and Market Equilibrium
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Taxation and Deadweight Loss
A given tax will cause a smaller deadweight loss if demand and supply are: Inelastic (the loss is bigger if they are elastic).
Deadweight loss occurs in a taxed market because: The tax causes the market to trade less than the optimal units, so all the surplus of the units not traded is lost.
If a tax is imposed on a good and the incidence falls more heavily on the sellers than the buyers: This is because demand is more elastic than supply for that good.
Production and Diminishing Returns
Diminishing Marginal Product of Labor (MPL) states that: Every additional worker contributes a smaller increase in production than the previously hired worker.
At low levels of production, ATC decreases because: Fixed cost is spread. Eventually, the ATC grows because of diminishing returns.
The supply curve of a firm in perfect competition: The MC curve lies above the minimum AVC.
Economic Theory and Methodology
Empirical vs. Theoretical Economics: Theoretical economics builds models; empirical economics tests them.
Consumer Theory and Utility Maximization
How is marginal utility defined? The change in utility from consuming one additional unit of a given good.
How do we graphically represent the utility-maximizing consumption basket? The point of tangency between an indifference curve and the total budget constraint.
How does the marginal rate of substitution (MRS) change as you move up along a non-linear indifference curve? It increases.
How does the MRS change as you move down? It declines.
The slope of the budget constraint curve will change whenever: The price of any of the two goods changes.
Market Dynamics and Equilibrium
If the price in a market happens to be below equilibrium: There will be a shortage in the market, and the price will tend to rise. If the price is above equilibrium, there is a surplus and the price will drop.
When a binding price floor is imposed on a market: An excess surplus is created.
Suppose there is a fall in the price of muffins: What is expected to happen with the equilibrium price and the quantity sold in the market of donuts? Both the price and quantity will fall. (If the price rises: Both the price and quantity will rise).
Suppose a scientific study just published demonstrates that eating... Both the equilibrium quantity and price will increase.
Total surplus in a market is maximized when: The market is in equilibrium.
What effects will an increase in price have on total revenue if demand is elastic? Total revenue will decrease due to the price effects.