Define Productive Efficiency and Allocative Efficiency correct answers - Productive efficiency: is concerned with the optimal method of producing goods; producing goods at the lowest cost.
- Allocative efficiency is concerned with the optimal distribution of goods and services.
Briefly contrast...
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Define Productive Efficiency and Allocative Efficiency correct answers - Productive efficiency:
is concerned with the optimal method of producing goods; producing goods at the lowest cost.
- Allocative efficiency is concerned with the optimal distribution of goods and services.
Briefly contrast how firms in a perfectly competitive market will respond to long-run profits and
losses. Include an explanation of each response affects the price level. correct answers In the
long run, firms will respond to profits through a process of entry, where existing firms expand
output and new firms enter the market. Conversely, firms will react to losses in the long run
through a process of exit, in which existing firms reduce output or cease production altogether.
Through the process of entry in response to profits and exit in response to losses, the price level
in a perfectly competitive market will move toward the zero-profit point where the marginal cost
curve crosses the average cost curve, at the minimum of the average cost curve.
Briefly explain what would happen if parties imposing a negative externality on others had to
take the board social cost into account. correct answers If those parties imposing a negative
externality on others had to take the broader social cost of their behavior into account, they
would have an incentive to reduce the production of whatever is causing the negative externality.
Briefly explain how the zero profit point and the shutdown point for a firm operating in a
perfectly competitive market are each determined. correct answers For a firm operating in a
perfectly competitive market, the point where the marginal cost curve crosses the average cost
curve, at the minimum of the average cost curve, is called the zero profit point. The point where
that firm's marginal cost curve crosses the average variable cost curve is called the shutdown
point.
Provide examples of market-oriented environmental policies. correct answers Examples of
market-oriented environmental policies include pollution charges; marketable permits; and better
defined property rights.
Briefly explain what is meant by the term "externality" and how it occurs. correct answers An
externality, which is sometimes also called a spillover, can have a negative or a positive impact
on the third party. An externality occurs when an exchange between a buyer and seller has an
impact on a third party who is not part of the exchange.
Briefly discuss the purpose of antitrust laws, including a brief description of how they work.
Include a brief explanation of what is meant by the term "regulatory capture". correct answers
Antitrust laws seek to ensure active competition in markets, sometimes by preventing large firms
from forming through mergers and acquisitions, sometimes by regulating business practices that
might restrict competition, and sometimes by breaking up large firms into smaller competitors.
Regulatory capture occurs when the industries being regulated end up having a strong influence
over what regulations exist.
, What does the budget constraint framework suggest when income rises? correct answers When
income rises, households will demand a higher quantity of normal goods, but a lower quantity of
inferior goods.
Briefly explain why markets often have a difficult time producing public goods. correct answers
Markets often have a difficult time producing public goods because free riders will attempt to
use the public good without making a contribution to paying for it.
Briefly explain the relationship between market price and a firm's profitability in perfectly
competitive market. correct answers If the market price faced by a perfectly competitive firm is
above average cost at the profit-maximizing quantity of output, then the firm is making profits. If
the market price is below average cost at the profit-maximizing quantity of output, then the firm
is making losses. If the market price is at average cost, at the profit-maximizing level of output,
then the firm is making zero profits.
Briefly compare and contrast a corporate merger and a corporate acquisition. correct answers A
corporate merger involves two private firms joining together. An acquisition refers to one firm
buying another firm. In either case, two formerly independent firms become one firm.
Recent decades have seen a trend toward globalization, which means that buying and selling in
markets have crossed national borders to an increasing extent. As a result, firms and workers
from different countries are increasingly interconnected. Globalization has occurred for a number
of reasons. List three reasons and briefly describe their effect contributing toward globalization.
correct answers Improvements in shipping and air cargo have driven down transportation costs.
Innovations in computing and telecommunications have made it easier and cheaper to manage
long-distance economic connections of production and sales. Many valuable products and
services in the modern economy can take the form of information. These products and many
others can be transported over telephones and computer networks at ever-lower costs. Finally,
international agreements and treaties between countries have encouraged greater trade.
Briefly explain how command-and-control regulation works. correct answers Command-and-
control regulation sets specific limits for pollution emissions and/or specific pollution-control
technologies that must be used.
Identify and briefly describe two examples of government run insurance programs. correct
answers 1. Deposit insurance: Banks are required by law to pay a small fraction of their deposits
to the Federal Deposit Insurance Corporation, which goes into a fund that is used to repay
depositors their money if the bank should go bankrupt.
2. Retirement insurance: All workers pay a percentage of their income into Social Security and
into Medicare, which then provides income and health care benefits to the elderly.
Identify and briefly explain what market-orinted environmental policies make use of in order to
reduce pollution. correct answers Market-oriented environmental policies use taxes, markets, and
property rights so that those who impose negative externalities must face the social cost.
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