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 An Outline of Topics Covered In Econ 2 The Big Concepts Chapter 7 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 Chapter 9 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 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 1
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 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 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 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 2
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 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 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 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 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 Definition How can it be determined Typical range of values used Types of government decisions used in Crime as an expected value calculation/ways in which the cost of criminal activity can be increases 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 3
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 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? 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 Optimal level of provision for a public good 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 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 Head tax Income tax Wage tax Consumption tax User fees Transactions tax Property tax Profit tax Value added tax Externality taxes Import/export tariff Types of Taxes 4
Political Economy Pork barrel legislation Logrolling Rent Seeking THE END Good luck! I will have office hours Tuesday 21 st from 2pm-3pm 5