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Review of Basic Concepts (Microeconomics)
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Review of Basic Concepts (Microeconomics)
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Review of Basic Concepts (Microeconomics)
good will record a rise in sale revenue whereas those selling complementary goods
will record a drop in sale revenue.
5. It is not possible to have all luxuries or all inferior goods in the economy.
6. The tax incidences (burden) shared by buyers and sellers depend on their respective
elasticity of demand and elasticity of supply. The lower the demand elasticity and
the greater the supply elasticity, the greater will be the consumer's burden.
7. Under uniform pricing with zero marginal cost, a wealth-maximizing seller will
charge a price at the level where the demand is unit elastic.
8. The higher the information cost to find substitutes, the lower the elasticity of a price
change.
Ch.6 Cost
1. Cost is the highest valued option forgone when making a choice.
2. Cost changes if and when the highest-valued alternative changes.
3. No choice, no cost.
4. Cost can be a flow or a stock concept.
5. A change in cost affects resource allocation.
6. Sunk (historical) cost is not a cost of current decision.
7. Money price is only a part of cost.
8. Full price (money price + non-pecuniary price) can represent cost.
9. The law of diminishing marginal returns states that in the short run, when more of
any variable factor is added to given amounts of fixed factors, the marginal product
resulting from each additional unit of the variable factor will diminishing eventually,
other things being constant.
10. Diminishing returns occurs when the marginal product begins to fall.
11. If diminishing marginal returns holds
(a) both 'superior' (most fertile) and 'inferior' (less fertile) land will be cultivated;
(b) the fixed factor can receive a rent
(c) MC curve will be upward sloping.
12. If diminishing returns does not hold
(a) only the 'most superior' land will be cultivated;
(b) the return to land(owners) is zero;
(c) MC will not be rising.
13. The relationship between MC and MP, AVC and AP, and AC and AP are as follows:
(a) MC = W / MP
(b) AVC = W / AP
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Review of Basic Concepts (Microeconomics)
(c) AC = AFC + W / AP
14. If the average variable costs are constant, a firm's short run supply curve is a
horizontal line.
15. Haste (a higher production rate) makes a higher cost.
16. The average cost of production will decrease when (a) the volume of output increases
and/or (b) the production rate of output decreases.
17. Rent is cost, but cost is not necessarily rent.
18. Cost is not necessarily rent in that a change in rent will not change supply or alter
behaviour in a certain dimension.
19. Profit is an unexpected (unanticipated) increase in wealth or income. Profit arises
only if it is unanticipated, thus the concept is useless in explaining human behaviour.
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Review of Basic Concepts (Microeconomics)
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Review of Basic Concepts (Microeconomics)
6. Pricing tactics other than the price discrimination include the all-or-nothing pricing,
two-part tariff, tie-in contract, …etc. Due to the presence of transaction costs,
different pricing arrangements are employed by price searchers to extract consumer’s
surplus such that the gains from production and exchange are maximized.
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Review of Basic Concepts (Microeconomics)
resource allocation.
2. Economic rent can be earned by any economic resource.
3. Economic rent is a cost of running a business if there is the option to sell the business
outright.
4. If the law of diminishing marginal returns does not hold, the price of land will be
zero and only 'superior' land will be cultivated.
5. A change in cost affects resource allocation but a change in rent does not.
6. Economic rent exists only in some particular dimensions. Given there are numerous
alternatives available, rent is cost.
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Review of Basic Concepts (Microeconomics)
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Review of Basic Concepts (Microeconomics)
14. Transaction costs are all non-production costs that exist only in a society
15. Transaction costs may or may not be information cost.
16. Transaction costs can exist even if there is no market transaction.
17. Transaction costs determine the choice of contracts and the choice of economic
systems (institutions).
18. When transaction costs are positive, the Pareto condition can still be achieved.
19. Transaction costs help us to explain why
(a) advertisements on goods are placed by sellers but advertisements on jobs are
placed by employers
(b) the airline companies accept more reservations for a flight than there are available
seats on the airplane
(c) reputable stores with big names often pay considerable lower rentals per square
foot
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Review of Basic Concepts (Microeconomics)
11. A rate-of-return control leads to a higher capital/labour ratio and thus a higher MP of
labour.
12. An effective wage control leads to a rise in marginal productivity of labour..
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Review of Basic Concepts (Microeconomics)
of externality.
2. Implications of the Coase theorem:
a. With the absence of private property rights, market transactions are impossible.
b. The divergence between private and social costs will disappear if there are well-
defined property rights and negligible transaction costs.
c. Government intervention is a solution to the social cost problem only when the
cost of government intervention is lower than the costs of market transaction
d. Under a private property rights system, resources allocation will always be the
same.
e. If property rights are enforceable at negligible transaction costs, the optimal level
of pollution may not be zero but is subject to private contracting.
3. The divergence between private and social costs does not imply inefficiency or
market failure. It is not market failure because the market is not allowed to function
well since property rights are absent.
4. If the marginal value of an unpaid effect is zero, there is no divergence between
private and social costs.
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