Final Exam Review Sheet - Principles of Microeconomics | ECON 201, Exams of Microeconomics

Download Final Exam Review Sheet - Principles of Microeconomics | ECON 201 and more Exams Microeconomics in PDF only on Docsity! Economics 201 Fall 2010 FINAL EXAM REVIEW Main Concepts and Topics covered this semester you should still remember:  principle of opportunity cost, the marginal principle, and the principle of diminishing (marginal) returns;  the distinction between a change in demand (or supply) and a change in quantity demanded (or supplied);  price elasticity of demand;  relationships between the cost variables;  basics of profit-maximization;  distinguishing features of the four different types of markets  the basic game theory model (prisoner's dilemma). Role of Government: Our first topic after the 3rd exam was the role of government. Look over your notes for a definition of the concept of market failure (see pp.60-61 in the book). You can also find material on this topic on Blackboard: go to Course Documents  Notes folder  find item titled ‘market failure’. Aside from providing a stable institutional environment, necessary for markets to function effectively, remedying market failures is the main rationale for government involvement in markets. Two examples of market failure are public goods and externalities. For both, be able to explain why market failure occurs and how a better outcome might be achieved. A related issue in chapter 6 is tax shifting. Tax shifting refers to the fact that the burden (incidence) of a tax is rarely borne entirely by the producer who initially pays it. Be able to graph and explain this issue recognizing that elasticity is the key determinant of how much of a tax is shifted forward or backward (see pp.140-44). Public choice economics tries to explain how governments actually operate. Be familiar with the three different (median voter, self-interest, and special-interest) models presented in ch.15. Economics of Pollution: The theme is to use economic concepts to explain both the causes of pollution and possible ways to reduce it. Know the distinction between social (instead of social I sometimes used the term ‘full’) cost and private cost, how this relates to the concept of externalities, and the market effects of a pollution tax. What is the concept of an optimal level of pollution (see the first part of chapter 16)? I used this application of the marginal principle to explain how the EPA evaluates site cleanups; the example I used in class is posted on blackboard in the Notes folder. Another policy option is to use a system of marketable pollution permits. Why would it be advantageous for firms to trade permits and how could you determine the equilibrium price? Regarding marketable permits, be familiar with problems like the ones we did in assignment #6. The assignment and key are on blackboard. Imperfect Information: It is important to understand the initial example in chapter 14 of the market for used cars. The assumption for this topic is asymmetric information (instead of the normal economic assumption that both buyer and seller have complete (perfect) information). Notice how there are supply curves for different qualities, that demand is referred to as willingness to pay, how this is related to expectations, and how the market reaches an equilibrium. Note the conditions necessary for a market to achieve equilibrium with a mix of qualities (e.g., a thin market). We did a problem in assignment #7 that is a good example. Aside from the used-car example, also be familiar with the insurance examples. These models explain the real world problem of adverse selection. What does moral hazard mean? Labor Markets:  Review what determines the supply of labor for an individual (labor-leisure tradeoff, opportunity cost) and the supply of labor for a market (changes in hours per worker, occupational choice, and migration).  Notice that the book (see p.368-69) makes the distinction between the short-run demand for labor, based on what firms’ estimate to be the marginal revenue product of additional workers, and the long-run demand based on the input-substitution effect and the output effect (the latter effect is just the factor market   product market linkages discussed earlier this semester and more recently in the ‘hiring pilots’ example discussed in class) .  How would a perfectly competitive or monopsonistic buyer of labor decide on the optimal quantity to hire? Know how marginal revenue product and marginal (factor) labor cost are determined. (Be able to do problems like those on the worksheet passed out in class or problems similar to those in the 7th assignment.)  How might unions affect labor income?  The concept of imperfect information can be applied to hiring labor. Look over the examples discussed in the text (pp.401-03) related to the chapter 18 topic of "imperfect information and efficiency wages;" an example discussed in class was problem 3.7 (p.405).  Be familiar with the description of labor markets related to section 17.4 titled “Explaining Differences in Wages and Income.” Connect the discussion of discrimination and the discussion of signaling effects (pp. 375-79) with the discussion of labor markets in the handout titled “A Different View of Labor Markets”.  Be familiar with the issue of the possible effects of raising the minimum wage.  The concept of economic rent was discussed in class but is not in the book. You can find a brief review of this concept on Blackboard: go to Course Documents  “Notes” folder  find the item titled “Economic Rent.”  Be able to explain why the distribution of income in the US has become more unequal recently (pp. 379-82); this topic is continued in ch.19 (pp.423-24). We will skip the material in section 17.6 on poverty.