second midterm topics with answers

second midterm topics with answers - Second Midterm Topics...

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Second Midterm Topics I. Market Failures a. Externalities i. Negative and Positive Externalities ii. Coase Theorem- under certain conditions private parties can arrive at efficient solutions to externalities without government involvement iii. iv. How can taxes fix distortions WHEN there is an externality? Set tax=MDC then MC=MPC + tax=MPC+MDC=MSC b. Public Goods i. Vertical summation of Willingness To Pay curves to get demand for a Public good ii. Know how we define Public Good! Non-rival- your using doesn’t impair anyone else’s & non-excludable- once built cannot prevent people from using c. Imperfect Information i. Moral Hazard- Ex. If you have insurance you are more willing to skydive! Explain that to yourself- less responsible if you do something bad because insurance contractually required to help you ii. Adverse Selection- Ex. If I know I am going to get Cancer in 5 years (say cause I know every woman in my family has dies of breast cancer by age 35) I am definitely going to want to buy insurance. What does that do to the market for insurance? Healthy people pay too much, sick pay too little d. Imperfect Competition i. Monopoly- 1. MR=MC that where we produce, go up to the demand curve. 2. Know what the DWL is!!!!!!! 3. Know Short run and long run profits, both can be positive 4. Natural Monopolies- economies of scale so large that a single firm producing is most efficient ii. Monopolistic Competition 1. MR=MC 2. Know Short run can be greater than 0 and long run profits=0 3. Draw ATC curve! Is it efficient like PC????? No, produces to where MR=MC, PC produces more (price takers) MC= demand price iii. Oligopoly 1. Strategic behavior- 2. Dominant Strategy- strategy that is best no matter what competition does 3. Nash Equilibrium- result of all players playing their best given what their competitors are doing II. Taxes a. Progressive- rich pay higher percent of income, Regressive- poor pay higher percent of income, Proportional- everyone pays same percent of income
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b. Marginal rate- tax on next dollar earned vs Average rate- average tax on all income earned. Can you calculate it? Yes, I can. c. Why is taxing consumers and producers the same???? Draw the graphs? d.
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second midterm topics with answers - Second Midterm Topics...

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