All Flashcards
What is the key difference in how per-unit and lump-sum taxes affect a firm's costs?
Per-unit taxes affect marginal costs, while lump-sum taxes affect fixed costs.
Compare the socially optimal and fair-return pricing strategies for monopolies.
Socially optimal pricing leads to allocative efficiency (P=MC) but requires subsidies, while fair-return pricing allows the firm to break even (P=ATC) but results in some deadweight loss.
Compare the effects of per-unit taxes and subsidies on market equilibrium.
Per-unit taxes increase prices and decrease quantity, while subsidies decrease prices and increase quantity.
What is the difference between allocative and productive efficiency?
Allocative efficiency occurs when P=MC, while productive efficiency occurs when production is at the minimum of the ATC curve.
Compare the short-run and long-run effects of a lump-sum tax on a perfectly competitive firm.
In the short run, a lump-sum tax reduces profits. In the long run, firms may exit the industry, decreasing supply and increasing the market price until firms earn normal profits.
Compare the effects of a price ceiling and a price floor.
A price ceiling set below the equilibrium price creates a shortage, while a price floor set above the equilibrium price creates a surplus.
Compare the goals of government intervention in perfectly competitive markets versus monopolies.
In perfectly competitive markets, intervention aims to correct market failures. In monopolies, intervention aims to reduce deadweight loss and increase social welfare.
Compare the effects of a per-unit tax on a monopoly versus a perfectly competitive firm.
For both, it increases the price and reduces quantity. However, a monopoly may absorb some of the tax burden, while in perfect competition, the tax burden is shared between consumers and producers.
What are the differences in the impact of a lump-sum tax on a firm's MC and ATC?
A lump-sum tax does not impact MC, but it shifts the ATC curve upward.
Compare the effects of a per-unit subsidy and a lump-sum subsidy on a firm's output.
A per-unit subsidy directly incentivizes increased production by lowering MC, while a lump-sum subsidy provides a general cost reduction that may not directly affect output.
In a monopoly graph, where is the profit-maximizing quantity located?
Where marginal revenue (MR) equals marginal cost (MC).
In a monopoly graph, where is the socially optimal quantity located?
Where price (P) equals marginal cost (MC).
How does a per-unit tax affect the MC and ATC curves on a graph?
Both the MC and ATC curves shift upward.
How does a lump-sum tax affect the MC and ATC curves on a graph?
The ATC curve shifts upward, but the MC curve remains unchanged.
On a monopoly graph, how is deadweight loss represented?
The area between the demand curve and the marginal cost curve, from the monopoly's output to the socially optimal output.
On a cost curve graph, how is a per-unit subsidy shown?
A downward shift of the MC and ATC curves.
On a cost curve graph, how is a lump-sum subsidy shown?
A downward shift of the ATC curve only.
In a monopoly graph with a fair-return price ceiling, where is the new quantity produced?
At the intersection of the demand curve and the average total cost curve.
What does the area between the demand curve and MC curve represent?
Total surplus (consumer surplus + producer surplus).
How does a price ceiling affect consumer and producer surplus in a monopoly graph?
A price ceiling can increase consumer surplus and decrease producer surplus, but it depends on the specific level of the price ceiling.
What is a per-unit tax?
A tax levied on each unit of a good or service produced.
What is a lump-sum tax?
A fixed tax amount, regardless of the quantity produced.
Define marginal cost (MC).
The change in total cost resulting from producing one more unit of a good or service.
Define average total cost (ATC).
Total cost divided by the quantity of output.
Define average fixed cost (AFC).
Fixed cost divided by the quantity of output.
What is the socially optimal point?
The point where price equals marginal cost (P=MC), leading to allocative efficiency.
What is the fair-return point?
The point where price equals average total cost (P=ATC), allowing the firm to break even.
Define deadweight loss.
The loss of economic efficiency that occurs when the equilibrium for a good or service is not Pareto optimal.
What is a price ceiling?
A government-imposed limit on how high a price can be charged for a product.
What is a natural monopoly?
A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.