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1) Regarding utility maximization, what is meant by the application of the “Equimarginal

Rule” and its relevance to the Marginal Principle? In your analysis, discuss the concepts
of utility (total & marginal), budget constraints and affordability. What is the
mathematical formula used in describing the Equimarginal rule?
 Utility maximization is when consumers decide to allocate their money incomes, so that
the last dollar spent on each product purchased yields the same amount of extra marginal
utility.
 Marginal principle is the increase in the level of an activity as long as the marginal
benefit exceeds the marginal cost. In relations to marginal principle, the “equimarginal
rule” is the principle that explains the behavior of a consumer in distributing his limited
income amongst various goods and services. It also highlights how he would allocate this
income and spends it between the vast options of goods to reach maximum satisfaction.
 The formula can be used as follows: Mux / Px = MUy / Py
o Where x and y are two goods
 Total Utility is the total satisfaction received from consuming a given total quantity of a
good or service. Marginal Utility is the satisfaction gained from consuming another
quantity of a good or service. The marginal utility of a good or service is expressed as an
increase in utility that one gets from consuming an additional unit of that good. A budget
constraint represents all the combinations of goods and services that a consumer may
purchase given current prices within his or her given income.
Refer to Chapter 21, pages 426 - 447. Review Figures 1 – 6, especially “FYI”, page 433;
Concepts to know…. Consumer preferences; Bowed Consumer indifferences curves;
Consumers’ budget line constraint; Marginal rate of substitution, Perfect substitutes &
Complements & Consumer optimum…Review Section 21-3b, Normal versus Inferior goods
/ services previously discussed in class, Figure 7 & 8, pages 434 – 435.
ON FINAL:
* Show / illustrate how a budget constraint (disposable income) represents the choices a
consumer can afford.

* Learn the concept of "indifference curves" and how they can be used to represent a
consumer's preferences.
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 Indifference curve: a curve (the axes of which represent quantities of two commodities)
that shows the consumption bundles that give the consumer the same level of satisfaction

budget constraint

optimum

indifference curve

* Analyze how a consumer's optimal choices are determined (income / budget constraint +
perceived utility).

* See how a consumer responds to changes in income and changes in prices.

 If an income increases, consumers will spend more. This is indicated by a shift to the
right. If the income decreases, consumers will spend less. This is indicated by a shift to
the left.
 If the price increases and a consumer is no longer able to buy the product, the slope shifts
inward. If the price decreases and a consumer is able to buy more of the product, the
slope shifts outward.

* Decompose the impact of a price change into an income effect and a substitution effect.
 The substitution effect occurs when a price changes and consumers have an incentive
to consume less of the good with a relatively higher price and more of the good with a
relatively lower price. Substitution effect: the change in consumption that results when
a price change moves the consumer along a given indifference curve to a point with a
new marginal rate of substitution (movement along the indifference curve). Income
effect: the change in consumption that results when a price change moves the consumer
to a higher or lower indifference curve (shifts the indifference curve). The income
effect is that a higher price means, in effect, the buying power of income has been
reduced (even though actual income has not changed), which leads to buying less of the
good (when the good is normal). If the price of one product increases, the consumer is
likely to consume less of that product.
 Normal good: a good for which an increase in income raises the quantity demanded
 Inferior good: a good for which an increase in income decreases the quantity demanded
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* Apply the theory of consumer choice to three (3) questions about household behavior.

2) What are the salient characteristics of consumer choice theory? Refer to BB / Assignment
notes.
 Consumer theory explains why demand curves can potentially slope upwards, why higher
wages could increase or decrease the quantity of labor supplied, and why higher rates of
interest could increase or decrease savings.
 Consumer choice theory: the tradeoffs that people face as consumers. These choices are
based on the marginal utility: additional enjoyment received from an additional unit of
the good (select purchases that maximize total utility- which is the satisfaction that
someone gained from consuming a good), consumer preference: what the consumer
wants, price (budget constraints which is the limit on the consumption bundles that the
consumer can afford with his or her income).

3) Describe both “Law of Demand” & “Law of Supply” regarding price changes relative to the
substitution and income effect? In your response, describe how a simultaneous increase in the
gasoline tax and a decrease in the income tax affect gasoline consumption?
 Law of demand states that all other factors being equal, as the price of a good or service
increases, consumer demand for the good or service will decrease and vice versa.
o Law of demand: Inverse relationship between price and quantity demanded

(movement along the demand curve is caused by price only)

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Shifts in the Demand Curve are due to change in demand

(change in tastes and preferences, expectations, consumer income, prices of
related goods, number of consumers)
 Law of supply states that all other factors being equal, an increase in price results in an
increase of quantity supplied.
o Law of supply: Positive or direct relationship between price and quantity supplied

(movement along the supply curve is caused by change in price)

Shifts in the Supply Curve are due to change in supply

(change in input prices, technology, expectations, number of sellers)
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Refer to Chapter 3 & 4, Figures 10, 11 and 12 including…. Table 4, highlighting what
happens to Price & Quantity when market supply and market demand curves
shifts……Pages 81 – 83.
3) What is the relationship (if any) between production technology (i.e. productivity) and
cost? In your analysis define the various cost structures (short-run & long-run); Describe
the difference between accounting versus economic profit assessing in detail the
different cost definitions (explicit versus implicit). How does the concept of diminishing
returns affect the total product curve and the shape / direction of marginal cost?

 With improved production technology this can allow for an increase in productivity. As
productivity increases, the cost on a per unit basis decreases (Marginal productivity
increases, marginal cost decreases).
 Accounting costs (do not include opportunity costs- break even for accounting costs
would still be considered an economic loss) economic costs (zero economic profit/ break-
even for economic costs- means covering fixed and variable costs, and opportunity costs)

Refer to Chapter 13, pages 248 - 259 Figure 1, pages 262 – 263.
5) What is (if any) the relationship between marginal cost and average cost? What happens in the
“long-run” regarding production and cost? In your analysis, describe such concepts as:
economies of scale; minimum efficient scale and diseconomies of scale. How do indivisible
inputs affect production costs?
 Marginal cost is the change in total cost when another unit is produced, while average
cost is the total cost divided by the number of goods produced.
 Marginal costs = change in total costs / change in output
 Marginal costs go down as the marginal productivity goes up
 In the long-run, market supply curves (production) are typically more elastic in the long
run than in the short run because in the long run the price of a good (average total cost)
equals the marginal cost of making that good.
 Economies of scale: the property whereby long-run average total cost falls as the quantity
of output increases
 Minimum efficient scale: the quantity of output that minimizes average total cost
 Diseconomies of scale: the property whereby long-run average total cost rises as the
quantity of output increases
 Indivisible inputs which cannot be scaled down to produce a small quantity of output.
 when the production process requires the use of indivisible input, the average cost of
production increases as output decreases. This is because the cost of the indivisible input
will be spread over a smaller quantity output. So, to gain maximum returns, the output
quantity must be regulated such that the quantity of indivisible input will more or less all
be used up to manufacture that amount of output.
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Refer to Chapter 13, Section 13-2a, Table 1, 2, Figures 2 – 3,7, 4, pages 251 - 261; Also
review Section 13-3d, pages 258 - 260, Figures 5 & 6.
6) What is the firm’s output decision as it relates to the shut-down price, break-even and profit
maximization? How do entry costs affect the number of firms in a market? Does the
consideration of sunk-cost (fixed costs) enter the business decision as it relates to shut-down
price considerations?
 A firm will shut down temporarily if the market price is less than average variable cost.
 Break-even is when the price equals the marginal cost
 Entry costs: barriers (ex sunk costs, brand loyalty) limiting market control and how many
companies can join the market
 If the firm shuts down the firm has to pay the fixed cost. The firm would have to
determine if it would have a smaller or greater loss if it were to stay in the market than if
it were to shut down and have to pay the fixed cost.
Refer to Chapter 14, and Figure 7.2.
7) Define economies of scale and explain why they might arise. Define diseconomies of scale,
and again, explain why they might arise? What is constant returns to scale?
 Economies of scale is a proportionate saving in costs gained by an increased level of
production. They might arise because of the inverse relationship between the quantity
produced and per-unit fixed costs. The greater number of goods produced, the lower
fixed cost.
 Diseconomies of scale refers to the situation when economies of scale do not function
anymore for a firm. Diseconomies arise when business grow and the cost per unit
increases too much. Output rises and the cost per unit falls.
 Constant returns to scale refers to the behavior of the rate of increase in output /
production in relation to the associated increase in inputs / factors of production. Refers
to a production process where an increase in the number of units produced causes no
change in the average cost of each unit. The returns to scale is constant when output
increases and the inputs are proportional in change.

Refer to Chapter 13, pages 259 – 262, Section 13.4

> What economic lessons (if any) can we learn from Adam Smith’s “An Inquiry into the Nation
and Causes of the Wealth of Nations”, 1776 regarding his description of the operations of a Pin
factory??
 Specialization among workers can result in higher economies of scale (the property
whereby long-run average total cost falls as the quantity of output increases). Due to
specialization, a larger factory could achieve higher output per worker and lower average
cost per unit than a small factory. Specialization allows for different countries/
companies/ individuals to focus on what they do well and allows them to network with
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other people who also focus on what they do well. In conclusion, we can determine that
everyone in society, is getting the best product they can.
Refer to pages 261 – 262, “Fyi”.
> Relate economies of scale to a monopoly market structure? Do the principles of Comparative
Advantage & Trade Liberalization intersect here?
 A monopoly will occur in economies of scale because if there is a single seller in the
market it leads to economics of scale because big scale production will lower the cost per
unit for the seller.
 Comparative advantage: when one company can produce a product more efficiently than
another
 Trade liberalization: the reduction of barriers; allows for the free exchange goods
between countries
 Trade liberalization and comparative advantage do intersect because trade liberalization
allows for the free exchange of goods, the free exchange of goods available increases
competition so companies will try to gain a comparative advantage (means one company
to produce a good more efficiently than other) by producing a good with greater
efficiency than other companies.
Refer to Sections 13-4, and Figure 6 (“Average Total Cost in the Short Run & Long Run”);
Chapters 13 and 15.
8) Highlight & discuss the various market structures illustrated in class as it relates to: price,
marginal revenue, total revenue, price elasticity of demand; market power (p / mc), marginal
cost, allocation / distribution of consumer versus producer surplus, product characteristics,
market entry / access / departure, patents, price discrimination, profit maximization (short run
versus long run), regulatory oversight / government intervention and deadweight loss (loss of
consumer welfare). Any other characteristics to consider comparing the various market structures
discussed in class?
 Perfectly competitive: the goods offered for sale are all exactly the same. The buyers and
sellers are so numerous that no single buyer or seller has any influence over the market
place (no market power to influence price, so goods are market price), equal distribution
of producer and consumer surplus, free entry into the market and free exit from the
market
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 Monopolistic competition: With monopolistic competition, there is some ability for

producers to be price makers rather than price takers and there is more ability to
differentiate the company
 Oligopoly: In an oligopoly, there are fewer producers than in a perfectly competitive
market where these few firms tend to dominate the market and there is more ability for
producers to be price makers
 Duopoly: there are two companies that own most or all of the market and have a
significant amount of power in determining prices
 Monopoly: only one producer, much more difficult to enter and exit the industry. A
monopoly does not have any differentiation and the single producer can entirely
determine the price especially if the product or service is highly demanded by consumers
or is inelastic which may not be beneficial for consumers (therefore governments may
intervene with antitrust laws and when they feel that the price is not fair for consumers
with price ceilings), large producer surplus

Deadweight loss: fall in total surplus that results from a market distortion, such as a tax.
Occurs when the equilibrium of a good or service is not achieved
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Review Chapters 14 – 17, Be specific and be able to provide graphical & numerical
analysis. Refer to class discussion & BB notes.
> What other factors should be discussed in describing the various market structures relative to
the production process (K / L ratios), price, cost and product branding, education & innovation?
Refer to class discussions & BB notes….
> In your study of the various market structures, what can we learn (if any) from the failed
attempt of Anthem BC / BS efforts to purchase CIGNA healthcare and Aetna to purchase
Humana where the federal government successfully pursued anti-trust actions. What were the
concerns raised by federal regulators concerning these mergers as it relates to market
concentration, market power, competition and consumer / producer surplus?
Refer to Chapters 15 & 17 summarizing effects of market concentration, with particular
attention to: section 17-3, pages 349 – 353.
9) What is a natural monopoly? What happens to price, output and consumer welfare when price
controls & regulation are adopted as it relates to average-cost pricing policy? Hint compare price
& output considerations between an “unregulated” versus “regulated” monopoly.
 Natural monopoly: a type of monopoly that arises because a single firm can supply a
good or service to an entire market at a lower cost than could two or more firms
Refer to Chapter 15, attention to Figures 1 - 5 and the “Welfare Cost of Monopolies”,
Section 15.3, Figure 8 (“The Inefficiency of a Monopoly”, and Table 2, “Comparing
Competition versus a Monopoly: A summary Comparison”; Refer to page 312.
10) Define the different types of goods (public versus private) relative to rivalry, common
resources, club goods, excludability and the free-rider principle? What can be suggested
(proposed) to overcome the “free-rider problem”? What is the importance of private property
rights as it relates to the mitigation of market failure?
 Public goods: goods that are neither excludable (a person cannot be prevented from using
it) nor rival in consumption (one person’s use does not diminish other people’s use)
 Private goods: goods that are both excludable (a person can be prevented from using it)
and rival in consumption (one person’s use diminishes other people’s use)
 Common resources: goods that are not rival in consumption but not excludable
 Club goods: goods that are excludable but not rival in consumption
o Example: a fire department in a town: someone can be excluded from using this
good (the fire department can let the house burn), however, fire protection is not
rival in consumption (once the town has paid for the FD, the cost of protecting
one more house is small)
 Excludability: the property of a good whereby a person can be prevented from using it
 Free-rider problem: key problem of public goods: problem in which a person receives the
benefit of a good but avoids paying for it
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o In order to remedy the free-rider problem, the government can impose taxes; the
government can provide the public good and pay for it with tax revenue
Refer to Chapter 11, Section 11-1 & 11-2.

> What is meant regarding “third-party” external benefits versus external costs?
 A third party external benefit is a positive externality. It is a benefit that is enjoyed by an
individual, organization, property owner, or resource that is indirectly affected and that is
a result of an economic transaction.
 A third party external cost is a negative externality. It is when production and/or
consumption imposes external costs on third parties outside of the market. Social costs
exceed private cost.

Chapter 10 review and BB notes!

> Can public & private goods generate externalities? If so, what can be done to improve
resource allocation designed to promote external benefits and mitigate external costs?
 Public goods can  national defense something everyone has access to
 Private goods can  flu shot: will still positively impact society.
 In relation to external benefits, external benefits can be improved by social gains and
government engagement. It varies in each situation; however, subsidies are one example.
 In relation to mitigating external costs, reducing the level of output can be helpful to
improving the resource allocations.

Refer to class discussion & BB notes, text. Review Chapter 10, pages 190 – 199.
> In your analysis, discuss external benefits associated with education and how it impacts the
marginal private & marginal social benefits? What happens to both price and output when the
external benefits of education are considered.
 External benefits are benefits someone else is gaining from another person’s doing.
 Marginal private benefit is the increase in benefit obtained from consumption or
production of one additional unit received by the entity consuming or producing the
product
 Marginal social benefit is the change in the producer's total cost brought about by the
production of an additional unit of a good or service
 In relation to education, education would benefit everyone in society. Education
produces a private benefit in which the person receiving the education benefits from the
results of the education. Society would have more educated people and would do better
holistically. Price and output would shift the curve based on the demand of more
educated people. This curve would go up, leading to an increase in price and quantity.
Chapter 10, pages 190 – 195, Figures 1 – 3;
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> What are external costs? Graph and explain the relationship between price and output when
social costs exceed private costs (i.e. pollution of a paper / manufacturing company)?
 External costs are costs that a transaction or activity imposes on a party that is not part of
the transaction or activity
 External costs and external benefits are sectors of externalities
 Externalities: when the decisions of buyers and sellers affect people, who are not
participants in the market at all

11) Compare the quantity and price of an oligopoly / duopoly to those of a monopoly? Also,
compare the quantity and price of an oligopoly to those of a monopolistic and competitive
market? How does the number of firms in an oligopoly affect outcome & price in its’ market?
What is “prisoner’s dilemma”, Nash equilibrium, “dominant strategy”, “game theory” and how
does it impact / explain oligopoly production & pricing behaviors?
 An oligopoly is a market in which it is dominated by a small number of sellers. The
theory of an oligopoly suggests that once a price has been determined, it will stay at this
price. The reason for this is because firms cannot pursue independent strategies. A
duopoly is a market in which two suppliers dominate the market for a commodity or
service. A monopoly is a market in which there is only one single supplier.
 Prisoner’s dilemma: “game” between two captured prisoners that illustrates why
cooperation is difficult to maintain even when it is mutually beneficial.
Refer to Chapter 17, with particular attention to pages 340, Section 17-1c, 17-1d, 17-2
and 17—2b; What in your opinion should be the public policy toward monopolies,
oligopolies & duopolies? Section 17-3, pages 349 – 354.
12) Several “other” questions:
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➢ What is the relationship between macro versus microeconomic analysis including

positive versus normative economic analysis? Refer to Chapter 2, Refer Table 1, page
31, summarizing 20 or so Economic propositions which most Economists agree with;

➢ Why is it important in understanding both sub - disciplines when assessing intended &
unintended consequences? Refer to Chapters 1, 2 and Chapter 4 (market forces).
Provide examples regarding intended versus unintended consequences discussed in
class.
➢ Important to understand both positive (what is) and normative (what should be)
economic analysis when assessing intended and unintended consequences because this
will help to analyze policies especially in terms of efficiency versus equality. For
example, a positive statement would be that “minimum wage laws cause unemployment”
because the minimum wage may be above the equilibrium wage therefore causing a
surplus of workers. The normative analysis may be that “the government should raise the
minimum wage” in order to increase equality for those with lower incomes.

➢ Explain the “Economics of Labor Markets”, (Markets for Factors of Production). Note:
FoP => FoI…Factors of production generate Factors of income; Refer to class notes,
BB & Chapter 18. Focus on: Demand for Labor, Production Function; Marginal
Product of Labor; Value of the Marginal Product of Labor (Table 1, Figures 2 & 3),
“Relationship between Input Demand and Output Supply: Two Sides of the Same
Coin”, P = MC, & Trade-off between Work & Leisure; Shifts in Labor Supply &
Demand (Figures 4-6), Labor Productivity and the influence on Marginal Cost of
Labor (Relationship between Productivity & Wages); Linkages among the Factors
of Production. Also, know the four (4) stages of the production process……” IRTS”;
“CRTS”; “DRTS” & “NRTS” (Increasing Returns to Scale; Constant Returns to
Scale; Decreasing Returns to Scale & Negative Returns to Scale) … respectively.
➢ Explain the concept of deadweight loss, tax rates, tax revenue generation regarding the
economic solvency of a state / municipal entity? Refer to Chapter 12; Pay attention to
pages highlighting the “Trade-off” between equity & efficiency in a tax structure.
Also, review Chapter 8, in particular, section 8-2. Review Figure 6, “How
Deadweight Loss and Tax Revenue Vary with the Size of a Tax”, page 162 – 164.
➢ Deadweight loss: fall in total surplus that results from a market distortion, such as
a tax. Occurs when the equilibrium of a good or service is not achieved
➢ Tax rate: the ratio at which a business or person is taxed
➢ Marginal tax rate: the amount of tax people pay on the last dollar they earned
➢ How can the monetary and fiscal policies adopted by global leaders (i.e. government
public policy & central bank actions globally) directly impact firm and consumer
behaviors? Class discussion, BB notes and outside readings….
➢ Tax reform is fiscal policy, make the collection of taxes/ tax system more
understandable
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➢ One of the benefits of the proposed tax reform is to hopefully lessen compliance
costs. This may allow for the tax system to be more understandable and for income tax to
be more understandable for working people. Tax reform aligns with various economic
principles because there is an attempt to increase economic efficiency through tax reform.
Economic efficiency means that the allocation of resources maximizes total surplus. The
proposed tax reform could assist in reversing the negative impact that taxes have on
consumer and producer surplus by lowering corporate taxes and creating improved
economic growth. Positive economic growth may also create employment which would
mean a larger tax base for income taxes which may allow for the government to collect
additional tax revenue for various subsidies like higher education and public
transportation.

➢ What is a Production function? What is Marginal product and how does it impact the
relationship of a firm’s cost structure? What are the various cost curves which a firm has
and how are they different regarding the various market structures discussed in class?
Refer to Chapter 13, pages 250 – 253. Focus your study regarding the difference in
production & costs between short run versus long run….
➢ Production function: the relationship between the quantity of inputs used to make
a good and the quantity of output of that good
➢ Marginal product: the increase in output that arises from an additional unit of
input
➢ As the number of inputs increases, the marginal product declines, and production
function becomes flatter. The total-cost curve gets steeper as the quantity of output
increases because of diminishing marginal product.
➢ What is meant by the following: “All economic decisions are made at the margin”? Refer
to Chapters 1 & 2, Also, review profit maximization methodology as it relates to the
MR = MC “rule” for all market structures.
➢ How do the concept s of “opportunity cost” and “trade-offs” directly impact our
economic decisions, both at the macroeconomic aggregates) and micro (consumer &
firm) level? Refer to Chapters 1, 2 and class notes including BB / Assignment. Pay
particular attention to pages 4 (Section 1.1) – pages 15 & 16; Table 1, page 16, “Ten
Principles of Economics” ….