ECON 110 Chapter Notes - Chapter 12: Monopolistic Competition, Allocative Efficiency, Productive Efficiency

Why is the shape of the production possibilities frontier (PPF) often curved instead of straight?

a) Because the PPF is based on the productive capabilities of a nation overall rather than the productive capacity of an individual.

b) Typically, some resources are better suited for producing one good than another, which means that there are diminishing returns when moving such resources away from producing what they are best suited for.

c) The productive efficiency of an economy decreases as it moves from left to right along the PPF.

d) To take a potential sunk cost into account, the PPF is curved to distribute the burden of the sunk cost based on allocative efficiency

1.Which of the following can be thought of as an adjustment for the risks involved with respect to the cost of a firm acquiring financial capital?

a.Cost of financial capital paid from firm

b.Higher retained earnings from past profits

c.Tax credits for physical capital investments

d.Imposition of hurdle rates of interest

2.If a firm is producing so that the point chosen along the production possibility frontier is socially preferred, then that firm is said to have reached its

a)minimum price efficiency

b)utility-maximizing efficiency

c)allocative efficiency

d)productive efficiency

3.When a firm uses retained profits to invest in more energy efficient equipment, an economist would calculate the _______________ of investing in physical capital.

a.Typical hurdle rate

b.Hurdle rate premium

c.Degree of risk

d.Opportunity cost

4.Deregulation occurs when a government eliminates or scales back rules relating to all but one of the following. Which one is it?

a.Conditions of entry in a certain industry

b.Natural monopoly

c.Prices that can be charged

d.Quantities that can be produced

5.A natural monopoly occurs when the quantity demanded is the minimum quantity it takes to be at the bottom of the long-run average cost curve

a.Greater than

b.Less than

c.Equal to

d. a or c above

6. The demand curve perceived by a perfectly competitive firm

a.Shows that such a firm is a price-maker

b.Shows economies of scale over a large range of output

c.Is horizontal

d. All of the above

The Production Possibilities Model is one of the first Economic Models students learn about.

a. Please explain what the mode teaches us.

b. Please explain each of the 4 assumptions of the model.

c. Please explain Productive Efficiency and how it relates to the PPC.

i. Define it and explain how it relates to the PPC.

d. Please explain Allocative Efficiency and how the point of AE is found.

i. Define it, ii. Discuss the significance of allocative efficiency relative to the model iii. Explain the 2 step process for finding the point of allocative efficiency on the PPC.

e. On the topic of Economic growth: i. What does it mean? ii. How can it be graphically represented? iii. What are the prerequisites to Economic growth? iv. Why is Economic growth important? v. What factors tend to limit growth?

f. The Presentville  Futureville case:

1. Explain what motivates each group to make decisions.

2. Explain the impact of those decisions on the future of each group.

3. Explain the relevance of this case for the U.S. Economy. 4. What does this case teach you? g. Law of increasing opportunity cost: 1. What does it tell us? 2. How could it be explained graphically? h. Explain how you could use the Production Possibility Model to represent the US Economy during 2008 - 2010.