Introduction to Microeconomics: Questions

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  • Topic: Consumer price index, Investment, GDP deflator
  • Pages : 3 (851 words )
  • Download(s) : 167
  • Published : May 19, 2013
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1. Name two types of market failure. Explain why each may cause market outcomes to be inefficient. Externalities and Market Power. Externalaties are byproducts of a product.Exteranlities can lead to a failure because buyers and sellers do not consider the side effects, which can lead to imbalance in equilibrium based on a societal standpoint. Market Power occurs when there is a single buyer and seller (or small group of them) with the ability to control market prices. This can lead to failure because it keeps prices and quantity away from the equilibrium of supply and demand. 2. What happens to consumer and producer surplus when the sale of a good is taxed? How does the change in consumer and producer surplus compare to the tax revenue? When a product is taxed both consumer and producer surplus drop. This change in surplus is gained in tax revenue, but producers earn less and consumers get less for their value. 3. How do the elasticities of supply and demand affect the deadweight loss of a tax? Why does this effect occur? The elasticities of supply and demand affect deadweight loss in that when: supply/demand is elastic, then the deadweight loss is high. If the supply/demand is inelastic, then the deadweight loss is small.This occurs because taxes change the behavior of buyers/sellers. If tax increases price of buyers, they consume less. If tax reduces profit of producers, then they produce less. 4. What does the domestic price that prevails without international trade tell us about a nation’s comparative advantage? If the domestic price is low, then it says that county can produce that product cheaply, and has a comparative advantage. If it is high, then that country is at a disadvantage compared to other countries. 5. What is the difference between the unilateral and multilateral approaches to achieving free trade? Give an example of each. Unilateral approach is when the country reduces trade restrictions on its own. ‘Isolandia’ removes tariffs on...
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