Microeconomics Flashcards

A tax imposed on a good with perfectly inelastic demand results in:

Answer: The entire tax burden falling on consumers

Perfectly inelastic demand means quantity demanded does not change regardless of price, so sellers pass the full tax to buyers with no reduction in sales.

The concept of X-inefficiency refers to:

Answer: A firm not minimizing costs due to lack of competitive pressure

X-inefficiency occurs when firms, shielded from competition, fail to minimize costs, often through organizational slack or managerial discretion.

Which of the following is a characteristic of monopolistic competition in the long run?

Answer: P > MC and P = ATC

In long-run monopolistic competition, free entry drives economic profit to zero (P = ATC) but firms retain market power so P exceeds MC.

The Coase theorem states that externalities will be internalized efficiently when:

Answer: Property rights are well-defined and transaction costs are negligible

With clear property rights and zero transaction costs, private bargaining leads parties to an efficient outcome regardless of who holds the rights.

An increase in the price of a complement to good X will:

Answer: Shift the demand curve for X leftward

Complements are consumed together; if the price of the complement rises, demand for that complement falls, reducing demand for X as well.

The long-run supply curve for a constant-cost industry is:

Answer: Perfectly horizontal at the minimum long-run average cost

In a constant-cost industry, input prices do not change with industry output, so the long-run equilibrium price always returns to minimum LRAC regardless of demand shifts.

Which outcome best describes the prisoner's dilemma equilibrium?

Answer: Both players defect even though mutual cooperation would be superior

Defection is the dominant strategy for each player, leading to mutual defection despite the fact that mutual cooperation would make both better off.