ECON 103 REVIEW EXAMS ALL QUESTIONS AND
ANSWERS SURE A+
✔✔Public Goods - ✔✔Another category of Market Failure; Goods that are neither
excludable nor rival in consumption
✔✔Non-Rival - ✔✔the consumption of the good by one person does not keep other
people from also consuming that good.
✔✔Non-excludable - ✔✔individuals cannot deny each other the opportunity to consume
a good
✔✔Public Good Example - ✔✔National Defense, Clean Air, Lighthouse, etc
✔✔Why do public goods cause market failure? - ✔✔free rider problem
✔✔Free-Rider Problem - ✔✔the problem faced by interest groups when citizens can
reap the benefits of interest group action without actually joining, participating in, or
contributing money to such groups. This leaves little incentive for private firms to
produce the good, resulting in little to no provision of the good for the market
✔✔Asymmetric Information - ✔✔a situation in which one side of the market has more
reliable information than the other side
, ✔✔Lemon Problem - ✔✔When the misalignment of information in a market causes the
quality of goods traded to decline, leaving only lemons remaining, preventing the market
from ever reaching an efficient outcome.
✔✔Club Goods - ✔✔goods that are excludable but not rival in consumption
✔✔Private Goods - ✔✔goods that are both excludable and rival in consumption
✔✔Common Goods - ✔✔goods that all people may use free of charge but that are of
limited supply, such as fish in the sea or clean drinking water. often overconsumed bc of
consumer ignorance of external costs
✔✔Price Elasticity of Demand - ✔✔a measure of how much the quantity demanded of a
good responds to a change in the price of that good, computed as the percentage
change in quantity demanded divided by the percentage change in price
✔✔Elastic Demand - ✔✔A situation in which consumer demand is sensitive to changes
in price, PED>1
✔✔Inelastic Demand - ✔✔A situation in which an increase or a decrease in price will
not significantly affect demand for the product. PED<1
✔✔Unitary Elastic Demand - ✔✔Occurs when a change in the price of a good or service
leads to an equal and opposite proportional change in the quantity demanded of the
good or service (PED = 1).
✔✔Total Revenue - ✔✔Price x Quantity
✔✔Elastic Demand and Total Revenue - ✔✔price and total revenue move in opposite
directions
✔✔Inelastic Demand and Total Revenue - ✔✔price and total revenue move in the same
direction
✔✔Determinants of Elasticity - ✔✔availability of close substitutes, necessities vs
luxuries, time horizon, % of consumer income
✔✔Time Horizon - ✔✔goods tend to have more elastic demand over longer time
horizons
✔✔Tax Incidence - ✔✔the actual division of the burden of a tax between buyers and
sellers in a market
ANSWERS SURE A+
✔✔Public Goods - ✔✔Another category of Market Failure; Goods that are neither
excludable nor rival in consumption
✔✔Non-Rival - ✔✔the consumption of the good by one person does not keep other
people from also consuming that good.
✔✔Non-excludable - ✔✔individuals cannot deny each other the opportunity to consume
a good
✔✔Public Good Example - ✔✔National Defense, Clean Air, Lighthouse, etc
✔✔Why do public goods cause market failure? - ✔✔free rider problem
✔✔Free-Rider Problem - ✔✔the problem faced by interest groups when citizens can
reap the benefits of interest group action without actually joining, participating in, or
contributing money to such groups. This leaves little incentive for private firms to
produce the good, resulting in little to no provision of the good for the market
✔✔Asymmetric Information - ✔✔a situation in which one side of the market has more
reliable information than the other side
, ✔✔Lemon Problem - ✔✔When the misalignment of information in a market causes the
quality of goods traded to decline, leaving only lemons remaining, preventing the market
from ever reaching an efficient outcome.
✔✔Club Goods - ✔✔goods that are excludable but not rival in consumption
✔✔Private Goods - ✔✔goods that are both excludable and rival in consumption
✔✔Common Goods - ✔✔goods that all people may use free of charge but that are of
limited supply, such as fish in the sea or clean drinking water. often overconsumed bc of
consumer ignorance of external costs
✔✔Price Elasticity of Demand - ✔✔a measure of how much the quantity demanded of a
good responds to a change in the price of that good, computed as the percentage
change in quantity demanded divided by the percentage change in price
✔✔Elastic Demand - ✔✔A situation in which consumer demand is sensitive to changes
in price, PED>1
✔✔Inelastic Demand - ✔✔A situation in which an increase or a decrease in price will
not significantly affect demand for the product. PED<1
✔✔Unitary Elastic Demand - ✔✔Occurs when a change in the price of a good or service
leads to an equal and opposite proportional change in the quantity demanded of the
good or service (PED = 1).
✔✔Total Revenue - ✔✔Price x Quantity
✔✔Elastic Demand and Total Revenue - ✔✔price and total revenue move in opposite
directions
✔✔Inelastic Demand and Total Revenue - ✔✔price and total revenue move in the same
direction
✔✔Determinants of Elasticity - ✔✔availability of close substitutes, necessities vs
luxuries, time horizon, % of consumer income
✔✔Time Horizon - ✔✔goods tend to have more elastic demand over longer time
horizons
✔✔Tax Incidence - ✔✔the actual division of the burden of a tax between buyers and
sellers in a market
