Review for Test II

The Firm

• Cost Curves and Profit Maximizing Output
• economic profits vs. business profit
• opportunity cost
• cost function, C(Q)
• marginal cost
• fixed vs. variable costs
• c = vc + fc
• ac = avc +afc
• producer's supply curve
• mc above avc
• why does p = mc?
• increasing, decreasing and constant costs
• u-shaped costs diagram
• short-run vs. long-run supply
• long-run competitive equilibrium
• profits are zero
• p = mc
• S = D

Deriving Cost Curves from Isoquants

• production function
• isoquant
• isocost means equal expenditure
• tangency gives chosen inputs
• derive cost curve
• derive (conditional) factor demand
• show effluent tax on a diagram
• show TBES on a diagram

Market Failure and Welfare

• Willingness to Pay
• Surplus
• Deadweight loss
• Competition maximizes profits plus surplus
• dead weight loss of tax

Pollution

• Technology Based Effluent Standard
  • isoquant diagram
  • price that achieves same level of pollution
  • Long run effect of TBES vs. Tax on polluting input
• Grandfathering in the short and long run
•  

• Taxes vs. Standards: who gets the money/efficiency   (NOT IN 08)
• Right amount of pollution: Between firms, (NOT IN 08)
  • Diagram read from both sides
• price of clean air/water is too low
(NOT IN 08)
• results in too much of polluting input (isoquant diagram)
• results in too much output
  • private marginal cost understates social mc
  • dead weight from pollution
• Clean Air act
•     New Source Performance Standards and Grandfathering
•     SOX trading program
•     Toxics
•     State Implementation plans
•     National Ambient Air Quality Standards
•     Mobile sources