chapter 4

Do producers tend to favor price floors or price​ ceilings? ​ Why? Producers favor

price floors​ because, when​ binding, price floors increase price above the equilibrium and may increase producer surplus.

As explained in the​ chapter, economic efficiency is an outcome in a market when the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production. Considering this explanation of economic​ efficiency, why does a tax creates deadweight loss​ (i.e. reduce​ surplus)? What is the impact of a production tax on the equilibrium​ price? The equilibrium price As a​ result, a tax on production reduces consumer surplus because ____ lose the of the quantity caused by the tax.

rises and the equilibrium quantity falls consumers, marginal benefit minus marginal cost, decreased

When the government imposes price floors or price​ ceilings,

some people​ win, some people​ lose, and there is a loss of economic efficiency.

Because economic surplus is the ______ of the benefit to firms and the benefit to​ consumers, it is the best measure we have of the benefit to society from the production of a particular good or service. For this​ reason, it is appropriate to label economic surplus as ____ surplus.

sum , social

Tax incidence indicates

the actual division of the burden of a tax

Marginal benefit is

the additional benefit to a consumer from consuming one more unit of a good or service

Marginal cost is

the additional cost of producing one more unit.

Consumer surplus is

the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.

Producer surplus is

the difference between the lowest price a firm would be willing to accept and the price it actually receives.

Deadweight loss is

the reduction in economic surplus resulting from a market not being in competitive equilibrium.

Economic surplus is

the sum of consumer surplus and producer surplus

Erik Brynjolfsson and Avinash Gannamaneni of MIT and Felix Eggers of the University of Groningen estimated that the average U.S. consumer over the age of 16 would pay​ $1,173 per year rather than do without Netflix. Netflix had about 59 million subscribers in the United States and charged an average of​ $11 per month. ​Source: Erik​ Brynjolfsson, Felix​ Eggers, and Avinash​ Gannamaneni, "Using Massive Online Choice Experiments to Measure Changes in​ Well-Being," National Bureau of Economic Research Working Paper​ 24514, April 2018. If the​ economists' estimate is​ accurate, how much consumer surplus do Netflix viewers as a whole​ receive? Netflix viewers receive a total consumer surplus of ​$_____ billion. ​

61.419

Using the graph to the​ right, determine the effect on consumer surplus and producer surplus of a shift in the supply curve from S1 to S2. Consumer surplus increases by areas Producer surplus changes from areas Economic surplus changes from areas

B, C, D BE to areas EFG ABE to areas ABCDEFG

Why is the demand curve referred to as a marginal benefit​ curve?

It shows the willingness of consumers to purchase a product at different prices.

Why is the supply curve referred to as a marginal cost​ curve?

It shows the willingness of firms to supply a product at different prices.

Briefly explain whether you agree with the following​ statement: ​"A lower price in a market always increases economic efficiency in that​ market."

I​ disagree, because economic efficiency declines if price falls below the market equilibrium.

On a shopping​ trip, Sofia decided to buy a light blue coat that had a price tag of​ $79.95. When she brought the coat to the​ store's sales​ clerk, Sofia was told that the coat was on​ sale, and she would pay 20 percent less than the price on the tag. After the discount was​ applied, Sofia paid​ $63.96, $15.99 less than the original price. The value of​ Sofia's consumer surplus from this purchase is

at least​ $15.99 since this is the difference between the price Sofia is willing to pay for the coat and the actual price she​ pays, but she could have be willing to pay more than​ $79.95 for the coat.

Deadweight loss is the reduction in economic surplus resulting from a market not being in competitive equilibrium. In the​ diagram, deadweight loss is equal to the​ area(s):

c and e

_____ surplus is the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. This component of economic surplus is illustrated in the diagram by area ____

consumer, A

Suppose that a frost in Florida reduces the size of the orange​ crop, which causes the supply curve to shift to the left​ (from Supply1 to Supply2​). As a​ result, consumer surplus : producer surplus:

decreases by areas​ B, C, and D. increases by area B and decreases by areas F and G.

A price ceiling

does not increase the amount of the product that consumers buy because it creates a shortage.

Briefly explain whether you agree with the following​ statement: ​"If consumer surplus in a market​ increases, producer surplus must​ decrease."

The statement is incorrect. Consumer surplus​ (and producer​ surplus) could increase by decreasing deadweight loss

Using the graph to the​ right, explain why economic surplusLOADING... would be smaller if Q1 or Q3 were the quantity produced than if Q2 is the quantity produced. Economic surplus at Q1 would be smaller than at Q2 because if Q1 units of output were​ produced, then some units for which marginal benefit is _____ to marginal cost would______ be produced. Economic surplus at Q3 would be smaller than at Q2 because if Q3 units were​ produced, then some units for which marginal cost is ____ marginal benefit would ____ produced.

greater than, not be greater, be

How does producer surplus change as the equilibrium price of a good rises or​ falls? As the price of a good​ rises, producer surplus ______ and as the price of a good​ falls, producer surplus ________

increases, decreases

A black market is

a market in which buying and selling occur at prices that violate government price regulations.

Economic efficiency

a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum (both A and B)

Economists define economic efficiency in this way

all of the above

An article in the Wall Street Journal discussed research at Ohio State University that may lead to producing carbon black—an important input in automobile tire making—out of​ eggshells, tomato​ skins, and other food waste. According to the​ article, this research could lead to a reduction in the cost of producing tires. ​Source: Daniel​ Akst, "Making Tire Filler from​ Eggshells" Wall Street Journal​, March​ 9, 2017. Refer to the graph at​ right, and the shaded areas designated by letters A through N. Assume that S0 is the initial supply curve. a. These falling costs result in a consumer surplus in the market for tires represented by areas b. These falling costs result in a loss of producer surplus equal to areas There is a gain of producer surplus equal to areas The actual net change in producer surplus

A, B,​ C, D,​ E, F,​ G, H, I. D, F, G. ​K, L, M. depends on the actual size of the loss and gain.

The graph shows the effect of a tax imposed on soft drinks. Use this graph to answer the following questions. Which areas in the graph represent the excess burden​ (deadweight loss) of the​ tax? Which areas represent the revenues collected by the government from the​ tax?

D​ + G B​ + C​ + E​ + F ​Yes, because it imposes a small excess burden​ (deadweight loss) relative to the tax revenue it raises

Do the people who are legally required to pay a tax always bear the burden of the​ tax? Briefly explain.

No. Whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government

Why do some consumers tend to favor price controls while others tend to oppose​ them?

Price ceilings generate shortages.​ Consequently, the consumers who obtain the product at a lower price​ win, but other consumers will lose because they would like to purchase the product but are unable to because of a shortage.

According to​ economists, an efficient tax is one that

imposes a small deadweight loss relative to the tax revenue it raises.

Black markets may arise

in reaction to binding price ceilings

Consider the graph at right. Comparing demand curves D1 and D2 ​, the consumer surplus is Comparing demand curves D1 and D2, the producer surplus is

larger with demand curve D1 because there is a larger area between the demand curve and the market equilibrium price. the same for both D1 and D2 because there is no difference in the area between the market equilibrium price and the supply curve.

A price ceiling is a legally determined ___ price that sellers may charge. A price floor is a legally determined _____ price that sellers may receive.

maximum, minimum

Consumer and producer surplus measure the​ _____ benefit rather than the​ _____ benefit.

net, total

The graph to the right shows the market demand and supply for eggs. Assume that the market for eggs is perfectly competitive. Suppose the egg producers organize themselves and establish a system of quotas. Each​ farmer's output is restricted by an amount indicated in the graph. Compared with the​ market-clearing equilibrium, is the quota system​ efficient? ______

no consumer and producer triangle

Does it matter whether buyers or sellers are legally responsible for paying a​ tax?

​No, the market price to consumers and net proceeds to sellers are the same independent of who pays the tax.

Discussions of the economic results of rent control and of federal farm programs would be considered​ ________ analysis, and discussions of whether rent control and the farm programs are good or bad policies would be considered​ ________ analysis.

​positive; normative