Chapter 4

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 S2.1. Consumer surplus increases by areas2. Producer surplus changes from areas3. Economic surplus changes from areas

1. BCD 2.BE to areas EFG. 3. ABE to areas ABCDEFG.

Black Market

A market in which buying and selling take place at prices that violate government price regulations.

According to a news​ story, Pennsylvania's liquor tax is​ "paid by the sellerlong dash—the restaurant or bar ownerlong dash—when the seller buys liquor from​ state-run wine and spirit​ stores." ​Source: Matt​ Assad, "How Booze Brings Heady​ Development," (Allentown,​ PA) Morning Call​, February​ 22, 2015. The way in which liquor taxes in Pennsylvania are collected influences the price of a glass of wine purchased by a consumer in a restaurant by A. decreasing supply and increasing the price of wine and other liquor drinks in stores. B. increasing demand and increasing the price of wine and other liquor drinks in stores. C. decreasing demand and decreasing the price of wine and other liquor drinks in stores. D. increasing supply and decreasing the price of wine and other liquor drinks in stores.

A. decreasing supply and increasing the price of wine and other liquor drinks in stores.

Consumer surplus is

A. the difference between the highest price a consumer is willing to pay and the lowest price a firm would be willing to accept. B. the difference between the highest price a consumer is willing to pay and marginal benefit. C. the highest price a consumer is willing to pay to consume a good or service. *D. the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. E. the difference between the lowest price a firm would be willing to accept and the price it actually receives.

Refer to the graph to the right. After rent control is​ imposed, area A represents

A. a shortage of apartments. B. a deadweight loss. *C. the producer surplus transferred from landlords to renters. D. the consumer surplus transferred from renters to landlords.

Refer to the graph to the right. Which of the following represents the deadweight loss when the price of tea is​ $2.20 per​ cup?

Area C​ + E

How does consumer surplus change as the equilibrium price of a good rises or​ falls?

As the price of a good​ rises, consumer surplus decreases​, and as the price of a good​ falls, consumer surplus increases.

Which areas in the graph represent the excess burden​ (deadweight loss) of the​ tax?

DG

Refer to the graphs above. In each of the graphs, a curve has shifted as a result of a new Social Security tax. In which graph do workers bear a larger burden from the tax?

In both cases, the burden on workers is the same.

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.

Which of the following is the definition of consumer surplus?

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

Briefly explain whether you agree with the following statement:"If at the current quantity marginal benefit is greater than marginal cost, there will be deadweight loss in the market. However, there is no deadweight loss when marginal cost is greater than marginal benefit."

The statement is incorrect. If marginal cost is greater than marginal benefit (just as when marginal benefit is greater than marginal cost), there will be deadweight loss.

Suppose the graph to the right illustrates the market for​ cigarettes, where the government has imposed a​ tax, shifting the supply curve up from Upper S1 to Upper S2.The vertical distance between the supply curve prior to the tax ​(Upper S1​) and the supply curve with the tax ​(Upper S2​) is the size of the tax.​Thus, the tax is ​$3.003.00 per pack.The price producers receive after paying the tax is the​ after-tax market price minus the tax.With the​ tax, producers receive a price of ​$7 per​ pack, and then pay the ​$3.00 tax to the government. ​(Enter a numeric response using a real number rounded to two decimal​ places.)​Therefore, after paying the​ tax, producers receive ​$4.00 per pack.The government collects a tax of ​$3.00 on10 billion packs of cigarettes per year.​Therefore, the government collects revenue of ​$30 billion dollars per year​ (from a tax of ​$3.00 multiplied by 10 billion packs of cigarettes​ sold).

Use the graph to the right of the market for cigarettes to answer the following questions.According to the​ graph, how much is the government tax on​ cigarettes?​$3.00 per pack. ​(Enter your response rounded to two decimal​ places.)What price do producers receive after paying the​ tax?​$3.50 per pack. ​(Enter your response rounded to two decimal​ places.)How much tax revenue does the government​ collect?​$42 billion dollars per year. ​(Enter your response rounded to two decimal​ places.) (14X3)If the tax were collected from the buyers of​ cigarettes, the graph would differ from the one shown here by havingC. demand shift down by the tax per pack instead of supply shifting up by the tax per pack.Your answer is correct.With the tax being collected from the buyers instead of the​ producers, the new equilibrium price that they would pay the producers will decrease.

The editorial argues that buying and selling kidneys should be​ legalized: "With proper​ regulation, a kidney market would be a big improvement over the current sorry state of affairs. Sellers could be checked for disease and drug​ use, and cared for after operations...Buyers would get better​ kidneys, faster. Both sellers and buyers would do better than in the illegal​ market, where much of the money goes to​ middlemen."

bothYes. Legalizing the exchange of kidneys would increase the quantity​ supplied, benefiting those who need a kidney but are unable to obtain one due to the shortage.No. Legalizing the exchange of kidneys would hurt those who otherwise would have been supplied a kidney at no cost.

------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 to the right 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 Supply 1 to Supply 2​).As a​ result, consumer surplus:

decreases by areas​ B, C, and D.

Black markets may arise

in reaction to binding price ceilings.

Producer surplus

increases by area B and decreases by areas F and G.

In the diagram to the​ right, marginal benefit-----marginal cost at output level Upper Q 2This output level is considered economically---

is equal to efficient

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

larger with demand curve D1 because there is a larger area between the demand curve and the market equilibrium price.

Economic surplus is maximized when

marginal benefit of consumption is equal to marginal costs of production.

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

According to an article in the New York Times, the Venezuelan government "imposes strict price controls that are intended to make a range of foods and other goods more affordable for the poor. They are often the very products that are the hardest to find."Imposing price controls on goods would make them hard to find because

producers would not want to supply as much as they did before the price controls.

Tax incidence indicates

the actual division of the burden of a tax.

Deadweight loss is

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

Comparing demand curves D1 and D2 ​, the producer surplus is

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

Refer to the graph to the right. The graph shows the market demand for satellite television service. If the market price is​ $81, which consumers receive consumer surplus in this​ market?

those willing to pay more than​ $81

Would this tax on soft drinks be considered​ efficient?

​Yes, because it imposes a small excess burden​ (deadweight loss) relative to the tax revenue it raises.