EC 2123 EXAM 2

Which of the following is an example of a quota?

A government limits the amount of a product that can be sold in a market.

A binding price floor in a market is removed. Which of the following is likely to occur as a result?

The market price will fall.

Which of the following claims reflects normative analysis?

The minimum wage should be higher sot hat workers earn a living wage.

(Figure Question #11 CH 6) Consider the market for environmentally friendly three-dimensional printed houses that is shown in the figure. The government wants to encourage buyers to buy such houses and places a price ceiling on the market at $200,000 per house. What occurs in this market after the implementation of the price ceiling?

a shortage of 300,000 houses

A binding price ceiling is:

always below the equilibrium price

When looking at a demand and supply graph, if a tax is implemented on a seller, the vertical distance between the old and new supply curves at the new equilibrium quantity will be equivalent to the

amount of the tax

You have a comparative advantage if you can complete a task:

at a lower opportunity cost than everyone else.

People gain consumer surplus when they purchase an item:

at a price below the value of the benefit they receive from the item

Factors to determine whether a good has elastic or inelastic demand

availability of substitutes, necessities, consumer search, and time

Which of the following is NOT a source of market failure?

lack of market power

Good M has an income elasticity of demand of -0.7. Which of the following items might good M be?

generic-brand toothpaste

Is elastic greater or less than 1?

greater

What does Einc mean?

income elasticity of demand

When the absolute value of the price elasticity of demand is less than 1, demand is:

inelastic

If demand is _____, a higher price yields _____ total revenue.

inelastic; higher

When the income elasticity of a product is negative, the good is considered ________.

inferior

When the price elasticity of demand is _____ relative to the price elasticity of supply, then buyers bear _____ of the economic burden of a tax.

large; a smaller share

Tax on buyer decreases marginal benefit, which shifts the demand curve to the

left

Is inelastic greater or less than 1?

less than

The person who has an absolute advantage in a task

is the one who is best at the task.

Suppose the percent change in the quantity demanded for water for any price change is zero. The demand curve for water is _____, and the price elasticity of demand is perfectly _____.

vertical; perfectly inelastic

The percent change in insulin demanded for any price change is zero. The demand curve for insulin is _____, and the price elasticity of demand is _____.

vertical; perfectly inelastic

law of demand

when price goes down, quantity demanded goes up

The price elasticity of demand for a good with a horizontal demand curve is:

perfectly elastic

When the absolute value of the price elasticity of demand is infinite, demand is:

perfectly elastic

What does ED mean?

price elasticity of demand

Comparative advantage explains why people

specialize and trade.

A tax on sellers shifts the:

supply curve to the left

(Figure Question #11 CH7) The bath towel market is at equilibrium. How large is the economic surplus?

$60

Lyft cuts the price of a ride in New York City by 20%. Thereafter, the quantity of rides demanded rises by 25%. What is the absolute value of the price elasticity of demand for Lyft rides?

1.25

Ang can mow the lawn in two hours. Bill takes three hours to mow the same lawn. What can you conclude from this information?

Ang has an absolute advantage over Bill in mowing the lawn

Which of the following is a TRUE statement about work assignments based on comparative advantage?

The person with the lowest opportunity cost at a task should perform it

Good M has an income elasticity of demand of -0.7. Which of the following items is good M?

bologna

When trade is based on comparative advantage

both trading partners end up better off

Specialization will increase output when it is based on:

comparative advantage.

When your employees receive work assignments based on who has the lowest opportunity cost in performing each task, the basis for the work assignments is

comparative advantage.

A tax on buyers shifts the:

demand curve to the left

If you are a seller making decisions according to the rational rule, you will:

earn producer surplus on all except the last unit sold

If demand is _____, a higher price yields _____ total revenue.

elastic; lower

Good M has an income elasticity of demand of 0.5. Which of the following items is good M?

electricity

The concept of equity focuses on:

fairness

(Figure Question #13 CH6) quota of 10,000 logs forest wood per month is placed in the market that is shown in the figure. The quota _____ the quantity that is sold in the market by _____ logs.

lowers; 2,000

When the income elasticity of a product is greater than 1, the good is considered a ________.

luxury

(Figure Question #18 CH6) A quota of 10,000 logs forest wood per month is placed in the market that is shown in the figure. How much are buyers willing to pay after the implementation of the quota?

$20,000

Portia produces and sells headbands. Her marginal cost for one headband is $6, and her average cost is $4. She gains producer surplus only when she sells headbands at a price above:

$6

The price of a carton of eggs is $2, and 100 cartons are sold. The consumer surplus is $80, and total economic surplus equals $150. What is the producer surplus?

$70

Bae is willing to pay up to $160 for a particular pair of boots. She is able to buy the boots for $120. The marginal cost of producing the boots is $70. How large is the economic surplus associated with her purchase of the boots? (hint: ES=CS+PS)

$90

Formula to find price elasticity of supply (Es)

% change in quantity supplied / % change in price

formula to find income elasticity of demand (Einc)

(% change QD) / (% change income)

formula to find cross-price elasticity of demand (Ex)

(% change quantity demanded for good B) / (% change in price for good A)

A subsidy is (i) a negative tax. (ii) a tax rebate given to those who make a specific choice. (iii) a payment made by the government to those who make a specific choice.

(i) and (iii)

Which of the following can a government use to change the quantity traded in a market? (i) quotas (ii) binding price floors (iii) binding price ceilings (iv) taxes

(i), (ii), (iii), and (iv)

formula for percent change

(new - old) / old x 100

The price of product A is cut by 30%. As a result, the quantity demanded of product B rises by 40%. The cross-price elasticity of demand between product A and product B is _____, and they are _____.

-1.33; complements

The price of chicken breast rises from $3.00 to $3.60 per pound. In response to the price change, the demand for chicken breast falls by 25%. The absolute value of the price elasticity of demand for chicken breast is _____, and the price elasticity of demand is _____.

1.25; elastic

The price of chicken breast rises from $3.50 per pound to $4.25 per pound. In response to this price change, the quantity demanded for chicken breast falls by 30%. What is the absolute value of the price elasticity of demand for chicken breast?

1.4

(Figure Question) It is mandatory for Jane to take several pills of a certain medication each day in order to remain healthy. The medication has no substitutes and is produced by only one pharmaceutical company. Which of the following demand curves represents Jane's demand for the medication? A. Vertical B. Horizontal C. Relatively steep D. Relatively flat

A. Vertical

Sellers bear a ________ share of the economic burden when supply is relatively elastic. A. smaller B. larger

A. smaller

(Figure Question) Which of the products has the most elastic demand curve? A. Vertical B. Horizontal C. Relatively steep D. Relatively flat

B. horizontal

(Figure Question) Which of the products has the perfectly elastic demand curve? A. Vertical B. Horizontal C. Relatively steep D. Relatively flat

B. horizontal

formula for price elasticity of demand

I % change QD I / I % change in Price I

How does a business use price elasticity of demand?

If a firm knows its consumers income elasticity of demand, they can figure out whether a price change will increase or decrease their revenue (price x quantity sold)

What is positive analysis?

It describes what is happening, explains why it is happening, or predicts what will happen.

Factors to determine whether a good has elastic or inelastic supply

inventories, availability of input, and time

If an item is a necessity rather than a luxury, its demand curve will be:

relatively steep

If a firm produces a product that has easily available variable inputs, its supply curve will be:

relativley flat

Taking the absolute value of the cross-price elasticity of demand is incorrect because it would:

remove the ability to tell whether the two products are substitutes or complements

tax on a _______ represents a marginal cost because it's an additional cost sellers must pay for each unit they sell

seller

(Figure Question #3 CH7) The sock market is at equilibrium. How much economic surplus is being generated in the sock market?

$45

(Figure Question #20 CH6) Refer to the market for child care that is shown in the figure. The original equilibrium price is $10,000. A subsidy is now introduced for parents who pay for child care. After the subsidy is implemented, the amount that parents pay is:

$9,000

The area on a market graph that lies below the price and above the supply curve is equal to:

producer surplus

(Figure Question #19 CH6) Refer to the market for child care that is shown in the figure. The original equilibrium price is $10,000. A subsidy is now introduced for parents who pay for child care. The amount of the subsidy is:

$2,000

The price of product A is cut by 50%. As a result, the quantity demanded of product B rises by 50%. The cross-price elasticity of demand between product A and product B is _____, and they are _____.

-1; complements

(Figure Question #1 CH8) The table lists the minutes that it will take four persons to wash a car and to sort and fold a load of laundry. Use the data to answer the question. Junko- wash a car (120 minutes) and sort and fold laundry (50 minutes) What is Junko's opportunity cost for washing a car?

2.4 loads of laundry will not be sorted and folded

perfectly inelastic=

0 (vertical)

The price of a gallon of milk rises from $2 to $2.60. In response to this price change, the quantity demanded for milk falls by 5%. The absolute value of the price elasticity of demand for milk is _____, and the price elasticity of demand is _____.

0.17; inelastic

The price of milk at the local grocery store is cut by 25%. In response to this price cut, the quantity of milk demanded increases by 10%. What is the absolute value of the price elasticity of demand for milk?

0.4

The price of a dozen eggs rises from $3 to $4.70. In response to this price change, quantity supplied increases from 100,000 dozen eggs to 127,000 dozen eggs. What is the approximate price elasticity of supply for eggs?

0.48

If income rises by 20% and the quantity demanded of an item rises by 10%, the income elasticity of demand for this item is:

0.5

(Figure Question #8 CH 6) In the graph of the soft drink market shown here, the original equilibrium price is $2.50 per bottle. A tax is then placed on the sellers of soft drinks. As a result of the tax, the equilibrium quantity in the market changed from _____ million bottles to _____ million bottles.

1.5, 1

(Figure Question #17 CH6) In the market for plastic bags shown here, the original equilibrium price is 50 cents per bag. In an effort to reduce plastics usage, a tax is then placed on the buyers of plastic bags. The economic burden of this tax on the seller is _____ cents.

10

If income rises by 10% and the quantity demanded of an item rises by 20%, the income elasticity of demand for this item is:

2

Lyft cuts the price of a ride in New York City by 10%. Thereafter, the quantity of rides demanded rises by 25%. What is the absolute value of the price elasticity of demand for Lyft rides?

2.5

The price of a dozen eggs falls from $3 to $2.70. In response to this price change, the quantity supplied of eggs falls from 100,000 dozen eggs to 75,000 dozen eggs. What is the price elasticity of supply for eggs?

2.7

The price of product C rises by 10%. As a result, the quantity demanded of product D rises by 20%. The cross-price elasticity of demand between product C and product D is _____, and they are _____.

2; substitutes

Uber cuts the price of a ride in Los Angeles by 15%. Thereafter, the quantity of rides demanded rises by 45%. What is the absolute value of the price elasticity of demand for Uber rides?

3

(Figure Question #1 CH 6) In the market shown, the original equilibrium price is 60 cents. A tax is then implemented on the buyer. After the implementation of the tax, the seller receives _____ cents per unit of the product.

58

(Figure Question #16 CH6) In the market shown, the original equilibrium price is 60 cents. A tax is then implemented on the buyer. The amount of the tax is _____ cents.

6

demand curve= marginal _______

benefit

formula to find economic surplus

consumer surplus (CS) + producer surplus (PS)= (MB-P) + (P-MC)= MB - MC

supply curve= marginal ________

cost

What does Ex mean?

cross-price elasticity of demand

how to find market failure

deadweight loss (ES at efficient quantity - actual economic surplus)

Tax leads to a _______ in the quantity sold, the tax ________ price buyers pay, tax ________ the price sellers keep, both buyers and sellers bear the burden of the tax which is levied on sellers

decrease; increases; decreases

the burden created by the change in after-tax prices faced by buyers and sellers

economic burden

The largest possible economic surplus is crested at the __________ quantity. (efficient quantity)

equilibrium

Demand for soda outside an airport is more elastic than inside of the airport because:

fewer choices means more inelastic demand

(Figure Question #3 CH 6) In the set of figures shown,

figure D is a binding price floor (X with horizontal line right above the intersection)

perfectly elastic=

infinity (horizontal)

Suppose the percentage change in newspapers demanded for any price change is infinite. The absolute value of the elasticity of demand for newspapers is _____, and demand is _____.

infinity; perfectly elastic

formula to find consumer surplus

marginal benefit - price

Consumer surplus equals:

marginal benefit minus price

when the forces of demand and supply lead to an inefficient outcome

market failure

Efficient outcomes:

may not make everyone happy

A quantity regulation is a:

minimum or maximum quantity that can be sold

Demand is more elastic when you are shopping in Walmart than when you shop at a small convenience store because:

more competing products means greater elasticity

When resources are organized according to the principle of comparative advantage, producers become

more specialized so they can trade and end up with more of everything.

When the income elasticity of a product is 0-1, the good is considered a ________.

necessity

When the cross-price of demand for a product is ______ it is a complement.

negative

When the income elasticity of a product is positive, the good is considered ________.

normal

You are given some data for four different products — milk, eggs, beef, and orange juice. The absolute value of the price elasticity of demand for milk is 3. The absolute value of the price elasticity of demand for eggs is 1.2. The absolute value of the price elasticity of demand for beef is 0.9. The absolute value of the price elasticity of demand for orange juice is 3.5. Which product has the most elastic demand?

orange juice

When the cross-price of demand for a product is ______ it is a substitute.

positive

formula to find producer surplus

price - marginal cost

A measure of how responsive buyers are to price changes is the:

price elasticity of demand

What does Es mean?

price elasticity of supply

Income elasticity of demand measures how responsive the:

quantity demanded of a good is to change in income

the burden of being assigned by the government to send a tax payment

statutory burden

is an economic term for understanding the division of a tax between buyers and sellers. - depends on ED,ES- the way to avoid a tax is to not buy or sell things that are taxed.

tax incidence