ECO 100 first exam

the effective price that sellers receive after the tax is imposed is

$10

If she had bought the iPhone on sale for $180, her consumer surplus would have been

$220

The price that buyers pay after the tax is imposed is

$24

Cho buys an iPhone for $240 and gets a consumer surplus of $160. Her willingness to pay for an iPhone is

$400

the per-unit burden of the tax on buyers is

$8

If the price of the iPhone had been $400, her consumer surplus would have been

0 the price of the iPhone would have been above her willingness to pay so she would receive no consumer surplus in this case

production possibilities curve

A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.

price floor

A legal minimum on the price at which a good can be sold

The tax burden refers to the distribution of the tax paid by buyers and sellers. For buyers, the tax burden is the difference between the price paid before the tax and the price paid after the tax. For sellers, the tax burden is the difference between the price received before the tax and the price received after the tax.

Because buyers pay $100.00 per pair before the tax and $140.00 per pair after the tax, their burden is $140.00 per pair−$100.00 per pair=$40.00 per pair$140.00 per pair−$100.00 per pair=$40.00 per pair. Because sellers receive $100.00 per pair before the tax and $93.60 per pair after the tax, their burden is $100.00 per pair−$93.60 per pair=$6.40 per pair$100.00 per pair−$93.60 per pair=$6.40 per pair.

True or False: A price ceiling below $25 per box is not a binding price ceiling in this market.

False

Suppose the government doesn't want to discourage employers from hiring research assistants and, therefore, wants to minimize the share of the tax paid by the employers. Of the three tax proposals, which is best for accomplishing this goal?

From this exercise, you can see that the quantity of labor hired, the amount employers pay per hour after the tax, and the amount workers take home are all independent of how the tax is levied. Therefore, it doesn't matter which tax proposal the government implements because none of the proposals is better than the others.

After the tax is imposed, the buyer's total cost of purchasing a bottle of wine rises from $6 to $8. The tax also reduces the price producers receive from $6 to $5 per bottle. The tax is equal to the difference between these two prices:

Price Consumers Pay−Price Producers Receive $8 per bottle−$5 per bottle = $3 Because consumers pay $2 more per bottle ($8−$6$8−$6) than they did before the tax, this represents the burden that falls on consumers. Similarly, producers receive $1 less per bottle ($6−$5$6−$5) than they did before the tax, so this represents the burden that falls on producers.

People face trade-offs

Principle 1

Suppose the price of a bottle of water is $4.

Sam receives $4 for his first bottle of water, but it costs only $1 to produce it. Therefore, Sam has a producer surplus of $3 from this sale. He also receives $4 for his second bottle of water, which costs $3 to produce, so he has a producer surplus of $1 for this bottle. Sam's total producer surplus is $3+$1=$4 $3+$1=$4, which is the area of the purple region you previously shaded.

Economic models are

Simplified versions of reality designed to analyze "what is" to explain human decision making in any context.

To evaluate the first proposal, enter $4 into the Tax Levied on Employers field. The new number of workers hired is 125, and the new wage paid by employers to workers in this market is $8 per hour.

Since employers have to pay $4 on top of that wage, it costs them $12 per hour to hire a research assistant. Since workers don't pay any tax directly, they take home the entire $8 per hour.

A binding price ceiling always creates a shortage, but the severity of the shortage may differ between the short run and the long run. In the short run, farmers may have no choice but to continue producing oranges since they already have orange trees planted. In the long run, if they cannot sell their oranges at the free-market equilibrium price, more and more farmers will switch to other crops or sell their land.

Therefore, at the same price set by the price ceiling, fewer and fewer oranges will be produced.

At a price of $20 per box, consumers demand 360 million boxes of oranges, but producers supply only 240 million boxes.

Therefore, there is a shortage of 120 million boxes. In the absence of a price ceiling, a shortage exerts upward pressure on prices until there is neither a surplus nor a shortage.

True or False: The effect of the tax on the quantity sold would have been the same as if the tax had been levied on consumers.

True The equilibrium quantity of wine produced, the amount consumers pay per bottle of wine, and the amount producers receive for each bottle of wine are all independent of who pays the tax. Regardless of whether the tax is levied on consumers, causing the demand curve to shift by the amount of the tax, or on producers, causing the supply curve to shift by the amount of the tax, the new quantity at which the curves intersect will be the same. Therefore, it doesn't matter whether the government imposes the tax on consumers or producers.

percentage change in supply price

[Quantity Supplied (New) -Quantity Supplied (Old)] /Quantity Supplied (Old)) [Price (New) - Price (Old)] /Price (Old))

production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

competitive market

a market in which there are many buyers and many sellers so that each has a negligible impact on the market price

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

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

tax burden

a measurement of taxes paid as a proportion of income

Suppose sellers of perfume are required to send $1.00 to the government for every bottle of perfume they sell. Further, suppose this tax causes the price paid by buyers of perfume to rise by $0.60 per bottle. Which of the following statements is correct? a. the effective price perceived by sellers is $0.40 per bottle less than it was before the tax b. sixty percent of the burden of the fax falls on sellers c. this tax causes the demand curve for perfume to shift downward by $1.00 at each quantity of perfume d. all of the above are correct

a. the effective price perceived by sellers is $0.40 per bottle less than it was before the tax

A decrease in supply and an increase in demand would do what to the equilbrium price and equlibrium quantity?

an increase in equilbrium price and an indeterminate change in equlibrium quantity

an increase in demand and supply would do what to the equilibrium quantity and equilibrium price?

an increase in equilibrium quantity and an indeterminate change in equilibrium price

binding price ceiling

below equilibrium

a price ceiling is binding when it is set

below the equilibrium price, causing a shortage

In economics, capital refers to

buildings and machines used in the production process

Positive statements are

claims about how the world is

total surplus in a market is equal to

consumer surplus + producer surplus

equilibrium price must decrease when demand

decreases and supply does not change, when demand does not change and supply increases, and when demand decreases and supply increases simultaneously

equilibrium quantity must decrease when

demand and supply both decrease

flow of income payments

firm to market for factors of productions to households

flow of goods and services

firms to product market to household

If the government levies a $1,000 tax per boat on sellers of boats, then the price paid by buyers of boats would

increase by less than $1,000

Equilibrium quantity must increase when demand

increases and supply does not change, when demand does not change and supply increases, and when both demand and supply increase

the principle that "people face tradeoffs" applies to

individual, families, societies

A statement describing how the world should be

is a normative statement

price floor is binding when

it is above the equilibrium

A country's standard of living depends on

its ability to produce goods and services

price ceiling (shortage)

occurs when the equilbrium is above the price ceiling

positive statements are not

prescriptive

The tax wedge is the difference between the

pretax and posttax returns to an economic activity

At the equilibrium price, consumer surplus is

price demanded + equiilibrium price

at the equilbrium price, producer surplus is

price x quantity

normative statement

statement which describes how the world should be

effect of rent control on tenants

tenants who are able to find housing, even if it isn't well maintained are better off whilst those who can no longer find a house are left homeless and definitely worse off

producer surplus

the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives

opporunity cost

the highest valued alternative that must be given up to engage in any activity

opportunity cost

the most desirable alternative given up as the result of a decision

equilibrium price

the price at the intersection of the market supply and demand curves; at this price, the quantity demanded equals the quantity supplied

equilbrium quantity

the quantity at the intersection of the market supply and demand curves

if the price of a good is low

the quantity supplied of the good could be zero.

Macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

Microeconomics

the study of how households and firms make decisions and how they interact in markets

total consumer surplus

the sum of the individual consumer surpluses of all the buyers of a good in a market

effect of rent control on landlords

they are worse off as they rent out fewer units at lower rent. Those who enter into illegal markets may be better off if they don't get caught whilst many have to sell property or let it deteriorate as they can't afford maintenance

consumer surplus =

willingness to pay - price if the consumer surplus was $60 then the willingness to pay is $360

result of rent-control laws

•Landlords provide less maintenance under rent control and are unlikely to upgrade their units because they cannot pass on these costs to tenants through higher rents. Because of reduced maintenance, quality suffers and housing units deteriorate more quickly. •Because the profitability of owning and renting apartment units decreases with rent control, landlords construct fewer new units and may even convert existing apartments to more profitable uses. This decreases the number of units available to renters in the future. •A shortage (excess demand) of housing units may lead renters to make under-the-table payments to secure an apartment. This can lead to the development of a black market for rental units. •Because price is no longer an effective mechanism of rationing apartments, alternative methods of rationing will emerge, such as screening processes or personal networking connections.