ECO201 Midterm 2

What is the formula for elasticity?

% change in QD of X / % change in price of X

How do you calculate % change in quantity?

( Change / average quantity ) x 100

What are factors that affect the magnitude of elasticity?

- Availability of substitutes - Percentage of a consumer's budget - Time period of adjustment

A price ceiling is

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

A shift in the supply curve to the left represents what kind of externality?

A negative externality

A shift in the demand curve to the right represents what kind of externality?

A positive externality

On a graph, producer surplus is represented by the area

Below price and above the supply curve

On a graph, consumer surplus is represented by the area

Below the demand curve and above price

The price elasticity of demand measures

Buyers' responsiveness to a change in the price of a good

Price ceilings and price floors that are binding

Cause surpluses and shortages to persist because price cannot adjust to the market equilibrium price

If the government were to limit the release of air pollution produced by a glue factory to 75 parts per million, the policy would be considered a

Command-and-control policy

Negative externalities lead markets to produce

Greater than efficient output levels

If the price elasticity of supply is 1.2, and price increased by 5 percent, quantity supplied would

Increase by 6 percent

If a good has an elasticity <1, what type of good is it?

Inferior good

What can you say about the elasticity of demand of a good with many close substitutes?

It is more elastic

To say that a price ceiling is nonbonding says what about its relationship to the equilibrium price?

It is set above the equilibrium price

If a good is elastic, how can you adjust the price to increase revenue?

Lower the price to increase total revenue

For cross-price elasticity, what does the outcome say about the relationship between the two products?

Negative elasticity = complements, Positive elasticity = substitutes

If a good has an elasticity = 0, what type of good is it?

Neutral good

If a good has an elasticity >1, what type of good is it?

Normal good

An externality is the uncompensated impact of

One person's actions on the well-being of a bystander

If the price of natural gas rises, when is the price elasticity of demand likely to be the highest?

One year after the price increase

What is the difference between positive and normative statements?

Positive statements are supported by facts and can be tested, whereas normative statements are based off of opinion and cannot be tested

What happens to quantity demanded if the price of X increases?

QD goes down

What happens to quantity demanded if the price of X decreases?

QD goes up

Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. What happens to the quantities demanded and supplied?

Quantity demanded increases, and quantity supplied decreases

How does time period of adjustment impact elasticity?

Shorter time = smaller elasticity, Longer time = larger elasticity

Positive externalities lead markets to produce

Smaller than efficient output levels

Suppose that in a particular market, the supply curve is highly elastic and the demand curve is highly inelastic. If a tax is imposed in this market, who will bear a greater burden of the tax?

The buyers will bear a greater burden than the sellers

According to the Coast theorem, private parties can solve the problem of externalities if

The cost of bargaining is small

The term tax incidence refers to

The distribution of the tax burden between buyers and sellers

Suppose that in a particular market, the supply curve is highly inelastic and the demand curve is highly elastic. If a tax is imposed in this market, who will bear a greater burden of the tax?

The sellers will bear a greater burden than the buyers