ECON 2000 Chapter 21, 7-9
Refer to Figure 21-6. If the price of good Y is $5, what is the price of good X?
$1.50
Larry purchases a book for $10, and his consumer surplus is $3. How much is Larry willing to pay for the book?
$13
deadweight loss
1/2 X Price Difference X Quantity Difference
A family on a trip budgets $800 for meals and gasoline. If the price of a meal for the family is $50, how many meals can the family buy if they do not buy any gasoline?
16
Refer to Figure 21-1. All of the points identified on the figure represent affordable consumption options with the exception of
C
Which tools allow economists to determine if the allocation of resources determined by free markets is desirable
Consumer and producer surplus
Refer to Figure 7-4. When the price rises from P1 to P2, which area represents the increase in producer surplus due to new producers entering the market?
DGH
Refer to Figure 7-9. At equilibrium, producer surplus is represented by the area
DHF
Refer to Table 7-7. If the price is $1,050, who would be willing to supply the product?
David and Codi
Consumer surplus
Maximum price willing to spend - Actual price.
indifference curve
a curve that shows consumption bundles that give the consumer the same level of satisfaction
Giffen good
a good for which an increase in the price raises the quantity demanded
inferior good
a good that consumers demand less of when their incomes increase
normal good
a good that consumers demand more of when their incomes increase
Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price for widgets to $6, producer surplus
might increase or decrease.
As a result of a decrease in price,
new buyers enter the market, increasing consumer surplus
If the price of pasta increases and a consumer buys more pasta, we can infer that
pasta is an inferior good, and the income effect is greater than the substitution effect.
"Left" gloves and "right" gloves provide a good example of
perfect complements.
perfect complements
two goods with right-angle indifference curves
perfect substitutes
two goods with straight-line indifference curves
At any point on an indifference curve, the slope of the curve measures the consumer's
willingness to trade one good for the other.
Sofia pays Sam $50 to mow her lawn every week. When the government levies a mowing tax of $10 on Sam, he raises his price to $60. Sofia continues to hire him at the higher price. What is the change in producer sur- plus, change in consumer surplus, and deadweight loss?
$0, $10, $0
Refer to Figure 21-5. If the price of good X is $5, and your budget constraint is DE, what is the price of good Y?
$10
At Yolo's Bakery, the cost of making one croissant is $1.50. If Yolo sells 20 croissants and gains producer surplus of $40.00, then Yolo must be selling their croissants for
$3.50 each.
Refer to Figure 7-5. If the supply curve is S', the demand curve is D, and the equilibrium price is $150, what is the producer surplus?
$625
Alex tutors in his spare time for extra income. Students are willing to pay $48 per hour for as many hours Alex is willing to tutor. On a particular day, he is willing to tutor the first hour for $16, the second hour for $24.0, the third hour for $29.0, and the fourth hour for $48. Assume Alex is rational in deciding how many hours to tutor. His producer surplus is
$75
Evan purchases a wall calendar for $9, and his consumer surplus is $1. How much is Evan willing to pay for the wall calendar?
$8
Refer to Figure 8-3. The deadweight loss associated with this tax amounts to
$80, and this figure represents the surplus that is lost because the tax discourages mutually advantageous trades between buyers and sellers.
Matthew and Susan are both optimizing consumers in the markets for shirts and hats, where they pay $100 for a shirt and $50 for a hat. Matthew buys 4 shirts and 16 hats, while Susan buys 6 shirts and 12 hats. From this information, we can infer that Matthew's marginal rate of substitution is _____ hats per shirt, while Susan's is _____.
2, 2
Refer to Figure 7-1. When the price is P2, consumer surplus is
A
Refer to Figure 7-9. If the price were P3, consumer surplus would be represented by the area
A
Tariff
A tax on imported goods
The effects of free trade can be determined by
comparing the domestic price without trade to the world price
Jen values her time at $60 an hour. She spends 2 hours giving Colleen a massage. Colleen was willing to pay as much at $300 for the massage, but they negotiate a price of $200. In this transaction,
consumer surplus is $20 larger than producer surplus
An efficient allocation of resources maximizes
consumer surplus plus producer surplus.
Refer to Figure 7-1. Suppose that the price falls from P2 to P1. Area C represents the
consumer surplus to new consumers who enter the market when the price falls.
When a country allows trade and becomes an importer of a good
consumers are better off, and producers are worse off
Bob builds tiny houses for a living. Bill's out-of-pocket expenses (for wood, paint, etc.) plus the value that he places on his own time amount to his
cost of building furniture.
When a tax is imposed on a good, the
equilibrium quantity of the good always decreases.
The world price of a ton of steel is $1,000. Before Russia allowed trade in steel, the price of a ton of steel there was $650. Once Russia allowed trade in steel with other countries, Russia began
exporting steel and the price per ton in Russia increased to $1,000.
surplus
extra
The Laffer curve illustrates that, in some circum- stances, the government can reduce a tax on a good and increase the
government's tax revenue.
If the labor supply curve is very elastic, a tax on labor
has a large deadweight loss.
When a market is in equilibrium, the buyers are those with the ________ willingness to pay and the sellers are those with the ________ costs.
highest, lowest
Peanut butter has an upward-sloping supply curve and a downward-sloping demand curve. If a 10 cent per pound tax is increased to 15 cents, the government's tax revenue
increases by less than 50 percent and may even decline.
Eggs have a supply curve that is linear and upward-sloping and a demand curve that is linear and downward-sloping. If a 2 cent per egg tax is increased to 3 cents, the deadweight loss of the tax
increases by more than 50 percent.
The infant-industry argument
is based on the belief that protecting industries when they are young will pay off later.
Darius buys only lobster and chicken. Lobster is a normal good, while chicken is an inferior good. When the price of lobster rises, Darius buys
less lobster and more chicken
Name two types of market failure
market power and externalities
Motor oil and gasoline are complements. If the price of motor oil increases, consumer surplus in the gasoline market
may increase, decrease, or remain unchanged.
Producing a quantity larger than the equilibrium of supply and demand is inefficient because the marginal buyer's willingness to pay is
positive but less than the marginal seller's cost.
When a nation opens itself to trade in a good and becomes an importer
producer surplus decreases, but consumer surplus and total surplus both increase.
When a country allows trade and becomes an exporter of a good
producers of the good are better off, and consumers of the good are worse off
A supply curve can be used to measure producer surplus because it reflects
sellers cost
tax revenue
shaded area in a graph , which we obtain by multiplying the tax per unit by the total quantity sold Qt.
If a policymaker wants to raise revenue by taxing goods while minimizing the deadweight losses, he should look for goods with ________ elasticities of demand and ________ elasticities of supply.
small, small
Which of the following trade policies would benefit producers, hurt consumers, and increase the amount of trade?
starting to allow trade when the world price is greater than the domestic price
Consider the indifference curve map for nickels and quarters. Assume nickels are on the horizontal axis and quarters are on the vertical axis. The indifference curves for nickels and quarters are
straight lines with slope of −1/5.
substitution effect
the change in consumption that results when a price change moves the consumer along a given indifference curve to a point witha new marginal rate of substitutio
income effect
the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve
If a nation that imports a good imposes a tariff, it will increase
the domestic quantity supplied.
budget constraint
the limit on the consumption bundles that a consumer can afford
willingness to pay
the maximum amount that a buyer will pay for a good
If a nation that does not allow international trade in steel has a domestic price of steel lower than the world price, then
the nation has a comparative advantage in produc- ing steel and would become a steel exporter if it opened up trade.
world price
the price of a good that prevails in the world market for that good
efficiency
the property of a resource allocation of maximizing the total surplus received by all members of society
equality
the property of distributing economic prosperity uniformly among the members of society
A tax on a good has a deadweight loss if
the reduction in consumer and producer surplus is greater than the tax revenue
welfare economics
the study of how the allocation of resources affects economic well-being
The labor supply curve slopes upward if
the substitution effect on leisure is greater than the income effect.
cost
the value of everything a seller must give up to produce a good
A simultaneous increase in both the demand for tablets and the supply of tablets would imply that
the value of tablets to consumers has increased, and the cost of producing tablets has decreased.
Explain how buyers' willingness to pay, consumer surplus, and the demand curve are related.
they all measure the buyer willingness to pay for a good
Refer to Figure 8-3. Suppose a 20th unit of the good were sold by a seller to a buyer. Which of the following statements is correct?
For the 20th unit, the difference between the buyer's value and the seller's cost is less than the tax per unit.
Refer to Figure 21-2. Which of the graphs in the figure reflects an increase in the price of good X only?
Graph A
Refer to Figure 8-1. Suppose the government imposes a tax of P'-P'''. Total surplus before the tax is measured by the area
I + J + K + L + M + Y.
The demand curve for cookies is downward-sloping. When the price of cookies is $2, the quantity demanded is 100. If the price rises to $3, what happens to consumer surplus?
It falls by less than $100.
Emilio buys pizza for $10 and soda for $2. He has income of $100. His budget constraint will experience a parallel outward shift if which of the following events occur?
The price of pizza rises to $20, the price of soda rises to $4, and his income rises to $400.
producer surplus
Total revenue - Total cost.
When the nation of Ectenia opens itself to world trade in coffee beans, the domestic price of coffee beans falls. Which of the following describes the situation?
When the nation of Ectenia opens itself to world trade in coffee beans, the domestic price of coffee beans falls. Which of the following describes the situation?
John has been working as a tutor for $300 a semester. When the university raises the price it pays tutors to $400, Jasmine enters the market and begins tutoring as well. How much does producer surplus rise as a result of this price increase?
between $100 and $200
Explain how sellers' costs, producer surplus, and the supply curve are related.
The Sellers cost is how much they pay to obtain a good. The producers surplus is the amount they pay minus the cost of providing it. The supply curve measures this amount by looking at the area above the supply curve.
The main difference between imposing a tariff and handing out licenses under an import quota is that a tariff increases
government revenue.
A low domestic price indicates
that the country has a comparative advantage in producing the good and that the country will become an exporter
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
producer surplus
the amount a seller is paid for a good minus the seller's cost of providing it
deadweight loss
the fall in total surplus that results from a market distortion, such as a tax
marginal rate of substitution
the rate at which a consumer is willing to trade one good for another
