ECON 210 Exam 2

income elasticity of demand

% change in quantity demanded / % change in income

price elasticity of demand

% change in quantity demanded / % change in price

cross price elasticity of demand

% change in quantity of A demanded / % change in price of B

price elasticity of supply

% change in quantity supplied / % change in price

midpoint method for elasticity

(1 / slope of demand curve) * (Price midpoint / Quantity midpoint)

Arguments for price controls

- Discipline monopolies and monopsonies - Help the poor

Dark side of price controls

- Soviet Union largest experiment with command economy price controls - blat: favors exchanged to get shortage goods from other people or enforcers of the price controls

Alternatives to price controls

- Wage subsidies like Earned Income Tax Credit - Subsidies for rent and food - Competition restrains monopolies and monopsonies - Gas should not be subsidized

price ceiling

A legal maximum on the price at which a good can be sold aka legally imposed shortage

price floor

A legal minimum on the price at which a good can be sold aka legally imposed surplus

If the price of ice cream changes by 30 percent and the quantity demanded changes by 75 percent, what is the absolute value of demand elasticity? A. 2.5, so demand is elastic B. 2.5, so demand is inelastic C. 0.4, so demand is inelastic D. 0.4, so demand is elastic

A. 2.5, so demand is elastic

Assuming that both alcohol demand and supply are relatively elastic, what happens to alcohol consumption and to the alcohol market price? A. Alcohol consumption decreases, whereas the alcohol market price increases if the tax is placed on the sellers or decreases if the tax is placed on the buyers B. Alcohol consumption increases, whereas the alcohol market price increases if the tax is placed on the sellers or decreases if the tax is placed on the buyers C. Alcohol consumption decreases, whereas the alcohol market price increases if the tax is placed on the buyers or decreases if the tax is placed on the sellers D. Alcohol consumption increases, whereas the alcohol market price increases if the tax is placed on the buyers or decreases if the tax is placed on the sellers

A. Alcohol consumption decreases, whereas the alcohol market price increases if the tax is placed on the sellers or decreases if the tax is placed on the buyers

Speculation is: A. attempting to profit from expectations about future price changes B. a disruption of the normal market mechanism C. polluting the price signal by guessing wildly about the future D. pondering the meaning of life

A. attempting to profit from expectations about future price changes

If gasoline prices remain high long enough, people will arrange to do more telecommuting. This would be an example of why the elasticity of: A. demand for gasoline is higher in the long run B. demand for gasoline is lower in the long run C. supply for gasoline is lower in the long run D. supply for gasoline is higher in the long run

A. demand for gasoline is higher in the long run

To what does the Russian concept of blat refer? A. having connections that one can use to get favors B. the act of standing in lines to buy goods C. the barter system that developed in Russia as a result of the shortages of goods D. the command economy system that was instituted in Russia

A. having connections that one can use to get favors

What does price elasticity of supply measure? A. how responsive quantity supplied is to a change in price B. how responsive price is to a change in quantity demanded C. how responsive supply is to a change in price D. how responsive price is to a change in quantity supplied

A. how responsive quantity supplied is to a change in price

In a market-oriented economy, individuals' economic lives are said to be A. interrelated with many other individuals and firms B. almost completely controlled by government regulation C. illegal and in violation of government rules on prices and sales D. based more on production than on consumption

A. interrelated with many other individuals and firms

Garret is an undergraduate looking for a job to pay for college. As Garret seeks employment, he is glad to know that he will be paid at least $7.25 per hour. Select the term that best fits the scenario. A. price floor B. license C. price ceiling D. quota E. black market

A. price floor

speculation

An involvement in risky business transactions in an effort to make a quick or large profit.

You are the product manager of Tide at Proctor and Gamble. The company is considering a 8.00% price increase and the CEO asks you to tell him how quantity demanded will change as a result. You know that the price elasticity for Tide is −1.10. You answer the CEO that quantity demanded will change by A. -7.27% B. -8.80% C. -8.10% D. 0% E. -0.138%

B. -8.80%

Suppose that the market for amphetamines consists of two types of users, addicts and casual users. Casual users only use the drug occasionally, whereas addicts go to much greater lengths to make sure they have some of it readily available whenever they feel the need to consume it. What would you predict about the demand elasticities for these two types of consumers? A. Casual users will have more elastic demand; their level of consumption will be less responsive to price changes B. Addicts will have more inelastic demand; their level of consumption will be less responsive to price changes C. Addicts and casual users are both likely to have very elastic demand D. Addicts and casual users are both likely to have very inelastic demand

B. Addicts will have more inelastic demand; their level of consumption will be less responsive to price changes

Why might the demand for massages be more elastic than the demand for chiropractic adjustments? A. Massages are much cheaper than physical therapy sessions B. Massages tend to be luxuries and physical therapy sessions tend to be necessities C. People get massages in the short run and physical therapy in the long run D. Relative to massages, there are more substitutes for physical therapy sessions

B. Massages tend to be luxuries and physical therapy sessions tend to be necessities

Which of the markets described is NOT an example of a prediction market? A. A national program for university statistics students allows them to place bets using fake money to buy shares in college football teams B. Several large investment firms collectively decide to purchase large amounts of sugar when the price is low in order to drive up its price on the world market, and then sell when the price is high C. The Recording Industry Association of America (the RIAA), the trade industry representing the American music business, uses an internal system among employees to speculate about future record sales D. An online system allows users to predict electoral outcomes across the globe

B. Several large investment firms collectively decide to purchase large amounts of sugar when the price is low in order to drive up its price on the world market, and then sell when the price is high

Which statement describes something that is NOT a difficulty of central economic planning? A. Designers must ensure that planners have the incentive to move goods from low-to-high valued uses B. The skills of central planners go unappreciated C. The planners must communicate orders to everyone in production D. Central planning distinguishes between low-and-high value uses of an item

B. The skills of central planners go unappreciated

Prices act as signals in markets. If the price of a good increases due to an increase in demand, this is a signal to producers to A. temporarily stop production of the good B. increase production C. decrease production D. continue producing at the current level

B. increase production

Nobel prize-winning economist Gary Becker suggested prohibited drugs should be legalized and then taxed. This would _____ the seller's cost and _____ government revenue. A. increase; decrease B. increase; increase C. decrease; decrease D. decrease; increase

B. increase; increase

If the cross-price elasticity of demand of two goods is positive, we can conclude that the two goods are: A. complements B. substitutes C. normal goods D. inferior goods

B. substitutes

Tonya consumes 40 steaks a year when her yearly income is $40,000. After her income falls to $35,000 a year, she consumes only 35 steaks a year. Calculate her income elasticity of demand for steaks. A. 12.5 B. -1 C. 1 D. -12.5

C. 1

Which statement is FALSE? A. A rise in prices will eliminate a shortage B. Politicians often blame speculators and profiteers for rising prices rather than changes in supply and demand C. A frost that destroys half the orange crop will create a surplus of oranges D. It is possible to have a shortage of a good even if its supplies are abundant

C. A frost that destroys half the orange crop will create a surplus of oranges

Which statement is TRUE in a market with a price ceiling? A. Resources are allocated to their most efficient uses B. The supply of goods is bought by the buyers with the highest willingness to pay C. Buyers and sellers experience unexploited gains from trade D. The supply of goods is sold by the sellers with the lowest cost

C. Buyers and sellers experience unexploited gains from trade

What does it mean if sellers use blat to allocate goods and services? A. Goods and services are allocated by the government. A representative of the government chooses who, among all consumers, actually gets to consume goods B. Coercive force is used to allocate goods and services. Goods flow to those who are most violent or have the most intimidating appearance C. Goods and services are allocated using a system based on informal connections and favors. Sellers allocate goods to people who can compensate them by offering another scarce good in exchange D. Goods are rationed. Consumers are able to purchase goods and services, but only in small quantities, to ensure that all consumers have a chance to acquire the good or service E. Sellers allocate goods on a "first come, first served" basis. The consumers who are in the front of the line are the ones who are able to acquire goods and services

C. Goods and services are allocated using a system based on informal connections and favors. Sellers allocate goods to people who can compensate them by offering another scarce good in exchange

The elasticity of supply measures: A. The profit margin of sellers' products B. The costs of changing production methods C. How quantity supplied responds to price changes D. How quickly a surplus is eliminated

C. How quantity supplied responds to price changes

Suppose that a hurricane hits both North Carolina and South Carolina. North Carolina has severe anti "price-gouging" laws (ceilings) in place while South Carolina has none. Both states have a shortage of ice. Which state will recover from its ice shortage more quickly? A. South Carolina will recover more quickly because the anti-gouging laws create incentives to invest in ice production B. North Carolina will recover more quickly because prices can adjust to make businesses willing to invest in ice production C. South Carolina will recover more quickly because prices can adjust to make businesses willing to invest in ice production D. North Carolina will recover more quickly because the anti-gouging laws create incentives to invest in ice production

C. South Carolina will recover more quickly because prices can adjust to make businesses willing to invest in ice production

If consumers pay 100 percent of the burden of a commodity tax, what could one conclude? A. The commodity in question has a perfectly elastic demand curve B. Neither side has a perfectly elastic curve but the supply side is more elastic than the demand side C. The commodity in question has a perfectly elastic supply curve D. Suppliers have more effective lobbying in Washington than consumers

C. The commodity in question has a perfectly elastic supply curve

Select the correct statement regarding tax wedges. A. Tax wedges are larger when demand is more inelastic than supply B. Tax wedges are larger when commodity taxes are imposed on buyers C. The size of the tax wedge is unrelated to elasticity D. Tax wedges are smaller when commodity taxes are imposed on buyers E. Tax wedges are larger when supply is more inelastic than demand

C. The size of the tax wedge is unrelated to elasticity

A subsidy is: A. equal to the price received by buyers minus the price paid by sellers B. paid by buyers of the good C. a reverse tax D. paid for by suppliers

C. a reverse tax

If quantity supplied equals 85 units and quantity demanded equals 80 units under a price control, then it is a: A. nonbinding price floor B. binding price ceiling C. binding price floor D. nonbinding price ceiling

C. binding price floor

In a competitive labor market, the higher the minimum wage is above the equilibrium wage, the: A. smaller is the labor surplus among teenagers B. more likely it is for students to stay in high school and receive their diploma C. greater is the number of low-skilled unemployed workers D. smaller is the number of low-skilled unemployed workers

C. greater is the number of low-skilled unemployed workers

If demand were to become more elastic, ceteris paribus, the deadweight loss from a tax would: A. remain the same B. change in an unpredictable direction C. increase D. decrease

C. increase

Farmer Darren raises goats. When he can sell his goats for $200/goat he will sell any or all of his goats. He never asks for more than $200/goat and he never sells his goats for less than $200/goat. This is an example of A. perfectly inelastic supply B. perfectly elastic demand C. perfectly elastic supply D. perfectly inelastic demand

C. perfectly elastic supply

Which of the following objects probably has the least elastic demand? A. eggs B. McDonald's hamburgers C. prescription medications D. cable television

C. prescription medications

Price ceilings: A. help reduce the deadweight losses owing to taxation B. increase market output to the point where consumer surplus equals producer surplus C. reduce the size of the market, shrinking both consumer and producer surplus D. increase the gains from trade because lower prices encourage consumers to buy more

C. reduce the size of the market, shrinking both consumer and producer surplus

If the price elasticity of supply for plastic is 0.31, then the price elasticity of supply for plastic is A. perfectly elastic B. relatively elastic C. relatively inelastic D. unit elastic E. perfectly inelastic

C. relatively inelastic

In the case of a binding price floor, economists expect the quality level of a good to: A. remain the same B. change in an indeterminate direction C. rise D. fall

C. rise

Rising prices act as a signal to: A. consumers that the good is overvalued B. speculators that the opportunity cost of the good is failing C. suppliers to increase the quantity supplied in those markets D. politicians that price gouging is occurring

C. suppliers to increase the quantity supplied in those markets

Buyers bear a greater share of a tax burden when a tax is imposed in a market where: A. the tax is imposed on buyers B. demand is more elastic than supply C. supply is more elastic than demand D. the tax is imposed on sellers

C. supply is more elastic than demand

Which statement is the prime reason individuals trade in prediction markets? A. Prediction markets allow users increased security for their finances compared to normal stock markets B. Online prediction markets allow users to escape online gambling prohibitions C. Prediction markets promise higher returns than the average stock trading system D. Prediction markets allow users to speculate on future forecasts

D. Prediction markets allow users to speculate on future forecasts

What does the price of diesel fuel in Russell, KS have to do with the price of bread in Boulder, CO? A. As the price of bread increases in Colorado, farmers use more and more diesel fuel. This drives up the price of diesel fuel B. Nothing. All bread in Boulder, CO is produced with grain from locally owned, wind‑powered, organic farm cooperatives C. As the price of diesel fuel in Kansas increases, the price of bread in Colorado falls because it is cheaper to plant, harvest, and transport grain D. Since farmers in Kansas use diesel fuel‑powered equipment to plant, harvest, and transport grain, an increase in the price of fuel may increase the price of bread

D. Since farmers in Kansas use diesel fuel‑powered equipment to plant, harvest, and transport grain, an increase in the price of fuel may increase the price of bread

Select the correct statement regarding commodity (or excise) taxes. A. From the perspective of buyers, taxes imposed on firms are preferable to taxes imposed on buyers, because firms ultimately pay a larger share of these types of taxes B. Regardless of who writes a check to the government, the burden of commodity taxes is shared equally by buyers and sellers C. The reduction in consumer and producer surplus associated with a commodity tax is equivalent to the tax revenue collected D. The burden of a tax is unrelated to who actually pays money to the government

D. The burden of a tax is unrelated to who actually pays money to the government

Which of the following is a reason why the demand curve for an item would be more elastic? A. People's incomes are very high relative to the cost of the item B. The cost of the item forms a very small part of consumers' budgets C. The item is a necessity D. The item has many good substitutes

D. The item has many good substitutes

Harry runs a hot dog factory. Beef is a primary ingredient in Harry's hot dogs. Harry has been watching the cattle (beef) futures market and noticed that the 33-month future price is $50 more than the spot (current) price. Which statement is consistent with the speculation reflected in the futures price? A. The cost of cattle feed has fallen due to an unexpectedly large crop of oats B. There was a disease that killed a large portion of the chocolate crop last month C. Speculators are manipulating the market D. There was a disease that killed a large number of buffalo (a substitute) earlier today

D. There was a disease that killed a large number of buffalo (a substitute) earlier today

What is a prediction market? A. a market that uses quantities as probabilities to make predictions B. a market that deals exclusively with oil C. a market that uses force to make predictions D. a market that uses prices as probabilities to make predictions

D. a market that uses prices as probabilities to make predictions

If quantity supplied equals 40 units and quantity demanded equals 50 units under a price control, then it is a: A. nonbinding price ceiling B. nonbinding price floor C. binding price floor D. binding price ceiling

D. binding price ceiling

Futures markets largely _________ risks of price fluctuations for buyers and sellers of the good. A. maintain B. increase C. do not affect D. decrease

D. decrease

Compared to the 1980s, the (inflation-adjusted) price of computer chips is much lower today and revenues from computer chips are _____ because demand is _____. A. approximately unchanged; unit elastic B. higher; inelastic C. lower; inelastic D. higher; elastic

D. higher; elastic

Steve decides not to rent out his second home since he is not allowed to set the rate above $1000 per month even though he knows he could find renters willing to pay much more. Select the term that best fits the scenario. A. license B. price floor C. quota D. price ceiling E. black market

D. price ceiling

Most examples in which prices are controlled above market levels involves a good for which the: A. buyers outnumber the sellers B. market is controlled by a monopolist C. market is controlled by a government D. sellers outnumber the buyers

D. sellers outnumber the buyers

In the early 2000s, economists and firms worked with a research arm of the Pentagon(specifically, DARPA) to develop prediction markets for national security purposes. One of the potential shares for trading would have been the event of a terrorist attack(the entire project was later canceled in 2003 because of publicity issues). What would intelligence agencies have looked at to determine the likelihood of a terrorist attack at any particular time? A. the level of fluctuation of the volume of trading B. the volume of trading C. the level of fluctuation of the price D. the price of the share

D. the price of the share

Whether a buyer or a seller pays more of a commodity tax depends on: A. the decisions made by Congress B. whether the demand curve is negatively or positively sloped C. whether the supply curve is negatively or positively sloped D. their relative price elasticities

D. their relative price elasticities

Determinants of Elasticity

Demand is more elastic in the following circumstances: - When more close substitutes are available - When the good is defined specifically rather than broadly - When the good is a luxury rather than a necessity - In the long run rather than the short run Supply is more elastic in the following circumstances: - When producers are able to adjust their output easily - In the long run rather than the short run producers can change the scale of their production

What is a subsidy wedge? A. the difference between the amount of a good that is produced before and after a subsidy is imposed B. the combined reduction in consumer surplus and producer surplus that results from a subsidy C. government cheese D. the difference between the quantity supplied and the quantity demanded that results from a subsidy E. the difference between the price that sellers receive and the price that buyers pay, resulting from a subsidy

E. the difference between the price that sellers receive and the price that buyers pay, resulting from a subsidy

Identify the scenario as examples of elastic, inelastic, or unit elastic demand. When Ruko, a device used to stream movies at home, increases prices by 48 percent, total revenue decreases by 61 percent.

Elastic

T/F: The incidence of a tax is determined by which group - buyers or sellers - must actually pay the government.

False

T/F: When demand is elastic and supply is inelastic, the burden of a tax falls mainly on consumers.

False

T/F: When demand is inelastic and supply is elastic, the burden of a tax falls mainly on producers.

False

Identify the scenario as examples of elastic, inelastic, or unit elastic demand. When Bluebox, a streaming service for foreign television shows and movies, increases its prices by 49 percent, total revenue increases by 28 percent.

Inelastic

wasteful lines and other search costs

Price controls on an item (such as oil) can cause intense shortages and lines.

T/F: An excise tax can distort incentives and create missed opportunities for mutually beneficial transactions.

True

Identify the scenario as examples of elastic, inelastic, or unit elastic demand. When Cinema Supreme increases ticket prices by 12 percent, total revenue does not change.

Unit Elastic

Elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

tax burden

a measurement of taxes paid as a proportion of income

Government Tax Revenue

tax * quantity post tax

tax revenue

the money a government gains from the collection of taxes T = t * Qt

Deadweight Loss

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

deadweight loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium 1/2 (Q* - Qt) * t