Econ Exam 2

Julie says, "I am willing to pay $10.00 for a pizza." The price of a pizza is $8. Julie's consumer surplus is $_____ . Which of the following is not a true statement about Julie's consumer surplus?

$2 Consumer surplus represents the total value that Julie placed on the pizza.

Moe's Pizzeria says, "I am willing to sell a pizza for $4." The price of a pizza is $8. Moe's producer surplus is $___ . Which of the following is not a true statement about Moe's producer surplus?

$4 Moe's producer surplus would increase if the price fell.

Which of the following could cause there to be a missing market?

All of these could create missing markets

Total ___ surplus is represented graphically by the area underneath the demand curve and above the equilibrium price. Total ___ surplus is represented by the area of the graph above the supply curve and below the equilibrium price.

Consumer, producer

Consumer surplus is measured by the:

Difference between willingness to pay and the actual price.

Willingness to pay is:

Equal to the benefit that a consumer receives from a good.

Suppose that the government gives a $10 per unit subsidy to sellers of Humbugs. The pre-tax price of Humbugs was $50. There are no additional social benefits to encouraging the consumption of Humbugs. If, at the original equilibrium price, the elasticity of demand was -0.5 and the elasticity of supply was 2, which of the following is true? Which of the following statements is correct about the overall effect of the subsidy?

Firms will receive relatively more benefits than consumers. Both consumers and producers will be better off. The subsidy will cost the goverment more than the net benefit to consumers and producers.

An effective price ceiling will cause consumers to:

Gain surplus from paying a lower price. lose surplus from trades that no longer take place.

Which of the following is an example of a time-inconsistent decision?

In the morning, Todd says that he will go for a walk at noon, but at noon, he goes to lunch instead.

Consider a market in which the government imposes a price floor. Assume that neither supply nor demand is perfectly elastic nor perfectly inelastic. Which of the following groups will always gain from a price floor? Which of the following groups will always lose from a price floor?

No group will always gain from a price floor Consumers Society as a whole, because total surplus will decrease

Vince likes to bet on football games. He says, "I would never bet more than $50 on a game, because it is not wise to risk more than that." But after he wins $500, he decides to place a $200 bet. Is Vince making a rational decision?

No, he is treating "his" money differently than money he has won.

Jessica works at a job that pays her $20 per hour. She needs to get her car fixed, and can do it herself at a cost of $100 for parts, but she will have to take four hours off work. She could also take her car to a repair shop and have the service done at a price of $160. Jessica says, "I should fix my car myself, because it's less expensive." Has she made the best choice?

No, she is undervaluing her opportunity costs.

Surplus

Producer surplus is the net benefit from selling a good. It is the revenue from the unit less its cost, so it depends both on the selling price and its cost (willingness to sell). If the price is $25, five firms will sell the product. Total producer surplus will be (25 - 5) + (25 - 10) + (25 - 15) + (25 - 20) + (25 - 25) = $50. If the price is $30, eight firms will sell the product. Total producer surplus will be (30 - 5) + (30 - 10) + (30 - 15) + (30 - 20) + (30 - 25) + (30 - 28) + (30 - 29) + (30 - 30) = $78.

Suppose that the government imposes a $10 tax on sellers of Humbugs. The pre-tax price of Humbugs was $50. If, at the original equilibrium price, the elasticity of demand was -2 and the elasticity of supply was 1.5, which of the following is true? Now suppose that the elasticity of demand was 0, and the elasticity of supply was 1.5. Which of the following is true?

Sellers will pay relatively more of the tax than buyers. Buyers will pay all of the tax. The price of Humbugs will rise to $60. The quantity of Humbugs demanded will not change.

Julie says, "I am willing to pay $10.00 for a pizza." Which of the following is true?

The benefit that Julie will receive from the pizza is $10.

It is sometimes argued that increases in gasoline prices act as an "income" tax on consumers in the short run. That is, consumers pay more for gasoline but do not change their consumption, and thus they simply have less money to spend on other goods. Which of the following best explains why this occurs? In the long run:

The demand for gasoline is very inelastic in the short run. demand will be more elastic, and consumers will buy less gas.

The government has decided to subsidize the consumption of Humbugs. The pre-subsidy price of Humbugs was $50, and neither supply nor demand is perfectly elastic nor perfectly inelastic. Which of the following is true? Who receives the greatest benefit from the subsidy depends on:

The price of Humbugs will fall by less than $10. the relative elasticity of the supply and demand curves.

Suppose that the government imposes a $10 tax on Humbugs. The pre-tax price of Humbugs was $50, and neither supply nor demand is perfectly elastic nor perfectly inelastic. If the government imposes the tax on sellers, which of the following is true? The incidence of a tax is determined by:

The price of Humbugs will rise by less than $10. the relative elasticity of the supply and demand curves.

When asked for next week's snack preference we say we prefer apples. At snack time next week, we say we want chocolate cake but next week we will prefer an apple. In this example, we are being _____

Time inconsistent

An arrangement entered into by an individual with the aim of helping fulfill a plan for future behavior that would otherwise be difficult is:

a commitment device.

Suppose you are trying on a $50 pair of shoes in a store. You may overvalue the benefit you would get from the shoes and undervalue their opportunity cost because the:

benefit can be identified, whereas the opportunity cost may be harder to identify.

An effective price , _____ which is below the equilibrium price, means ______ producers will be willing to sell the good but ______ buyers will be willing to buy.

ceiling, fewer, more

____ Surplus is the net benefit that a consumer receives from purchasing a good or service

consumer

At prices above or below the market equilibrium price:

fewer trades take place, because some people are no longer willing to buy or sell.

An effective milk price ______ which is above the equilibrium price, means ______ producers will be willing to sell milk but buyers ______ will be willing to buy milk.

floor, more, fewer

When producers receive a subsidy, sellers receive a:

higher price than the pre-subsidy equilibrium, and buyers pay a lower one.

In the short run, government policies that are intended to discourage consumption, such as taxes, are likely to be: In the longer run:

ineffective, because there will be a small change in quantity, since demand is less elastic in the short run. demand will be more elastic, and thus the policy will be more effective.

Equilibrium in a perfectly competitive, well-functioning market ____ _____ and is, therefore,_____ .

maximizes, total surplus, efficent

The demand curve is a line showing the ____ willingness to pay for all buyers.

maximum

Dead-weight loss is the total surplus at the market equilibrium before the intervention ______ the total surplus after a market intervention.

minus

When there are people who would like to make exchanges but cannot, for one reason or another, we say that a market is:

missing

Saying that a market is efficient means that:

no exchange can make anyone better off without making someone else worse off.

The use or enjoyment that the seller could get from keeping the product or from doing something else with the money that would be required to make it is the:

opportunity cost of the seller.

Markets can be missing for a variety of reasons:

public policy prevents the market from existing. lack of technology that would make the exchanges possible. lack of accurate information or communication between potential buyers and sellers.

The tax incidence is the:

relative tax burden borne by buyers and sellers.

When the price is raised above the equilibrium price, ____ gain some well-being at the expense of ____ although they also lose some well-being because there are fewer transactions taking place

sellers, buyers

When a price floor is in effect:

some consumer surplus is transferred to the producers.

People sometime stay in a bad relationship because they feel it would be a shame to waste the time and effort already put into it. This is an example of the:

sunk-cost fallacy.

Taryn says, "I can't change my major because I've already taken classes that count toward that major." This is an example of:

the sunk-cost fallacy

When there are missing markets:

there are beneficial exchanges that cannot take place.

Because it takes __________ for buyers and sellers to respond to a change in price, sometimes the full effect of price controls becomes clear only in the _____ run.

time, long

Deadweight loss is a loss of surplus that occurs because the quantity traded is different from the market equilibrium quantity.

total surplus

At market equilibrium

total surplus is maximized.

The implicit cost of ownership is an example of a cognitive bias documented by behavioral economists in which people:

value things more once they possess them.

The implicit cost of ownership refers to:

valuing something more because you own it.