Econ Midterm

Ice cream is a normal good if the demand

increases when income increases.

An increase in quantity supplied is different from shifting the supply curve to the right because an increase in quantity supplied

is caused by a price increase while a shift to the right is caused by a change in a nonprice determinant of supply.

Suppose that, in an attempt to combat severe inflation, the government decides to decrease the amount of money in circulation in the economy. This monetary policy decreases the economy's demand for goods and services, leading to ________ product prices. In the short run, the change in prices induces firms to produce ________ goods and services. This, in turn, leads to a _________ level of unemployment. In other words, the economy faces a trade-off between inflation and unemployment: Lower inflation leads to __________ unemployment.

lower, fewer, higher, higher

Refer to the attached figure figure3.pdf . Who bears the larger incidence of tax?

sellers The tax incidence is higher on those who are more inelastic i.e. those who have less substitutes available when price changes. in this case, supply curve is more inelastic than demand curve. hence sellers face larger incidence of tax.

deadweight loss

the fall in total surplus that results from a market distortion, such as a tax

externality

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

nominal interest rate

the interest rate as usually reported without a correction for the effects of inflation

real interest rate

the interest rate corrected for the effects of inflation

scarcity

the limited nature of society's resources

tax incidence

the manner in which the burden of a tax is shared among participants in a market

GDP

the market value of all final goods and services produced within a country in a given period of time

GDP equals:

the market value of all final goods and services produced within a country in a given period of time.

willingness to pay

the maximum amount that a buyer will pay for a good

inflation rate

the percentage change in the price index from the preceding period

world price

the price of a good that prevails in the world market for that good

equilibrium price

the price that balances quantity supplied and quantity demanded

real GDP

the production of goods and services valued at constant prices

nominal GDP

the production of goods and services valued at current prices

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

efficiency

the property of society getting the most it can from its scarce resources

productivity

the quantity of goods and services produced from each unit of labor input

equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price

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

economics

the study of how society manages its scarce resources

welfare economics

the study of how the allocation of resources affects economic well-being

cost

the value of everything a seller must give up to produce a good

Refer to the Figure. If the price increases from $4 to $8 due to a shift in the demand curve, producer surplus increases by

When the price is $4, producer surplus is ½ x 20 x ($4 - $0) = $40. When price is $8, producer surplus is ½ x 40 x ($8 - $0) = $160. The increase in producer surplus is $160 - $40 = $120.

Refer to the Figure. The imposition of the tax of $ 6 causes the price paid by consumers to:

When the tax is imposed, the price paid by consumers increases by $ 4, that is, the price paid by consumers after the tax is $ 12.

Refer to the Figure. The loss of producer surplus for those sellers of the good who continue to sell it after the tax of $ 20 is imposed is:

When the tax is imposed, the quantity sold decreases from 40 to 30 units. The loss of producer surplus associated with the 30 units that continue to be sold after the tax is computed as 30 x ($45 - $35) = 300.

Refer to the Figure. The loss of consumer surplus associated with some buyers dropping out of the market as a result of the tax is:

When the tax is imposed, the quantity sold decreases from 60 to 40 units. The loss of consumer surplus associated with these 20 units is from some consumers dropping out of the market. This share of the loss of consumer surplus is computed as ½ x (60-40) x ($12 - $8) = $40.

Refer to the Figure. The price that sellers effectively receive after a tax of $ 7 is imposed is:

When the tax of $ 7 is imposed, the quantity sold decreases from 40 to 20 and the price that sellers effectively receive is $ 4.

Refer to the Figure. Suppose the government imposes a tax of $ 7. Total surplus after the tax is equal to:

When the tax of $ 7 is imposed, the quantity sold decreases from 40 to 20. The new consumer surplus is 30, the new producer surplus is 40 and the government tax revenue is 140. The total surplus is 210.

Suppose the followings are your recent activities in April, 2020 Purchase 10 units of N95 face mask from amazon with $100. Make 100 regular face masks by yourself at home, and sell 50 of them to your local community with $1 per mask. Produce a ventilator by yourself and donate it to the local hospital, you think it can help the hospital save $1000.

When you buy face masks from Amazon, GDP increases by $100. For the face masks you made at home, only the part that actually went into the market counts towards GDP (another $50). Finally, donations don't occur through a market and the ventilator was not purchased from you, so it's also not part of GDP. Thus, your contribution to the domestic GDP is $100 + $50 = $150.

A movement upward and to the right along the supply curve for computers is caused by a(n)

increase in the price of computers.

Assuming bread and peanut butter are complements, decrease in price of bread will :

increase quantity demanded of peanut butter

If supply of wheat is price elastic, a 10% increase in price of wheat will:

increase quantity supplied of wheat by 25% price elasticity of supply is always positive. hence options a and d are ruled out. price elastic means elasticity of supply is greater than 1. hence % change in quantity is greater than % change in price. only option b satisfies the condition.

total revenue

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

Suppose, before you started college, you had a part-time job in a ice-cream place. The owner offered you a full-time position with an annual salary of $30,000. However, you decided to go to college. The annual costs including housing, tuition etc. is $20,000. What are your opportunity costs? What is your personal value of going to college?

$50,000, >$50,000

Toni and Mike are toymakers. Toni can either produce 500 units of shoes or 600 units of cars while Mike can produce 300 units of shoes and 600 units of cars. Before specialization, both of them were dividing their time equally between the production of shoes and cars. If both of them decide to specialize in the good in which they have a comparative advantage, total production will increase by

0 Cars and 100 shoes

Which of the elements of this scenario represent a flow from a household to a firm? This could be a flow of dollars, inputs, or outputs. The $400 Harry spends to purchase software Webex from Cisco systems Jake's labor The $200 per week Harry earns working for McDonald The hamburger Jake receives

1 2

If the nominal interest rate is 3 percent and the real interest rate is 0 percent, then the inflation rate is

3 percent Correct. The inflation rate is equal to the nominal interest rate minus the real interest rate. 3 - 0 = 3 percent.

indexation

the automatic correction by law or contract of a dollar amount for the effects of inflation

According to the table below, assume the base year is 2013, what is the GDP deflator in year 2013 and 2014 ?

100 and 109.73

Suppose the consumer price index is 80 in 2012, 90 in 2014, 100 in 2016, and 105 in 2018. If Social Security benefits were $1,000 in 2012 and we indexed them for inflation, the Social Security benefits would have been ________ in 2014.

1125 To index a value from year x to year y, you multiply the value by the ratio of CPIy/CPIx. In this case, you multiply $1,000 by 90/80 to obtain the value of $1125.

Suppose the US real GDP in 2019 is 19,222 billions of dollars, and the nominal GDP in 2019 is 21,729 billions of dollars. The base year is 2012. What is the GDP deflator in year 2019?

113.04

Refer to the attached figurefigure2.pdf

12

According to the table below, assume the base year is 2002, what is the real GDP in 1980 and 2010 ?

1357 and 1828

Based on the table below, if these are the only consumers on the market, then when the price decreases by 4, the market quantity demanded increases by

15

ssume these are the only firms in the market. If the price increases by $5 the market quantity supplied increases by

15

Refer to the attached figurefigure2_1_.pdf . How much revenue does the government collect from the tax on this good?

150 Government's tax revenue is tax per unit of the good times the number of units traded on the market. 6*25=$150. 25 is the quantity traded on the market post tax.

Refer to the attached figure figure2_1_.pdf . The effective price buyers pay after tax is imposed is:

18

Susan sells a house built several years ago. The house sells for $300,000, but $20,000 of this is her real estate agents' commission fee. How much does this transaction add to GDP?

20000

According to the table below, in which year was nominal GDP the highest?

2013

Using the graph below, what is the deadweight loss of this tariff policy? Assume the tariff is $2.

220

Suppose that a worker in Lago can produce either 5 units of oats or 20 pounds of tuna per year, and a worker in Abuta can produce either 20 units of oats or 5 pounds of tuna per year. There are 20 workers in each country. No trade occurs between the two countries. Lago produces and consumes 50 units of oats and 200 pounds of tuna per year while Abuta produces and consumes 200 units of oats and 50 pound of tuna per year. If trade were to occur, Lago would trade 60 pounds of tuna for 60 units of oats. If Lago now completely specializes in tuna production, how many pounds of tuna could it now consume along with the 60 units of imported oats?

340

The table below contains the quantity of Beer or Wine that each country can produce in a day. If Germany specializes in Beer and Spain in Wine, then the total production is

40 units of cheese and 20 units of wine. Response Feedback: Correct. If Germany specializes in producing Beer, then Germany will produce 40 units of Beer and 0 unit of wine. If Spain specializes in producing Wine, then Spain will produce 20 units of wine and 0 units of Beer. So, the total production will be 40 unit of Beer and 20 units of wine.

Suppose coke has price inelastic demand. A 15% increase in price of coke causes:

8% fall in demand for coke

Refer to the figure. At the equilibrium price, consumer surplus is:

800 Consumer surplus is the area below the demand curve and above the equilibrium price, which is $45 in this market. The area of this triangle is computed as ½ x 40 x (85-45) = $800

law of demand

the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

chapter 6 summary

A price ceiling is a legal maximum on the price of a good or service. An example is rent control. If the price ceiling is below the equilibrium price, then the price ceiling is binding, and the quantity demanded exceeds the quantity supplied. Because of the resulting shortage, sellers must in some way ration the good or service among buyers. A price floor is a legal minimum on the price of a good or service. An example is the minimum wage. If the price floor is above the equilibrium price, then the price floor is binding, and the quantity supplied exceeds the quantity demanded. Because of the resulting surplus, buyers' demands for the good or service must in some way be rationed among sellers. When the government levies a tax on a good, the equilibrium quantity of the good falls. That is, a tax on a market shrinks the size of the market. A tax on a good places a wedge between the price paid by buyers and the price received by sellers. When the market moves to the new equilibrium, buyers pay more for the good and sellers receive less for it. In this sense, buyers and sellers share the tax burden. The incidence of a tax (that is, the division of the tax burden) does not depend on whether the tax is levied on buyers or sellers. The incidence of a tax depends on the price elasticities of supply and demand. Most of the burden falls on the side of the market that is less elastic because that side of the market cannot respond as easily to the tax by changing the quantity bought or sold.

chapter 8 summary

A tax on a good reduces the welfare of buyers and sellers of the good, and the reduction in consumer and producer surplus usually exceeds the revenue raised by the government. The fall in total surplus—the sum of consumer surplus, producer surplus, and tax revenue—is called the deadweight loss of the tax. Taxes have deadweight losses because they cause buyers to consume less and sellers to produce less, and these changes in behavior shrink the size of the market below the level that maximizes total surplus. Because the elasticities of supply and demand measure how much market participants respond to market conditions, larger elasticities imply larger deadweight losses. As a tax grows larger, it distorts incentives more, and its deadweight loss grows larger. Because a tax reduces the size of the market, however, tax revenue does not continually increase. It first rises with the size of a tax, but if the tax gets large enough, tax revenue starts to fall.

Suppose Germany produces only two goods: corn and tablets. The following graph shows Germany's current production possibilities frontier, along with six output combinations represented by black points (plus symbols) labeled A to F. Find the correct pairs of efficient, inefficient, and infeasible points.

A, B; C, D; E, F

Refer to the Table. If the market price is $ 6.75, who would be willing to supply the product?

B At the price of $6.75, Ming, Kenzie and Adriana are comfortable in this market because their cost is lower than the market price. Also, Julia is willing to be in this market because the price is at least as her cost of production.

law of supply

the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises

chapter 10 summary

Because every transaction has a buyer and a seller, the total expenditure in the economy must equal the total income in the economy. Gross domestic product (GDP) measures an economy's total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. More precisely, GDP is the market value of all final goods and services produced within a country in a given period of time. GDP is divided among four components of expenditure: consumption, investment, government purchases, and net exports. Consumption includes spending on goods and services by households, with the exception of purchases of new housing. Investment includes spending on business capital, residential capital, and inventories. Government purchases include spending on goods and services by local, state, and federal governments. Net exports equal the value of goods and services produced domestically and sold abroad (exports) minus the value of goods and services produced abroad and sold domestically (imports). Nominal GDP uses current prices to value the economy's production of goods and services. Real GDP uses constant base-year prices to value the economy's production of goods and services. The GDP deflator—calculated from the ratio of nominal to real GDP—measures the level of prices in the economy. GDP is a good measure of economic well-being because people prefer higher to lower incomes. But it is not a perfect measure of well-being. For example, GDP excludes the value of leisure and the value of a clean environment.

Suppose you make two purchases for yourself. Which of them is included in GDP ?

Both a bottle of hand sanitizer and a haircut

law of supply and demand

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

Marlyne and Claudia are two toymakers who both produce dogs and cats. In one month, Marlyne can produce 5 dogs or 20 cats, whereas Claudia can produce 8 dogs or 24 cats. Given this, we know that

Claudia has an absolute advantage in cats.

chapter 7 summary

Consumer surplus equals buyers' willingness to pay for a good minus the amount they actually pay, and it measures the benefit buyers get from participating in a market. Consumer surplus can be computed by finding the area below the demand curve and above the price. Producer surplus equals the amount sellers receive for their goods minus their costs of production, and it measures the benefit sellers get from participating in a market. Producer surplus can be computed by finding the area below the price and above the supply curve. An allocation of resources that maximizes total surplus (the sum of consumer and producer surplus) is said to be efficient. Policymakers are often concerned with the efficiency, as well as the equality, of economic outcomes. The equilibrium of supply and demand maximizes total surplus. That is, the invisible hand of the marketplace leads buyers and sellers to allocate resources efficiently. Markets do not allocate resources efficiently in the presence of market failures such as market power or externalities.

Using the same graph and setting in the question 9, comparing with the closed economy, what are the changes of consumer surplus and producer surplus?

Consumer surplus is increased by (B+D+F). So the change is 12. Producer surplus is reduced by area B. So the change is -8.

Refer to the Figure. After the tax $ (P3 - P1) is levied, consumer surplus is represented by area

Consumer surplus is measured by the area below the demand curve and above the price that buyers pay. After the tax, consumer surplus is represented by area A.

Using the same graph and setting in the question 5, comparing with the closed economy, what are the changes of consumer surplus and producer surplus?

Consumer surplus is reduced by (B+E). So the change is -8. Producer surplus is increased by (B+E+G). So the change is 12.

Refer to the Figure. Which area represents the decrease in consumer surplus when the price increases from P2 to P1?

Consumer surplus when the price is P1 is area WYZ and consumer surplus when the price is P2 is area UXZ, so the decrease in consumer surplus when the price increases from P2 to P1 is UXYW

A gallon of milk cost $3.00 in 2019. The value for the CPI in 1965 is 60.2 and the value of the CPI for 2019 is 236.2, what is the price of a gallon of milk in 1965 dollars?

Correct. $3.00*(60.2/236.2) = $0.76.

Refer to the Table. If the market price is $ 6.40, the producer surplus in the market is

D When the market price is $6.40, Adriana, Kenzie, and Ming are willing to sell because their cost is less than the market price. Total producer surplus is ($6.40 - 6.35) + ($6.40 - 5.81) + ($6.40 - $5.43) = $1.61.

The decrease in the sum of consumer and producer surplus that results from a tax, is called

Deadweight loss is the decrease in total surplus (consumer surplus plus producer surplus) that results from a market distortion, such as a tax.

The quantity of the blender bought at the price of $35 is 300. After a sales tax of $5 is introduced, only 200 people purchase it. Is there a deadweight loss?

Deadweight loss is the decrease in total surplus that results from a market distortion, such as a tax.

Refer to the figure. With a tax in the amount of $ 7, the deadweight loss from taxation is equal to:

Deadweight loss is the decrease in total surplus that results from a market distortion, such as a tax. Due to the tax of $ 7, the quantity decreases from 40 to 20, resulting in a loss of total surplus represented by area: ½ x 7 x 20 = 70

Chapter 3 summary

Each person consumes goods and services produced by many other people both in the United States and around the world. Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services. There are two ways to compare the ability of two people to produce a good. The person who can produce the good with the smaller quantity of inputs is said to have an absolute advantage in producing the good. The person who has the smaller opportunity cost of producing the good is said to have a comparative advantage. The gains from trade are based on comparative advantage, not absolute advantage. Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage. The principle of comparative advantage applies to countries as well as to people. Economists use the principle of comparative advantage to advocate free trade among countries.

Which individual is most likely to invoke the "unfair-competition" argument?

If some countries do not abide by the same rules and regulations, then the individuals described by ANSWER 4 will think they themselves get the short end of the stick. So they are most likely to invoke the "unfair-competition" argument. An individual who believes free trade is desirable only if all countries abide by the same rules and regulations.

chapter 2 summary

Economists try to address their subject with a scientist's objectivity. Like all scientists, they make appropriate assumptions and build simplified models to understand the world around them. Two simple economic models are the circular-flow diagram and the production possibilities frontier. The field of economics is divided into two subfields: microeconomics and macroeconomics. Microeconomists study decision making by households and firms and the interactions among households and firms in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole. A positive statement is an assertion about how the world is. A normative statement is an assertion about how the world ought to be. When economists make normative statements, they are acting more as policy advisers than as scientists. Economists who advise policymakers sometimes offer conflicting advice either because of differences in scientific judgments or because of differences in values. At other times, economists are united in the advice they offer, but policymakers may choose to ignore the advice because of the many forces and constraints imposed by the political process.

chapter 4 summary

Economists use the model of supply and demand to analyze competitive markets. In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the market price. The demand curve shows how the quantity of a good demanded depends on the price. According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopes downward. In addition to price, other determinants of how much consumers want to buy include income, the prices of substitutes and complements, tastes, expectations, and the number of buyers. If one of these factors changes, the demand curve shifts. The supply curve shows how the quantity of a good supplied depends on the price. According to the law of supply, as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward. In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations, and the number of sellers. If one of these factors changes, the supply curve shifts. The intersection of the supply and demand curves determines the market equilibrium. At the equilibrium price, the quantity demanded equals the quantity supplied. The behavior of buyers and sellers naturally drives markets toward their equilibrium. When the market price is above the equilibrium price, there is a surplus of the good, which causes the market price to fall. When the market price is below the equilibrium price, there is a shortage, which causes the market price to rise. To analyze how any event influences a market, we use the supply-and-demand diagram to examine how the event affects the equilibrium price and quantity. To do this, we follow three steps. First, we decide whether the event shifts the supply curve or the demand curve (or both). Second, we decide in which direction the curve shifts. Third, we compare the new equilibrium with the initial equilibrium. In market economies, prices are the signals that guide economic decisions and thereby allocate scarce resources. For every good in the economy, the price ensures that supply and demand are in balance. The equilibrium price then determines how much of the good buyers choose to consume and how much sellers choose to produce.

A farmer produces potatoes, and sells them to a company which uses them all to make potato chips. The potatoes produced by the farmer are called

Inventory goods are goods that were produced but not sold or goods that were bought by companies to be used on the production of other goods but were not used, being kept in companies' inventories. Final goods are goods sold directly to households for use. Luxury goods are goods whose consumption increases more than proportionally as income increases. Intermediate goods are goods that are used in the production of other goods. In this case, the potatoes are used to produce potato chips, making them intermediate goods.

A teaching assistant in Jake's math course gives him some advice. "Based on past experience," the teaching assistant says, "working on 15 problems raises a student's exam score by about the same amount as reading the textbook for 1 hour." For simplicity, assume students always cover the same number of pages during each hour they spend reading.

Many decisions are made on the margin.

Milk is weighted more than soymilk in the calculation of the CPI if

Milk is weighted more than soymilk in the calculation of the CPI if consumers buy more milk than soymilk. Weights in the CPI are determined by the importance of the good to the representative consumer.

Paul can solve 20 Econ 103 conceptual question in an hour or 10 Econ 103 factual questions in an hour while Peter can solve 15 Econ 103 conceptual question in an hour or 5 Econ 103 factual questions in an hour.

Paul has a comparative advantage in solving factual questions

Paul can solve 20 Econ 103 conceptual question in an hour or 10 Econ 103 factual questions in an hour while Peter can solve 15 Econ 103 conceptual question in an hour or 5 Econ 103 factual questions in an hour. Based on this information we can say that,

Paul has an absolute advantage in solving both conceptual and factual questions. Response Feedback: Incorrect. Absolute advantage is the ability to produce a good using fewer inputs than another producer. Because Paul can solve more conceptual questions within an hour, Paul has an absolute advantage in solving conceptual questions. Similarly, Paul can solve more factual question in an hour, so Paul has an absolute advantage in solving factual questions.

The following table contains statements that provide some analysis of policies that address income inequality. Categorize each of these statements as either positive or normative. Income inequality has been severe for decades. Income inequality should be resolved to enlarge the portion of middle class. Income inequality seems involved with gender. The government ought to increase tax from the rich as a resolution for income inequality.

Positive, Normative, Positive, Normative

Suppose Jake earns $2,000 per week working as a programmer for Cisco systems. He uses $10 to order a hamburger at McDonald's. McDonald's pays Harry $200 per week to wait tables. Harry uses $400 to purchase software Webex from Cisco systems. Identify whether each of the following events in this scenario occurs in the factor market or the product market. Jake spends $10 to order a hamburger. Harry earns $200 per week working for McDonald's. Harry spends $400 to purchase software Webex from Cisco systems.

Product market, Factor market, Product marke

marginal change

a small incremental adjustment to a plan of action

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

Toni and Mike are toymakers. Toni can either produce 500 units of shoes or 600 units of cars while Mike can produce 300 units of shoes and 600 units of cars. Before specialization, both of them were dividing their time equally between the production of shoes and cars. If both of them decide to specialize in the good in which they have a comparative advantage, total production of

Shoes will increase and cars will remain unchanged

Using the same graph and setting in the question 9, suppose the government imposes an import-quota policy, which means the government only allows to import 2 units of the wines (2 thousands of bottles) from other countries. What is domestic price of the wine?

Since the import quota is 2, the country only imports 2 units, and any remaining need must be met by domestic production. Therefore, domestic demand should be 2 units more than domestic supply. When domestic price is 4, domestic demand is 2 units more than the domestic supply.

Which of the following statements is true?

The CPI is computed using a fixed basket of goods, whereas the GDP deflator allows the basket of goods to change over time as the composition of GDP changes. The CPI is better than the GDP deflator at reflecting the prices of goods and services bought by consumers. The CPI measures the overall cost of goods and services bought by a representative consumer. The CPI assigns fixed weights to the prices of different goods, whereas the GDP deflator assigns changing weights. In other words, the CPI is computed using a fixed basket of goods, whereas the GDP deflator allows the basket of goods to change over time as the composition of GDP changes. Inflation rate is the percentage change in the price index from the preceding period. The consumer price index (CPI)and the GDP deflator both can be used to measure inflation.

Which of the following is the most commonly reported measure of inflation by the media.

The CPI measures the overall cost of goods and services bought by a representative consumer, that is why it is the most commonly reported measure of inflation by the media.

The GDP deflator equals

The GDP deflator is a measure of how much price changes (usually increases) are making the nominal GDP be different from (usually greater than) the real GDP. It is defined as the nominal GDP divided by the real GDP multiplied by 100.

supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

chapter 11 summary

The consumer price index (CPI) shows the cost of a basket of goods and services relative to the cost of the same basket in the base year. The index is used to measure the overall level of prices in the economy. The percentage change in the CPI measures the inflation rate. The CPI is an imperfect measure of the cost of living for three reasons. First, it does not take into account consumers' ability to substitute toward goods that become relatively cheaper over time. Second, it does not take into account increases in the purchasing power of the dollar due to the introduction of new goods. Third, it is distorted by unmeasured changes in the quality of goods and services. Because of these measurement problems, the CPI overstates true inflation. Like the CPI, the GDP deflator measures the overall level of prices in the economy. The two price indexes usually move together, but there are important differences. The GDP deflator differs from the CPI because it includes goods and services produced rather than goods and services consumed. As a result, imported goods affect the CPI but not the GDP deflator. In addition, while the CPI uses a fixed basket of goods, the GDP deflator automatically changes the group of goods and services over time as the composition of GDP changes. Dollar figures from different times do not represent a valid comparison of purchasing power. To compare a dollar figure from the past to a dollar figure today, the older figure should be inflated using a price index. Various laws and private contracts use price indexes to correct for the effects of inflation. The tax laws, however, are only partially indexed for inflation. A correction for inflation is especially important when looking at data on interest rates. The nominal interest rate is the interest rate usually reported; it is the rate at which the number of dollars in a savings account increases over time. By contrast, the real interest rate takes into account changes in the value of the dollar over time. The real interest rate equals the nominal interest rate minus the rate of inflation.

In the market for cigarettes, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. A tax of $4.50 per pack is imposed on cigarettes. The tax reduces the equilibrium quantity in the market by 3,000 packs. The deadweight loss from the tax is:

The deadweight loss is the triangle between the demand and supply curves up to the quantity sold after the tax. The base of the triangle is the reduction in the equilibrium quantity due to the tax and the height of the triangle is the amount of the tax per unit. The deadweight loss is ½ × 3,000 × 4.50 = 6,750.

chapter 9 summary

The effects of free trade can be determined by comparing the domestic price before trade with the world price. A low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter. A high domestic price indicates that the rest of the world has a comparative advantage in producing the good and that the country will become an importer. 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. When a country allows trade and becomes an importer of a good, consumers are better off, and producers are worse off. In both cases, the gains from trade exceed the losses. A tariff—a tax on imports—moves a market closer to the equilibrium that would exist without trade and, therefore, reduces the gains from trade. Although domestic producers are better off and the government raises revenue, the losses to consumers exceed these gains. There are various arguments for restricting trade: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions. Although some of these arguments have merit in some cases, most economists believe that free trade is usually the better policy.

chapter 1 summary

The fundamental lessons about individual decision making are that people face trade-offs among alternative goals, that the cost of any action is measured in terms of forgone opportunities, that rational people make decisions by comparing marginal costs and marginal benefits, and that people change their behavior in response to the incentives they face. The fundamental lessons about interactions among people are that trade and interdependence can be mutually beneficial, that markets are usually a good way of coordinating economic activity among people, and that the government can potentially improve market outcomes by remedying a market failure or by promoting greater economic equality. The fundamental lessons about the economy as a whole are that productivity is the ultimate source of living standards, that growth in the quantity of money is the ultimate source of inflation, and that society faces a short-run trade-off between inflation and unemployment.

chapter 5 summary

The price elasticity of demand measures how much the quantity demanded responds to changes in the price. Demand tends to be more elastic if close substitutes are available, if the good is a luxury rather than a necessity, if the market is narrowly defined, or if buyers have substantial time to react to a price change. The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. If quantity demanded moves proportionately less than the price, then the elasticity is less than 1 and demand is said to be inelastic. If quantity demanded moves proportionately more than the price, then the elasticity is greater than 1 and demand is said to be elastic. Total revenue, the total amount paid for a good, equals the price of the good times the quantity sold. For inelastic demand curves, total revenue moves in the same direction as the price. For elastic demand curves, total revenue moves in the opposite direction as the price. The income elasticity of demand measures how much the quantity demanded responds to changes in consumers' income. The cross-price elasticity of demand measures how much the quantity demanded of one good responds to changes in the price of another good. The price elasticity of supply measures how much the quantity supplied responds to changes in the price. This elasticity often depends on the time horizon under consideration. In most markets, supply is more elastic in the long run than in the short run. The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. If quantity supplied moves proportionately less than the price, then the elasticity is less than 1 and supply is said to be inelastic. If quantity supplied moves proportionately more than the price, then the elasticity is greater than 1 and supply is said to be elastic. The tools of supply and demand can be applied in many different kinds of markets. This chapter uses them to analyze the market for wheat, the market for oil, and the market for illegal drugs.

US is an importer of cups, taking the world price of $10 per cup as given. Suppose US imposes a $5 tariff on cups. Which of the following outcomes is possible?

The price of cups in US increases to $15; the quantity of US-produced cups increases; and the quantity of cups imported by US decreases. Domestic Price = World Price + Tariff . So the price in US increases to $15. With a higher price, US cup-producer will increase supply. With a higher domestic supply, cups imported will decrease.

Refer to the figure. Which area represents producer surplus when the price is P2?

The producer surplus is HKN when the market price is P2. Producer surplus is measured by the area below the price and above the supply curve.

According to the graph below, in the open trade economy, the total surplus in the egg market is:

Total surplus = A+B+D+E+G+C, which is 29.

efer to the attached figure figure3.pdf Consider the market for luxury cars. The government imposes a tax of $300 per unit. what is the proportion of total tax per unit paid by buyers?

Total tax per unit is $300. buyer's tax burden is (buyer's price -equilibrium price) i.e. 1600-1500=$100 . share of total tax per unit paid by buyers is 100/300=33.3%

We all (or may) hear about the US-China trade war. Which of the following statement is absolutely false about the trade war.

Trade war will create a deadweight loss. So trade war will not increase the worldwide total social welfare.

tariff

a tax on goods produced abroad and sold domestically

We have two countries A and B producing coffee and cocoa. Country A has an absolute in producing both goods. So, we can say that

We cannot say anything regarding which country has a comparative advantage

Suppose the demand for tea decreases. What will happen to producer surplus in the market for tea?

When demand decreases, price decreases and producer surplus decreases.

Assume the price elasticity of supply is the same between Good A and Good B and the demand for Good A is relatively inelastic while the demand for Good B is relatively elastic. If a $2.00 per unit tax is imposed on both markets

When demand is relatively elastic, the deadweight loss of a tax is large; and when demand is relatively inelastic, the deadweight loss of a tax is small. The tax burden falls more heavily on the inelastic side of the market, and both tax burden and deadweight loss are independent of tax collection.

Assume the price elasticity of supply is the same between Good A and Good B and the demand for Good A is relatively inelastic while the demand for Good B is relatively elastic. If a $2.00 per unit tax is imposed on both markets,

When demand is relatively elastic, the deadweight loss of a tax is large; and when demand is relatively inelastic, the deadweight loss of a tax is small. The tax burden falls more heavily on the inelastic side of the market, and both tax burden and deadweight loss are independent of tax collection. b. the deadweight loss in the market for Good B will be larger than the deadweight loss in the market for Good A.

Refer to the table. Who experiences the largest gain of consumer surplus when the price of the good decreases from $ 38 to $ 35?

When the price changes, all three buyers who would be willing to purchase the good gain the same amount of consumer surplus because the price changes by the same amount for all three buyers. b. Alfredo, Padraig, and Marisol experience the same gain of consumer surplus

Refer to the Figure. If the equilibrium price decreases from $40 to $20, what is the loss of producer surplus for the producers who drop out of the market because the price decreases?

When the price decreases from $40 to $20, producer surplus decreases by the area between the two prices and up to the quantities given by the supply curve. The loss of producer surplus for the producers who remain in the market is the area 120 x ($40 − $20) = $ 2 400. The loss of producer surplus for the producers who drop out of the market because of the price decreases is the area ½ × (240 − 120) × ($40 − $20) = $1 200.

Refer to the Figure. Suppose the government imposes a tax of $ (P3 - P1). The area measured by F + G represents

a. Loss of producer surplus after the tax. Producer surplus is measured by the area above the supply curve and below the price that sellers receive. After the tax, sellers receive a price of P1, so producer surplus is illustrated as area H in this graph. Therefore, F + G is the loss of producer surplus due to the tax.

If the Federal Reserve announces that it will be increasing the money supply through its monetary policy tools, it tells us the Federal Reserve is

hoping to stimulate demand for goods and services.

inferior good

a good for which, other things being equal, an increase in income leads to a decrease in demand

normal good

a good for which, other things being equal, an increase in income leads to an increase in demand

demand curve

a graph of the relationship between the price of a good and the quantity demanded

supply curve

a graph of the relationship between the price of a good and the quantity supplied

market

a group of buyers and sellers of a particular good or service

price ceiling

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

price floor

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

competitive market

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

income elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

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

cross price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good

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

producer price index

a measure of the cost of a basket of goods and services bought by firms

core CPI

a measure of the overall cost of consumer goods and services excluding food and energy

CPI

a measure of the overall cost of the goods and services bought by a typical consumer

GDP deflator

a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

elasticity

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

market failure

a situation in which a market left on its own fails to allocate resources efficiently

shortage

a situation in which quantity demanded is greater than quantity supplied

surplus

a situation in which quantity supplied is greater than quantity demanded

equilibrium

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

market economy

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

Assume Ice cream is a normal good. Which of the following would shift its demand from demand C to demand B?

an expectation by buyers that their incomes will decrease in the very near future

inflation

an increase in the overall level of prices in the economy

refer to the attached figure.figure1.pdf . A government imposed price of $12 in this market is an example of :

binding price ceiling that creates a shortage

n the market for cars, demand is determined by:

buyers of cars

positive statement

claims that attempt to describe the world as it is

normative statement

claims that attempt to prescribe how the world should be

Suppose in the attached figure figure4.pdf , government imposes minimum wage at $20. what happens to the quantity of labour hired legally?

decrease When government imposes minimum wage at $20 which is above the equilibrium price and hence binding, quantity of labour demanded falls from 3000. Hence quantity of labour hired legally which is the quantity of labour demanded, falls.

Assuming tea and coffee are substitutes, as coffee becomes cheaper, people will consume more tea. true or false?

false

If demand for jeans is perfectly price inelastic, increase in price of jeans will cause quantity demanded of jeans to fall less than proportionately. True or False?

false

If supply of wheat is perfectly price elastic at $15, quantity supplied above $15 is zero. true or false?

false

Refer to the attached figurefigure2_1_.pdf . The tax per unit of the good is $3. True or false?

falseThe tax per unit of the good is the difference between price paid by buyers and price received by sellers. It is $18-$12=$6. so the statement is false.

business cycle

fluctuations in economic activity, such as employment and production

Economists make assumptions to make models easier for students to understand. focus their thinking. better match the complexity of the real world. represent their political bias.

focus thinking

imports

goods produced abroad and sold domestically

exports

goods produced domestically and sold abroad

According to the graph below, in the open economy, what is the total surplus in the wine market:

he total surplus is A+B+D+F+C, which is 29.

Consider the following production possibility frontier. How much is the opportunity cost of trains between points B and C?

other over number

rational people

people who systematically and purposefully do the best they can to achieve their objectives

The standard of living in a country is most closely tied to its

productivity.

Suppose the government in champaign imposes a price ceiling of $200 on apartments when the equilibrium price of apartments is $100. what happens to the equilibrium quantity?

remains unchanged

Suppose price of shirts increases from 90 to 120. the producer of shirts increases quantity supplied from 5 to 7. then the price elasticity of supply for shirts is:

se the midpoint formula for price elasticity of supply. Plug in Q1=5, Q2=7, P1=90, P2=120 in the formula: 1.17

incentive

something that induces a person to act

consumption

spending by households on goods and services, with the exception of purchases of new housing

investment

spending on business capital, residential capital, and inventories

net exports

spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

government purchases

spending on goods and services by local, state, and federal governments

Refer to the attached figure. in free market, equilibrium wage is $15 and equilibrium quantity of labor hired is 3000. government imposes minimum wage at $14. what happens to the quantity of labour hired legally?

stay same A minimum wage is a price floor below which price cannot fall. The minimum wage is binding only if it is above the equilibrium price. In this case, minimum wage is below the equilibrium price of $15, so it is not binding. quantity of labor hired stays same at initial equilibrium level of 3000. hence option a is correct.

Suppose you want to buy new sneakers. However, the stores are only open during your work hours. Therefore, you need to take off early to purchase your sneakers.You earn $50 an hour. Assume there are no other costs. Based on the information below, where would you buy your sneakers

store 2 70 dollars 30 mins

The CPI does not reflect the change in the purchasing power of a dollar when new goods are introduced because

the CPI is based on a fixed consumer basket of goods and services. The introduction of new goods creates a problem when measuring the CPI. Because the CPI is based on a fixed basket of goods and services, it does not reflect increased value as a result of a larger variety of goods. It is difficult to measure the increased value as a result of new and improved goods.

market power

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

property rights

the ability of an individual to own and exercise control over scarce resources

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

absolute advantage

the ability to produce a good using fewer inputs than another producer

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

quantity demanded

the amount of a good that buyers are willing and able to purchase

quantity supplied

the amount of a good that sellers are willing and able to sell

Refer to the attached figure figure3.pdf . what is the proportion of total tax per unit paid by sellers?

total tax per unit is $300. Sellers' burden of the tax is equilibrium price-seller's price i.e. 1500-1300=$200 . hence share of total tax per unit paid by sellers is 200/300=66.67%.

If demand for apples is price elastic, increase in price of apples will cause total revenue from apples to fall. true or false?

true

If demand for jeans is perfectly price elastic at $10, consumers will demand no jeans at a price above $10. true or false?

true

complement

two goods for which an increase in the price of one leads to a decrease in the demand for the other

substitute

two goods for which an increase in the price of one leads to an increase in the demand for the other

opportunity cost

whatever must be given up to obtain some item

Can government's intervention into the market improve market outcomes?

yes sometimes