MICRO MIDTERM STUDY GUIDE
Recently, a series of studies have demonstrated the considerable beneficial health effects of food and drink derived from the amaranth plant. This has affected consumer tastes for amaranth flour, pods, root, etc. At the same time, particularly favorable weather has resulted in a bumper crop of amaranth plants.
Supply and demand both shift right. (This is because change in tastes increase demand alongside supply)
What is the biggest problem facing Command Economies (socialism)?
Coordination and incentives to direct output
Move the point, E, in the accompanying graph to reflect equilibrium in the competitive market for corn and answer the following questions. Calculate consumer surplus (CS) and producer surplus (PS). *LESSON FROM THIS QUESTION: CHECK YOUR UNITS.
CS: ((9-4)*5)/2 = 12.50 but you have to divide by 5000 instead of just 5 (probably because hmmm the quantity being thousands of bushels) so the answer is 12,500. PS: ((4-1)*5)/2= 7.50, but again because the quantity is 1,000 the proper calculation is ((4-1)*5,000)/2 = 7500. (<-this is the answer)
Shift in the demand curve
College students purchase many more energy drinks during finals week than during the rest of the semester. Students eat out more often as the federal government increases how much grant money it provides students. (Because this illustrates greater willingness and greater quantity provided by the government)
Movement along the demand curve
College students reduce how much detergent they use for each load of laundry in response to higher detergent prices. College students rush and buy discount furniture to take advantage of an unexpected price drop.
Stone and brick are substitutes in home construction. Consider the market for bricks depicted in the graph. Suppose the price of stone increases due to new regulations for the stone quarrying industry. Illustrate the impact this will have on the market for bricks. What happens to equilibrium price? What happens to equilibrium quantity?
Considering that the price for bricks has gone up, the demand for substitutes such as stone will also go up. Therefore, the demand curve shifts to the right for bricks. As a result--equilibrium price goes UP (increases) and equilibrium quantity also goes UP (increases) because now there is more demand for an unchanging supply curve.
Determine how the equilibrium price and equilibrium quantity in the market for coffee changes if - the price of tea, a substitute for coffee, decreases, - and due to better weather, the price of coffee beans also decreases.
Ep: decreases Eq: TBD (may increase, decrease, or stay the same)
Marginal decisions (A decision made at the. margins of an activity about whether to do a bit more or a bit less)
Jake needs to stay awake while he studies for his midterm tomorrow. What quantity of coffee should Jake drink? Marvin arrives at his favorite buffet to eat Chinese food. Sometimes, he overeats and leaves the buffet with a stomach ache.
Assume that in order to help hay farmers, the government imposes a price floor on hay of $14 per bale and the price floor stays in place for the long run. Use the graph to show the price floor, then answer the questions. What is the surplus from this long‑run price floor? In the long run, the surplus caused by a price floor on hay is likely to:
Surplus from long-run price run: If there are no visible points idiot you just subtract the quantity demanded at the price floor from the quantity supplied at the price floor. (7 thousand bales - 2 thousand bales. Look at where the floor marks points on the graphs) In the long run: In the long run, surplus will increase because farmers will increase the amount of land used to grow hay.
Rent controls are a typical example of a price ceiling.
These are the likely consequences when a ceiling is BINDING: More subletting of apartments Reductions in apartment quality Inefficient allocation of apartments Black markets
With fewer substitutes, demand tends to be
less elastic
Shortage
Underneath equilibrium price but it needs to be under it by more than one line to generate shortage.
Demand for a luxury item tends to be
more elastic
Over longer periods of time, demand tends to be
more elastic
The hypothetical country of Crabby Island has imposed a production quota of 4,000 crabs per month. Use the line segment to show a production quota of 4,000 crabs per month. What is the price of crab after the introduction of the quota?
7 It's not asking for quota rent, which is a different story--for that you have to do 7 subtracted by whichever point the quota touches the supply line.
Either-or decision
After graduation from law school, Frank is offered one job in Chicago and another in New York. Where should Frank work? Bella is accepted to four graduate school programs. Where should she go to school?
Assume Fiona is willing to pay $8 for a pizza cutter. Tim also wants one, but is only willing to pay $6 for one. At a pizza baker's convention, Fiona buys the last pizza cutter at the market price just before Tim can buy it. Tim contacts the convention organizers and complains about missing out on the last pizza cutter. The organizers refund Fiona for the pizza cutter and allow Tim to buy it at the market price. What happens as a result of the organizers refunding Fiona, taking the pizza cutter from her, and letting Tim buy it at the market price?
Consumer surplus decreases. Why? Because Tim is a petty BIATCH and he caused her to have less consumer surplus. She paid 8$ for it but she got refunded and received NOTHING whereas Tim only paid 5$ (market price) which is 1$ gain for him but NOTHING for Fiona.
For a number of reasons, governments set price floors for many agricultural products. Assume the government sets a price floor of $3.50 per bushel of corn. Assume a competitive market. Add and adjust the DWL triangle in the accompanying graph to show the deadweight loss due to the price floor. Without the price floor, what would the equilibrium price per bushel be? With the price floor in place, what is the amount of the surplus?
Equilibrium price: $2.50, look at the graph Surplus: 1 (2 billion bushels - 1 billion) A price floor is a limit on how low a price can fall. When the price floor of $3.50 is implemented, buyers will buy 1 billion bushels. However, firms are willing to sell 2 billion bushels at this price. The difference between these two quantities is the surplus. Therefore, the price floor causes a surplus of 1 billion bushels.
Alaskan king crab is one of the most prized shellfish. Suppose that, to protect their numbers, the Alaskan government allows only 15 million pounds of crab to be caught during the fishing season so that the Alaskan king crab population remains at an environmentally sustainable level. The graph includes the supply and demand curves for Alaskan king crab. Before the government imposes its regulations, what is the price of crab? (Equilibrium price) What is the demand price after the quota? (The first dot on the quota, demand line) What is the quota rent for Alaskan king crab? (The two dots on the quota line subtracted by one another)
Price of crab: $3.50 Demand price: $4 Quota Rent: $1 ($4-$3)
The U.S. government has subsidized ethanol production since 1978. With the advent of affordable electric cars, policymakers are considering whether to allow the subsidy to expire. The accompanying graph represents the market for ethanol. Move the supply and/or demand curves to show how reducing the subsidy will affect the ethanol market. Equilibrium price: Equilibrium quantity:
The supply curve will shift to the left (indicating less supply per dollar) due to reduction in the subsidy (less money going towards production). Demand is unaffected here because nothing is said about change in tastes, etc. Equilibrium price: Goes up (it now costs more per quantity demanded) Equilibrium quantity: Goes down (Remember to look carefully at the graphs, the supply shifted LEFT) so therefore there is LESS provided to consumers.
Amazon has a "Lightning Deal" where it slashes the price of one item. At 3:15 p.m. today, they announced that the item was a new tablet with a sales price of $150 which is less than half the original price. The table contains the maximum willingness to pay of five college students wanting to buy a tablet on Amazon. What is total consumer surplus for the five students? If the price increases from $150 to $350, what is the change in total consumer surplus? (*REMEMBER CHANGE INDICATES + OR - IF YOUR ANSWER IS A NEGATIVE CHANGE INDICATE WITH - OR + SIGN, DON'T FORGET IT LIKE I DID)
Total consumer surplus: (Calculated by subtracting the $150 from everyone willing to pay that much / more and adding it all together. For example since Francisco is willing to pay $200, his surplus is $50, so take that and add it with everyone else) $800 What is the CHANGE in total consumer surplus? $-600 (remember that negative sign)
The accompanying diagram represents the market for violins. Suppose that a new technology allows beginner-level violin producers to make violins at a substantially lower (marginal) cost while retaining the same quality. a. Use the graph to illustrate the effect that this will have on the supply and demand of beginner-level violins and then answer the following three questions. b. How much does this new technology increase consumer surplus? c. How much does this new technology increase PRODUCER surplus? d. How much does this new technology increase total (or social) surplus?
a. Demand has NOT changed and ONLY SUPPLY, so supply shifts rightwards to indicate improved technology. b. consumer surplus new graph: ((240-120)*40,000)/2 = 2,400,000 consumer surplus old graph: ((240-150)*30,000)/2= 1,350,000 total change in consumer surplus: 2,400,000 - 1,350,000 = 1,050,000 c. producer surplus new graph: ((120-0)*40,000)/2 = 2,400,000 producer surplus old graph: ((150-60)*30,000)/2 = 1,350,000 total change in producer surplus: 2,400,000 - 1,350,000 = 1,050,000 d. Increase in total surplus: change in PS + change in CS = 1,050,000 + 1,050,000 = 2,100,000
Match the institution with the role it plays in the coordination of resources in decentralized economies. - brings buyers and sellers together to carry out mutually beneficial exchanges - established rules for ownership of resources and creates incentives for innovation - organizes resources in order to produce goods and services - allows for the exchange of goods and services using a common unit as a measure of value that is generally accepted as payment
markets property rights firms money
Demand for an item that uses a large portion of your budget tends to be
more elastic