MIDTERM 2

Look at the figure The Gasoline Market. The pretax equilibrium price is $3, and the equilibrium quantity before tax is 20,000 gallons. An excise tax has been levied on each gallon of gasoline supplied by producers. Based on the graph, the incidence of the tax on suppliers is:

$0.75

If $100 tax per ticket is imposed, the deadweight loss is _____ while the tax revenue is _____.

$1,250; $7,500

Two consumers, Casey and Josey, want cheese-stuffed jalapeno peppers for lunch. Two producers, Cara and Jamie, can provide them. The table shows the consumers' willingness to pay and the producers' costs. Note that consumers and producers in this market are not willing to consume or produce more than four peppers at any price. Total surplus (consumer surplus plus producer surplus) at equilibrium(p=$0.5 and Q=5) is:

$2.1

According to data from the U.S. Department of Energy, sales of the fuel-efficient Toyota Prius hybrid fell from 158,574 vehicles sold in 2008 to 139,682 in 2009. Over the same period, according to data from the U.S. Energy Information Administration, the average price of regular gasoline fell from $3.27 to $2.35 per gallon. Using the midpoint method to perform the calculation, the cross-price elasticity of demand between Toyota Priuses and regular gasoline is _____. Based on this estimate of the cross-price elasticity, the two goods _______.

0.4; are substitutes

se the following information to calculate the price elasticity of demand for hotel rooms : if P = $135, Qd = 8600 if P = $165, Qd = 7400 The price elasticity of demand for hotel rooms (by midpoint method) is _____.

0.75

Using the midpoint method, calculate the elasticity of supply for web-design services when the price per hour rises from $100 to $150 and the number of hours transacted increases from 300,000 to 500,000. Is supply elastic, inelastic, or unit-elastic?

1.25, elastic

Figure. A Supply Curve (Note: horizontal axis for quantity and vertical axis for price of a good) Suppose the market price rises to $30 from $20. The increase in producer surplus (PS) is total ______ : The increase in PS due to new sellers entering the market is _____ and the increase in PS due to existing sellers receiving higher price is ______.

125; 25; 100

Look at the figure Change in Total Surplus. Which of the following areas represent the change in total surplus when the price falls from P2 to P3?

C and E

Suppose a competitive market has a downward-sloping demand curve and a horizontal supply curve. If the supply curve shifts downward, equilibrium price will _____, equilibrium quantity will _____, consumer surplus will _____, and producer surplus will _____.

Decrease; increase; increase; not change

Look at the figure Producer Surplus. When the price falls from $45 to $35, producer surplus _____ for a total producer surplus of _____.

Decreases by $40; $60

Which of the following is NOT a valid statement?

Demand by a blood transfusion by an accident victim is elastic.

You design websites for local businesses. You charge $200 per website, and currently sell 12 websites per month. Your costs are rising (including the opportunity cost of your time), so you consider raising the price to $250. The law of demand says that you won't sell as many websites if you raise your price. Suppose the price elasticity of demand for your websites estimated by midpoint method is 1.8. Is the demand elastic or inelastic? How many fewer websites would you expect? How much will your revenue fall, or might it increase?

Elastic, 8, fall

Hugo Chávez was the president of Venezuela. Venezuela is a major producer of oil products, which remain the keystone of Venezuela's economy. Suppose President Chávez wanted to increase his popularity with the citizens of Venezuela and enacted a government policy to reduce the price of gasoline sold at state-owned gas stations to 50% of the previous price. Assuming a downward-sloping demand curve for gasoline, in theory, this policy would result in the quantity of gasoline demanded to be _____ the quantity of gasoline supplied.

Greater than

A major state university in the South recently raised tuition by 12%. An economics professor at this university asked his students, "How many of you will transfer to another university because of the increase in tuition?" One student in about 300 said that he or she would transfer. Based on this information, the price elasticity of demand for education at this university is:

Highly inelastic

Figure: The Gains from Trade Look at the figure The Gains from Trade. When demand increases from D1 to D2, equilibrium total surplus:

Increases by $27.50

Governments continue to impose price controls. Which of the following is NOT a valid reason for this?

Price controls are always effective.

Figure: Supply and Demand in Agriculture Look at the figure Supply and Demand in Agriculture. If a price floor at P4 is set to help improve farm incomes and the government wants to assure farmers that their output will be purchased, the government must purchase an amount of output equal to:

Q3 - Q0

The total producer surplus for a good can be calculated in all of the following ways EXCEPT as:

The area below the supply curve for the good up to the quantity of the good sold.

Suppose the United States removes sugar quotas and the market price of sugar drops. If the demand curve for candy bars is downward-sloping, in the candy bar market we would expect:

The consumer surplus to increase

In many European countries high minimum wages have led to high levels of unemployment and underemployment, and two a two-tier labor system. In the formal labor market, workers have good jobs that pay at least the minimum wage. In the informal, or black market for labor, workers have poor jobs and receive less than the minimum wage. Assume that the imposition of the high minimum wage causes a contraction in the economy so that employers in the formal sector cut their production and their demand for workers. Assume also that the workers who cannot get a job paying at least the minimum wage move into the informal labor market where there is no minimum wage. What happens to the size of the informal market for labor as a result of the economic contraction? What happens to the equilibrium wage in the informal labor market?

The equilibrium wage in the informal labor market falls and the quantity of hours transacted increases, as the informal labor market expands.

A consumer's willingness to pay reflects:

The maximum price at which he or she would buy the good or service.

Peanut butter is an inferior good. If there is an increase in income, total surplus in the peanut butter market:

Will decrease

Suppose the price elasticity of demand for yachts equals 4.04, while the price elasticity of supply for yachts equals 0.22. If Congress reinstates a luxury tax on yachts, who will pay more of the tax?

Yacht builders will pay more

Figure: The Market for Hybrid Cars Look at the figure The Market for Hybrid Cars. What area represents consumer surplus if there is a binding price floor at P1?

a

The price elasticity of demand can be found by:

comparing the percentage change in quantity demanded to the percentage change in price.

If the market for grapefruit is in equilibrium without any outside intervention to change the equilibrium price:

consumer and producer surplus are maximized.

The government of Bassaland is looking for new revenue sources. It is considering imposing an excise tax on two goods: diapers and palm wine. If the price elasticity of demand for the goods are 0.47 and 1.89 respectively, which good should it tax if the goal is to raise revenue? If the government wants to tax only one good, which good should it tax if the goal is to discourage consumption?

diapers; palm wine

Use of the midpoint method to calculate the price elasticity of demand eliminates the problem of computing:

different elasticities, depending on whether price decreases or increases.

Look at the figure The Market for Yachts. A price _____ of _____ will bring the about the same price and output in the market for yachts as would an excise tax of $60,000.

floor; $160,000

Given any upward-sloping supply curve for a good, the more inelastic the demand curve, the _____ equilibrium output will fall and the _____ will be the deadweight loss when the government imposes an excise tax.

less; smaller

The most likely reason that the government implements a _____ is because it feels the price is too high for _____.

price ceiling; consumers

When the government removes a binding price floor:

quantity demanded will increase and quantity supplied will decrease.

When the minimum wage increases:

unemployment among unskilled workers increases.