Chapter 4 Microeconomics

Paul goes to Dick's Sporting Goods to buy a new tennis racquet. He is willing to pay $200 for a new racquet, but buys one on sale for $125. Paul's consumer surplus from the purchase is

$75.

Economists working for Uber, along with economists from the University of Oxford and the University of Chicago, estimated the consumer surplus attributed to Uber. For the entire United States, these economists estimated that the total consumer surplus from Uber in 2015 was

6.76 billion.

In the economic sense, almost everything is scarce. ________ of a good or service occurs when the quantity demanded is greater than the quantity supplied at the current market price.

A shortage

Which of the following statements best describes the concept of consumer surplus?

"I was all ready to pay $300 for a new leather jacket that I had seen in Macy's but I ended up paying only $180 for the same jacket."

Frieda is at her local florist to buy a dozen roses. She is willing to pay $75 for the roses, and buys them for $75. Frieda's consumer surplus from the purchase is

$0.

Lucinda buys a new GPS system for $250. She receives consumer surplus of $75 from the purchase. What value does Lucinda place on her GPS system?

$325

Government intervention in agricultural markets in the U.S. began in the

1930s.

4.1

Consumer Surplus and Producer Surplus

Which of the following statements is true?

Consumer surplus measures the net benefit from participating in a market.

________ refers to the reduction in economic surplus resulting from not being in competitive equilibrium.

Deadweight loss

Suppose a binding price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia. What will be the likely effect on the market for sparkling wine in Vinyardia?

Deadweight loss will increase.

________ is maximized in a competitive market when marginal benefit equals marginal cost.

Economic surplus

Congress passed the ________ in 1996, the purpose of which was to phase out price floors and return to a free market in agriculture.

Freedom to Farm Act

4.3

Government Intervention in the Market: Price Floors and Price Ceilings

Economists have shown that the burden of a tax is the same whether the tax is collected from the buyer or the seller. Why, then, are gasoline and cigarette taxes imposed on sellers?

It is more difficult for buyers to keep track of their purchases, and for the government to verify that the right of amount of tax revenue is collected.

Which of the following is not a consequence of minimum wage laws?

Producers have an incentive to offer workers non-wage benefits such as health care benefits and convenient working hours rather than a higher wage.

Suppose a binding price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia. What will be the likely effect on the market for sparkling wine in Vinyardia?

Quantity demanded will decrease, quantity supplied will increase, and a surplus will result.

Which of the following is not a result of imposing a rent ceiling?

Some consumer surplus is converted to producer surplus.

4.4

The Economic Effect of Taxes

4.2

The Efficiency of Competitive Markets

Suppose an excise tax of $1 is imposed on every case of beer sold and sellers are responsible for paying this tax. How would the imposition of the tax be illustrated in a graph?

The supply curve for cases of beer would shift up by $1.

Suppose that in Canada the government places a $1,500 tax on the buyers of new snowmobiles. After the purchase of a new snowmobile, a buyer must pay the government $1,500. How would the imposition of the tax on buyers be illustrated in a graph?

The tax will shift the demand curve down by $1,500.

Economists refer a to a market where buying and selling take place at prices that violate government price regulations as

a black market.

Which term refers to a legally established minimum price that firms may charge?

a price floor

The area ________ the market supply curve and ________ the market price is equal to the total amount of producer surplus in a market.

above; below

In New York City, government limits on the supply of taxis resulted in a price ________ the competitive market level, which would typically ________ economic efficiency.

above; reduce

Marginal benefit is equal to the ________ benefit a consumer receives from consuming one more unit of a good or service.

additional

When the government taxes a good or service, it

affects the market equilibrium for that good or service.

A tax that imposes a small excess burden relative to the tax revenue that it raises is

an efficient tax.

In cities with rent controls, the actual rents paid can be higher than the legal maximum. One explanation for this is

because there is a shortage of apartments, tenants often are willing to pay rents higher than the law allows.

In Venezuela, the government has implemented price controls on cornmeal, and the resulting shortage created a black market for the product. When compared to the competitive equilibrium, this situation has resulted in a transfer of ________ to black market sellers.

both consumer surplus and producer surplus

Suppose the demand curve for a product is vertical and the supply curve is upward sloping. If a per-unit tax is imposed in the market for this product,

buyers bear the entire burden of the tax.

The difference between the highest price a consumer is willing to pay for a good and the price the consumer actually pays is called

consumer surplus.

If Uber is required to start paying the value-added tax (VAT) in Great Britain, this will have the potential to raise the equilibrium price in this market and, therefore, decrease efficiency. This would have a tendency to

decrease consumer surplus and increase deadweight loss.

Each point on a ________ curve shows the willingness of consumers to purchase a product at different prices.

demand

The government proposes a tax on imported champagne. Buyers will bear the entire burden of the tax if the

demand curve for imported champagne is vertical.

Suppose the demand curve for a product is horizontal and the supply curve is upward sloping. If a per-unit tax is imposed in the market for this product,

sellers bear the entire burden of the tax.

If there is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and consumer surplus plus producer surplus is maximized, then

economic efficiency is achieved.

The payroll tax is a tax imposed on ________ that is used to fund Social Security and Medicare.

employers and workers

David Card and Alan Krueger conducted a study of fast-food restaurants in New Jersey and Pennsylvania. The study found that

increases in the minimum wage had a very small impact on employment.

Economic surplus

is equal to the sum of consumer surplus and producer surplus.

In a city with rent-controlled apartments, all of the following are true except

landlords have an incentive to rent more apartments than they would without rent control.

The difference between the ________ and the ________ from the sale of a product is called producer surplus.

lowest price a firm would have been willing to accept; price it actually receives

In a competitive market, the demand curve shows the ________ received by consumers and the supply curve shows the ________.

marginal benefit; marginal cost

To affect the market outcome, a price ceiling

must be set below the equilibrium price

In order to be binding, a price ceiling

must lie below the free market equilibrium price.

Rent control is an example of

price ceiling

A ________ curve shows the marginal cost of producing one more unit of a good or service.

supply

The actual division of the burden of a tax between buyers and sellers in a market is called

tax incidence.

Marginal cost is

the additional cost to a firm of producing one more unit of a good or service.

The total amount of producer surplus in a market is equal to

the area above the market supply curve and below the market price.

Consumer surplus in a market for a product would be equal to ________ if the market price was zero.

the area under the demand curve

When Congress passed a law that imposed a tax designed to fund its Social Security and Medicare programs, it wanted employers and workers to share the burden of the tax equally. Most economists who have studied the incidence of the tax have concluded

the burden of the tax falls almost entirely on workers.

A minimum wage law dictates

the lowest wage that firms may pay for labor.

Economic efficiency in a competitive market is achieved when

the marginal benefit equals the marginal cost from the last unit sold.

In a competitive market equilibrium

the marginal benefit equals the marginal cost of the last unit sold.

Consumers are willing to purchase a product up to the point where

the marginal benefit of consuming a product is equal to its price.

Willingness to pay measures

the maximum price that a buyer is willing to pay for a good or service.

If, in a competitive market, marginal benefit is less than marginal cost,

the output is greater than the equilibrium quantity.

Economic efficiency is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production, and in which

the sum of consumer surplus and producer surplus is at a maximum.

When a competitive equilibrium is achieved in a market,

the total net benefit to society is maximized.

A demand curve shows

the willingness of consumers to buy a product at different prices.

If equilibrium is achieved in a competitive market, then

there is no deadweight loss.

Economists are reluctant to state that price controls are desirable or undesirable because

whether the gains from the winners exceed the losses from the losers is not strictly an economic question.