Chapter 7

Suppose that the price of a new bicycle is $300. Sue values a new bicycle at $400. It costs $200 for the seller to produce the new bicycle. What is the value of total surplus if Sue buys a new bike? A) $100 B) $200 C) $300 D) $500

$200

Suppose that at a price of $30 per month, there are 30,000 subscribers to cable television in Small Town. If Small Town Cablevision raises its price to $40 per month, the number of subscribers will fall to 20,000. At which of the following prices does Small Town Cablevision earn the greatest total revenue? A) either $30 or $40 per month because the price elasticity of demand is 1.0 B) $30 per month C) $40 per month D) $0 per month

$30

If consumers always spend 15 percent of their income on food, then the income elasticity of demand for food is A) 1.00. B) 1.15. C) 1.50. D) none of these answers.

1.00

Suppose that at a price of $30 per month, there are 30,000 subscribers to cable television in Small Town. If Small Town Cablevision raises its price to $40 per month, the number of subscribers will fall to 20,000. Using the midpoint method for calculating the elasticity, what is the price elasticity of demand for cable television in Small Town? A) 1.0 B) 0.66 C) 1.4 D) 2.0

1.4

Refer to Figure 10-1. The socially optimal quantity of output is A) 120 units, since the value to the buyer of the 120th unit is equal to the cost incurred by the seller of the 120th unit. B) 120 units, since the value to the buyer of the 120th unit is equal to the cost incurred by society of the 120th unit. C) 160 units, since the value to the buyer of the 160th unit is equal to the cost incurred by the seller of the 160th unit. D) 160 units, since the value to the buyer of the 160th unit is equal to the cost incurred by society of the 160th unit.

120 units, since the value to the buyer of the 120th unit is equal to the cost incurred by society of the 120th unit.

If a buyer's willingness to pay for a new Honda is $20,000 and she is able to actually buy it for $18,000, her consumer surplus is A) $20,000. B) $38,000. C) $2,000. D) $18,000.

2,000

Suppose there are three identical vases available to be purchased. Buyer 1 is willing to pay $30 for one, buyer 2 is willing to pay $25 for one, and buyer 3 is willing to pay $20 for one. If the price is $25, how many vases will be sold and what is the value of consumer surplus in this market? A) Two vases will be sold, and consumer surplus is $5. B) One vase will be sold, and consumer surplus is $30. C) One vase will be sold, and consumer surplus is $5. D) Three vases will be sold, and consumer surplus is $0.

Two vases will be sold, and consumer surplus is $5

Refer to Figure 10-1. Which of the following statements is correct? A) The private cost of producing the 160th unit of output is $16. B) The social cost of producing the 160th unit of output is $22. C) The external cost of producing the 160th unit of output is $6. D) All of the above are correct.

all of the above are correct

. If the cross-price elasticity between two goods is negative, the two goods are likely to be A) complements. B) substitutes. C) necessities. D) luxuries.

complements

Equilibrium Price: P = (a-c)/(b+d) Equilibrium Output: Q = (ad+bc)/(b+d) 1/2*Q(a-P) (a is the intersect between the Price axe and the demand curve)

consumer surplus

(% Change in Quantity Demand for Good X)/(% Change in Price for Good Y)

cross price elasticity

The costs to society created by market inefficiency

deadweight loss

Joe has ten baseball gloves and Sue has none. A baseball glove costs $50 to produce. If Joe values an additional baseball glove at $100 and Sue values a baseball glove at $40, then to maximize A) efficiency, Joe should receive the glove. B) consumer surplus, both should receive a glove. C) efficiency, Sue should receive the glove. D) equity, Joe should receive the glove.

efficiency, joe should receive the glove

an effect of a purchase or use decision by one set of parties on others who did not have a choice and whose interests were not taken into account.

externality

Imperfect competition is a competitive market situation where there are many sellers, but they are selling heterogeneous (dissimilar) goods as opposed to the perfect competitive market scenario. As the name suggests, competitive markets that are imperfect in nature.

imperfect competition market

(% Change in Quantity Demanded)/(% Change in Income)

income elasticity of demand

changes in the price do not affect the quantity demanded for the good; raising prices will always cause total revenue to increase.

inelastic demand

If supply is price inelastic, the value of the price elasticity of supply must be A) greater than 1. B) zero. C) infinite. D) less than 1.

less than 1

when the allocation of goods and services by a free market is not efficient.

market failure

is the ability of a firm to profitably raise the market price of a good or service over marginal cost

market power

(B2 - B1)(B2 + B1)/2 ÷ (A2 - A1)(A2 + A1)/2

midpoint formula

Occurs when a product or decision costs the society more than its private cost.

negative externality

means that once a good has been created, it is impossible to prevent other people from gaining access to it (or more realistically, is extremely costly to do so).

non excludability

A situation that occurs when the overall consumer requirements for a particular good or service do not vary when its price changes

perfectly inelastic demand

Positive effect or benefit realized by a third party resulting from a transaction in which they had no direct involvement

positive externality

= (% Change in Quantity Demanded)/(% Change in Price)

price elasticity of demand

the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good.

price elasticity of demand

measures the rate of response of quantity demand due to a price change

price elasticity of supply

A producer's or supplier's cost of providing goods or services. It includes internal costs incurred for inputs, labor, rent, and depreciation but excludes external costs incurred as environmental damage (unless the producer or supplier is liable to pay for them)

private cost

Equilibrium Price: P = (a-c)/(b+d) Equilibrium Output: Q = (ad+bc)/(b+d) 1/2*Q(P-c) (c is the intersect between the Price axe and the supply curve)

producer surplus

a commodity or service that is provided without profit to all members of a society, either by the government or a private individual or organization.

public goods

Social cost is the total cost to society. It includes both private costs plus any external costs.

social cost

When output occurs at the intersection of marginal social benefit (MSB) and marginal social cost (MSC), the socially optimal level of output is achieved. Also known as the allocatively efficient level of output. If output occurs at any other level, a market failure exists.

socially optimal output

Which of the following would cause a demand curve for a good to be price inelastic? A) There are a great number of substitutes for the good. B) The good is a necessity. C) The good is inferior. D) The good is a luxury.

the good is a necessity

13. Refer to Figure 10-1. The graph represents a market in which A) there is no externality. B) there is a positive externality. C) there is a negative externality. D) The answer cannot be determined from inspection of the graph.

there is a negative externality

is the total receipts of a firm from the sale of any given quantity of a product. It can be calculated as the selling price of the firm's product times the quantity sold

total revenue

The equilibrium in the market is where the level of demand is equal to the level of supply. The shaded area shows the total revenue for firms from selling the equilibrium level of output.

total revenue supply and demand

consumer surplus + producer surplus

total surplus

. The demand for which of the following is likely to be the most price inelastic? A) airline tickets B) transportation C) taxi rides D) bus tickets

transportation

A type of price elasticity that assumes a move higher in prices will cause a proportional decrease in demand.

unit elastic demand

is a subjective study that may assign units of welfare or utility in order to create models that measure the improvements to individuals based on their personal scales.

welfare economics