eco 1305 exam 2

Without free trade, the domestic price of a good must be equal to the world price of a good. T or F?

false

deadweight loss

results from a tax (or any market distortion), takes away from TS

What does a tax on buyers do?

shifts demand curve down by the amount of the tax

Laffer Curve

shows the relationship between the size of the tax and tax revenue

market distortions

taxes, monopolies, price floors/ceilings, tariffs, etc.

a tax on sellers decreases supply T or F?

true

Tax Equation

(new price buyers pay - old price buyers pay) + (old price sellers received - new price sellers receive) - Buyers burden(BB)+ sellers burden (BS)

Q imports formula

Qdt - Qst

Suppose Yolanda needs a dog sitter so that she can travel to her sister's wedding. Yolanda values dog sitting for the weekend at $200. Rebecca is willing to dog sit for Yolanda so long as she receives at least $175. Yolanda and Rebecca agree on a price of $185. Suppose the government imposes a tax of $30 on dog sitting. What is the deadweight loss of the tax?

The lost benefit to Yolanda and Rebecca because after the tax, Rebecca will not dog sit for Yolanda

where is CS on a graph

above the equilibrium, below the demand curve

unemployment

amount of people seeking jobs < people hiring

Long lines

are an inefficient rationing mechanism because they waste buyers' time, and discrimination according to seller bias is an inefficient rationing mechanism because the good does not necessarily go to the buyer who values it most highly.

where is PS on the graph

below the equilibrium, above the supply curve

Total surplus formula

consumer surplus + producer surplus

When a country that imports a particular good imposes an import quota on that good

consumer surplus decreases and total surplus decreases in the market for that good.

The decrease in total surplus that results from a market distortion, such as a tax, is called a

deadweight loss

consumer surplus formula

maximum price willing to pay - actual market price

Motor oil and gasoline are complements. If the price of motor oil decreases, consumer surplus in the gasoline market

may increase, decrease, or remain unchanged

When a tax is placed on the sellers of a product, generally, buyers pay

more, and sellers receive less than they did before the tax.

If a tax is levied on the sellers of a product, then the demand curve will

not shift

Total WTP (taxes)

price + tax

Pnt

price w/o tax

Which of the following would be the most likely result of a binding price ceiling imposed on the market for rental cars?

slow replacement of old rental cars with newer ones

A tax levied on the sellers of a good shifts the

supply curve upward by the size of the tax.

The government's benefit from a tax can be measured by

tax revenue

Pd

the domestic price of a good

revenue

the total amount of income generated by the sale of goods or services related to the company's primary operations.

Pw

the world price of a good, the price that prevails in world markets

producer surplus formula

total revenue - total cost

A tax on buyers shifts the demand curve to the left. t or f?

true

All else equal, an increase in demand will cause a decrease in producer surplus.

true

Suppose you sell a kayak for $600, but you were willing to sell it for $450. The buyer was willing to pay $650. The total surplus is $200. T or F?

true

Taxes create deadweight losses. t or f?

true

Suppose prices of personal computers fall significantly and consumers respond by buying more personal computers. The consumer price index

understates this price decrease due to the substitution bias.

free market

what someone is willing to accept (WTA)

WTA

willingness to accept (selling price for sellers)

Quotas

-limit the number of imports allowed into a country -similar to tariffs

What generally happens to the total surplus in a market when the government imposes a tax?

total surplus decreases

Area of a triangle

A=1/2bh

Consumer surplus can be measured as the area between the demand curve and the equilibrium price. T or F?

true

When the supply of a good increases and the demand for the good remains unchanged, consumer surplus

increases

buyers burden

new price buyers pay - old price buyers pay

all sellers sell at this price

world price (Pw)

shortage

- Quantity demand w/trade > Quantity supplied w/trade -Quantity supplied w/o trade > Quantity supplied w/trade -Quantity demand w/trade > Quantity demand w/o trade

price ceiling

"price gouging" a legal maximum on the price of a good or service ex. rent control

Suppose a tax of $5 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 200 units to 100 units. The tax decreases consumer surplus by $450 and decreases producer surplus by $300. The deadweight loss from the tax is

$250

Ronnie operates a lawn-care service. On each day, the cost of mowing the first lawn is $10, the cost of mowing the second lawn is $12, and the cost of mowing the third lawn is $15. His producer surplus on the first three lawns of the day is $53. If Ronnie charges all customers the same price for lawn mowing, that price is

$30

Assume, for Vietnam, that the domestic price of textiles without international trade is higher than the world price of textiles. This suggests that, in the production of textiles,

other countries have a comparative advantage over Vietnam and Vietnam will import textiles.

surplus

- Quantity supplied w/o trade < Quantity supplied w/trade - Quantity demand w/trade < Quantity demand w/o trade - Quantity demand w/trade < Quantity supplied w/trade

tariff/quota revenue

-politically useful -"appears" to be paid by foreigners, not by citizens

Suppose that Firms A and B each produce high-resolution computer monitors, but Firm A can do so at a lower cost. Cassie and David each want to purchase a high-resolution computer monitor, but David is willing to pay more than Cassie. If Firm A produces a monitor that Cassie buys but David does not, then the market outcome illustrates which of the following principles? (i) Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay. (ii) Free markets allocate the demand for goods to the sellers who can produce them at the least cost.

1 and 2

price floors

A legal minimum on the price at which a good can be sold Ex. Minimum wage

tariff

A tax on an imported good is called a

What happens to consumer surplus in the iPod market if iPods are normal goods and buyers of iPods experience an increase in income?

Consumer surplus may increase, decrease, or remain unchanged

One economist has argued that rent control is "the best way to destroy a city, other than bombing." Why would an economist say this?

He fears that rent control will eliminate the incentive to maintain buildings, leading to a deterioration of the city.

Which of the following statements regarding a Laffer curve is the most plausible?

Reducing a high tax rate is more likely to increase tax revenue than is reducing a low tax rate.

Which of the following quantities decrease in response to a tax on a good?

The equilibrium quantity in the market for the good, producer surplus, and the well-being of buyers of the good

Suppose the government has imposed a price floor on the market for soybeans. Which of the following events could transform the price floor from one that is not binding into one that is binding?

The number of consumers buying soybeans increases.

A shortage results when a

binding price ceiling is imposed on a market.

If the government removes a binding price floor from a market, then the price received by sellers will

decrease, and the quantity sold in the market will increase.

The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium price of chocolate

decreases, and producer surplus decreases.

disputed surplus

domestic consumers and producers both want the area

Qst

domestic quality supplied with trade

Qdt

domestic quantity demanded with trade

Qdnt

domestic quantity demanded without trade

Qsnt

domestic quantity supplied without trade

Inflation Rate Formula

ending cost (2019) - starting cost (2018) / starting cost x 100

The world price of a pound of almonds is $4.50. Before Uruguay allowed trade in almonds, the price of a pound of almonds there was $3.00. Once Uruguay began allowing trade in almonds with other countries, Uruguay began

exporting almonds and the price per pound in Uruguay increased to $4.50

Suppose you buy an iPod for $100. If your consumer surplus is $30, your willingness to pay is $70. T or F?

false, WTP = 130

If the government imposes a binding price floor in a market, then the consumer surplus in that market will increase. T or F?

false, it will decrease

When a tax is imposed on a good, the resulting decrease in consumer surplus is always larger than the resulting decrease in producer surplus. t or f?

false, it's smaller

If the government imposes a $3 tax in a market, the buyers and sellers will share an equal burden of the tax. t or f?

false, the buyers suffer more

Under rent control, bribery is a mechanism to

force the total price of an apartment (including the bribe) to be less than the market price.

tax incidence

how the burden of a tax is shared among market participants

The nation of Wheatland forbids international trade. In Wheatland, you can buy 1 pound of corn for 3 pounds of fish. In other countries, you can buy 1 pound of corn for 2 pounds of fish. These facts indicate that

if Wheatland were to allow trade, it would import corn.

Tariff Revenue

number of imports

sellers burden

old price sellers received - new price sellers receive

Zelzar has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs. Which groups in Zelzar are better off as a result of the new free-trade policy?

producers of steel and consumers of incense

Qnt

quantity w/o tax

why do we have taxes?

raising revenues, transfer payments, financing operations, correcting market failures

What does a tax on sellers do?

shifts the supply curve up by the amount of the tax

An alternative to rent-control laws that would not reduce the quantity of housing supplied is

the payment by government of a fraction of a poor family's rent.

GDP

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

Because taxes distort incentives, they cause markets to allocate resources inefficiently. t or f?

true

WTP

willingness to pay (buyers)