ECO 2013 Ch 4 - Economic Efficiency, Government, Prices, Taxes

Equilibrium Condition

Quantitative Demand = Quantitative Supply. *Q*D = *Q*S

Getting around government price regulations for housing

- Landlords may sign short-term rentals. - 3rd parties can facilitate short term room rentals (Airbnb). These lower the deadweight loss by allowing additional apartment rentals; but buyers and sellers lose valuable legal protections.

Economic Efficiency traits

1) Trades that take place when the marginal benefit exceeds the marginal cost, only. 2) Maximizes the sum of consumer and producer surplus.

Price Ceiling

A legally determined maximum price that sellers can charge for a product. Determined by the government.

Price Floor

A legally determined minimum price that sellers may receive for a product. Determined by the government.

Black Market

A market in which buying and selling take place at prices that violate government price regulations.

Economic Efficiency

A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.

If the cost of producing sofas decreases, then consumer surplus in the sofa market will: A. increase. B. decrease. C. remain constant. D. increase for some buyers and decrease for other buyers.

A. increase.

When there is a technological advance in the pork industry, consumer surplus in that market will: A. increase. B. decrease. C. not change, since technology affects producers and not consumers. D. not change, since consumers' willingness to pay is unaffected by the technological advance.

A. increase.

You are offered a free ticket to see the Chicago Cubs play the Chicago White Sox at Wrigley Field. Assume the ticket has no resale value. Willie Nelson is performing on the same night, and his concert is your next-best alternative activity. Tickets to see Willie Nelson cost $40. On any given day, you would be willing to pay up to $50 to see and hear Willie Nelson perform. Assume there are no other costs of seeing either event. Based on this information, at a minimum, how much would you have to value seeing the Cubs play the White Sox to accept the ticket and go to the game? A. $0 B. $10 C. $40 D. $50

B. $10

All else equal, what happens to consumer surplus if the price of a good increases? A. Consumer surplus increases. B. Consumer surplus decreases. C. Consumer surplus is unchanged. D. Consumer surplus may increase, decrease, or remain unchanged.

B. Consumer surplus decreases.

Dallas buys strawberries, and he would be willing to pay more than he now pays. Suppose that Dallas has a change in his tastes such that he values strawberries more than before. If the market price is the same as before, then A. Dallas's consumer surplus would be unaffected. B. Dallas's consumer surplus would increase. C. Dallas's consumer surplus would decrease. D. Dallas would be wise to buy fewer strawberries than before.

B. Dallas's consumer surplus would increase.

Which of the following will cause an increase in consumer surplus? A. an increase in the production cost of the good. B. a technological improvement in the production of the good. C. a decrease in the number of sellers of the good. D. the imposition of a binding price floor in the market.

B. a technological improvement in the production of the good.

Suppose your own demand curve for tomatoes slopes downward. Suppose also that, for the last tomato you bought this week, you paid a price exactly equal to your willingness to pay. Then: A. you should buy more tomatoes before the end of the week. B. you already have bought too many tomatoes this week. C. your consumer surplus on the last tomato you bought is zero. D. your consumer surplus on all of the tomatoes you have bought this week is zero.

C. your consumer surplus on the last tomato you bought is zero.

A drought in California destroys many red grapes. As a result of the drought, the consumer surplus in the market for red grapes: A. increases, and the consumer surplus in the market for red wine increases. B. increases, and the consumer surplus in the market for red wine decreases. C. decreases, and the consumer surplus in the market for red wine increases. D. decreases, and the consumer surplus in the market for red wine decreases.

D. decreases, and the consumer surplus in the market for red wine decreases.

Motor oil and gasoline are complements. If the price of motor oil increases, consumer surplus in the gasoline market A. decreases. B. is unchanged. C. increases. D. may increase, decrease, or remain unchanged.

D. may increase, decrease, or remain unchanged.

Suppose televisions are a normal good and buyers of televisions experience a decrease in income. As a result, consumer surplus in the television market A. decreases. B. is unchanged. C. increases. D. may increase, decrease, or remain unchanged.

D. may increase, decrease, or remain unchanged.

When the demand for a good increases and the supply of the good remains unchanged, consumer surplus: A. decreases. B. is unchanged. C. increases. D. may increase, decrease, or remain unchanged.

D. may increase, decrease, or remain unchanged.

Which of the following will cause a decrease in consumer surplus? A. an increase in the number of sellers of the good. B. a decrease in the production cost of the good. C. sellers expect the price of the good to be lower next month. D. the imposition of a binding price floor in the market.

D. the imposition of a binding price floor in the market.

Surplus

Something that remains (extra) above what is used or needed.

Per-unit Taxes

Taxes assessed as a particular dollar amount on the sale of a good or service. Ex: U.S. govt imposes a $0.184 per gallon tax on gas sales.

Tax Incidence

The actual division of the burden of a tax between buyers and sellers in a market. - consumers could be paying 80% and the producers pay 20%.

Marginal Benefit

The additional benefit associated with a small amount extra of some action

Marginal Cost

The additional cost associated with a small amount extra of some action

Consumer Surplus

The difference between the highest price a consumer is willing to pay for a good/service and the actual price that the consumer pays. = Total benefit - Total amount paid

Producer Surplus

The difference between the lowest price a firm would be willing to accept for a good/service and the price it actually receives. = Total amount received - total cost of product

Equilibrium Price

The price at which the quantity demanded equals the quantity supplied

Deadweight Loss

The reduction in economic surplus resulting from a market not being in competitive equilibrium (in which there is no inefficiency). - Usually caused by Government regulation.

Price ceilings and Price floors in USA

These price settings are uncommon, but they do include: - Minimum wages - Rent controls - Agricultural price controls

According to the demand curve, if the quantity of a product is too low, the value of that product to consumers ...

is high. Also it exceeds value exceeds the cost to produce another product.