ECO110 Exam 2 - Modules 11, 12, 13, 14, 17

comparing the benefit of doing a little more with the cost of doing a little more

marginal analysis

the additional benefit derived from producing one more unit of that good or service

marginal benefit

shows the benefit from producing in more unit depends on the quantity that has already been produced

marginal benefit curve

the additional cost incurred by producing one more unit of that good or service

marginal cost

shows how the cost of producing one more unit depends on the quantity that has already been produced

marginal cost curve

positive income elasticity of demand means that the good is...

normal

the quantity that generates the highest possible total profit, where the marginal cost and marginal benefit curves intersect

optimal quantity

any price increase will cause the quantity demanded to fall to zero, horizontal demand curve

perfectly elastic demand

a tiny change in price will have large impacts on quantity supplied, horizontal line

perfectly elastic supply

quantity demanded does not respond to changes in price, vertical demand curve

perfectly inelastic demand

price elasticity of supply is zero, changes in price have no impact on supply, vertical line

perfectly inelastic supply

after a price increase, each unit sold sells at a higher price, which tends to raise revenue

price effect

a measure of the responsiveness of the quantity of a good supplied to the price of that good

price elasticity of supply

after a price increase, fewer units are sold, which tends to lower revenue

quantity effect

economic profit

revenue - explicit costs - implicit costs

accounting profit

revenue-explicit costs

If demand or supply are inelastic, the deadweight loss will be ____

smaller

positive cross-price elasticity means the two goods are...

substitutes

a cost that has already been incurred and is nonrecoverable, should be ignored in decisions about future actions

sunk cost

when an excise tax is imposed on producers, the ____ curve moves ___

supply, up

the amount of tax people are required to pay per unit of whatever is being taxed

tax rate

price elasticity of supply formula

% change in quantity supplied / % change in price

midpoint formula

(Q2-Q1)/((Q1+Q2)/2) / (P2-P1)/((P1+P2)/2)

cross-price elasticity of demand formula

% change in quantity of A demanded / % change in price of B

income elasticity of demand formula

% change in quantity demanded / % change in income

Prior to any taxes, the equilibrium price of bottled water is $5 per gallon. Then a $1-per-gallon tax is levied. As a result, the price of bottled water rises to $5.75 per gallon. The incidence of the $1 tax is _____ paid byconsumers and _____ paid by producers. a. $0.75; $0.25 b. $0; $1.00 c. $0.50; $0.50 d. $0.25; $0.75

a. $0.75; $0.25

If an excise tax is imposed on whiskey and collected from producers, the _____ curve will shift _____ bythe amount of the tax. a. supply; upward b. supply; downward c. demand; downward d. demand; upward

a. supply; upward

If the demand for golf is unit price elastic and your local public golf course increases the green's fees for using the course, you would expect: a. a decrease in the amount of golf played on the course. b. an increase in total revenue received by the course. c. a decrease in total revenue received by the course. d. no change in the amount of golf played on the course.

a. a decrease in the amount of golf played on the course.

(Figure: Market for Blue Jeans) The government recently levied a $10 tax on the producers of blue jeans. Using the graph, identify the area(s) that represent the loss of producer surplus due to the tax. a. d + e b. e c. d d. d + e + f

a. d + e

Because an excise tax discourages mutually beneficial transactions, the number of transactions in the marketis reduced. There is therefore a(n) _____ from a tax. a. deadweight loss b. increased consumer surplus c. increased producer surplus d. quota rent

a. deadweight loss

Taxes on the purchase of specific items such as gasoline, tobacco, or alcoholic beverages are called _____taxes. a. excise b. property c. income d. sales

a. excise

A rancher in Oklahoma decides to raise the price of her beef by 19% over the prevailing market price. If the demand for beef is perfectly elastic, this rancher's quantity demanded will: a. fall to zero. b. not change. c. fall slightly. d. increase slightly.

a. fall to zero.

If the government levies a $5 tax per MP3 player on buyers of MP3 players, then the price paid by buyers of MP3 players would likely a. increase by less than $5. b. increase by more than $5. c. decrease by $5. d. increase by exactly $5.

a. increase by less than $5.

In the market for MacBooks, if the demand curve is elastic, and the price of a MacBook decreases, total revenue will _____. If the demand curve is inelastic, and the price of a MacBook decreases, total revenue will _____. a. increase; decrease b. increase; increase c. decrease; decrease d. decrease; increase

a. increase; decrease

State governments levy excise taxes on tobacco because: a. it is an efficient way to raise tax revenue while discouraging smoking. b. they want to minimize the tax burden on producers. c. they want to subsidize tobacco farming. d. they want to encourage tobacco smuggling.

a. it is an efficient way to raise tax revenue while discouraging smoking.

The burden of a tax on a good is said to fall completely on the consumers if the: a. price paid by consumers for the good increases by the amount of the tax. b. price paid by consumers for the good declines by the amount of the tax. c. price received by producers for the good declines by the amount of the tax. d. price received by producers for the good increases by the amount of the tax.

a. price paid by consumers for the good increases by the amount of the tax.

If the demand for economics textbooks is perfectly elastic, and a tax is levied on the producers of each unit: a. producers will pay the entire tax, and there will be a deadweight loss, since the equilibrium quantity of economics textbooks will fall. b. consumers will pay the entire tax, and there will be no deadweight loss, since the equilibrium quantity of economics textbooks will remain constant. c. consumers and producers will share the burden of the tax, and there will be no deadweight loss, since the equilibrium quantity of economics textbooks will remain constant. d. consumers will pay the entire tax, and there will be a deadweight loss, since the equilibrium quantity of economics textbooks will fall.

a. producers will pay the entire tax, and there will be a deadweight loss, since the equilibrium quantity of economics textbooks will fall.

The price elasticity of demand measures the: a. responsiveness of a change in quantity demanded to a change in price. b. change in quantity demanded versus a change in the slope of the demand curve. c. responsiveness of a change in the slope of the demand curve to a change in price. d. relative change in price versus the relative change in quantity demanded.

a. responsiveness of a change in quantity demanded to a change in price.

tax burden falls mainly on consumers when price elasticity of demand is ____ than price elasticity of supply

lower

Recently, the government considered imposing an excise tax on music downloads. If this tax were enacted, the MOST likely effect would be: a. that consumers would pay a higher price and producers would sell fewer music downloads than before the tax. b. no change in consumption or in the prices paid by consumers of music downloads. c. that consumers would pay a lower price and producers would receive a higher price for music downloads than before the tax. d. an increase in economic activity due to the tax.

a. that consumers would pay a higher price and producers would sell fewer music downloads than before the tax.

the resources used for tax collection, payment methods, and attempts to evade the tax

administrative costs

The number of seats at Century Link Field (home of the Seattle Seahawks) football stadium is fixed at 70,000. The city of Seattle imposes a tax of $10 per ticket. In response, the team management raises the ticket price from $30 to $40 and still sells all 70,000 tickets. The tax causes a change in consumer surplus of _____, a change in producer surplus of _____, and a deadweight loss of _____. a. -$700,000; $0; $700,000 b. -$700,000; $0; $0 c. -$10; $0; $10 d. -$10; $0; $0

b. -$700,000; $0; $0

Each month Jessica buys exactly 15 Big Macs regardless of the price. Jessica's price elasticity of demand for Big Macs is: a. less than 1, but greater than 0. b. 0. c. greater than 1. d. 1.

b. 0.

Each month Jacquelyn spends exactly $50 on ice cream regardless of the price of each container. Jacquelyn's price elasticity of demand for ice cream is: a. 0. b. 1. c. greater than 1. d. less than 1.

b. 1.

If the price of new automobiles decreases by 5%, and the quantity of new automobiles demanded increases by 20%, then the price elasticity of demand is equal to:\ a. 0.25. b. 4. c. 0.75. d. 1.

b. 4.

When a tax is placed on the sellers of cell phones, the size of the cell phone market a. and the effective price received by sellers both increase. b. and the effective price received by sellers both decrease. c. decreases, but the effective price received by sellers increase. d. increases, but the effective price received by sellers decrease.

b. and the effective price received by sellers both decrease.

If the price of a good increases by 15%, and quantity demanded changes by 5%, then the price elasticity of demand is equal to: a. approximately 1.33. b. approximately 0.33. c. 1. d. 0.75.

b. approximately 0.33.

(Figure: Market for Blue Jeans) The government recently levied a $10 tax on the producers of blue jeans. Using the graph, identify the area(s) that represent the loss of consumer surplus due to the tax. a. c b. b + c c. b d. a + b + c

b. b + c

(Figure: Market for Blue Jeans) The government recently levied a $10 tax on the producers of blue jeans. Using the graph, identify the area(s) that represent tax revenue. a. a + b + c b. b + d c. c + e d. d + e + f

b. b + d

The price elasticity of demand for snowboarding lessons at Jay Peak resort in Vermont is greater than 1. Thismeans that the demand for snowboarding lessons is _____. a. unit-elastic b. elastic c. inelastic d. perfectly elastic

b. elastic

A price floor will cause a larger surplus when demand is ________ and supply is ________. a. elastic; inelastic b. elastic; elastic c. perfectly inelastic; elastic d. inelastic; inelastic

b. elastic; elastic

The demand for strawberry ice cream tends to be relatively price elastic because: a. there are few substitutes for it. b. for most people, there are many close substitutes for strawberry ice cream. c. it has to be consumed very quickly. d. it costs so little.

b. for most people, there are many close substitutes for strawberry ice cream.

If a good is a necessity with few substitutes, then the price elasticity of demand will tend to be: a. the same as that of a luxury good. b. less price elastic. c. equal to 1. d. more price elastic.

b. less price elastic.

The percentage change in quantity demanded divided by the percentage change in price is the _____. a. income elasticity of demand b. price elasticity of demand c. cross-price elasticity of demand d. quantity elasticity of demand

b. price elasticity of demand

The price elasticity of demand is measured as the percentage change in _____ divided by the percentage change in _____. a. price; quantity demanded b. quantity demanded; price c. the slope of the demand curve; quantity demanded d. quantity demanded; the slope of the demand curve

b. quantity demanded; price

Suppose the price of Cherry Coke increases by 9%, and quantity demanded falls by 13% overall but only by 4% for loyal Coca-Cola customers. This means that for the general public, there are _____ for CherryCoke, but for loyal Coca-Cola customers, Cherry Coke is more of a _____. This means that Coca-Cola will enjoy an increase in total revenue only from _____. a. several substitutes; necessity; the general public b. several substitutes; necessity; loyal Coca-Cola customers c. no substitutes; necessity; the general public d. few substitutes; luxury item; the general public

b. several substitutes; necessity; loyal Coca-Cola customers

The federal government has passed legislation requiring that, starting in February 2021, all airlines pay a security fee of $20 for each passenger. Assuming the demand and supply curves in this market have their usual slopes: a. the airlines will bear the entire burden of the tax. b. the airlines and their customers will split the burden of the tax. c. the airlines will pass the entire fee of $20 to their customers. d. the airlines will raise the price for business travelers.

b. the airlines and their customers will split the burden of the tax.

If an increase in the price of a good leads to an increase in total revenue, then: a. the supply curve must be price inelastic. b. the demand curve must be price inelastic. c. the supply curve is price elastic. d. none of the above is correct.

b. the demand curve must be price inelastic.

Taxes are administered at both the federal and state levels of government and collected from both consumersand producers. To determine who actually pays what portion of a tax, we look to: a. public choice theory. b. the incidence of the tax. c. externality analysis. d. public interest theory.

b. the incidence of the tax.

The price elasticity of demand is defined as: a. the percentage change in price divided by the percentage change in quantity demanded. b. the percentage change in quantity demanded divided by the percentage change in price. c. the percentage change in the slope of the demand curve divided by the percentage change in price. d. the percentage change in the slope of the demand curve divided by the percentage change in quantity demanded.

b. the percentage change in quantity demanded divided by the percentage change in price.

when making either or decisions, choose the option with the...

best economic profit

How is the burden of a tax divided? I. When the tax is levied on the sellers, the sellers bear a higher proportion of the tax II. When the tax is levied on the buyers, the buyers bear a higher proportion of the tax III. Regardless of whether the tax is levied on the buyers or the sellers, the buyers and sellers bear an equal proportion of the tax IV. Regardless of whether the tax is levied on the buyers or the sellers, the buyers and sellers bear some proportion of the tax a. (I) and (II) only b. (I), (II), and (III) only c. (IV) only d. (I), (II), and (IV) only

c. (IV) only

If the price of profiteroles decreases from $2.00 to $1.55, and the quantity demanded of profiteroles increases from 180 pastries to 220 pastries, then the price elasticity, obtained using the midpoint method, is: a. 0.50. b. 0. c. 0.79. d. 0.97

c. 0.79.

Suppose there is a sudden increase in the supply of kiwis that causes the price of kiwis to fall from $10.50 to$9.50 per basket at the local market. In response, quantity demanded increases from 19.2 to 20.8 basketsper month. Given this information, the price elasticity of demand is: a. 8.00. b. 1.20. c. 0.80. d. 1.25.

c. 0.80.

(Figure: Estimating Price Elasticity) Between the two prices, P1 and P2, which demand curve has the highest price elasticity (absolute value)? a. D1 b. D2 c. D3 d. D4

c. D3

Which of the following is true? a. When the income elasticity of demand is positive, the good is an inferior good. b. Income elasticity of demand measures the effect of the change in one good's price on the quantity demanded of the other good. c. Income elasticity of demand measures how much the demand for a good is affected by changes in consumers' incomes. d. When the income elasticity of demand is negative, the good is a normal good.

c. Income elasticity of demand measures how much the demand for a good is affected by changes in consumers' incomes.

(Figure: Estimating Price Elasticity) Between the two prices, P1 and P2, which demand curve has the lowest price elasticity (absolute value)? a. D1 b. D2 c. D3 d. D4

d. D4

Which of the following statements is correct regarding the imposition of a tax on gasoline? a. The amount of tax revenue raised by the tax depends upon whether the buyers or the sellers are required to send tax payments to the Government. b. The burden (incidence) of the tax depends upon whether the buyers or the sellers are required to send tax payments to the Government. c. The burden (incidence) of the tax depends upon the price elasticities of demand and supply. d. The amount of tax revenue raised by the tax does not depend upon the amount of the tax per unit.

c. The burden (incidence) of the tax depends upon the price elasticities of demand and supply.

(Figure: Market for Blue Jeans) The government recently levied a $10 tax on the producers of blue jeans. Using the graph, identify the area(s) that represent deadweight loss. a. a + b + c b. b + d c. c + e d. d + e + f

c. c + e

If the government imposes an excise tax in a market in which the demand curve is perfectly inelastic, the burden of the tax will fall completely on the ______ and the deadweight loss will equal ________. a. producers; the government's tax revenue b. consumers; the government's tax revenue c. consumers; zero d. producers; zero

c. consumers; zero

The cross-price elasticity of electricity with respect to the price of natural gas has been estimated as being equal to 0.2. This implies that: a. electricity and natural gas are complements. b. natural gas and electricity are both normal goods. c. electricity and natural gas are substitutes. d. one of the two goods is inferior while the other is normal, but we need additional information to determine which of them is inferior.

c. electricity and natural gas are substitutes.

Suppose the price elasticity of demand for fishing rods is 1.5 in Mississippi and 0.63 in Louisiana. Toincrease revenue, fishing rod manufacturers should: a. lower prices in each state. b. leave prices unchanged in Mississippi and raise prices in Louisiana. c. lower prices in Mississippi and raise prices in Louisiana. d. raise prices in each state.

c. lower prices in Mississippi and raise prices in Louisiana.

Which of the following would be most likely to have a vertical supply curve? a. oil b. insulin c. paintings by Van Gogh d. salt

c. paintings by Van Gogh

A tax on a good a. raises the price that buyers effectively pay and raises the price that sellers effectively receive. b. lowers the price that buyers effectively pay and lowers the price that sellers effectively receive. c. raises the price that buyers effectively pay and lowers the price that sellers effectively receive. d. lowers the price that buyers effectively pay and raises the price that sellers effectively receive.

c. raises the price that buyers effectively pay and lowers the price that sellers effectively receive.

Total revenue is: a. the price effect times the quantity effect. b. the price of a good divided by the amount of the good sold. c. the price of a good times the quantity of the good sold. d. total sales less total cost.

c. the price of a good times the quantity of the good sold.

the total value of assets owned by an individual or firm

capital

negative cross-price elasticity means the two goods are...

complements

each additional unit costs the same to produce as the previous one

constant marginal cost

measures the effect of the change in one good's price on the quantity demanded of the other good

cross-price elasticity of demand

Eric's income increased from $40,000 to $50,000 per year. Eric's consumption of tickets to pro football games increased from 2 to 4 per year. Using the midpoint formula, his income elasticity of demand for pro football game tickets is equal to ________ and football game tickets are ________ goods. a. -3; inferior b. -1/3; inferior c. +2/3; normal d. +3; normal

d. +3; normal

Suppose there is a sudden increase in the supply of fresh strawberries that causes the price of freshstrawberries to fall from $10.50 to $9.50 per basket at the local market. In response, the quantity ofstrawberries demanded increases from 18.8 to 21.2 baskets per month. Given this information, the price elasticity of demand is: a. 0.80. b. 8.00. c. 1.25. d. 1.20.

d. 1.20.

Which of the following is likely to make supply more inelastic? a. The inputs necessary for production cannot readily be increased. b. The time period under consideration is very short. c. The good is necessary for survival (e.g., a life-saving drug). d. The time period under consideration is very short and the inputs necessary for production cannot readily be increased.

d. The time period under consideration is very short and the inputs necessary for production cannot readily be increased.

(Figure: Market for Blue Jeans) The government recently levied a $10 tax on the producers of blue jeans. Using the graph, identify the area(s) that represent consumer and producer surplus after the tax was levied. a. a + b + c b. a + b + c + d + e + f c. d + e + f d. a + f

d. a + f

Which item best represents an excise tax? a. a tax of 18% of your wages b. your property taxes c. a one-time local per capita tax of $50 d. a tax of $0.53 per gallon of gas

d. a tax of $0.53 per gallon of gas

A price ceiling will cause a larger shortage when demand is ________ and supply is ________. a. perfectly inelastic; elastic b. inelastic; inelastic c. elastic; inelastic d. elastic; elastic

d. elastic; elastic

For which of the following is the cross-price elasticity of demand most likely a large positive number? a. hockey pucks and hockey sticks b. DVDs and milk c. all of these, because the cross-price elasticity is always a positive number d. french fries and onion rings

d. french fries and onion rings

If you want to reduce the inefficiency costs of taxation, you should devise taxes to fall on goods for which the supply is price _______ and the demand is price ___________. a. inelastic; elastic b. elastic; inelastic c. elastic; elastic d. inelastic; inelastic

d. inelastic; inelastic

If two goods are complementary, we can assume that the cross-price elasticity of demand for these goods is: a. equal to 0. b. between 0 and 1. c. greater than 0. d. less than 0.

d. less than 0.

If a university decreases the price of tickets to football games to collect more revenue, it is assuming that the demand for tickets is: a. unstable. b. price inelastic. c. unit-price elastic. d. price elastic.

d. price elastic.

Because demand curves are usually downward sloping, the price elasticity of demand is: a. positive or negative. b. usually greater than 1. c. usually positive. d. usually negative.

d. usually negative.

Tax incidence refers to: a. the deadweight loss from the tax. b. who writes the check to the government. c. the total revenue that the government collects from the tax. d. who really pays the tax.

d. who really pays the tax.

each additional unit of the activity yields less benefit than the previous unit

decreasing marginal benefit

each additional unit costs less to produce than the previous one, usually due to learning effects in production

decreasing marginal cost

when an excise tax is imposed on consumers, the ___ moves ___

demand, down

inelastic demand

e<1

price unit elastic demand

e=1

elastic demand

e>1

higher prices decrease total revenue, quantity effect is stronger than price effect

elastic demand

when making a how much decision, the optimal quantity is the largest quantity at which marginal benefit is _______ to marginal cost

equal than or greater to

a tax charged on each unit of a good or service that is sold

excise tax

a cost that requires an outlay of money

explicit cost

tax burden falls mainly on producers when price elasticity of demand is ____ than price elasticity of supply

higher

a cost measured by the value, in dollar terms, of benefits that are forgone

implicit cost

the opportunity cost of the use of capital, the income that would have been earned if the capital had been employed in its next-best alternative use

implicit cost of capital

a measure of who really pays the tax

incidence

income elasticity of a good is greater than 1, demand changes faster than income

income elastic

helps determine whether a good is normal or inferior, determines how demand changes in relation to income

income elasticity of demand

income elasticity of a good is less than 1, demand changes slower than income

income inelastic

occurs when each unit of a good costs more to produce than the previous unit

increasing marginal cost

higher prices increase total revenue, quantity effect is weaker than price effect

inelastic demand

negative income elasticity of demand means that the good is...

inferior

If demand or supply are elastic, the deadweight loss will be ___

larger

price x quantity sold

total revenue

economic profit

total revenue minus total cost, including both explicit and implicit costs

increase in price does not change total revenue

unit elastic demand