ECO202 Module 3 study guide

A manufacturer produces 350 units when the market price is $10 per unit and produces 460 units when the market price is $14 per unit. Using the midpoint method, for this range of prices, the price elasticity of supply is about

0.81

An example of positive analysis is studying

how market forces produce equilibrium

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

decreases, and producer surplus decreases

Cadence says that she would smoke one pack of cigarettes each day regardless of the price. If she is telling the truth, Cadence's

demand for cigarettes is perfectly inelastic.

A seller's opportunity cost measures the

value of everything she must give up to produce a good

The maximum price that a buyer will pay for a good is called

willingness to pay .

Refer to Figure 5-1. Between point A and point B, price elasticity of demand is equal to

1.5.

If the price elasticity of demand for a good is 5, then a 10 percent increase in price results in a

50 percent decrease in the quantity demanded

The distinction between efficiency and equality can be described as follows:

Efficiency refers to maximizing the size of the pie; equality refers to distributing the pie fairly among members of society.

Which of the following is likely to have the most price elastic demand

Häagen-Dazs® vanilla bean ice cream

Refer to Figure 7-5. If the supply curve is S and the demand curve shifts from D to D', what is the change in producer surplus?

Producer surplus increases by $3,125

Refer to Figure 7-1 . Suppose that the price falls from P2 to P1. Area B represents the

additional consumer surplus to initial consumers when the price falls

Refer to Figure 5-4 . Total revenue when the price is P1 is represented by

areas B + D.

Demand is said to be price elastic if

buyers respond substantially to changes in the price of the good

Steak and chicken are substitutes. A sharp reduction in the supply of steak would

decrease consumer surplus in the market for steak and increase producer surplus in the market for chicken.

For which pairs of goods is the cross-price elasticity most likely to be positive?

pens and pencils

Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The income elasticity of demand for the good is

positive, and the good is a normal good.

You are in charge of the local city-owned aquatic center. You need to increase the revenue generated by the aquatic center to meet expenses. The mayor advises you to increase the price of a day pass. The city manager recommends reducing the price of a day pass. You realize that

the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.

Income elasticity of demand measures how

the quantity demanded changes as consumer income changes.

Efficiency in a market is achieved when

the sum of producer surplus and consumer surplus is maximized.