Econ 101 Exam 2

If the price elasticity of demand for a good is 4, then a 12 percent decrease in price results in a

48 percent increase in the quantity demanded. 4 x 0.12 = 48%

Refer to Table 6-2. A price ceiling set at $5 results in

50 units sold.

When demand is inelastic, a decrease in price increases total revenue.

False

Efficiency refers to whether a market outcome is fair, while equality refers to whether the maximum amount of output was produced from a given number of inputs.

False.

Figure 8-7 The vertical distance between points A and B represents a tax in the market. Refer to Figure 8-7. The deadweight loss associated with this tax amounts to

$80, and this figure represents the surplus that is lost because the tax discourages mutually advantageous trades between buyers and sellers. Area = ( 1/2 ) x ( 32 - 16 ) x ( 25 - 15) = ( 1/2 ) x 16 x 10 = 8 x 10 = 80

A price floor is

- legal minimum on the price at which a good can be sold. - often imposed when sellers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price floor. - a source of inefficiency in a market. ALL OF THE ABOVE IS CORRECT

In response to a shortage caused by the imposition of a binding price ceiling on a market,

- price will no longer be the mechanism that rations scarce resources. - long lines of buyers may develop - sellers could ration the good or service according to their own personal biases. ALL OF THE ABOVE IS CORRECT

When the price of a bracelet was $28 each, the jewelry shop sold 128 per month. When it raised the price to $32 each, it sold 112 per month. Using the midpoint method, the price elasticity of demand for bracelets is

1 [(q2-q1)/q2+q1/2)]/[(p2-p1)/(p2+p1/2)]

Refer to Figure 7-8. If the government imposes a price ceiling of $80 in this market, then, assuming those with the highest willingness to pay purchase the good, consumer surplus will be

1,500 (100 - 80)(30) + 1/2 (160-100)(30) = 20(30) +1/2(60)(30) = 600 + 900 = 1,500

If a 15% increase in price for a good results in a 20% decrease in quantity demanded, the price elasticity of demand is

1.33. 0.20/0.15 = 1.33

Taxes affect market participants by increasing the price paid by the buyer and decreasing the price received by the seller.

True

As the size of a tax increases, the government's tax revenue rises, then falls.

True.

The more elastic the supply, the larger the deadweight loss from a tax, all else equal.

True.

Refer to Figure 6-4. A government-imposed price ceiling of $6 in this market results in

a shortage of 8 units. 14 - 6 = 8

Suppose the government imposes a 20-cent tax on the sellers of artificially-sweetened beverages. The tax would shift

supply, raising the equilibrium price and lowering the equilibrium quantity in the market for artificially-sweetened beverages.

Figure 8-2 The vertical distance between points A and B represents a tax in the market. Refer to Figure 8-2. The loss of consumer surplus for those buyers of the good who continue to buy it after the tax is imposed is

$3

Refer to Figure 7-24. At equilibrium, total surplus is

$54. 1/2(6 x 6) = 18 1/2(12x6) = 36 18+36 = $54

Refer to Figure 7-22. The efficient price is

$70, and the efficient quantity is 100.

Tom walks Bethany's dog once a day for $50 per week. Bethany values this service at $60 per week, while the opportunity cost of Tom's time is $30 per week. The government places a tax of $35 per week on dog walkers. After the tax, what is the total surplus?

$0.

Figure 8-3 The vertical distance between points A and C represents a tax in the market. Refer to Figure 8-3. The per unit burden of the tax on buyers is

P3 - P2.

Which of the following statements is not correct?

Since sellers cannot set the price for their product, they must be willing to sell their product at any price.

The quantity sold in a market will increase if the government

decreases a binding price floor in that market.

Figure 8-9 ​ The vertical distance between points A and C represents a tax in the market. Refer to Figure 8-9. The total surplus with the tax is

$15,000

Refer to Figure 7-5. If the price of the good is $12, then consumer surplus is

$16.

Refer to Figure 5-14. Over which range is the supply curve in this figure the least elastic?

$220 to $430

Refer to Figure 6-6. Which of the following statements is correct?

A price floor set at $11 would result in a surplus.

Suppose the equilibrium price of a tube of toothpaste is $2, and the government imposes a price floor of $3 per tube. As a result of the price floor,

All of the above are correct.

Figure 8-19 The vertical distance between points A and B represents the original tax. Refer to Figure 8-19. The original tax can be represented by the vertical distance AB. Suppose the government is deciding whether to lower the tax to CD or raise it to FG. Which of the following statements is correct?

Compared to the original tax, the larger tax will decrease tax revenue and increase deadweight loss.

Which of the following is true when the price of a good or service rises?

Some buyers exit the market.

Consumer surplus measures the benefit to buyers of participating in a market.

True

If the price elasticity of demand for a good is 1.4, then a 14 percent increase in the quantity demanded must be the result of

a 10 percent decrease in the price. 14/1.4 = 10

When demand is inelastic, a decrease in price will cause

a decrease in total revenue.

You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. Your roommate still enjoys Ramen noodles very much and buys even more, but you plan to buy fewer Ramen noodles in favor of foods you prefer more. When looking at income elasticity of demand for Ramen noodles, yours would

be negative and your roommate's would be positive.

Suppose a tax is imposed on the sellers of fast-food French fries. The burden of the tax will

be shared by the buyers and sellers of fast-food French fries but not necessarily equally.

Refer to Figure 6-11. If the government imposes a price floor at $10, it would be

binding if market demand is Demand A and non-binding if market demand is Demand B.

When a tax is levied on a good,

both buyers and sellers are made worse off.

Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten-year period because

buyers tend to be much more sensitive to a change in price when given more time to react.

Hot dogs and hot dog buns are complements. An increase in the price of flour used to make hot dogs buns will

decrease consumer surplus in the market for hot dog buns and decrease producer surplus in the market for hot dogs.

When the price of an eBook is $15.00, the quantity demanded is 400 eBooks per day. When the price falls to $10.00, the quantity demanded increases to 700. Given this information and using the midpoint method, we know that the demand for eBooks is

elastic.

Holding all other forces constant, if decreasing the price of a good leads to a decrease in total revenue, then the demand for the good must be

inelastic

If the demand for leather increases, consumer surplus in the leather market

may increase, or remain the same.

Refer to Figure 6-5. Suppose the market is initially in equilibrium. Then the government imposes a price control, as represented by the solid horizontal line on the graph. If the price control is a price floor, then the price control

means that some firms will not be able to sell all that they want

Refer to Table 6-2. A price ceiling set at $20 will

not be binding.

When a binding price floor is imposed on a market,

price no longer serves as a rationing device

Figure 8-8 Suppose the government imposes a $10 per unit tax on a good. Refer to Figure 8-8. One effect of the tax is to

reduce producer surplus from $96 to $24. Producer surplus before tax = ½ ($8 x 24) = $96 Producer surplus after tax = ½ ($4 x 12) = $24

Total surplus in a market will increase when the government

removes a binding price ceiling from that market.

A seller is willing to sell a product only if the seller receives a price that is at least as great as the

seller's cost of production.

Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then the

supply curve will shift downward by $20, and the price paid by buyers will decrease by less than $20. 50-30 = 20

If a change in the price of a good results in no change in total revenue, then

the demand for the good must be unit elastic.

A key determinant of the price elasticity of supply is the

time horizon.