Econ 120 - EXAM 2

Refer to the figure below (7.1-1). When the price is P1, consumer surplus is A. A + B. A + B + C. A + B + D.

A + B + C

For a good that is a necessity: quantity demanded tends to respond substantially to a change in price. demand tends to be inelastic. the law of demand often does not apply. All of the above are correct.

demand tends to be inelastic. Necessity (for example, water, electricity, and insulin) tends to have inelastic demand, which means the consumers are not sensitive to price change. The law of demand applies to any product, regardless of its elasticity.

SELLER COST DALE $1,500 JILL $1,200 DENISE $1,000 CATHERINE $750 JACKSON $500 Refer to the table in question 2. If the market price is $1,100, the combined total cost of all participating sellers is $3,700. $2,700. $2,250. $1,500.

$2,250.

Refer to the Figure in Question 2 (6.2-1). The amount of the tax per unit is $1. $2. $3. $5.

$3. The distance between the original and the new demand curves is $3, (that's $8-$5 or $6-$3).

Refer to the figure in question 1 (7.3-1). If the price decreases from $22 to $16, consumer surplus increases by $120. $360. $480. $600.

$360.

If a consumer is willing and able to pay $20 for a particular good and if he pays $16 for the good, then for that consumer, consumer surplus amounts to $4. $16. $20. $36.

$4.

Suppose Lauren, Leslie and Lydia all purchase bulletin boards for their rooms for $15 each. Lauren's willingness to pay was $35, Leslie's willingness to pay was $25, and Lydia's willingness to pay was $30. Total consumer surplus for these three would be $15. $30. $45. $90

$45.

BUYER WILLINGNESS TO PAY MIKE $50.00 SANDY $30.00 JONATHAN $20.00 HALEY $10.00 Refer to the Table in question 3. If the table represents the willingness to pay of four buyers and the price of the product is $18, then their total consumer surplus is $38. $42. $46. $72.

$46.

Refer to the figure in question 1 (7.3-1). Assume demand increases and as a result, equilibrium price increases to $22 and equilibrium quantity increases to 110. The increase in producer surplus to producers already in the market would be equal to $90. $210. $480. $570.

$480.

Refer to the figure below (6.2-1). The equilibrium price in the market before the tax is imposed is $8 $6 $5 $3

$6.

Refer to the figure in question 1 (7.3-1). At the equilibrium price, producer surplus is $480. $640. $1,120. $1,280.

$640.

Refer to the table below. If the market price is $1,000, the producer surplus in the market is SELLER COST DALE $1,500 JILL $1,200 DENISE $1,000 CATHERINE $750 JACKSON $500 $700. $750. $2,250. $3,700.

$750. As a producer, you are willing to produce and sell if the market price is higher than your costs (if the price is lower than costs, you will lose money). In this question, CATHERINE and JACKSON have costs lower than the market price. So the market's producer surplus would be (1000-750)+(1000-500)=750.

Refer to the Figure below (6.1-2). A binding price ceiling would be the result if the price ceiling were set at $14. $12. $10. $8.

$8.

Refer to Figure below (5.3-1). When the price is $30, total revenue is $3,000 $5,000 $7,000 $9,000

$9,000

When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7, the quantity demanded is 80 units per month. Using the midpoint method, the price elasticity of demand is about 0.22 0.67 1.33 1.50

0.67

When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7, the quantity demanded is 80 units per month. Using the midpoint method, the price elasticity of demand is about. 0.22, 0.67, 1.33, or 1.50

0.67

Harry's Barber Shop increased its total monthly revenue from $1,500 to $1,800 when it raised the price of a haircut from $5 to $9. The price elasticity of demand for Harry's Haircuts is 0.567. 0.700. 1.429. 2.200.

0.700.

In which of these instances is demand said to be perfectly inelastic? An increase in price of 2% causes a decrease in quantity demanded of 2%. A decrease in price of 2% causes an increase in quantity demanded of 0%. A decrease in price of 2% causes a decrease in total revenue of 0%. The demand curve is horizontal.

A decrease in price of 2% causes an increase in quantity demanded of 0%.

Refer to Figure in Question 4 (6.1-2). Which of the following statements is correct? A price ceiling set at $12 would be binding, but a price ceiling set at $8 would not be binding. A price floor set at $8 would be binding, but a price ceiling set at $8 would not be binding. A price ceiling set at $9 would result in an excess supply. A price floor set at $11 would result in a surplus.

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

Which of the following is the most correct statement about tax burdens? A tax burden falls most heavily on the side of the market that is more elastic. A tax burden falls most heavily on the side of the market that is less elastic. A tax burden falls most heavily on the side of the market that is closer to unit elastic. A tax burden is distributed independently of relative elasticities of supply and demand.

A tax burden falls most heavily on the side of the market that is less elastic.

Refer to the figure in question 6 (7.1-1). When the price is P2, consumer surplus is A. B. A + B. A + B + C.

A.

You are a website designer. Currently you charge each website $200 and you design 12 websites every month. You are trying to decide whether you should raise your price so that you can get higher revenue. Total Revenue (TR) = Price*Quantity A. If you raise your price from $200 to $250, your quantity demanded decreases from 12 to 8. Does your revenue increase or decrease? What is your price elasticity of demand? Demonstrate the change in revenue on a graph. B. If you raise your price from $200 to $250, your quantity demanded decreases from 12 to 10. Does your revenue increase or decrease? What is your price elasticity of demand? Demonstrate the change in revenue on a graph. Takeaway: When D is elastic, a price increase causes revenue to_________________. When D is inelastic, a price increase causes revenue to ________________.

A. Revenue decrease, elastic and 1.8. B. Increase revenue, inelastic and 0.8. Key Takeaway: When D is elastic, a price increase causes revenue to DECREASE. When D is inelastic, a price increase causes revenue to INCREASE.

It is likely that: the demand for flat-screen computer monitors is more elastic than the demand for monitors in general. the demand for grandfather clocks is more elastic than the demand for wristwatches. the demand for cardboard is more elastic over a long period of time than over a short period of time. All of the above are correct

All of the above are correct

Refer to Figure in Question 5 (5.3-2). If rectangle D is larger than rectangle A, then demand is elastic between prices P1 and P2. a decrease in price from P2 to P1 will cause an increase in total revenue. the magnitude of the percent change in price between P1 and P2 is smaller than the magnitude of the corresponding percent change in quantity demanded. All of the above are correct.

All of the above are correct. If rectangle D is larger than rectangle A, that means rectangle (B+D) is larger than rectangle (B+A). Rectangle (B+D) represents the revenue when the price is P1 and rectangle (B+A) represents the revenue when the price is P2. When the price increases from P1 to P2, the total revenue decreases, which implies an elastic demand curve. When the price decreases from P2 to P1, the total revenue should increase. Since the demand is elastic, the percentage change in price should be smaller than the corresponding percentage change in quantity, representing consumers being sensitive to price change.

Refer to Figure below (5.3-2). Total revenue when the price is P1 is represented by the area(s) B + D. A + B. C + D. D.

B + D.

SELLER COST DALE $1,500 JILL $1,200 DENISE $1,000 CATHERINE $750 JACKSON $500 Refer to the table in question 2. If the price is $775, who would be willing to supply the product? Dale and Jill Dale, Jill and Denise Denise, Catherine and Jackson Catherine and Jackson

Catherine and Jackson

SELLER COST DALE $1,500 JILL $1,200 DENISE $1,000 CATHERINE $750 JACKSON $500 Refer to the table in question 2. If the price is $1,000, Denise is an eager supplier. Catherine is an eager supplier. Dale's producer surplus is $500. All of the above are correct.

Catherine is an eager supplier. An eager supplier is one that has a positive producer surplus from selling the good (price higher than costs). Denise's cost equals the price, so she is not an eager supplier. Catherine is an eager supplier as her cost is lower than the price. Dale's cost is higher than the price, so she is not going to sell and has no producer surplus.

Refer to Figure below (5.2-1). As price falls from PA to PB, which demand curve represents the most elastic demand? D1 D2 D3 All of the above are equally elastic.

D1

Refer to Figure in Question 3 (5.2-1). As price falls from PA to PB, we could use the three demand curves to calculate three different values of the price elasticity of demand. Which of the three demand curves would produce the smallest elasticity? D1 D2 D3 All of the above are equally elastic.

D3

BUYER WILLINGNESS TO PAY MIKE $50.00 SANDY $30.00 JONATHAN $20.00 HALEY $10.00 Refer to the table above. If the table represents the willingness to pay of four buyers and the price of the product is $15, then who would be willing to purchase the product? Mike Mike and Sandy Mike, Sandy, and Jonathan Mike, Sandy, Jonathan, and Haley

Mike, Sandy, and Jonathan

Using the graph shown (Quiz 5), answer the following questions. a. What was the equilibrium price in this market before the tax? b. What is the amount of the tax? c. How much of the tax will the buyers pay? d. How much of the tax will the sellers pay? e. How much will the buyer pay for the product after the tax is imposed? f. How much will the seller receive after the tax is imposed? g. As a result of the tax, what has happened to the level of market activity? The buyer pays for $___________ and the seller receive $ __________ after the tax is imposed.

a. $10. b. $3. c. $1. d. $2. e. $11. f. $8. g. decreased (100 to 90). The buyer pays for $11 and the seller receives $8 after the tax is imposed.

You own a small town movie theatre. You currently charge $5 per ticket for everyone who comes to your movies. Your friend who took an economics course in college tells you that there may be a way to increase your total revenue. Given the demand curves shown, answer the following questions (5.4-1). a. What is your current total revenue for both groups? b. The elasticity of demand is more elastic in which market? c. Which market has the more inelastic demand? d. What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is this elastic or inelastic? e. What is the elasticity of demand between $5 and $3 in the children's market? Is this elastic or inelastic? f. Given the graphs and what your friend knows about economics, he recommends you increase the price of adult tickets to $8 each and lower the price of a child's ticket to $3. How much could you increase total revenue if you take his advice?

a. Total revenue from children's tickets is $100 and from adults' tickets is $250. Total revenue from all sales would be $350. b. The demand for children's tickets is more elastic. c. The adult ticket market has the more inelastic demand. d.The elasticity of demand between $5 and $2 is 0.21 or inelastic. % change in quantity demanded: (60-50)/55=0.18 % change in price: (5-2)/3.5=0.86 Elasticity=0.18/0.86=0.21 e. The elasticity of demand between $5 and $3 is 1.33 or elastic. % change in quantity demanded: (40-20)/30=0.33 % change in price: (5-3)/4=0.25 Elasticity=0.33/0.25=1.3 f. If the price is increased to $8 for adult tickets and the price decreased to $3 for child tickets, total revenue would increase to $440 [($8)(40) + ($3)(40)] or $90 more than before.

If a tax is imposed on a market with inelastic demand and elastic supply, buyers will bear most of the burden of the tax. sellers will bear most of the burden of the tax. the burden of the tax will be shared equally between buyers and sellers. it is impossible to determine how the burden of the tax will be shared.

buyers will bear most of the burden of the tax.

Last year, Sheila bought 6 pairs of shoes when her income was $40,000. This year, her income is $50,000 and she purchased 10 pairs of shoes. Holding other factors constant, it follows that Sheila considers shoes to be a necessity. considers shoes to be an inferior good. considers shoes to be a normal good. has a low price elasticity of demand for shoes.

considers shoes to be a normal good.

Refer to Figure in Question 1 (5.3-1). An increase in price from $30 to $35 would increase total revenue by $250. decrease total revenue by $250. increase total revenue by $500. decrease total revenue by $500.

decrease total revenue by $250.

When a tax is imposed on the buyers of a good, the demand curve shifts downward by the amount of the tax. upward by the amount of the tax. downward by less than the amount of the tax. upward by more than the amount of the tax.

downward by the amount of the tax.

The demand for Werthers candy is likely: elastic because candy is expensive relative to other snacks. elastic because there are many close substitutes for Werthers. elastic because Werthers are regarded as a necessity by many people. inelastic because it is usually eaten quickly, making the relevant time horizon short.

elastic because there are many close substitutes for Werthers.

Refer to Figure in Question 1 (5.3-1). When the price falls from $50 to $40, it can be inferred that demand between those two prices is inelastic, since total revenue decreases from $8,000 to $5,000. inelastic, since total revenue increases from $5,000 to $8,000. elastic, since total revenue increases from $5,000 to $8,000. unit elastic, since total revenue increases from $5,000 to $8,000.

elastic, since total revenue increases from $5,000 to $8,000.

Refer to Figure in Question 1 (5.3-1). An increase in price from $20 to $30 would increase total revenue by $2,000. decrease total revenue by $2,000. increase total revenue by $1,000. decrease total revenue by $1,000.

increase total revenue by $1,000.

If the demand for donuts is elastic, then a decrease in the price of donuts will increase total revenue of donut sellers. decrease total revenue of donut sellers. not change total revenue of donut sellers. There is not enough information to answer this question.

increase total revenue of donut sellers.

Over time, housing shortages caused by rent control increase, because the demand for, and supply of, housing are less elastic in the long run. increase, because the demand for, and supply of, housing are more elastic in the long run. decrease, because the demand for, and supply of, housing are less elastic in the long run. decrease, because the demand for, and supply of, housing are more elastic in the long run.

increase, because the demand for, and supply of, housing are more elastic in the long run.

When demand is inelastic the price elasticity of demand is less than 1, and price and total revenue will move in the same direction. less than 1, and price and total revenue will move in opposite directions. greater than 1, and price and total revenue will move in the same direction. greater than 1, and price and total revenue will move in opposite directions.

less than 1, and price and total revenue will move in the same direction.

SELLER COST DALE $1,500 JILL $1,200 DENISE $1,000 CATHERINE $750 JACKSON $500 Refer to the table in question 2. Who is a marginal seller when the price is $1,200? only Jill Jill and Dale only Denise, Catherine, and Jackson Denise, Catherine, Jackson, and Jill

only Jill

Refer to Figure in Question 1 (6.1-1). In which panel(s) of the figure would there be a shortage of the good at the ceiling panel (a) but not panel (b) panel (b) but not panel (a) panel (a) and panel (b) neither panel (a) nor panel (b)

panel (b) but not panel (a)

Refer to the figure below (6.1-1). A binding price ceiling is shown in panel (a) but not panel (b). panel (b) but not panel (a). both panel (a) and panel (b). neither panel (a) nor panel (b).

panel (b) but not panel (a).

Unlike minimum wage laws, wage subsidies discourage firms from hiring the working poor. cause unemployment. help only wealthy workers. raise living standards of the working poor without creating unemployment.

raise living standards of the working poor without creating unemployment.

Refer to Figure in Question 4 (6.1-2). If the government imposes a price floor of $14 in this market, the result would be a surplus of 20. surplus of 40. shortage of 20. shortage of 40.

surplus of 40.

A key determinant of the price elasticity of supply is the ability of sellers to change the price of the good they produce. the ability of sellers to change the amount of the good they produce. how responsive buyers are to changes in sellers' prices. the slope of the demand curve.

the ability of sellers to change the amount of the good they produce.

Refer to the Figure in Question 2 (6.2-1). As the figure is drawn, who sends the tax payments to the government? the buyers the sellers A portion of the tax payments is sent by the buyers and the remaining portion is sent by the sellers. The question of who sends the tax payments cannot be determined from the figure.

the buyers Since the demand curve shifts in the graph, the buyers send the tax payment to the government.

Refer to the figure in question 1 (7.3-1). If 110 units of the good are being bought and sold, then the cost to sellers is equal to the value to buyers. the value to buyers is greater than the cost to sellers. the cost to sellers is greater than the value to buyers. producer surplus is greater than consumer surplus.

the cost to sellers is greater than the value to buyers.

Refer to Figure in Question 1. The situation in panel (a) may be described as one in which the price ceiling is not binding. the price "ceiling" really functions as a price floor. a surplus of the good will be observed. All of the above are correct.

the price ceiling is not binding. When a price ceiling is above the equilibrium price, it is not binding. There will be no surplus or shortage.

A price floor is not binding if the price floor is higher than the equilibrium price of the good. the quantity of the good demanded with the price floor is less than the quantity demanded of the good without the price floor. the quantity of the good supplied with the price floor is less than the quantity supplied of the good without the price floor. All of the above are correct.

the quantity of the good supplied with the price floor is less than the quantity supplied of the good without the price floor. A price floor is not binding when the price floor is lower than the equilibrium price. Since the price floor is lower than the equilibrium price, based on the law of supply, the quantity of the good supplied with the price floor is less than the quantity supplied of the good without the price floor.

At a minimum wage that exceeds the equilibrium wage, the quantity demanded of labor will exceed the quantity supplied. the quantity supplied of labor will exceed the quantity demanded. the minimum wage will not be binding. the market for skilled workers is affected, but the market for unskilled workers remains unaffected.

the quantity supplied of labor will exceed the quantity demanded.

If, for two goods, the cross-price elasticity of demand is 1.25, then the two goods are luxuries. the two goods are substitutes. one of the goods is normal and the other good is inferior. the demand for one of the goods conforms to the law of demand and the demand for the other good violates the law of demand.

the two goods are substitutes.

SELLER COST DALE $1,500 JILL $1,200 DENISE $1,000 CATHERINE $750 JACKSON $500 Refer to the table in question 2. Suppose each of the five sellers can supply at most one unit of the good; then the market quantity supplied is exactly 3 if the price is $670. $770. $970. $1,170.

$1,170.

Refer to the Figure in Question 2 (6.2-1). The burden of the tax on sellers is $1.00 per unit. $1.50 per unit. $2.00 per unit. $3.00 per unit.

$1.00 per unit.

Donald produces nails at a cost of $200 per ton. If he sells the nails for $350 per ton, his producer surplus per ton is $150. $200. $350. $550

$150.

Refer to the Figure in Question 2 (6.2-1). The burden of the tax on buyers is $1.00 per unit. $1.50 per unit. $2.00 per unit. $3.00 per unit.

$2.00 per unit.

BUYER WILLINGNESS TO PAY MIKE $50.00 SANDY $30.00 JONATHAN $20.00 HALEY $10.00 Refer to the table in question 3. If the table represents the willingness to pay of four buyers and the price of the product is $30, then their total consumer surplus is $10. $6. $20. $30.

$20.

Refer to the figure below (7.3-1). At the equilibrium price, consumer surplus is $480. $640. $1,120. $1,280.

$480.

If the price elasticity of demand for a good is 4.0 then a 10% increase in price results in a: 0.4 percent decrease in the quantity demanded. 2.5 percent decrease in the quantity demanded. 4 percent decrease in the quantity demanded. 40 percent decrease in the quantity demanded.

40 percent decrease in the quantity demanded.

Refer to Figure in Question 5 (5.3-2). Total revenue when the price is P2 is represented by the area(s) B + D. A + B. C + D. D.

A + B.

Using the midpoint method, compute the elasticity of demand between points A and B. Is demand along this portion of the curve elastic or inelastic? Interpret the number you calculated with regard to price and quantity demanded. Now compute the elasticity of demand between points B and C. Is demand along this portion of the curve elastic or inelastic? (5.2-2)

In the section of the demand curve from A to B, % change in quantity = (300-100)/((300+100)/2) = 100% % change in price = (18-12)/((18+12)/2) = 40% Price elasticity of demand = 100%/40% = 2.5 This would be an elastic portion of the curve. This would mean that for every 1 percent change in price, the quantity demanded would change by 2.5 percent. In the section of the demand curve from B to C, % change in quantity = (500-300)/((500+300)/2) = 50% % change in price = (12-6)/((12+6)/2) = 66.7% Price elasticity of demand = 50%/66.7% = 0.75 This would be an inelastic portion of the curve. This would mean that for every 1 percent change in price, the quantity demanded would change by 0.75 percent.

The graph below (Quiz 6) shows the supply and demand curves for the market of airplane tickets. a. Compute CS, PS, and total surplus without a tax. b. If $100 tax per ticket was imposed, compute CS, PS, tax revenue, total surplus. c. What is the deadweight loss? The deadweight loss is $_______________

The deadweight loss is $1250.

Can Good News for Farming Be Bad News for Farmers? The researchers at UW-Madison developed a new hybrid of wheat, which increased production per acre by 20%. Suppose the demand for wheat is inelastic. How will this new technology affect the revenue of farmers? Show your answers using a graph. The revenue increase/decreases with the new technology. (circle the right answer)

The revenue DECREASES with the new technology.

Refer to the figure in question 6 (7.1-1). When the price rises from P1 to P2, consumer surplus increases by an amount equal to A. decreases by an amount equal to B + C. increases by an amount equal to B + C. decreases by an amount equal to C.

decreases by an amount equal to B + C.

A tax on the buyers of coffee will increase the effective price of coffee paid by buyers, increase the price of coffee received by sellers, and increase the equilibrium quantity of coffee. decrease the effective price of coffee paid by buyers, increase the price of coffee received by sellers, and decrease the equilibrium quantity of coffee. increase the effective price of coffee paid by buyers, decrease the price of coffee received by sellers, and decrease the equilibrium quantity of coffee. increase the effective price of coffee paid by buyers, decrease the price of coffee received by sellers, and increase the equilibrium quantity of coffee.

increase the effective price of coffee paid by buyers, decrease the price of coffee received by sellers, and decrease the equilibrium quantity of coffee.

Refer to the Figure in Question 2 (6.2-1). Suppose the same S and D curves apply, and a tax of the same amount per unit as shown here is imposed. Now, however, the sellers of the good, rather than the buyers, are required to pay the tax to the government. Now, relative to the case depicted in the figure, the burden on buyers will be larger and the burden on sellers will be smaller. the burden on buyers will be smaller and the burden on sellers will be larger. the burden on buyers will be the same and the burden on sellers will be the same. The relative burdens in the two cases cannot be determined without further information.

the burden on buyers will be the same and the burden on sellers will be the same. The theory on tax incidence indicates that it doesn't matter whether the buyers or the sellers pay taxes directly to the government. The burden on buyers and sellers stays the same.