ECON 130 Midterm 2
Demand is said to be inelastic if
the quantity demanded changes only slightly when the price of the good changes.
According to IED, as income goes down, what happens to demand?
it goes up
What is the percentage change in QD if PED = 0.4 and price falls by 10%?
0.4 x 0.10 = 0.04%
What are the key provisions of the Affordable Care Act?
1. mandating insurance or face a tax penalty 2. prevent denial of coverage based on preexisting conditions 3. giving states the option to expand Medicaid
What are the determinants of the price elasticity of demand for a good?
1. the time horizon 2. the definition of the market for the good 3. the availability of substitutes for the good
Holding all other forces constant, if decreasing the price of a good leads to an increase in total revenue, then the demand for the good must be
1.2, and X and Y are substitutes.
Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 0.75. Which of the following events is consistent with a 10 percent decrease in the quantity of the good demanded?
13.33 percent increase in the price of the good
Suppose the price of a bag of frozen chicken nuggets decreases from $6.50 to $5.75 and, as a result, the quantity of bags demanded increases from 600 to 800. Using the midpoint method, the price elasticity of demand for frozen chicken nuggets in the given price range is
2.33
If PD (Domestic Price) < PW (World Price), what happens to CS, PS, and TS?
CS goes down, PS goes up, TS goes up
If PD (Domestic Price) > PW (World Price), what happens to CS, PS, and TS?
CS goes up, PS goes down, and TS goes up
what will happen to CS if the price of a good decreases?
CS increases
TS =
CS+PS+TR-DWL
If PED > 1, what's its elasticity?
Elastic
What happens when there is less quantity supplied than quantity demanded (shortage) in terms of homes available and people who want homes?
Homelessness
If PED is < 1, what's its elasticity?
Inelastic
Before trade, how would you identify PS?
It's the triangle below P* and in line with the supply curve
In class, what tax curve did we talk about?
Laffer curve
How would you determine PS?
P(price it sells for)-C(cost it took to make it) P-C
How do you find TS?
PS+CS
If PED = infinity, what's its elasticity?
Perfectly elastic (completely horizontal demand curve)
If PED = 0, what's its elasticity?
Perfectly inelastic (completely vertical demand curve)
Tax revenue =
Tax x QT
Suppose that when the average college student's income is $10,000 per year, the annual quantity demanded of Patty's Pizza is 50 and the annual quantity demanded of Sue's Subs is 80. Suppose also that when the average student's income increases to $12,000 per year, the annual quantity demanded of Patty's Pizza increases from 50 to 60. Using the midpoint method, what is the income elasticity of demand for pizza and what does the value indicate about the demand for pizza? Note: More than one is correct and either choice will be accepted
The income elasticity is 1 so pizza is a normal good.
Define Price Elasticity of Demand (PED)
The price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good. When we talk about elasticity, that responsiveness is always measured in percentage terms. Specifically, the price elasticity of demand is the percentage change in quantity demanded due to a percentage change in the price.
After trade, how would you identify CS?
Triangle (everything) above PW
What happens when there is a more quantity supplied than quantity demanded (surplus) in terms of people who want jobs and people who are hiring?
Unemployment
If PED = 1, what's its elasticity?
Unit Elastic
How do you determine CS?
WTP-P
What kind of relationship does IED have?
a negative one
What kind of relationship does tax revenue and DWL have?
a negative one
What is a tariff?
a tax on imports or exports
Suppose Katie, Kendra, and Kristen each purchase a particular type of cell phone at a price of $80. Katie's willingness to pay was $100, Kendra's willingness to pay was $95, and Kristen's willingness to pay was $80. Which of the following statements is correct? 1 point a. For the three individuals together, consumer surplus amounts to $35. b. Having bought the cell phone, Kristen is better off than she would have been had she not bought it. c. Had the price of the cell phone been $95 rather than $80, Katie and Kendra definitely would have been buyers and Kristen definitely would not have been a buyer. d. The fact that all three individuals paid $80 for the same type of cell phone indicates that each one placed the same value on that cell phone.
a. For the three individuals together, consumer surplus amounts to $35.
If supply or demand (usually demand) is inelastic and price goes down and quantity goes up, what happens to total revenue?
it goes down
On a Laffer curve, when tax is greater than the optimal tax rate, what happens to tax revenue?
it goes down
A tax levied on the sellers of blueberries a. increases sellers' costs, reduces profits, and shifts the supply to the left b. increases sellers' costs, reduces profits, and shifts the supply to the right c. decreases sellers' costs, increases profits, and shifts the supply to the left d. decreases sellers' costs, increases profits, and shifts the supply to the right
a. increases sellers' costs, reduces profits, and shifts the supply to the left
A price ceiling is not binding when it is set
above the equilibrium price
A price floor will be binding only if it is set
above the equilibrium price
A price ceiling will be binding only if it is set
below the equilibrium price
A price floor is not binding when it is set
below the equilibrium price
Do the buyers or sellers bear more of the tax when the demand curve is vertical and the supply curve is horizontal?
buyers bc demand curve is more inelastic
If supply is horizontal and demand is vertical, then majority of the tax will be borne on
consumers since demand is more inelastic than supply
What will happen to consumer surplus if the price of a good increases?
cs decreases
Suppose buyers of fountain drinks are required to send $0.50 to the government for every fountain drink they buy. Further, suppose this tax causes the effective price received by sellers of fountain drinks to fall by $0.20 per drink. Which of the following statements is correct? a. This tax causes the demand curve for fountain drinks to shift downward by $0.50 at each quantity. b. The price paid by buyers is $0.30 per drink more than it was before the tax. c. Forty percent of the burden of the tax falls on sellers. d. All of the above are correct.
d. all of the above are correct
When studying how some event or policy affects a market, elasticity provides information on the
direction and magnitude of the effect.
Holding all other forces constant, if decreasing the price of a good leads to an increase in total revenue, then the demand for the good must be
elastic
After tariff, how would you identify CS?
everything (triangle) above tariff line
Before tax, how would you identify CS?
everything (triangle) above the P*
After tax, how would you identify CS?
everything (triangle) above the price buyers pay (PB) line
After trade, how would you identify PS?
everything (triangle) below PW
Before tax, how would you identify PS?
everything (triangle) below the P*
After tax, how would you identify PS?
everything (triangle) below the price sellers receive (PS) line
After tax, how would you identify DWL?
everything (triangle) on the right of of the quantity tax line (2 triangles on the right)
If PD < PW, is your country getting imports or exporting?
exporting
Price controls can...
generate inequities of their own.
If PD > PW, is your country getting imports or exporting?
getting imports
If IED < 0, what kind of good is it?
inferior good
If supply has a perfectly elastic supply, then price elasticity of supply will be
infinite
On a Laffer curve, when there is too much or too little tax rate, what happens to tax revenue?
it declines (meaning it's either too high or too low)
According to IED, as income goes up, what happens to demand?
it goes down
If supply or demand (usually demand) is elastic and price goes up and quantity goes down, what happens to total revenue?
it goes down
If supply or demand (usually demand) is elastic and price goes down and quantity goes up, what happens to total revenue?
it goes up
If supply or demand (usually demand) is inelastic and price goes up and quantity goes down, what happens to total revenue?
it goes up
On a Laffer curve, when the tax is less than the optimal tax rate, what happens to tax revenue?
it goes up
On a Laffer curve, when tax is equal to the optimal tax rate, what is tax revenue?
it is maxed
After tariff, how would identify total revenue?
it's only rectangle
Before trade, how would you identify the CS?
it's the triangle above P*
Under minimum wage laws
labor supply exceeds labor demand and causes unemployment
If IED > 1, what kind of good is it?
luxury good
Willingness to pay....
measures the value that a buyer places on a good
If 0 < IED < 1, what kind of good is it?
necessity
If IED > 0, what kind of good is it?
normal good
if Demand is Inelastic, does TR mirror price or quantity?
p
Economists compute the price elasticity of demand as the
percentage change in quantity demanded divided by the percentage change in price.
Is rent control a price floor or price ceiling?
price ceiling
Is minimum wage a price floor or price ceiling?
price floor
What is total revenue equal to?
price x quantity
If Demand is Elastic, does TR mirror price or quantity?
q
The local bakery makes such great cinnamon rolls that consumers do not respond much at all to a change in the price. If the owner is only interested in increasing revenue, she should
raise the price of the cinnamon rolls.
do the buyers or sellers bear more of the tax when the demand curve is horizontal and the supply curve is vertical?
sellers bc the supply curve is more inelastic
What is tax revenue equal to?
tax rate x quantity
DWL =
tax x (QE-QT) /2
PED = (change in version and long formula version)
the change (percentage) in QD/the change (percentage) in P Q2-Q1/((Q2+Q1)/2) over P2-P1/((P2+P1)/2)
Income Elasticity of Demand (IED) =
the change in D/the change in I
The value of the price elasticity of demand for a good will be relatively large when
the good is a luxury rather than a necessity.
A price ceiling is...
the maximum price the government will allow
A price floor is...
the minimum price that the government will allow
After tax, how would you identify tax revenue?
the only two rectangles
On the Laffer curve, if the point is in the direct middle, what is that point called?
the optimal tax rate.
After tariff, how would you identify the PS?
the triangle (everything) below the tariff line and in line with supply curve
After trade, how do you identify the imports?
the triangle made in the middle (on the right of the supply curve)
After tariff, how would you identify DWL?
the triangles on the sides of the TR
If a price ceiling is not binding, then
there will be no effect on the market price or quantity sold.