Econ 201 Exam 2
which graph could be used to show the result of 5 percent of the country's smokers deciding to stop smoking?
Demand curve shift left
buyers of a product will pay the majority of a tax placed on a product when
supply is more elastic than demand
when OPEC raised the price of crude oil in the 1970s, it caused the
supply of gasoline to decrease
if a change in the price of a good results in no change in total revenue,
the demand for the good must be unit elastic
what happens when there's a tax on buyers
the demand shifts down by the amount of the tax the price buyers pay rises, the price sellers receive falls
what are the determinants of price elasticity of demand (4)
the extent to which close substitutes are available whether the good is a necessity or a luxury how broadly or narrowly the good is defined the time horizon: elasticity is higher in the long run than the short run
what is a price floor
a legal minimum on the price of a good or service
moving down a linear demand curve we know that elasticity gets
smaller
a binding price ceiling causes
a shortage, which cannot be eliminated through market adjustment
in general, the tax burden falls more heavily on the side of the market that is
less elastic
a tax of $0.10 per bar on the sellers of Snickers will cause the
supply curve of snickers to shift up by $0.10
define price elasticity of supply
% change in Qs / % change in P
janine would be willing to pay $50 to see a play, but buys the ticket for only $30. janine values the play at
$50
how do you calculate percent change?
( (end value - start value) / midpoint ) * 100
an allocation of resources is said to be inefficient if
a good is not being produced by the sellers with the lowest cost
what is consumer surplus
a consumer's willingness to pay (WTP) minus the Price they pay CS = WTP - P
what is a price ceiling
a legal maximum on the price of a good or service
movement right of a supply curve is called
an increase in supply
an increase in farm technology which increases market supply is
bad for farmers because total revenue will fall, but good for consumers because prices for food will fall
what is income elasticity of demand?
deals with normal goods and inferior goods % change in Qd / % change in income normal goods = income elasticity is positive inferior goods = income elasticity is negative
what is cross price elasticity of demand?
deals with substitutes and complements % change in Qd for good 1 / % change in Price for good 2 substitutes = elasticity is positive complements = elasticity is negative
Suppose a producer is able to separate customers into two groups, one having a price inelastic demand and the other having a price elastic demand. If the producer's objective is to increase total revenue, she should
decrease the price charged to customers with the price elastic demand and increase the price charged to customers with the price inelastic demand.
which of the following will definitely cause equilibrium *quantity* to fall?
demand and supply both decrease
if a good is a luxury, demand for the good would tend to be
elastic
when price falls from $40 to $30 we know that demand must be
elastic, since total revenue *increases* from $8,000 to $9,000
lawmakers enacted the FICA tax to be
equally shared between the employer and employee
cross-price elasticity is used to determine whether goods are inferior or normal goods
false
if there is an improvement in the technology of producing a product, the supply curve for that product will shift to the left
false
rent subsidies and wage subsidies are better than price controls at helping the poor because they have no costs associated with them
false
the law of demand states that the quantity demanded of a product is positively related to price
false
the market demand is the average of all the individual demands for a particular good or service
false
the movement along a supply curve is called a change in supply while a shift of the curve is called a change in quantity supplied
false
total surplus in a market can be measured as the area below the supply curve and the area above the demand curve
false
when a new, more productive strawberry was developed which caused supply to increase, strawberry farmers were
hurt, since both price and total revenue fell due to an inelastic demand curve
what is tax incidence
if buyers' price elasticity > sellers' price elasticity, buyers can more easily leave the market when the tax is imposed, so buyers will bear a smaller burden of the tax than sellers
the space that would represent an increase in equilibrium quantity and an indeterminate change in equilibrium price would be
increase in demand, increase in supply
a tax on the buyers of coffee will
increase the equilibrium price of coffee, and reduce the equilibrium quantity
define price elasticity of demand
measures how much quantity demanded responds to a change in price. % change in Qd / % change in P
cost refers to a seller's
opportunity cost
if the demand curve shifts left from D to D1, then
people are now willing to buy the product at any price than before
if two goods are substitutes, their cross-price elasticity will be
positive
when supply and demand both increase, equilibrium
price may increase, decrease, or remain unchanged
An economy's scarce resources are allocated by
prices for resources
a supply curve can be used to measure producer surplus because it reflects
sellers' costs
what will happen to the equilibrium of new textbooks if more students attend college, paper becomes cheaper, textbook authors accept lower royalties, and fewer used textbooks are sold
the price change will be amibguous
what is producer surplus
the price received by sellers minus the Cost to sellers PS = P - Cost
what is total surplus
the producer surplus plus consumer surplus TS = PS + CS
what happens when there's a tax on sellers
the supply curve shifts up by the amount of the tax the price buyers pay rises, the price sellers receive falls
what is deadweight lost
total surplus lost when taxes are put in place producers and consumers who have left the market
TS = value to buyers - costs to sellers
true
free markets allocate 1) the supply of goods to the buyers who value them most highly and 2) the demand for goods to the sellers who can produce them at least cost
true
if demand is perfectly inelastic, the demand curve is vertical, and elasticity is equal to 0
true
producer surplus is the amount a seller is paid minus the cost of production
true
the area below the price and above the supply curve measures the PS in a market
true
which of the following would be true as the elasticity of supply approaches infinity
very small changes in price will lead to very large changes in quantity supplied
what is the relation between total revenue and price elasticity of demand
when demand is *elastic*, prices fall and total revenue RISES when demand is *inelastic*, prices rise and total revenue also RISES when demand is *perfectly inelastic*, any price change will result in the same change in total revenue
when is a market efficient
when the eq'm Q maximizes total surplus the goods are produced by the producers with lowest cost goods are consumed by buyers who value them most highly
what is equilibrium
where supply and demand meet
