ECON 201 Final

Quota

restriction on the quantity of goods that can be imported

When the price is above the equilibrium price, greed (in other words, self-interest) tends to

push the price down

Rent Controls

create shortages

Harry is lucky enough to get a rent-controlled apartment for $300 per month. The market rent on such an apartment is $3,000 per month. Harry himself values the apartment at $2,000 per month. If he stays in the apartment, how much consumer surplus does he enjoy?

$1,700 per month

Your roommate just bought an iPhone for $800. She would have been willing to pay $1000 for a machine that could store and replay that much music. How much consumer surplus does your roommate enjoy from the iPhone?

$200

Michael is an economist. He loves being an economist so much that he would do it for a living even if he only earned $30,000 per year. Instead, he earns $80,000 per year. How much producer surplus does Michael enjoy?

$50,000

There are three conditions that explain why a free market is efficient: 1. The supply of goods is sold by the sellers with the lowest cost. 2. There are no unexploited gains or wasteful trades. 3. The supply of goods is purchased by the buyers that place the highest value on the goods. Which condition or conditions cease to hold in the case of a tariff on imported goods? Choose all that apply.

1 and 2

Imagine that you can hire four low-skilled workers to move dirt with shovels at $5 an hour, or you can hire one skilled worker at $24 an hour to move the same amount of dirt with a skid loader. Who will you hire if the minimum wage increases from $5 per hour to $6.50 per hour?

1 high-skilled worker

a tariff has two effects that influence welfare (welfare costs)

1. domestic consumption decreases 2. domestic production increases Both of these effects reduce welfare: 1) domestic consumptions falls so there are lost gains from trade 2) domestic production increases creating wasted resources from higher-cost production. On a net level, there's going to be more resources going into production than are necessary. aka wasted resources. when the domestic industry expands because of the tariff, we invest more resources in producing than are necessary. the tariff switches production from the low cost world producers to the high cost domestic producers, and that generates wasted resources

Bryan recently found a pair of $10 arch supports that saved him from the pain of major foot surgery. He would have been willing to pay $100,000 to fix his foot problem, but instead he only paid a few dollars. How much consumer surplus did Bryan enjoy from this purchase?

99,990

What did the minimum wage create: a labor surplus or a labor shortage?

A labor surplus

Which of the following is NOT an example of incentives at work?

After an increase in shoplifting, a store installs hidden cameras.

Spend some time driving in Detroit, MI—the Motor City—and you're sure to see bumper stickers with messages like "Buy American" or "Out of a job yet? Keep buying foreign!" or "Hungry? Eat your foreign car!" Explain these bumper stickers in light of what you've learned: Who is hurt most by imported automobiles?

American (domestic) car manufacturers

If Harry illegally subleases his apartment to Sally on the black market for $2,500 per month and instead rents a $2,000 apartment, is he better off or worse off than if he obeyed the law?

Better off

In a rent-controlled apartment, a landlord will likely do which of the following more often:

Discriminate more against applicants

The supply curve for rice in Japan slopes upward, just like any normal supply curve. If Japan eliminated its trade barriers to rice, what would happen to the number of workers employed in the rice-producing industry in Japan: Would it rise or fall?

Fall

True or false: free trade protects jobs.

False

Along a supply curve, if the price of oil falls, what will happen to the quantity of oil supplied

It will decrease

The Japanese people currently pay about four times the world price for rice because of trade barriers. Who is more likely to make a greater effort lobbying for or against a reduction in trade barriers?

Japanese rice farmers

Does free trade always increase wages?

No, some wages will increase, while others will decrease. But on average, wages do increase.

Consider a factory, located in the middle of nowhere, producing a nasty smell. As long as no one is around to experience the unpleasant odor, what type of externality is produced?

None of the above

What other ways countries can discourage child labor? Choose all that apply.

Offer free schooling. Give money to schools for student lunches.

Jon is on eBay, bidding for a first edition of the influential Frank Miller graphic novel Batman: The Dark Knight Returns. In this market, who is Jon competing with?

Other bidders

Supply Curve

Supply represents the behavior of sellers a function that shows the quantity supplied at different prices Horizontally: how much suppliers are willing and able to sell at a given price Vertically: the minimum price at which suppliers will sell a given quantity Quantity supplied is the quantity that producers are willing and able to sell at a particular price Shift right/down=increase in supply (greater quantity supplied at the same price; willing to sell same quantity at lower prices) shift left/up=decrease in supply (smaller quantity supplied at the same price; higher price needed to sell same quantity) The major factor that's going to increase supply is a reduction of costs The major factor that's going to decrease supply is an increase in costs A change in cost is the major factor that changes the supply: -technological innovations -input prices -taxes and subsidies -expectations -entry or exit of producers -changes in opportunity costs higher price = greater quantity supplied

Who is impacted most by a change in the minimum wage?

Teenagers

When the price of Apple computers goes down, what probably happens to the demand for Windows-based computers?

The demand for Window-based computers decrease

When the price of olive oil goes up, what probably happens to the demand for corn oil?

The demand for corn oil increases

When the price of petroleum goes up, what probably happens to the demand for natural gas?

The demand for natural gas increases

What should happen to the "demand for speed" (measured by the average speed on highways) once airbags are included on cars?

The demand for speed increases

If everyone thinks that the price of tomatoes will go up next week, what is likely to happen to demand for tomatoes today?

The demand for tomatoes increases

Choose all that could apply. Suppose that the family clearly possesses the right to a pleasant-smelling environment. What could happen?

The factory stops producing the bad smell., The factory pays the family to move., The factory pays the family for the right to continue the bad smell.

Choose all that apply. Suppose that a family moves in next door to a smelly factory. Who is causing the externalities problem?

The factory, The family

Trade restrictions on sugar cause U.S. consumers to pay more than twice the going world price for sugar. However, you are very unlikely to ever encounter bumper stickers that say things like "Out of money yet? Keep taxing foreign sugar!" or "Hungry? It's probably because domestic sugar is so expensive!" Why?

The price increase of sugar per person is small.

The industrial areas in northeast Washington, DC, were relatively dangerous in the 1980's. Over the last two decades, the area has become a safer place to work. When an area becomes a safer place to work, what probably happens to the "supply of labor" in that area?

The supply of labor increases

Some people argue for protectionism by pointing out that other countries with whom we trade engage in "unfair trade practices," and that we should retaliate with our own protectionist measures. One such policy is the policy of some countries to subsidize exporting industries. India, for example, subsidizes its steel industry. Who is hurt by this subsidy? Choose all that apply.

US steel producers

Sugar farmers in Florida who use unusually large amounts of fertilizer to produce their crops do so because their land isn't all that great for sugar production. If we translate this into the language of the supply curve, where would these sugar farmers be on the supply curve?

Upper-right

Demand Curve

a function that shows the quantity demanded at different prices shows how much of a good people will want at different prices The Quantity Demanded is the quantity that buyers are willing (and able) to purchase at a particular price at a lower price, the quantity demanded is greater. horizontally: the quantity buyers are willing and able to purchase at a given price vertically: the maximum price that buyers are willing to pay for a given unit of oil shift right = increase in demand shift left = decrease in demand

Price Ceiling

a maximum price allowed by law five important effects: 1) shortages 2) reductions in product quality 3) wasteful lines and other search costs 4) a loss in gains from trade (deadweight loss) 5) a misallocation of resources

price floor

a minimum price allowed by law price floors create: surpluses lost gains from trade (deadweight loss) wasteful increases in quality a misallocation of resources price floors are less common than price ceilings because there are typically more buyers of goods than sellers of goods.

Tariff

a tax on imports increase prices to consumers so domestic consumption falls and this creates a dead weight loss divert production from low-cost (world) producers to high-cost (domestic) producers and this wastes resources distribution of losses and gains: -bad for consumers -good for domestic producers -bad overall with tariff: -raises the world price by the amount of the tariff. world price + tariff price prevails -world supply curve/world price shifts up until we get to the new equilibrium which means that at a higher price, domestic consumers are going to demand a lower quantity. -domestic consumption falls from Qd free trade to Qd tariff -with the higher price, domestic suppliers are now willing to supply more -domestic production increases from Qs free trade to Qs tariff along the domestic supply curve -imports = Qd tariff - Qs tariff; imports have fallen when adding a tariff -tariff's generate revenue which will go to the government -government tariff revenue = tax/tariff amount x quantity of imports w/ tariff

Economics is the study of

choices under scarcity

When the price of a good increases, the quantity demanded

decreases

If the price of cars falls, carmakers are more likely to make...

fewer cars

Free trade

international trade free of government interference with free trade: -world price prevails ex: consumers can go out into the world and buy as much of a good as they want at the world price whereas given by the world supply curve. the free trade equilibrium would then involve greater consumption. -domestic consumption = Qd Free Trade at the high price, with no international trade, the quantity demanded is lower than with international trade where consumers can buy at the lower, world price, so the quantity demanded increases with free trade. -domestic production = Qs Free Trade domestic producers can only charge as much as the world producers, so when the world price falls meaning domestic consumers are able to buy at the world price, domestic producers can only sell at the world price and will be less willing to sell, so the domestic production will fall. at the lower price, domestic suppliers are only willing to produce a lesser amount. - Imports = Qd Free Trade (minus) Qs Free Trade demanders are demanding more than domestic suppliers are willing to supply, so the difference must be made up by imports.

Consumer Surplus

is the consumer's gain from exchange. the difference between the maximum price a consumer is willing to pay for a given quantity and the market price.

Total Consumer Surplus

is the sum of consumer surplus of all buyers. graphically, total consumer surplus is measured by the area below the demand curve and above the price Calculated by area of a triangle: 1/2(base x height) = T.C.S. example: 1/2(80-20)x90=$2700

shortage

quantity demanded exceeds quantity supplied buyers bid up the price by competing to buy more and then sellers raise the prices until equilibrium is reached.

Surplus

quantity supplied is greater than quantity demanded sellers have an incentive to lower prices to outsell other sellers

Incentives always involve

rewards and/or penalties

If the price in a market is above the equilibrium price, this creates a

surplus

Gains from trade

the difference between the value a good creates and its cost

Protectionism

the economic policy of restraining trade through tariffs, quotas or other regulations that burden foreign producers but not domestic producers

Equilibrium Price

the price at which the quantity demanded equals the quantity supplied only the equilibrium price is stable

Producer Surplus

the producer's gain from exchange the difference between the market price and the minimum price at which producers would be willing to sell a given quantity

the coase theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

Total producer surplus

the sum of the producer surplus of each seller graphically, total producer surplus is measured by the area above the supply curve and below the price

When will people search harder for substitutes for oil?

when the price of oil is high