Econ Chapter 5-9

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Demand is said to be inelastic if

the quantity demanded changes only slightly when the price of the good changes.

Refer to Figure 6-13. Acme, Inc. is a seller of the good. Acme sells a unit of the good to a buyer and then pays the tax on that unit to the government. After paying the tax, Acme receives how much?

8.00

Which tools allow economists to determine if the allocation of resources determined by free markets is desirable?

Consumer and producer surplus

Consumer surplus is the amount a buyer actually has to pay for a good minus the amount the buyer is willing to pay for it. T/F

False

Total surplus in a market does not change when the government imposes a tax on that market because the loss of consumer surplus and producer surplus is equal to the gain of government revenue. T/F

False

Welfare economics is the study of the welfare system. T/F

False

Your younger sister needs $50 to buy a new bike. She has opened a lemonade stand to make the money she needs. Your mother is paying for all of the ingredients. She currently is charging 25 cents per cup, but she wants to adjust her price to earn the $50 faster. If you know that the demand for lemonade is elastic, what is your advice to her?

Lower the price to increase total revenue.

Which of the following is not a commonly-advanced argument for trade restrictions?

The efficiency argument

When a country allows trade and becomes an importer of cheese, which of the following is a consequence?

The price paid by domestic consumers of cheese increases.

When a country allows trade and becomes an exporter of silk, which of the following is a consequence?

The price paid by domestic consumers of silk decreases.

What happens to the total surplus in a market when the government imposes a tax?

Total surplus decreases.

A tax places a wedge between the price buyers pay and the price sellers receive. T/F

True

According to the principle of comparative advantage, all countries can benefit from trading with one another because trade allows each country to specialize in doing what it does best. T/F

True

Free markets allocate (a) the supply of goods to the buyers who value them most highly and (b) the demand for goods to the sellers who can produce them at least cost. T/F

True

Taxes affect market participants by increasing the price paid by the buyer and received by the seller. T/F

True

The sum of consumer and producer surplus measures the total benefits that buyers and sellers receive from participating in a market. T/F

True

When markets fail, public policy can potentially remedy the problem and increase economic efficiency. T/F

True

Refer to Table 7-1. If the price of the product is $125, then who would be willing to purchase the product?

Zed, Sam, and Andrew

A price ceiling is

a legal maximum on the price at which a good can be sold.

A shortage results when a

binding price ceiling is imposed on a market.

When a good is taxed,

both buyers and sellers of the good are made worse off.

Demand is said to be price elastic if

buyers respond substantially to changes in the price of the good

The price elasticity of demand measures

buyers' responsiveness to a change in the price of a good.

Price ceilings and price floors that are binding

cause surpluses and shortages to persist because price cannot adjust to the market equilibrium price.

The decrease in total surplus that results from a market distortion, such as a tax, is called a

deadweight loss.

Suppose that a tax is placed on books. If the buyers pay the majority of the tax, then we know that the

demand is more inelastic than the supply.

If the demand for donuts is elastic, then a decrease in the price of donuts will

increase total revenue of donuts sellers.

Goods with many close substitutes tend to have

more elastic demands

When a tax is placed on the sellers of a product, buyers pay

more, and sellers receive less than they did before the tax.

As a result of a decrease in price,

new buyers enter the market, increasing consumer surplus.

Minimum-wage laws dictate

only a minimum wage that firms may pay workers.

A legal minimum on the price at which a good can be sold is called a

price floor.

Rent control

serves as an example of a price ceiling.

Refer to Figure 6-9. In this market, a minimum wage of $6 creates a labor

surplus of 4,000 worker hours.

Suppose demand is perfectly inelastic, and the supply of the good in question decreases. As a result,

the equilibrium price increases, and the equilibrium quantity is unchanged.

Income elasticity of demand measures how

the quantity demanded changes as consumer income changes.

Cross-price elasticity of demand measures how

the quantity demanded of one good changes in response to a change in the price of another good.

Efficiency in a market is achieved when

the sum of producer surplus and consumer surplus is maximized.

A key determinant of the price elasticity of supply is the

time horizon.

A seller's opportunity cost measures the

value of everything she must give up to produce a good.


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