Econ Exam 2 Study Guide
(Assignment 3, Q20) Which of the following is likely to have the most price inelastic demand? a. Yoga mats b. Prescription medicine c. Protein powder d. Gym membership
b. Prescription medicine necessity matter of survival
(Assignment 4, Q3) Refer to Table 7-4. Who experiences the largest loss of consumer surplus when the price of an apple increases from $0.80 to $1.05? a. Allison b. Keira c. Erica d. All three individuals experience the same loss of consumer surplus
a. Allison Allison's CS decreased from 1.9 to 1.4 so 0.5 decrease Keira's CS decreased from 0.9 to 0.45 so 0.45 decrease
(Assignment 3, Q19) Refer to Figure 5-6. Along which of these segments of the supply curve is supply least elastic? a. BA b. DC c. FD d. FE
a. BA The steeper the line the less elastic it is, so BA is the steepest part it's the least elastic (more inelastic)
(Assignment 4, Q18) Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by J represents a. consumer surplus after the tax. b. consumer surplus before the tax. c. producer surplus after the tax. d. producer surplus before the tax.
a. consumer surplus after the tax. After tax: CS=j PS=m Tax revenue=k+L DWL=I+Y Total surplus=j+k+L+m Buyers pay p' Sellers receive p'''
(Assignment 3, Q16) Refer to Figure 6-15. In which market will the majority of the tax burden fall on buyers? a. The market shown in graph (a). b. The market shown in graph (b) c. The market shown in graph (c) d. The tax burden on buyers is the same for all three graphs.
b. The market shown in graph (b) The majority of tax burden will fall on buyers if the elasticity of demand is lower than the elasticity of supply (D is more inelastic), look where D is steeper than S
(Assignment 4, Q19) Refer to Figure 8-2. The imposition of the tax causes the quantity sold to a. increase by 10 units. b. decrease by 10 units. c. increase by 20 units. d. decrease by 20 units.
b. decrease by 10 units.
(Assignment 4, Q2) Refer to Table 7-4. If the market price of an apple increases from $0.80 to $1.05, then consumer surplus a. increases by $0.75. b. decreases by $0.95. c. decreases by $0.75. d. decreases by $1.00.
b. decreases by $0.95. When p=0.8 only Allison and keira are willing to pay, Erica does not value the apple more than 0.75 so she will not buy At p=0.8 Allison and Keira each will buy 2 apples Allison: CS for 1st apple=2-0.8=1.2 CS for 2nd apple=1.5-0.8=0.7 So CS for Allison=1.9 Keira: CS for 1st apple=1.5-0.8=0.7 CS for 2nd=1-0.8=0.2 So CS for Keira=0.9 Total CS= 2.8 ---------------------------------- When p=1.05 still only Allison and keira are willing to pay At p=1.05 Allison will buy 2 apples and Keira only one Allison: CS for 1st apple=2-1.05=0.95 CS for 2nd apple=1.5-1.05=0.45 So CS for Allison=1.4 Keira: CS for 1st apple=1.5-1.05=0.45 Total CS= 1.85 So Total CS decreased by 0.95
(Assignment 3, Q27) Refer to Figure 6-2. The price ceiling a. causes a shortage of 40 units of the good. b. makes it necessary for sellers to ration the good using a mechanism other than price. c. is not binding because it is set below the equilibrium price. d. causes a shortage of 20 units of the good.
b. makes it necessary for sellers to ration the good using a mechanism other than price. it creates a shortage of 60 units (120-60) so it pushes sellers to use rationing mechanism with buyers
(Assignment 4, Q23) Refer to Figure 8-2. The loss of consumer surplus as a result of the tax is a. $300. b. $200. c. $450. d. $100.
c. $450. Before tax: CS= 0.5x20x(120-60) = 600 After tax: CS=0.5x10x(120-90) = 150 600 - 150 = 450
(Assignment 4, Q25) Refer to Table 8-1. Suppose the government is considering levying a tax in one or more of the markets described in the table. Which of the markets will allow the government to minimize the deadweight loss(es) from the tax? a. Market A only b. Markets A and C only c. Markets B and D only d. Market C only
c. Markets B and D only The greater the elasticity the greater is DWL i.e the less the elasticity (more inelastic) the less DWL.
(Assignment 4, Q1) Refer to Table 7-1. If the price of the product is $105, then who would be willing to purchase the product? a. Zed b. Zed and Sam c. Zed, Sam, and Andrew d. Zed, Sam, Andrew, and Keira
c. Zed, Sam, and Andrew are willing to pay more than the price which is 105
(Assignment 4, Q5) Henry is willing to pay 45 cents, and Janine is willing to pay 55 cents, for 1 pound of bananas. When the price of bananas falls from 50 cents a pound to 40 cents a pound, a. Henry experiences an increase in consumer surplus, but Janine does not. b. Janine experiences an increase in consumer surplus, but Henry does not. c. both Janine and Henry experience an increase in consumer surplus. d. neither Janine nor Henry experiences an increase in consumer surplus.
c. both Janine and Henry experience an increase in consumer surplus. price decreases so Janine CS increases and so for Henry who now can participate in the market at the new price (at price 50 only Janine buys her CS=5 while Henry's CS is 0)
(Assignment 3, Q26) Refer to Figure 6-13. What is the amount of the tax per unit? a. $1 b. $2 c. $3 d. $4
d. $4 The shift is exactly $4 (12-8)
(Assignment 4, Q13) Refer to Table 7-11. Both the demand curve and the supply curve are straight lines. At equilibrium, consumer surplus is a. $24. b. $36. c. $42. d. $48.
d. $48. At equilibrium P=4 and Q=12 CS are above P and below D curve Height=12-4=8 Width=12 CS=0.5x8x12=48
(Assignment 4, Q16) Refer to Figure 8-1. Suppose the government imposes a tax of P'-P'''. Total surplus before the tax is measured by the area a. I + Y. b. J + K + L + M. c. L + M + Y. d. I + J + K + L + M + Y.
d. I + J + K + L + M + Y. Before tax: CS=k+i+j PS=L+y+m Total surplus=k+i+j+L+m+y
(Assignment 3, Q15) The supply of a good will be more elastic, the a. more the good is considered a luxury. b. broader is the definition of the market for the good. c. larger the number of close substitutes for the good. d. longer the time period being considered.
d. longer the time period being considered. a. for demand b. for demand c. for demand
(Assignment 4, Q21) Refer to Figure 8-2. The per-unit burden of the tax on sellers is a. $20. b. $30. c. $80. d. $90.
a. $20. Sellers receive 40 so their tax burden is 20 (before they got 60) Buyers pay 90 so their tax burden is 30 (before they paid 60)
(Assignment 4, Q22) Refer to Figure 8-2. The amount of deadweight loss as a result of the tax is a. $250. b. $600. c. $400. d. $50.
a. $250. DWL=0.5x(20-10)x(90-40) = 250
(Assignment 3, Q18) Refer to Figure 5-7. Using the midpoint method, what is the price elasticity of supply between point B and point C? a. 1.44 b. 1.29 c. 0.96 d. 0.69
a. 1.44 B(200,6) C(250,7) solve using midpoint method Percentage change in P= [(7-6)/6.5] *100=15.38% Percentage change in Q=[(250-200)/225]*100= 22.22% Elasticity=22.22/15.38= 1.44 (>1 elastic)
(Assignment 3, Q5) The following table contains the demand schedule and supply schedule for a market for a particular good. Suppose sellers of the good successfully lobby Congress to impose a price floor $2 above the equilibrium price in this market. Refer to Table 6-1. How many units of the good are purchased after the imposition of the price floor? a. 5 b. 9 c. 10 d. 15
a. 5 (Equilibrium price is 3, if we impose a price floor 2 above the equilibrium price, then the price floor is 5, at price 5 the quantity bought is 5)
(Assignment 4, Q24) Scenario 8-1 Erin would be willing to pay as much as $100 per week to have her house cleaned. Ernesto's opportunity cost of cleaning Erin's house is $70 per week. Refer to Scenario 8-1. Assume Erin is required to pay a tax of $40 when she hires someone to clean her house for a week. Which of the following is correct? a. Erin will now clean her own house. b. Ernesto will continue to clean Erin's house, but his producer surplus will decline. c. Total economic welfare (consumer surplus plus producer surplus plus tax revenue) will increase. d. Erin will continue to hire Ernesto to clean her house, but her consumer surplus will decline.
a. Erin will now clean her own house. Erin is willing to pay 100, so with presence of tax he can pay the seller 60 and pay 40 for the gov as tax i.e after tax Erin is willing to pay $60 for Ernesto but Ernesto's cost is $70 so he can not accept a price below 70, so Erin end up not buying the service and clean her own house.
(Assignment 3, Q11) If the demand for bananas is elastic, then an increase in the price of bananas will a. decrease total revenue of bananas sellers. b. increase total revenue of bananas sellers. c. not change total revenue of bananas sellers. d. change total revenue of bananas sellers but in an unknown way without more information.
a. decrease total revenue of bananas sellers. elastic demand, the P and TR move in opposite direction
(Assignment 3, Q23) Cadence says that she would smoke one pack of cigarettes each day regardless of the price. If she is telling the truth, Cadence's a. demand for cigarettes is perfectly inelastic. b. price elasticity of demand for cigarettes is infinite. c. income elasticity of demand for cigarettes is 0. d. demand for cigarettes is unit elastic.
a. demand for cigarettes is perfectly inelastic. quantity is unchanged (percentage change in Q is 0) no matter how price change so elasticity is zero
(Assignment 3, Q30) Suppose that a tax is placed on books. If the buyers pay the majority of the tax, then we know that the a. demand is more inelastic than the supply. b. supply is more inelastic than the demand. c. government has required that buyers remit the tax payments. d. government has required that sellers remit the tax payments.
a. demand is more inelastic than the supply. buyers bear the majority of the tax if demand elasticity is lower than supply, so demand is more inelastic.
(Assignment 3, Q28) If the government removes a binding price ceiling from a market, then the price paid by buyers will a. increase, and the quantity sold in the market will increase. b. increase, and the quantity sold in the market will decrease. c. decrease, and the quantity sold in the market will increase. d. decrease, and the quantity sold in the market will decrease.
a. increase, and the quantity sold in the market will increase. the price ceiling should be below equilibrium price to be binding, so if we have a binding price ceiling and the gov removed it the price will increase back to reach the equilibrium, ao P and Q will increase
(Assignment 3, Q4) Goods with many close substitutes tend to have a. more elastic demands. b. less elastic demands. c. price elasticities of demand that are unit elastic. d. income elasticities of demand that are negative.
a. more elastic demands.
(Assignment 3, Q13) If the price of walnuts rises, many people would switch from consuming walnuts to consuming cashews. But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of a. the availability of close substitutes in determining the price elasticity of demand. b. a necessity versus a luxury in determining the price elasticity of demand. c. the definition of a market in determining the price elasticity of demand. d. the time horizon in determining the price elasticity of demand.
a. the availability of close substitutes in determining the price elasticity of demand.
(Assignment 3, Q10) Suppose demand is perfectly inelastic, and the supply of the good in question decreases. As a result, a. the equilibrium price increases, and the equilibrium quantity is unchanged. b. the equilibrium quantity decreases, and the equilibrium price is unchanged. c. the equilibrium quantity and the equilibrium price both are unchanged. d. buyers' total expenditure on the good is unchanged.
a. the equilibrium price increases, and the equilibrium quantity is unchanged. demand is perfectly inelastic so it is a vertical line, and supply shifts to left since it decreases
(Assignment 3, Q14) Refer to Figure 5-3. At a price of $70 per unit, sellers' total revenue equals a. $900. b. $1,050. c. $1,200. d. $1,020.
b. $1,050. look at the graph at p=70 Q=15 so TR= 15*70
(Assignment 4, Q11) Refer to Figure 7-5. If the supply curve is S and the demand curve shifts from D to D', what is the increase in producer surplus to existing producers? (Ignore S') a. $625 b. $2,500 c. $3,125 d. $5,625
b. $2,500 The orange area is the one that represents increase in PS due to existing producers (on teachers graph) Height=150-100=50 Width=50 Area=50x50=2500
(Assignment 4, Q15) For widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. A tax of $20 per unit is imposed on widgets. The tax reduces the equilibrium quantity in the market by 350 units. The deadweight loss from the tax is a. $8,750. b. $3500 c. $187.5. d. $162.5.
b. $3500 the highlighted area is the area of dwl (on teachers graph) Height is 20 width is 350 so area is 0.5x20x350 = 3500
(Assignment 3, Q7) Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy aimed at reducing smoking changed the price of a pack of cigarettes from $2 to $6. According to the midpoint method, the government policy should have reduced demand for cigarettes by a. 30 percent. b. 40 percent. c. 80 percent. d. 250 percent.
b. 40 percent. percentage change in price=[(6-2)/4]*100=100 Percentage change in Q=price elasticity * percentage change in P=0.4*100=40%
(Assignment 3, Q21) Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 0.95. Which of the following events is consistent with a 10 percent decrease in the quantity of the good demanded? a. An increase of 9.5 percent in the price of the good b. An increase of 10.53 percent in the price of the good c. An increase in the price of the good from $9.50 to $10 d. An increase in the price of the good from $10 to $19.50
b. An increase of 10.53 percent in the price of the good Similar to Q7 but here we have percentage change in Q and want the percentage change in P Percentage change in Q=price elasticity * percentage change in P 10% = 0.95 * %changeinP = 10.53
(Assignment 4, Q17) Refer to Figure 8-1. Suppose the government imposes a tax of P'-P'''. Total surplus after the tax is measured by the area a. I + Y. b. J+ K + L + M. c. I + Y + W. d. I + J + K + L + M + Y.
b. J+ K + L + M. After tax: CS=j PS=m Tax revenue=k+L DWL=I+Y Total surplus=j+k+L+m
(Assignment 4, Q14) Tomato sauce and spaghetti noodles are complementary goods. A decrease in the price of tomatoes will a. increase consumer surplus in the market for tomato sauce and decrease producer surplus in the market for spaghetti noodles. b. increase consumer surplus in the market for tomato sauce and increase producer surplus in the market for spaghetti noodles. c. decrease consumer surplus in the market for tomato sauce and increase producer surplus in the market for spaghetti noodles. d. decrease consumer surplus in the market for tomato sauce and decrease producer surplus in the market for spaghetti noodles.
b. increase consumer surplus in the market for tomato sauce and increase producer surplus in the market for spaghetti noodles. In the market of tomato sauce, tomato is cheaper so S of sauce shifts right so P of sauce decrease and CS increase In the market of noodles, price of sauce decrease so D of noodles increase and price of noodles increase so PS increase
(Assignment 3, Q22) When a tax is placed on the sellers of a product, buyers pay a. more, and sellers receive more than they did before the tax. b. more, and sellers receive less than they did before the tax. c. less, and sellers receive more than they did before the tax. d. less, and sellers receive less than they did before the tax.
b. more, and sellers receive less than they did before the tax.
(Assignment 4, Q7) Refer to Figure 7-2. If the government imposes a price floor of $110 in this market, then consumer surplus will decrease by a. $2400. b. $600. c. $1800. d. $1200.
c. $1800. price floor here is binding so the new price is 110 CS at initial equilibrium (P=70 and Q=60) is area of triangle above P and below D curve Height=150-70=80 Width=60 CS=0.5x60x80=2400 CS at the new point (P=110 and Q=30) Height=150-110=40 Width=30 CS=0.5x40x30=600 So CS decreased by 1800
(Assignment 4, Q8) At Sarah's Bakery, the cost of making one cake is $1.00. If Sarah sells 10 cakes and gains producer surplus of $30.00, then Sarah must be selling her cakes for a. $1.00 each. b. $3.00 each. c. $4.00 each. d. $10.00 each.
c. $4.00 each. cost of making 10 cakes is $10 PS= P-Cost So Price of 10 cakes= PS of 10 cakes + Cost of 10 cakes= 30+10=40 Price of 10 cakes is 40 so price of one cake is 4
(Assignment 4, Q9) Refer to Table 7-9. The equilibrium market price for 10 piano lessons is $400. What is the total producer surplus in the market? a. $0 b. $300 c. $400 d. $700
c. $400 Market price is 400 Marcia, Jan, Cindy, and Greg can produce since their cost is less than or equal to the market price PS for Marcia=400-200=200 PS for Jan=400-250=150 PS for Cindy=400-350=50 PS for Greg=400-400=0 (he is indifferent, can supply or can choose not) Total PS=200+150+50+0=400
(Assignment 4, Q20) Refer to Figure 8-2. The amount of the tax on each unit of the good is a. $1. b. $30. c. $50. d. $20.
c. $50 Tax= 90-40 = 50
(Assignment 3, Q17) Which of the following is not correct? a. The economy contains many labor markets for different types of workers. b. The impact of a minimum wage depends on the skill and experience of the worker. c. A minimum wage would be binding for workers with high skills and much experience. d. A minimum wage would not be binding if the equilibrium wage was above the minimum wage.
c. A minimum wage would be binding for workers with high skills and much experience. High skilled and experienced workers are not affected with the min wage law since they are paid much more than the equilibrium wage so for them this price control is not binding
(Assignment 4, Q6) Refer to Figure 7-1. When the price is P2, consumer surplus is a. A+B+C. b. A+B+D. c. A. d. A+B.
c. A. CS is the area above Price and below D curve
(Assignment 3, Q29) Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. How much will buyers pay per unit after the tax is imposed? a. $3 b. Between $3 and $5 c. Between $5 and $7 d. $7
c. Between $5 and $7 Before tax, the buyers paid $5, after tax the buyers will pay more than $5, the tax is $2 and buyers and sellers share the burden of the tax so buyers will not bear the whole tax so will not pay 7, they will pay more than the original equilibrium 5 but less than the price with whole tax 7
(Assignment 3, Q24) If the government wants to reduce the burning of fossil fuels, it should impose a tax on a. only the buyers of gasoline. b. only the sellers of gasoline. c. either buyers or sellers of gasoline. d. whichever side of the market is less elastic.
c. either buyers or sellers of gasoline. we saw that whether taxes imposed on sellers or buyers the outcome will be exactly the same
(Assignment 3, Q9) The presence of a price control in a market for a good or service usually is an indication that a. an insufficient quantity of the good or service was being produced in that market to meet the public's need. b. the usual forces of supply and demand were not able to establish an equilibrium price in that market. c. policymakers believed that the price that prevailed in that market in the absence of price controls was unfair to buyers or sellers. d. policymakers correctly believed that price controls would generate no inequities of their own once imposed.
c. policymakers believed that the price that prevailed in that market in the absence of price controls was unfair to buyers or sellers.
(Assignment 3, Q6) Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling, the a. demand curve for physicals shifts to the right. b. supply curve for physicals shifts to the left. c. quantity demanded of physicals increases, and the quantity supplied of physicals decreases. d. number of physicals performed stays the same.
c. quantity demanded of physicals increases, and the quantity supplied of physicals decreases. (it's a binding case, so price is lower buyers will demand more and sellers will supply less)
(Assignment 3, Q2) Suppose the government imposes a 20-cent tax on the sellers of artificially-sweetened beverages. The tax would shift a. demand, raising both the equilibrium price and quantity in the market for artificially sweetened beverages. b. demand, lowering the equilibrium price and raising the equilibrium quantity in the market for artificially sweetened beverages. c. supply, raising the equilibrium price and lowering the equilibrium quantity in the market for artificially sweetened beverages. d. supply, lowering the equilibrium price and raising the equilibrium quantity in the market for artificially sweetened beverages.
c. supply, raising the equilibrium price and lowering the equilibrium quantity in the market for artificially sweetened beverages. (The tax is imposed on the sellers so it will affect only the supply curve, now the cost of production is higher, so the S curve will shift to the left)
(Assignment 3, Q1) Which of the following could be the price elasticity of demand for a good for which a decrease in price would increase total revenue? a. 0.7 b. 0.0 c. 1 d. 2.8
d. 2.8 (When price and TR move in opposite direction, then the demand is elastic which means price elasticity of demand > 1)
(Assignment 3, Q25) Suppose buyers of protein shakes are required to send $0.50 to the government for every protein shake they buy. Further, suppose this tax causes the effective price received by sellers of protein shakes to fall by $0.25 per protein shake. Which of the following statements is correct? a. This tax causes the supply curve for protein shakes to shift downward by $0.50 at each quantity. b. The price paid by buyers is $0.25 per shake more than it was before the tax. c. Forty percent of the burden of the tax falls on buyers. d. This tax causes the demand curve for protein shakes to shift downward by $0.50 at each quantity.
d. This tax causes the demand curve for protein shakes to shift downward by $0.50 at each quantity. The tax is 0.5 and imposed on buyers so the demand will shift left by exactly 0.5, I can not conclude other things using the info given
(Assignment 3, Q8) Demand is said to be price elastic if a. the price of the good responds substantially to changes in demand. b. demand shifts substantially when income or the expected future price of the good changes. c. buyers do not respond much to changes in the price of the good. d. buyers respond substantially to changes in the price of the good.
d. buyers respond substantially to changes in the price of the good.
(Assignment 4, Q12) The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium price of chocolate a. increases, and producer surplus increases. b. increases, and producer surplus decreases. c. decreases, and producer surplus increases. d. decreases, and producer surplus decreases.
d. decreases, and producer surplus decreases. D curve will shift to the left so Price will decrease and thus PS will decrease
(Assignment 3, Q3) Refer to Figure 5-1. Between point A and point B on the graph, demand is a. perfectly elastic. b. inelastic. c. unit elastic. d. elastic, but not perfectly elastic.
d. elastic, but not perfectly elastic. A (12,7) B (20,5) Percentage change in P= [(7-5)/6] *100=33.34% Percentage change in Q=[(12-20)/16]*100= 50% Elasticity=50/33.34=1.5>1 elastic
(Assignment 4, Q4) A good weather in California results in good crop of oranges causing the prices of both oranges and orange juice to fall. As a result, the consumer surplus in the market for oranges a. decreases, and the consumer surplus in the market for orange juice decreases. b. decreases, and the consumer surplus in the market for orange juice increases. c. increases, and the consumer surplus in the market for orange juice decreases. d. increases, and the consumer surplus in the market for orange juice increases.
d. increases, and the consumer surplus in the market for orange juice increases. price decreases in both markets so CS increases in both too
(Assignment 3, Q12) If a tax is levied on the sellers of a product, then the demand curve will a. shift down. b. shift up. c. become flatter. d. not shift.
d. not shift. only supple curve will shift left
(Assignment 4, Q10) Refer to Table 7-10. You want to hire a professional photographer to take pictures of your family. The table shows the costs of the four potential sellers in the local photography market. Which of the following graphs represents the market supply curve? look at graphs for this answer.
look at graphs for this answer. We have 4 possible sellers so 4 steps If P<400 no one will produce 400<=P<450 Steve will produce 450<=P<600 Kevin and steve will 600<=P<700 kevin, steve and kobe will p>=700 all will produce
