Economics Test 2
What is the difference between a change in quantity supplied and a change in supply?
A change in the market price affects the quantity supplied, but not the supply.
Suppose that an artist prices his painting at $150, but it remains unsold. We can conclude that the price of $150 is too:
HIGH for this painting and it should be lowered.
Example: Existence of Public Goods
Goods that one person can consume without diminishing what is left for others. (Public Television)
Suppose the market price is $5. The producer who sells the first unit of output has a willingness-to-sell equal to $1; the producer who sells the second unit of output has a willingness-to-sell equal to $2; and the producer who sells the third unit of output has a willingness-to-sell equal to $4. Total producer surplus is:
$8
The four basic determinants of a product's elasticity of demand are:
1. Availability of substitute products 2. the percentage of income or household budget spent on the product 3. the difference between luxuries and necessities 4. the time period being examined
Price System
A name given to the market economy because prices provide considerable information to both buyers and sellers
Parami volunteers at a homeless shelter. It takes a lot of her time, and sometimes she takes off time from her job to do it. Parami's behavior can be explained by:
Altruism
Substitutes have a _____ cross elasticity of demand.
Positive
Which of the following is NOT a determinant of demand? a.) history of the product b.) tastes and preferences c.) prices of related goods d.) income
a.) history of the product
Which of the following is NOT an example of a market? a.) neighborhood lemonade stand b.)painting one's house c.)ticket scalping d.)New York Stock Exchange
b.) painting one's house
As the price of orange juice rises, the:
demand for grape juices rises.
In a market-based economy, producers will tend to seek less competition because it:
enables higher prices
If supply is perfectly inelastic and demand is relatively elastic, the burden of an excise tax:
falls entirely on the producers
Consumer Surplus
he difference between market price and what consumers would be willing to pay
Bus tickets are often considered _____ goods because _____.
inferior; as income rises, demand for bus tickets falls
Driving your car in a large city during the rush hour causes externalities because:
it adds to the congestion and pollution
Uvaldo is deciding which brand of energy drink to buy. According to market economics, he would benefit MOST from basing his decision on which brand has the:
most value relative to his price.
If a price ceiling is set above the equilibrium price:
no impact is felt in the market
If one person consumes a public good:
others cannot be excluded from enjoying it.
Some people hang on to a stock in the face of overwhelming evidence that its price is going to drop because they are so sure of their ability to pick winners. These people are subject to:
overconfidence
If the price of a good is higher than the equilibrium price:
producers can gain at consumer's expense
If demand is inelastic and prices rises
quantity demanded does not decline much and total revenue rises
If demand is elastic and price lowers
quantity demanded rises and total revenue lowers
Luz sells cupcakes. According to market economics, which is the BEST signal that consumers value her product highly?
they they readily pay $6 per cupcake
Time period where # of firms in the industry do not change
Short run
A price below the equilibrium leads to a
Shortage
Markets differ in:
Size, products offered, and geographical location.
When cross elasticity is greater than 0, goods A & B are:
Substitutes
The local school district wants to close down a neighborhood high school because its outdated heating and cooling systems make it too expensive to operate compared to the new high school being built nearby. Parents who are against closing the neighborhood school argue that the $2 million dollars spent refurbishing the school over the last few years will be wasted if the school is shut down. This argument is an example of:
Sunk cost fallacy
Wheat is the main input in the production of flour. If the price of wheat increases, all else equal, we would expect the:
Supply of flour to decrease
An increase in the cost of coffee beans, which is used to make coffee, will cause the ____________ for coffee to shift __________.
Supply; left
A price above equilibrium leads to a
Surplus
Suppose that a customer's willingness to pay for a product is $5, and the seller's willingness to sell is $2. If the negotiated price is $4, how much is consumer surplus?
$1
At an all-you-can eat buffet, a person will stop eating when:
Marginal utility is equal to 0
Walmart is thinking about offering a 25% discount on a brand of shoes. If the elasticity of demand is two, then the discount would increase sales by:
50%
Four Major Reasons why markets fail:
1. Lack of Competition 2. Mismatch of information 3. External benefits or costs 4. Existence of Public Goods
If the price of a product falls by 15%, and the quantity supplied falls by 25%, the elasticity of supply is:
1.67
Jeremy's level of satisfaction from consuming the first cookie was 25 utils. The second cookie increased the level of satisfaction by 20 utils. Jeremy's total level of satisfaction after three cookies was 60. Thus, the marginal utility for the third cookie is:
15
Lump-Sum Tax
A fixed amount of tax regardless of income, and is a type of regressive tax
Inferior Good
A good for which an increase in income results in declining demand
Normal Good
A good for which an increase in income results in rising demand
Price Ceiling
A government-set maximum price that can be charged for a product or service. When the price ceiling is set below equilibrium, it leads to shortages.
Price Floor
A government-set minimum price that can be charged for a product or service. When the price floor is set above equilibrium, it leads to surpluses.
Demand Curve
A graphical illustration of the law of demand, which shows the relationship between the price of a good and the quantity demanded
Supply Curve
A graphical illustration of the law of supply, which shows the relationship between the price of a good and the quantity supplied
Laissez-faire
A market that is allowed to function without any government intervention.
Price elasticity of demand
A measure of the responsiveness of quantity demanded to a change in price, equal to the percentage change in quantity demanded divided by the percentage change in price
Price elasticity of supply
A measure of the responsiveness of quantity supplied to changes in price. An elastic supply curve has elasticity greater than 1, whereas inelastic supplies have elasticities less than 1.
Example: Mismatch of Information
A seller of a used car knowns more about the true condition of a car than a potential buyer. (Prices may be set to low or too high.)
Price Gouging:
A seller spikes the prices of goods, services, or commodities to a price much higher than is considered reasonable or fair.
Suppose that a major hurricane hits Florida, causing widespread damage to homes and businesses. If the legislature imposes price controls in order to keep reconstruction costs reasonable, which of the following is the MOST likely result?
A shortage of building materials
Demand Schedule
A table that shows the quantity of a good a consumer purchases at each price
Regressive Tax
A tax that falls in percentage of income as income increases
Flat Tax
A tax that is a constant proportion of one's income
Progressive Tax
A tax that rises in percentage of income as income increases
Willingness-to-pay
An individual's valuation of a good or service, equal to the most an individual is willing and able to pay
Where you can find Consumer Surplus on the graph:
Area above market price and below the demand curve.
If a pharmaceutical company knows that one of its products has a dangerous side effect, but does not disclose that to its customers, then the market for that product is likely to fail due to:
Asymmetric Information
When the price elasticity of supply is elastic, the ___ bears the burden of taxes.
Buyer ; with a larger deadweight loss.
An increase in the price of ice cream causes the demand for sprinkles to decrease. In this case, ice cream and sprinkles are:
Complementary goods
When cross elasticity is less than 0, goods A & B are:
Complements
Jason purchased a new printer for $150 although he was willing to pay $175. The minimum price acceptable by the seller, Jasmine, was $145. The results of this transaction are:
Consumer Surplus: $25 Producer Surplus: $5
The more inelastic the demand or elastic the supply, the greater the incidence of a tax on ______
Consumers
A budget line shows:
Consumption Possibilities
The more elastic the demand or inelastic the supply, the greater the incidence of a tax on ______
Sellers
Example: Existence of External Benefits or Costs
Driving your car on a crowded highway, or receiving a flu shot.
Midpoint Equation to compute elasticity:
Ed= (Q1-Q0)/((Q0+Q1)/2)) divided by (P1-P0)/((P0+P1)/2))
Price elasticity of demand equation:
Ed= Percentage change in quantity demanded/ percentage change in price
If a price ceiling is set below the market price, it is:
Effective
The flatter the demand curve, the more _______ the good or service.
Elastic
______ demand typically involves many substitutes, high-priced goods, longer time horizon and luxury goods.
Elastic
Products with many close substitutes tend to have _____ demand, and products considered to be luxury goods tend to have ____ demand.
Elastic ; Elastic
Luxury Goods
Goods that have income elasticities greater than 1. When consumer income grows, quantity demanded of luxury goods rises more than the rise in income
Inferior Goods
Goods that have income elasticities that are negative. When consumer income grows, quantity demanded falls for inferior goods
Normal Goods
Goods that have positive income elasticities of less than 1. When consumer income grows, quantity demanded rises for normal goods, but less than the rise in income
Alma lives next to a freeway and the noise wakes her up every morning. This situation involves a(n):
External Cost
Paul A. Samuelson
First American to win a Nobel Price in Economics. He Sold more than 4 million copies of his book Economics.
Substitutes
Goods consumers substitute for one another depending on their relative prices, such as coffee and tea.
Substitute Good
Goods consumers will substitute for one another depending on their relative prices. When the price of one good rises and the demand for another good increases, they are substitute goods, and vice versa
Complements
Goods that are typically consumed together, such as coffee and sugar.
Complementary Good
Goods that are typically consumed together. When the price of a complementary good rises, the demand for the other good declines, and vice versa
Law of Demand
Holding all other relevant factors constant, as price increases, quantity demanded falls, and as price decreases, quantity demanded rises
Law of Supply
Holding all other relevant factors constant, as price increases, quantity supplied will rise, and as price declines, quantity supplied will fall
Perfectly elastic demand is best represented by drawing a
Horizontal demand curve
The fundamental reason why supply curves slope upward is:
Increasing costs
If a price ceiling is set above the market price, it is:
Ineffective
The steeper the demand curve, the more _____ the good or service.
Inelastic
___ demand typically involves few substitute, low-priced goods, shorter time horizon, and necessities.
Inelastic
Market
Institutions that bring buyers and sellers together so they can interact and transact with each other
Where you can find Producer Surplus on the graph:
It is equal to the area below market price and above the supply curve.
A new tac collected on sellers shifts the supply curve to the
Left
Price elasticity of supply is the greatest in the:
Long run
Time period where a firm can leave or enter the industry
Long run
For a given supply curve, the more elastic is demand, the _____ the tax burden will be on consumers and the deadweight loss will be _____.
Lower ; Larger
Horizontal Summation
Market demand and supply curves are found by adding together how many units of the product will be purchased or supplied at each price
Equilibrium Price
Market equilibrium price is the price that results when quantity demanded is just equal to quantity supplied
Equilibrium Quantity
Market equilibrium quantity is the output that results when quantity demanded is just equal to quantity supplied
Equilibrium
Market forces are in balance when the quantities demanded by consumers just equal the quantities supplied by producers
Institutions that bring buyers and sellers together so they can interact and transact with each other are called:
Markets
A utility-maximizing consumer will always choose to:
Maximize total utility
Income elasticity of demand
Measures how responsive quantity demanded is to changes in consumer income
Cross elasticity of demand
Measures how responsive the quantity demanded of one good is to changes in the price of another good
Complements have a _______ cross elasticity of demand.
Negative
There is a(n) _____ relationship between price and quantity demanded.
Negative
When price elasticity of supply is inelastic, _____ bears the burden of taxes.
Sellers ; with a lower deadweight loss.
Ineffective Price Ceiling:
Set above the equilibrium price, has no effect.
Determinants of Demand
Non-price factors that affect demand, including tastes and preferences, income, prices of related goods, number of buyers, and expectations
Determinants of Supply:
Non-price factors that affect supply, including production technology, costs of resources, prices of other commodities, expectations, number of sellers, and taxes and subsidies.
If an increase in income leads to an increase in the demand for opera tickets, then opera concerts are a(n):
Normal good
If the demand for iPhones rises as incomes increase, then the iPhone is a(n):
Normal good
Change in Demand
Occurs when one or more of the determinants of demand changes, shown as a shift in the entire demand curve
Change in Supply
Occurs when one or more of the determinants of supply change, shown as a shift in the entire supply curve
Surplus
Occurs when the price is above market equilibrium, and quantity supplied exceeds quantity demanded
Shortage
Occurs when the price is below market equilibrium, and quantity demanded exceeds quantity supplied
Change in quantity demanded
Occurs when the price of the product changes, shown as a movement along an existing demand curve
Change in quantity supplied
Occurs when the price of the product changes, shown as a movement along an existing supply curve
Xiao has a budget of $150 to spend on T-shirts and jeans. The jeans she likes cost $56, and t-shirts with her college logo on them cost $10. The combination of three t-shirts and three pairs of jeans would fall:
Outside the budget line
In any given market, _____ is determined by "what the market will bear."
Price
Merchants' raising prices of necessary goods during a crisis or disaster is known as:
Price Gouging
Unitary Elastic Supplu
Price elasticity of supply is equal to 1. The percentage change in quantity supplied is equal to the percentage change in price
Elastic Supply
Price elasticity of supply is greater than 1. The percentage change in quantity supplied is greater than the percentage change in price.
Inelastic Supply
Price elasticity of supply is less than 1. The percentage change in quantity supplied is less than the percentage change in price
Total Revenue
Price x Quantity demanded (# of units sold)
A budget line is linear because:
Prices are held constant
A poultry rancher discovered what when she increased the price of organic eggs from $0.75 to $1.00 per dozen, the sales of her eggs fell from 300 dozen per week to 200 dozen per week. If she wants to increase her total revenue from egg sales, she should:
Reduce the price of eggs back to $0.75
Incidence of Taxation
Refers to who bears the economic burden of a tax
Effective Price Ceiling:
Set below the equilibrium price, but causes a shortage.
Unitary elasticity of demand
The absolute value of the price elasticity of demand is equal to 1. The percentage change in quantity demanded is just equal to the percentage change in price
Elastic demand
The absolute value of the price elasticity of demand is greater than 1. Elastic demands are very responsive to changes in price. The percentage change in quantity demanded is greater than the percentage change in price
Inelastic demand
The absolute value of the price elasticity of demand is less than 1. Inelastic demands are not very responsive to changes in price. The percentage change in quantity demanded is less than the percentage change in price
If bagels and doughnuts are substitute goods, then which of the following is likely to occur if the price of bagels is reduced?
The demand curve for doughnuts will shift to the left.
Producer Surplus
The difference between market price and the price at which firms are willing to supply the product.
Demand
The maximum amount of a product that buyers are willing and able to purchase over some time period at various prices, holding all other relevant factors constant
Supply
The maximum amount of a product that sellers are willing and able to provide for sale over some time period at various prices, holding all other relevant factors constant
Deadweight loss
The reduction in total surplus that results from the inefficiency of a market not in equilibrium.
When markets are efficient..
The sum of consumer and producer surplus is maximized.
Total Surplus
The sum of consumer surplus and producer surplus, and a measure of the overall net benefit gained from a market.
What is true about Markets?
They can contain legal or illegal activity conducted by an individual or business.
____ is the most important determent of supply.
Time
Long Run
Time period long enough for firms to alter their plant capacities and for the number of firms in the industry to change
Market Period
Time period so short that the output and the number of firms are fixed
Short Run
Time period when plant capacity and the number of firms in the industry cannot change
A change in price results in an equal % change in quantity demanded is _____ demand.
Unitary Elastic
When cross elasticity is = to 0, goods A & B are:
Unrelated
Perfectly inelastic demand is best represented by drawing a
Vertical demand curve
Suppose the equilibrium price of a bunch of carrots is $1. The price floor instituted by the government is $1.50.
We would expect to see a surplus of carrots.
When does market failure occur?
When a free market does not lead to a socially desirable outcome. They fail to provide an optimal amount of goods and services.
Misallocation of Resources:
When a good or service is not consumed by the person who values it the most, and typically results when a price ceiling creates an artificial shortage in the market.
Example: Lack of Competition
When a market lacks competition, a firm can raise its price in the market. Water providers are an example.
Asymmetric Information
When one party to a transaction has significantly better information than another party.
Time Horizon
affects elasticity of supply: the longer the period, the more a firm is able to adjust to changing prices, and therefore the more elastic the good.
When the supply curve shifts out (to the right) and the demand curve shifts out (to the right), the equilibrium price will:
be indeterminate
Two-Buck Chuck is an example of the results of a(n):
excess in supply in California grapes, which caused the price to drop.
Suppose that the price of pork rises. We would expect that the supply of beef will
fall because farmers will shift resources from beef production to pork production
Bayram had the opportunity to choose between two investments. The first investment was described as having a 30% chance of succeeding, while the second investment was described as having a 70% chance of failing. Bayram opted for the first investment, because he thought it sounded less risky than the second investment. The chances of succeeding and failing are the same for the two investments, which implies Bayram is subject to:
framing bias
Ryan stayed out late last night and is very tired. He plans to skip his 8 A.M. economics class, even though he knows his professor will cover material that will be on the final exam. Ryan is subject to:
overvaluing the present relative to the future
Laws that prohibit price gouging are often politically:
popular, but result in shortages.
Total Revenue increases when:
price rises on an inelastic good or is lowered on an elastic good
The market economy is often called the price system because:
prices provide information for both buyers and sellers
Total Revenue decreases when:
prices rises on an elastic good, or lowered on an inelastic good
Quantity supplied is the:
quantity that producers are willing and able to sell at a given price.
Many jurisdictions require that an inspector evaluate a house before it can be sold. This requirement:
reduces the problem of asymmetric information
A decrease in supply causes the equilibrium price to ___________ and the equilibrium quantity to ___________.
rise;fall
An increase in demand causes the equilibrium price to __________ and the equilibrium quantity to ____________.
rise;fall
During the recent recession, consumer spending on dogs and cats:
rose, even though national income declined.
Effective Price Floor:
set above the equilibrium, resulting in a surplus
Ineffective Price Floor:
set below the equilibrium price, has no impact.
If the United States experiences an inflationary episode in which prices of goods and services go up faster than incomes, budget lines for U.S. consumers will:
shift inward
A price ceiling usually results in a:
shortage, and a misallocation of resources
A consumer is in equilibrium when:
the addition to total utility per dollar is the same for every commodity
If the prices of the two goods the consumer buys increase:
the budget line shifts closer to the origin.
According to the law of supply, producers will supply more of their products when:
the price rises
Flu vaccination shots provide external benefits. Thus:
too few flu vaccination shots are given.
If the price of a product whose demand is elastic goes up:
total revenue will fall
There are two sellers in the DVD market, Wen and Ahmed. If the market price were $5 per DVD, Wen would be willing to sell 10 DVDs and Ahmed would want to sell 15 DVDs. If the market price were to rise to $7, then
we can confidently say that market quantity supplied is at least 25 DVDs.
A surplus exists:
when quantity supplied exceeds the quantity demanded.
