Micro Exam 1

Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?

$0.40

Every summer, Matt travels by air to see his grandmother. Matt's maximum willingness to pay for an airline ticket is $260, but the airline only requires a minimum of $100 to fly him. Normally, Matt pays the airline the going market price of $250 per ticket. If the government places a $50 tax on each ticket, raising ticket prices to $270, and causing Matt not to go, what is the deadweight loss created by this tax?

$160

(Table: Unit Taxes) Because of the $4 tax in the accompanying table, buyers are paying ______ per unit and sellers are receiving _______ per unit.

$2.50 more; $1.50 less

Martin's maximum willingness to pay for an electric boat motor is $250. Because of a tax, the price of the motor increases from $230 to $280. The deadweight loss of the tax attributable to Martin is:

$20.

Refer to the figure. According to this figure, how much should Sam's Club charge for membership?

$40

(Figure: Tax on Sellers) In the diagram, sellers receive _____ without the tax and _____ with the tax.

$4; $3

(Figure: Consumer and Producer Surplus) According to the figure, what is the value of the deadweight loss?

$50

Assume that the unit price of good A is $2, and the unit price of good B is $5. If an individual has income of $30, which consumption bundles of (good A, good B) is on the edge of the budget constraint?

(5,4)

Assume that the unit price of good A is $2, and the unit price of good B is $2. If an individual has income of $20, which consumption bundles of (good A, good B) is on the edge of the budget constraint?

(5,5)

Assume that the unit price of good A is $3, and the unit price of good B is $5. If an individual has income of $43, which consumption bundles of (good A, good B) is on the edge of the budget constraint?

(6,5)

Suppose the price of a good rises from $10 to $20 and quantity demanded falls from 500 to 400. If you calculate the elasticity of demand WITHOUT using the midpoint method, the answer would be _____. If you calculate the elasticity of demand WITH the midpoint method, the answer would be _____. Economists say _____ when calculating elasticity.

-1/5; -1/3; use the midpoint method

Good X and Good Y are related goods. When the price of Good X rises by 20 percent, the quantity demanded for Good Y falls by 40 percent. What is the cross-price elasticity?

-2

When the demand curve for a good is unit elastic, raising the price of the good by 25 percent will change the revenue of the firm by:

0 percent.

If the price of cocoa rises by 20 percent, the quantity supplied of cocoa rises by 4 percent. What is the elasticity of supply?

0.2

Assume that demand increases by 1 percent, the absolute value of price elasticity of demand is 1.0, and price elasticity of supply is 1.0. What is the percentage price change in this case?

0.5

On October 1, 2009, the Nintendo Wii's Japanese price dropped from ¥25,000 to ¥20,000. In the three months after the price drop, Japanese sales of the Wii were approximately 1,040,000. Twelve months earlier, over the same interval at the high price, sales totaled 890,000. Using the midpoint method, what is the absolute value of the price elasticity of demand of a Wii console? Is it an elastic or inelastic good?

0.7; inelastic

If the price of Good Y falls from $10 to $8, and the quantity demanded of it rises from 1,000 units to 1,200 units, the price elasticity of demand expressed in absolute value is:

0.82.

Tonya consumes 40 steaks a year when her yearly income is $40,000. After her income falls to $35,000 a year, she consumes only 35 steaks a year. Calculate her income elasticity of demand for steaks.

1

Figure: Slave Redemption) Refer to the figure. Assume the graph illustrates the Sudanese slave trade. When slave redeemers enter the market, the total number of freed slaves is ________ and the net number of freed slaves is ________.

1,100; 100

The price of cigars is $10, with a quantity demanded of 1,000 per day. If the price increases to $12, the quantity demanded declines to 800 per day. What is the absolute value of elasticity of demand?

1.22

(Figure: Budget Constraint 2) Refer to the figure. What is the relative price of music downloads to movie downloads?

1/3

(Figure: Music and Movie Downloads) Refer to the figure. What is the relative price of music downloads to movie downloads?

1/3

Amy purchased four cantaloupes at $2 each and three watermelons at $4 each. If Amy is following the optimal consumption rule, the marginal utility of the fourth cantaloupe and third watermelon are:

12 and 24, respectively.

At the consumer's optimal consumption bundle, the MRS XY is 4, and the marginal utility of good X is 8. What is the marginal utility of good Y?

2

If the price of Good Y falls from $10 to $8, and the quantity supplied of it falls from 1,000 units to 600 units, the price elasticity of supply is:

2.25.

If the demand for a good is estimated to be _____, then firms producing the good will experience an increase in total revenue if prices fall.

2.5

(Figure: Coffee and Comic Books) Refer to the figure. The price of comic books is $0.50. Using the diagram, the marginal utility per dollar for the third comic book is:

22

The elasticity of demand for a good is -0.75. A 4 percent increase in price will cause a:

3 percent decrease in quantity demanded.

(Figure: Slave Redemption and Elasticity) Refer to the figure. Assume the graph illustrates the Sudanese slave trade. How many slaves are freed after the redemption program?

400

(Figure: Wage Subsidy) Refer to the figure. If a minimum wage of $8 had been implemented instead of a wage subsidy, how many workers would have been unemployed?

60

(Figure: Labor Supply and Welfare) Refer to the figure. The budget constraint is:

ABD.

(Figure: Music and Movie Downloads 4) Refer to the figure. According to this figure, which of the following statements is FALSE?

At the optimal consumption bundle, the marginal utility of movie downloads is equal to half the marginal utility of music downloads.

(Figure: Indifference Curve 2) Refer to the figure. Which point generates the highest level of utility for the consumer?

B

Figure: Tax on Supply and Demand) According to the figure, if the tax is placed on sellers, the equilibrium is at Point:

B, and the equilibrium price and quantity are P 3 and Q 2.

(Figure: Kiwi and Nuts) Refer to figure. Which statement is TRUE for this figure?

Bundle C is preferred to bundle D.

(Figure: Taxes and Deadweight Loss) In the diagram, the deadweight loss is ______ and government tax revenue is ______.

C + E; B + D

In the figure, demand curve _____ is the least elastic demand curve, and the lost gains from trade because of a tax are greater with demand curve _____.

D 1; D 2

In this figure, the benefits of a subsidy will be greater for sellers facing demand curve ______, the ______ demand.

D 2; more elastic

In Free Market Environmentalism, economists Terry Anderson and Donald Leal write, "Subsidized irrigation . . . encourages farmers to break prairie sod and plant crops in arid regions. Rather than choosing drought-resistant crops that might be more appropriate in an environment undergoing global warming, farmers intensify the use of pesticides and chemical fertilizers to increase their yields. . ." (pp. 163-164). Which of the following explains the deadweight loss from irrigation subsidies?

Farmers are using methods for which the social cost of growing food exceeds the social benefit.

Which of the following statements is NOT true for a case in which the demand for labor is more elastic than the supply of labor?

Firms cannot escape the cost of health insurance for labor by employing fewer workers.

Which of the following statements is TRUE? I. Subsidizing buyers is no different than subsidizing sellers. II. Unlike taxes, subsidies do not create deadweight losses. III. Subsidies are payments the government makes to either producers or consumers. IV. Taxpayers pay for subsidies.

I, III, and IV only

(Figure: Consumption Bundle) Refer to the figure. Which statement is FALSE?

In the optimum consumption bundle, the marginal utility of movie downloads equals half the marginal utility of music downloads.

The elasticity of demand for oil is -0.5 and the elasticity of supply is 0.20. If the demand for oil increases 10 percent, what happens to the price of oil?

It increases by 14 percent.

The quantity demanded for cosmetic surgery increased by 12 percent following a period of strong economic growth that raised consumer income by 4 percent. What type of good is cosmetic surgery?

It is a luxury good since the income elasticity of demand exceeds 1.

Istanbul's Dolmabaçe Palace, built near the end of the Ottoman Empire, rests on a former garden that was created in the eighteenth century at great expense by filling in a bay. (Dolmabaçe means "filled-in garden" in Turkish.) What does the Dolmabaçe Palace teach us about the elasticity of supply of land?

It is not perfectly inelastic, but close to it.

Because of aging requirements it takes many years to make good Scotch. If a technology were invented that made it possible to create good Scotch literally overnight, how would the short-run supply of good Scotch change?

It would become more elastic.

By law, workers pay half the Social Security tax and employers pay the other half. However, the price of labor (wages) does not adjust very quickly. If the government wanted to temporarily create a shortage of labor (or combat a surplus of labor), what should it do?

Move the whole tax onto workers (suppliers of labor).

(Figure: Coffee and Comic Books) Refer to the figure. A consumer has $2 to spend on comic books (priced at $1 per comic book) and coffee (priced at $1 per cup). To maximize utility, should this consumer buy two cups of coffee?

No, the consumer should put back one cup of coffee (losing 16 utils) and replace it with a comic book (gaining 18 utils).

On June 14, 2011, the Delaware Senate approved a gun buyback program. The yearlong program would authorize the state to pay $100 for every gun turned over to police. What sort of guns should Delaware officials expect to get if this plan becomes law?

Nonworking guns, usually kept in someone's back closet.

If the demand for currently illegal recreational drugs is highly inelastic and these drugs became legal, prices would fall. An economist would expect which of the following to happen in response to the lower price?

Not many more people would become drug users.

Refer to the figure. What is the marginal rate of substitution (MRS) between bundle A and bundle B in this figure?

The MRS is 3; the consumer is willing to give up 3 movie downloads for an additional music download.

Consider an indifference curve based around video games and pizza. If the price of pizza falls, what would have to be true for the consumer to buy less pizza compared with when the price of pizza was higher?

The income effect would be greater than the substitution effect.

(Figure: Leisure 2) Refer to the figure. According to this diagram, which statement is FALSE?

The labor supply curve is downward sloping.

Which statement is TRUE?

The price of leisure decreases with a decrease in wages.

Barry's wage increased and he responded by working more hours. Which statement must be TRUE?

The substitution effect of the wage increase dominated the income effect.

The government subsidizes driving by building roadways, but it also taxes driving through gasoline taxes. Which of the following is TRUE?

These policies at least partially offset each other because a subsidy is a negative tax.

A new per unit subsidy for almond production in the United States increases the world supply of almonds. If almonds are inelastically demanded, what will happen to total revenues from almond production?

They will fall.

A new per unit tax on yacht production decreases the supply of yachts. If yachts are elastically demanded, what will happen to total revenues from yacht production?

They will fall.

A new per unit subsidy for hybrid car production increases the supply of hybrid cars. If hybrid cars are elastically demanded, what will happen to total revenues from hybrid car production?

They will rise.

Which of the following statements about the price elasticity of supply in the Sudanese slave trade is correct?

When the supply curve is perfectly inelastic, every slave bought by the redeemers is one fewer slave held in captivity.

(Figure: Water and Electricity 2) Refer to the figure. If the price of electricity changed and the price of water stayed the same, causing the change in the budget constraint as indicated by the dashed line, did an income effect play a role in the change in this person's consumption bundle?

Yes, because after keeping utility constant this person still buys more electricity.

By law, workers pay half the Social Security tax and employers pay the other half. Is this a fair way to allocate the tax?

Yes, the legal responsibility for the tax has nothing to do with who ultimately pays, so it is as good an allocation as any other.

The table lists the characteristics of three goods. Good ________ is the most inelastic, and Good ________ is the most elastic.

Z; Y

If the price elasticity of demand for a product is 2 in absolute value, and the price elasticity of supply for the same product is 1, what is the predicted percent change in price from a 5 percent fall in the supply?

a 1.67 percent rise in price

If both the supply of and the demand for a good are highly elastic, a shift of either curve will always result in

a large change in quantity.

If the price elasticity of demand for a product is 1 in absolute value, and the price elasticity of supply of the same product is 1, what is the predicted percent change in price from a 1 percent increase in demand?

a rise in price of 0.5 percent

(Figure: Budget Constraint) Refer to the figure. If the price of sneakers rises, then the budget constraint in the figure will:

become flatter.

Which one of the following products would tend to have inelastic demand?

crude oil

As one moves down along an indifference curve, the slope of the indifference curve typically:

decreases.

Diminishing marginal utility means that marginal utility ______ as consumption ______.

decreases; increases

The price of good X increases from $55 to $60, and quantity demanded decreases from 500 to 400. The price of good Y increases from $55 to $60, and quantity demanded decreases from 500 to 475. Given this information, the:

demand curve for good X is more elastic than the demand curve for good Y.

If the supply of rental housing increases causing its price to fall and apartment dwellers move into bigger apartments that cost the same as their old ones, we can infer that the:

demand for apartments is unit elastic.

The conventional demand curve appears strange to many students since the dependent variable (quantity) is on the vertical axis and the independent variable (price) is on the horizontal axis. We generally describe our demand as " If apples cost $1, then I'd be willing to buy four apples" instead of " If I want four apples, then I'd be willing to pay $1 per apple." Which concept reframes the dependent and independent variables so the orientation is more intuitive?

diminishing marginal utility

The consumption bundle that maximizes utility for a consumer is the bundle that:

equates the slope of the budget constraint with the slope of the indifference curve.

If the price elasticity of supply is 0.75, then when the price of Good Y falls by 10 percent, the quantity supplied of Good Y:

falls by 7.5 percent.

Refer to the figure. If price decreases from $20 to $10, total revenue will:

increase by $1,500, so the demand curve is elastic.

As demand becomes more elastic, ceteris paribus, the deadweight loss from a tax:

increases.

Increasing marginal utility means that marginal utility ______ as consumption ______.

increases; increases

A 4 percent increase in the price of beer will cause a 1 percent decline in the quantity of beer demanded. The demand for beer is:

inelastic.

Farmers can produce more milk at lower cost, but Americans want to drink only so much milk. This suggests that the demand curve for milk is:

inelastic.

The manager of a company notices that the company's total revenue would increase if she raised the price of the company's product. Accordingly, the manager can assert that the demand for the company's product is:

inelastic.

When the supply curve in the Sudanese slave trade is perfectly ________, every slave bought by the redeemers results in/is ________ held in captivity.

inelastic; one less slave

In the market for Good X—a necessity good without any good substitutes—the workers and capital in the industry can easily find work producing other goods. The burden of the tax is likely to fall:

more heavily on buyers, given that demand is more inelastic than supply.

If there are only two goods in the economy, chocolate and peanut butter, and the price of chocolate falls, the new utility-maximizing bundle for a typical consumer would entail consuming _____ peanut butter and ______ chocolate.

more; more

The case for drilling oil in ANWR is strengthened when the:

price of oil is higher.

(Figure: Labor Supply and Welfare) Refer to the figure. The presence of the welfare program causes this person to:

reduce hours of work from 12 to 0.

After purchasing and then losing a ticket to a concert, a rational consumer would:

repurchase the ticket as long as the price hasn't changed and the income effect is low.

If you purchase a ticket to a concert but then lose the ticket, a rational consumer would:

repurchase the ticket as long as the price hasn't changed and the income effect is low.

When the income effect from a wage increase is less than the substitution effect, the labor supply curve:

slopes upward.

The difference between what buyers pay for a unit of a good and what sellers receive is known as the:

tax.

If an individual's labor supply curve is downward sloping, this indicates that:

the income effect dominates the substitution effect.

Refer to the figure. Assume the graph illustrates the Sudanese slave trade. If the supply curve is perfectly elastic as it is in the graph, a rise in the demand for slaves (from D 1 to D 2) causes:

the price of slaves to remain unchanged.

(Figure: Income and Substitution Effects) Refer to the figure. The consumer is initially in equilibrium at Point A then moves to Point B. What is the income effect from the price change?

the reduction of the number of music downloads by one

(Figure: Income and Substitution Effects) Refer to the figure. The consumer is initially in equilibrium at Point A then moves to Point B. What is the substitution effect from the price change?

the reduction of the number of music downloads by three

Refer to the figure. The figure represents the budget constraint and indifference curves for the labor-leisure decision of a consumer when the wage rate falls from $20 to $10. For this worker:

the substitution effect will dominate and the consumer will work less.

(Figure: Water vs. Soda) Refer to the figure. The figure represents the marginal utility Janet receives when she consumes bottled water and soda. The prices of bottled water and sodas are both $1 each. Janet has $5 to spend. What mix of bottled water and soda will maximize Janet's utility?

three bottles of water and two sodas

(Figure: Coffee and Comic Books) Refer to the figure. A consumer has $5 to spend on comic books (priced at $1 per comic book) and coffee (priced at $1 per cup). Using the figure, how many comic books and cups of coffee will this consumer purchase?

two comic books and three cups of coffee

Refer to the figure. If price falls from $60 to $40, total revenue goes ________, so demand is ________.

up by $120; elastic

Countries in Western Europe tend to have more generous unemployment benefits for their workers than we do in the United States. All else equal, workers in Western Europe should:

work fewer hours on average.

Increasing marginal utility means that one's first apple in a sitting is ______ one's second apple in the same sitting.

worse than