Micro Launchpad Quiz 1

Your dormitory roommate plays loud music most of the time; you, however, would prefer more peace and quiet. You suggest that she buy some earphones. She responds that although she would be happy to use earphones, she has many other things that she would prefer to spend her money on right now. You discuss this situation with a friend who is an economics major. The following exchange takes place: He: How much would it cost to buy earphones? You: $15. He: How much do you value having some peace and quiet for the rest of the semester? You: $30. He: It is efficient for you to buy the earphones and give them to your roommate. You gain more than you lose; the benefit exceeds the cost. You should do that. You: It just isn't fair that I have to pay for the earphones when I'm not the one making the noise. Parts of this conversation contain positive statements and parts contain normative statements. Which of the following is correct?

"It is efficient for you to buy the earphones" is a positive statement (it is either right or wrong); that is, it is about description

In order to ingratiate himself with voters, the mayor of Gotham City decides to lower the price of taxi rides, and he sets a maximum price of $5.50. Suppose that the stock market crashes and, as a result, people in Gotham City are poorer. This reduces the quantity of taxi rides demanded by 6 million rides per year at any given price. With both the mayor's maximum price and the demand reduction, the price now will be ______.

$5

Lauren makes $150 a day as a bank clerk. She takes two days off work without pay, to fly to another city to attend the concert of her favorite band. The cost of transportation and lodging for the trip is $250. The cost of the concert ticket is $50. The opportunity cost of Lauren's decision to attend the concert is:

$600

In the United States, 2015 was a bad year for growing wheat. As the wheat supply decreased, the price of wheat rose dramatically, leading to a lower quantity demanded (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity of wheat demanded. Using the midpoint method to perform the calculation, the price elasticity of demand for wheat is ____.

.43

If a price floor of $15 is imposed on this market and the government chooses to purchase the surplus, the government must buy _____ units of the good and spend a total amount of _____ on its purchase.

10,150

The equilibrium price of lobsters is ____ per pound and the equilibrium quantity of lobsters is _____ pounds.

15,600

The Market for Sandwiches. How much total surplus would be lost if there were a quota of eight sandwiches that could be legally exchanged?

3

The Market for Sandwiches. Suppose a price floor is set at $7. At this price, consumer surplus is equal to _____ and producer surplus is equal to _____.

32, 40

The waters off the North Atlantic coast were once teeming with fish. Now, due to overfishing by the commercial fishing industry, the stocks of fish are seriously depleted. In 1991, the National Marine Fishery Service of the U.S. government implemented a quota to allow fish stocks to recover. The quota limited the amount of swordfish caught per year by all U.S.-licensed fishing boats to 7 million pounds. As soon as the U.S. fishing fleet had met the quota limit, the swordfish catch was closed down for the rest of the year. The accompanying table gives the hypothetical demand and supply schedules for swordfish caught in the United States per year. The diagram below shows the effect of the quota on the market for swordfish in 1991. All the fishermen together earn $____ million in quota rent.

42

In the diagram, which area indicates the deadweight loss from the inefficiently low quantity bought by consumers?

A

The accompanying table lists the cross-price elasticities of demand for several goods, where the percent change in price is measured for the first good of the pair, and the percent change in quantity is measured for the second good. Using the information in the table, a 5% increase in the price of Pepsi would cause the quantity of Coke demanded to change by ____%.

A cross-price elasticity of 0.63 implies that a 1% increase in the price of Pepsi would increase the quantity of Coke demanded by 0.63%. Therefore, a 5% increase in the price of Pepsi would increase the quantity of Coke demanded by five times as much, that is, by 5 × 0.63% = 3.15%.

The demand for hamburgers in your hometown shifts due to income falling in town. Assume that hamburgers are an inferior good for most people. Choose the answer that best describes the shift and the effect on equilibrium price and quantity that results.

A fall in income causes the demand for an inferior good (hamburgers) to increase. This represents a rightward shift of the demand curve from D1 to D2 and results in a rise in the equilibrium price and quantity as the equilibrium changes from E1 to E2.

The accompanying table lists the cross-price elasticities of demand for several goods, where the percent change in price is measured for the first good of the pair, and the percent change in quantity is measured for the second good. If the sign of the cross-price elasticity is positive, then the two goods are ______.

A tneigaotivne cross-price elasticity of demand implies that the two goods are comple- ments. So air-conditioning units and kilowatts of electricity are complements, as are sport-utility vehicles and gasoline. A positive cross-price elasticity of demand implies that the two goods are substitutes. So Coke and Pepsi are substitutes, as are McDonald's and Burger King burgers as well as butter and margarine.

On Thursday nights, a local restaurant has a pasta special. Ari likes the restaurant's pasta, and his willingness to pay for each serving is shown in the accompanying table. If the price of a serving of pasta is $4, Ari will buy ___ servings and receive ____ of consumer surplus.

Ari will buy four servings of pasta. His consumer surplus is equal to $12, that is: Solution ($10 − $4) + ($8 − $4) + ($6 − $4) + ($4 − $4) = $12.

(Figure: The Market for Hybrid Cars) Use Figure: The Market for Hybrid Cars. What area represents deadweight loss if there is a binding price floor at P1?

C and E. Area of triangle in cross section

There are six potential consumers of computer games, each willing to buy only one game. Consumer 1 is willing to pay $40 for a computer game, consumer 2 is willing to pay $35, consumer 3 is willing to pay $30, consumer 4 is willing to pay $25, consumer 5 is willing to pay $20, and consumer 6 is willing to pay $15. Suppose the market price is $29. What is the total consumer surplus at this price?

Consumer 1 buys a game since her willingness to pay is greater than the price. She gains $40 − $29 = $11. Consumer 2 buys a game since his willingness to pay is greater than the price. He gains $35 − $29 = $6. Consumer 3 buys a game since her willingness to pay is greater than the price. She gains $30 − $29 = $1. The total consumer surplus is $11 + $6 + $1 = $18.

You are analyzing a trade-off when you compare the _____ and _____ of doing something.

Costs and benefits

The market for many goods changes in predictable ways according to the time of year, in response to events such as holidays, vacation times, seasonal changes in production, and so on. Using supply and demand, explain the change in price in the following case. Note that supply and demand may shift simultaneously. The price of a Christmas tree is lower after Christmas than before and fewer trees are sold. This is due to a(n) ___ in ___.

Decrease In demand

A study conducted by Yahoo! revealed that chocolate is the most popular flavor of ice cream in America. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream. The resulting decrease in the supply of cream will cause the supply of chocolate ice cream to______, which means the equilibrium price will ______, and the equilibrium quantity will _______.

Decrease, rise, fall

After several years of decline, the market for handmade acoustic guitars is making a comeback. These guitars are usually made in small workshops employing relatively few highly skilled luthiers. Assess the impact on the equilibrium price and quantity of handmade acoustic guitars as a result of the following event. In your answers, indicate which curve(s) shift(s) and in which direction. The country goes into a deep recession and the income of the average American falls sharply. As a result, the ___ curve shifts ___, the equilibrium price ___ and the equilibrium quantity ___.

Demand, left, falls, falls. If average American income falls sharply, then the demand for handmade acoustic guitars will decrease sharply as well because they are a normal good. This is rep- resented by a leftward shift of the demand curve, leading to a lower equilibrium price and quantity.

What incentives does the free market offer

Economic growth

Which tribe has the comparative advantage in spaghetti production? In meatball production?

For the Tivoli, the opportunity cost of 1 pound of meatballs is 3⁄5 of a pound of spaghetti. For the Frivoli, the opportunity cost of 1 pound of meatballs is 4⁄3 pounds of spaghetti. That is, the Tivoli have a comparative advantage in meatball production because their opportunity cost is lower. For the Tivoli, the opportunity cost of 1 pound of spaghetti is 5⁄3 pounds of meatballs. For the Frivoli, the oppor- tunity cost of 1 pound of spaghetti is 3⁄4 pound of meatballs. That is, the Frivoli have a comparative advantage in spaghetti production because their opportunity cost is lower.

Two important industries on the island of Bermuda are fishing and tourism. According to data from the Food and Agriculture Organization of the United Nations and the Bermuda Department of Statistics, in 2009 the 306 registered fishermen in Bermuda caught 387 metric tons of marine fish. And the 2,719 people employed by hotels produced 554,400 hotel stays (measured by the number of visitor arrivals). Suppose that this production point is efficient in production. Assume also that the opportunity cost of 1 additional metric ton of fish is 2,000 hotel stays and that this opportunity cost is constant (the opportunity cost does not change). If all 306 registered fishermen were to be employed by hotels (in addition to the 2,719 people already working in hotels), how many hotel stays could Bermuda produce?

Forgoing the production of 1 metric ton of fish allows Bermuda to produce 2,000 additional hotel stays. Therefore, forgoing the production of 387 metric tons of fish allows Bermuda to produce 2,000 × 387 = 774,000 additional hotel stays. If all fishermen worked in the hotel industry, Bermuda could produce 554,000 + 774,000 = 1,328,400 hotel stays.

You are the manager of Fun World, a small amusement park. The accompanying diagram shows the demand curve of a typical customer at Fun World. The graph shows the vertical axis labeled as "Price of ride" and the horizontal axis is labeled as "Quantity of rides (per day)." It shows a downward sloping, linear demand curve (D), starting at 10 dollars and ends at 20 rides per day. It shows a point on the linear curve, depicting the price of 10 rides per day is 5 dollars. Suppose that the price of each ride is $5. At that price, how much consumer surplus does an individual consumer get?

Frotmiothendemand curve, you can see that with a price per ride of $5, the customer takes 10 rides. At this point her consumer surplus is 1⁄2 × ($10 − $5) × 10 = $25.

Determine the amount of producer surplus generated in the following situation. Gordon lists his old Lionel electric trains on eBay. He sets a minimum acceptable price, known as his reserve price, of $75. After five days of bidding, the final high bid is exactly $75. He accepts the bid. The amount of Gordon's producer surplus is _____.

Gordon will receive no producer surplus since the price received for the trains is equal to his cost.

There is a debate about whether sterile hypodermic needles should be passed out free of charge in cities with high drug use. Proponents argue that doing so will reduce the incidence of diseases, such as HIV/AIDS, that are often spread by needle sharing among drug users. Opponents believe that doing so will encourage more drug use by reducing the risks of this behavior. As an economist asked to assess the policy, you must know the following: (i) how responsive the spread of diseases like HIV/AIDS is to the price of sterile needles; and (ii) how responsive drug use is to the price of sterile needles. Assuming that you know these two things, use the concepts of price elasticity of demand for sterile needles and the cross-price elasticity between drugs and sterile needles to answer the following questions. This is a beneficial policy if the price elasticity of demand for sterile needles is _____ and the cross-price elasticity of demand between drugs and sterile needles is ______ and low.

Hatnidiongnout free needles lowers the price of needles to zero. First consider the demand for needles. The higher the price elasticity of demand for sterile needles, the greater the increase in the quantity of sterile needles demanded in response to a decrease in the price. And the greater the increase in the quantity of sterile nee- dles demanded, the lower the spread of diseases like HIV/AIDS. Now consider the demand for drugs. Drugs and sterile needles are complements: as the price of ster- ile needles falls, the demand for drugs increases. This implies that the cross-price elasticity of demand between drugs and sterile needles is negative. The less nega- tive (the closer to zero) the cross-price elasticity of demand between drugs and sterile needles, the less responsive is the demand for drugs to the price of sterile needles. So the policy would be beneficial if the price elasticity of demand for ster- ile needles is high (elastic) and the cross-price elasticity of demand between drugs and sterile needles is negative and low (close to zero, that is, weakly complemen- tary).

You decide whether to eat one more slice of pizza based on how hungry you feel. This statement best represents this economic concept:

How much is a decision at the margin

The accompanying table shows hypothetical demand and supply schedules for milk per year. The U.S. government decides that the incomes of dairy farmers should be maintained at a level that allows the traditional family dairy farm to survive. So it implements a price floor of $1 per pint by buying surplus milk until the market price is $1 per pint. The amount of surplus milk that will be produced as a result of this policy is ______ million pints per year.

However, with a price floor at $1, the quantity supplied is 750 million pints and the quantity demanded is 650 million pints. So the policy causes a surplus of milk of 100 million pints per year.

The accompanying table shows the supply and demand schedules for used copies of the first edition of this textbook. The supply schedule is derived from offers at Amazon.com. The demand schedule is hypothetical. Calculate consumer and producer surplus at the equilibrium in this market.

In equilibrium, the price is $85, the equilibrium quantity is 15, consumer surplus is $155 and producer surplus is $125.

The accompanying table shows hypothetical demand and supply schedules for milk per year. The U.S. government decides that the incomes of dairy farmers should be maintained at a level that allows the traditional family dairy farm to survive. So it implements a price floor of $1 per pint by buying surplus milk until the market price is $1 per pint. The cost to the government of this policy will be ______ million dollars.

In order to sustain this price floor (to prevent black market sales of surplus milk below the price floor), the government has to buy up the surplus of milk. Buying 100 million pints of milk at a price of $1 each costs the government $100 million.

For the given market, explain the effect on the demand curve, the supply curve, the equilibrium price, and the equilibrium quantity for the following event. The market for newspapers in your town. The salaries of journalists go up. The supply will ___, and so the equilibrium price will ___, and the equilibrium quantity will ___.

Journalists are an input in the production of newspapers; an increase in their salaries will cause newspaper publishers to reduce the quantity supplied at any given price. This represents a leftward shift of the supply curve from S1 to S2 and results in a rise in the equilibrium price and a fall in the equilibrium quantity as the equilibrium changes from E1 to E2.

A representative of the American clothing industry recently made the following statement: "Workers in Asia often work in sweatshop conditions earning only pennies an hour. American workers are more productive and as a result earn higher wages. In order to preserve the dignity of the American workplace, the government should enact legislation banning imports of low-wage Asian clothing." Low-wage Asian workers would _____ such a policy.

Low-wage Asian workers would also be hurt by this policy. The Asian country would channel its resources away from producing clothing toward producing other goods that it previously imported from America. But since it does not have the comparative advantage in those other goods, the Asian country would be able to consume less of all goods.

More people choose to get graduate degrees when the job market is poor, because the opportunity cost of going to graduate school is ____ it would be when the job market is strong.

Lower than. The worse the job market, the lower the opportunity cost of getting a graduate degree. One of the opportunity costs of going to graduate school is not being able to work. But if the job market is bad, the salary you can expect to earn is low or you might be unemployed. So the opportunity cost of going to school is also low.

Determine the amount of consumer surplus generated in the following situation. After soccer practice, Stacey is willing to pay $2 for a bottle of mineral water. The 7-Eleven sells mineral water for $2.25 per bottle, so she declines to purchase it.

No trade takes place because Stacey's willingness to pay is less than the price. So no consumer surplus is created.

Can Atlantis produce 500 pounds of fish and 800 pounds of potatoes? Where would this point lie relative to the production possibilities frontier?

No, Atlantis cannot produce 500 pounds of fish and 800 pounds of potatoes. If it produces 500 pounds of fish, the most potatoes it can produce is 600 pounds. This point would lie outside the production possibility frontier, at point G on the diagram.

In A.D. 100, the Frivoli discover a new technique for making meatballs that doubles the quantity of meatballs they can produce each month. After the innovation, which tribe now has an absolute advantage in producing meatballs? In producing spaghetti? Which has the comparative advantage in meatball production? In spaghetti production?

Now the Frivoli have the absolute advantage in both meatball production and spa- ghetti production. The Frivoli's opportunity cost of meatballs has now fallen to 4 ⁄6 = 2⁄3; that is, for each pound of meatballs that the Frivoli now produce, they have to give up producing 2⁄3 of a pound of spaghetti. Since the Frivoli's opportunity cost of meatballs (2⁄3) is still higher than the Tivoli's (3⁄5), the Tivoli still have the comparative advantage in meatball production. The Frivoli's opportunity cost of spaghetti is 3⁄2 pounds of meatballs and the Tivoli's is 5⁄3 pounds of meatballs, so the Frivoli have the comparative advantage in spaghetti production.

Peter Pundit, an economics reporter in the United States, states that the European Union (EU) is increasing its productivity very rapidly in all industries. He claims that this productivity advance is so rapid that output from the EU in these industries will soon exceed that of the United States and, as a result, the United States will no longer benefit from trade with the EU. Do you think Peter Pundit is correct or not? If not, what do you think is the source of his mistake?

Peter Pundit is not correct. He confuses absolute and comparative advantage. Even if the EU had an absolute advantage over the United States in every product it produced, the United States would still have a comparative advantage in some products. And the United States should continue to produce those products: trade will make both the EU and the United States better off.

Atlantis is a small, isolated island in the South Atlantic. The inhabitants grow potatoes and catch fish. The accompanying table shows the maximum annual output combinations of potatoes and fish that can be produced. Obviously, given their limited resources and available technology, as they use more of their resources for potato production, there are fewer resources available for catching fish. If you drew a production possibilities frontier (PPF) with potatoes on the horizontal axis and fish on the vertical axis illustrating these options:

Point A would be the horizontal intercept of the PPF.

Assume you do not know whether the good is normal or inferior. Which of the following experiments would allow you to determine this?

Raise consumers' income; if the quantity demanded at every price falls, the good is inferior.

Corner offices in high-rise office buildings usually cost more to rent than other offices. This best illustrates the economic principle of:

Scarcity

(Problem 8b.) You are the manager of Fun World, a small amusement park. The accompanying diagram shows the demand curve of a typical customer at Fun World. The graph shows the vertical axis labeled as "Price of ride" and the horizontal axis is labeled as "Quantity of rides (per day)." It shows a downward sloping, linear demand curve (D), starting at 10 dollars and ends at 20 rides per day. It shows a point on the linear curve, depicting the price of 10 rides per day is 5 dollars. Suppose that Fun World considers charging an admission fee, and maintains its current price of each ride at $5. What is the maximum admission fee it could charge? (Assume that all potential customers have enough money to pay the fee.)

Since a consumer obtains consumer surplus of $25 from going to Fun World when each ride costs $5, that is the most that she would be willing to pay to go there. And it is therefore the maximum admission fee that Fun World could charge. (Charging consumers both an entrance fee and a price for each unit of a good bought is called a two-part tariff.)

Using the midpoint method to perform the calculation when the price of a T-shirt is $4, the income elasticity of demand when the average tourist income increases from $20,000 to $30,000 is ___. When the price of a T-shirt is $7, for the same change in income, the income elasticity is ___.

Suppose the price of a T-shirt is $4. Using the midpoint method, the percent change in the quantity demanded is 5,000 − 3,000 (3,000 + 5,000)/2 and the percent change in income is $30,000 − $20,000 ($20,000 + $30,000)/2 × 100 = 2,000 × 100 = 50% 4,000 The income elasticity of demand is therefore 50% = 1.25 40% × 100 = $10,000 × 100 = 40% $25,000 Now suppose the price is $7. The percent change in the quantity demanded is 1,800 − 800 × 100 = 1,000 × 100 = 76.9% (800 + 1,800)/2 1,300 and the percent change in income is, as before, $30,000 − $20,000 × 100 = $10,000 × 100 = 40% ($20,000 + $30,000)/2 The income elasticity of demand is therefore $25,000 76.9% = 1.9 40%

For the following situation, choose the statement that best describes the price elasticity of supply. An increase in demand this summer for luxury cruises leads to a huge jump in the sales price of a cabin on the Queen Mary but no increase in the number of people who sail on the Queen Mary. In this case, the price elasticity of supply is ___.

Sutppilyoisnperfectly inelastic: the quantity of cabins on the Queen Mary 2 is fixed. As demand increases (a rightward shift in the demand curve), the price of a cabin on the Queen Mary 2 increases, without an increase in the quantity supplied. See the accompanying diagram.

****Do you think that the increase in quantity demanded (from 90 to 110 in the table) when price decreases (from 21 to 19) is due to a rise in consumers' income? Which of the following best answers this question?

TNo, because the change represents an upward movement along the same demand curve. The increase in quant. demanded from 90 to 110 when the price declines from $21 to $19 is not due to a rise in consumers' income. Rather, it represents a movement along the demand curve as the price falls. In contrast, a rise in con- sumers' income causes the demand curve to shift rightward for a normal good; as a result, the quantity demanded will increase at any given price

Taiwan is a major world supplier of semiconductor chips. A recent earthquake severely damaged the production facilities of Taiwanese chip-producing companies, sharply reducing the amount of chips they could produce. Assume that the total revenue of a typical non-Taiwanese chip manufacturer rises due to these events. This means that demand must be _____. None of these, as this is the result of the price elasticity of supply, not the price elasticity of demand

Taiwan is a major world supplier of semiconductor chips. A recent earthquake severely damaged the production facilities of Taiwanese chip-producing companies, sharply reducing the amount of chips they could produce. Assume that the total revenue of a typical non-Taiwanese chip manufacturer rises due to these events. This means that demand must be _____. None of these, as this is the result of the price elasticity of supply, not the price elasticity of demand

The demand for hamburgers in your hometown shifts due to hot dog stands cutting the price of hot dogs. Choose the answer that best describes the shift and the effect on equilibrium price and quantity that results.

The demand curve shifts to the left, and results in a fall in the equilibrium price and quantity.

The demand for hamburgers in your hometown shifts due to an increase in the price of tacos. Choose the answer that best describes the shift and the effect on equilibrium price and quantity that results.

The demand curve shifts to the right, and results in a rise in the equilibrium price and quantity.

Will Shakespeare is a struggling playwright in sixteenth-century London. As the price he receives for writing a play increases, he is willing to write more plays. For the following situations, choose the statement which best explains how the event affects the equilibrium price and quantity in the market for Shakespeare's plays.The playwright Christopher Marlowe, Shakespeare's chief rival, is killed in a bar brawl.

The demand for Shakespeare's plays will increase, and as a result, equilibrium price and quantity will rise.

Choose the statement that explains how the following event affects the equilibrium price and quantity of pizza. The incomes of consumers rise and pizza is an inferior good.

The demand for an inferior good decreases when the incomes of consumers rise. So a rise in consumer incomes produces a leftward shift of the demand curve from D1 to D2, and results in lower equilibrium price and quantity as the equilibrium changes from E1 to E2.

(Problem 3c.) The accompanying table gives part of the supply schedule for personal computers in the United States. Suppose a longer time period under consideration means that the quantity supplied at any given price is 20% higher than the figures given in the table. As price increases from $900 to $1,100, the price elasticity of supply is now ___ it was in part a.

The elasticity estimate would be lower. A price change from $900 to $1,100 is a 20% price change, just as calculated in part a. Previously, when the quantity sup- plied changed from 8,000 to 12,000, that was a 40% change in the quantity sup- plied. Now that the quantity supplied at each price is higher by 1,000, the same price change would imply a change in the quantity supplied from 9,000 to 13,000, which is a 36% change using the midpoint method. The new price elasticity of supply is 36%/20% = 1.8, which is lower than in part a.

In the following situation, first consider in what sense the market is going wrong, then determine how government intervention could improve society's welfare by changing people's incentives. Everyone in Woodville would be better off if streetlights were installed in the town. But no individual resident is willing to pay for installation of a streetlight in front of his or her house, because it is impossible to recoup the cost by charging other residents for the benefit they receive from it.

The market in this situation leads to too few (or no) streetlights in Woodville. Governments could improve residents' welfare by paying for streetlight installation from the taxes paid by residents.

What is the opportunity cost of increasing the annual output of potatoes from 600 to 800 pounds?

The opportunity cost of increasing output from 600 to 800 pounds of potatoes is 200 pounds of fish. If Atlantis increases output from 600 to 800 pounds of potatoes, it has to cut fish production from 500 pounds to 300 pounds, that is, by 200 pounds.

When a chef prepares a dinner for a customer, which factor is physical capital?

The oven

The government pays the full tuition for every college student to study whatever subject he or she wishes. Is this equitable/ and or efficient

The policy is equitable but may not be efficient

Suppose it is decided that rent control in New York City will be abolished and that market rents will now prevail. Assume that all rental units are identical and are therefore offered at the same rent. To address the plight of residents who may be unable to pay the market rent, an income supplement will be paid to all low-income households equal to the difference between the old controlled rent and the new market rent. What will happen to the quantity and quality of rental housing supplied as a result of the elimination of rent control?

The quantity supplied increases from QC to the equilibrium quantity Q1. At the same time, you should expect the quality of rental housing to improve. As you learned in this chapter, one of the inefficiencies caused by price ceilings is inefficiently low quality. As the rent returns to the equi- librium rent, landlords again have the incentive to invest in the quality of their apartments in order to attract renters.

In Maine, you must have a license to harvest lobster commercially; these licenses are issued yearly. The state of Maine is concerned about the dwindling supplies of lobsters found off its coast. The state fishery department has decided to place a yearly quota of 80,000 pounds of lobsters harvested in all Maine waters. It has also decided to give licenses this year only to those fishermen who had licenses last year. The accompanying figure shows the demand and supply curves for Maine lobsters.

The quota rent per pound of lobster is $14 − $8 = $6

In the United States, 2015 was a bad year for growing wheat. As the wheat supply decreased, the price of wheat rose dramatically, leading to a lower quantity demanded (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity of wheat demanded. The total revenue for U.S. wheat farmers was $____ billion in 2012, and $____ billion in 2013.

The total revenue in 2006 is the price per bushel in 2006 times the quantity of bush- els demanded in 2006. That is, total revenue in 2006 is $3.42 × 2.2 billion = $7.524 billion. Similarly, total revenue in 2007 is $4.26 × 2.0 billion = $8.52 billion.

Although he was a prolific artist, Pablo Picasso painted only 1,000 canvases during his "Blue Period." Picasso is now dead, and all of his Blue Period works are currently on display in museums and private galleries throughout Europe and the United States. The supply for Picasso Blue Period works would be a(n) ___ line.

There are no more Picasso Blue Period works available. Hence the supply curve is a vertical line at the quantity 1,000.

What can you conclude about the price elasticity of demand in each of the following statements? "My economics professor has chosen to use the Krugman/Wells textbook for this class. I have no choice but to buy this book." In this situation, price elasticity of demand is ___.

There is no substitute available, so demand is inelastic. (Although, over time, as more used Krugman/Wells textbooks become available, the price elasticity of demand will increase.)

Suppose that, three years ago, the small town of Middling experienced a sudden doubling of the birth rate. Today, the birth rate returned to normal. Relative to before the doubling of the birth rate, choose the statement that best describes the effect of these events on the market for an hour of babysitting services 14 years into the future, after the birth rate has returned to normal, by which time children born today are old enough to work as babysitters.

There will be a rightward shift of the supply curve for babysitting services 14 years from now, which will result in a lower equilibrium price and a higher equilibrium quantity. The children born today will cause an increase in the supply of babysitters avail- able 14 years from now, when there will be a rightward shift of the supply curve for babysitting services from S1 to S2. This will result in a lower equilibrium price and a higher equilibrium quantity as the equilibrium changes from E1 to E2.

The following table shows a demand schedule for a normal good. Suppose that the good is an inferior good. Would the demand schedule be valid for an inferior good?

This demand schedule is valid for an inferior good because inferior goods obey the law of demand: a rise in the price leads to a fall in the quantity demanded, other things equal.

Although they cost the same amount to prepare, the cafeteria in your dorm consistently provides too many dishes that diners don't like, such as tofu casserole, and too few dishes that diners do like, such as roast turkey with dressing.Is this efficient?

This is not efficient.

(Problem 17c.) Although he was a prolific artist, Pablo Picasso painted only 1,000 canvases during his "Blue Period." Picasso is now dead, and all of his Blue Period works are currently on display in museums and private galleries throughout Europe and the United States. Suppose that rich art collectors decide that it is essential to acquire Picasso Blue Period art for their collections. This will result in a ___ shift of demand; as a result, the equilibrium price will ___ and the equilibrium quantity will ___.

This results in a rightward shift of the demand curve for these works from D1 to D2, and the equilibrium changes from E1 to E2. But since no more works are available, this increase in demand simply results in an increase in the equilibrium price.

After several years of decline, the market for handmade acoustic guitars is making a comeback. These guitars are usually made in small workshops employing relatively few highly skilled luthiers. Assess the impact on the equilibrium price and quantity of handmade acoustic guitars as a result of each of the following events. In your answers, indicate which curve(s) shift(s) and in which direction. Environmentalists succeed in having the use of Brazilian rosewood banned in the United States, forcing luthiers to seek out alternative, more costly woods. As a result, the ___ curve shifts ___, the equilibrium price ___ and the equilibrium quantity ___.

Thte icost nof producing handmade acoustic guitars rises as more costly woods are used to construct them. This reduces supply, as luthiers offer fewer guitars at any given price. This is represented by a leftward shift of the supply curve and results in a rise in the equilibrium price and a fall in the equilibrium quantity.

For the following event, indicate the effect on the price elasticity of demand for Ford sport-utility vehicles (SUVs). Other car manufacturers, such as General Motors, decide to make and sell SUVs. The price elasticity of demand will ___.

Thte iproicenelasticity of demand for Ford SUVs will increase because more substi- tutes are available.

Choose the statement that explains how the following event affects the equilibrium price and quantity of pizza. The price of tomato sauce falls.

Tomato sauce is an input in the production of pizza. Since the cost of an input has fallen, pizza producers will increase the quantity supplied at any given price, a rightward shift of the supply curve from S1 to S2. As a result, the equilibrium price of pizza will fall and the equilibrium quantity will rise as the equilibrium changes from E1 to E2.

When a factory closes, why does it spell bad news for the local restaurants?

Unemployed factory workers have lower incomes and are less likely to dine out.

On Thursday nights, a local restaurant has a pasta special. Ari likes the restaurant's pasta, and his willingness to pay for each serving is shown in the accompanying table. Suppose you own the restaurant and Ari is a "typical" customer. What is the highest price you can charge for the "all-you-can-eat" special and still attract customers?

When there is an "all-you-can-eat" special, Ari will consume six servings, which, if free, would give him consumer surplus of $30. Therefore, the most he is willing to pay for an "all-you-can-eat" special is $30. If Ari is a typical customer, this is the highest price you can charge for the special.

Suppose the French government sets a minimum yearly wage of €35,000. There will be involuntary unemployment at this wage of ____ workers. If the minimum wage is set at €40,000, there will be ____ involuntarily unemployed workers.

With a minimum wage of €35,000, there is a surplus of workers of 60,000 (the quantity supplied is 310,000 and the quantity demanded is 250,000). That is, there are 60,000 workers who are involuntarily unemployed. At a minimum wage of €40,000, there is a surplus of workers of 100,000: this is the number of involuntarily unemployed workers.

If the government sets a price floor of $5 per bushel, ____ bushels of corn are produced, of which ___ are purchased by consumers, and _____ by the government. The program costs the government ___. Farmers receive ____ in total revenue.

With a price floor of $5, the quantity of corn supplied is 1,200 bushels. The quantity demanded is only 800 bushels: there is a surplus of 400 bushels. The government therefore has to buy up the surplus of 400 bushels, at a price of $5 each: the program costs the government 400 × $5 = $2,000. Corn farmers sell 1,200 bushels (800 to consumers and 400 to the government) and therefore make 1,200 × $5 = $6,000 in revenue.

In the United States, 2015 was a bad year for growing wheat. And as wheat supply decreased, the price of wheat rose dramatically, leading to a lower quantity demanded (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity of wheat demanded. There was _______ in the total revenue of American wheat farmers due to the bad harvest. This could have been predicted from the answer to part a because the calculation showed that the demand is ________.

an increase; inelastic

he accompanying diagram illustrates a taxi driver's individual supply curve (assume that each taxi ride is the same distance). The graph shows the vertical axis labeled as Price of taxi ride and the horizontal axis is labeled as Quantity of taxi rides. It shows an upward sloping, linear supply curve (S). It shows two points on the linear curve, depicting the price of 40 rides and 80 taxi rides is 4 dollars and 8 dollars respectively. Suppose the city sets the price of taxi rides at $4 per ride, and at $4 the taxi driver is able to sell as many taxi rides as he desires. What is this taxi driver's producer surplus?

at a price of $4,nthe taxi driver supplies 40 rides.His producer surplus is therefore 1⁄2 × $4 × 40 = $80.

For the following event, indicate the effect on the price elasticity of demand for Ford sport-utility vehicles (SUVs). Due to ad campaigns, Americans believe that SUVs are much safer than ordinary passenger cars. The price elasticity of demand will ___.

c. The price elasticity of demand for Ford SUVs will decrease because other cars are viewed as less of a substitute.

Economists who work for the government are often called on to make policy recommendations. Their recommendations:

contain both positive and normative statements and it is important that the public be able to distinguish between the two.

In the absence of government interference, the equilibrium wage would be ____ and the number of graduates hired per year would be ____ workers. Will there be anyone seeking a job at the equilibrium wage who is unable to find one? That is, will there be anyone who is involuntarily unemployed?

he equilibrium wage is €30,000, and 290,000 workers are hired. There is full employment: nobody is involuntarily unemployed. The equilibrium is at point E.

Convenience stores, which have higher prices than supermarkets, cater to busy people because the opportunity cost of time is ______

higher for busy people

What can you conclude about the price elasticity of demand in each of the following statements? "The pizza delivery business in this town is very competitive. I'd lose half my customers if I raised the price by as little as 10%." In this situation, price elasticity of demand is ___.

his statement says that a 10% increase in price reduces the quantity demanded by 50%. That is, the price elasticity of demand is -50%/10% = -5. so demand is elastic

A study conducted by Yahoo! revealed that chocolate is the most popular flavor of ice cream in America. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream. New technology for mixing and freezing ice cream lowers manufacturers' costs of producing chocolate ice cream. As a result, the supply of chocolate ice cream will ___, which means the equilibrium price will ___ and the equilibrium quantity will ___.

increase, fall, rise

A 2015 article published by the American Journal of Preventive Medicine studied the effects of an increase in alcohol prices on the incidence of new cases of sexually transmitted diseases. In particular, the researchers analyzed the responsiveness of gonorrhea cases to a tax-induced increase in the price of beer. The report concluded that "the . . . analysis suggested that a beer tax increase of $0.20 per six-pack could reduce overall gonorrhea rates by 8.9%." Assume that a six-pack costs $5.90 before the price increase. Using the midpoint method to determine the percent increase in the price of a six-pack, the cross-price elasticity of demand between beer and incidence of gonorrhea can be calculated to be _____. According to this estimate of this cross-price elasticity of demand, beer and gonorrhea are ____

lThue ptericeontnincrease in the price of beer is $0.20 × 100 = $0.20 × 100 = 3.3% ($5.90 + $6.10)/2 $6.00 Since the incidence of gonorrhea fell by 8.9%, the cross-price elasticity of demand is −8.9% = −2.7 3.3% Since the cross-price elasticity of demand is negative, beer and gonorrhea are complements.

Let's assume that each person in the United States consumes an average of 37 gallons of soft drinks (non-diet) at an average price of $2 per gallon, and that the U.S. population is 294 million. At a price of $1.50 per gallon, each individual consumer would demand 50 gallons of soft drinks. From this information about the individual demand schedule, calculate the market demand schedule for soft drinks for the prices of $1.50 and $2 per gallon. The market quantity demanded at a price of $1.50 per gallon = _________ billion gallons.

lThueqtuainotityndemandedbyanindividualconsumeratapriceof$2was37gallons, and there were 294 million consumers. Multiplying the quantity demanded at that price by each individual consumer gives us the market quantity demanded at that price: 294 million × 37 gallons = 10.9 billion gallons. Similarly, the market quan- tity demanded at a price of $1.50 would be 294 million × 50 gallons = 14.7 billion gallons.

Hollywood screenwriters negotiate a new agreement with movie producers stipulating that they will now receive 10% of the revenue from every video rental of a movie they authored, when they previously received no royalties. They have no such agreement for movies shown on pay-per-view television. When the new writers' agreement comes into effect, the result will be a ____ in the market for video rentals, which will ____ consumer surplus in the market for video rentals.

leftward shift in the supply curve; decrease

The mayor of Gotham City, worried about a potential epidemic of deadly influenza this winter, asks an economic adviser the following series of questions. Determine whether the question requires the economic adviser to make a positive assessment or a normative assessment: If we offer to pay 10% more per dose to the pharmaceutical companies providing the vaccines, will they provide additional doses?

positive

In order to ingratiate himself with voters, the mayor of Gotham City decides to lower the price of taxi rides. Suppose that the mayor sets a maximum price at $5.50. This ______ would result in a ______ of ______ rides.

price ceiling; shortage; 4 million

How does the Free Market Economy View property Rights

private property is respected and kept secure

After several years of decline, the market for handmade acoustic guitars is making a comeback. These guitars are usually made in small workshops employing relatively few highly skilled luthiers. Assess the impact on the equilibrium price and quantity of handmade acoustic guitars as a result of each of the following events. In your answers, indicate which curve(s) shift(s) and in which direction. Environmentalists succeed in having the use of Brazilian rosewood banned in the United States, forcing luthiers to seek out alternative, more costly woods. As a result, the ___ curve shifts ___, the equilibrium price ___ and the equilibrium quantity ___.

supply; left; rises; falls

In the ancient country of Roma, only two goods, spaghetti and meatballs, are produced. There are two tribes in Roma, the Tivoli and the Frivoli. By themselves, the Tivoli each month can produce either 30 pounds of spaghetti and no meatballs, or 50 pounds of meatballs and no spaghetti, or any combination in between. The Frivoli, by themselves, each month can produce 40 pounds of spaghetti and no meatballs, or 30 pounds of meatballs and no spaghetti, or any combination in between. Assuming that all production possibilities frontiers are straight lines, the diagram shows the monthly production possibilities frontier for the Tivoli and the monthly production possibilities frontier for the Frivoli. Based on the diagram:

the Tivoli can produce more meatballs and the Frivoli can produce more spaghetti.

Macroeconomics deals with..

the working of the entire economy or large sectors of it.

The accompanying table gives part of the supply schedule for personal computers in the United States. The price elasticity of supply when the price increases from $900 to $1,100, calculated using the midpoint method, is ____.

uUstinigothenmidpoint method, the percent change in the quantity supplied is 12,000 − 8,000 × 100 = 4,000 × 100 = 40% Price of computer Quantity of computers supplied (8,000 + 12,000)/2 and the percent change in the price is 10,000 $1,100−$900 ×100= $200 ×100=20% ($900 + $1,100)/2 $1,000 The price elasticity of supply is therefore 40% = 2