Mirco Test 2

Refer to Figure 8-2. The per-unit burden of the tax on sellers is

Correct P2 - P1.

Suppose that when the price of corn is $2 per bushel, farmers can sell 10 million bushels. When the price of corn is $3 per bushel, farmers can sell 8 million bushels. Which of the following statements is true?

The DEMAND for corn is price INELASTIC, and so an increase in the price of corn will INCREASE the total revenue of corn farmers. $2*10 mil=$20 mil $3*8 mil=$24 mil Corn is considered inelastic because there is no exact substitute for corn

Consumer surplus

amount a buyer is willing to pay for a good minus the amount the buyer actually pays.

producer surplus

amount a seller must give up to produce a good

A legal maximum price at which a goo can be sold is

called a price ceiling

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

called a price floor.

The loss in total surplus resulting from a tax is called

deadweight loss.

Since the amount of land is fixed, the total supply of land is

perfectly inelastic.

Scenario 8-1 Ryan would be willing to pay as much as $100 per week to have his house cleaned. Tammy's opportunity cost of cleaning Ryan's house is $70 per week. Refer to Scenario 8-1. If Tammy cleans Ryan's house for $80, Tammy's producer surplus is

$10.

Scenario 8-1 Ryan would be willing to pay as much as $100 per week to have his house cleaned. Tammy's opportunity cost of cleaning Ryan's house is $70 per week. Refer to Scenario 8-1. If Ryan pays Tammy $80 to clean his house, Ryan's consumer surplus is

$20.

Refer to Table 7-4. If the market price is $1,000, the producer surplus in the market is

$750. The difference between what each seller is willing to pay and the market price. Catherine 1000-750=250 Jackson 1000-500=500 250+500=750

Refer to Figure 7-10. At the market-clearing equilibrium, total surplus is represented by the area

A + B + C + D + E + F

Refer to Figure 8-2. The amount of deadweight loss associated with the tax is equal to

A B C.

Total surplus

All of the above are correct. can be used to measure society's well-being. is the sum of consumer and producer surplus. amounts to value to buyers minus cost to sellers.

Refer to Figure 7-7. Which area represents total surplus in the market when the price is P1?

B + C The total surplus of the consumers and the suppliers.

Figure 8-7 The graph below represents a $10 per unit tax on a good. On the graph, Q represents quantity and P represents price. Refer to Figure 8-7. The tax causes consumer surplus to decrease by the area

B + C.

Figure 8-7 The graph below represents a $10 per unit tax on a good. On the graph, Q represents quantity and P represents price. Refer to Figure 8-7. The government collects tax revenue that is represented by the area

B + D.

Refer to Figure 7-8. Sellers whose costs are greater than price are represented by segment

CD The segment of the supplier line that is ABOVE the selling price.

Refer to Figure 7-8. Buyers who value this good less than price are represented by which line segment?

CE The demand curve BELOW the price stated.

Figure 8-7 The graph below represents a $10 per unit tax on a good. On the graph, Q represents quantity and P represents price. Refer to Figure 8-7. The decrease in consumer and producer surpluses that is not offset by tax revenue is the area

Correct C + F.

When a tax is imposed on the buyers of a good, the demand curve shifts

Correct downward by the amount of the tax.

At a minimum wage that exceeds the equilibrium wage,

Correct the quantity supplied of labor will exceed the quantity demanded. Draw a chart with the price ceiling above the equilibrium and determine qty of supply vs demand.

Figure 8-7 The graph below represents a $10 per unit tax on a good. On the graph, Q represents quantity and P represents price. Refer to Figure 8-7. After the tax goes into effect, producer surplus is the area

J.

Demand is inelastic if elasticity is

Less than 1.

Refer to Figure 8-2. The price that sellers effectively receive after the tax is imposed is

P1

Refer to Figure 8-2. The equilibrium price before the tax is imposed is

P2

Refer to Figure 8-2. The price that buyers effectively pay after the tax is imposed is

P3

Refer to Figure 8-2. The amount of the tax on each unit of the good is

P3 - P1.

Refer to Figure 8-2. The per unit burden of the tax on buyers is

P3 - P2.

Refer to Figure 8-2. The amount of tax revenue received by the government is equal to the area

P3 A C P1.

Refer to Figure 5-2. If the price decreased from $18 to $6,

Revenue at $18 = 18*100=$1800 $6=6*500=$3000 Revenue increased by $1200 and demand is considered elastic from pt A to B.

Scenario 8-1 Ryan would be willing to pay as much as $100 per week to have his house cleaned. Tammy's opportunity cost of cleaning Ryan's house is $70 per week. Refer to Scenario 8-1. Assume Ryan is required to pay a tax of $40 when he hires someone to clean his house for a week. Which of the following is correct?

Ryan will now clean his own house.

Refer to Figure 5-11. Which supply curve represents perfectly inelastic supply?

S1 Regardless of the amount of goods supplied, qty never changes, inelastic

For which of the following goods would demand be most elastic?

Tommy Hilfiger jeans A specific brand of jeans as opposed to clothes in general.

Economists generally believe that rent control is

a highly inefficient way to help the poor raise their standard of living.

Economists tend to see ticket scalping as

a way of increasing the efficiency of ticket distribution.

On a graph, consumer surplus is the area

below the demand curve and above price.

If a person only occasionally buys a cup of coffee, his demand for coffee is probably

elastic.

Producer surplus measures all of the following

he amount sellers receive above the minimum they would accept. the benefit to sellers of participating in a market. the amount sellers are paid less the amount they were willing to accept

Motor oil and gasoline are complements. If the price of motor oil increases, consumer surplus in the gasoline market

may increase, decrease, or remain unchanged.

equality

property of distributing economic prosperity uniformly among the members of society

When a tax is levied on a good, the buyers and sellers of the good share the burden,

regardless of how the tax is levied.

If demand is unit elastic (=1) total revenue

remain constant when the price changes.

Total revenue

remains unchanged as price increases when demand is unit elastic. The change in qty and price will always be equally proportional.

An example of a price ceiling is

rent control

If the cross-price elasticity of demand is 1.25, then the two goods would be

substitutes

Market power refers to

the ability to influence price.

If there are very few, if any, good substitutes for good A, then (ex, gas)

the demand for good A would tend to be price inelastic.

There are very few, if any, good substitutes for motor oil. Therefore,

the demand for motor oil would tend to be inelastic.

Long lines at gas stations in the U. S. in the 1970s were primarily a result of

the fact that the U.S. government had imposed a price ceiling on gasoline.

deadweight loss

the fall in surplus that results from a market distortion such as a tax

Willingness to pay

the maximum amount that a buyer will pay fro a good

An example of a price floor is

the minimum wage.

efficiency

the property of a resource allocation of maximizing the total surplus received by all members of society

Taxes discourage market activity. So when a good is taxed

the qty of the good sold is smaller in the new equilibrium.

Income elasticity of demand measures how

the quantity demanded changes as consumer income changes.

If a tax is added to a highly elastic good then

the seller usually pays less of the tax.

Which of the following is not a determinant of the price elasticity of demand for a good?

the steepness or flatness of the SUPPLY curve for the good Supply curve is not effected by change in demand

Welfare economics

the study of how the allocation of resources affects economic well-being

Efficiency in a market is achieved when

the sum of producer surplus and consumer surplus is maximized.

Producer surplus measures does NOT measure

the total value of a good to sellers.

cost

the value of everything a seller must give up to produce a good

To measure the gains and losses from a tax on a good, economists use the tools of

welfare economics.

Refer to Figure 6-8. The equilibrium price in the market BEFORE the tax is imposed is

$6

Refer to Figure 6-8. The effective price that buyers pay AFTER the tax is imposed is

$8

Refer to Figure 6-8. The burden of the tax on buyers is

$8-$6=$2

The price elasticity of demand measures

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

Refer to Figure 6-8. The price that SELLER receive after the tax is imposed is

$5 The price of the good after the tax is added.

Refer to Figure 6-8. The burden of the tax on sellers is

$6-$5=$1

Refer to Figure 6-9. How much tax revenue does this tax produce for the government?

$600 $18-$8=$10 Qty = 60 60*$10=$600

Figure 7-3. On the graph below, Q represents the quantity of the good and P represents the good's price. Refer to Figure 7-3. If the price of the good is $6, then consumer surplus is

$8 Add the changes in price above the $6 price point. Ex. 12-6=6 8-6=2 6+2=8

Refer to Figure 6-8. The amount of the tax per unit is

$8-$5 = $3

Refer to Figure 6-2. A binding price ceiling would be the result if the price ceiling were set at

$8.

Cross price elasticity of demand formula

% change in qty of good 1 / % change in $ of good 2

Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the quantity of X demanded. Price elasticity of demand for X is

1 =%Qty/%$ =6/6 =1

Muriel's income elasticity of demand for football tickets is 1.50. All else equal, this means that if her income increases by 20 percent, she will buy

30 percent more football tickets. 1.5*20=30

Refer to Figure 7-2. Which area represents consumer surplus at a price of P1?

ABD Consumer surplus is below the demand curve and above price.

Alice says that she would buy one banana split a day regardless of the price. If she is telling the truth

Alice's demand for banana splits is perfectly inelastic. In other words no matter the price her qty purchased would not change.

Total Revenue

Amount paid by the buyer and received by the seller. =Price of goods * qty sold

Refer to Figure 7-4. Which area represents producer surplus when the price is P1?

BCE Supplier surplus is above the supply curve and BELOW the price

Refer to Figure 7-2. When the price falls from P1 to P2, which area represents the increase in consumer surplus to existing buyers?

BCED the area between the old price and new price.

Dallas buys strawberries, and he would be willing to pay more than he now pays. Suppose that Dallas has a change in his tastes such that he values strawberries more than before. If the market price is the same as before, then

Correct Dallas's consumer surplus would increase.

Refer to Figure 5-4. As price falls from PA to PB, which demand curve represents the most elastic demand?

D1 The more parallel to the X axis the more elastic the demand.

Technological advances in wheat production can lower farmers' total revenue because the

DEMAND for wheat is inelastic.

This table refers to five possible buyers' willingness to pay for a case of Vanilla Coke. Refer to Table 7-2. If the price of Vanilla Coke is $6.90, who will purchase the good?

David and Laura The table list the amounts in which people are willing to pay up to for the Coke. Since the price is $6.90 only people are willing to pay that or more for the Coke.

If the price elasticity of demand for a good is 0.94, then which of the following events is consistent with a 4 percent decrease in the quantity of the good demanded?

Elasticity=%Qty/%$ .94=4%/x ............

If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a

Elasticity=%Qty/%$ 4=x/10% 4*10=x x=40

Normal goods have negative income elasticities of demand, while inferior goods have positive income elasticities of demand.

False

Time Horizon

Goods tend to be more elastic over longer periods of time. Example: Gas, as time progresses people can move closer to work, buy more fuel efficient cars, etc.

Availability of close substitutes:

Goods with close substitutions tend to have MORE elastic demand because it is easier for consumers to switch from that good to another. Example: Butter and margarine

Necessities vs luxuries

Necessities tend to have INELASTIC demand (Dr visits) Luxuries tend to have ELASTIC demand. (Sail boats) A rise in price of these items would more than likely result in a large qty of change in the purchase of sailboats more than Dr visits.

Inferior goods have a _______________ income elasticity.

Negative Higher income (+) and lower qty demanded (-). They move in opposite directions and creates a neg.

Normal goods have a _______________ income elasticity.

Positive. Higher income (+) and higher qty demanded (+)

Definition of a market

The narrower the definition of the market the more elastic the demand. Example: Clothes, there is no overall substitute for all clothing so demand is inelastic Leivs jeans is more elastic because it is easy to substitute one brand/ flavor for another

Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes.

True

If a supply curve is horizontal then supply is said to be perfectly elastic and the price elasticity of supply approaches infinity.

True

When an increase in price of 22% results in a 22% increase in qty you have

Unit Elasticity Demand: Elasticity equals 1.

Refer to Figure 6-3. In panel (b), with the price floor in effect, there will be

a surplus of wheat. To determine surplus vs shortage evaluate where qty falls on both the supply and demand curve. the difference determines which one it is.

Refer to Figure 6-4. For a price ceiling to be binding, it would have to be set at

any price below $6.00.

A perfectly ELASTIC demand implies that

any rise in price above that represented by the demand curve will result in a quantity demanded of zero.

A perfectly elastic demand implies that

any rise in price above that represented by the demand curve will result in a quantity demanded of zero.

A price become binding when it is

below the equilibrium price.

In the long run, the quantity supplied of most goods

can respond substantially to a change in price.

Eric produces jewelry boxes. If the demand for jewelry boxes is elastic and Eric wants to increase his total revenue, he should

decrease the price of his jewelry boxes. For elastic goods, the lower the price the more consumers will buy.

An increase in price causes an increase in total revenue when

demand is inelastic. This occurs because increasing the price does not have a large impact on the qty being purchased.

Denise values a stainless steel dishwasher for her new house at $500. The actual price of the dishwasher is $650. Denise

does not buy the dishwasher and on her purchase she experiences a consumer surplus of $0 on her non-purchase.

When quantity demanded responds strongly to changes in price, demand is said to be

elastic.

Cross price elasticity of demand

measure of how much qty demanded of one good responds to a change in the price of another good.

Complement good have a __________ cross-price elasticity.

negative When one sees a decrease in qty demanded so does the other good. change in qty of one good is (-) and change in price of the other is (+)

Suppose a tax is imposed on the buyers of a good or service. The burden of the tax will fall

on both the buyers and the sellers.

The demand for Chocolate Chip Cookie Dough ice cream is likely quite elastic because

other flavors of ice cream are good substitutes for this particular flavor.

Buyers and sellers share the burden of taxes, So in the new equilibrium, buyers

pay more for the goods and sellers receive less.

Economists compute the price elasticity of demand as the

percentage change in quantity demanded divided by the percentage change in price.

If two goods are substitutes, their cross-price elasticity will be

positive.

Substitute good have a __________ cross-price elasticity.

positive. Substitutes are used in place of other goods so there is "no lose". change in qty of one good is (+) and change in price of the other is also (+)

When government imposes a price ceiling or a price floor in a market,

price no longer serves as a rationing device.

Demand is said to be inelastic if the

quantity demanded changes proportionately less than price.

In the case of perfectly INELASTIC demand,

quantity demanded stays the same whenever price changes.

If corn farmers know that the demand for corn is inelastic, and they want to increase their total revenue, they should all

reduce the number of acres they plant in corn. If they produce/supply less they have less cost in production and they will earn more in revenue.

Refer to Figure 6-4. If the government imposes a price ceiling in this market at a price of $5.00, the result would be a

shortage of 20 units.

Refer to Figure 6-5. If the government imposes a price ceiling of $2.00 in this market, the result is a

shortage of 50 units of the good.

A key determinant of the price elasticity of supply is

the ability of sellers to change the amount of the good they produce. Items that can not be produced such as land is inelastic. Items that can be produced are considered elastic. The longer the time frame the more elastic the supply.

If a tax is added to an inelastic good then

the buyer tends to pay more of the taxes.

If demand is equal to 1 it is considered

unit elastic

Formula for Elasticity of Demand

% change Qty Demanded/ % change in $

Shannon buys a new CD player for her car for $135. She receives consumer surplus of $25 on her purchase if her willingness to pay is

$160. In other words she received a $25 surplus on her purchase of $135 because she was willing to pay up to $160. There is only a consumer surplus is money is spent but also saved.

Refer to Figure 7-5. If the price of the good is $14, then producer surplus is

$25. 14-3=11 14-6=8 14-10=4 14-12=2 11+8+4+2=25

What are the 4 determinate of the price elasticity of demand

Availability of close substitutes Necessities vs luxuries Definition of a market Time horizon

Refer to Figure 5-7. Total revenue when the price is P1 is represented by the area(s)

B + D

Producer surplus is the

Correct amount a seller is paid minus the cost of production.

For a good that is a necessity,

Correct demand tends to be inelastic.

Revenue on the graph

Find current price and multiply by current qty.

Income Elasticity Estimates by product types.

Luxury goods greater than 1 Normal good less than 1 (above 0) Inferior goods lass than 0.

Tax incidence

The manner in which the burden of a tax is shared among participants in a market.

Demand is elastic if elasticity is

greater than 1.

The greater the price elasticity of demand, the

greater the responsiveness of quantity demanded to a change in price.

A consumer's willingness to pay directly measures

how much a buyer values a good.

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

increase total revenue of donut sellers. For elastic goods, the lower the price the more consumers will buy.

Over time, housing shortages caused by rent control

increase, because the demand for, and supply of, housing are more elastic in the long run.

Elasticity

measure of the responsive of qty demanded (or qty supplied) to a change in one of its determinate.

The price elasticity of supply measures how much

the quantity supplied responds to changes in the price of the good.

You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles,

yours would be positive and your roommate's would be negative. Because I buy more (+) and make more (+), positive Because they make more (+) but buy less (-), negative.