Econ 201 Exam 2

which graph could be used to show the result of 5 percent of the country's smokers deciding to stop smoking?

Demand curve shift left

buyers of a product will pay the majority of a tax placed on a product when

supply is more elastic than demand

when OPEC raised the price of crude oil in the 1970s, it caused the

supply of gasoline to decrease

if a change in the price of a good results in no change in total revenue,

the demand for the good must be unit elastic

what happens when there's a tax on buyers

the demand shifts down by the amount of the tax the price buyers pay rises, the price sellers receive falls

what are the determinants of price elasticity of demand (4)

the extent to which close substitutes are available whether the good is a necessity or a luxury how broadly or narrowly the good is defined the time horizon: elasticity is higher in the long run than the short run

what is a price floor

a legal minimum on the price of a good or service

moving down a linear demand curve we know that elasticity gets

smaller

a binding price ceiling causes

a shortage, which cannot be eliminated through market adjustment

in general, the tax burden falls more heavily on the side of the market that is

less elastic

a tax of $0.10 per bar on the sellers of Snickers will cause the

supply curve of snickers to shift up by $0.10

define price elasticity of supply

% change in Qs / % change in P

janine would be willing to pay $50 to see a play, but buys the ticket for only $30. janine values the play at

$50

how do you calculate percent change?

( (end value - start value) / midpoint ) * 100

an allocation of resources is said to be inefficient if

a good is not being produced by the sellers with the lowest cost

what is consumer surplus

a consumer's willingness to pay (WTP) minus the Price they pay CS = WTP - P

what is a price ceiling

a legal maximum on the price of a good or service

movement right of a supply curve is called

an increase in supply

an increase in farm technology which increases market supply is

bad for farmers because total revenue will fall, but good for consumers because prices for food will fall

what is income elasticity of demand?

deals with normal goods and inferior goods % change in Qd / % change in income normal goods = income elasticity is positive inferior goods = income elasticity is negative

what is cross price elasticity of demand?

deals with substitutes and complements % change in Qd for good 1 / % change in Price for good 2 substitutes = elasticity is positive complements = elasticity is negative

Suppose a producer is able to separate customers into two groups, one having a price inelastic demand and the other having a price elastic demand. If the producer's objective is to increase total revenue, she should

decrease the price charged to customers with the price elastic demand and increase the price charged to customers with the price inelastic demand.

which of the following will definitely cause equilibrium *quantity* to fall?

demand and supply both decrease

if a good is a luxury, demand for the good would tend to be

elastic

when price falls from $40 to $30 we know that demand must be

elastic, since total revenue *increases* from $8,000 to $9,000

lawmakers enacted the FICA tax to be

equally shared between the employer and employee

cross-price elasticity is used to determine whether goods are inferior or normal goods

false

if there is an improvement in the technology of producing a product, the supply curve for that product will shift to the left

false

rent subsidies and wage subsidies are better than price controls at helping the poor because they have no costs associated with them

false

the law of demand states that the quantity demanded of a product is positively related to price

false

the market demand is the average of all the individual demands for a particular good or service

false

the movement along a supply curve is called a change in supply while a shift of the curve is called a change in quantity supplied

false

total surplus in a market can be measured as the area below the supply curve and the area above the demand curve

false

when a new, more productive strawberry was developed which caused supply to increase, strawberry farmers were

hurt, since both price and total revenue fell due to an inelastic demand curve

what is tax incidence

if buyers' price elasticity > sellers' price elasticity, buyers can more easily leave the market when the tax is imposed, so buyers will bear a smaller burden of the tax than sellers

the space that would represent an increase in equilibrium quantity and an indeterminate change in equilibrium price would be

increase in demand, increase in supply

a tax on the buyers of coffee will

increase the equilibrium price of coffee, and reduce the equilibrium quantity

define price elasticity of demand

measures how much quantity demanded responds to a change in price. % change in Qd / % change in P

cost refers to a seller's

opportunity cost

if the demand curve shifts left from D to D1, then

people are now willing to buy the product at any price than before

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

positive

when supply and demand both increase, equilibrium

price may increase, decrease, or remain unchanged

An economy's scarce resources are allocated by

prices for resources

a supply curve can be used to measure producer surplus because it reflects

sellers' costs

what will happen to the equilibrium of new textbooks if more students attend college, paper becomes cheaper, textbook authors accept lower royalties, and fewer used textbooks are sold

the price change will be amibguous

what is producer surplus

the price received by sellers minus the Cost to sellers PS = P - Cost

what is total surplus

the producer surplus plus consumer surplus TS = PS + CS

what happens when there's a tax on sellers

the supply curve shifts up by the amount of the tax the price buyers pay rises, the price sellers receive falls

what is deadweight lost

total surplus lost when taxes are put in place producers and consumers who have left the market

TS = value to buyers - costs to sellers

true

free markets allocate 1) the supply of goods to the buyers who value them most highly and 2) the demand for goods to the sellers who can produce them at least cost

true

if demand is perfectly inelastic, the demand curve is vertical, and elasticity is equal to 0

true

producer surplus is the amount a seller is paid minus the cost of production

true

the area below the price and above the supply curve measures the PS in a market

true

which of the following would be true as the elasticity of supply approaches infinity

very small changes in price will lead to very large changes in quantity supplied

what is the relation between total revenue and price elasticity of demand

when demand is *elastic*, prices fall and total revenue RISES when demand is *inelastic*, prices rise and total revenue also RISES when demand is *perfectly inelastic*, any price change will result in the same change in total revenue

when is a market efficient

when the eq'm Q maximizes total surplus the goods are produced by the producers with lowest cost goods are consumed by buyers who value them most highly

what is equilibrium

where supply and demand meet