econ 2020 exam 2

Equilibrium with tax =

$T per unit Buyers pay = Pb Sellers receive = Ps Quantity = Qt

revenue from tax =

$T x Qt

cross-price elasticity of demand =

% change in Qd for good 1 / % change in price of good 2

income elasticity of demand =

% change in quantity demanded / % change in income

price elasticity of demand =

% change in quantity demanded / % change in price

price elasticity of supply =

% change in quantity supplied / % change in price

allocation of resources

-how much of each good is produced -which producers produce it -which consumers consume it

two reasons for the fall in CS

1. buyers leaving market 2. remaining buyers paying higher P

rationing mechanisms

1. long lines 2. discrimination according to seller's biases

two reasons for the fall in PS

1. sellers leaving market 2. remaining sellers getting lower P

For the typical worker, the marginal rate tax is about ____%

40

Consider the market for theater tickets. Theater tickets and TV tickets (tickets to a live screening of a TV show) are substitutes. When the price of TV tickets (tickets to a live screening of a TV show) decreases, what happens to producer surplus in the market for theater tickets? A. Producer surplus decreases. B. Producer surplus increases. C. Producer surplus will not change, only consumer surplus changes. D. Not enough information to answer this question.

A

If the price of sheet metal (an input for washing machines) decreases, what happens to consumer surplus in the market for washing machines? a. Consumer surplus increases. b. Consumer surplus decreases. c. Consumer surplus will not change, only producer surplus changes. d.Not enough information to answer this question.

A

price ceiling

A legal maximum on the price at which a good can be sold

price floor

A legal minimum on the price at which a good can be sold

Price Quantity $0 1,000 3 800 6 600 9 400 12 200 15 0 Using the midpoint method, demand between $0 and $3 is A. elastic B. inelastic C. unit elastic D. perfectly inelastic E. perfectly elastic

B

Price, QD, QS $12.00 0 36 $10.00 3 30 $8.00 6 24 $6.00 9 18 $4.00 12 12 $2.00 15 6 $0.00 18 0 At a price of $2.00, total surplus is a. Larger than it would be at the equilibrium price. b. Smaller than it would be at the equilibrium price. c. The same as it would be at the equilibrium price. d. There is not enough information to make this determination.

B

Good A, B Price Elasticity of Demand 0.5, 1.9 Which of the following is consistent with the elasticities given in the above table? A. A has more substitutes than B B. A is a good after an increase in income and B is that same good after a decrease in income C. A is a luxury B is a necessity D. A is a good immediately after a price increase and B is that same good 3 years after the price increase

D

Price, QD, QS $12.00 0 36 $10.00 3 30 $8.00 6 24 $6.00 9 18 $4.00 12 12 $2.00 15 6 $0.00 18 0 Both the demand curve and the supply curve are straight lines. At equilibrium, consumer surplus is a. $24 b.$36 c.$42 d.$48 e. None of the above.

D

the more elastic supply is the easier it is for firms to leave the market when the tax reduces Ps, the greater Q falls below the surplus maximizing quantity

DWL is greater when

supply is inelastic (harder for firms to leave the market when tax reduces Ps) so the tax only reduces Q a little

DWL is small when

Efficiency means

Goods are consumed by buyers who value them most highly. Goods are produced by producers with lowest costs. Raising or lowering quantity of good would not increase total surplus.

normal goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

inferior goods

Goods for which demand tends to fall when income rises.

Laissez-faire

Idea that government should play as small a role as possible in economic affairs french for "allow them to do"

Producer Surplus (PS) =

P-Cost

Demand is perfectly elastic when

Price elasticity of demand = infinity Demand curve is horizontal

total revenue

Price x Quantity

the laffer curve shows the relationship between

Size of the Tax and Tax Revenue

demand is unit elastic

TR remains constant when P changes

Total revenue when demand is inelastic.

There is a direct relationship between price and total revenue when demand is inelastic.

total revenue when demand is elastic

There is an inverse relationship between price and total revenue when demand is elastic.

market failures occur when

a buyer or seller has market power—the ability to affect the market price transactions have side effects, called externalities, that affect bystanders

Supply is elastic when

a change in price leads to a relatively larger change in quantity supplied

income elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good

cross-price elasticity of demand

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

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good

Elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

supply is inelastic when

a small increase in price causes little change in supply

linear demand curve

a straight-line curve; such as a demand curve has a constant slope but usually has a varying price elasticity

the CS is the

area under the D curve above the price, from 0 to Q

Kate's Hot Yoga Studio provides hot yoga classes. They had been charging $10 per class and selling 400 classes per month at that price. When they raised their price to $15 per class, their customers cut back to 300 classes per month. Which of the following is true? a. Revenue went from $4,000 per month to $4,500 per month, indicating that the demand for their good must be elastic. b. Revenue went from $400 per month to $300 per month, indicating that demand for their good must be elastic. c. Revenue went from $4,000 per month to $4,500 per month indicating that the demand for their good must be inelastic. d. Revenue went from $400 per month to $300 per month indicating that demand for their good must be inelastic. e. Revenue went from $10 to $15 per month, indicating that demand for their good must be inelastic.

c

government can or cannot raise total surplus by changing the market's allocation of resources

cannot

the fall in total surplus is called the

deadweight loss (DWL) of the tax

a tax

drives a wedge between price buyers pay and the price sellers receive raises the price buyers pay and lowers the price sellers receive reduces the quantity bought and sold

Jack and Rebecca have different preferences when it comes to consuming lemonade and iced tea. Jack likes to consume either lemonade or iced tea (separately). Rebecca likes to consume lemonade and iced tea together (otherwise known as, an "Arnold Palmer"). Which of the following is true? a. Lemonade and iced tea are complements for Jack, meaning they have a positive cross-price elasticity of demand. b. Lemonade and iced tea are complements for Rebecca, meaning they have a positive cross-price elasticity of demand. c. Lemonade and iced tea are substitutes for Jack, meaning they have a negative cross-price elasticity of demand. d. Lemonade and iced tea are substitutes for Rebecca, meaning they have a negative cross-price elasticity of demand. e. Lemonade and iced tea are substitutes for Jack, meaning they have a positive cross-price elasticity of demand.

e

Toby and Randall each eat 4 packages of rice a week. Their income has tripled in the past month. Toby now buys 6 packages of rice a week while Randall now buys 2 packages of rice a week. Which of the following is true? a. Rice is an inferior good for Toby, meaning it has a negative income elasticity of demand. b. Rice is an inferior good for Randall, meaning it has a positive income elasticity of demand. c. Rice is a normal good for Toby, meaning it has a negative income elasticity of demand. d. Rice is a normal good for Randall, meaning it has a positive income elasticity of demand. e. None of the above statements are true.

e

linear demand curve- price rises and quantity drops

elastic demand

luxuries

elastic demand

Demand is elastic when

elasticity is greater than 1

demand is inelastic when

elasticity is less than 1

cost is the value of

everything a seller must give up to produce a good

When the tax is larger, increasing it causes tax revenue to _____

fall

Prices are signals that

guide the allocation of society's resources, which is altered by policymakers restrictive prices

higher elasticities imply

higher DWL's

the price elasticities of demand and supply measure

how much buyers and sellers respond to price changes

Welfare economics is the study of

how the allocation of resources affects economic well-being

the incidence of tax

how the burden of a tax is shared among market participants

Demand is more elastic

in the long run

linear demand curve- price drops and quantity rises

inelastic demand

necessities

inelastic demand

Any Q height of D curve

is the WTP of marginal buyer

a tax has a DWL because

it causes consumers to buy less and producers to sell less, thus shrinking the market below the level that maximizes total surplus

When demand is inelastic

it's harder for consumers to leave the market when the tax raises PB so, the tax only reduces Q a little and DWL is small.

Goods with no close substitutes

less elastic demand

Goods with close substitutes

more elastic demand

Narrowly defined markets

more elastic demand

Doubling the tax causes the DWL to

more than double

discrimination according to seller's biases are

often unfair and inefficient

demand is elastic then P and TR

opposite directions

Markets are usually a good way to

organize economic activity

Equilibrium with no tax

price = Pe quantity = Qe

Demand is perfectly inelastic when

price elasticity of demand = 0 demand curve is a vertical line

Demand has unit elasticity when

price elasticity of demand = 1

supply is perfectly inelastic when

price elasticity of supply = 0 supply curve is vertical

supply is unit elastic when

price elasticity of supply = 1

supply is perfectly elastic when

price elasticity of supply = infinity supply curve is horizontal

the demand for a good is inelastic when

quantity demanded responds only slightly to changes in price

The demand for a good is elastic when

quantity demanded responds substantially to changes in price

When the tax is small, increasing it causes tax revenue to _____.

rise

an increase in the size of a tax causes revenue to

rise at first, but eventually revenue falls b/c the tax reduces the size of the market

demand is inelastic then P and TR

same direction

with a shortage

sellers must ration the goods among buyers

if labor supply is inelastic then DWL is

small

Consumer Surplus (CS) =

the amount a buyer is willing to pay for a good - the amount the buyer actually pays for it

which buyers consume the good?

the buyers who value the good most highly are the ones who consume it

more elastic demand

the easier for buyers to leave the market when the tax increases PB, the more Q falls below the surplus maximizing quantity and the greater the DWL

Deadweight Loss (DWL)

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

taxes

the government can make buyers or sellers pay a specific amount on each unit

The flatter the demand curve

the greater the price elasticity of demand

Does Equilibrium Maximize Total Surplus?

the market equilibrium quantity maximizes total surplus at any other quantity, can increase total surplus by moving toward the market equilibrium quantity

Willingness to Pay (WTP)

the maximum amount that a buyer will pay for a good

A seller will produce and sell the good/service only if

the price exceeds his/her cost. so cost is a measure of willingness to sell

which sellers produce the good?

the sellers with the lowest cost produce the good

Which goods or services should govt tax to raise the revenue it needs?

those with the smallest DWL

complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other negative cross-price elasticity

Substitiutes

two goods for which an increase in the price of one leads to an increase in the demand for the other positive cross-price elasticity

A tax on sellers shifts the S curve

up by the amount of the tax

total surplus =

value to buyers - cost to sellers