ECON 2106 Exam 2
The supply curve for manufactured goods is usually more elastic than for raw materials because production of manufactured goods can often be:
increased at the same cost per unit by building more factories.
Why was the luxury tax on yachts such an incredible failure?
Because the government neglected to consider that the demand of yachts is very elastic.
If a $6 tax were levied in this market, which areas would represent the portion of the tax burden that sellers bear?
D.
If the demand for oranges is more elastic than the supply of oranges, then the burden of a tax on oranges will:
Fall mainly on suppliers.
A price ceiling is a minimum price below the market price that can be legally charged. True or false?
False.
OLD EXAM QUESTION!! Price ceilings reduce the quantity bought and sold while price floors increase the quantity bought and sold.
False. (Both reduce the quantity bought and sold).
The minimum wage is a good example of a price ceiling. True or false?
False. (Price floor).
Price floors usually create shortages. True or false
False. It creates a surplus.
Suppose that a group of humans build an enormous space ship of fixed size and travel into outer space, never to return. They live on board the ship and allocate all goods on the ship using markets. As the population grows, the price of housing on board the ship will:
grow faster than the quantity of housing supplied.
Farmer Paul raises goats. When he can sell his goats for $200/goat he will sell any or all of his goats. He never asks for more than $200/goat and he never sells his goats for less than $200/goat. This is an example of:
Perfectly elastic supply.
A vertical demand curve represents a(n) _____ demand.
Perfectly inelastic.
The supply curve for a Picasso painting is:
Perfectly inelastic.
Suppose that owners refill their pet's prescription every month. If the government eliminates all taxes on pet medications, who will benefit more?
Pet owners would receive most of the tax savings.
Prices act as signals in markets. If the price of a good increases due to an increase in demand, this is a signal to producers to:
Increase production.
If the supply of automobiles is elastic, a small percentage price increase will: a. increase the quantity supplied by a larger percentage b. cause a modest decrease in supply c. only bring about a small increase in quantity supplied d. decrease the quantity supplied by a larger percentage.
Increase the quantity supplied by a larger percentage. PES = % change in Qs / % change in P.
If the demand for the new iPhone is inelastic, then an increase in the price of this iPhone will
Increase the revenue of the sellers.
For each of the situations, please determine whether the futures price of the commodity listed will increase or decrease. Imagine that the United States Department of Agriculture announced that a new strain of avian bird flu has been discovered in several million Californian egg‑laying chickens. As a result, the price of egg futures will likely
Increase.
Are P{casso's paintings inelastic or elastic?
Inelastic because Picasso won't paint any more no matter how high the price rises.
If price rises by 10% and the quantity demanded falls by 5% then the demand is:
Inelastic.
In your college town, real estate developers are building thousands of new student‑friendly apartments close to campus. If you want to pay the lowest rent possible, should you hope that demand for apartments is relatively elastic or relatively inelastic?
Inelastic.
When Food Lamb Grocery Store raised the prices on all of its organic produce, the total revenue taken in by the store increased. Food Lamb's customers' demand for organic produce must be:
Inelastic.
When P = $10, the revenue is $1,250. When P = $12, the revenue is $1,440. Is demand elastic or inelastic.
Inelastic.
In general, it is better to tax goods with _______ demand because _______.
Inelastic; fewer trades will be discouraged.
In a market-oriented economy, individuals' economic lives are said to be
Interrelated with many other individuals and firms.
If the government imposes a new tax on every car sold, most of the tax will be paid by:
It depends; who ultimately pays the tax depends on the laws of supply and demand.
Why has the Earned Income Tax Credit (EITC) increased employment among single mothers?
It provides a certain amount of tax relief for families with children.
What does a tax do to consumer and producer surplus?
It reduces both consumer and producer surplus.
How does the price elasticity of demand move on a demand curve?
It relates to a movement along a demand curve in response to a price change. (Demand curve slopes down). If the price RISES, the quantity demanded is FALLS, and the ratio will be negative. If the price FALLS, the quantity demanded RISES, and the ratio will be negative.
Suppose the elasticity of demand for good A is −10, and the elasticity of supply for good A is 0. If demand were to decrease by 20 percent, what would happen to the price?
It would fall by 2%. -0.02 / -10 + 0 = -0.02 or -2%.
Suppose the elasticity of demand for good A is −1.20, and the elasticity of supply for good A is 0.60. If supply were to increase by 4 percent, what would happen to the price?
It would fall by 2.22%. -0.04 / -1.2 + 0.6 = -0.0222 or -2.22%.
What would happen if a tax was placed on gray T-shirts (for which there are many substitutes making them elastic)?
It would increase the price of gray T-shirts and motivate customers to purchase other color shirts instead. This would cause the tax to not raise much tax revenue.
Suppose the elasticity of demand for good A is −5, and the elasticity of supply for good A is 1. If demand were to increase by 10 percent, what would happen to the price?
It would rise by 1.67%. 0.01 / -5 + .1 = 0.0167 or 1.67%.
Suppose the elasticity of demand for good A is −0.45, and the elasticity of supply for good A is 1.00. If demand were to increase by 4 percent, what would happen to the price?
It would rise by 2.76%. .04 / -0.45 + 1 = 0.0276 or 2.76%
The market equilibrium price for three-bedroom apartments in Kansas City is $1,300. What will happen to the apartment market in this city if the city government decides to set the price for three-bedroom apartments at $1,000 in an attempt to make apartment living more affordable for local families?
Landlords' revenues will fall, and fewer families will live in apartments.
The market equilibrium price for two-bedroom apartments in Birmingham is $1,400. What will happen to the apartment market in this city if the city government decides to set the price for two-bedroom apartments at $1,100 in an attempt to make apartment living more affordable for local families?
Landlords' revenues will fall, and fewer families will live in apartments.
What will happen to the rental market in Birmingham if the city government decides to set the price for two-bedroom apartments below the market equilibrium price in an attempt to make apartment living more affordable for local families?
Landlords' revenues will fall, and fewer families will live in apartments.
What will happen to the rental market in Nashville if the city government decides to set the price for two-bedroom apartments below the market equilibrium price in an attempt to make apartment living more affordable for local families?
Landlords' revenues will fall, and fewer families will live in apartments.
Define price controls:
Laws making it illegal for prices to move above a maximum price (price ceilings) or below a minimum price (price floors). Price controls interfere with market signals in wasteful ways. Price controls delink some markets and link others in ways that are counterproductive.
One advantage of free markets over central planning is that free markets:
Make use of much more information than any central planner could possibly gather.
Rank each of the four statements with regards to whether the economic organizations in each statement are more market-oriented or part of a planned economy.
Market-oriented -> planned economy activities: 1. Buyers and sellers make all production/consumption decisions. 2. The government attempts to induce certain production/consumption decisions using monetary incentives. 3. The government regulates some production/consumption decisions. 4. The government makes all production/consumption decisions.
How does the price elasticity of supply for Henri Matisse paintings compare with the price elasticity of supply for Damien Hirst paintings? Note that Matisse is deceased, whereas Hirst still lives.
Matisse paintings likely have a lower price elasticity of supply.
Define the price elasticity of supply:
Measures how responsive the quantity supplied is to a change in price. The fundamental determinant is how quickly per-unit costs increase with an increase in production. -If increased production requires much higher per-unit costs, then supply will be inelastic. -If production can increase without increasing per-unit costs very much, then supply will be elastic. -Supply is more elastic when the industry can be expanded without causing a big increase in the demand for that industry's inputs. -The local supply of a good is much more elastic than the global supply. -Supply tends to be more elastic in the long run than in the short run.
What is an example of a price floor?
Minimum wage. A minimum wage above the market price creates a surplus (the quantity of labor supplied exceeds the quantity demanded).
When speculators buy up oil today because they expect supply disruptions to raise the price of oil in the future, they:
Mitigate the impact of the price change.
Would demand for BMW cars be more elastic or less elastic than demand for cars in general?
More elastic
If the price of gold is expected to rise, speculators will buy:
More gold today, driving the current price of gold up.
Rank the curves by how much dead-weight loss would be generated if a per unit tax was levied in the market. Assume the supply curve has an elasticity equal to 1.
Most to least dead-weight loss: 1. A demand curve with price elasticity of demand equal to 100. 2. A demand curve that is unit elastic. 3. A demand curve with price elasticity of demand equal to 0.4. 4. A demand curve that is perfectly inelastic.
Suppose the government in your City imposes a $0.50 excise tax on gasoline. If demand for gasoline is more inelastic than its supply, then the burden of this tax will be shared:
Mostly by buyers of gasoline.
Assume that oil speculators buy oil and put it in storage. Shift one of the curves in the accompanying graph to show the effect of this speculation and then place the equilibrium point, E, at the new equilibrium price and quantity. What is the new price? Why is speculation advantageous for future consumption?
Move supply curve to the left. New price: $75 It tends to smooth prices over time
The units of a good that would be traded without a tax, but that are not traded when a tax is imposed, generate:
No benefits for buyers, sellers, or the government.
Suppose that goods A and B are complements in consumption, but good B is an input into the production of good C. All else equal, if the price for good A increases, the equilibrium price:
Of good C will decrease, but the equilibrium quantity of good C will increase.
Suppose that goods A and B are complements in consumption, but good B is an input into the production of good C. All else equal, if the price of good A decreases, the equilibrium price:
Of good C will increase, but the equilibrium quantity of good C will decrease.
During the gasoline shortages in the United States in the 1970s, Americans blamed which of the following groups for the shortages?
Oil companies
On average, old cars pollute more than newer cars. Therefore, every few years, a politician proposes a cash-for-clunkers program: The government offers to buy up and destroy old, high‑polluting cars. If a cash‑for‑clunkers program buys 1,000 old, high‑polluting cars, is this the same as saying that there are 1,000 fewer old, high‑polluting cars on the road? Why or why not?
One CANNOT assume that drivers will drive 1,000 fewer clunkers around. The cars turned in were probably BEING USED VERY LITTLE IF AT ALL.
Why are there more births in the United States in late December than in early January?
Parents get a tax deduction if babies are born before the year end.
Define speculation:
Practice of making high-risk investments in hopes of obtaining large profits. -If you believe oil prices will be higher in one year, you can make a profit by buying oil now, storing it, and making a profit next year. -It raises prices today but lowers prices in the future. -Speculators move goods from today, when they have low value, to the future, when the value is higher.
Which statement is the prime reason individuals trade in prediction markets?
Prediction markets allow users to speculate on future forecasts.
A rent control is a regulation that:
Prevents rents from rising to equilibrium levels.
Under a price ceiling, resources are misallocated because?
Price can't signal that there is a shortage.
Steve decides not to rent out his second home since he is not allowed to set the rate above $1000 per month even though he knows he could find renters willing to pay much more. What is the term that best fits the scenario?
Price ceiling.
Suppose that a disruption in the supply of graphite causes the price of pencils to increase by 5 percent. As a result of this price increase, pencil sales decline by 10 percent. Is the demand for pencils elastic or inelastic? What is the price elasticity of demand for pencils? Did the revenue of pencil sellers rise or fall as a result of the price rise?
Price elasticity of demand: = -10% / 5% = -2 or 2. Demand is elastic. Revenue declines.
Garret is an undergraduate looking for a job to pay for college. As Garret seeks employment, he is glad to know that he will be paid at least $7.25 per hour. Select the term that best fits the scenario.
Price floor.
The minimum wage is an example of a(n):
Price floor.
Suppose that the price of oil changes. Determine which actions will occur in response to an increase in the price of oil, and which will occur in response to a decrease in the price of oil. Who would interpret an increase in price as a signal to enter a market?
Price of oil increases: -Suppliers invest in alternative energy sources. -Ethanol production increases -Plastics producers increase the amount of plastic recycled. Price of oil decreases: -Families begin taking more frequent driving trips. -Asphalt roads are paved more often. Producers.
The elasticity of demand for spring break packages to Cancun is −5. If you notice that this year in Cancun the quantity of packages demanded increased by 10%, then what happened to the price of Cancun vacation packages?
Prices for Cancun spring break packages FELL by -2%.
What does the price of diesel fuel in Russell, KS have to do with the price of bread in Boulder, CO?
Since farmers in Kansas use diesel fuel‑powered equipment to plant, harvest, and transport grain, an increase in the price of fuel may increase the price of bread.
If a city places a $10 tax on every skateboard sold, who ends up with the burden of the tax?
Skateboard consumers and shops will likely share the burden of the tax.
If the cattle futures price is much higher than the spot or current price for cattle, that is a sign that:
Smart people with their own money on the line think that supply disruptions may soon occur.
If the soybeans futures price is much higher than the spot or current price for soybeans, that is a sign that:
Smart people with their own money on the line think that supply disruptions may soon occur.
If the wheat futures price is $6.15/bushel, and the spot or current price for wheat is $4.85/bushel, that is a sign that:
Smart people with their own money on the line think that supply disruptions may soon occur.
If the wheat futures price is much higher than the spot or current price for wheat, that is a sign that:
Smart people with their own money on the line think that supply disruptions may soon occur.
If the futures price for commodity A is much higher than the spot or current price for commodity A, that is a sign that:
Smart people with their own money on the line think that supply disruptions may soon occur. If the futures price is much higher than the spot or current price, that is a sign that smart people with their own money on the line think that supply disruptions may soon occur.
When a price ceiling is in effect:
Some mutually beneficial trades between buyers and sellers do not occur.
Suppose the government imposes a tax on a market that was otherwise in equilibrium. What happens to the producer surplus?
Some of it is transferred to the government in the form of tax revenue.
After the imposition of a per unit tax on production, consumers pay $5.00 per unit and producers receive $4.95 per unit. What is the value of the per unit tax?
$0.05
If a tax shifts the supply curve from S1 to S2, tax revenue is:
$1,800.
In the accompanying pizza market, with a $2 tax imposed on the sellers, how much do buyers pay for a pizza?
$11.50
Kayla is a speculator in the market for a rare French goat cheese known as Crottin de Chavignol. She entered into a futures contract with farmers from the small town of Chavignol, where the cheese is produced. The futures contract specifies that after 45 months, Kayla will purchase 5000 kilograms (kg) of Crottin de Chavignol at $200/kg. When the specified number of months has passed, the price of Crottin de Chavignol is $235/kg. What is Kayla's profit per kilogram? Please denote losses with a negative sign. Which of the statements is NOT true about futures contracts? a. Few people have the space or resources to purchase commodity futures. b. Futures markets can help to reduce investor risk. c. The futures markets are used as a prime tool for speculators. d. Many futures contracts are settled in cash that do not require actual delivery of the commodity.
$35 per kg. She agrees to purchase 5000 kg of the cheese at $200 per kg, and when her contract matures, the price of the cheese is $235 per kg, a loss of $35 per kg (or $235−$200). a. Few people have the space or resources to purchase commodity futures.
If a $3 tax per unit purchased were placed on buyers instead of sellers, buyers would pay _____ and sellers would receive _____.
$6; $3
Suppose the imposition of a per unit tax on sellers shifts the supply curve from S0 to S1. With the tax, buyers pay _____ and sellers receive _____.
$6; $3
The table contains the demand and supply schedule for apartments in a city. Suppose the city council feels that the equilibrium rent is too high and imposes a price ceiling of $750/month. Rent/month Quantity demanded Quantity supplied $1,750 300 4800$1,500 600 2400$1,250 1200 1200$1,000 2400 600$750 4800 300 The price ceiling results in a (1) The city now has a shortage or surplus of how many apartments?(2)
(1) Shortage (2) 4500
Sophie is operating a lemonade stand. She knows that her customers' elasticity of demand is −5.0. If Sophie wants to increase the quantity of lemonade demanded by 30 percent, what change should she make to the price of lemonade?
Sophie should decrease the price of lemonade by 6 percent. 30% / -5 = -6%.
Futures are standard contracts to buy or sell:
Specified quantities of a commodity or financial instrument at a specified price in the future.
In the world of fashion, the power to imitate a trendy look is the power to make money. Stores like H&M and Forever 21 focus on imitating fashions wherever possible. As soon as they see a new look coming along that people are willing to pay a high price for, they start cranking out that look. Do these imitation‑centered stores make the supply of clothing more elastic or more inelastic? How can you tell?
Stores like these make supply MORE elastic. The INCREASE in the price of popular styles is FOLLOWED by a substantial INCREASE in quantity supplied.
If soymilk and dairy milk have a cross-price elasticity of demand of 2.6, they would be classified as:
Substitutes
If coffee and soda have a cross-price elasticity of demand of 10, they would be classified as:
Substitutes.
If hamburgers and hotdogs have a cross-price elasticity of demand of 2.34, they would be classified as:
Substitutes.
The graphs show four markets in which a tax will be imposed. Put the proper label next to each graph according to how the tax will be shared between buyers and sellers once the tax is in place.
(A) Buyers pays the MAJORITY of the tax. (B) Buyers pay ALL of the tax. (C) Sellers pay ALL of the tax. (D) Sellers pay the MAJORITY of the tax. -When a commodity tax is imposed, the burden of the tax is usually shared by buyers and sellers. Although both groups are impacted, the relative elasticity determines which group is affected more dramatically. The group showing more inelastic behavior pays a larger share of the tax. Therefore, if demand is more inelastic than supply, buyers pay a larger share of the tax (and vice versa). -Here, graph A shows a demand curve that is more inelastic than the supply curve (because it is steeper) and therefore shows the case where buyers pay the majority of the tax. Graph D would result in sellers paying the majority of the tax because the supply curve is more inelastic. -The only time that buyers will pay all of the tax is when demand is perfectly inelastic, which occurs when the demand curve is vertical such as in graph B. The graph shows how buyers end up paying 100% of a tax in this case. -The vertical distance between these two prices is equivalent to the amount of the tax and therefore means that buyers pay 100% of the tax. -Using similar thinking, sellers pay 100% of a tax only when the supply curve is perfectly inelastic. This case is shown in graph C in this question.-
Which of the following calculations can be used to determine the amount of revenue generated by a tax?
(Buyer price − seller price) × After-tax quantity
If turkey and ham have a cross-price elasticity of demand of 2, they would be classified as:
Substitutes.
The price of jelly has increased from $3 to $4, leading to a decrease in the quantity demanded of peanut butter from 11 to 10 jars. The cross-price elasticity of demand for jelly and peanut butter is:
-0.33
Suppose that 200,000 Uber trips are taken every day in New York City. Additionally, suppose that the elasticity of demand for an Uber trip is −0.5. If the price increased by 10%, how many Uber trips would be taken in a day?
-0.5 x 10% = -5%. A 5% decline in 200,000 trips is a decline of 10,000 trips. Therefore, the quantity of trips will decline to 190,000.
You are the product manager of Tide at Proctor and Gamble. The company is considering a 6.006.00% price increase and the CEO asks you to tell him how quantity demanded will change as a result. You know that the price elasticity for Tide is −2.90−2.90. You answer the CEO that quantity demanded will change by:
-17.4%. -2.90 x 6.00% = -17.4%.
If the elasticity of demand for ballpoint pens with blue ink is −20, and the price of ballpoint pens with blue ink rises by 1%, what happens to the quantity demanded?
-20%. Elasticity x % change in price: -20 x 1% = -20%. What's an obvious substitute for ballpoint pens with blue ink? Ballpoint pens with black ink.
Calculate the price elasticity of demand for the following points on a demand curve. At a price of $10, the quantity demanded is 200. However, if the price rises from $10 to $15, the quantity demanded falls from 200 to 180. Is the this demand elastic or inelastic? What happened to the revenue of sellers as a result of the price rise?
-> Percentage change in Qd: = (180 - 200) / 200 = -20/200 = -10% -> Percentage change in P: = (15 - 10) / 10 = ½ = 50% -> Price elasticity of demand: = -10% / 50% = -0.2 Using the midpoint formula: -> Percentage change in Qd = (180 - 200) / 190 = -10.5% ->Percentage change in P = (15 - 10) / 12.5 = 40% ->Price elasticity of demand = -10.5% / 40% = -0.2625 -Demand is inelastic. -If P rises when demand is inelastic, then revenue moves up with the price. -When P = $10, revenue = $10 x 200 = $2,000 -When P = $15, revenue = $15 x 180 = $2,700
Provide examples of misallocation of resources:
-Apartments are not allocated to the renters who value them the most. -Some people with a high willingness to pay can't buy as much housing as they want. -Others with a low willingness to pay consume more housing than they would purchase at the market rate.
Define lost gains from trade:
-As long as Probability of consumers are willing to pay > Probability sellers are willing to accept, there are mutually profitable trades that can be made. -With price controls, some profitable trades will not be made. -This creates a dead-weight loss.
Define wasteful lines:
-At the controlled price, demanders are willing to pay more. -The price controls make a higher price illegal. -Other ways to pay: bribes; waiting in line (includes value of time) -A bribe goes to the supplier, while time in line goes to no one.
Define reductions in quality:
-At the controlled price, sellers find there is an excess of demand. -Sellers can evade the law by cutting quality rather than raising price. -Another way quality can fall is with reductions in service.
What are the determinants of the price elasticity of demand?
-Ease in finding substitutes: Easier to substitute -> greater elasticity. -Time to adjust to price change: more time -> more substitutes -> greater elasticity. (For durable goods, it may work the opposite). -The definition of the commodity: narrow definition / specific brand -> more substitutes -> greater elasticity. -Necessities vs. luxuries: demand for luxuries -> greater elasticity. -Share of budget devoted to the good: larger share -> greater elasticity.
Wasteful lines, search costs, lost gains:
-Finding an apartment often involves a costly search. -At controlled price, landlords have more renters than apartments so they can discriminate. -Bribes are illegal but can be disguised: ->"Key money". ->Charged for a "furnished" apartment.
Rent regulation:
-In the 1990s, many American cities eliminated or eased rent controls. -Some changed to "rent regulation". ->Limits are placed on the amount that rent can be increased e.g., 10% per year. ->Usually allow landlords to pass along cost increases so the incentive to cut back on maintenance is reduced. ->It is not clear to economists whether rent regulation is needed. Competition between landlords would probably do a better job of keeping rents reasonable. However, compared to rent controls, modern rent regulation probably is less harmful.
Arguments of price control:
-It is often claimed—by people who have neither studied it or thought carefully about it—that rent controls help the poor. -Price controls are not the only way, and often not the best way. -Vouchers generally are a better way to help the poor: -> Do not create a shortage. -> Can be targeted to the poor.
Peter lived in the Union of Soviet Socialist Republics (USSR). In 1987, he ran the finest pirozhki shop in Leningrad. The USSR was a command economy at the time, so the government mandated a daily production quota of 500 pirozhki. Each day, Peter would make the allotted pirozhki, close the shop, bring the pirozhki to the local government market, and claim his government wages. The demand for his pirozhki was always greater than his supply, so the 500 pirozhki would sell out within 15 min. Which statements are valid reasons why Peter did not make more pirozhki to meet demand?
-Peter reached his daily production goal, so he had no incentive to make more pirozhki. -The government did not provide any incentives for Peter to produce more than his quota, even if he knew there was demand for them. -Peter did not have freedom of enterprise or freedom of choice. -A command economy system is not focused on maximizing profits.
What are some reductions in quality?
-Rent controls reduce housing quality. -Maintenance costs rises. -Owners respond by cutting costs. When rent controls are strong: -Apartment buildings turn into slums. -Slams turn into abandoned and hollowed-out buildings.
Price controls and production:
-Shortages in one market create breakdowns and shortages in other markets. -Effect of price controls expands into markets without price controls. -In an economy with many price controls, shortages can appear at any time. ->In the 1970's, when the U.S. had price controls on many goods, shortages of steel drilling equipment made it difficult to expand oil production even as the United States was undergoing the worst energy crisis in its history.
Main points of economics and tax:
-The imposition of a tax raises the price that buyers pay (including the tax) and reduces the amount that sellers receive (net of the tax). Buyers pay more and sellers receive less. -The tax reduces the quantity bought and sold -The tax raises revenue for the government but also creates a dead-weight loss.
Suppose that the income elasticity of demand for acoustic guitars is 1.5. Can you tell from this information whether acoustic guitars are a normal good or an inferior good? Briefly explain. Can you tell from this information whether acoustic guitars and electric guitars are substitutes for each other? Briefly explain.
-The income elasticity of demand is positive, so the good is a normal good. -No, the income elasticity of demand for acoustic guitars does not say anything about the relationship between acoustic guitars and electric guitars.
Define/describe shortages:
-The long-run supply curve is much more elastic than the short-run supply curve. -The shortage grows over time: •Fewer new apartment units are built. •Older units are turned into condominiums. •Units are torn down to make way for other uses.
Rent controls:
-Usually begin with a rent freeze, prohibiting landlords from raising rents. -As overall rents rise, controlled rents fall below the market equilibrium rent. -The short-run supply curve for apartments is inelastic. -Landlords have few options other than to absorb lower price.
When might a price ceiling rise?
-We haven't covered this yet, but if the market is a monopoly then it is possible that a price control could actually increase output, rather than decreasing output. -When there is one seller, then supply and demand is not the best model for the situation. The following few slides sketch out an alternative way to think about a market with only one seller. It also illustrates how a price control might actually make sense in this situation.
Define misallocation of resources:
-When prices are controlled, resources do not flow to their highest value uses. -Example: on the East Coast a cold winter increases the demand for heating oil: -> the demanders of heating oil are prevented from bidding up the price of oil -> there's no signal and no incentive to ship oil to where it is needed.
Define shortages:
-When the price ceiling is below market price, Qd > Qs which leads to a shortage. -The shortage is measured by the difference between Qd and Qs at the controlled price. -The lower the controlled price is relative to the market equilibrium price, the larger the shortage.
Under a price control,
-a good is not necessarily allocated to its highest-valued uses. -Consumer surplus will be less than under market allocation. •In the worst-case scenario, all the goods are allocated to the lower-valued uses. -More likely, goods are allocated randomly so that a high-valued use is as likely as a low-valued use.
If the price of cocoa rises by 20%, the quantity supplied of cocoa rises by 4%. What is the elasticity of supply?
0.2
If a 4% increase in the price of pepper results in a 1% decrease in pepper sales, what is the absolute value of the price elasticity of demand for pepper? Is it elastic or inelastic?
0.25; inelastic
The price of soda has increased by from $2 to $2.50, leading to an increase in the quantity demanded of sports drinks from 20 to 22 bottles. The cross-price elasticity of demand between sports drinks and soda is _____, so the products are _____.
0.4286; substitutes.
Determinants of elasticity of supply continued:
Supply is more elastic when the industry can be expanded without causing a big increase in the demand for that industry's inputs. The local supply of a good is much more elastic than the global supply. Supply tends to be more elastic in the long run than in the short run.
Gun buyback programs will be less effective if the:
Supply of guns is more elastic.
For each of the following pairs, which of the two goods is more likely to be inelastically demanded and why?
1. Demand for tangerines vs. demand for fruit: FRUIT will be more inelastically demanded because there are fewer substitutes for a BROADLY defined good. 2. Demand for beef next month vs. demand for beef over the next decade: The demand for beef will be more inelastic NEXT MONTH because the LESS time people have to change their behavior, the less they will be able to adjust to price changes. 3. Demand for Exxon gasoline at the corner of 7th and Grand vs. demand for gasoline in the entire city: Demand will be more inelastic IN THE ENTIRE CITY because there are MANY substitutes for a specific brand at a single gas station. d. Demand for insulin vs. demand for vitamins: INSULIN will be more inelastically demanded because it is more of A NECESSITY.
What are the five important effects that price ceilings create?
1. Shortages. 2. Reductions in product quality. 3. Wasteful lines and other search costs. 4. A loss of gains from trade. 5. A misallocation of resources.
For each of the following pairs, which of the two goods is more likely to be elastically supplied?
1. Supply of apples over the next growing season vs. supply of apples over the next decade: The supply of apples over the next DECADE is more elastic. b. Supply of construction workers in Binghamton, New York, vs. supply of construction workers in New York State: The supply of construction workers in BINGHAMTON is more elastic. c. Supply of breakfast cereal vs. supply of food: The supply of BREAKFAST CEREAL is more elastic. d. Supply of gold vs. supply of computers" The supply of COMPUTERS is more elastic.
What four things do price floors create?
1. Surpluses 2. Lost gains from trade 3. Wasteful increases in quality 4. A misallocation of resources
For each of the following, indicate if the supply for the good would become more elastic or less elastic as a result of each change. In each case, the supply curve also shifts, but the focus is on changes in elasticity.
1. The supply curve for diamonds if a new process for manufacturing diamonds is created. Supply will become MORE elastic because the number of diamond‑manufacturing plants can be increased with CONSTANT costs. 2. The supply curve for food if pesticides and fertilizers were banned: Supply will become LESS elastic because farmers will have FEWER ways to respond to price changes. 3. The supply curve for plastic if a very large share of oil output was used to make plastic: Supply will become LESS elastic because it would be relatively EXPENSIVE to increase the amount of oil available for plastic producers. d. The supply curve for nurses after several years of increasing wages in nursing: Supply will become LESS elastic because market participants will be MORE able to adjust to changes in the market over several years.
Consider two markets: the market for motorcycles and the market for pancakes. The initial equilibrium for both markets is the same, the equilibrium price is $3.50, and the equilibrium quantity is 23.0. When the price is $11.75, the quantity supplied of motorcycles is 61.0 and the quantity supplied of pancakes is 107.0. For simplicity of analysis, the demand for both goods is the same. Using the midpoint formula, calculate the elasticity of supply for pancakes. Please round to two decimal places.
1.19. elasticity of supply: = % change 𝑄𝑠 / % change 𝑃 = (𝑄𝑆2−𝑄𝑆1 / (𝑄𝑆1+𝑄𝑆2/2)) / (𝑃2−𝑃1 / (𝑃1+𝑃2/2)) =(107.0−23.0 / (23.0+107.0) / 2)) / (11.75−3.50 / (3.50+11.75 / 2)) =1.29 / 1.08 =1.19 The supply of motorcycles is LESS ELASTIC than supply of pancakes. This is apparent because the change in quantity supplied in the market for motorcycles is smaller, but the price change is the same.
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
The price of bread has increased from $2 to $3, leading to an increase in the quantity demanded of butter from 5 to 10 pounds. The cross-price elasticity of demand between bread and butter is:
1.67.
Calculate the price elasticity of supply for Belinda's Bakery's banana bread. When the price changes by 23%, the quantity supplied changes by 54%. Round your answer to two decimal places.
2.35%. 0.54 / 0.23 = 2.35%
What is the price elasticity of demand if a price drop from $4 to $3 causes quantity to increase from 120 to 150?
30 / 120 = 1 /4 or 25%. -1 / 4 = -25%.
If a $.075 tax is imposed on sellers of candy bars, the new equilibrium is:
325 candy bars at $2.25 a piece
Assume the price elasticity of demand for oil is −0.5 and the price elasticity of supply for oil is 0.3. The estimated impact on oil prices of a 5 percent increase in the supply of oil is a:
6.25% decrease in price. -0.05 / -0.05 + 0.03 = -0.0625 or -6.25%.
Define elasticity:
A dimensionless measure of sensitivity or responsiveness. EX: How responsive is the quantity of oil demanded to a change in the price of oil?
Immigration is a fact of life in the United States. This will lead to a big boost in the labor supply. What field would you rather be in: a field where the demand for your kind of labor is elastic or a field where the demand for your kind of labor is inelastic?
A field where demand is ELASTIC.
Define price ceiling:
A maximum price allowed by law.
Choose the correct price-elasticity label for each pair of goods. Assume this involves demand for the total of all people currently residing in Canada, the United States, and Mexico.
A. Cosmetic surgery is MORE ELASTIC than emergency surgery. B. A cheeseburger at 7:00 p.m. at a 24-hour restaurant is MORE ELASTIC than a cheeseburger at 2:00 a.m. at a 24-hour restaurant. C. Monthly electricity consumption is LESS ELASTIC than yearly electricity consumption. D. All cars are LESS ELASTIC than red cars. E. The Wall Street Journal is MORE ELASTIC than the Wall Street Journal at the airport.
An important tradition in the Santos family is that they eat the same meal at their favorite restaurant every Sunday. By contrast, the Chen family spends exactly $50 for their Sunday meal at whatever restaurant sounds best. A. Which family has a more elastic demand for restaurant food? B. Which family has a unit elastic demand for restaurant food? Hint: How would each family respond to an increase in food prices?
A. The CHEN FAMILY has a more elastic demand. B. The CHEN FAMILY has unit elasticity.
Suppose that the market for crack cocaine consists of two types of users, addicts and casual users. Casual users only use the drug occasionally, whereas addicts go to much greater lengths to make sure they have some of it readily available whenever they feel the need to consume it. What would you predict about the demand elasticities for these two types of consumers?
Addicts will have more inelastic demand; their level of consumption will be less responsive to price changes.
Price signals:
Allow entrepreneurs to examine what areas of the economy consumers want expanded.
When is demand elastic?
Anytime that the percentage change in the quantity demanded exceeds the percentage change in price (an increase in price reduces the quantity demanded by a lot; and a decrease in price increases the quantity demanded by a lot.).
When is demand inelastic?
Anytime the percentage change in the quantity demanded is less than the percentage change in price (when the increase in price reduces the quantity demanded just a little or when the same decrease in price increases the quantity demanded just a little).
How are oil prices and sugar prices related?
As oil prices increase, producers divert sugar cane from sugar production to ethanol production.
OLD EXAM QUESTION!! A price floor that is far above the equilibrium will:
Attract labor and capital into the industry that produces the good.
Who pays taxes for cigarettes?
Because nicotine is addictive, demand is inelastic. -Manufacturers can escape the taxes by selling overseas or in other states. -Supply is more elastic than demand, so most of the tax is paid by BUYERS.
Suppose that there is a tax of $5 per unit and the demand curve is more elastic than the supply curve. Which of the following statements could be TRUE?
Buyers pay $1 of the tax.
If a tax is imposed on a market with inelastic demand and elastic supply:
Buyers will bear most of the burden of the tax. Inelastic pays most of the tax. Elastic pay less of the tax.
According to the figure, if the tax is placed on buyers, the equilibrium is at point:
C, and the equilibrium price and quantity are P1 and Q2.
The effects of price controls:
Can spread to other markets without price controls.
What is the basic way to calculate a percentage change?
Change / original value. EX: (5-4) / 4 = 0.2 or 20%. This calculation is called the point formula for percentage changes and is often used to calculate the price elasticity of demand.
What is the price elasticity of demand if a price prices from $4 to $3 causes quantity to increase from 150 to 120?
Change / original value: -30 / 150 = -1/5 or -0.2. FINISH ONCE I GET PPT!!!
At a price of $4, the quantity demanded is 120. At a price of $3, the quantity demanded is 150. What is the price elasticity of demand in this region of the demand curve?
Change in quantity demanded = 30 / 135 = 0.222 Change in P = change / average value = 1 / 3.5 = 0.286.
Is the demand for cigarettes likely to be elastic or inelastic? Explain your reasoning.
Cigarette demand is most likely INELASTIC because cigarettes ARE ADDICTIVE AND HAVE FEW SUBSTITUTES.
What happens to a demand curve if there are not a lot of substitutes for a good?
Consumers are going to find it harder to adjust when the price of a good has changed. The quantity demanded for the original good is going to remain fairly constant without a lot of substitutes. Few substitutes means inelastic demand.
For each of the situations, please determine whether the futures price of the commodity listed will increase or decrease. Maple syrup is produced from the sap of maple trees. If the winter season is longer than usual and has freezing temperatures at night and warm temperatures during the day, more sap can be obtained from the maple trees. Meteorologists predict an especially long winter in 2013 with the freezing nights and warm days required for the increase in sap. As a result, the price of maple syrup futures will likely
Decrease
If the price elasticity of demand for cigarettes is -0.2, then a 10% increase in the price of cigarettes will:
Decrease the quantity demanded by 2%.
For each of the situations, please determine whether the futures price of the commodity listed will increase or decrease. Bolivia is an important producer for much of the world's lithium. Lithium is an important component in the production of lithium batteries, commonly used in many cell phones and laptop computers. If political tensions in Bolivia decrease and larger supplies of lithium are expected to be released, the price of lithium futures will likely
Decrease.
If the price elasticity of demand for wine is 1.2, and the price of wine increases, the total revenues of the wine industry would:
Decrease. Demand is elastic, so a price increase would cause revenues to decrease.
Suppose that the price elasticity of demand for pianos is -1.5. If this is true, then a 10% increase in the price of pianos is predicted to ________ the quantity demanded by ______. Explain.
Decrease; 15% -1.5 = x/10% -1.5 x 10% = x x = 15%
If demand for iPhones is inelastic, an increased supply of iPhones would result in:
Decreased revenues. The increase in quantity sold would be offset by a much larger decrease in price.
Henry Ford famously mass-produced cars at the beginning of the twentieth century, starting Ford Motor Company. He made millions because mass production made cars more cheaply, and he passed some of the savings to the consumer in the form of a low price. Cars became a common sight in the United States thereafter. Keeping total revenue and its relationship with price in mind, do you think the demand for cars was elastic or inelastic given the story of Henry Ford?
Demand for cars was ELASTIC.
Productivity hsa increased in computer chips, increasing revenues. This implies that:
Demand for computer chips is elastic. Increase in supply -> lower price -> higher revenues.
Increases in farm productivity lowered the prices of many agricultural products. Farm revenues decreased, which implies that the:
Demand for many agricultural products is inelastic. Increase in supply -> lower price -> lower revenues.
A price elasticity of -1.27 means:
Demand is elastic because 1.27 > 1
A free market is not:
Directed. -If activity is directed, it is not free.
When a country participates in international trade and becomes an importer of a good:
Domestic producers become worse off, and domestic consumers become better off.
Elastic:
Ed > 1 = elastic. Total Revenue and Price move in opposite directions. Ed < 1 = inelastic. TR & P move together. Ed = 1 = unit elastic. Price changes but TR remains the same. Elastic if the % change in Qd is greater than the % change in P.
if a 5% increase in the price of good x results in a 7% decreases in the quantity of good x demanded than the demand is:
Elastic
Christy enjoys baking pies from fresh fruit, especially blueberries, blackberries, and strawberries. When she goes to the market intending to buy blackberries, she finds that the price of blackberries has risen slightly. She decides to buy blueberries or strawberries instead. Christy's demand for blackberries is:
Elastic.
In your college town, the local government decrees that thousands of apartments close to campus are uninhabitable and must be torn down next semester. If you want to pay the lowest rent possible, should you hope that demand for apartments is relatively elastic or relatively inelastic?
Elastic.
Learning Curve: A price floor:
Encourages the most efficient allocation of resources.
To be efficient, the revenue from taxation must provide goods that have benefits that _____ the dead-weight loss caused by the taxation itself.
Exceed
For any country, if the world price of zinc is higher than the domestic price of zinc without trade, that country should:
Export zinc, since that country has a comparative advantage in zinc.
Are toothpicks inelastic or elastic?
Extremely elastic because its easy for suppliers to make more in response to even a small increase in price.
Central planners run into difficulty:
Figuring out which uses of a good provide the highest value.
The market for roses is:
Global
What does it mean if sellers use blat to allocate goods and services?
Goods and services are allocated using a system based on informal connections and favors. Sellers allocate goods to people who can compensate them by offering another scarce good in exchange.
Why might Kris, an entrepreneur, face a contraction or bankruptcy in today's market?
He may fail to compete with his competitors' lower costs.
What is the fundamental determinant of elasticity of supply?
How quickly per-unit costs increase with an increase in production. -If increased production requires much higher per-unit costs, then supply will be inelastic. -If production can increase without increasing per-unit costs very much, then supply will be elastic.
What does price elasticity of supply measure?
How responsive quantity supplied i to a change in price.
Which of the following statements is TRUE? A tax and a subsidy are similar in that: I. they both create a dead-weight loss. II. the burden of the tax and the benefit of the subsidy depend on relative elasticities of demand and supply. III. they both change the equilibrium level of output.
I, II, and III.
Suppose that drug addicts pay for their addiction by stealing. So the higher the total revenue of the illegal drug industry, the higher the amount of theft. If a government crackdown on drug suppliers leads to a higher price of drugs, what will happen to the amount of stealing if the demand for drugs is elastic? What if the demand for drugs is inelastic?
If demand is elastic, the amount of stealing will FALL. If demand is inelastic, the amount of stealing will RISE.
What is the relationship between elasticity and revenue?
If the demand curve is INELASTIC, revenues INCREASE when price INCREASES. If the demand curve is ELASTIC, revenues DECREASE when price INCREASES.
OLD EXAM QUESTION!! The higher above equilibrium the price floor, the greater the:
Surplus.
A tax on imported good is called a:
Tariff
If a $2 tax on cigarettes decreases both consumer and producer surplus:
Tax revenues will be less than the amount of the lost consumer and producer surplus.
The difference between what buyers pay for a unit of a good and what sellers receive is known as the:
Tax.
Define commodity taxes:
Taxes on goods, such as those on fuel, coffee, and liquor.
The elasticity of demand:
Tells us how responsive consumer purchases are to price changes.
How much oil does the Department of Energy's Energy Information Service (EIS) predict the ANWR will produce?
The Department of Energy's Energy Information Service (EIS) predicts the ANWR will produce about 800,000 barrels per day.
Define arbitrage:
The act of buying an item at a low price and reselling it at a higher price. This can be done across locations or over time. -Entrepreneurs who fail to compete by providing lower costs and better products suffer losses and eventually go bankrupt. -Resources will go to firms that are able to compete. -In a successful economy, there will be many unsuccessful firms.
What determines whether a demand curve is more or less elastic?
The availability of substitutes. The more substitutes, the more elastic the curve. A longer time horizon is going to make the curve more elastic. A broad category of product is going to be less elastic; a specific category is more elastic Luxuries are going to be more elastic. Bigger purchase sizes are going to be more elastic.
If the manager of a small ice cream shop desires to increase revenue, she should lower prices if,
The demand for ice creams is elastic.
A 20 year study concluded that a 10% increase in the price of soda would decrease the quantity of soda demanded by 7%.
The demand for soda is inelastic and equal to -0.7.
During the Middle Ages, the African city of Taghaza quarried salt in 200‑pound blocks to be sent to the salt market in Timbuktu, in present-day Mali. Travelers reported that Taghazans used salt instead of wood to construct buildings. Compared with other towns without big salt mines, was the demand for wood more elastic or less elastic in Taghaza? How do you know?
The demand for wood was MORE elastic because there were readily available SUBSTITUTES.
What is a subsidy wedge?
The difference between the price that sellers receive and the price that buyers pay, resulting from a subsidy.
Trade raises the economic well-being of a nation in the sense that:
The gains of the winners exceed the losses of the losers.
The value a person places on a good is revealed by:
The highest price that person is willing to pay for that good.
Is the price elasticity of demand for Steinway & Sons grand pianos likely to be greater than or less than the price elasticity of demand for grand pianos in general?
The price elasticity of demand for Steinway & Sons grand pianos is likely to be more elastic than the demand for grand pianos in general.
If a 5% increase in price results in a 10% decrease in the quantity demanded, then:
The price elasticity of demand is -10% / 5% = -2. Demand is elastic.
Learning Curve: In the United States in the 1970s, there were shortages of gasoline because:
The price of gasoline was controlled.
When cigarette taxes are raised, what is a potential social benefit that may result?
The quantity of cigarettes purchased will fall, as some consumers will stop smoking.
The price of elasticity of demand measures:
The responsiveness of the quantity demanded to changes in price.
Define deadweight loss:
The total of lost consumer and producer surplus when not all mutually profitable gains from trade are exploited.
Dead-weight loss is:
The value of the trades not made because of the 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?
The will fall.
Why is the demand curve for oil rather inelastic?
There are few widely available good substitutes for oil.
Harry runs a hot dog factory. Beef is a primary ingredient in Harry's hot dogs. Harry has been watching the cattle (beef) futures market and noticed that the 3-month future price is $50 more than the spot (current) price. Which statement is consistent with the speculation reflected in the futures price?
There was a disease that killed a large number of swine (a substitute) earlier today.
The government places excise (per unit) taxes on a variety of goods consumers buy, including gasoline, cigarettes, and alcoholic beverages. How would you describe the demand elasticity of goods most likely to be subject to excise taxes?
They tend to be inelastic.
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.
Extensive flooding in the Midwest decreases the world supply of corn. If corn is inelastically demanded, what will happen to total revenues from corn production?
They will rise.
What is the great economic problem?
To satisfy as many of our wants as possible with our scarce resources.
Government gun buyback programs designed to take guns off the street cause the demand for low-quality guns to increase. True or false?
True.
If two linear demand curves through a common point, then at any given quantity the curve that is flatter is more elastic. True or false?
True.
In the event of an oil supply disruption, the price system provides incentives to allocate oil away from low-value uses. True or false?
True.
When price increases and demand is elastic, revenue decreases. True or false?
True. PED= % change in Qd / % change in P. Demand is elastic = revenue and price move in opposite directions of each other.
Please determine whether the statements about speculation in the market are true or false.
True: -Speculators help to keep prices level and steady. -Speculation sometimes leads to lower prices than without speculation. False: -If speculators anticipate a price increase in the future, prices will initially drop when speculation occurs. -Speculators earn a profit by selling goods on the black market. -Speculation is only effective when there is a surplus of goods.
Suppose that in the quest to increase the number of insured, the government decides to implement a mandate that employers provide health insurance to all employees. Please categorize the items based on their truth or falsehood.
True: - Firms will substitute capital for labor if possible - Firms will likely employ fewer workers after the mandate. False: -The cost of health insurance mandate will be borne entirely by the employer. -Workers will benefit without any costs. -Workers are always worse off than before the mandate because their take home wage decreases.
Tyler buys a futures contract from Alex that gives him the right to buy 1,000 barrels of oil at $125 per barrel in 48 months. What happens in 48 months if the actual price per barrel of oil is $100?
Tyler must pay Alex $25,000.
How is revenue affected with elastic demand?
When demand is elastic, a reduction in price will increase revenue. -Revenue when price is $15: =$15 x 50 per week =$750 per week -Revenue when price is $10: =$10 x 100 per week =$1,000 per week
What happens to a demand curve if there are a lot of substitutes for a good?
When the price of a good goes up, people are going to switch from it towards the substitutes. This causes the quantity demanded of the original good to go down. A lot of substitutes means elastic demand.
Consider the graph. Move point A to the correct position on the demand curve when price is $40. Next, move point B to the correct position on the demand curve when price is $10. Now, consider a movement along this demand curve from A to B. Use the midpoint formula to calculate the percentage change in quantity demanded between A and B. Include a negative sign if the answer is negative; round to the nearest integer. a. Change in quantity demanded? Next, use the midpoint formula to calculate the percentage change in price between A and B. Include a negative sign if the answer is negative; round to the nearest integer. b. Change in price? What is the price elasticity of demand between these two points? Include a negative sign if the answer is negative; round to two decimals. c. Price Elasticity?
a. 67% =(600−300) / (600+300) 2 =300450 =.666×100 =66.6% b. -120% [(10−40) / (10+40) / 2)] =−30 / 25 =−1.2×100 =−120 c. -0.558% =66.6% / −120% =−0.55
Each scenario gives some information about price elasticity of demand. For each, calculate the missing data, and determine if the price change under consideration will increase, decrease, or not change the firm's total revenue. a. Honest Abe's Used Cars estimates the price elasticity of demand for their cars to be −3.1. Last month, Abe tried a new marketing scheme which decreased the number of cars sold by 95%. For the following numerical answers, please round your answer to one decimal. b. At Webs-R-Us, a website design company, the new manager has decided to increase the price of Webs-R-Us services by 15%. She estimates that the price elasticity of demand for Webs-R-Us is −0.50.
a. Abe must have INCREASED his prices by 30.65%. Abe's total revenue DECREASED. 95% / -3.1 = -30.65% b. The manager expects the number of websites designed to DECREASE by 7.5% and total revenue to INCREASE. -0.50 x 15% = -7.5%
For each of the following examples, calculate how much money each consumer spends at the low price and at the high price and decide whether the right answer for a question asking for the price elasticity of demand on a multiple‑choice exam would be (a) −2.33, (b) −1.17, (c) −1.00, or (d) −0.56. a. When the price of a movie ticket rises from $6 to $8 for senior citizens, Gary (a senior citizen) decides to go to the movies every other day (15 times per month) instead of every day (30 times per month). b. When the price of a large specialty coffee drink rises from $3 to $4, Martha reduces her weekly consumption from 7 to 5. c. When PX = $10.00, QDX = 30. When PX = $7.50, QDX = 40.
a. At the low price, he spends $180 per month, and at the high price, he spends $120. Since he spends more at the low price, demand must be elastic: a or b. This is a huge increase (from $120 to $180), however, so the answer is probably a. b. At the low price, she spends $21, and at the high price, she spends $20. Since she spends more at the low price, demand must be elastic: a or b. However, this is a small increase (from $20 to $21), so the answer is probably b. c. At the low price, revenue is $300. At the high price, revenue is $300. Therefore, demand is unit elastic: c.
The curves show the demand and supply for three different products (A, B and C). The government is looking to introduce a tax on one of these products to help meet its budget deficit. a. Which of these products should the government look to tax to minimize the dead-weight loss from the same size tax? b. Looking at the diagram you selected as the answer to the first question, which of the products is most likely to be represented by your selection?
a. B b. Cigarettes
The graph shows demand and supply in the market for airline tickets. The government decides to introduce an excise, or commodity, tax that pushes up the price for consumers from 𝑃e to 𝑃c and decreases the quantity supplied from 𝑄e to 𝑄1. Identify the areas that match the terms indicated. Each letter may be used multiple times, and some terms will require more than one letter to identify the appropriate area on the graph. a. Government tax revenue b. Producer surplus before tax c. Producer surplus after tax d. Consumer surplus before tax e. Consumer surplus after tax f. Dead-weight loss after tax
a. B; C b. C; D; G c. D d. A; B; F e. A f. F; G
The U.S. Department of Agriculture (USDA) has been concerned that Americans aren't eating enough fruits and vegetables, and they've considered ways to encourage people to eat these healthier foods. Use the information about the elasticity of demand for a selection of fruits in the table to answer the questions. Apple: -0.16 Banana: -0.42 Grapefruit: -1.02 Grapes: -0.91 Orange: -1.14
a. Based on these demand elasticity estimates, APPLES are most inelastically demanded. ORANGES are most elastically demanded. b. A 10% drop in price would cause an increase in total revenue from the sale of GRAPEFRUIT AND ORANGES. c. If the government could offer "10% off " coupons for only three of these fruits, and it wanted to have the biggest possible effect on quantity demanded, which three fruits should get the coupons? The best three choices are: ORANGES, GRAPEFRUIT, AND GRAPES.
Consider two scenarios giving some information about price elasticity of demand. For each scenario, calculate the missing data and determine if the price change under consideration will increase, decrease, or not change the firm's total revenue. Round your answers to two decimal places. a. At Betty's Burgers, the hamburgers have a price elasticity of demand equal to −4.05. Suppose the number of burgers Betty sells increases by 95.00% b. Patty's Putts increased the price of a round of miniature golf by 16%. Patty has calculated her price elasticity of demand at −0.72.
a. Betty's prices must have DECREASED by 23.46%. Betty can expect her total revenue to INCREASE. b. Patty can expect the number of golfers to DECREASE by 11.52%. Patty can expect her total revenue to INCREASE. price elasticity of demand = %Δ quantity demanded / %Δ price. Rearrange the equation to see how much prices must change to result in this change in quantity. 95.00% / -4.05 = 23.46%. Use the same process and the variables that correspond with Patty's Putts to determine how much Patty can expect quantity demanded to change when she raises prices. −0.72 × 16% = 11.52%. When demand is inelastic, changes in price and total revenue are directly related, meaning a price increase will result in higher total revenue, and vice versa. Demand for Patty's Putts is inelastic—because it is less than one—and she will therefore earn more revenue when she raises prices. When demand is elastic, changes in price and total revenue are inversely related, meaning a price increase will result in lower total revenue, and vice versa. Demand for Betty's Bugers is elastic—because it is greater than one—and she will therefore earn more revenue when she lowers prices.
Identify the scenarios as examples of elastic, inelastic, or unit elastic demand. a. When Ruko, a device used to stream movies at home, increases prices by 48 percent, total revenue decreases by 61 percent. b. When Cinema Supreme increases ticket prices by 12 percent, total revenue does not change. c. When Bluebox, a streaming service for foreign television shows and movies, increases its prices by 45 percent, total revenue increases by 34 percent.
a. Elastic b. Unit Elastic c. Inelastic -Elastic = 2nd number is bigger than 1st number. -Inelastic = 1st number is bigger than the 2nd number. -Unit elastic = both numbers are the same.
Determine whether each statement is true or false. a. Price ceilings result in resources being allocated to activities with the highest possible value. b. Price ceilings result in a reduction in mutually beneficial exchanges. c. Though they may face higher prices, consumers usually see an increase in product quality when price ceilings are imposed. d. A problem with price ceilings is that they lead to surpluses. e. When price ceilings are imposed, consumers pay lower explicit prices but often face higher costs in terms of waiting in line for goods and services.
a. False b. True c. False d. False e. True
Please complete the given statements about prices as signals to producers. a. When prices _____ in a product market, firms will open and begin to produce. b. Eventually, many firms will exit markets because they cannot compete, especially when prices ____ to a significant degree. c. A(n) _____ in price signals to entrepreneurs that consumers want that market expanded, while a(n) _____ in price signals an area consumers want contracted.
a. Increases b. Decreases c. Increase; Decrease
Suppose the city council in a large city decides to pass a law which forces landlords to charge a maximum rent of $750/month for a one-bedroom apartment. Prior to the rent control, the average rent for a one-bedroom apartment was $1,750/month. a. Which is likely to occur as a result of the price ceiling? b. The answer above is an example of:
a. Landlords will begin decreasing the quality of one-bedroom apartments by not making repairs or paying for upkeep. b. inefficiently low quality.
In the short run, the price elasticity of the demand and supply of electricity can be very low. a. How might revenue for the electricity industry change if one power plant were shut down for maintenance, reducing supply? b. If one power company owned many power plants, would it have a short-term incentive to keep all of its plants running, or could it have a short-term incentive to shut down a power plant now and then?
a. Revenue will INCREASE. b. Be tempted to shut a plant down arbitrarily now and then.
Which of the markets described is NOT an example of a prediction market? a. Several large investment firms collectively decide to purchase large amounts of sugar when the price is low in order to drive up its price on the world market, and then sell when the price is high. b. A national program for university statistics students allows them to place bets using fake money to buy shares in college football teams. c. The Recording Industry Association of America (the RIAA), the trade industry representing the American music business, uses an internal system among employees to speculate about future record sales. d. An online system allows users to predict electoral outcomes across the globe.
a. Several large investment firms collectively decide to purchase large amounts of sugar when the price is low in order to drive up its price on the world market, and then sell when the price is high.
Determine whether the items are characteristics of taxes, subsidies, or both. Assume that markets are perfectly competitive. a. increase the price that buyers pay. b. increase the price that sellers receive, c. create a wedge between the price that buyers pay and the price that sellers receive. d. are shared by both buyers and sellers. e. result in government revenue. f. result in a dead-weight loss.
a. Taxes b. Subsidies c. Both d. Both e. Taxes f. Both
For each of the following cases, assume the demand curves all pass through the same price and quantity point. State whether each demand curve is relatively steep or flat and whether a fall in price will raise total revenue or lower it. a. Elasticity of demand = 0.7 b. Elasticity of demand = 3.0 c. Elasticity of demand = 20.0 d. Elasticity of demand = 1.05 e. Elasticity of demand = 0.95
a. The demand curve is relatively STEEP so a fall in price will LOWER revenue. b. The demand curve is relatively FLAT so a fall in price will RAISE revenue. c. The demand curve is relatively FLAT so a fall in price will RAISE revenue. d. The demand curve is relatively FLAT so a fall in price will RAISE revenue. e. The demand curve is relatively STEEP so a fall in price will LOWER revenue.
a. Suppose that the city of Lethbridge decrees that all restaurants located within a 15 mile radius of the University of Lethbridge can charge no more than $1 a meal so that college students can eat out economically. Which statement is NOT a likely result of this price ceiling? b. Suppose that the city of Halifax decrees that all restaurants located within a 15 mile radius of the University of Halifax must charge at least $10 a meal so that college students can become more refined in their dining. What is a likely result of this price floor?
a. There will be food surpluses at many of the restaurants as quantity supplied exceeds quantity demanded at a price of $1 per meal. b. Some restaurants like Le Cordon Bleu will create rustic chicken and imported cheese paninis at $10 a sandwich to satisfy the refined demands of college students instead of its old $5 ham and cheese specials.
Which statement is NOT true about price signals? a. They tell the government what goods and services require price ceilings after a natural disaster. b. They allow entrepreneurs to examine what areas of the economy consumers want expanded. c. They lend themselves to interpretation by both consumers and politicians. d. They occur in free markets.
a. They tell the government what goods and services require price ceilings after a natural disaster.
Identify whether the statements about the economics of taxes are true or false. a. An excise tax can distort incentives and create missed opportunities for mutually beneficial transactions. b. When demand is elastic and supply is inelastic, the burden of a tax falls mainly on consumers. c. When demand is inelastic and supply is elastic, the burden of a tax falls mainly on producers. d. The incidence of a tax is determined by which group - buyers or sellers - must actually pay the government.
a. True b. False c. False d. False
Indicate whether each statement describes elastic, inelastic, or unit elastic demand. a. When Cowboy Blues lowers the price of their blue jeans by 12.0%, the number of jeans sold increases by 12.0%. b. When Cowboy Blues lowers the price of their blue jeans by 50.0%, the number of jeans sold increases by 22.0% c. When Cowboy Blues raises the price of their blue jeans by 48.0%, the number of jeans sold decreases by 57.0%. d. When Cowboy Blues lowers the price of their blue jeans by 35.0%, the number of jeans sold increases by 41.0%. e. When Cowboy Blues lowers the price of their blue jeans by 27.0%, the number of jeans sold increases by 5.0%.
a. Unit elastic. b. Inelastic. c. Elastic. d. Elastic. e. Inelastic. -Elastic = 2nd number is bigger than 1st number. -Inelastic = 1st number is bigger than the 2nd number. -Unit elastic = both numbers are the same.
Select the answers from the boxes that make each statement correct. a. In the long run, the shortages of available housing resulting from rent controls are _____ pronounced than (as) they are in the short run. b. One explanation for this is that in the long run, firms can makes changes to the amount of housing they provide _____ easily than (as) they can in the short run. c. Because of differences in firms' ability to make changes to quantity supplied, the long-run supply curve for housing is modeled as a line that is _____ steep than (as) the short-run supply curve. d. Therefore, supply is _____ elastic in the short run than (as) in the long run.
a. more b. more c. less d. less
Classify each scenario according to whether it occurs as a result of implementing a price floor or price ceiling. Assume that all scenarios have some form of price control. a. A 24-hour diner is now open only 20 hours a day. This could result from a: . b. If your favorite restaurant downsizes its portion sizes, this could be the result of a: . c. A shortage in the market for tie-dye shirts could result from a: d. Lawrence stands an hour in line at the local butcher's shop to obtain a mutton cutlet. Long waiting lines could result from a: e. A surplus of workers in the labor market could result from a: f. Suppose an airline offers unnecessarily lavish flights. This could result from a:
a. price ceiling. b. price ceiling c. price ceiling d. price ceiling e. price floor f. price floor
Many economists have estimated elasticities of oil demand. Let's see if a rise in the price of oil hurts oil revenues in the long run. Cooper, the author cited in this chapter, found that in the United States, the long‑run elasticity of oil demand is −0.5. a. If the price of oil rises by 10%, by how much will the quantity of oil demanded fall? b. Does a 10% rise in oil prices increase or decrease total revenues to the oil producers? c. Some policymakers and environmental scientists would like to see the United States cut back on its use of oil in the long run. We can use this elasticity estimate to get a rough measure of how high the price of oil would have to rise in order to get people to make big cuts in oil consumption. How much would a permanent rise in the price of oil have to be to cut oil consumption by 50%? d. France has the largest long‑run elasticity of oil demand (−0.6) of any of the large, rich countries. This suggests that France is ____ at responding to long‑run price changes than other rich countries.
a. the quantity demanded will fall by: 10% x -0.5 = -5%. Quantity demanded falls by 5%. b. Revenue will: Rise. c. the price would have to rise by: 100%. d. BETTER
Consumers are likely to be more sensitive to price changes for automobiles than for canned soft drinks because:
automobiles have more substitutes.
The same tax rate has been applied to both demand curves. Which statement is true? a. Area E + F + G + H + I + J is the producer surplus after the tax. b. After the tax, consumer surplus is area A using demand 2. c. Consumer surplus associated with demand 1 equals area J. d. Area C + D + F + G is the tax revenue associated with demand 2.
b. After the tax, consumer surplus is area A using demand 2.
Which statement explains why prices are so important in a market economy? (POSSIBLE EXAM QUESTION!! WRITTEN ANSWER!!!) a. They convey information regarding the value of good to consumers. b. They convey information regarding the value of resources in alternative uses. c. They hold a negative correlation with the producers' opportunity cost. d. They directly correlate with producer profits.
b. They convey information regarding the value of resources in alternative uses.
In the United States today: a. blat is rarely used. b. blat is used to a greater extent than in the past. c. blat is an essential part of everyday life. d. blat is illegal
b. blat is used to a greater extent than in the past.
Rent controls are a typical example of a price ceiling. Please select all likely consequences of rent controls when the price ceiling is binding. There is more than one correct answer. a. surplus of affordable housing b. inefficient allocation of apartments c. shortage of affordable housing d. reductions in apartment quality
b. inefficient allocation of apartments c. shortage of affordable housing d. reductions in apartment quality
Suppose the demand for pizza is inelastic and the supply of pizza is elastic, and the demand for cigarettes is inelastic and the supply of cigarettes is elastic. If a tax were levied on the sellers of both of these commodities, we would expect that the burden of:
both the pizza and the cigarette taxes would fall more heavily on buyers than on sellers.
If demand is more elastic than supply, more of the tax will be paid by:
buyers. If demand is more elastic than supply, buyers pay less and sellers pay more.
Which of the following is a correct statement about tax burdens? a. A tax burden falls most heavily on the side of the market that is more elastic. b. A tax burden is distributed independently of relative elasticities of supply and demand. c. A tax burden falls most heavily on the side of the market that is less elastic. d. A tax burden falls most heavily on the side of the market that is closer to unit elastic.
c. A tax burden falls most heavily on the side of the market that is less elastic.
A wage subsidy will: a. increase the unemployment rate, especially among low-skilled workers. b. reduce the wages received by workers. c. increase the number of workers employed. d. reduce the number of workers employed.
c. increase the number of workers employed.
What is the midpoint formula to produce a measure of the percentage change that is independent of the direction of the change?
change / average value. EX: (5-4) / 4.5 = 0.222 or 22.2%. It can also be done (4-5) / 4.5 = -0.222 or -22.2%. It approximates the percentage changes by selecting a point midway between the two values and using that point as a base.
Which statement is TRUE if the wheat futures price is much higher than the spot or current price of wheat? a. It is a sign that there will be an increase in supply very soon. b. It is a sign that the product is more valuable today than in the future. c. It is a sign that the market price is likely to fall. d. It is a sign that smart people with their own money on the line think that supply disruptions may soon occur.
d. It is a sign that smart people with their own money on the line think that supply disruptions may soon occur.
Which of the following will occur when a new tax is placed on satellite radio services? a. Consumers will end up with the entire burden of the new tax. b. The quantity of satellite radio services will rise to make up for the tax. c. The profits of satellite radio companies will rise. d. The price consumers pay will rise by less than the amount of the tax.
d. The price consumers pay will rise by less than the amount of the tax.
The long-run demand for oil _____ the short-run demand for oil. a. differs in elasticity in an indeterminate direction compared with b. is less elastic than c. is equally elastic to d. is more elastic than
d. is more elastic than (everything is more elastic in the long run than in the short run).
When a price is pushed below the market equilibrium price, the quantity:
demanded exceeds the quantity supplied.
In an "open access" city, where building new housing is less restricted, the supply of housing is:
elastic.
As an example of the use of blat in the former Soviet Union, if the manager of a small factory that made radios decided that he wanted some beef, he would have to:
find a worker in a slaughterhouse who needed a radio.
Anne managed a small leather goods factory in the former Soviet Union. She used blat when she needed beef, which means she had to:
find a worker in a slaughterhouse who needed leather goods.
A government subsidy does not:
increase market efficiency.
If the supply of a product is inelastic, a large price increase will:
only bring about a small increase in quantity supplied.
If price controls were the only way to help the poor, this might be a good argument in favor of price controls. However:
price controls are not always the only way to help the poor.
If gun buyback programs became very common, they could potentially increase the number of guns on the street because:
the buyback program acts like a free insurance policy, protecting the gun against a decrease in value.
The price elasticity of demand is:
the responsiveness of quantity demanded to changes in the price of the product.
Total revenues and elasticity:
A firm's revenues are equal to price per unit times quantity sold. Revenue = price x quantity (R = P x Q). Elasticity measures how much Qd goes down when P goes up.
Jena is a seller in a free market. This market must be:
A fully cooperative market.
What is a prediction market?
A market that uses prices as probabilities to make predictions
The graph depicts five demand curves. Please rank each curve in terms of elasticity. A curve that is more elastic than another curve for any given quantity can be considered more elastic.
1. C 2. E 3. B 4. D 5. A Elastic graphs look more horizontal while Inelastic graphs look more vertical.
Summary of demand curve and elasticity:
-For less elastic goods: that means fewer substitutes. Short run, less time to adjust, necessities, small part of the budget. Each of these factors makes the demand curve less elastic. -More elastic demand: that means more substitutes. Long run, more time to adjust. Luxuries, large part of the budget. These factors make a demand curve more elastic. -Elasticity means how responsive is the quantity demanded to a change in the price.
Define the price elasticity of demand:
A measure of the responsiveness of quantity demanded to a change in price. More responsive equals more elastic. Price elasticity of demand = percentage change in quantity demanded / percentage change in price.
Define price floor:
A minimum price allowed by law.
Define rent control:
A price ceiling on rental housing.
Suppose the cross-price elasticity of demand between one good and another good is 2. The good would be classified as:
A substitute.
Price floors result in:
A surplus.
Define the tax wedge:
A tax drives a tax wedge between the price paid by buyers and the price received by sellers. Tax = price paid by buyers - price received by sellers.
In analyzing international trade, we often focus on a country whose economy is small relative to the rest of the world. We do so:
Because then we can assume that world prices of goods are unaffected by that country's participation in international trade.
Shortages caused by rent controls:
Become more severe over time. Since long-run supply is more elastic than short-run supply, shortages caused by rent controls become more severe over time
Manuel uses personal connections to obtain scarce intermediate goods that he needs to make his bathroom soaps. In the former Soviet Union, this was called:
Blat
Given an upward-sloping supply curve and a downward-sloping demand curve, if the government imposes a $1 tax on 12-packs of mechanical pencils:
Both buyers and sellers will bear the burden of the tax.
Suppose the government in your city imposes a $0.50 tax on gasoline. The burden of paying the tax falls on:
Both buyers and sellers.
A government subsidy:
Causes a dead-weight loss in the market.
For each of the situations, please determine whether the futures price of the commodity listed will increase or decrease. Assume that there is a large demand for bananas in the United States and that Cuba is a supplier of bananas. Suppose that the President of the United States has signaled his/her intentions to lift the United States' trade embargo with Cuba within a year. In response to this new policy, the price of banana futures will likely
Decrease
A consumer buys a good in a market where people act in their own interests and actions are voluntary. What type of market is this?
Free market
Altus is a seller in a market where people act in their own interest and actions are cooperative and voluntary. What type of market is this?
Free market
Janet is a buyer in a market where people act in their own interests and actions are cooperative and voluntary. What type of market is this?
Free market
Michael is a buyer in a market where people act in their own interests, and actions are cooperative and voluntary. What type of market is this?
Free market
Which economist suggested that a tax could be set that would raise drug seller costs to the level that would exist with effective government law enforcement?
Gary Becker.
What is the simple rule of linear demand or supply curves for elasticity? (also known as elasticity rule)
If two linear demand or supply curves run through a common point, then at any given quantity, the curve that is flatter, more horizontal, that's the more elastic curve.
Define the law of one price:
Ignoring transaction costs, the same item should have the same price in all countries.
How does most economists refer to the price elasticity of demand?
In terms of its absolute value due to the price elasticity of demand is always a negative number and there is no information in the sign.
The demand for a necessity is likely to be ____ than the demand for a luxury.
Less elastic.
If speculators believe supply disruptions will occur, the futures price will be _____ the spot price.
Much higher than
Which country serves as a present-day cautionary tale against central planning?
North Korea
If the elasticity of demand for ballpoint pens with blue ink is −20, and the price of ballpoint pens with blue ink rises by 1%, what happens to the quantity demanded?
Quantity demanded changes by %.
If the elasticity of demand for college textbooks is −0.1, and the price of textbooks increases by 20%, how much will the quantity demanded change, and in what direction?
Quantity demanded changes by 2% in a down direction: Percentage change in quantity = 20% × −0.1 = −2%.
If the demand for cigarettes is perfectly inelastic, a $1 per unit tax on packs of cigarettes will:
Raise the price of cigarettes by $1.
Given an upward-sloping supply curve and a downward-sloping demand curve, a $1 per unit tax on packs of cigarettes will:
Raise the price of cigarettes by less than $1.
Once one considers the quality of consumers' time and the possible reductions in quality, price ceilings probably:
Reduce consumer surplus.
Would the supply of roofing nails in Fargo, North Dakota be relatively elastic or inelastic?
Relatively elastic. It would be easy to increase production at a constant unit cost; nails are a small share of the market for galvanized steel; and local supply in Fargo is more elastic than global supply.
If the price elasticity of supply for zinc is 00.27, then the price elasticity of supply for zinc is
Relatively inelastic.
Rent control policies tend to cause:
Relatively smaller shortages in the short run than in the long run because supply tends to be more inelastic in the short run than in the long run.
Samantha's Simple Stockades Fence Company can build fences for less than $1,000. This provides information about:
Samantha's opportunity cost.
A movie theater owner runs an experiment. She decreases prices by 2% and discovers that ticket sales increase by 5%. Also, she increases prices by 1% and discovers that sales decrease by 2%. What should the owner do to maximize revenue?
She should LOWER THE PRICE.
If the government imposes a $1 tax on farmers for every 5 pounds of oranges grown:
There will be a dead-weight loss in the orange market.
Why does government levy taxes?
To raise revenue
Ebenezer Scrooge has just been elected the new President of Christmasland. As his first action, he is thinking of introducing an excise (or commodity) tax on either Santa hats or Christmas lights. The demand and supply curves for both products are shown on the graphs. Use the graphs to answer the questions: a. What would be the total dead-weight loss of a $3 tax on Santa hats? b. What would be the total dead-weight loss of a $3 tax on Christmas lights? c. The dead-weight loss for Santa hats and the dead-weight loss for Christmas lights are different because the graph with the higher dead-weight loss has a more _____.
a. $3,000 b. $1,500 c. Elastic demand curve
Which one of the following statements about subsidies is NOT correct? a. Who benefits from the subsidy depends on the relative elasticities of demand and supply. b. Who actually receives the subsidy does not depend on who gets the check from the government. c. Subsidies cause dead-weight losses. d. Subsidies always increase the gains from trade for producers.
d. Subsidies always increase the gains from trade for producers.
The more substitutes for a product, the:
more elastic the demand for it.
When a tax is placed on the sellers of a product, buyers pay:
more, and sellers receive less than they did before the tax.
Consumer surplus falls after a tax because the price buyers pay _______ and the quantity exchanged _______.
rises; falls
In the former Soviet Union, all factory managers wanted:
shortages in the products that their own factories produced.
If the supply of a good is very elastic, then any increase in demand for the good will have a:
very small impact on the price of the good.
