ECON 2302 - Ch. 4 Markets & Government (LC & HW)

Markets work most efficiently when:

there are many buyers and sellers

Consumer surplus is shown graphically as the area:

under the demand curve and above the market price

If Brad buys a textbook costing $100 for which he is willing to pay $110, then the consumer surplus is:

$10

rivalrous, nonrivalrous, excludable, or nonexcludable: The air we breathe

nonrivalrous and nonexcludable

T/F: Market failure occurs when either external costs or benefits are present.

True

T/F: Price ceilings result in a reduction in mutually beneficial exchanges.

True

T/F: A problem with price ceilings is that they lead to surpluses.

False

Consumer surplus is the difference between the market price and:

willingness-to-pay

Nicole has a hockey puck from the 2018 Winter Olympic Games and puts it up for sale on eBay. She will only sell the puck if the winning bid is greater than or equal to $500. After bidding closes, the last bid stands at $501. Nicole's surplus:

$1.00

Suppose Alexandra is willing to pay $200 for a tablet and she has $53 worth of consumer surplus. What is the market price of the tablet?

$147

Jeff finds some steaks for $16 for which he would have been willing to pay $20 The butcher notices the meat is near the expiration date and gives him an extra 75% off. Jeff's surplus:

$16

Deadweight Loss:

A measure of the reduction in social welfare associated with an inefficient outcome.

T/F: When price ceilings are imposed, consumers pay lower explicit prices but often face higher cost in terms of waiting in line for goods and services.

True

Suppose that Michelle buys a cappuccino from Paul's Cafe and Bakery for $6.25$6.25. Michelle was willing to pay up to $8.25$8.25 for the cappuccino, and Paul's Cafe and Bakery was willing to accept $3.25$3.25 for the cappuccino. Based on this information, answer the questions. Michelle's consumer surplus:

$2.00

Suppose that Michelle buys a cappuccino from Paul's Cafe and Bakery for $6.25$6.25. Michelle was willing to pay up to $8.25$8.25 for the cappuccino, and Paul's Cafe and Bakery was willing to accept $3.25$3.25 for the cappuccino. Based on this information, answer the questions. Paul's Cafe and Bakery's producer surplus:

$3.00

Suppose Marco is willing to pay $15/hr. On Tuesday, he will tutor Kelly for $1/hr. and Mike $3/hr. Kelly will pay $30/hr, but Mike will only pay $20/hr, since he has a longer tutoring session. How much producer supplies will Marco gain from tutoring both Kelly and Mike?

$30

Alice is willing to spend $30 on a pair of jeans, and has a coupon for $10 off which she found online. She selects and purchases a pair of jeans which cost $35 pre-discount. Alice's surplus:

$5

Example of Price Gouging:

A deadly tornado strikes Oklahoma City, destroying the homes of 50% of its population. Immediately afterward the price of sleeping bags increases by 150%.

T/F: Market failure can occur only in the presence of external costs.

False

T/F: Market failure occurs when external benefits are present but not when external costs are present.

False

T/F: Market failure occurs when external costs are present but not when external benefits are present.

False

T/F: Price ceilings result in resources being allocated to activities with the highest possible value.

False

T/F: Though they may face higher prices, consumers usually see an increase in product quality when price ceilings are imposed.

False

Price Ceiling

Government making it illegal to charge a price above a certain threshold.

Suppose the equilibrium price for double-scoop ice cream cone is $4 but the market price falls to $2. Miguel is still able to make a small profit at this lower price, so he stays in business. Jen, who was able to make a small profit by selling ice cream cones at $4, goes out of business as prices fall. Benny brought the ice cream cones at the higher prices from Jen and is delighted to buy them at a lower price from Miguel. April, who previously did not purchase ice cream cones, is willing to pay the lower price, so she buys them from Miguel. Which individual experiences a reduction in his or her surplue?

Jen

T/F: Market failure is when free markets provide a suboptimal amount of goods and services.

True

What happens to consumer surplus and producer surplus if the equilibrium price of a product is $500 but the product currently sells for $200?

Producer surplus decreases, but consumer surplus could either increase or decrease.

Airline ticket prices typically increase during the holidays. Madeline paid $800 for a ticket to San Francisco over the holiday break. Four months ago, she paid $450 to fly to San Francisco. Who benefits from this price increase?

The airlines still able to sell tickets during the holiday season benefit.

Producer Surplus

The difference between the price a firm receives for a good and the actual cost of that good.

Consumer Surplus

The difference between what a person is willing to pay for a good and what the person actually pays.

Suppose the equilibrium price for bicycle tries is $42 but the market price rises to $67. What happened to the total surplus in this market?

Total surplus decreases

T/F: Government sometimes intervenes when market failure occurs.

True

Price Floor

When the price of a good is forced above the equilibrium price.

The equilibrium wage for hiring a low-skilled worker is $10/hr, but the government has set a minimum wage of $12/hr. What will be the result of this minimum wage policy?

a surplus of labor

At what level would you expect prices to settle during a period of price gouging?

above the pre-gouging market price

Producer surplus is shown graphically as the area:

above the supply curve and below the market price

The lease on Allison's apartment will expire next month, and she wants to move closer to campus. There are two apartments that she likes. Both are close to campus and in her price range. The first one is next door to a garage where local bands often practice late at night. The second one is next door to a donut shop that opens at 5 a.m. If her roommate hates loud music and the smell of donuts makes her sick, she will reject both apartments due to what she sees as:

an external cost

What would cause an increase in producer surplus?

an increase in price due to rising consumer income

Jodi wants to sell her motorcycle, and Gregory is looking for a used motorcycle to buy. Gregory takes it for a test drive. Jodi knows that the clutch is going out on her motorcycle, the fuel filter is leaking, and the tires will need to be replaced soon. If she does not disclose this information to Gregory and he cannot tell from his test drive, this is an example of

asymmetrical information

Alice is willing to spend $30 on a pair of jeans, and has a coupon for $10 off which she found online. She selects and purchases a pair of jeans which cost $35 pre-discount. Alice experiences a:

consumer surplus

Jeff finds some steaks for $16 for which he would have been willing to pay $20 The butcher notices the meat is near the expiration date and gives him an extra 75% off. Jeff experiences a:

consumer surplus

The lease on Allison's apartment will expire next month, and she wants to move closer to campus. There are two apartments that she likes. Both are close to campus and in her price range. The first one is next door to a garage where local bands often practice late at night. The second one is next door to a donut shop that opens at 5 a.m. If she is a morning person and loves the smell of donuts, she will view the donut shop as a(n):

external benefit

The lease on Allison's apartment will expire next month, and she wants to move closer to campus. There are two apartments that she likes. Both are close to campus and in her price range. The first one is next door to a garage where local bands often practice late at night. The second one is next door to a donut shop that opens at 5 a.m. If she likes to stay up late and loves listening to all kinds of music, she will view the bands practicing as a(n):

external benefit

Many governments have implemented their action plans to tackle the problems of climate change. One goal is to promote sustainable product beacause it generates:

external benefits

Markets exhibit efficiency when every buyer and seller eager to buy or sell goods is able to do so. When this happens, _________________________ maximized.

gains from trade are

Increased demand has driven up helium prices dramatically over the past several years. Because of this, the cost of helium-filled birthday balloons quadrupled. Who might benefit from the price increase?

helium producers still able to sell helium at the higher price

rivalrous, nonrivalrous, excludable, or nonexcludable: A toll road in normal traffic

nonrivalrous and excludable

A price ceiling is a(n) _________________ price for a good.

maximum

The equilibrium price of a bushel of wheat is $6.50. The government has put a price ceiling of $8 on a bushel of wheat. What will be the result of this price ceiling?

no effect

The equilibrium price of a gallon of milk is $3, but the government has put a price ceiling of $4 on all gallon bottles of milk. What will be a result of this price ceiling?

no effect

Nicole has a hockey puck from the 2018 Winter Olympic Games and puts it up for sale on eBay. She will only sell the puck if the winning bid is greater than or equal to $500. After bidding closes, the last bid stands at $501. Nicole experiences a:

producer surplus

Example of a Price Ceiling:

rent-controlled apartments in New York City during WWII

rivalrous, nonrivalrous, excludable, or nonexcludable: A sports team t-shirt

rivalrous and excludable

rivalrous, nonrivalrous, excludable, or nonexcludable: Atlantic bluefin tuna in the Mediterranean Sea

rivalrous and nonexcludable

Producer surplus is the difference between:

the market price and the minimum price a seller is willing to accept

Consumer surplus is equal to the difference between:

the maximum price a buyer is willing to pay and the market price