Econ Exam 2 - Mea Ahlberg
Your younger sister needs $50 to buy a new bike. She has opened a lemonade stand to make the money she needs. Your mother is paying for all of the ingredients. She currently is charging 25 cents per cup, but she wants to adjust her price to earn the $50 faster. If you know that the demand for lemonade is elastic, what is your advice to her?
Lower the price to increase total revenue.
If an allocation of resources is efficient, then
all potential gains from trade among buyers are sellers are being realized. consumer surplus is maximized.
Using the midpoint method, if the price falls from $100 to $50, the price elasticity of demand is
inelastic
When OPEC raised the price of crude oil in the 1970s, it caused the United States'
nonbinding price ceiling on gasoline to become binding.
Under rent control, landlords can cease to be responsive to tenants' concerns about the quality of the housing because
with shortages and waiting lists, they have no incentive to maintain and improve their property.
Income elasticity of demand measures how
the quantity demanded changes as consumer income changes.
Cross-price elasticity of demand measures how
the quantity demanded of one good changes in response to a change in the price of another good.
Consider the market for gasoline. Buyers
would lobby for a price ceiling, whereas sellers would lobby for a price floor.
If the price a consumer pays for a product is equal to a consumer's willingness to pay, then the consumer surplus relevant to that purchase is
zero
Which of the following statements is valid when the market supply curve is vertical?
Market quantity supplied does not change when the price changes.
if the supply curve is S and the demand curve shifts from D to D', what is the increase in producer surplus due to new producers entering the market?
$625
Using the midpoint method, if the price falls from $100 to $50, the absolute value of the price elasticity of demand is
0.43
When the price of good A is $50, the quantity demanded of good A is 500 units. When the price of good A rises to $70, the quantity demanded of good A falls to 400 units. Using the midpoint method, the price elasticity of demand for good A is
0.67, and an increase in price will result in an increase in total revenue for good A.
Using the midpoint method, what is the price elasticity of supply between points C and D?
0.72
A manufacturer produces 330 units when the market price is $11 per unit and produces 450 units when the market price is $16 per unit. Using the midpoint method, for this range of prices, the price elasticity of supply is about
0.83
If a 30 percent change in price results in a 39 percent change in quantity supplied, then the price elasticity of supply is about
1.30, and supply is elastic.
In January, the price of dark chocolate candy bars was $2.00, and Willy's Chocolate Factory produced 80 pounds. In February, the price of dark chocolate candy bars was $2.50, and Willy's produced 110 pounds. In March, the price of dark chocolate candy bars was $3.00, and Willy's produced 140 pounds. Using the midpoint method, the price elasticity of supply of Willy's dark chocolate candy bars was about
1.42 when the price increased from $2.00 to $2.50 and 1.32 when the price increased from $2.50 to $3.00.
Which of the following could be the price elasticity of demand for a good for which an increase in price would decrease total revenue?
1.5
If the price elasticity of demand for a good is 2, then a 10 percent increase in price results in a
20.00 percent decrease in the quantity demanded.
If the price elasticity of supply is 1.2, and a price increase led to a 4.5 percent increase in quantity supplied, then the price increase is about
3.75
Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy aimed at reducing smoking changed the price of a pack of cigarettes from $2 to $6. According to the midpoint method, the government policy should have reduced smoking by
40%
Suppose the price elasticity of supply for cheese is 0.6 in the short run and 1.4 in the long run. If an increase in the demand for cheese causes the price of cheese to increase by 15 percent, then the quantity supplied of cheese will increase by
9 percent in the short run and 21 percent in the long run.
Consider the U.S. market for coffee, a market in which the government has imposed a nonbinding price ceiling. Which of the following events could convert the price ceiling from a non binding to a binding price ceiling?
Brazilian coffee bean producers refuse to ship to coffee producers in the United States.
Suppose there is an early freeze in California that reduces the size of the lemon crop. As the price of lemons rises, what happens to consumer surplus in the market for lemons?
Consumer surplus decreases
What happens to consumer surplus in the smart watch market if smart watches are normal goods and income of the smart watch buyers rises?
Consumer surplus may increase, decrease, or remain unchanged.
If the cost of producing chairs increases causing the price of chairs to increase, consumer surplus in the chair market will
Decrease.
Dalia says that she would smoke one pack of cigarettes each day regardless of the price. If she is telling the truth, Dalia's
Demand for cigarettes is perfectly inelastic
Which of the following is likely to have the most price elastic demand?
Diamond earrings
The distinction between efficiency and equality can be described as follows:
Efficiency refers to maximizing the size of the pie; equality refers to distributing the pie fairly among members of society.
If the price of orange juice rises, when is the price elasticity of demand likely to be the lowest?
Immediately after the price increase
Which of the following statements about agriculture in the United States is correct?
Increasing the supply of agricultural products typically benefits consumers but harms farmers as a group.
When the price of candy bars is $1.10, the quantity demanded is 480 per day. When the price falls to $0.90, the quantity demanded increases to 530. Given this information and using the midpoint method, we know that the demand for candy bars is
Inelastic.
For which pairs of goods is the cross-price elasticity most likely to be positive?
Pens and pencils
If the demand curve is D and the supply curve shifts from S' to S, what is the change in producer surplus?
Producer surplus increases by $1,875.
Which of the following is true when the price of a good or service rises?
Some buyers exit the market.
Which of the following is not correct?
Taxes levied on sellers and taxes levied on buyers are not equivalent.
You receive a paycheck from your employer, and your pay stub indicates that $300 was deducted to pay the FICA (Social Security/Medicare) tax. Which of the following statements is correct?
The $300 that you paid is not necessarily the true burden of the tax that falls on you, the employee.
For a particular good, a 14 percent increase in price causes a7 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?
The market for the good is broadly defined.
Which of the following is not a determinant of the price elasticity of demand for a good?
The steepness of the supply curve for the good
Suppose buyers of fountain drinks are required to send $1.10 to the government for every fountain drinkthey buy. Further, suppose this tax causes the effective price received by sellers of fountain drinks to fall by $0.55 per fountain drink. Which of the following statements is correct?
This tax causes the demand curve for fountain drinks to shift downward by $1.10 at each quantity.
You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles, yours would
be positive, and your roommate's would be negative.
Suppose that the demand for picture frames is highly inelastic, and the supply of picture frames is highly elastic. A tax of $1 per frame levied on picture frames will increase the price paid by buyers of picture frames b
between $0.50 and $1.
Dawn's bridal boutique is having a sale on evening dresses. The increase in consumer surplus comes from the benefit of the lower prices to
both existing customers who now get lower prices on the gowns they were already planning to purchase and new customers who enter the market because of the lower prices.
A decrease in supply will cause the smallest increase in price when
both supply and demand are elastic.
Under rent control, bribery is a potential mechanism to
bring the total price of an apartment (including the bribe) closer to the equilibrium price.
If a tax is levied on the sellers of shrimp, then
buyers and sellers will share the burden of the tax.
If a consumer places a value of $15 on a particular good and if the price of the good is $17, then the
consumer does not purchase the good.
Steak and chicken are substitutes. A sharp reduction in the supply of steak would
decrease consumer surplus in the market for steak and increase producer surplus in the market for chicken.
Scenario 5-2 The supply of pickles is inelastic, and the supply of rice is elastic.Both goods are considered to be normal goods by a majority of consumers.Suppose that a large income tax increase decreases the demand for both goods by 10 percent. Refer to Scenario 5-2. The equilibrium quantity will
decrease in both the pickles and rice markets.
If the government imposes a binding price ceiling on a market, then the price paid by buyers will
decrease, and the quantity sold in the market will decrease.
Scenario 5-2 The supply of pickles is inelastic, and the supply of rice is elastic.Both goods are considered to be normal goods by a majority of consumers.Suppose that a large income tax increase decreases the demand for both goods by 10 percent. Refer to Scenario 5-2. Total consumer spending on pickles will
decrease, and total consumer spending on rice will decrease
When small changes in price lead to infinite changes in quantity demanded, demand is perfectly
elastic, and the demand curve will be horizontal.
Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the
flatter the demand curve will be.
Most labor economists believe that the supply of labor is
less elastic than the demand, and, therefore, workers bear most of the burden of the payroll tax.
The supply of a good will be more elastic, the
longer the time period being considered
Suppose researchers at the University of Wisconsin discover a new vitamin that increases the milk production of dairy cows. If the demand for milk is relatively inelastic, the discovery will
lower both price and total revenues.
One disadvantage of government subsidies over price controls is that subsidies
make higher taxes necessary.
A result of welfare economics is that the equilibrium price of a product is considered to be the best price because it
maximizes the combined welfare of buyers and sellers.
Goods with many close substitutes tend to have
more elastic demands
The burden of a luxury tax usually falls
more on the middle class than on the rich.
When a tax is placed on the sellers of a product, buyers pay
more, and sellers receive less than they did before the tax.
If two goods are complements, their cross-price elasticity will be
negative
As a result of a decrease in price,
new buyers enter the market, increasing consumer surplus
Moving production from a high-cost producer to a low-cost producer will
raise total surplus
Which of the following is likely to have the most price inelastic demand?
salt
Suppose that in a particular market, the supply curve is highly inelastic and the demand curve is highly elastic. If a tax is imposed in this market, then the
sellers will bear a greater burden of the tax than the buyers.
Which of the following statements is not correct concerning government attempts to reduce the flow of illegal drugs into the country? Drug interdiction
shifts the demand curve for drugs to the left.
For a good that is a necessity, demand
tends to be inelastic
In the 1970s, long lines at gas stations in the United States were primarily a result of the fact that
the U.S. government maintained a price ceiling on gasoline.
If the price of almonds rises, many people would switch from consuming almonds to consuming pecans.But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of
the availability of close substitutes in determining the price elasticity of demand.
Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result,
the equilibrium quantity decreases, and the equilibrium price is unchanged.
Suppose the market demand curve for a good passes through the point (quantity demanded = 100, price = $25). If there are five buyers in the market, then
the marginal buyer's willingness to pay for the 100th unit of the good is $25.
You are in charge of the local city-owned aquatic center. You need to increase the revenue generated by the aquatic center to meet expenses. The mayor advises you to increase the price of a day pass. The city manager recommends reducing the price of a day pass. You realize that
the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.
A simultaneous increase in both the demand for tablets and the supply of tablets would imply that
the value of tablets to consumers has increased, and the cost of producing tablets has decreased.
If a price floor is not binding, then
there will be no effect on the market price or quantity sold.
In the market for apartments, rent control causes the quantity supplied
to fall and quantity demanded to rise.
Zima says that she will spend exactly $25 each month on new apps for her mobile device, regardless of the price of apps. Zima's demand for apps is
unit elastic
The Earned Income Tax Credit, a government program that supplements the incomes of low-wage workers, is an example of a
wage subsidy.
For which of the following goods is the income elasticity of demand likely lowest?
water
Scenario 5-1 Suppose the demand function for good X is given by: Qdx = 15 − 0.5Px − 0.8Py where Qdx is the quantity demanded of good X, Px is the price of good X, and Py is the price of good Y, which is related to good X. Refer to Scenario 5-1.Using the midpoint method, if the price of good X is constant at $10 and the price of good Y decreases from $10 to $8, the cross-price elasticity of demand is about
−2.57, and X and Y are complements.