ECON EXAM TWO

Income elasticity of demand measures how

the quantity demanded changes as consumer income changes.

Demand is said to be inelastic if

the quantity demanded changes only slightly when the price of the good changes.

We can say that the allocation of resources is efficient if

total surplus is maximized.

A seller's opportunity cost measures the

value of everything she must give up to produce a good.

Assume a positively sloped supply curve and a negatively sloped demand curve. If there is an increase in supply, total surplus:

will increase

Assume a positively sloped supply curve and a negatively sloped demand curve. If there is an increase in demand, total surplus:

will increase.

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

At Nick's Bakery, the cost to make a cheese danish is $1.50 per danish. As a result of selling 10 danishes, Nick experiences a producer surplus in the amount of $20. Nick must be selling his danishes for

$3.50 each.

Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book?

$8

If the price of a good increases by 2%, and the quantity demanded changes by 1%, then the price elasticity of demand is equal to:

.5

The state of Massachusetts recently saw an increase in the price of electricity of 10%, which brought about a fall in the quantity of electricity consumed of 2%. The price elasticity of demand is equal to _____, and demand is described as _____.

0.2; inelastic

If the price of strawberries increases by 20%, and the quantity of strawberries demanded decreases by 15%, then the price elasticity of demand is equal to:

0.75.

If a 15% increase in price for a good results in a 20 percent decrease in quantity demanded, the price elasticity of demand is

1.33

If the price of profiteroles decreases from $1.05 to $0.95, and the quantity demanded of profiteroles increases from 180 pastries to 220 pastries, then the price elasticity of demand, obtained using the midpoint method, is:

2

A manufacturer produces 400 units when the market price is $10 per unit and produces 600 units when the market price is $12 per unit. Using the midpoint method, for this range of prices, the price elasticity of supply is about

2.2

If the price elasticity of demand for a good is 2.0, then a 10 percent increase in price results in a

20 percent decrease in the quantity demanded.

Butter producers know that the price elasticity of demand for butter is 0.2. If they want to increase sales by 4%, they will have to lower price by:

20%

Which of the following could be the price elasticity of demand for a good for which a decrease in price would increase total revenue?

4

The price of gasoline rises by 1%, and the quantity of gasoline purchased falls by 5%. The price elasticity of demand is equal to _____, and demand is described as _____.

5; elastic

The state of Texas recently saw a gasoline price increase of 1%, which brought about a fall in the quantity of gasoline purchased of 5%. The price elasticity of demand is equal to _____, and demand is described as _____.

5; elastic

Which of the following causes a shortage of a good?

Binding price ceiling

Dallas buys strawberries, and he would be willing to pay more than he now pays. Suppose that Dallas has a change in his tastes such that he values strawberries more than before. If the market price is the same as before, then

Dallas's consumer surplus would increase.

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.

For which pairs of goods is the cross-price elasticity most likely to be positive?

Pens and pencils

What is the formula for calculating price elasticity of supply using the midpoint method?

Price Elasticity of Supply = [(Change in Quantity)/(Average Quantity)] / [(Change in Price)/(Average Price)]

Consider the U.S. market for chocolate, a market in which the government has imposed a nonbinding price ceiling. Which of the following events could convert the price ceiling from a nonbinding to a binding price ceiling?

South American cocoa bean producers refuse to ship to chocolate producers in the United States.

A price ceiling is

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

A price floor is

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

Which of the following observations would be consistent with the imposition of a binding price ceiling on a market? After the price ceiling is established,

a smaller quantity of the good is bought and sold.

If a binding price floor is imposed on the video game market, then

a surplus of video games will develop.

If the price of mangoes increases by 15% and the quantity demanded of mangoes decreases by 20%, then the price elasticity of demand is equal to:

approximately 1.33

To be binding, a price ceiling must be set at a price _____ the equilibrium price.

below

A surplus results when a

binding price floor is imposed on a market.

Suppose the government sets a price floor of $4.85 per bushel of wheat when the equilibrium price is $4.55 per bushel. This price floor will:

cause a surplus of wheat

Price ceilings and price floors that are binding

cause surpluses and shortages to persist because price cannot adjust to the market equilibrium price.

If the cross-price elasticity of two goods is negative, then the two goods are

complements.

Ariana bought a new pair of shoes at Nordstrom. When she walked out of the store, she thought, "I got such a great deal; I would have paid $40 more for these shoes!" This BEST represents the concept of:

consumer surplus.

The market for Chinook salmon is in equilibrium. A binding price ceiling in this market would cause:

deadweight loss, arising from a quantity bought and sold that is less than the equilibrium quantity.

If the government removes a binding price floor from a market, then the price paid by buyers will

decrease, and the quantity sold in the market will increase.

The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium price of chocolate

decreases, and producer surplus decreases.

A drought in California destroys many red grapes causing the prices of both red grapes and red wine to rise. As a result, the consumer surplus in the market for red grapes

decreases, and the consumer surplus in the market for red wine decreases.

A decrease in supply will cause the largest increase in price when

demand is inelastic and supply is elastic.

If the income elasticity of electric cars is positive:

electric cars are a normal good.

The cross-price elasticity of hydroelectric power with respect to the price of natural gas has been estimated as being equal to 0.26. This implies that:

electricity and natural gas are substitutes.

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.

The supply of aged cheddar cheese is inelastic, and the supply of bread 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.

greater in the bread market than in the aged cheddar cheese market.

Suppose the government sets a price floor that is below the equilibrium price of a good. The price floor will:

have no immediate effect on the price of the good.

If the government removes a binding price ceiling from a market, then the price paid by buyers will

increase, and the quantity sold in the market will increase.

When the price of candy bars is $1.00, the quantity demanded is 500 per day. When the price falls to $0.80, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for candy bars is

inelastic

Milk is an inexpensive good that most would consider a necessity. You would therefore expect its demand to be:

inelastic.

When the price of candy bars is $1.00, the quantity demanded is 500 per day. When the price falls to $0.80, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for candy bars is

inelastic.

To say that a price ceiling is nonbinding is to say that the price ceiling

is set above the equilibrium price.

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.

Suppose televisions are a normal good and buyers of televisions experience a decrease in income. As a result, consumer surplus in the television market

may increase, decrease, or remain unchanged.

Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price for widgets to $6, producer surplus

might increase or decrease.

Goods with many close substitutes tend to have

more elastic demands.

In the housing market, supply and demand are

more elastic in the long run than in the short run, and so rent control leads to a larger shortage of apartments in the long run than in the short run.

Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The income elasticity of demand for the good is

positive, and the good is a normal good.

A minimum price that the government guarantees farmers will receive for a particular crop is a(n):

price floor (or price support).

Rowena consumes 50% more liquid ink pens when the price of mechanical pencils increases by 25%. For Rowena, liquid ink pens and mechanical pencils are _____, and the cross-price elasticity of demand is _____.

substitutes; 2

Producer surplus is

the amount a seller is paid minus the cost of production.

If the cross elasticity of demand between cheese and yogurt is positive, then:

the demand for cheese and the demand for yogurt are both price elastic.

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.