LC3: LearningCurve: Ch. 3: Using Supply and Demand to Analyze Markets

Which of the following best explains why a tax creates a deadweight loss for a market with no market failures?

If there are no market failures and if property rights are well defined, total surplus is maximized at the market equilibrium. A government intervention, such as a tax, causes the market to move away from the market equilibrium and reduce total surplus creating a deadweight loss.

The market demand curve is given by QD = 150 − 2P, while the market supply curve is given by QS = 5P − 25. If the government enacts a price floor of $50 per unit, what is the loss in consumer surplus?

The consumer surplus falls $1,875 as a result of the price floor. The implementation of the $50 price floor has caused the price to increase from $25 to $50. The consumer surplus before the price floor is $2,500 and after the price floor is $625.

Producer surplus is:

The difference between the price producers actually receive for their goods and the cost of producing them.

The demand for mill worker hours is given by QD = 1,000 − 70W, where W is the wage rate per worker hour. The supply of mill worker hours is given by QS = 25W − 140. The local government would like for mill workers to be covered by health-care insurance; however, the mill does not currently provide coverage. For this reason, the local government imposes a $5 tax on the mill for each worker hour it hires. The government plans to use this tax revenue to purchase health-care insurance for the mill workers. What portion of the tax is paid for by mill workers (supply) and what portion is paid for by the mill (demand)?

The mill workers pay 73.68% of the tax imposed on the mill, while the mill pays 26.32% of the tax. The portion of the tax paid by the mill is ES/ (ES + (|ED|)).

A nonbinding price ceiling is

a price ceiling set at a level above equilibrium price.

Consumer surplus measures the full benefit of the new product because it tells us how much:

consumers value the product over and above the price they pay. why: A high willingness to pay on the part of consumers indicates that a product is viewed as very important.

The producer surplus after the price control law is:

everything below the capped price and above the supply curve. Why: The regulated price has altered how much suppliers produce and the price they now charge.

The economic unit that actually pays a tax is called the

tax incidence

Demand is given by QD = 105 − 1.5P, where QD is in millions of tires per year. Supply is QS = 1.5873P − 15.873. Assuming the effective tax is $20 per tire, producer surplus after the tax is imposed will be about:

$300 After the tax is imposed, sellers would face the price of $29.4345 per tire and sell 30.8483 million tires per year. The producer surplus after tax can be calculated by 1/2 × (29.4345 − 10) × 30.8483.

Which of the following equations could describe a consumer surplus triangle area?

0.5 × (quantity sold) × (PDChoke − market price) why: When there is no deadweight loss, the area representing consumer surplus would be a triangle with this area.

The demand for gasoline is given by QD = 15 − 0.5P. If the price per gallon falls from $4 per gallon to $2 per gallon, what is the gain in consumer surplus?

27 The quantity of gasoline would increase from 13 gallons to 14 gallons. The consumer surplus increases from $169 to $196.

Demand is given by QD = 105 − 1.5P, where QD is in millions of tires per year. Supply is QS = 1.5873P − 15.873. Suppose the U.S. government creates a subsidy of $5 per tire paid to tire producers. After the subsidy is imposed, what approximately will the seller's price (PS) be?

41 This is higher than the free-market equilibrium price, but not $5 higher. The new equilibrium price is 36.68 and the new quantity is 50.13.

Demand is given by QD = 105 − 1.5P, where QD is in millions of tires per year. Supply is QS = 1.5873P − 15.873. Suppose instead of a tax the U.S. government creates a subsidy of $5 per tire paid to tire producers. After the subsidy is imposed, what will the seller's price (PS) be?

41.58

Demand is given by QD = 105 − 1.5P, where QD is in millions of tires per year. Supply is QS = 1.5873P − 15.873. Suppose instead of a tax the U.S. government creates a subsidy of $5 per tire paid to tire producers. After the subsidy is imposed, the deadweight loss will be $ _____ million. Round your answer to the nearest integer value and enter your answer without the $ sign. Be aware of rounding errors.

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