Micro Exam #2
Kelly is willing to pay $5.20 for a gallon of gasoline. The price of gasoline at her local gas station is $3.80. If she purchases ten gallons of gasoline, what is her consumer surplus?
$14
If the market price for a good is $16, and the government imposes a $14 sales tax per unit, what is the per-unit burden of the tax on buyers? (the price buyers pay is $24 and the price sellers receive is $10)
$6
Mark purchases a book for $6, and his consumer surplus is $2. How much is Mark willing to pay for the book?
$8
Tyler purchases 5 pounds of hot dogs per month when his monthly income is $2,000 and 4 pounds of hot dogs per month when his monthly income is $2,200. What is Tyler's income elasticity of demand for hot dogs?
-2.33
Using the midpoint method, the price elasticity of demand for a good is computer to be approximately 2. What is the change in the quantity of the good demanded if there is a 0.1 percent increase in the price of the good?
0.2
What are consequences of sales tax?
1. market size shrinks 2. buyers pay more than original price without tax 3. sellers receive less than original price 4. buyer's price is always higher than seller's price
Suppose that when the price of good X increases from $800 to $850, the quantity demanded of good Y increases from 65 to 70. Using the midpoint method, what is the cross price elasticity of demand?
1.213
When the price of an eBook is $15.00, the quantity demanded is 400 eBooks per day. When the price falls to $10.00, the quantity demanded increases to 700. Given this information, what type of elasticity does the demand for eBooks have?
1.36
Suppose the price of a bag of tortilla chips decreases from $3.00 to $2.50 and, as a result, the quantity of tortilla chips demanded increases from 200 bags to 300 bags. Using the midpoint method, what is the price elasticity of demand for tortilla chips?
2.2
Suppose the price of a bag of frozen chicken nuggets decreases from $6.50 to $5.75 and, as a result, the quantity of bags demanded increases from 600 to 800. Using the midpoint method, what is the price elasticity of demand for frozen chicken nuggets?
2.33
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 how much?
40%
When elasticity = 1, price and total revenue do what?
TR remains constant when price changes
What is an excludable good?
a good that it is possible to exclude others who have not paid for it; e.g. tacos, internet access
The term market failure refers to what?
a market that fails to allocate resources efficiently
Suppose the government wants to encourage Americans to exercise more, so it imposes a binding price ceiling on the market for in-home treadmills. What happens as a result?
a shortage of treadmills will develop
For a particular good, a 5% increase in price causes a 15% decrease in quantity demanded. Which of the following statements is most likely applicable to this good? a. There are many substitutes for the good b. The good is a necessity c. The market for the good is broadly defined d. The relevant time horizon is short
a. There are many substitutes for this good
How do you find deadweight loss?
area of triangle next to tax revenue rectangle
What are some determinants of price elasticity of demand?
availability of close substitutes have more elastic demand; necessities (inelastic) vs. luxuries (elastic)
Suppose the government has imposed a price floor on cellular phones. Which of the following events could transform the price floor from one that is binding to one that is not binding? a. cellular phones become less popular b. traditional landline phones become more expensive c. the components used to produce cellular phones become less expensive d. firms expect the price of cellular phones to fall in the future
b. traditional landline phones become more expensive
When looking at a demand curve, what is the new consumer surplus after an increase in price?
black triangle
When looking at a supply curve, what is the new producer surplus after an increase in price?
black triangle
When looking at a demand curve, what is the additional consumer surplus to existing consumers after an increase in price?
blue rectangle
When looking at a supply curve, what is the additional producer surplus to existing producers after an increase in price?
blue rectangle
Governments can improve market outcomes for what?
both public goods and common resources
What kind of good has negative cross price elasticity of demand?
complements
Suppose you are in charge of setting prices at a local ice cream shop. The business needs to increase its total revenue, and your job is on the line. You evaluate the data and determine that the price elasticity of demand for ice cream at your shop is 1.8. What should you do?
decrease the price of ice cream
What does deadweight loss show?
diminished welfare
If demand is price elastic, how do buyers respond?
do not respond much to a change in price
When the price of chai tea lattes is $5, Maxine buys 20 per month. When the price is $4, she buys 30 per month. What kind of elasticity of demand does Maxine have?
elastic, and her demand curve would be relatively flat
What determines the tax burden ratio?
elasticity: more elastic goods put more burden on sellers, more inelastic goods put more burden on buyers
What can market failure be caused by?
externalities, public goods, open access to common resources, informational problems (asymmetric info, moral hazards)
What would the demand curve representing the demand for luxury goods with several close substitutes look like?
fairly elastic
What does a unit elastic demand curve look like?
flat
Resources tend to be allocated inefficiently when what happens?
goods are available free of charge
In general, elasticity is a measure of what?
how much buyers and sellers respond to changes in market conditions
If the government removes a binding price ceiling from a market, then the price received by sellers will do what?
increase, and the quantity sold in the market will increase
An increase in price causes an increase in total revenue when demand is what?
inelastic
There are very few, if any, good substitutes for motor oil, so what kind of elasticity of demand would it have?
inelastic
What kind of good has negative income elasticity of demand?
inferior goods
In a competitive market free of government regulation, what happens to price?
it adjusts until quantity demanded equals quantity supplied
If demand is elastic and price goes up, what happens to total revenue?
it decreases
When elasticity = 1...
it has unit elasticity
If demand is inelastic and price goes up, what happens to total revenue?
it increases
What happens when the price ceiling is set below the market price?
it is binding, causes a shortage, and causes the quantity demanded to exceed the quantity supplied
What happens when the price floor is set above the market price?
it is binding, causes a surplus, and causes the quantity supplied to exceed the quantity demanded
When elasticity > 1...
it is elastic
When elasticity < 1...
it is inelastic
What happens when the price ceiling is set above the market price?
it is nonbinding and nothing changes
What happens when the price floor is set below the market price?
it is nonbinding and nothing changes
The particular price that results in quantity supplied being equal to quantity demanded is the best price because why?
it maximizes the combined welfare of buyers and sellers
What will happen to the price elasticity of demand for mobile phones if consumers perceive mobile phones to be a necessity?
it will be lower
What kind of income elasticity of demand do luxuries have?
large and positive
In a market economy, government intervention does what?
may improve market outcomes in the presence of externalities
When elasticity is > 1, price and total revenue do what?
move in opposite directions
When elasticity is < 1, price and total revenue do what?
move in the same direction
What are some important public goods?
national defense, basic research, and antipoverty programs
What kind of cross price elasticity of demand do complements have?
negative
What kind of income elasticity of demand do inferior goods have?
negative
Are public goods excludable or non-excludable? Rival or non-rival?
non-excludable and non-rival
What kind of good has positive income elasticity of demand?
normal goods
Are common resources excludable? Rival?
not excludable and rival
If a nonbinding price ceiling is imposed on a market, what happens to the quantity sold in the market?
nothing/stays the same
What is a good that is rival in consumption?
one person's use of it diminishes another's use; e.g. fish tacos
What is a free-rider?
person who receives the benefit of a good but avoids paying for it
What kind of cross price elasticity of demand do substitutes have?
positive
What kind of income elasticity of demand do normal goods have?
positive
For private goods allocated in markets, what guides decisions of buyers and sellers? What do these decisions lead to?
prices guide decisions of buyers and sellers and these decisions lead to an efficient allocation of resources
What are market-based policies?
provide incentives so that private decision-makers will choose to solve the problem on their own; e.g. corrective taxes and subsidies or tradable pollution permits
Demand is said to be elastic when what?
quantity demanded changes proportionately less than price
Suppose the equilibrium price of a tube of toothpaste id $2, and the government imposes a price floor of $3 per tube. What will happen as a result?
quantity demanded decreases, quantity supplied increases, there is a surplus
When looking at a demand curve, what is the initial consumer surplus?
red triangle
When looking at a supply curve, what is the initial producer surplus?
red triangle
When consumers face rising gasoline prices, they typically do what?
reduce their quantity demanded more in the long run than in the short run
What are command-and-control policies?
regulate behavior directly; e.g. limits on quality of pollution emitted or requirements that firms adopt a particular technology to reduce emissions
What kind of income elasticity of demand do necessities have?
smaller and positive
What would a demand curve that is perfectly inelastic look like?
straight up and down
What kind of good has positive cross price elasticity of demand?
substitutes
When a buyer's willingness to pay for a good is equal to the price of the good, what happens?
the buyer is indifferent between buying the good and not buying it
When is supply more elastic?
the long run
What do advocates of the minimum wage emphasize?
the low annual income of those who work for minimum wage
How do you find tax revenue when looking at supply and demand curve?
the rectangle's area
Suppose that gasoline prices increase dramatically this month. Lola commutes 100 miles to work each weekday. Over the next few months, Lola drives less on the weekends to try to save money. Within the year, she sells her home and purchases one only 10 miles from her place of employment. What does this illustrate the importance of?
the time horizon in determining the price elasticity of demand
What are determinants of the price elasticity of demand for a good?
the time horizon, the definition of the market for the good, the availability of substitutes for the good
When there is taxation, how many market actors are there?
three
What do public goods tend to be? Common resources?
under-provided; over-consumed
Suppose Larry, Moe, and Curly are bidding in an auction for a mint-condition video of Charlie Chaplin's first movie. Each has in mind a maximum amount that he will bid. What is this called?
willingness to pay
A demand curve reflects what?
willingness to pay of all buyers in the market, value each buyer in the market places on the good, highest price buyers are willing to pay for each quantity