Micro Week 2
The price of product A is cut by 30%. As a result, the quantity demanded of product B rises by 40%. The cross-price elasticity of demand between product A and product B is _____, and they are _____.
-1.33; complements
The price of milk at the local grocery store rises by 25%, and the quantity of milk demanded falls by 10%. The absolute value of the price elasticity of demand for milk is _____, and demand is _____.
.4 inelastic
If income rises by 20% and the quantity demanded of an item rises by 10%, the income elasticity of demand for this item is:
.5
The price of milk at the local grocery store is cut by 15%, and the quantity of milk demanded increases by 10% in response. What is the absolute value of the price elasticity of demand for milk?
.67
In 2017, Hurricane Irma had a significant, negative impact on the orange harvest in the state of Florida. The U.S. Department of Agriculture predicted that the quantity of oranges produced would be 21% lower than the previous year. If the price elasticity of demand for oranges is -1.5, what impact would Hurricane Irma have on the price of oranges? change in the price of oranges:
14 change in d/change in p= PED plug and chug
Congratulations! You have just landed your first job out of college as an economic analyst at the Bureau of Labor Statistics. Your starting salary is $55,000 per year; an increase of 250% per year over the salary you made at the local coffee shop. The corresponding table gives the percentage change in your purchases of each good after your income increases. Use this information to estimate your income elasticity of demand for each of the items. Percentage change in quantityMeals at restaurants500Cups of coffee80Instant noodles-75 a. Income elasticity for meals at restaurants is . b. Income elasticity for cups of coffee is . c. Income elasticity for instant noodles is . d. Based on the calculations of income elasticity, meals at restaurants are a normal good, coffee is a necessity, and ramen noodles are an inferior good.
2 .32 -.3 normal necessity inferior
The price of product C rises by 10%. As a result, the quantity demanded of product D rises by 20%. The cross-price elasticity of demand between product C and product D is _____, and they are _____.
2, substitutes
According to the U.S. Department of Energy, the average price of gasoline in the U.S. fell by 14% in 2015. The number of hybrid electric vehicles (HEV) sold in the U.S. fell by 36% in the same year. Calculate the cross-price elasticity of demand for HEVs and gasoline. Round answer to one place after the decimal. a. Cross-price elasticity = b. Based on your answer in part a, gasoline and HEVs are
2.57, substitutes
The price of a dozen eggs falls from $3 to $2.70. In response to this price change, the quantity supplied of eggs falls from 100,000 dozen eggs to 75,000 dozen eggs. What is the price elasticity of supply for eggs?
2.7
Which of the following is an example of a quantity quota?
A city enforces zoning laws that restrict the number of housing units.
A subsidy is a:
A government payment designed to encourage particular purchases or productive activities
What is collusion?
Agreements between sellers to increase their market power
Almonds are a crop that grows on trees. Farmers do not need to replant trees every year to produce a crop of almonds. It takes at least five years after planting for trees to bear fruit. Several factors such as weather, disease, and long term projections about price impact the supply of almonds available. Barley is a grass that must be planted each year to produce a crop. The growing season is short, about three to four months. Several factors influence farmers' decisions to plant barley each year, including price, weather, and disease. a. Based on this information, Select each factor which helps determine the price elasticity of supply for a product.
Almonds have a more inelastic supply in the short run because little can be done to change production in the short run all
A binding price floor is:
Always above the equilibrium price
Which of the following is a positive economic statement?
If the government raises taxes, people will have less income available for purchases and saving.
Mary loves avocados and must consume avocados every week, regardless of the price. Which of the following must be true?
Mary has an inelastic demand for avocados.
In 2015, Netflix increased its monthly price for new subscribers by $1. In response, one individual tweeted the following: "So tired of being a college student. Can't wait until I have a stable job and won't have to give up Netflix cause they raised their price by $1". What does this statement indicate about the income elasticity of demand for Netflix?
Netflix is a normal good.
An article in Forbes noted that the Intercounty Connector toll road that connects two counties in Maryland was not generating as much toll revenue as predicted. At that time, the toll rate was $8 for a passenger car making a round trip from end to end on the tollway during rush hour. What additional information would you need to know in order to determine if the toll should be increased or decreased?
PED
How would the discount effect on marginal revenue differ for a seller increasing sales from 100 units to 101 units compared to an increase in sales from 1,000 units to 1,001 units?
The discount effect would be smaller for a change from 100 to 101 units than 1,000 to 1,001 units.
Patents on drugs to treat AIDS were removed in South Africa. How would the market for these drugs have been different if there had never been patents on drugs?
The drugs would stop being produced
An article in Forbes noted that the Intercounty Connector toll road that connects two counties in Maryland was not generating as much toll revenue as predicted. At that time, the toll rate was $8 for a passenger car making a round trip from end to end on the tollway during rush hour. What additional information would you need to know in order to determine if the toll should be increased or decreased?
The price elasticity of demand
A price ceiling is:
a maximum price sellers are allowed to charge for a good or service
A quantity regulation is a:
a minimum or maximum quantity that can be sold
(Figure: Market for Sustainable Furniture) The graph depicts the market for furniture made from sustainable, man-made forests. The government wants to encourage buyers to buy such furniture and imposes a price ceiling of $250. What occurs as a result of the price ceiling?
a shortage of 400,000 pieces of furniture.
In a market graph, consumer surplus is the area:
above the price and below the demand curve.
A tax on buyers causes which of the following?(i) a leftward shift of the demand curve(ii) a decrease in quantity sold(iii) an increase in the price buyers pay
all three
A tax on sellers causes which of the following?(i) a leftward shift of the supply curve(ii) a decrease in quantity sold(iii) an increase in the price buyers pay
all three
(Figure: Market 5) The graph shows the market for teddy bears. When the market produces and sells nine teddy bears, the deadweight loss is represented by the:
area between the demand and supply curves between quantities of 5 and 9.
People gain consumer surplus when they purchase an item:
at a price below the value of the benefit they receive from the item.
Price ceilings tend to create shortages when used to
bring down price in a competitive market
Consider the supply and demand schedules. PriceQuantity demandedQuantity supplied$1,00020,000300,000$90040,000250,000$80060,000200,000$70080,000150,000$600100,000100,000$500120,00050,000$400140,0000 Select the policy or policies that represent binding price controls.
ceiling at 500
You may have observed that items such as different brands of aspirin, tomato sauce, or gasoline are typically priced the same as each other. This is particularly true when consumers can find these goods in close proximity to each other. For example, prices are often the same at gas stations that are on opposite sides of the street. Prices are also generally the same for products next to each other on the same grocery store shelf. The aforementioned examples are goods that are likely to be . You would expect the value of the cross-price elasticity to be , because the opportunity cost of getting information on price is low.
compliments, large
When the economic surplus in a market is less than it would be if the market were efficient, the market is experiencing:
deadweight loss
The EpiPen is a lifesaving device used by individuals with severe allergies. The U.S. manufacturer of the EpiPen raised its price by nearly 25% per year for nearly a decade. For each 25% increase in the price, quantity demanded would
decrease less than
In 2016, Amazon began charging a 5.75% sales tax on products it sells in the District of Columbia. Holding all else constant, the effect of this tax would be to _____ in the District of Columbia.
decreases amazon sales
City officials are devising two alternative policies to reduce the risk of eviction for families living downtown, where rent has increased precipitously. One proposed policy is to divert housing demand away by building low‑income apartments in the surrounding area. The other proposed policy is to subsidize the development of low‑income apartments within the downtown area. For simplicity, assume that these are two bedroom apartments that have all the same attributes and that the slope of the supply and demand curves do not change. The line P0 in the diagram shows the current rent. The objective of any policy is to lower the rent to P1 while minimizing the impact on the quantity of apartments available. Show the optimal policy impact on the graph by shifting either the supply or demand curve. Downtown housing marketRent ($ per apartment)Quantity of apartmentsP0P1SupplyDemand Which curve is more elastic? in this case the bestt policy decision would be to
demand build apartments in the surrounding area?
A subsidy for buyers of a product shifts the:
demand curve to the right
The cross-price elasticity of demand measures how responsive the:
demand for one good is to a change in the price of another good.
Buyers bear a smaller incidence of the tax when:
demand is more elastic than supply
When the absolute value of the price elasticity of demand is greater than 1, demand is:
elastic
Place the items in the appropriate box based on whether the price elasticity of demand is more likely to be elastic or inelastic.
elastic : movie tix pizza inelastic : gas insulin electricity and water
Consumers now have easy access to internet shopping because of smartphones. Technology has caused demand to become more for goods you can purchase at stores like Barnes and Noble and Best Buy. This is because the cost of getting price information from other retailers is now . To stay competitive, Best Buy uses a strategy called where they offer to sell items at competitor prices.
elastic lower price matching
A quota will impact the market if the maximum quantity it allows falls short of the equilibrium quantity. Which of the following are quantity regulations?
fall short taxi quotas health insurance mandates zoning laws
(Figure: Market Power) Based on the demand curves for four sellers, which of the following sellers has the most market power?
firm C (vertical graph)
The statutory burden of a tax is the:
government-designated burden of a tax payment.
When the absolute value of the price elasticity of demand is less than 1, demand is:
inelastic
If demand is _____, a higher price yields _____ total revenue
inelastic, higher
Suppose the percentage change in newspapers demanded for any price change is infinite. The absolute value of the elasticity of demand for newspapers is _____, and demand is _____.
infinity; perfectly elastic
The higher the level of market power among the sellers in a market, the _____ when the Rational Rule for Sellers is applied.
lower the market output
According to the Rational Rule for Sellers, a seller should choose the output level where _____ and the price level _____.
marginal cost equals marginal revenue; that is on the seller's demand curve at that output level
A market with a large number of sellers and a high level of product differentiation is known as
monopolistically competitive
Walmart has a large aisle that displays many different kinds of toothpastes. This observation indicates that the toothpaste market is
monopolistically competitive
_____ using specific business practices that increase a seller's market power and excludes other sellers is illegal under U.S. law.
monopolizing
Suppose the price of gasoline rises. As time passes, people adjust to the higher price, and the demand for gasoline becomes:
more elastic
Europe has eight different companies selling devices similar to the EpiPen. If these devices were available for use in the U.S. market, you would expect price elasticity of demand to become . This would also lead Mylan to charge a price.
more inelastic, lower
Statements about what option should be chosen are _____ statements.
normative
A government leader determines that the 5% unemployment rate is too high. She asks her staff to research policy options to reduce the rate and a few weeks later is given four options. Each option would reduce the rate by a different amount and at a different cost. The leader studies the options and chooses the one she feels is best for the country. In order, what types of analysis were used in this three-stage chain of events?
normative; positive; normative
When a company has market power, it is _____ in its market.
not a price talker
In which market structure do the actions of a rival have a significant impact on your operations?
oligopoly
An experiment is conducted that provides the data in the accompanying table. Toll rateNumber of vehicles using the tollway per day$810,000$612,000 a. What is the absolute value of price elasticity when the toll rate decreases from $8 to $6? Round to the nearest hundredth.
p
Consider the market for movie theater tickets shown in the accompanying graph.
p
Individuals differ in their willingness to pay for air travel, and airlines would like to charge different prices to different individuals based on their willingness to pay. Airlines typically attempt to divide passengers into two types: leisure travelers and business travelers. Suppose that an airline is charging $400 per ticket for all passengers on flights between New York and Washington D.C. The accompanying tables provide information on quantity demanded for air travel for leisure travelers and business travelers.
p
Suppose the accompanying table contains data on how many Veggie Delite sandwiches Subway is willing to sell each day at two different prices. Calculate the daily price elasticity of supply when the price increases from $5.00 to $7.50. Please round to the nearest hundredth. Price (per sandwich)Quantity supplied (sandwiches per day)$5.00200,000$7.50210,000 a. Daily price elasticity of supply for Veggie Delite sandwiches =
p
When the absolute value of the price elasticity of demand is infinite, demand is:
perfectly elastic
The price elasticity of demand for a good with a vertical demand curve is:
perfectly inelastic
Analysis that describes what would happen if various actions were taken is _____ analysis.
positive
What type of relationship exists between the level of a company's market power and the price that its owner is able to charge for its product?
positive
The producer surplus on a unit sold equals:
price minus marginal cost
When buyers in a market have market power, then the
product price is lower
(Figure: Output Level) According to the rational rule, what output and price should the firm in the following example choose?
quantity = 4; price = $7.00 up up over
In 2017, eBay started charging a 20% value-added tax on fees charged to small businesses in the United Kingdom. Holding all else constant, this would _____ in the United Kingdom.
raise the prices that eBay sellers charge their customers
If an item is a necessity rather than a luxury, its demand curve will be:
relatively steep
Taking the absolute value of the income elasticity of demand is incorrect because it would:
remove the ability to tell whether the product is an inferior good or a normal good.
You are given data on four products — toothpaste, shampoo, soap, and laundry detergent. The absolute value of the price elasticity of demand for toothpaste is 4. The absolute value of the price elasticity of demand for shampoo is 0.2. The absolute value of the price elasticity of demand for soap is 0.5. The absolute value of the price elasticity of demand for laundry detergent is 2. Which product has the most inelastic demand?
shampoo
Which of the following markets is an example of a perfectly competitive market?
shares of McDonalds stock
Price ceilings create shortages if they are set below the equilibrium price. Which of the following are price ceilings?
shortages below price controls on prescription drugs rent control
You may have observed that items such as different brands of aspirin, tomato sauce, or gasoline are typically priced the same as each other. This is particularly true when consumers can find these goods in close proximity to each other. For example, prices are often the same at gas stations that are on opposite sides of the street. Prices are also generally the same for products next to each other on the same grocery store shelf. The aforementioned examples are goods that are likely to be substitutes. You would expect the value of the cross-price elasticity to be large, because the opportunity cost of getting information on price is low.
sub large
If the price of a good falls and this causes the quantity demanded of another good to fall, then the items are considered to be and the cross-price elasticity is If the price of a good falls and this causes the quantity demanded of another good to increase, then the items are considered to be and the cross-price elasticity is .
substitutes positive compliments negative
You are a pricing manager at a generic pharmaceutical distributor. The CEO of the company calls a meeting of all the managers and states that it is critical to increase revenue soon or you may have to start laying off employees. You know that the price elasticity of demand for your leading generic drug is 1.5 and you sell it for three times what it costs. As the pricing manager, you should
suggest decreasing the price on the leading generic drug to increase revenue.
A tax on sellers shifts the:
supply curve to the left
Price floors create surpluses if they are set above the equilibrium price. Which of the following are price floors?
surplus above a minimum unit price on alcohol an agricultural price support
The economic burden of a tax is the:
the burden created by the change in after-tax prices faced by buyers and sellers
Which principle helps buyers and sellers make decisions about whether to trade?
the cost benefit principle
A market's deadweight loss is calculated as:
the economic surplus at the efficient quantity minus the economic surplus at the actual quantity.
The marginal benefit minus the marginal cost equals:
the economic surplus.
A binding price floor in a market is removed. Which of the following is likely to occur as a result?
the market price will fall
Ultimately, who pays the majority of the economic burden of the tax is dependent upon
the relative supply and demand elasticities.
Which of the following is a characteristic of monopoly that is not present in other market structures?
there is oney one seller
According to the Rational Rule for Sellers, the manager of this company should choose to produce _____ of output and charge a price of _____.
two units; $450 mc=mr
One of the market failures caused by market power is
underproduction\
Which of the following statements is based on normative analysis?
we should protect the environment
To avoid harm to society, the government often becomes the supplier of a good or service when the respective market
would be a natural monopoly, and the good or service is considered essential.
(Figure: Supply Curve) The graph shows the supply curve for jars of laundry detergent. If 18 units are sold at a price of $20, what is the producer surplus on the last jar sold?
$0
Chin purchases five protein bars at a price of $3 each. The marginal benefit he receives from each bar is $5 for the first bar, $4.50 for the second bar, $4 for the third bar, $3.50 for the fourth bar, and $3 for the fifth bar. The marginal cost of producing the bars is $2 each. What is Chin's consumer surplus on the fifth bar?
$0
Chin purchases five protein bars at a price of $3 each. The marginal benefit he receives from each bar is $5 for the first bar, $4.50 for the second bar, $4 for the third bar, $3.50 for the fourth bar, and $3 for the fifth bar. The marginal cost of producing the bars is $2.50 each. What is Chin's total consumer surplus from the five bars that he purchased?
$5
Portia produces and sells headbands. Her marginal cost for one headband is $6, and her average cost is $4. She gains producer surplus only when she sells headbands at a price above:
$6.
