Microeconomics Quiz 1 Review

57) government sets a price floor of $3.50 per bushel of corn Without the price floor, what would the equilibrium price per bushel be? With the price floor in place, what is the amount of the surplus?

a) $2.5 per bushel b) surplus = quantity from supply curve - quantity from demand curve = 2-1 = 1

58) Before the government imposes its regulation, what is the price of crab? what is the demand price after the quota? what is the quota rent for Alaskan king crab?

a) $3.50 per pound b) $4 per pound c) quota rent = A-B = 4-3= $1 per pound

82) If a 25% price increase for Product A causes a 10% decrease in its quantity demanded, but no change in the quantity demanded for Product B, what is the cross-price elasticity of these goods? What is the relationship between these two goods?

a) 0 b) no relationship

27) Market for Candy graph

Excess demand line at y=$3 per bag Quantity demand point (7,3) & Quantity supplied point (3,3) Excess demand = 7-3 = 4 million bags

84) Initial Equilibrium: P = $0.50, Q = 29 units When the price is $12.75, quantity of motorcycles is 61 units and quantity of pancakes is 107 units. What is the elasticity of supply for pancakes? Supply in the market for motorcycles is... If the government put a price floor of $12.75 on both of the markets, which market would have a greater surplus or shortage?

a) [(107-29)/(107+29)]/[(12.75-0.50)/(12.75+0.50)] = 0.62 b) less elastic than supply in the market for pancakes. c) the market for pancakes would have a bigger surplus.

3) What is the biggest problem facing a Command Economies (socialism)?

Coordination and incentives to direct output

29) Determine how the equilibrium price and equilibrium quantity in the market for coffee changes if a) the price of tea, a substitute for coffee, decrease, b) and due to better weather, the price of coffee beans also decreases

Equilibrium price decreases; equilibrium quantity may increase, decrease, or stay the same. Lower price of substitute (tea) = lower demand for coffee ---> demand curve for coffee shifts left Lower price to make coffee = increased supply of coffee ---> supply curve for coffee shifts right

31) Market for Ethanol

Equilibrium price increases If the subsidy expires, ethanol producers will face higher costs. This causes a decrease in the supply of ethanol at any price. ---> supply curve shifts left

55) Crabby Island has imposed a production quota of $4,000 per month. What is the price of crab after the introduction of the quota?

Point where production quota intersects demand curve (4000, 7) Price: $7

98) Pretax equilibrium price $3 and quantity 20,000 gallons. The total tax revenue calculated by the government is equal to:

TR = (4-2.25)(15,000) = $26,250

36a) Which student will purchase a tablet if the price of a tablet is $550? 36b) Identify which portion of the demand curve represents Anthony

a) no one b) A

38) Amazon has a "Lightning Deal" where it slashes the price of one item. At 3:15 pm today, they announced that the item was a new tablet with a sales price of $150 which is less than half the original price. a) what is the total consumer surplus for the five students? b) if the price increases from $150 to $350, what is the change in total consumer surplus?

a) total consumer surplus = (500-150) + (400-150) + (300-150) + (200-150) = $800 ^Ignore Max since he is only willing to pay $100 and the minimum price is $150, so he won't buy. b) total consumer surplus ($350) = (500-350) + (400-350) = $200 ---> change in total consumer surplus = 200-800 = $-600 ^Ignore Lily, Francisco, and Max because the price they are willing to pay is below $350, so they won't buy the tablet.

78) Lauren's salary decreases from $34,000 to $30,000, and she decides to reduce the number of outfits she purchases each year from 20 to 19. Calculate income elasticity

income elasticity = [(30000-34000)/(30000+34000)]/[(19-20)/(19+20)] = 0.41 New outfits are a normal good with an income-inelastic demand.

40) Move the point E to the equilibrium point on the graph. Calculate consumer surplus and producer surplus

a) Consumer surplus = $12,500 A = 1/2 (9-4)(5) = 12.5 ---> 12.5 *1000 = 12,500 b/c quantity is in thousands b) Producer surplus = $7,500 A = 1/2 (4-1)(5) = 7.5 ---> 7.5*1000 = 7,500 b/c quantity is in thousands

42) Suppose that a new technology allows beginner-level violin producers to make violins at a substantially lower cost while retaining the same quality. a) show how the supply and demand curve shift on the graph b) how much does this new technology increase consumer surplus? c) how much does this new technology increase producer surplus? d) how much does this new technology increase total surplus?

a) The supply curve shifts to the right, demand curve stays the same b) consumer surplus at old equilibrium = 1/2 (240-150)(30) = 1350 consumer surplus at new equilibrium = 1/2 (240-120)(40) = 2400 new-old = 2400-1350 = 1050 Increase by $1,050,000 (Remember 1050*1000 b/c quantity in thousands) c) producer surplus at old equilibrium = 1/2 (150-60)(30) = 1350 producer surplus at new equilibrium = 1/2 (120-0)(40) = 2400 new-old = 2400-1350 = 1050 Increase by $1,050,000 (Remember 1050*1000 b/c quantity in thousands) d) total surplus at old equilibrium = 1350 + 1350 = 2700 total surplus at new equilibrium = 2400 + 2400 = 4800 new-old = 4800-2700 = 2100 Increase by $2,100,000 (Remember 2100*1000 b/c quantity in thousands)

87) Initial Equilibrium: P= $6.50, Q=3.50 When the price is $11.75, the quantity supplied of waffles is 55.0 and the quantity supplied of pancakes is 109.0. What is the elasticity of the supply of pancakes?

a) [(109-3.50)/(109+3.50)]/[(11.75-6.50)/(11.75+6.50)] = 1.79 b) Supply in the market for waffles is less elastic than supply in the market for pancakes.

83) Product C increases in price from $1 a pound to $2 a pound. This causes the quantity demanded for Product D to increase from 27 units to 81 units. When the price of Product E decreases by 2%, this causes its quantity demanded to increase by 14% and the quantity demanded for Product F to increase 17%

a) [(81-27)/(27+81)]/[(2-1)/(2+1)] = 1.5 b) relationship between C and D: substitutes c) delta quantity/ delta price = 17%/2% = -8.5 d) relationship between E and F: complements

81) The table below lists two goods with their cross-price elasticities, where the percentage change in quantity is measured for Good 1 and the percentage change in price is for Good 2. Identify the relationship between each of the pairs of goods.

negative cross-price elasticities = complements positive cross-price elasticities = substitutes

99) Look at the table for Taxes, Spending, Income. Suppose Governor Meridia decides to initiate a state tax of 5% on all sales. This tax will be...

regressive

28) Recently, a series of studies have demonstrated the considerable beneficial health effects of food and drink derived from the amaranth plant. This has affected consumer tastes for amaranth flour, pods, root, etc. At the same time, particularly favorable weather has resulted in a bumper crop of amaranth plants.

An increase in consumers' interest in the good (amaranth plant) would result in increased demand for the good, thus the demand curve shifts to the right. The bumper crop would lead to an increase in supply, so the supply curve shifts to the right. Equilibrium quantity must increase, but equilibrium price could increase, decrease, or stay the same.

43)Assume $5 is the equilibrium price. Assume Fiona is willing to pay $8 for a pizza cutter. Tim also wants one, but is only willing to pay $6 for one. What happens as a result of the organizers refunding Fiona, taking the pizza cutter for her, and letting Tim buy it at the market price?

Consumer surplus decreases. 8-5= $3 > 6-5= $1

10) Classify each scenario as an "either-or" decision or a "how much" decision.

Either-or: -After graduation from law school, Frank is offered one job in Chicago and another in New York. Where should Frank work? -Bella is accepted to four graduate school programs. Where should she go to school? Marginal decisions ("how much"): -Jake needs to stay awake while he studies for his midterm tomorrow. What quantity of coffee should Jake drink? -Marvin arrives at his favorite buffet to eat Chinese food. Sometimes, he overeats and leaves the buffet with a stomach ache.

30) Stone and bricks are substitutes in home construction. Suppose the price of stone increases due to new regulations for the stone quarrying industry. Illustrate the impact this will have on the market for bricks.

Supply curve stays the same, demand curve shifts right higher price for substitute (stone) = higher demand for bricks ---> Equilibrium price increases

37) Four college friends all lost their computers in a dorm theft after Drew forgot to lock the door. Now they are each considering buying a netbook. The lowest price they can find is $150. What is the total consumer surplus?

Total consumer surplus = (500-150) + (400-150) + (300-150) = $750 Ignore Oscar since he is only willing to pay $100 and the minimum price is $150, so he won't buy.

76) Sylvia's annual salary increases from $100,000 to $109,500, and she decides to increase the number of vacations she takes per year from three to four. Calculate income elasticity. Blake eats two bags of generic chips each day, and does not purchase any name-brand chips. Blake's hourly wage increases from $7 to $15, and he decides to eat one bag of generic chips and one bag of name-brand chips each day. Calculate income elasticity

a) income elasticity = [(4-3)/(4+3)]/[(109500-100000)/(109500+100000)] = 3.15 b) vacations are a(n) normal good. As a good, vacations are income-elastic. c) income elasticity = [(2-1)/(2+1)]/[(15-7)/(15+7)] = -0.92 d) generic chips are a(n) inferior good. As a good, generic chips are income-inelastic.

92) Calculate the tax income rate for each person. Is this a progressive, regressive, or proportional tax system? Suppose the government of Lilliput voted to increase taxes on the top earners and decrease it on the lowest earners. How would this new tax system be classified?

a) income tax rate = (taxes paid/income)(100) b) regressive c) more progressive

7) Match the institution with the role it plays in the coordination of resources in decentralized economies. a) brings buyers and sellers together to carry out mutually beneficial exchanges b) established rules for ownership of resources and creates incentives for innovation c) organizes resources in order to produce goods and services d) allows for the exchange of goods and services using a common unit as a measure of value that is generally accepted as payment

a) market b) property rights c) firms d) money

71) Consider the following statements regarding elasticity. a) over longer periods of time, demand tends to be... b) with fewer substitutes, demand tends to be... c) demand for an item that uses a large portion of your budget tends to be... d) demand for a luxury item tends to be...

a) more elastic b) less elastic c) more elastic d) more elastic

20) Categorize each scenario as describing a movement along a demand curve or a shift of the demand curve. a) college students reduce how much detergent they use for each load of laundry in response to higher detergent prices. b) college students rush and buy discount furniture to take advantage of an unexpected price drop. c) college students purchase many more energy drinks finals week than during the rest of the semester. d) students eat out more often as the federal government increases how much grant money it provides students

a) movement along the demand curve b) movement along the demand curve c) shift in the demand curve d) shift in the demand curve

100) Ramone is making $156,141.00 a) Use the table to calculate how much Ramone will owe in taxes under a progressive tax program. b) Calculate how much money Ramone will owe in taxes under a proportional, or flat, tax rate of 30%.

a) progressive tax = (10%)(16,700) + (15%)(51,200) + (25%)(69,150) + (28%)(19,091) + (33%)(0) + (35%)(0) = $31,982.98 b) proportional tax rate = (tax rate)(income) = (30%)(156,141.00) = $46,842.30

56) price floor on hay of $14 per bale What is the surplus from this long-run price floor? In the long run, the surplus caused by a price floor on hay is likely to...

a) surplus = quantity from supply curve - quantity from demand curve = 7-2 = 5 b) increase because farmers will increase the amount of land used to grow hay

88) Suppose a $1 excise tax on the purchasers of cans of soda. a) Show the impact of the tax on the graph. b)Calculate the deadweight loss c) the tax would affect a household's

a) the demand curve will shift down by an equal amount of size of the tax b) deadweight loss = 1/2 (5-4)(10000) = $5,000 c) uses side, but tax shifting is likely to occur

52) Rent controls are a typical example of a price ceiling. Please select all likely consequences of rent controls when the price ceiling is binding.

inefficient allocation of apartments, black markets, more subletting apartments, reductions in apartment quality

65) As the price of gummy bears rises from $2.75 to $3.15, what is the price of elasticity of demand of sugar-free gummy bears and of ordinary gummy bears? Use the midpoint formula.

midpoint formula = [Qb-Qa/Qb+Qa]/[Pb-Pa/Pb+Pa] a) [(155-173)/(173+1550]/[(3.15-2.75)/(3.15+2.75)] = -0.8 b) [(271-377)/(271+377)]/[(3.15-2.75)/(3.15+2.75)] = -2.4