Section 9 Test

After Chelsea's income increased from $12,000 to $18,000 a year, her purchases of CDs increased from 10 to 40 CDs a year. Calculate Chelsea's income elasticity of demand for CDs using the midpoint method.

120%/40% = 3.

Deadweight loss

(From a tax) is the decrease in total surplus resulting from the tax, minus the tax revenues generated.

Giffen good

a good for which an increase in the price raises the quantity demanded, there is controversy over whether they even exist

Regressive tax

Rises less than in proportion to income

If price elasticity of supply is greater than 1...

Supply is considered elastic

Using the midpoint method, calculate the price elasticity of supply for web-design services when the price per hour rises from $100 to $150 and the number of hours supplied increases from 300,000 hours to 500,000. Is supply elastic, inelastic, or unit-elastic?

50%/40% = 1.25. So supply is elastic

If cross-price elasticity is positive, then X and Y.......

Are substitutes

An excise tax imposed on sellers in a market will result in which of the following? I. an upward shift of the supply curve II. a downward shift of the demand curve III. deadweight loss a. I only b. II only c. III only d. I and III only e. I, II, and III

B

If E is less than 1...

Inelastic

Consumer surplus

Often used to refer to both individual and consumer surplus

Marginal utility curve

Shows how marginal utility depends on the quantity of a good or service consumed.

Marginal utility per dollar

The marginal utility per dollar spent on a good or service is the additional utility from spending one more dollar on that good or service.

What deos it mean for cross-price elasticity of demand when there are complements?

The outcome will be negative.

individual producer surplus

net gain to an individual seller from selling a good. It is equal to the difference between the price received and the seller's cost

Optimal consumption rule

says that in order to maximize utility, a consumer must equate the marginal utility per dollar spent on each good and service in the consumption bundle.

Budget line

shows the consumption bundles available to a consumer who spends all of his or her income.

Optimal consumption bundle

the consumption bundle that maximizes the consumer's total utility given his or her budget constraint.

consumption possibilities

the set of all affordable consumption bundles, given the consumer's income and prevailing prices

At market equilibrium in a competitive market, which of the following is necessarily true? I. Consumer surplus is maximized. II. Producer surplus is maximized. III. Total surplus is maximized. a. I only b. II only c. III only d. I and II only e. I, II, and III

C

IF there is an increase in the price of an inferior good on which consumers spend a large share of their income, which of the following will decrease the quantity of that good demanded? A. The Giffen effect B. The Income effect only C. The substitution effect only D. The income and substitution effects

C

Total revenue is maximize when demand is A. Elastic B. Inelastic C. Unit-elastic D. Zero E. Infinite

C

A perfectly elastic demand curve is A. Upward-sloping B. Vertical C. Not a straight line D. Horizontal E. Downward-sloping

D

A perfectly elastic supply curve is A. Positively sloped B. Negatively sloped C. Vertical D. Horizontal E. U-shaped

D

If Kylie buys 200 units of good X when her income is $20,000 and 300 units of good X when her income increases to $25,000, her income elasticity of demand, using the midpoint method, is A.0.06 B. 0.5 C. 1.65 D. 1.8 E. 2.00

D

Inelastic

Demand is inelastic if the price elasticity of demand is less than 1.

Unit-Elastic

Demand is unit-elastic if the price elasticity of demand is exactly 1.

a. Total revenue decreases when price increases.

Elastic demand. Consumers are highly responsive to changes in price. For a rise in price, the quantity effect (which tends to reduce total revenue) outweighs the price effect (which tends to increase total revenue). Overall, this leads to a fall in total revenue.

Cost

A seller's cost is the lowest price at which he or she is willing to sell a good

lump-sum tax

a tax of a fixed amount paid by all taxpayers

excise tax

a tax on sales of a particular good or service

total producer surplus

the sum of the individual producer surpluses of all the sellers of a good in a market.

Income elasticity of demand

Measures the responsiveness of demand for a good to changes in income. Ei= % change in Qd / % change in Income

Price elasticity of supply

Measures the responsiveness of quantity supplied to changes in price. (Same as demand, but using Quantity Supplied instead). Es= % change in Qs / % change in P

An excise tax will be paid mainly by producers when a. it is imposed on producers. b. it is imposed on consumers. c. the price elasticity of supply is low and the price elasticity of demand is high. d. the price elasticity of supply is high and the price elasticity of demand is low. e. the price elasticity of supply is perfectly elastic.

D

Principle of diminishing marginal utility

Each successive until of a good or service consumed adds less to total utility than the previous unit.

If price elasticity of supply is less than 1...

Supply is considered inelastic

marginal utility

change in total utility generated by consuming one additional unit of that good or service

Willingness to pay

the maximum amount that a buyer will pay for a good

Individual consumer surplus

the net gain to an individual buyer from the purchase of a good. It is equal to the difference between the buyer's willingness to pay and the price paid.

What is the midpoint formula?

(Q2-Q1) / (Q2+Q1)/2 ____________________________ = Ed P2-P1 / (P2+P1)/2

What are the determinants of price elasticity of supply?

1. Availability of Inputs -if a firm can get inputs (labor, capital, raw materials) into and out of production quickly, the price elasticity of supply will be more elastic. 2. Time -agriculture and planting seasons...short-run and long-run

If a decrease in price from $2 to $1 causes an increase in quantity demanded from 100 to 120, using the midpoint method, price elasticity of demand=

0.27...inelastic

The price elasticity of demand for ice-cream sandwiches is 1.2 at the current price of $0.50 per sandwich and the current consumption level of 100,000 sandwiches. Calculate the change in the quantity demanded when price rises by $0.05. Use Equations 46-1 and 46-2 to calculate percent changes and Equation 46-3 to relate price elasticity of demand to the percent changes.

1.2 so that the percent change in quantity demanded is 12%. A 12% decrease in quantity demand

The price of strawberries falls from $1.50 to $1.00 per carton, and the quantity demanded goes from 100,000 to 200,000 cartons. Use the midpoint method to find the price elasticity of demand.

1.7

At the present level of consumption, 4,000 movie tickets, and at the current price, $5 per ticket, the price elasticity of demand for movie tickets is 1. Using the midpoint method, calculate the percentage by which the owners of movie theaters must reduce the price in order to sell 5,000 tickets.

22%. Since the price elasticity of demand is 1 at the current consumption level, it will take a 22% reduction in the price of movie tickets to generate a 22% increase in quantity demanded.

If a 2% change in the price of a good leads to a 10 % change in the quantity demanded of a good, what is the price elasticity of demand?

5

Allocating kidneys to those with the highest net benefit (where net benefit is measured as the expected increase in lifespan from a transplant) is an attempt to maximize a. consumer surplus. b. producer surplus. c. profit. d. equity. e. respect for elders.

A

Income Effect

A change in the price of a good makes a consumer feel like they have more money, leading to an increase in quantity demanded. This is NOT an increase in income, but an increase in purchasing power.

Substitution Effect

A change in the price of a good will cause a consumer to substitute the good due to the lower price creating more quantity demanded.

Midpoint method

A technique for calculating the percent change by dividing the change in a variable by the average, or midpoint, of the initial and final values of that variable.

If cross-price elasticity is negative, then X and Y....

Are complements

Consumer surplus is found as the area a. above the supply curve and below the price. b. below the demand curve and above the price. c. above the demand curve and below the price. d. below the supply curve and above the price. e. below the supply curve and above the demand curve.

B

If the cross-price elasticity between two goods is negative, this means that the two goods are A. Substitutes B. Complements C. Normal D. Inferior E. Luxuries

B

Which of the following is correct for a price increase? When demand is __________, total revenue will _____________. A. Inelastic; decrease B. Elastic; decrease C. Unit-elastic; increase D. Unit-elastic; decrease E. Elastic; increase

B

Other things equal, a rise in price will result in which of the following? a. Producer surplus will rise; consumer surplus will rise. b. Producer surplus will fall; consumer surplus will fall. c. Producer surplus will rise; consumer surplus will fall. d. Producer surplus will fall; consumer surplus will rise. e. Producer surplus will not change; consumer surplus will rise.

C

When a competitive market is in equilibrium, total surplus can be increased by I. reallocating consumption among consumers. II. reallocating sales among sellers. III. changing the quantity traded. a. I only b. II only c. III only d. I, II, and III e. None of the above

C

Which of the following is true if the price elasticity of demand for a good is zero? A. The slope of the demand curve is zero. B. The slope of the demand curve is one. C. The demand curve is vertical. D. The demand curve is horizontal. E. The price of the good is high.

C

Which of the following leads to a more inelastic price elasticity of supply? I. The use of inputs that are easily obtained II. A high degree of substitutability between inputs III. A shorter time period in which to supply the good A. I only B. II only C. III only D. I and II only E. I, II, and III

C

The income elasticity of demand for a normal good is A. Zero B. 1 C. Infinite D. Positive E. Negative

D

Which of the following statements is true? I. When a good absorbs only a small share of the typical consumer's income, the income effect explains the demand curve's negative slope II. A change in consumption brought about by a change in purchasing power describes the income effect. III. In the case of an inferior good, the income and substitution effects work in opposite directions. A. I B. II C. III D. II and III E. I, II, and III

D

Which of the following would cause the demand for a good to be relatively inelastic? A. The good has a large number of close substitutes. B. Expenditures on the good represent a large share of consumer income. C. There is ample time to adjust to price changes. D. The good is a necessity. E. The price of the good is in the upper left section of a linear demand curve.

D

Elastic

Demand is elastic if the price elasticity of demand is greater than 1.

Perfectly Elastic

Demand is perfectly elastic when any price increase will cause the quantity demanded to drop to zero. When demand is perfectly elastic, the demand curve is a horizontal line.

Perfectly Inelastic

Demand is perfectly inelastic when the quantity demanded does not respond at all to changes in the price. When demand is perfectly inelastic, the demand curve is vertical line.

Which of the following is likely to have the highest price elasticity of demand? A. Eggs B. Beef C. Housing D. Gasoline E. Foreign travel

E

Which of the following is true regarding equity and efficiency in competitive markets? a. Competitive markets ensure equity and efficiency. b. There is often a trade-off between equity and efficiency. c. Competitive markets lead to neither equity nor efficiency. d. There is generally agreement about the level of equity and efficiency in a market. e. None of the above.

E

with an inferior good, the substitution effect and income effect work in _______

Opposite directions

What does it mean for income elasticity of demand if the good is a normal good?

Positive

Producer surplus

Economists use this term to refer both to individual and to total producer surplus

If E is greater than 1....

Elastic

Draw a correctly labeled graph illustrating a demand curve that is a straight line and is neither perfectly elastic nor perfectly inelastic. a. On your graph, indicate the half of the demand curve along which demand is elastic. b. In the elastic range, how will an increase in price affect total revenue? Explain.

Elastic upper half; An increase in price will decrease total revenue because the negative quantity effect of the price increase is greater than the positive price effect of the price increase.

Elasticity

Elasticity measures the responsiveness of one variable to changes in another. The percent change in the dependent variable divided by the percent change in the independent variable.

Income elastic

The demand for a good is income elastic if the income elasticity if demand for that good is greater than 1.

What is a problem that can occur when calculating percentage changes?

If the starting and ending prices are reversed, elasticity is different. Also, pay attention to base units> (remember car sped example.. if something increases by 50% then decreases by 50%, it won't be the same number)

Perfectly elastic supply

If the the quantity supplied is zero below some price and infinite above that price. A perfectly elastic supply curve is a horizontal line.

c. Total revenue falls when output increases.

Inelastic demand. Consumers are relatively unresponsive to changes in price. For consumers to purchase a given percent more, the price must fall by an even greater per- cent. The price effect of a fall in price (which tends to reduce total revenue) outweighs the quantity effect (which tends to increase total revenue). As a result, total revenue decreases.

d. Producers in an industry find they can increase their total revenues by working together to reduce industry output.

Inelastic demand. Consumers are relatively unresponsive to price, so a given percent fall in output is accompanied by an even greater percent rise in price. The price effect of a rise in price (which tends to increase total revenue) outweighs the quantity effect (which tends to reduce total revenue). As a result, total revenue increases.

What is important to remember when calculating the cross-price elasticity of demand?

It is important to remember to NOT use absolute value, because the +/- sign is VERY important.

Budget constraint

Limits the cost of a consumer's consumption bundle to no more than the consumer's income

Cross-price elasticity of demand

Measures the responsiveness of the demand for good "X" to changes in the price of good "Y". Exy = % change in Qd of X / % change in P of Y.

What does it mean for income elasticity of demand if the good is an inferior good?

Negative

Income inelastic

The demand for a good is income inelastic if the income elasticity of demand for that good is positive but less than 1.

Proportional tax

Rises in proportion to income

What are the determinants of price elasticity of demand?

SPLAT S- Substitutes P- Proportion of income L- Luxury or necessity A- Addictive ro habit forming T- Time

The cost of a semester-long meal ticket at the student cafeteria rises, representing a significant increase in living costs. As a result, many students have less money to spend on weekend meals at restaurants and eat in the cafeteria instead. Assume that cafeteria meals are an inferior good.

Since a meal ticket is a significant share of the students' living costs, an increase in its price will generate a significant income effect. Because cafeteria meals are an inferior good, the substitution effect (which would induce students to substitute restaurant meals in place of cafeteria meals) and the income effect (which would induce them to eat in the cafeteria more often because they are poorer) move in opposite directions.

Apartment rents have risen dramatically this year. Since rent absorbs a major part of her income, Delia moves to a smaller apartment. Assume that rental housing is a normal good.

Since rent is a large share of Delia's expenditures, the increase in rent generates a significant income effect, making Delia feel poorer. Since housing is a normal good for Delia, the income and substitution effects move in the same direction, leading her to reduce her consumption of housing by moving to a smaller apartment.

Orange juice represents a small share of Clare's spending. She buys more lemonade and less orange juice when the price of orange juice goes up. She does not change her spending on other goods.

Since spending on orange juice is a small share of Clare's spending, the income effect from a rise in the price of orange juice is insignificant. Only the substitution effect, represented by the substitution of lemonade in place of orange juice, is significant.

If price elasticity of supply is equal to 1...

Supply is considered unit-elastic

Administrative costs

The administrative costs of a tax are the resources used by the government to collect the tax, and by taxpayers to pay (or to evade) it, over and above the amount collected

As the price of margarine rises by 20%, a manufacturer of baked goods increases its quantity of butter demanded by 5%. Calculate the cross-price elasticity of demand between butter and margarine. Are butter and margarine substitutes or complements for this manufacturer?

The cross-price elasticity of demand is 5%/20% = 0.25. Since the cross-price elasticity of demand is positive, the two goods are substitutes.

What is elasticity measuring in cross-price elasticity of demand?

The elasticity is measuring the shift of the demand curve.

What does it mean for cross-price elasticity of demand when there's are substitutes?

The outcome will be positive. More substitutes ->more opportunity cost -> positive outcome

Price Elasticity of Demand

The ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve (dropping the minus sign and using absolute terms).

With a normal good, the substitution effect and income effect work in _______

The same direction

Assume the price of an inferior good increases. a. In what direction will the substitution effect change the quantity demanded? Explain. b. In what direction will the income effect change the quantity demanded? Explain. c. Given that the demand curve for the good slopes downward, what is true of the relative sizes of the income and substitution effects for the inferior good? Explain.

The substitution effect will decrease the quantity demanded. As price increases, consumers will buy other goods instead. b. The income effect will increase the quantity demanded. As price increases, real income decreases, so consumers will purchase more of the inferior good. c. The substitution effect is larger than the income effect. If the income effect were larger than the substitution effect, more of the good would be purchased as the price increased, and the demand curve would be upward sloping.

Total consumer surplus

The sum of the individual consumer surpluses of all the buyers of a good in a market

Total surplus

The total net gain to consumers and producers from trading in a market. It is the sum of the producer and consumer surplus.

Total revenue

The total value of sales of a good or service. It is equal to the price multiplied by the quantity sold.

If E is equal to 1...

Unit Elastic

b. When price falls, the additional revenue generated by the increase in the quantity sold is exactly offset by the revenue lost from the fall in the price received per unit.

Unit-elastic demand. Here the revenue lost to the fall in price is exactly equal to the revenue gained from higher sales. The quantity effect exactly offsets the price effect.

Perfectly inelastic supply

When the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied. A perfectly inelastic supply curve is a vertical line.

Assume the price of corn rises by 20% and this causes suppliers to increase the quantity of corn supplied by 40%. a. Calculate the price elasticity of supply. b. In this case, is supply elastic or inelastic? c. Draw a correctly labeled graph of a supply curve illustrating the most extreme case of the category of elasticity you found in part b (either perfectly elastic or perfectly inelastic supply). d. What would likely be true of the availability of inputs for a firm with the supply curve you drew in part c? Explain.

a. 40%/20% = 2 b. elastic C. Horizontal line d. Inputs are readily available and can be shifted into/out of production at low cost.

For the following goods, is demand elastic, inelastic, or unit-elastic? Explain. What is the shape of the demand curve? a. demand by a snake-bite victim for an antidote b. demand by students for blue pencils

a. Once bitten by a venomous snake, the victim's demand for an antidote is very likely to be perfectly inelastic because there is no substitute and it is necessary for sur- vival. The demand curve will be vertical at a quantity equal to the needed dose. b. Students' demand for blue pencils is likely to be perfectly elastic because there are readily available substitutes, such as yellow pencils. The demand curve will be horizontal at a price equal to that of non-blue pencils.

Progressive tax

rises more than in proportion to income

tax incidence

the distribution of tax burden among taxpayers; who ultimately pays the tax