Unit 5 - Consumers, Producers, & the Efficiency of Markets / The Costs of Taxation

Maria buys an iPhone for $150 and gets a consumer surplus of $200. Her willingness to pay for an iPhone is ____. If she had bought the iPhone on sale for $100, her consumer surplus would have been ____. If the price of the iPhone had been $450, her consumer surplus would have been _____.

$350 ($200 + $150) $250 ($350 - $100) $0

Allen tutors in his spare time for extra income. Buyers of his service are willing to pay $40 per hour for as many hours Allen is willing to tutor. On a particular day, he is willing to tutor the first hour for $10, the second hour for $18, the third hour for $28, and the fourth hour for $40. Assume Allen is rational in deciding how many hours to tutor. His producer surplus is

$64

Willingness to Pay

A buyer's maximum; measures how much the buyer values a good.

Efficiency

An allocation of resources that maximizes total surplus (the sum of consumer and producer surplus).

Suppose there is an early freeze in California that reduces the size of the lemon crop. As the price of lemons rises, what happens to consumer surplus in the market for lemons?

Consumer surplus decreases.

Kate is a personal trainer whose client William pays $80 per hour-long session. William values this service at $100 per hour, while the opportunity cost of Kate's time is $75 per hour. The government places a tax of $10 per hour on personal trainers. After the tax, what is likely to happen in the market for personal training?

Kate and William will agree to a new price somewhere between $85 and $100.

Scenario 8-2: Roland mows Karla's lawn for $25. Roland's opportunity cost of mowing Karla's lawn is $20, and Karla's willingness to pay Roland to mow her lawn is $28. Assume Roland is required to pay a tax of $3 each time he mows a lawn. Which of the following results is most likely?

Roland and Karla still can engage in a mutually-agreeable trade.

If the government changed the per-unit tax from $5.00 to $2.50, then the price paid by buyers would be $7.50, the price received by sellers would be $5, and the quantity sold in the market would be 1.5 units. Compared to the original tax rate, this lower tax rate would

decrease government revenue and decrease the deadweight loss from the tax

Suppose the demand for tomato juice falls. Illustrate the effect this has on the market for tomato juice. Illustrate the effect the quantity change in tomato juice has on the market for tomato.

demand curve shifts left ; producer surplus in the market for tomato juice decreases. demand curve shifts left ; producer surplus in the market for tomatoes decreases.

Tax Revenue

equals the size of the tax multiplied by the quantity of units sold.

The particular price that results in quantity supplied being equal to quantity demanded is the best price because it

maximizes the combined welfare of buyers and sellers.

Motor oil and gasoline are complements. If the price of motor oil increases, consumer surplus in the gasoline market

may increase, decrease, or remain unchanged.

A supply curve can be used to measure producer surplus because it reflects

sellers' costs

Exceptionally good weather conditions result in a huge apple harvest. Illustrate the effect this has on the market for apples. Illustrate the effect the price change of apples has on the market for apple juice.

supply curve shifts to the right ; consumer surplus in the market for apples increases. supply curve shifts to the right ; consumer surplus in the market for apple juice increases.

Consumer Surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. - The area below the demand curve and above the price measures the consumer surplus in a market.

Producer Surplus

the amount a seller is paid minus his cost of production; measures the benefit sellers receive from participating in a market. - The area below the price and above the supply curve measures the producer surplus in a market.

Deadweight Loss

the fall in total surplus that results from a market distortion, such as a tax.

Market Failure

the inability of some unregulated markets to allocate resources efficiently. When markets fail, public policy can potentially remedy the problem and increase economic efficiency.

Welfare Economics

the study of how the allocation of resources affects economic well-being.

A seller's opportunity cost measures the

value of everything she must give up to produce a good.

Equality

whether the various buyers and sellers in the market have similar levels of economic well-being