Econ 102 exam 2

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Prior to the 1997 federal tobacco settlement a pack of cigarettes sold for $2.48. The terms of the settlement required a decrease in teenage smoking of 60 percent. If the elasticity of cigarette demand for teenagers is about 1.3 then the price of cigarettes should rise to __________ in order to achieve the target reduction of 60 percent.

$3.62

Income Elasticity of Demand

% Change in QD as a result of increase/decrease in income

2.0

% change in price of milk = ($2.20 - $2.00)/$2.00 = .10 or 10% increase. The percentage change in quantity supplied is: % change in quantity supplied = (120 - 100)/100 = 20%. The elasticity of supply = 20/10 = 2.0

Formula for demand elasticity

% change in quantity demanded / % change in price

formula for supply elasticity

% change in quantity supplied / % change in price

Necessities have a positive elasticity that is between

0 and 1

Luxuries have a positive elasticity greater than

1

5 Determinants of Price Elasticity of Demand?

1) Availability of Close Substitutes 2) Passage of Time 3) Luxuries vs Necessities 4) Definition of the Market 5) Share of Goods in a Consumer Budget

5 Reasons why LRAC (Long Run Avg Cost) falls as quantity increases:

1) Division of Labor 2) Specialization 3) Quantity Discounts on Inputs 4) Larger Q = Lower Interest Rates = Cost Savings on Interest 5) Power of Buyers over Supplier

2 Reasons that Marginal Product of Labor rises in the Beginning?

1) Division of Labor - Many Workers to reduce time 2) Specialization - Focus of fewer tasks = more efficient

3 Common Pitfalls that consumers fall into preventing them from making optimal decisions:

1) Fail to Include Opp. Cost 2) Fail to Ignore Sunk Cost 3) Fail to be Realistic in Future Behavior

Determinants of supply elasticity:

1. how costly is it to produce more output units when more inputs are needed 2. time

The current price of wheat is $1.00 per bushel, and the price elasticity of demand for wheat is known to be 0.50. A bad harvest causes the supply of wheat to decrease and as a result the price of wheat rises by 20%. What will be the percentage change in quantity demanded for wheat and will farm revenues rise or fall?

10%, rise

What is the elasticity of demand if change in quantity is 20% and the change in price is negative 10%?

2

price ceilings

A legal maximum on the price at which a good can be sold

price floor

A legal minimum on the price at which a good can be sold

Availability of Close Subs

More Subs = More Elastic (low fluctuation in P) Fewer Subs = More Inelastic (more fluctuation in P)

if price elasticity of demand is unit elastic... revenue can be increased by

CANT! revenue already at max

marginal cost

Change in cost when a additional unit of a good is produced

Are consumers only interested in making themselves as well off as possible in a material​ sense?

Consumers are also concerned with fairness as exemplified by tipping in restaurants that will never be visited again

Variable costs

Costs that change as output (Q) changes

Is utility measurable?

No

normal good v. inferior good

Normal Goods: any goods for which demand increases and falls when income decreases but price stays constant. Inferior Good: a good that decreases in demand when consumer income rises

Find the consumer surplus when x=40 The demand function, in dollars per unit, for a commodity is given by D(x)=3000-0.6x^2 where x is the number of units demanded.

D = 3000 - 0.6x^2 x= 40 3000 -(3/5)40^2 =3000 - (3/5)1600= 3000-960 = 2040 $20.40 is the price when 40 are sold consumer surplus is the area below the demand curve and above P=20.40 It's a right triangle from 3000-2040 = 960 as the height, base = 40 area =bh/2 = 40(960)/2 = 20(960) = 19200 = $192 consumer surplus

For a linear curve

Demand is elastic at high prices

point elasticity formula:

Ed = change in Q / change in P x P/Q or 1/slope x P/Q

The opponents of globalization contend that

Globalization destroys cultures

The more substitutes that exist for a particular product, the __________ the price elasticity of demand.

Greater

An increase in the price of a substitute for iPads will lead to __________ in the quantity demanded of iPads so the cross-price elasticity of demand will be __________.

Increase, positive

In general, which good is going to be more price inelastic, insulin or yachts?

Insulin

The following excerpt is from a letter sent to a financial advice​ columnist: ​"My wife and I are trying to decide how to invest a​ $250,000 windfall. She wants to pay off our​ $114,000 mortgage, but​ I'm not eager to do that because we refinanced only nine months​ ago, paying​ $3,000 in fees and​ costs."

It is a sunk cost and should not be taken into account when deciding to pay off the mortgage

Implicit costs

Opportunity costs associated with an activity

Passage of Time

Passage of Time creates substitutes More Time = More Subs = More Elastic

total revenue is

Price x Quantity

Technology

Process turning inputs to outputs

Budget Constraint

Purchased goods/services within a given income

Why don't we reley on slope for elasticity measurements

Slope depends on units and if you change the units the demand curve changes and so does the slope, but elasticity won't change

Total costs

TC = FC + VC costs that change as output changes

Total Revenue

TR = P x Q total $$$ from selling a good/service

marginal benefit

The maximum price a consumer will be willing to pay for an additional unit of a product. It is the dollar value of the consumer's marginal utility from the additional unit, and therefore it falls as consumption increases.

Law of Diminishing Marginal Utility (DMU)

The more one consumes of something, the less satisfied they are about it over a period of time.

inelastic demand

The percentage change in quantity demanded is less than the percentage change in price. Elasticity is less than 1 in absolute value

perfect elastic demand

The quantity demanded will increase to infinity when the price decreases, and quantity demanded will decrease to zero when price increases.

Which of the following is a source of comparative advantage?

The relative abundance of capital and labor

Elastic Demand in terms of slope

The smaller the slope, the more elastic is the product

Network Externality

The usefulness of a product Increases as the # of people using the product increases

The Only Determinant of Price Elasticity of Supply

Time

opportunity cost

Trade offs

What values make elasticity elastic?

Values> |1|

Inealistic demand

When a product has inelastic demand it is not sensitive to a change in price. As you can see the quantity demanded remains constant at 20 for the curve on the left regardless of price.

elastic demand

When percentage change in quantity is greater than the percentage change in price. Price is elastic when the price elasticity is greater than 1 in absolute value.

What is the cross-price elasticity of demand for two goods that are unrelated?

Zero

sunk cost

a cost that has already been committed and cannot be recovered

Indifference Curve

a curve that shows the combinations of consumption bundles that give the consumer the same utility

Black markets

a market in which goods or services are bought and sold illegally, either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling

The income elasticity for peanut butter is -3. This defines peanut butter as what type of good?

an inferior good

A perfectly inelastic supply curve:

indicates the quantity supplied does not respond to a change in price

If the cross-price elasticity of demand between two products is -3.0, then the two products are:

complements

explicit costs

costs that managers must take account of because they must be paid wages, taxes, raw materials, insurance

fixed costs

costs that remain the same as output (Q) changes

explicit costs

costs that require a firm to spend money ( anything you have to pay money for)

if price increases, quantity demanded will

decrease

perfect inelastic demand

demand in which quantity demanded does not change at all to a change in price

Which of the following refers to a flow of funds from savers to firms through financial markets?

direct finance

The flatter the curve the more (

elastic

passage of time: long run = more ___ short run = more ____

elastic and inelastic

implicit costs

expenses that managers do not have to pay out of pocket and hence do not normally explicitly calculate no direct payment

The more substitutes that exist for a particular product, the __________ the price elasticity of demand.

greater

what does share of income mean? how does it effect price elasticity?

how much of my wallet do I have to give up? cars, houses --> elastic gum, candy --> inelastic (if price change, not a big deal will still buy)

One determinant of price elasticity of supply is

how rapidly costs increase when a firm increases its output.

The disappearance of the family farm can be partially attributed to the fact that the elasticity of demand for wheat is __________, while at the same time, the income elasticity for wheat is __________.

inelastic, low

The income elasticity for peanut butter is -3. This defines peanut butter as what type of good?

inferior good

Along a linear demand curve, the slope __________ while the price elasticity of demand __________.

is constant, changes from one point to another

supply elasticity: how costly is it to produce more output units when more inputs are needed?

low increase in costs to increase production = elastic supply high increase in costs to increase production = inelastic supply

what is perfectly inelastic mean? what does the graph look like?

no matter what happens to price, you will always buy the same amount of good example: life saving drugs, surgery vertical slope

Economists avoid confusion over units in the computation of elasticity by using:

percentage changes

Which of the following goods is probably the most highly income elastic?

private education

Behavioral Economics

psychological, social, emotional factors of decisions.

A numerical limit on the quantity of a good that can be imported is a:

quota

if price elasticity of demand is elastic... revenue can be increased by

selling more units at a lower price

for a linear demand function

slope is constant, but Ed changes

When the elasticity of demand for a product is __________ the elasticity of supply, consumers pay __________ of the tax on the product.

smaller than, the majority

consumer surplus

the amount a buyer is willing to pay for a good and the actual amount the buyer actually pays for it

producer surplus

the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives

tax incidence

the division of the burden of a tax between buyers and sellers

short run

the period of time during which at least one of a firm's inputs is fixed

dead weight loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium

economic surplus

the sum of consumer surplus and producer surplus

Endowment Effect

the tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it

long run

the time period in which all inputs can be variable

Inelastic goods examples

toothpicks, insulin, salt, alcohol, tobacco

An agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from another country is known as a(n):

voluntary export restraint

In order to maximize utility what two conditions must be met?

would be the number of units of utility that a consumer gains from consuming a given quantity of a good, service, or activity during a particular time period. The higher a consumer's total utility, the greater that consumer's level of satisfaction.

what is perfectly elastic mean? what does the graph look like?

you will only buy this good at one price, any increase in price means you will buy none of this good example: $10 bill horizontal; slope = 0


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