Econ 215 Exam 2
If the price were P3, consumer surplus would be represented by the area
A
Equilibrium Price
the price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy
The vertical distance between points A and B represents a tax of consumer surplus associated with some buyers dropping out of the market as a result of the tax is.. 1/2 x b x h b= 2-1 ; h= 9-6 1/2 x 1 x 3 = 1.5
$1.50
The vertical distance betwen points A and B represents the tax in the market. The price that buyers pay after the tax is imposed
$24
The vertical distance between points A and B represents a tax in the market. The loss of consumer surplus for those buyers of the good who continue to buy it after the tax is imposed is...
$3
At Nick's Bakery, the cost to make a cheese danish is $1.50 per danish. As a result of selling 10 danishes, Nick experiences a producer surplus in the amount of $20. Nick must be selling his danishes for... (Solving 10 x (P - cost) 20= 10x (P - 1.50) 2=P-1.50 P= 2 + 1.50 = 3.50
$3.50 Each
Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book?
$8
The vertical distance betwen points A and B represents the tax in the market. The per unit burden of the tax on buyers is..
$8
At the equillibrium price, consujmer surplus is
$800
Opponents of Minimum Wage (Not the best way to combat poverty)
-Causes unemployment, encourages teenagers to drop out of school, prevents some unskilled workers from getting on the job training -Less than a third of minimum wage earners are in the families with incomes below the poverty line -Many are teenagers from middle class homes working at part time jobs for extra spending money.
Total Surplus = CS + PS
-Consumer surplus = value to buyers - amount paid by buyers; buyers' gains from participating in the market -Producer surplus = amount recieved by sellers - cost ti sellers ; Sellers' gains from participating in the market. -Totoal surplus= value to buyers - cost to sellers;
Allocaation of Resources
-Decentralized ; determined by interactions of many self-interested buyers and sellers -Totoal surplusm - measure of society's allocation is effecient
Equality
-Distribute eonomic prosperity uniformly among the members of society -Every member of society gets an equal slice of the pie
Markets are usually a good way to organize economic activity
-Ecomnomists usually oppose price ceilings and prce floors -Prices are not the outcome of some haphazard process -Prices have the crucuial job of balancing supply and demand; Coordinating economic activity
Market Efficiency & Market Failure
-Forces of supply & demand; Allocate resources efficietly -Assumptions ab how markets work; 1.)Markets are perfectly competitive. 2.)Outcome in a market matters only to the buyers & sellers in the market -When these assumptions do not hold; Market equilirbirum is efficient may no longer be true
Tax incidence
-How the burden of a tax is shared among market participants
The benevolent planner
-Hypothetical character: an all-knowing, all-powerful, well intended dictator -Wants to maximize the economic well-being of everyone in society -Evaluate market outcomes -Cares about efficieency and equality
Minimum Wage
-If the federal mimimum wage is raised gradually to $15 per hour by 2020, the emplyment rate for low wafe U.S. workers will be substantially lower than it would be under the status quo. -Greatest impact on the market for teenage labor -Least skilled and least experienced -WIlling to accept a lower wage in exchange for on the job training -10% increase in minimum wage decreases teenage emplyment by 1-3$ -Focus on effecrs in short-run -Long run effects: Hared to estimate, more relevant and likely larger.
Minimum Wage Long Run Effects
-Increase quantity supplied of labor -Higher # of teens who choose to look for jobs
Rationing mechanisms for shortage
-Long lines -Discrimination according to sellers biases -Often unfair and inefficient -DO not necessrily go to the buyers who value them most highly.
Policies
-Often have effects that their architects did not intend or anticipate -Alter the private market outcome -Price controls -Taxes
Advocates of Minimum Wage
-One way to raise the income of working poor -Workers who earn the minimum wage can afford only a meager standard of living
Total Consumer Surplus
-The area below the demand curve and above the market price -The height of the demand curve = the value buyers place on the good (WTP0 -Each buyer's CS = WTP - P -The sum of the consumer surplus of all buyers in the market
Producer surplus (PS = P - cost)
-The area below the price and above the supply curve; the height of the supply curve measures seller's costs -Total area is the sum of the producer surplus of all sellers.
Unskilled Labor Example Image (1)
-The equilibrium wage ($9) is below the floor and therefore legal -The price floor is binding, causes surplus(unemployment) W=$10.25 Qd=400 Qs=550
Willingness to sell(WTS)
-The lowest price accepted by a seller for one unit of a good or service -The cost is a measure of willingness to sell: produce and sell the goods/service only if the price > the cost
Binding
-The price cisimg is _______; causes a shortage. -Supply and demand of rental apartments are more price-elastic. -The shortage is LARGER
The market for bicycles is in equilibrium as in the graph. A.$90 Price ceiling B.$90 Price floor C.$120 Price floor
-The price falls to $90(binding price ceiling below the equillibrium) -Buyers demand 120 bicycles, sellers supply 90, leaving a shortage of 120-90= 30 bicycles
Government uses taxes
-To raise revenue for public projects; roads, schools, national defense
Cost
-Value of everything a seller must give up to produce a good; including oppurtunity cost.
Governments can sometimes improve market outcomes
-Want to use price-controls; bc of their unfair market outcome; aimed at helping the poor -Often hurt those they are trying to help -Other ways of helping those in need; rent subsides -Wage subsidies(earned income tax credit)
Tax incidence
-the manner in which the burden of a tax is shared among participants in a market -The gov. can make the seller/buyer pay the tax
In the absence of trade, total surplus in the Guatemalan coffee market amounts to CS= A + B + D PS=C + F CS= 1/2 x 30 x (140-90) = 750 PS=1/2 x 30 x (90-30) = 900 TS= 750+900
1,650
With trade, total surplus in the Guatemala coffee market amounts to CS= A PS= B+ D + G + C + F CS= 1/2 x 18 x (140-110)= 270 PS= 1/2 x 40 x (110 - 30) = 1,600 TS=270+ 1600
1,870
Free Market Outcomes
1.)Allocate the supply of goods to the buyers who value them most, as measured by their WTP 2.)Allocate the demand for goods to sellers who can produce them at the lowest cost. 3.)Produce the quantity of goods thatb miximizes the sum of consumer and producer surplus; raising or lowering the quanity of a good would not increase total surplus
If the tax on a good is increased $1 per unit to $4 per unit, the deadweight loss from the tax increases by a factor of.. (Taxes increase 4 times DWL 4 x 4 = 16 times)
16
In the market for widgets, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. The equilibrium quantity in the market for widgets is 200 per month when there is no tax. Then a tax f $5 per widget is imposed. As a result, the gov. is able to raise $800 per month in tax revenue. We can conclude that the equilibrium quantity of widgets has fallen by.. T x Qt 800= 5x Qt Q= 800/5 = 160 Qf= 200 Reduction = Qe- Qt =200 - 160 = 40
40 per month
Suppose sellers of the good successfully lobby Congress to impose a price floor $2 above the equillibirum price in this market. How many units of th3e good are pirchased after the imposition of the price floor?
5, two down from equillibrium
If the supply curve is S', the demand curve is D, and the equillibrium price is $150, what isw the producer surplus? PS=1/2x bx h 1/2 x 25x 50 =625
625
Price Floor
A legal minimum on the price at which a good can be sold -Example: Minimum wage laws
Supppose the government wants to encourage Americans to excercise more, so it , so it imposes a binding price ceiling on the market for in-home treadmills As a result,
A shortage of treadmills will develop
If a bindinf price floor is imposed on the video game market then
A surplus of video gmes will develop
Area of triangle
A=1/2bh
When is a good taxed?
Buyers and sellers of the goods share the burden of the tax -Tax burden is divided based on the elasticity of demand and elasticity of supply
Whow bears the most of the tax burden?
Buyers do, it is easier for sellers to leave the markert.
Suppose the gov. imposes a $1 tax in each of the four markets represented by demand curves D1, D2, D3 & D4. The deadweight will be the smallest in the marker represented by (Smaller elasticity, smaller DWL; Steeper the demand curve, lower the elasticity)
D1
If Pd>Pw
Domestic country does not have comparative advantage, country imports the goodDomestic country has comparative advantage, country exports the good direction of trade -imports consumer surplus-rises producer surplus-falls Total surplus -rises
If Pd < Pw
Domestic country has comparative advantage, country exports the good direction of trade -exports consumer surplus-falls producer surplus-rises Total surplus -rises
When a tax is imposed on the buyers of a good, the demand curve shifts
Downward by the amount of the tax
Gov. revenue raised by tarriff is represented by the area Area of E: (4.5 - 3) x (6.5 - 3.5) = 1.5 x 3 = 4.5
E
Erin would be willing to pay as much as $100 per week to have her house cleaned. Ernesto's opportunity cost of cleaning Erin's house is $70 per week. Assume Erin is required to pay a tax of $40 when she hires someone to clean her house for a week. Which of the following is correct.
Erin will now clean her own house
Not Binding
Has no effect on the market outcome'; a price ceiling ABOVE the equilibrium price is ___ _______
Suppose the world price for televisiom is $300. Before Paraguay allowed trade in televisions, the price of a television there was $350. Once Paraguay began allowing trade in televisions with other countries, Paraguay began..
Importing televisions and the price of a television in Paraguay decreased to $300
If the government levies $1,000 tax per boat on sellers of boats, then the price paid by buyers of boats would..
Increase by less that $1,000
Tomato sauce and spaghetti noodles are complementary goods. A decrease in the price of tomatoes will...
Increase consumer surplus in the market for tomato sauce & increase producer surplus in the market for spaghetti noodles.
Price Ceiling
Legal maximum on the price at which a good can be sold. -Example: rent control laws
Rent Control
Local ordinances that are reasonably related to the prevention of excessive rents and maintaining the availability of existing housing. Limits rent increase for some rental housing units
Market failures
Market power: A single buyer/seller controls market prices; markers are inefficient -Externalitites: Decisions of buyers and sellers affect people who are not participants in the market at all; inefficient eqilibrium - from the standpoint of society as a whole
Suppose televisions are a normal good and buyers of televisions experience a decrease in income. As a result, consumer surplus in the television market
May increase, decrease, or remain unchanged
If the giv. imposes a price ceiling at $6, it would be
Nonbinding if market demand is Demand A and binding if market demand is Demand B
When the nation of Worldova allows trade and beomes an exporter of silk,
Residents of Worldova who produce silk become better off; residents of Worldova who buy silk become worse off; and the economic well-being of Worldova rises.
Shortage =
Sellers mist ration the goods among buyers
Suppose the gov. imposes a tax of P'-P". The area measured by K + L represents
Tax Revenue
Efficiency
The allocation of resources meximizes total surplus -Is the pie as big as possible?
Economists as policy advisors
Use theories to help change the world for the better.
Assume, for Vietnam, that the domestic price of textiles without international trade is lower than the world price of textiles. This suggests that, in the production of textiles
Vietnam has a comparative advantage over the other countries and Vietnam will export textiles
Suppose that the demand for picture frames is highly inelastic, and the supply of picture frames is highly elastic. A tax of $1 per frame levied on picture frames will increase the price paid by buyers of picture frames by
between $0.50 and $1
In this market, a minimum wage of $7.00 is
binding and creatres unemplyment
With trade, Guatemala will
export 22 units of coffee
