Econ Exam 1 Study guide

According to the law of demand, assuming other factors are held constant

As the price of milk decreases, the quantity of milk demanded will increase.

Which of the following will shift the supply curve to the left?

An increase in the price of inputs to production.

Price ceilings attempt to make consumer prices ________.

lower

The downward slope of a demand curve illustrates the pattern that as ________ rises, ________ decreases.

price : quantity demanded

The federal minimum wage is an example of a:

price floor.

A supply curve is a graphical illustration of the relationship between price and

quantity supplied.

Price ceilings typically result in ________.

shortages

Which of the following factors does NOT influence the price elasticity of demand of a product?

slope of the supply curve

Determining the price elasticity of demand involves all of the following factors, but NOT

slope of the supply curve.

When supply is inelastic and demand is elastic, the tax incidence falls on ________.

the producer

A severe freeze has damaged the Florida orange crop. The impact on the market for orange juice will be a leftward shift of

the supply curve.

When quantity demanded decreases in response to a change in price

there is a movement from one point to another along the demand curve.

The conditions of demand and supply are given in the table below. What is the equilibrium price?

$2.80

At a price of $13, quantity demanded is ________, quantity supplied is ________, therefore excess ________ has occurred.

45, 27, demand

Which of the following questions would be asked by an economist studying elasticity?

How responsive are consumers and producers to changes in price?

Which of the following example(s) describe a proportional tax?

Medicare payroll tax of 2.9% of income for everyone, regardless of how much they earn

If wage increases by 10%, a(n) ________ worker is likely to supply 7% more labor because elasticity of labor supply is assumed to be ________.

adult; inelastic.

An increase in the quantity supplied can be the result from

an increase in price.

Negative cross price elasticity of demand between two goods indicates that the two goods are

complements.

When supply is elastic and demand is inelastic, the tax incidence falls on the ________.

consumer

Given that total revenue = price x quantity, what will happen to total revenue if price increases when demand is elastic?

decrease

When the price of a particular good increases

demand for substitute goods rises. demand for complementary goods falls.

A price floor attempts to keep prices ________.

higher than the equilibrium price

Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of demand for your company's product at the current price is 1.4, what would you advise the company to do?

lower the price

Excess supply will result in suppliers ________ prices, which encourages demanders to demand ________ .

lowering; more

In general, supply curves slope

upward from left to right.

There are two common ways to discourage tobacco use; taxes on tobacco and information campaigns on the hazards of tobacco use. Which way causes a decrease in demand for smoking?

Information campaign on hazards of tobacco.

A price floor creates ________ when it is set ________ the equilibrium price.

It results in a greater quantity supplied than the quantity demanded, otherwise known as excess supply.

When ________, business firms will collectively supply a higher quantity of output at any given price, and the supply curve will shift to the right.

costs of production fall

Elasticity measures the behavioral response of economic agents in a given situation. Which question is likely to be answered using elasticity?

If a restaurant puts their pizza on sale, will the additional number of pizzas sold offset the discount on each item? Will their sales revenues for pizza go up or down?

How does a price floor set above the equilibrium price affect quantity demanded and quantity supplied?

It results in a greater quantity supplied than the quantity demanded, otherwise known as excess supply.

Suppose there is a major technological advance in the production of a good that causes production costs to fall. If demand for the product is relatively inelastic, what will happen in the market?

Price will relatively decrease greater than the increase in quantity.

Which of the following example(s) describe a regressive tax?

Social Security tax rate of 6.2% on earned income below $117,000 and 0% on income earned above $117,000

Using the midpoints method, calculate the price elasticity of demand of Good X using the following information: When the price of good X is $50, the quantity demanded of good X is 400 units. When the price of good X rises to $60, the quantity demanded of good X falls to 300 units.

The price elasticity of demand for good X = 1.57.

Using the midpoints method, calculate the price elasticity of demand of Good Z using the following information: When the price of good Z is $10, the quantity demanded of good Z is 85 units. When the price of good Z rises to $15, the quantity demanded of good Z falls to 60 units.

The price elasticity of demand for good Z = 0.52.

You are the manager of the public transit system. You are informed that the system faces a deficit, but you cannot cut service, which means you cannot cut costs. Your only hope is to increase revenue by increasing fares. You are advised that the estimated price elasticity of demand for the first few months after a price change is about −0.3. Select the statement that best describes the results of raising the fare in the short run.

Total revenue rises immediately after the fare increase, since demand over the immediate period is price inelastic.

The size of the change in the quantity demanded of a good or service due to change in its price is measured by the elasticity of demand. When the percentage change in the quantity demanded for a good or service is less than the percentage change in price, the demand for that good or service is ________ and the price elasticity coefficient is ________.

inelastic, less than 1

A person who takes life-saving prescription drugs most likely has a(n) ________demand for that drug. Therefore an increase in the price of the drug will result in ________ total revenue for the drug company.

inelastic; increased

When income increases and demand for a good falls, the good is considered a

inferior good.

A flat tax:

may not be realistic because most actual proposals exempt lower income households from paying taxes. imposes a single, identical tax rate on the income of all taxpayers.

The downward slope of a demand curve illustrates the pattern that as ________ decreases, ________ increases.

price : quantity demanded

The elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in

price.

Elastic supply occurs if the change in quantity supplied is ________ to a change in price.

relatively responsive

If consumers find cola and iced tea good substitutes, then it is likely that

the goods' cross price elasticities are greater than zero.

When a 5% increase in income causes a 3% drop in quantity demanded of a good

the income elasticity is .6 and the good is an inferior good.

The elasticity of supply is defined as the

the percentage change in quantity supplied divided by the percentage change in price.

You are the manager of a restaurant and would like to increase revenue. The host staff suggests that you should increase the price of drinks and food, but the servers suggest decreasing the price of drinks and food. You are unsure if you should increase or decrease price, but you know that

the servers thinks demand for drinks and food is elastic.

A competitive market is one in which

there is a large number of buyers and sellers.

When quantity demanded increases in response to a change in price

there is a movement from one point to another along the demand curve.

If the supply curve for a product is horizontal, then the elasticity of supply is

equal to infinity.

Price ceilings attempt to make consumer prices ________. ​

lower

When income increases and the demand for a good increases, the good is considered a

normal good.

The ability to pay principle of taxation holds that:

people with more income should pay more taxes.

When the demand for a good or service does NOT vary when there is a change in price, the good is ________?

perfectly inelastic

Demand "D" represents a demand curve that is

perfectly inelastic.

A demand curve shows the graphical relationship between quantity demand and

price.

A supply curve is a graphical illustration of the relationship between quantity supplied and

price.

When there is an excess demand for a good

suppliers increase prices, causing demanders to demand less.

Good weather and heavy winter rain increases the supply of agricultural products. This means that at any given price, a higher quantity will be supplied. Conversely, a drought would shift the

supply curve to the left.

A drought decreases the supply of agricultural products. This means that at any given price, a lower quantity will be supplied. Conversely, especially good weather would shift the

supply curve to the right.

The relationship between the price in a market and the amount that producers collectively make available for sale, is referred to as

supply.

In a market with an upward sloping supply curve and a downward sloping demand curve, when there is an excess supply,

the actual price must be higher than the equilibrium price.

In a planned economy, government determines what can be produced and

what prices will be charged.

At a price of $16, quantity demanded is ________, quantity supplied is ________, therefore excess ________ has occurred.

5, 35, supply

If price was $1.40 per gallon and increased to $2.00 per gallon, how does quantity demanded of gasoline change?

600 million gallons to 460 million gallons

Which of the following will shift the supply curve to the right?

A decrease in the price of inputs to production.

A 10% decrease in the price of potato chips leads to a 30% increase in the quantity of soda demanded. It appears that

cross-price elasticity of demand for soda is -3.

Suppose the price of apples increase by 20%, resulting in consumers to purchase 15% more pears. Given this information, it appears that

cross-price elasticity of pears is 0.75.

In a market with relatively inelastic demand, if the supply curve shifts due to a fall in production costs, the equilibrium price will ________ by ________ than equilibrium quantity.

decrease; more

Supply is said to be ________ when the quantity supplied is very responsive to changes in price.

elastic

Which of the following concepts can be used to understand the effects of price changes on quantity demanded and quantity supplied, as well as the effect of raising taxes on revenue from the tax?

elasticity

The ________ is where quantity demanded and quantity supplied are equal at a certain price.

equilibrium

The one unique point in which quantity demanded equals quantity supplied is called

equilibrium.

A price ceiling creates ________ when it is set ________ the equilibrium price.

excess demand -- below

A price floor creates ________ when it is set ________ the equilibrium price.

excess supply -- above

In a market with an upward sloping supply curve and a downward sloping demand curve, when the actual price must be higher than the equilibrium price, there will be

excess supply.

Sales taxes are:

generally considered to be regressive. imposed as a percentage of the value of the purchase

Elasticity refers to

how responsive one variable is to changes in another.

Complete the following sentence: If people think that the price of electronics will increase in the near future, that belief may cause a(n)

increase in the demand for electronics today.

According to the law of demand, assuming other factors are held constant

As the price of milk decreases, the quantity of milk demanded will increase

The demand for cigarettes is highly inelastic. This suggests that the incidence of a higher tax on cigarettes will fall primarily on:

Cigarette consumers.

If an increase in the price of Nike shoes increases the demand for Adidas shoes, this means that

Nike shoes and Adidas shoes are substitutes.

You are the manager of the public transit system. You are informed that the system faces a deficit, but you cannot cut service, which means you cannot cut costs. Your only hope is to increase revenue by increasing fares. You are advised that the estimated price elasticity of demand, several years after the price change, will be about −1.5. Select the statement that best describes the results of raising the fare in the long run.

Total revenue falls, since demand changes and becomes price elastic.