econ midterm 2
Government should tax goods with __________ externalities
negative to discourage them
If the government imposes a price ceiling of $6 on a market w an equilibrium price of $5, then there will be
no shortage - 6 is the max price that can be charged therefore people will continue to buy
whats a binding price floor
one set above the equilibrum price
deadweight loss
the fall in total surplus that results from a market distortion, such as a tax
Suppose the government places a per-unit tax on a good. The smaller the price elasticities of demand and supply for the good, the
smaller the deadweight loss from the tax.
how do you find consumer surplus
subtract how much they are willing to pay with the actual price
Suppose a tax of $4 per unit is imposed on a vaping liquid, and the tax causes the equilibrium quantity of vaping liquid to decrease from 2,000 units to 1,700 units. The tax decreases consumer surplus by $3,000 and decreases producer surplus by $4,400. The deadweight loss of the tax is
1/2(2000-1700)(4)= $600
dead weight loss formula
1/2* base*height
Kristi and Rebecca sell lemonade on the corner for $0.50 per cup. It costs them $0.10 to make each cup. On a certain day, their producer surplus is $20. How many cups did Kristi and Rebecca sell?
50 - .50-.10= .4 - 20/.4= 50
Cameron lives in an apartment building and gets a $700 benefit from playing his stereo. Renee, who lives next door to Cameron and often loses sleep due to the music coming from Cameron's stereo, bears a $1,000 cost from the noise. At which of the following offers from Renee could both Renee and Cameron benefit from the silencing of Cameron's stereo?
750 - cameron would benefit with a price more than 700 - renee would benefit w a price less than 1000
What is a price ceiling?
A legal maximum on the price at which a good can be sold
Which of the following is an example of a positive externality?
A neighbor plants beautiful flowers in her front yard.
Suppose that flu shots create a positive externality equal to $8 per shot. Further suppose that the government offers a $11-per-shot subsidy to consumers. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?
The equilibrium quantity is greater than the socially optimal quantity.
Which of the following would cause a shortage?
binding price ceiling is imposed on a market. - bc a binding price ceiling is above he equilibrium price so it is reducing the surplus
When the government places a new tax on a good,
both buyers and sellers are made worse off. it affects both
Dawn's bridal boutique is having a sale on evening dresses. The increase in consumer surplus comes from the benefit of lower prices to
both existing customers who now get lower prices on the gowns they were already planning to purchase and new customers who enter the market because of the lower prices.
Suppose the government puts a tax on a market with inelastic demand and elastic supply, then
buyers will bear most of the burden of the tax. - the demand isn't affected by the price change so people are still buying it but the supply is affected by it. Therefore the buyers are having to pay more willingly
The decrease in total surplus that results from a market distortion, such as a tax, is called a
deadweight loss
Introducing a binding price floor into a market will
decrease consumer surplus and have ambiguous implications for producer surplus.
deadweight loss is at its maximum when supply curve is
elastic
Most economists prefer corrective taxes to regulation as a way to correct the problem of pollution because the market-based solution
encourages the firms with the lowest costs of reducing pollution to reduce the most.
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. Suppose 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 celan her own house - if she has to pay ernesto 70 on top of a 40 tax it would be 110 but she is only willing to pay 100. so she wont hire him
Suppose that a market is allowed to adjust freely to its equilibrium price and quantity, then an increase in demand will
increase producer surplus. - bc they woould be intersected
A positive externality
is a benefit to someone other than the producer and consumer of the good.
A negative externality
is a cost to a bystander. - bc its an imposition to the price not set my supply or demand
government should subsidize goods w ______________externalities
positive to promote them
consumer surplus
price consumers pay is less than what they are willing to pay
Suppose a tax is created that the buyers of a good must pay to the government. This will raise the
price paid by buyers and lower the equilibrium quantity. - bc tax increase the price so the buyer pays more but the equilibrium lowers bc the demand will decrease due to the higher price
Moving production from a high-cost producer to a low-cost producer will
raise total surplus. overall its less expensive
what happens when the price ceiling is placed belwo the equilibrium
shortage
Consider a good to which a per-unit tax applies. The size of the deadweight that results from the tax is smaller, the
smaller is the price elasticity of supply.
The majority of economists prefer corrective taxes to command-and-control regulation as a way to correct the problem of pollution because
the market-based solution can result in a greater reduction in pollution. - bc the buyer is being burdened the market-based solution raises revenue for the government. - gov is getting more money for more things tat are useful the market-based solution is less costly to society. -
A seller's opportunity cost measures the
value of everything she must give up to produce a good.
The equilibrium price is
when demand and supply are equal
consumer surplus loss
when demand is higher than production
market distortion
when the price of goods is influence by anythign other thsn supply and demand ex. subsidising farming activity ex: tax