Exam 2

Producing a soccer ball costs Jake $5. He sells it to Darby for $35. Darby values the soccer ball at $50. For this transaction, the total surplus in the market is

$36

If the price elasticity of demand for a good is 5, then a 10 percent increase in price results in a

50 percent decrease in the quantity demanded

inelastic demand

A situation in which an increase or a decrease in price will not significantly affect demand for the product- there are substitutes

Dallas buys strawberries, and he would be willing to pay more than he now pays. Suppose that Dallas has a change in his tastes such that he values strawberries more than before. If the market price is the same as before, then

Dallas's consumer surplus would increase

if the price elasticity of demand for a good is 1.4, then a 14 percent increase in the quantity demanded must be the result of

a 10 recent decrease in the price

If the price elasticity of supply for a window manufacturer is 1.5,

a 10% increase in the price of windows results in a 15% increase in the quantity of windows supplied

Minimum-wage laws dictate

a minimum wage that firms must pay workers

In response to a shortage caused by the imposition of a binding price ceiling on a market,

a price will no longer be the mechanism that rations scarce resources

A price ceiling set above the equilibrium price causes

a shortage in the market

After a binding price floor becomes effective, a

a smaller quantity of the good is bought and sold

a price floor is binding when it is set

above the equilibrium price, causing a surplus.

producer surplus is the

amount a seller is paid minus the cost of production

when demand is elastic, an increase in price will cause

an decrease in total revenue

consumer surplus in a market can be represented by the

area below the demand curve and above the price

producer surplus measures the

benefit to sellers of participating in a market

Dawn's bridal boutique is having a sale on evening dresses. The increase in consumer surplus comes from the benefit of the 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

when a tax is places on the sellers of energy drinks, the

burden of the tax will be shared by the buyers and the sellers, but the division of the burden is not always equal.

If demand is price inelastic, then

buyers do not respond much to a change in price

To say that a price floor is binding is to say that the price floor

causes quantity supplied to exceed quantity demanded

if a tax is levied on the sellers of a product, then there will be a

decrease in quantity demanded

The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium price of chocolate

decreases, and producer surplus decreases

why was OPEC unable to maintain high oil prices in the long run

demand and supply are both elastic in the long run compared to the short run

The mayor of Workerville proposes a local payroll tax to fund a new water park for the city. The mayor proposes to collect half the tax from workers and half the tax from firms. The mayor will be able to successfully divide the burden of the tax equally if the

demand for labor and supply of labor are equally elastic

Sellers of a good bear the larger share of the tax burden when a tax is placed on a product for which the

demand in more elastic than the supply

Denise values a stainless steel dishwasher for her new house at $500. The actual price of the dishwasher is $650. Denise

does not buy the dishwasher, and on her purchase she experiences a consumer surplus of 0$

When a tax is placed on the buyers of a product, the

effective price received by sellers decreases, and the price paid by buyers increases

Demand is said to have unit elasticity if the price elasticity of demand is

equal to 1

Welfare economics is the study of the welfare system.

false

The case of perfectly elastic demand is illustrated by a demand curve that is

horizontal

if the price elasticity of supply is 1.2, and price increased by 10%, quantity supplied would

increase by 12%

if the government levies a $5 tax per MP3 player on buyers of MP3 players, then the price paid by buyers of MP3 players would likely

increase by less than $5

Holding all other forces constant, if decreasing the price of a good leads to a decrease in total revenue, then the demand for the good must be

inelastic

The supply of oil is

inelastic in the short run and elastic in the long run

A nonbinding price ceiling

is set at a price above the equilibrium price

Which of the following could be the price elasticity of demand for a good for which an increase in price would increase revenue?

less than 1

Suppose the government imposes a 25-cent tax on the buyers of incandescent light bulbs. The tax would NOT

lower the equilibrium price by 25 cents

the price elasticity of demand measure the

magnitude of the response in quantity demanded to a change in price

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

consumer surplus

measures the benefit buyers receive from participating in a market

Goods with many close substitutes tend to have

more elastic demands

In general, demand curves for luxuries tend to be

price elastic

when a binding price floor is imposed on a market,

price no longer serves as a rationing device

total surplus in a market will increase when the government

removes a binding price ceiling from that market

A seller is willing to sell a product only if the seller receives a price that is at least as great as the

sellers cost of production

if the government allowed a free market for transplant organs such as kidneys to exist, the

shortage of organs would be eliminated, and there would be no surplus of organs

When a supply curve is relatively flat, the

supply is relatively elastic

For a particular good, a 5 percent increase in price causes a 15 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?

there are many substitutes for this good

If a price floor is not binding, then

there will be no effect on the market price or quantity sold.

a key determinant of the price elasticity of supply is the

time horizon

We can say that the allocation of resources is efficient if

total surplus is maximimized

The willingness to pay is the maximum amount that a buyer will pay for a good and measures how much the buyer values the good.

true

When a free market for a good reaches equilibrium, anyone who is willing and able to sell at the market price can sell the good.

true

consumer surplus is equal to the

value to buyers - amount paid by buyers

Total surplus in a market is equal to

value to buyers - costs of sellers.

At the equilibrium price of a good, the good will be sold by those sellers

whose cost is less than the price

You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles,

your would be negative and your roommates would be positive