MicroEconomics Exam 2

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Labor taxes may distort labor markets greatly if

the number of hours many part-time workers want to work is very sensitive to the wage rate.

Total surplus equations (3)

CS+PS WTP-WTS Value to buyers-cost to sellers

In cross price elasticity of demand: a negative is a

Compliment

Inelastic or Elastic? Goods with substitutes

Elastic

Inelastic or Elastic? Long term

Elastic

Inelastic or Elastic? Luxuries

Elastic

Inelastic or Elastic? Narrow categories

Elastic

Inelastic or Elastic? Broad categories

INElastic

Inelastic or Elastic? Necessities

INElastic

Inelastic or Elastic? Short term

INElastic

In Income Elasticity of demand: negative means

Inferior good

In cross price elasticity of demand: 0 is a

No relationship

Price ceiling above equilibrium

Nonbinding

Price floor below equilibrium

Nonbinding

In Income Elasticity of demand: positive means

Normal goods: necessities, luxuries

How is the burden of a tax divided?

Regardless of whether the tax is levied on the buyers or the sellers, the buyers and sellers bear some proportion of the tax burden.

In cross price elasticity of demand: a positive is a

Substitute

Suppose that Jane enjoys Diet Coke so much that she consumes one can every day. Although she enjoys gourmet cheese, she consumes it sporadically. If the price of Diet Coke rises, Jane decreases her consumption by only a very small amount. But if the price of gourmet cheese rises, Jane decreases her consumption by a lot. These examples illustrate the importance of

a necessity versus a luxury in determining the price elasticity of demand

Price ceiling below equilibrium

are binding, causes deficiency and price will lower (sellers favor)

Price floors above equilibrium

are binding. cause excess supply which will raise prices (suppliers favor)

Demand effects

consumers

A tax imposed on the buyers of a good will lower the

effective price received by sellers and lower the equilibrium quantity.

Other things equal, the deadweight loss of a tax

increases as the size of the tax increases, and the increase in the deadweight loss is more rapid than the increase in the size of the tax.

The deadweight loss from a tax of $2 per unit will be smallest in a market with

inelastic supply and inelastic demand

The minimum wage, if it is binding, lowers the incomes of

only those workers who have become unemployed

Supply effects

suppliers

Buyers of a product will bear the larger part of the tax burden, and sellers will bear a smaller part of the tax burden, when the

supply of the product is more elastic than the demand for the product.

If a change in the price of a good results in no change in total revenue, then

the demand for the good must be unit elastic.

The "invisible hand" refers to

the marketplace guiding the self-interests of market participants into promoting general economic well-being.

Whichever one is more INelastic

will pay more tax


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