Problem Set #2

If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods? Prices and quantities both rise. Prices and quantities both fall. Prices rise, quantities fall. Prices fall, quantities rise.

Prices and quantities both rise. If the demand for a good rises when income falls, the good is called an inferior good. An increase in demand results in a rise in both the equilibrium price and quantity of a good

Movement along / shift in the demand curve: ==> An increase in the price of hazelnut spread (a substitute for peanut butter) ==> A change in tastes of consumers that makes them desire more peanut butter ==> A decrease in the price of peanut butter

Shift Shift Movement along The demand curve for peanut butter shows the relationship between the price of peanut butter and the quantity of peanut butter demanded by consumers, assuming that all of the determinants of demand are held constant. The following list displays determinants of demand, which are the factors that affect the quantity of peanut butter consumers want to buy at a given price: Therefore, if the price of peanut butter changes, the result is a movement along the demand curve from the old price to the new one. However, if a change occurs in any of the factors that determine demand, the result is a shift of the demand curve.

Movie tickets and film streaming services are substitutes. If the price of film streaming increases, what happens in the market for movie tickets? The supply curve shifts to the left. The supply curve shifts to the right. The demand curve shifts to the left. The demand curve shifts to the right.

The demand curve shifts to the right. When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. If movie tickets and film streaming services are substitutes and the price of film streaming increases, this means the demand for movie tickets will also increase. This results in the demand curve shifting to the right. See Section: Shifts in the Demand Curve.

Which of the following would increase quantity supplied, increase quantity demanded, and decrease the price that consumers pay? The imposition of a binding price floor The removal of a binding price floor The passage of a tax levied on producers The repeal of a tax levied on producers

The repeal of a tax levied on producers When a tax is levied on producers, it places a wedge between the price that buyers pay and the price that sellers receive. This wedge shifts the relative position of the supply and demand curves. In the new equilibrium, buyers and sellers share the burden of the tax. If this tax is repealed, the market returns to its competitive equilibrium, increasing quantity supplied ( QS ) and quantity demanded ( QD ) and decreasing the price consumers pay ( P )

Two drivers—Walt and Jessie—each drive up to a gas station. Before looking at the price, each places an order. Walt says, "I'd like 10 gallons of gas." Jessie says, "I'd like $10 worth of gas." what is each of their price elasticity of demand

Walt-- 0 Jessie-- 1 The price elasticity of demand measures how much the quantity demanded responds to a change in price. Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price; this is consistent with a price elasticity of demand greater than 1. Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price; this is consistent with a price elasticity of demand less than 1. When the percentage change in quantity equals the percentage change in price, the price elasticity of demand is 1 and demand is said to be unit elastic. Walt's price elasticity of demand is 0 in this case because he wants the same quantity regardless of the price. Jessie's price elasticity of demand is 1 because she spends the same amount on gas no matter what the price. See Section: Total Revenue and the Price Elasticity of Demand.

A $1 per unit tax levied on consumers of a good is equivalent to a $1 per unit tax levied on producers of the good. a $1 per unit subsidy paid to producers of the good. a price floor that raises the good's price by $1 per unit. a price ceiling that raises the good's price by $1 per unit.

a $1 per unit tax levied on producers of the good. Taxes levied on sellers and taxes levied on buyers are equivalent. In both cases, the tax places a wedge between the price that buyers pay and the price that sellers receive. The wedge between the buyers' price and the sellers' price is the same, regardless of whether the tax is levied on buyers or sellers. In either case, the wedge shifts the relative position of the supply and demand curves. In the new equilibrium, buyers and sellers share the burden of the tax. The only difference between a tax levied on sellers and a tax levied on buyers is who sends the money to the government. See Section: How Taxes on Buyers Affect Market Outcomes.

Rent controls force landlords to price apartments below the equilibrium price level. An immediate effect is a shortage (excess demand) of apartments, because the quantity of apartments demanded is greater than the quantity supplied at the regulated price. When cities prevent landlords from charging market rents, which of the following are common long-run outcomes? Check all that apply. a. The quality of rental housing units falls. b. Efficient use of housing space results. c. The quantity of available rental housing units falls. d. Landlords earn lower profits from renting housing units, but the rent charged has no effect on either the quantity or quality of rental units.

a. The quality of rental housing units falls. c. The quantity of available rental housing units falls. Results of Rental-Control Laws • Landlords provide less maintenance under rent control and are unlikely to upgrade their units because they cannot pass on these costs to tenants through higher rents. Because of reduced maintenance, quality suffers and housing units deteriorate more quickly. • Because the profitability of owning and renting apartment units decreases with rent control, landlords construct fewer new units and may even convert existing apartments to more profitable uses. This decreases the number of units available to renters in the future. • A shortage (excess demand) of housing units may lead renters to make under-the-table payments to secure an apartment. This can lead to the development of a black market for rental units. • Because price is no longer an effective mechanism of rationing apartments, alternative methods of rationing will emerge, such as screening processes or personal networking connections.

A linear, downward-sloping demand curve is inelastic. unit elastic. elastic. inelastic at some points and elastic at others.

inelastic at some points and elastic at others. Even though the slope of a linear demand curve is constant, the elasticity is not. This is true because the slope is the ratio of changes in the two variables, whereas the elasticity is the ratio of percentage changes in the two variables. At points with a low price and high quantity, the demand curve is inelastic, while at points with a high price and low quantity, the demand curve is elastic. The explanation for this fact comes from the arithmetic of percentage changes. When the price is low and consumers are buying a lot, a $1 price increase and two-unit reduction in quantity demanded constitute a large percentage increase in the price and a small percentage decrease in quantity demanded, resulting in a small elasticity. By contrast, when the price is high and consumers are not buying much, the same $1 price increase and two-unit reduction in quantity demanded constitute a small percentage increase in the price and a large percentage decrease in quantity demanded, resulting in a large elasticity. Therefore, a linear, downward-sloping demand curve is inelastic at some points and elastic at others. See Section: Elasticity and Total Revenue along a Linear Demand Curve.

Factors That Determine Demand

• Price of a related good (complement or substitute) • Income of consumers • Tastes of consumers • Number of consumers • Expectations of consumers

Factors Affecting Supply

• Price of inputs • Production technology • Number of producers • Expectations of producers