Quiz HW3

Which of the following goods (with their respective income elasticity coefficients in parentheses) will most likely suffer a decline in demand during a recession?

Plasma screen and LCD TVs (+4.2)

A producer's minimum acceptable price for a particular unit of a good:

equals the marginal cost of producing that particular unit

If the supply of product X is perfectly elastic, an increase in the demand for it will increase:

equilibrium quantity but equilibrium price will be unchanged.

Other things the same, if a price change causes total revenue to change in the opposite direction, demand is:

relatively elastic

The demand for a necessity whose cost is a small portion of one's total income is:

relatively price inelastic.

The price elasticity of supply measures how:

responsive the quantity supplied of X is to the changes in the price of X.

Compared to coffee, we would expect the cross elasticity of demand for:

tea to be positive, but negative for cream.

Suppose that Mick and Cher are the only two members of society and are willing to pay $10 and $8, respectively, for the 3rd unit of a public good. Also, assume that the marginal cost of the 3rd unit is $17. We can conclude that:

the 3rd unit should be produced

Demand-side market failures occur when:

the demand and supply curve don't reflect consumers' full willingness to pay for a good or service

We would expect:

the demand for Coca-Cola to be more price elastic than the demand for soft drinks in general.

Suppose that the price of peanuts falls from $3 to $2 per bushel and that, as a result, the total revenue received by peanut farmers changes from $16 to $14 billion. Thus:

the demand for peanuts is inelastic.

If the income elasticity of demand for lard is -3.00, this means that:

lard is an inferior good

Refer to the graph below. If the price in the above market was somehow held at $8.15 per unit (like a price floor) and only 220 units were sold, producer surplus would now equal:

1,171.5 At the price of $8.15, producer surplus is equal to [(8.15-3.65) x (220)] + [(3.65-2) x (220)x (1/2)]

Suppose the price of local cable TV service increased from $16.20 to $19.80 and as a result the number of cable subscribers decreased from 224,000 to 176,000. Along this portion of the demand curve, price elasticity of demand is:

1.2

Suppose that as the price of Y falls from $2.00 to $1.90 the quantity of Y demanded increases from 110 to 118. Then the price elasticity of demand is:

1.37

The supply of product X is perfectly inelastic if the price of X rises by:

10 percent and the quantity supplied stays the same.

The price elasticity of demand for widgets is 0.80. Assuming no change in the demand curve for widgets, a 16 percent increase in sales implies a:

20 percent reduction in price

Refer to the graph below. When the above market is in equilibrium, total surplus is equal to:

2000 Consumer surplus is equal to (12-5) x (400)x (1/2)= 1,400 and the producer surplus is equal to (5-2)x (400)x (1/2)= 600. The sum of these is 2,000 or (12-2)x 400 x (1/2)

Refer to the graph below. If the price in the above market was somehow held at $8.15 per unit (like a price floor) and only 220 units were sold, consumer surplus would now equal:

423.5 At the price of $8.15, consumer surplus is equal to (12-8.5) x (220) x (1/2)

The supply of product X is elastic if the price of X rises by:

5 percent and quantity supplied rises by 7 percent.

Refer to the graph below. When this market is in equilibrium, producer surplus is equal to:

600 Producer surplus is the area between the supply curve and the price of $5.00 per unit. This area is equal to (5-2)x(400)x (1/2)

Refer to the graph below. If the price in the above market was somehow held at $8.15 per unit (like a price floor) and only 220 units were sold, the Dead Weight Loss (DWL) to society would equal:

Deadweight loss= .5 x (P2-P1)x (Q1-Q2) =.5 x (8.15-3.65) x (400-220) = $405

Which of the following is correct?

If demand is elastic, a decrease in price will increase total revenue

The two main characteristics of a public good are:

Nonrivalry and nonexcludability

What two conditions must hold for a competitive market to produce efficient outcomes?

Supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay.

The trains of the Transcontinental Railway Company, when shipping goods, sometimes emit sparks that start fires along the tracks and damage the property of others. If Transcontinental does not pay for the damage it causes, what has occurred?

Supply-side market failure

Which of the following is not characteristic of the demand for a commodity that is elastic?

The elasticity coefficient is less than one.

Suppose the price elasticity coefficients of demand are 1.43, 0.67, 1.11, and 0.29 for products W, X, Y, and Z respectively. A 1 percent decrease in price will increase total revenue in the case(s) of:

W and Y

Suppose the income elasticity of demand for toys is +2.00. This means that:

a 10 percent increase in income will increase the purchase of toys by 20 percent.

A supply curve that is a vertical straight line indicates that:

a change in price will have no effect on quantity supplied.

Jennifer buys a piece of costume jewelry for $33 for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences

a consumer surplus of $9 and Nathan experiences a producer surplus of $3.

Which of the following is an example of a public good?

a weather warning system

Graphically, producer surplus is measured as the area:

above the supply curve and below the actual price

When the percentage change in price is greater than the resulting percentage change in quantity demanded:

an increase in price will increase total revenue

From society's perspective, in the presence of a supply-side market failure, the last unit of a good produced typically:

costs more to produce than it provides in benefits.

If the demand for product X is inelastic, a 4 percent increase in the price of X will:

decrease the quantity of X demanded by less than 4 percent.

Suppose we find that the price elasticity of demand for a product is 3.5 when its price is increased by 2 percent. We can conclude that quantity demanded:

decreased by 7 percent.

A perfectly inelastic demand curve:

graphs as a line parallel to the vertical axis.

Price elasticity of demand is generally:

greater in the long run than in the short run

If the price elasticity of demand for a product is unity, a decrease in price will:

increase the quantity demanded, but total revenue will be unchanged

An efficiency loss (or deadweight loss):

is measured as the combined loss of consumer surplus and producer surplus

Consumer surplus:

is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price

At the optimal quantity of a public good:

marginal benefit equals marginal cost

A leftward shift in the supply curve of product X will increase equilibrium price to a greater extent the:

more inelastic the demand for the product.

Suppose that a 20 percent increase in the price of normal good Y causes a 10 percent decline in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is:

negative and therefore these goods are complements

Which of the following is an example of market failure?

negative externalities, positive externalities & public goods

If one person's consumption of a good does not preclude another's consumption, the good is said to be:

nonrival in consumption

The basic formula for the price elasticity of demand coefficient is:

percentage change in quantity demanded/percentage change in price.

If quantity demanded is completely unresponsive to price changes, demand is:

perfectly inelastic

Cross elasticity of demand measures how sensitive purchases of a specific product are to changes in:

the price of some other product.

In which of the following instances will total revenue decline?

price rises and demand is elastic

Market failure is said to occur whenever:

private markets do no allocate resources in the most economically desirable way.

The formula for cross elasticity of demand is percentage change in:

quantity demanded of X/ percentage change in price of Y

Because of the free-rider problem:

the market demand for a public good is nonexistent or understated

At the output level defining allocative efficiency:

the maximum willingnes to pay for the last unit of output equals the minimum acceptable price of that unit of output

If a firm can sell 3,000 units of product A at $10 per unit and 5,000 at $8, then:

the price elasticity of demand is 2.25.

The Illinois Central Railroad once asked the Illinois Commerce Commission for permission to increase its commuter rates by 20 percent. The railroad argued that declining revenues made this rate increase essential. Opponents of the rate increase contended that the railroad's revenues would fall because of the rate hike. It can be concluded that:

the railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic

A negative externality or spillover cost occurs when:

the total cost of producing a good exceeds the cost borne by the producer

Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle:

under the demand curve and above the actual price

Suppose the supply of product X is perfectly inelastic. If there is an increase in the demand for this product, equilibrium price:

will increase, but equilibrium quantity will be unchanged.