ECO 202 chpt 4-7
A price floor
is the lowest price at which it is legal to trade a particular good, service, or factor of production.
Cost
is what the seller must give up to produce the good.
If the market for bicycles is efficient, then
it is not possible to produce more bicycles without sacrificing another, more highly valued good.
Labor unions support the minimum wage because
it puts upward pressure on all wages.
The "equality of opportunity" idea of fairness claims
it's not fair if the rules aren't fair.
If a minimum wage is introduced that is above the equilibrium wage rate,
job search activity increases.
A rent ceiling set below the equilibrium rent decreases the quantity of housing supplied because
landlords of previously barely profitable apartments refuse to rent them.
Because of a sharp increase in the price of gasoline, the demand for Sports Utility vehicles (SUVs) has decreased. So, the high price of gasoline leads to a
leftward shift of the demand curve for SUVs and no shift in the supply curve of SUVs.
If there is a surplus of a good, the quantity demanded is ________ the quantity supplied and the price will ________.
less than; fall
The Ironman Hawaii randomly draws a few hundred slots from thousands of applicants for the race. The method of allocation for the opportunity to participate in the race is ________, and the method of allocation for determining the winner of the race is ________.
lottery; contest
Import restriction in advanced economies deny developing economies access to the food market of the advanced economies. The result is ________ price and ________ farm production in the developing economies.
lower; smaller
Seventy percent of Austin's chess club wanted to purchase new chess sets and thirty percent did not. The club purchased the sets. Which method of allocation best describes the choice to purchase the sets?
majority rule
When the city of Fresno holds a referendum to determine if taxes will be raised to pay for road repairs, the city is using a ________ allocation method.
majority rule
The demand curve is also the
marginal benefit curve.
A competitive market with no externalities is efficient when it is in equilibrium because
marginal benefit equals marginal cost.
Efficiency in a market occurs when the production of the good is such that
marginal benefit equals marginal cost.
The cost of producing one more unit of a good or service is equal to its
marginal cost.
The opportunity cost of producing one more unit of a good or service is the
marginal cost.
Honda will sell its vehicles to anyone who wants to and can buy one. Honda is using a ________ allocation method.
market price
The cross elasticity of demand
measures how a change in the price of one good impacts the demand for another good.
The supply curve shows the
minimum price that firms must receive to supply a certain quantity of a good.
If the demand for insulin is inelastic, an increase in insulin prices leads to
more total revenue for insulin makers.
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more total revenue for insulin makers.
"Other things remaining the same, if the price of a good rises, the quantity supplied of that good increases." This sentence describes a
movement along a supply curve.
Suppose that the price of flour used to produce bagels increases. Hence the equilibrium price of a bagel ________ and the equilibrium quantity ________.
rises; decreases
Assume a competitive market is in equilibrium. There is an increase in demand, but no change in supply. As a result, the equilibrium price ________, and the equilibrium quantity ________.
rises; increases
Nonunion labor is a substitute for union labor, so when the minimum wage ________, the demand for union labor ________
rises; increases
A price floor is considered
"unfair" based on both the fair results and fair rules views.
If a firm produces five chairs with marginal costs of $25, $30, $40, $55, and $75, respectively, and sells them for $80 each, what is the firm's total producer surplus?
$175
Suppose you're willing to tutor a student for $10 an hour. The student pays you $15 an hour. What is your producer surplus?
$5 an hour
If the price of a good decreases from $9 to $6 and the quantity supplied decreases from 1,500 to 1,300, using the midpoint formula the elasticity of supply equals
0.36.
If the price doubles and the quantity supplied also doubles, the price elasticity of supply for the good is
1.
A firm can sell 10 units if the price is $100 and can sell 8 units if the price is $125. Using the midpoint method, what is the price elasticity of demand?
1.00
Suppose an increase in supply lowers the price from $10 to $8 and increases the quantity demanded from 100 units to 130 units. Using the midpoint method, the elasticity of demand equals
1.17.
During last year the price of regular unleaded gasoline in Oakland, California increased 11.0 percent. If the price elasticity of demand for gasoline was 0.13, the price hike means that the quantity demanded decreased by
1.43 percent.
When income increases from $20,000 to $30,000 the number of home delivered pizzas per year increases from 22 to 40. The income elasticity of demand for home delivered pizza equals
1.45.
Tacos and pizza are substitutes. If a 2 percent change in the price of a taco leads to a 4 percent change in the demand for pizza, the cross elasticity of demand equals
2
When the price of tacos rise 4 percent, the quantity demanded decreases 10 percent. What is the price elasticity of demand for tacos?
2.5
If a 5 percent decrease in income leads to a 15 percent decrease in the demand for a good, the income elasticity of demand equals
3 and the good is a normal good.
An increase in the minimum wage to $15 per hour would lead to
an increase in search activity for many workers.
Which of the following indicates that the law of supply applies to makers of soda?
An increase in the price of a soda leads to an increase in the quantity of soda supplied.
Which of the following lowers the equilibrium price of a canoe?
an increase in the supply of canoes
A demand curve
Both answers has a downward slope and is a graph of the relationship between quantity demanded of a good and its price are correct
What did Adam Smith identify as the source of the invisible hand in 1776?
an individual's own self-interest
Both the demand for and supply of cars changes in France. You observe that the quantity of cars does not change but the price rises. Thus, which of the following occurred?
Demand increased and supply decreased by an equal amount.
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Demand increased and supply decreased by an equal amount.
Assume the Nozick rules are being followed in the economy so that the distribution of income is fair. What must be true for this to create an efficient allocation of resources?
There are no public goods, monopolies, high transactions costs, or external costs and benefits.
Suppose the government imposes a small carbon tax on automakers. But the price of gasoline has doubled due to a Middle East crisis which has reduced oil production. In the market for autos, these changes mean that supply and demand have both changed with the effect on the demand larger than the effect on the supply. The result is that the price of autos will ________ and the number of autos sold will ________.
Fall;decrease
Pizza Hut lowers the price of its pizza. The price elasticity of demand for Pizza Hut pizza equals 0.3. What happens to the Pizza Hut's total revenue?
It decreases.
KFC raises the price of its grilled chicken. The price elasticity of demand for KFC grilled chicken is 0.8. What happens to the KFC's total revenue?
It increases.
Autoworkers negotiate a wage increase. How does this change affect the supply curve of cars?
It shifts the supply curve leftward.
New York City, which has had a rent ceiling law for more than sixty years, has many abandoned apartment buildings throughout the city. Which of the following explains this?
Landlords have no incentive to finance maintenance and remodeling of apartment buildings.
Which of the following situations describing a resource allocation method most resembles the market price method?
Lattes are sold at Starbucks.
The price of a cowboy hat is $100. Willie is willing to pay $130, Waylon is willing to pay $100, and Merle is willing to pay $85. All of the following statements are true EXCEPT:
Merle's consumer surplus is $15
What is the impact of a government subsidy to producers?
More is produced relative to the efficient level, creating a deadweight loss.
The total revenue test says that if a price decrease leads to
None of these answers is correct.
When marginal benefit exceeds marginal cost in a market,
None of these answers is correct.
If both producers and consumers believe that a product's price will rise in the future, then at the present, the equilibrium price
Rises
Black markets can occur when price ceilings are imposed in a market. Which of the following explains why sellers participate in a black market?
Sellers are able to sell the product for a higher than legal price.
Which of the following is an example in which "the big tradeoff" can occur?
The government redistributes income from the rich to the poor.
Why do some workers lose their job when the minimum wage is increased?
The increase in the minimum wage decreases the quantity of labor demanded.
Assuming that the rent ceiling is strictly enforced so that there is no black market, which of the following statements about a housing market with a rent ceiling set below the equilibrium rent is correct?
The rent ceiling creates a deadweight loss.
Which of the following occurs when a market is efficient?
The sum of consumer surplus and producer surplus is maximized.
The price of a cowboy hat is $100. Willie can produce a hat at a marginal cost of $130, Waylon can produce at a marginal cost of $100, and Merle can produce at a marginal cost of $85. Which of the following statements is correct?
The sum of producer surplus is $15.
The minimum wage is set above the equilibrium wage rate. Does the minimum wage create inefficiency?
Yes
Both price supports and a price floor can
create a deadweight loss.
It is expected that the price of a bushel of wheat will increase in one month. This belief will result in
a decrease in the current supply of wheat.
Which of the following increases the supply of gasoline?
a decrease in the price of a resource used to produce gasoline, such as crude oil
The law of supply states that other things remaining the same, a decrease in the price of a kayak leads to
a decrease in the quantity of kayaks supplied.
A monopoly is
a firm that has control of a market because it is the only seller.
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a firm that has control of a market because it is the only seller.
Which of the following is an example of a price floor?
a minimum wage law
A price floor in an agricultural market is called
a price support.
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a price support.
Suppose the equilibrium rent in Denver is $1,050. A rent ceiling of $755 per month leads to
a shortage of apartments in Denver.
A rent ceiling on housing creates a problem of allocating the available housing units because
a shortage of apartments occurs.
A minimum wage that is above the equilibrium wage rate
creates a deadweight loss.
To be effective in raising people's wages, a minimum wage must be set
above the equilibrium wage rate.
Price supports are generally used in
agricultural markets.
Goods that can be produced at a constant or very gently rising opportunity cost have
an elastic supply.
A benefit that accrues to people other than the buyer of a good is known as ________ benefit.
an external
Suppose that the government imposes a price ceiling on gasoline that is below the equilibrium price. The black market for gasoline is ________ market in which the price ________ ceiling price.
an illegal; exceeds the
Which of the following definitely results in a product's equilibrium price rising?
an increase in demand combined with a decrease in supply
Which of the following results in an increase in the supply of a good or service?
an increase in foreign imports of the good or service
A student at New York University used to take the Redhound bus when she visited her grandmother in Boston. After graduating, although the bus fare and the plane fare were the same as they were when she was a student with a well-paid job on Wall Street, she now takes the plane to Boston to visit her grandmother. For this student, travel by Redhound bus is
an inferior good.
Ramen noodles are a staple food item for many college students. Ramen noodles are very inexpensive, easy to prepare, and can be combined easily with other foods. After students graduate, find employment, and earn a higher income, they decrease their Ramen noodle purchases significantly. In this case, Ramen noodles are
an inferior good.
In a competitive market with no externalities,
at the equilibrium price, marginal benefit equals marginal cost.
Consumer surplus is the area
below the demand curve and above the market price.
A price floor makes prices
below the price floor illegal.
If a rent ceiling is set ________ the equilibrium price, the effect can result in a housing ________.
below; shortage
Marginal benefit equals the
benefit that a person receives from consuming another unit of a good.
The "fair results" view of fairness says that a minimum wage law set above the equilibrium wage rate is unfair because the minimum wage
benefits only those workers who are able to find and keep a job.
A stated goal of a minimum wage is to
boost the incomes of low-wage earners.
To be part of the supply for a good, a producer must be
both able and willing to supply the good.
In a market with a rent ceiling set below the equilibrium rent, the producer and consumer surplus
both decrease, but generally not to zero.
The price elasticity of demand is a measure of
buyers' responsiveness to changes in the price of a product.
Alan purchases 10 percent fewer bags of chips when his income decreases by 5 percent. Based on only this information, we know that for Alan
chips are a normal good.
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chips are a normal good.
If the price of a one good increases and the quantity demanded of a different good decreases, then these two goods are
complements.
If the price of tangerines increases, the price of oranges also rises because
consumers consider the two goods substitutes, and demand for oranges increases.
A rent ceiling set below the equilibrium rent
creates a situation in which the quantity demanded of housing is greater than quantity supplied.
A price floor set above the equilibrium price
creates a surplus.
Subsidies ________ the price paid by the buyer and ________ the price received by the seller.
decrease, increase
As more of a good is consumed, the marginal benefit of the good
decreases.
In a housing market with a rent ceiling set below the equilibrium rent, as time passes the supply of apartments
decreases.
In general, as the consumption of a good or service increases, the marginal benefit from consuming that good or service
decreases.
If the minimum wage is set above the equilibrium wage, after taking into account the resources lost in job search, the firms' surplus ________ and the workers' surplus ________.
decreases; decreases
In Great Britain, raising taxes on gasoline has increased the costs of supplying gasoline. As a result, the equilibrium quantity of gasoline ________ and the equilibrium price of gasoline ________.
decreases; rises
Suppose the price of leather used to produce shoes increases. The higher price of leather ________ the supply of shoes, and the supply curve of shoes ________.
decreases; shifts leftward
Which of the following shifts the supply curve for oranges?
disastrous weather that destroys about half of this year's orange crop
When a price support is set below the equilibrium price, producers ________ the quantity supplied, and consumers ________ the quantity demanded.
do not change; do not change
If both supply and demand decrease by the same amount, the equilibrium price
does not change.
A change in the price of a good ________ its supply curve and ________ a movement along its supply curve.
does not shift; causes
The "big tradeoff" refers to
efficiency and fairness.
When economists use the term "big tradeoff" when discussing efficiency they are referring to the tradeoff between
efficiency and fairness.
If both the supply and demand curves shift simultaneously, we can always predict what will happen to
either the price or the quantity, but not both.
If a 2 percent rise in price leads to a 4 percent decrease in quantity demanded, then demand is
elastic and total revenue decreases.
If a good has many close substitutes, then its demand is most likely
elastic.
Suppose the Chicago Bears football team raises ticket prices by 13 percent and as a result the quantity of tickets demanded decreases by 21 percent. This response means that the demand for Bears tickets is
elastic.
The price elasticity of demand for Red Delicious apples, a certain type of apple, is likely
elastic.
In a housing market with no rent ceilings, the equilibrium rent is that for which the quantity of apartments demanded
equals the quantity supplied.
If the quantity of housing demanded ________ the quantity of housing supplied, scarce housing resources are allocated efficiently because the marginal cost of the housing ________ the marginal benefit.
equals; equals
Consider the market for peanut butter. If there is a decrease in the price of deli turkey slices (a substitute in consumption for peanut butter) along with a decrease in the price of peanut brittle (a substitute in production for peanut butter), the
equilibrium price of peanut butter definitely falls.
Consider the market for peanut butter. If there is an increase in the price of bread (a complement for peanut butter) along with a drought in peanut growing areas, the
equilibrium quantity of peanut butter definitely decreases.
Millions of people from Mexico have migrated to the United States. This has reduced the supply of labor in Mexico and increased the supply of labor in the United States. Assume that the demand for labor in Mexico and the United States is unchanged. Then wages in the United States ________ and wages in Mexico ________.
fall, rise
The technology associated with manufacturing computers has advanced enormously. This change has led to the price of a computer ________ and the quantity ________.
falling; increasing
Bagels and cream cheese are complementary goods. Suppose that the price for flour, which is used to produce bagels, increases. The equilibrium price of cream cheese ________, and the equilibrium quantity of cream cheese ________.
falls; decreases
When the demand for a good decreases, its equilibrium price ________ and equilibrium quantity ________.
falls; decreases
The demand for cat food decreases while the supply increases. The equilibrium price of cat food ________, and the equilibrium quantity ________.
falls; perhaps changes but we can't say if it increases, decreases, or stays the same
Auditors working for a large accounting firm are often away from the office. When they are in the office, they are allowed to use any desk that is available. Which method is used to allocate desks?
first-come, first-served
Often people trying to withdraw money from their bank must wait in line, which reflects a ________ allocation method.
first-come, first-served
University of Colorado reserves 5,000 free tickets to each home football game for students. Students must stand in line to receive their ticket. Football tickets are allocated through which method?
first-come, first-served
Wal-Mart has a limited number of "Black Friday" (the day-after Thanksgiving Day) special items on sale at prices well below their typical price. Wal-Mart opens at 10 PM on Thanksgiving. Wal-Mart is using a ________ allocation method for these items.
first-come, first-served
The long-run price elasticity of demand for electricity is ________ the short-run price elasticity of demand for electricity.
greater than
The marginal benefit of the first hotdog consumed is ________ the marginal benefit of the fifth hotdog consumed.
greater than
In general, the marginal cost curve
has a positive slope.
If Mark tries to purchase a new refrigerator in a perfectly competitive market, then
he will have a very limited ability to negotiate over the price.
When a society achieves allocative efficiency, it
is producing that combination of goods and services that society values most highly.
Rent ceilings
increase search activity.
A decrease in the price of driver liability insurance will ________ the ________ for new automobiles.
increase; demand
One of the consequences of a rent ceiling set below the equilibrium rent is
increased search activity.
When the price rises and the supply curve does not shift, the firms' producer surplus ________. When the price falls and the supply curve does not shift, the firms' producer surplus ________.
increases; decreases
An increase in the number of producers of bird seed ________ the supply of bird seed and shifts the supply curve of bird seed ________.
increases; rightward
The demand for a necessity generally is
inelastic
If the percentage change in the quantity demanded is not zero but is less than the percentage change in the price, demand is
inelastic.
If the price elasticity of demand for razors is 0.32, the demand for razors is
inelastic.
It is very difficult for Gourmet Chocolatier to find inexpensive and available inputs for the business. Because of this, we predict that Gourmet Chocolatier's supply to be
inelastic.
When the percentage change in the quantity demanded is less than the percentage change in price, then demand is
inelastic.
A Minnesota snowmobile dealer lowers its prices in February by 16 percent and the quantity demanded increases by 2 percent. Thus the demand for snowmobiles from this dealer is ________ and the dealer's total revenue will ________.
inelastic; decrease
The shortage created by a rent ceiling below the equilibrium rent is smallest when the demand for housing is ________ and the supply of housing is _
inelastic; inelastic
The shortage created by a rent ceiling below the equilibrium rent is smallest when the demand for housing is ________ and the supply of housing is ________.
inelastic; inelastic
Air pollution is an external cost because it
is a cost not borne by the producer of the good.
A public good
is a good people can consume even if they do not pay for it.
Ebay
is a market because buyers and sellers are brought together to buy and sell.
If substitutes for a good are readily available, the demand for that good
is elastic.
if the price of a pizza is $10 per pizza, the consumer surplus from the first pizza consumed ________ the consumer surplus from the second pizza consumed.
is greater than
To achieve allocative efficiency, an economy
must produce on its PPF.
If a product is an inferior good, then its income elasticity of demand is
negative.
Suppose the current equilibrium wage rate for landscapers is $6.65 in Little Rock; $7.50 in St. Louis and $9.05 in Raleigh. An increase in the minimum wage to $7.50 per hour results in unemployment of landscapers in
only Little Rock.
A competitive market is in equilibrium. Then there is a decrease in demand and a decrease in supply. The equilibrium price ________, and the equilibrium quantity ________.
perhaps changes but we can't say if it rises, falls, or stays the same; decreases
A competitive market is in equilibrium. Then there is an increase in demand and an increase in supply. The equilibrium price ________, and the equilibrium quantity ________.
perhaps changes but we can't say if it rises, falls, or stays the same; increases
If a landlord will rent an apartment only to married couples over 30 years old, the landlord is allocating resources using a ________ allocation method.
personal characteristics
If a landlord will rent an apartment only to married couples, the landlord is using a ________ allocation method.
personal characteristics
Canned milk was only rationed to babies and small children during World War II. This rationing was an example of allocation by
personal characteristics.
For a good such as a large screen HD television set, the income elasticity would likely be
positive and greater than one.
The income elasticity of demand is
positive for a normal good.
Kiwis and strawberries are substitutes for consumers. An increase in the price of a kiwi coupled with an increase in the number of strawberry growers ________ the equilibrium price of a pound of strawberries and ________ the equilibrium quantity of strawberries.
probably changes, but more information is needed to determine if it rises or falls; increases
When people cannot be excluded from consuming a good, even if they have not paid for the good, competitive markets would
produce less than the efficient quantity.
Products X, Y, and Z have price elasticities of 3.0, 0.80, and 1.0 respectively. Total revenue decreases if the price of
product Y falls
The "fair rules" view of fairness is based on
property rights and voluntary exchange.
An unequal distribution of income is considered fair according to Robert Nozick if
property rights are enforced and voluntary exchange occurs.
Suppose the equilibrium wage rate for apricot pickers is $9.00 per hour in California and at that wage rate the equilibrium quantity of apricot pickers is 14,000. If the minimum wage is set at $7.50 per hour, then the
quantity of apricot pickers employed does not change.
When the demand curve shifts rightward and the market moves to a new equilibrium, then the
quantity supplied increases.
The downward slope of a demand curve
represents the law of demand.
The demand for oranges increases while the supply decreases. The equilibrium price of oranges ________, and the equilibrium quantity ________.
rises; perhaps changes but we can't say if it increases, decreases, or stays the same
A black market for housing exists because of a rent ceiling. The rent for housing in the black market is
somewhere between the ceiling rent and the maximum rent a tenant is willing to pay
Goods are ________ when the income elasticity of demand is positive.
substitutes
Pete feeds his dog 100 percent more Pup-Peronis when Zuke's treats increase in price by 50 percent. For Pete, Pup-Peronis and Zuke's are ________ and the cross-price elasticity of demand is ________.
substitutes; 2
The producer surplus of making and selling 10 chairs is found by
subtracting the marginal cost from the selling price for each chair and summing the differences for all 10 chairs.
When a market is efficient, the
sum of consumer surplus and producer surplus is maximized.
The fair results approach to fairness
supports transferring income from the rich and giving it to the poor.
Suppose the current price of a pound of steak is $12 per pound and the equilibrium price is $9 per pound. In this case, there is a
surplus, so the price falls and quantity demanded increases.
The methods that governments use to support farmers vary, but they almost always involve some or all the following methods EXCEPT
tax farmers.
The price of coffee rose 40 percent and the quantity of coffee demanded fell by 20 percent. The quantity of doughnuts demanded also fell by 20 percent. From this information, we can conclude that
the cross elasticity demand between coffee and doughnuts is -0.5.
Hot dogs and hot dog buns are complements. If the price of a hot dog falls, then
the demand for hot dog buns will increase.
The American Dairy Association starts a highly successful advertising campaign that makes most people want to drink more milk. As a result,
the demand for milk increases.
Production efficiency requires that
the economy be producing on the PPF but the marginal cost of a good does not need to equal its marginal benefit.
The income elasticity of demand is a measure of
the extent to which the demand for a good changes when income changes.
The market demand curve for mangos is
the horizontal sum of the individual demand curves of all the buyers.
In the market for cotton, suppose the equilibrium price is $10 per ton and the equilibrium quantity is 100 tons. If the government then imposes a price support of $20 per ton,
the market price increases.
Marginal cost equals
the opportunity cost of producing one more unit of output.
When a surplus of rice occurs,
the price of rice falls.
The price elasticity of demand is a measure of the extent to which the quantity demanded of a good changes when ________ and all other influences on buyers' plans remain the same.
the price of the good changes
The law of demand refers to how
the quantity demanded changes when the price of the good changes.
Market equilibrium occurs when
the quantity demanded equals the quantity supplied.
Suppose the equilibrium price of a gallon of milk is $4. If the government imposes a price floor of $5 per gallon of milk,
the quantity supplied of milk exceeds the quantity demanded.
Consider the market for wheat. If there is an improvement in harvesting technology,
the supply curve for wheat shifts rightward.
The people who immediately benefit from a minimum wage are
the workers who retain their jobs after enactment of the minimum wage.
When underproduction occurs,
there is a deadweight loss that is borne by the entire society.
The "law of demand" refers to the fact that, other things remaining the same, when the price of a good rises,
there is a movement up along the demand curve to a smaller quantity demanded.
Consider the market for turkeys. In the United States, because of Thanksgiving in the month of November,
there is an upward movement along the supply curve for turkeys.
If the price of iPods decreases,
there will be a movement down along the supply curve for iPods.
The demand for luxury suites at basketball games is more elastic if
these suites are a luxury item.
People come to expect that the price of a gallon of gasoline will rise next week. As a result,
today's demand for gasoline increases.
The marginal cost curve is
upward sloping to reflect the increasing opportunity cost of producing one more uni
To a seller, the cost of a good or service is ________, and the price is ________.
what must be given up to produce the good or service; what is received for the good or service
Resource use is allocative efficient
when we produce goods and services that we value most highly.
Suppose the demand for peaches sold from one roadside stand in Georgia is perfectly elastic. As a result, a 7 percent increase in the price charged by the owner of this stand leads to
zero peaches sold by this stand.
