econ chapter 2

If Tom sells a pair of jeans for $35 and his producer surplus from the sale is $25, his cost must have been

$10.

A supplier's reservation price must include

A supplier's reservation price must exclude wealth effects and externalities. Wealth effects and externalities make it impossible to accurately find a reservation price.

What effect will an improvement in computing technology have on the distribution of total economic value in the computer market?

Both the consumer surplus and producer surplus will increase.

If some sellers are blocked from selling by a price control, how does the market allocate the remaining units over the potential buyers?

By non-price competition.

If an excise tax raises no revenue, it cannot create a deadweight loss.

False A tax that raises no revenue may have completely destroyed the market for the good. If that is the case, all economic value is destroyed because no transactions take place. If no transactions take place, no revenue is raised.

Which of the following must be used to determine total economic value of each unit of a good in a market?

Marginal benefit Marginal cost Marginal benefit created when an additional good is consumed and the marginal cost created when an additional good is sold are used to find economic value. The total economic value of each unit of a good is the difference between marginal social benefit and marginal social cost.

How does positive economics differ from normative economics?

Positive economics describes the world objectively while normative economics asesses outcomes.

Which of the following statements about price controls is correct?

Price controls usually harm those persons that they are designed to help.

Which of the following would represent some of the external costs of baking bread?

The pollution that results from the outdated oven used by the baker An external cost is a production cost that someone other than the producer must pay. Pollution caused by an outdated oven is a social cost that all citizens must pay for. However, in determining a reservation price, producers do not consider the social cost because they do not have to bear the social cost.

Graphically, the area identified as the cost of the tax to consumers consists of which of the following two components?

The portion of tax revenue captured from consumers and a portion of total deadweight loss

What effect will an increase in the costs of inputs have on the total costs to society of producing a good or service?

The total costs to society of producing the good or service will increase.

If the price of coffee rises, how will the total social benefits associated with tea, a substitute good, be affected?

The total social benefits of tea will increase.

The reservation price of a good is considered to be

a good measure of the benfits a consumer gets from consuming a good.

If the market price for basketballs is $5 each and the government establishes a price ceiling of $3, the market will react with

a shortage, where the Qd at $3 is greater than the quantity supplied at Qs.

A price ceiling that is set below the market equilibrium price causes

a shortage.

A price floor that is set above the market equilibrium price would cause

a surplus.

Total economic value is found on a graph

between the supply and demand curves.

Excise taxes destroy economic value and create deadweight loss by

blocking buyers and sellers from realizing some of the gains from trade.

When a price control forces competitors to engage in non-price competition, the winner is the one who

can expend the most resources.

Increases in international trading of a good will

cause producer surplus to decrease and consumer surplus to increase.

An increase in the number of producers in a market will

cause the total costs to society to decrease.

As a result of increased international trading, the

change in the consumer surplus can be identified graphically as the area difference between the world price and the domestic equilibrium price.

If the tax revenues received from excise taxes are used to provide additional public goods, most economists are

concerned only with the generation of economic value.

If John, your neighbor, mows and manicures his lawn frequently, John is

creating external benefits for the entire neighborhood. He creates external benefits if the entire neighborhood benefits.

Compared to free market outcomes, an excise tax causes

deadweight loss because of blocked trading.

When an import tariff is imposed on a good, total economic value will

decrease since deadweight loss is created.

The presence of a tariff in an open economy will

decrease the domestic quantity demanded. increase the domestic quantity supplied. increase the domestic price of the good A tariff raises the price of the product to domestic consumers. At a higher price, domestic suppliers want to supply a greater quantity, and displace some of the previously imported goods. Consumers demand a smaller quantity at the higher price.

If the reservation price of a producer increases and the reservation price of a consumer decreases, the resulting total economic value will

decrease. If the producer requires a higher product price and the consumer requires a lower product price, additional sales will not occur and additional economic value will not be generated.

If the world price is greater than the domestic price, the

domestic producers will export some of the product.

Price controls can't block the bidding mechanism.

false Price controls block the bidding mechanism by preventing the free market from operating. Prices are the mechanism that allocates scarce resources. When the government imposes a ceiling, bidders cannot compete in a free market.

A deadweight loss exists when the government will not create an excise tax.

false A deadweight loss is the result of some excise taxes imposed by the government. The tax places a tax wedge between the buyer and seller and destroys economic value.

If a consumer refuses to pay a specific price for a certain good or service, his refusal indicates that the his reservation price is higher than the market price.

false A refusal to purchase, on the part of the consumer, a specified quantity of a good at a specific price indicates that the consumer's reservation price is lower than the specific price. The consumer values the good at his / her reservation price.

Consumer surplus is defined as the sum of the consumer's reservation price and the price at which the consumer actually purchases the good.

false Consumer surplus is the difference between the consumer's reservation price and the price at which the consumer actually buys the good.

Each point on the supply curve represents the marginal benefit to society for producing an additional unit.

false Each point on the supply curve represents the marginal cost to society for producing an additional unit.

The concept of economic value is a useful tool in the classroom but cannot be used to make normative economic judgements about the desirability of market outcomes.

false Economic value is the measure by which normative economics judges the success or failure of market outcomes.

To measure the costs of economic activity, economists use the demand curve.

false Economists use the supply curve to measure the costs of economic activity. The demand curve measures benefits.

Economists are concerned about excise taxes because they don't want the government to take money.

false Excise taxes are indeed concerning to economists, but not because of government's need to generate revenue. They are concerned because of the trades that are blocked from the wedge created between buyers and sellers in the market.

In the free trade market, the area under the demand curve and above the equilibrium price represents total economic value.

false In the free trade market, the area under the demand curve and above the equilibrium price represents consumer surplus.

Economists generally support rent controls because they believe that rent controls help the poorest citizens find adequate housing.

false Rent controls may actually harm the poorest citizens because the shortages that rent controls create force potential renters to engage in non-price competition. The winners are those renters who have the mmost resources available to engage in the non-price competition.

Rent-seeking behavior means that property owners try to raise the monthly rental on rental houses illegally.

false Rent-seeking behavior means expending resources to try to get a larger share of economic value for oneself. It may mean trying to get the government to change the rules to benefit oneself or to gain exceptions to price controls on products that you sell.

Society's benefit is the sum of all of the benefits from the people who sell a particular good.

false Society's benefit is the sum of all of the individual benefits from the people who consume a particular good. Sellers are concerned with costs.

The area above the demand curve represents the total benefit generated by consumption

false The area below the demand curve represents the total benefit.

When an import tariff is imposed, the portion of total economic value captured by the government equals the product of the tariff multiplied by the entire production of the good in the marketplace.

false The portion of total economic value captured by the government can be calculated by multiplying the value of the import tariff by the total volume of the imported good.

A buyer's willingness to pay reflects how much a seller values a good.

false Willingness to pay is the measure of the value a consumer places on a product.

Non-price competition is all of the following except

giving up trying to buy a scarce product. Non-price competition takes the place of price competition when price controls are in effect. Buyers have to compete against each other by using strategies other than bidding against each other for scarce resources.

If the supply curve shifts inward, the total social cost of producing a good or service will

increase. An inward supply curve shift represents a decrease in supply. In terms of social cost, the area under the supply curve increases. The area under the supply is the total social cost. Therefore, social cost increases.

Assume that in the market for chocolate candy, competitive equilibrium has been attained. Economic value

is no longer being generated. At competitive equilibrium, the marginal economic benefits generated match the marginal economic cost incurred. When marginal cost equals marginal benefit, an additional unit sold cannot generate further economic value.

If a consumer lives in poverty, his / her reservation price for food

is not a reliable measure of the benefit you will be receiving from consuming that good.

When economists study value, they

look at the benefit created by the trades that occur in the market. Value is the difference between the benefits and the costs of a particular activity. In normative economics, economists compare the value, or benefits, created by a trade with the costs of that trade.

Marginal social cost is equal to

marginal economic cost. the cost of providing an additional unit of a particular good. Marginal social cost is another term for marginal economic cost. It is the social cost incurred from producing an additional unit of a good.

When an import tariff is imposed, the increase in producer surplus can be measured by

multiplying the value of the tariff by the total volume of domestic production.

The imposition of an import tariff will

not affect the level of the world price.

All the following are examples of non-price competiton except

paying the market price. Standing in line, bribing officials, and lobbying Congress are all forms of non-price competition. They all represent wasted resources that could be used in productive activities.

Private benefits differ from external benefits in that

private benefits are exerienced by one individual only while external benefits may be experienced by many.

According to the normative perspective, when the marginal social cost of producing a good exceeds the marginal social benefit,

production of the good should not continue.

A tax wedge

separates what the buyer pays from what the seller gets. is the value that the government usually gets. makes a difference between what the buyer has to pay and the price the seller gets to keep. A tax wedge is the gap formed by the difference between what the buyer pays and the seller keeps. This wedge, or value, goes to the government as a tax.

If the number of coffee consumers decreases, total social benefits will

surely decrease. Total social benefits will decrease because the area under the demand curve for coffee will be smaller when the demand curve shifts inward.

An import tariff is, in effect, a

tax on all foreign-produced goods.

A measure of producer surplus in a market is

the area above the supply curve and below the price.

If the tax increases,

the area of the total deadweight loss will increase in size.

The demand curve can also tell us

the benefit society gains when an additional unit of a product is purchased. Another use of the demand curve is to measure the marginal benefit society receives when an additional unit of a good is purchased.

The distance of the supply curve from the horizontal axis at any given quantity is

the cost that the seller incurs for providing that unit of the good.

Studies on international trade have shown that

the costs of trade barriers exceed their benefits, thereby destroying economic value.

If coffee is a normal good and a consumer recieves additional income,

the demand curve for coffee will shift outward and additional social benefits will be produced.

When a market is in equilibrium and a price floor is imposed below the equilibrium point,

the market will stay in equilibrium.

The reservation price for a baker selling bagels is

the minimum price that the baker would accept to produce a bagel.

In general, as the tax wedge increases,

the precise impact on consumer and producer surplus is difficult to say.

The distribution of economic value depends upon

the price at which the buyer and seller trade.

An excise tax may reduce the consumer surplus because

the price the consumer must pay increases.

If the government sets a price ceiling below the seller's reservation price,

the producer would not cover his opportunity cost. the trade would be blocked and deadweight loss occurs. When the price ceiling falls below a seller's reservation price, the transaction will not take place because the opportunity costs are not covered. Therefore, the producer drops out of the market. The ceiling has destroyed the market.

Under a normative interpretation, cost measures

the producer's willingness to sell a product.

The total government revenue derived from an excise tax is calculated as

the product of the excise tax times the quantity of the good actually traded.

If there are no external benefits and no wealth effects,

the reservation price for a consumer will be equal to the benefit that a good creates for society. The reservation price is a measure of social benefit.

If the government imposes an excise tax that is greater than the potential economic value,

the trade does not take place at all.

The demand curve represents

the value each buyer places on a good. the willingness of all buyers in the market to buy. the highest price buyers are willing to pay for each quantity. The demand curve reflects the willingness of all buyers to buy. It is the value each buyer places on the good or service and it reflects each buyer's reservation price.

If a price ceiling is greater than the buyer's reservation price,

there would be no effect on the market.

The usual interpretation of the demand curve is

to find the quantity that consumer's in the market are willing and able to buy at a certain price.

When the world price is less than the domestic equilibrium price, the

total amount of trading in the market will occur at the world price.

The sum of sellers' reservation prices is

total social cost.

In normative economics, economists describe the area under the supply curve as

total social costs.

A price ceiling is a government regulation setting a maximum price that sellers may sell a product for.

true

Both producers and consumers benefit when the equilibrium price results in a consumer and producer surplus.

true

If a change in demand and / or supply occurs, the economic value generated in the market will change.

true

In a closed economy, total economic value consists of both the consumer's surplus and the producer's surplus.

true

To calculate total economic value, one first solves for equilibrium price and quantity and then find the areas of the triangles representing producer and consumer suplus.

true

Total economic benefits are derived by summing the additional benefits gained from consuming the good or service.

true

A higher producer reservation price will reduce total social benefits.

true A higher producer reservation price means that the producer requires a higher price to provide the good or service. A higher product price reduces total social benefits.

The external benefit of you getting a flu shot is the protection from the flu that others have when you are not contagious.

true An external benefit is any benefit that others get that they do not have to pay for. When you get a flu shot, the people around you cannot get the flu from you. This is a benefit that they do not have to buy

If the supply curve shifts inward (to the left), the social cost increases.

true An inward shift of the supply curve means that all costs have risen. Therefore, the social cost for producing the product at every output level increases.

Any demand factor that causes the demand curve for a product to shift will affect overall total social benefits.

true As the demand curve for a product shifts, the area underneath the curve (which represents total social value) will change. If the demand curve shifts outward, the total social benefit increases; if it shifts inward, the total social benefit decreases.

At any given point on a demand curve, the price at that quantity represents the next, or marginal, buyer's willingness to pay.

true Assuming that, in a market for a good, consumers have different reservation prices, then each point on a demand curve reflects another consumer's reservation price. The reservation price is the consumer's willingness-to-pay signal.

At any given quantity, the price on a demand curve associated with that quantity represents the marginal consumer's willingness to pay.

true Each price is a consumers willingness-to-pay price or the consumer's reservation price.

The maximum price that a consumer would pay to have a particular good is called the reservation price.

true Reservation price for a consumer is the maximum price that a consumer would be willing to pay for something instead of doing without.

For a reservation price to be a good measure of social benefit, wealth effects and external benefits should be excluded.

true To properly equate a reservation price to relevant social benefits, wealth effects and external benefits should be excluded.