Econ Exam 2
If a good is seen as a necessity instead of a luxury, is it inelastic or elastic?
inelastic because if a good is a necessity consumers will buy it regardless of the price, so price doesnt really affect the quantity of demand luxuries are elastic
T/F As time passes, an immediate market becomes short run and then long run, each type for elastic than the last
true
T/F Elastic demand means the consumers are relatively sensitive to price changes
true
T/F Negative externalities exists in a market characterized by external marginal costs, making the market inefficient with too much output produced
true
T/F The optimal amount of pollution prevention occurs when the marginal benefits are in equilibrium with marginal costs
true
T/F When price rises, producer surplus rises as well
true
T/F When the price is not equal to the equilibrium price, the amount of output actually traded is the smaller of the quantity demanded or quantity supplied
true
T/F When analyzing a good/service seen as "bad", like pollution, you should analyze what would happen if you reduced the activity instead of its current state
true Compare the marginal cost and marginal benefit of reducing pollution to find the optimal amount of pollution prevention Think about MC and MB for prevention instead of production
T/F Along a linear demand curve, the price elasticity of demand changes
true can see this by doing calculations for different quantity and price changes along the line
When total revenue is maximized, demand is _________
unit elastic
Excludable vs nonexcludable
People can be prevented/excluded from consuming the good/service People CANNOT be easily prevented from consuming the good/service even if they dont pay for it
How would you calculate customer surplus when given marginal benefit and the market price of the object?
Subtract the market price from the person's marginal benefit Add up the customer surplus for each individual to get the total
How do you calculate the % change in quantity demanded? % change in price?
(New quantity demanded - original quantity demanded / original quantity demanded) x 100 New price - original price / original price x 100
What 2 things does the price elasticity of demans and consumers' responsiveness to price changes depend on?
1. # subtitiutes available for the good 2. Proportion of a consumer's income spent on the good
What are the four assumptions we make about utility maximization?
1. Behave rationally 2. Can rank thier preferences 3. Have limited incomes 4. Consider prices For ultimate happiness
What are the 3 specific characteristics identified with indifference curves?
1. Downward sloping 2. Curves further from the origin are preferred to those closer to the origin 3. Cannot cross over each other
Concertville is hosting a series of outdoor concerts in the park. The concert series will cost the city $500 to host. City officials expect the concert series to draw a crowd of 100 people, 20 of whom will free ride. Based on this information, how much should city officials charge for the concert series in order to cover the $500 expense?
100-20 = 80 people paying 500/ 80= $6.25
An example of poorly defined property rights resulting in a market failure is most likely to occur in which of the following? A private household garden A community garden A single farmer selling produce at the farmers' market A commercial agriculture plot One possible outcome of market failures is: an abundance of resources. inefficient market outcomes. laissez-faire government action. less pollution and dumping.
A community garden inefficient market outcomes.
How would you draw in the additional producer surplus created for EXISTING production? How would you draw in the additional producer surplus created from ADDITIONAL production?
Add a rectangle above the existing producer surplus already drawn, but do not continue to fill out the rectangle along the supply curve because the quantity is staying the same, only the price is increasing Shade in the triangle above the supply curve up to the new price line, between the original quantity and the new quantity
How would you find the intercepts on your budget line graph?
Amount of the budget / price of each of the products For example: $10 to spend on cookies and sodas. $1 for cookies, $2 per cup of soda. Divide 10 by 1 to get (10 cookies,0 soda) and divide 10 by 2 to get (0 cookies, 5 sodas) Graph these two points and you have your line
What is producer surplus? Graphically?
Amount of wealth (in dollars) created for suppliers by the market. The difference between the price producers receive for a good or service and the minimum price they are willing and able to accept (marginal cost) Area below the equilibrium price and above the supply curve, from 0 to the quantity traded
After imposition of tax, how can you find consumer and producer surplus on a graph?
CS: The triangle above the tax revenue rectangle but below the demand curve PS: The triangle below the tax revenue rectangle and above the original supply curve
How could you measure the effect of a policy on a market?
Calculate economic surplus (CS+PS) before and after the policy is implemented, and find the difference
If you are given a budget, the marginal utility and the marginal utility per dollar, how do you determine what to buy to maximize total utility? How would you then calculate total utility from that bundle?
Chose items based on highest marginal utility per dollar -continue choosing items while keeping track of how much each item will cost (given in the original problem) Total utility is the sum of marginal utilities so add up the items you selected
Equal marginal principle for utility maximization
Consumers maximize their utility when they allocate their limited incomes so that the marginal utility per dollar spent on each of their final choices in a bundle is equal Marginal utility(a)/Price(a) = Marginal utility (b)/Price (b) -Chose the items with the highest marginal utility per dollar
External MC vs external MB? Give examples
Cost of an additional unit of good/service imposed on people other than the producer -cigarettes Benefit of an additional unit of good/service enjoyed by people other than direct consumer of that good -flu shots (positive externality)
Private marginal cost vs private marginal benefit?
Cost to the producer of an additional unit of a good/service Benefit to consumer of additional unit of a good/service
On a graph, does the supply or deman curve represent marginal cost? Marginal benefit?
Cost: supply curve Benefit: demand curve
What are transaction costs?
Costs in terms of time/energy/resources associated with completing a transaction
Where could deadweight loss be if the price is adjusted to somewhere to the right of the equilibrium point?
Deadweight would be above the demand curve and below the supply curve touching the equilibrium point on the left side now Deadweight loss is the area between the supply and demand curves from the current level of output to the level of equilibrium
What is a private market?
Demand and supply curves represent the benefits and costs to only the consumers and producers in the market
Normal good vs inferior good? Which one is the case if income elasticity is positive? negative?
Direct relationship between demand for the good and income -positive Inverse relationship between demand for the good and income -negative
Reminder: how do you calculate the opportunity cost of choosing one activity over another?
Divide the activity you are doing by the activity you are giving up
Difference between elastic, inelastic and unit-elastic demand
Elastic: Price elasticity is greater than 1 and quantity demanded is more responsive to change in price, so will change more than the percent of price change % Inelastic: Price elasticity is lass than 1 and quantity demanded is less responsive to change in price, so changes less than percent of price change % Unit: Price elasticity is equal to 1, prices and quantities change equally
What are the 3 classification rules for price elasticity supply to determine elastic, inelastic, or unit elastic?
Elastic: The value of the price elasticity of supply is greater than 1 Inelastic: The value of th eprice elasticity of supply is less than 1 Unit elastic: If the value of the price elasticity of supply is equal to 1
How do you calculate the price received by suppliers after a tax is implemented?
Equilibrium price paid by consumers - tax To find this on a graph, locate the new equilibrium point after the tax increase and follow the line down vertically until it hits the original supply line
Property right
Exclusive right to determine how a resource is used When unclear or unenforceable, it is more likely to result in overconsumption or underproduction
T/F If marginal utility decreases, so does total utility
False, even if marginal utility decreases, total utility will always increase the more consumption
T/F A market with a tax in place is allocatively efficient
False, the price buyers pay is greater than the price producers receive
What happens to a firm at prices above the equilibrium price? Below the equilibrium price?
Firms wont sell all the output produced Firms wont provide as much output as consumers want to purchase
How would you graph a positive externality (social demand curve)?
For a positive externality, the social marginal benefit is greater than the private marginal benefit, so the social demand curve is above the private demand curve
What are solutions to the free rider problem?
Government taxes Selling advertising to firms (who want as many free riders to see their advertising as possible) Or developing technologies to bypass the nonexcludability of the good/service like netflix vs TV
Define Coase Theorem
If a property right is well defined and transaction costs are low, resources will naturally gravitate to their highest valued use, regardless of who owns the property right -The action completed will be the one with more benefit than cost
What is an immediate period vs short run vs long run?
Immediate: Time period when producers cant increase their use of economic resources to increase quantity supplied Short run: time period when at least 1 input of production is fixed but other inputs can be changed Long run: Time period when all inputs of production can be changed
After calculating the elasticity, what does the final number reflect?
It means if the price increase by 1% the quantity demanded will decrease by ...% OR If the price decreases by 1%, the quantity demanded will increase by ...%
How would the following scenarios shift the pollution MC and MB on a SO2 prevention graph? Increase in population Decrease in air quality PRoducing energy using nuclear power plants that provide energy/dont emit SO2 A inexpensive cure for asthma is developed
Increase in costs for economy (MB line shifts up the MC line) Same affect as above Decrease in cost of SO2, MC line goes down the MB line Causes decrease in optimal amount of SO2 reduction so pollution would increase, MB curve shifts left along the MC curve
How is inelastic supply curves drawn vs elastic?
Inelastic: vertical Elastic: horizontal
What does an inelastic curve ona graph look like compared to an elastic?
Inelatic: looks more steep like an I Elastic: looks more horizontal like the top of an E
Perfectly elastic demand Perfectly inelastic demand
Infinite price elasticity, Quantitiy demanded is so responsive to change in price, that if price increases/decreases, quantity drops to 0 Price elasticity is equal to 0, quantity demanded is nonresponsive to price changes so any increase/decrease results in quantity unchanged
What is a budget line? What does it look like on a graph?
Line showing the different combinations of 2 products that can be purchased with a given budget and at a known set of prices Product A on the y axis, Product B on the x axis A negative sloping linear line, under the line is attainable and above is unattainable
Consumer surplus is the benefit received by customers when they pay a price ____ than the maximum price they're willing/able to pay Producer surplus is the benefit suppliers receive when they receive a price ________ than the minimum price they're willing/able to accept
Lower higher
Law of diminishing marginal utility
Marginal utility associated with the consumption of good/service becomes smaller with each extra unit that is consumed in a given time period
How would you calculate the marginal utility per dollar?
Marginal utility/ price -DO NOT USE THIS FOR TOTAL UTILITY CALCULATION, must use the raw marginal values
Income elasticity of demand? Equation?
Measure of how responsive demand is to a change in consumer income % change in quantity demanded / % change in income
Define price elasticity of demand? Equation? Should the answer be negative or positive?
Measure of how responsive quantity demanded is to change in price % change in quantity demanded/ % change in price negative (increase in price causes decrease in quantity demanded, decrease in prices causes increase in quantity demanded)
Cross price elasticity of demand? Equation?
Measure of the effect of a change in the price of one product on the quantity demanded of another % change in quantity demanded of one good/ % change in price of another good
Define elasticity? Equation?
Measures how responsive one variable is to a change in another variable % change in quantity / % change in price
What is the price elasticity of demand MIDPOINT formula?
Midpoint % change in quantiity/ midpoint % change in price
When working with cross price elasticity, should you convert the percents to decimals? If the cross price elasticity is positive, what does that mean for those 2 goods? If its negative?
NO They are substitutes -if the price of good A increases, quantity of good B will increase They are compliments -if the price of good A increases, the quantity demanded of good B will decrease
Define utility maximization? Graphically?
Obtaining the greatest level of overall satisfaction/happiness from consuming goods/services, subject to consumers preferences, incomes and prices Budget line is graphed tangent to indifference curve. The point where the two lines touch is maximum total utility
Equation for total revenue
Price x Quantity
Catherine owns a factory that produces computers. Determine whether the following costs are private or social costs: a. Equipment inside the factory b. Unused scrap material piled in a nearby ditch c. Land for the factory and the parking lot for employees d. Air pollution created by the production of computers e. Catherine's entrepreneurial ability f. Factory building:
Private social private social private private
Private vs public good
Private: good is both rival and excludable public: Good is nonrival and nonexcludable -typically provided by government (but not healthcare) -parks, national defense, tv
What are the typical 2 reasons why markets fail?
Producers are not paying the full costs of production OR Consumers aren't enjoying all the benefits of consuming a good/service -defined as market not produing the efficient level of output that maximizes total surplus
Describe the difference between productive efficiency and allocative efficiency? Star the one that represents no deadweight loss
Productive: Producing out put at the lowest possible average total cost of production w/ fewest resources possible **Allocative: Producing goods/services most wanted by consumers so marginal benefit equals marginal cost
How does a price floor affect the market?
Reduces quantity traded and creates more of a producer surplus than customer surplus due to market price being higher than equilibrium price, causes deadweight loss
Rival vs. Non-rival goods
Rival: Consumption of good/service by one person reduces quantity available for consumption by others Nonrival: Consumption of good/service by one person does NOT diminish amount available to someone else
Define utility
Satisfaction/happiness received from consumption of goods/services
What is an indifference curve?
Shows the combinations of 2 products that generate the same amount of total utility/satisfaction
How do you calculate social marginal cost and social marginal benefit
Social MC= Private MC + External MC Social MB= Private MB + External MB
What is it called when the level of production and consumption of a good/service is such that the marginal social benefit equals the marginal social cost?
Socially optimal production/consumption
How do you calculate the percent tax "borne by suppliers"?
Subtract the percent borne by consumers from 100 OR Subtract the amount consumers are now paying in new equilibrium by the amount of tax. Subtract this from the initial equilibrium price Multiply this by the new quantity produced at new equilibrium Divide this by total tax revenue
T/F The price elasticity of supply is always positive due to the direct relationship between price and quantity supplied, yet the equations for price elasticity of supply and price elasticty of demand are the same just handling variables of supply, not demand
TRUE -midpoint formulas are also the same but remember dont use midpoint unless specifically asked in the question
marginal cost vs marginal benefit
The actual price vs. his or her willingness to pay
How do you calculate consumer surplus for the entire market?
The area below the demand curve and above the equilibrium price, from 0 to the quantity traded
If asked to find the consumer surplus for exisiting customers at a lower price than the original, where would you shade? Where would you shade for the area representing the additional consumer surplus created for NEW consumers at this new dropped price?
The area below the demand curve and above the original price and from 0 to the quantity traded should already be shaded You would shade the area to the new price below, but still only from 0 to the same quantity traded The area below the demand curve, to the right of the area you shaded for the surplus of existing customers at the new price (should be a small triangle to the right of the rectangle)
Explain deadweight loss? Graphically?
The economic surplus lost when markets cant reach competitive equilibrium and is inefficient The difference between the economic surplus when the market is at its competitive equilibrium and the economic surplus when the market is not in equilibrium -the triangle of space missing from the equilibrium point to the edge of CS and PS at the new adjusted competitive equilibirum
How do you calculate the tax revenue collected by the government?
The rectangle between the new equilibrium point and the point that shows price received by suppliers (explained in previous notecard) and the space all the way to the left of these two points
Define economic surplus
The sum of consumer and producer surplus to measure the total welfare/wealth that trade creates for consumers and producers in a market
How would you graph a negative externality?
The supply curve for the negative externality, so social costs, are higher than the private costs. This means the social supply curve is above the private supply curve
wealth welfare economics
The value you receive from everything you possess (not just monetary) Measuring how much wealth a market creates and how changes in the market might affect how much wealth is created -how markets affect well-being
Giffen good? Example?
This is a good that defies the consumer demand theory A low-income, nonluxury product that demand rises when price rises or falls when price falls. Suppose you have a very low income and eat two basic foodstuffs rice and meat. Meat is a luxury and is much more expensive than rice. If rice increased in price, your disposable income is effectively reduced significantly. Therefore, with a reduction in disposable income - you buy less meat To compensate for less meat, you buy more rice to gain enough calories.
Which of the following scenarios is likely to make the supply of Maine lobsters more elastic? The price of lobster increases by $2 per pound. Time passes to allow lobstermen to adjust to market conditions. The prices of butter, potatoes, and lobster bibs decrease. Lobster locating technologies improve.
Time passes to allow lobstermen to adjust to market conditions.
Total utility vs marginal utility
Total: Total satisfaction/happiness received from consumption of good/services -sum of marginal utilities Marginal: additional satisfaction/happiness received from consumption of additional unit of a good/service -Change in total utility / change in quantity
T/F A negative percent indicates the demand for a good decreased, just as a positive percent indicates an increase in demand
True
T/F According to the coarse theorem, if a person who owns the property right values it more than the person who wants it, then the owner will retain the right. But, if the person who owns the right values it less than the person who wants it, then the person who wants it can buy the right and both will be better off
True
T/F Generally, the higher the price, the more elastic the good. As the price gets higher, the percentage changes in price will be smaller; alternatively, as the quantity gets smaller, the percentage changes in quantity will be relatively larger.
True
T/F The production possibilities frontier, like the budget line idea, shows how much of 2 good can be produced in an economy with given resources and technology
True
T/F When both goods are subject to diminishing marginal utility, indifference curves are bowed inward, not straight lines
True
T/F when property rights are clearly defined, the costs and benefits of market activity are also clearly defined and competitive markets can reach the efficient level of output produced and consumed
True
T/F When a tax is imposed on a market, the result is tax revenue for the government and deadweight loss for the market, but deadweight loss should be as small as possible relative to amount of revenue collected
True Efficient if the deadweight loss is smaller than revenue (divide deadweight loss by tax revenue, the smaller number the more efficient)
T/F It is more efficient to tax several different markets at low rates than to tax fewer markets at higher rates
True This generates smaller amount of deadweight loss in each of the markets
T/F Consumers benefit from a price ceiling
True-ish SOME benefit but because there is less of the good produced, less people who are willing and able to purchase it can actually buy it Price ceiling=shortage in the market, deadweight losses
On a linear demand curve, which part of the graph represents elastic quantity-price combinations? Inelastic? Unit elastic?
Upper part of the graph Lower part Midpoint
What is the free-rider problem?
When a good is nonexcludable, people will consume it without paying for it Makes it difficult for private companies to profit from a public good
When would you use the midpoint elasticity formulas instead of the normal elasticity ones?
When the question specifically asks for midpoint
How do you calculate the percentage of a tax "borne by customers"?
[(new equilibirum- original) new quantity]/ tax revenue
What is the midpoint % change in quantity demanded formula? Price?
[New quantity - original quantity/ ((new quantity + original quantity)/2)] x 100 [New price- original price/ ((new price+ original price)/2)] x 100
Consumer surplus? Graphically for an individual?
amount of wealth created for consumers by the market The difference between the maximum price consumers are willing and able to pay for a good/service and they price they actually pay Area below the demand curve and above the equilibrium price, from 0 to the quantity traded
It has been estimated that the price elasticity of demand for attending Atlanta Braves baseball games is -0.57.1 If price were the only factor to change, one might conclude that a decrease in attendance of 11.4% was caused by: an increase in ticket prices of 2%. a decrease in ticket prices of 20%. an increase in ticket prices of 20%. a decrease in ticket prices of 2%.
an increase in ticket prices of 20%. Ed = %∆Qd/%∆P -0.57 = -11.4%/X, where X is the percentage change in price X= 20%
The marginal benefit of an additional beach towel is $12. The marginal cost of producing an additional beach towel is $8. If producers are minimizing the average costs of production, then we can conclude: beach towel production is both allocatively and productively efficient. beach towel production is allocatively efficient but not productively efficient. beach towel production is not allocatively efficient but is productively efficient. beach towel production is neither allocatively nor productively efficient.
beach towel production is not allocatively efficient but is productively efficient. Producing at a minimum of average costs is productively efficient, but it is not allocatively efficient. The latter requires MB = MC.
If a market is defined _____, substitutes will be less available and the demand is more inelastic If a market is defined ____, substitutes are much more available and demand is elastic
broadly narrowly
The law of demand states that an increase in price will lead to a ______ in the quantity demanded. The law of supply states that an increase in price will lead to an ______ in the quantity supplied.
decrease increase
The optimal level of pollution is: dependent on the type of pollution and population of the affected area. determined by analyzing the marginal cost and marginal benefit. determined by undertaking any affordable cleanup project. no pollution.
determined by analyzing the marginal cost and marginal benefit.
a.) Increasing consumption of one good means consumption of the other good must decrease in order to maintain constant utility. Additionally, individuals experience less marginal utility for each additional unit consumed. These statements explain why indifference curves must be: downward-sloping and concave. downward-sloping and convex. upward-sloping and concave. upward-sloping and convex. b. Consumers tend to prefer more goods to less. This statement explains why indifference curves: closer to the origin are preferred. further from the origin are preferred. must remain constant over time. will change over time. c. Transitivity requires that indifference curves: cannot cross. cannot slope upward. must intersect the origin. must always be positive.
downward-sloping and convex. further from the origin are preferred. cannot cross.
The more time consumers have to respond to price changes, the relatively more ________ the demand for a product will be
elastic
If demand is ________, a decrease in price will increase total revenue and an increase in price will decrease total revenue If demand is ______, a decrease in price will decrease total revenue and an increase in price will increase total revenue
elastic inelastic
The market supply curve is: more elastic in the long run than in the short run. less elastic in the long run than in the short run. perfectly elastic in the short run, but not the long run. perfectly inelastic in the long run, but not the short run
more elastic in the long run than in the short run.
The additional benefit of producing one more roast beef sandwich at a local deli is $2. The additional cost of producing one more roast beef sandwich is $3. To improve allocative efficiency: producers should produce at least one more roast beef sandwich because MB > MC. producers should produce at least one more roast beef sandwich because MC > MB. producers should not produce one more roast beef sandwich because MB > MC. producers should not produce one more roast beef sandwich because MC > MB.
producers should not produce one more roast beef sandwich because MC > MB. The marginal cost ($3) exceeds the marginal benefit ($2). The society would have to bear a cost of $3 for the additional sandwich, while it would only benefit $2 from the extra sandwich.
When opportunity costs are constant, a Production Possibilities Frontier is seen as a _______. When opportunity costs are increasing, a PPF is seen as a _________
straight line curve
