econ exam 3

J

if government imposes a tax from P' to P''', consumer surplus after tax is...

J, K , I

if government imposes a tax from P' to P''', consumer surplus before tax is...

I + Y

if government imposes a tax from P' to P''', dead weight loss due to the tax is...

M

if government imposes a tax from P' to P''', producer surplus after tax is...

L + M + Y

if government imposes a tax from P' to P''', producer surplus before tax is...

K + L

if government imposes a tax from P' to P''', tax revenue is...

D

A drought in California destroys many red grapes. As a result of the drought, the consumer surplus in the market for red grapes a.increases, and the consumer surplus in the market for red wine increases. b.increases, and the consumer surplus in the market for red wine decreases. c.decreases, and the consumer surplus in the market for red wine increases. d.decreases, and the consumer surplus in the market for red wine decreases.

If an early freeze in California sours the lemon crop, the supply curve for lemons shifts to the left, The result is a rise in the price of lemons. So consumer surplus declines.

An early freeze in California sours the lemon crop. a. Explain what happens to consumer surplus in the market for lemons

In the market for lemonade, the higher cost of lemons reduces the supply of lemonade. The result is an increase in the price of lemonade and a decline in consumer surplus. Note that an event that affects consumer surplus in one market often has effects on consumer surplus in other markets.

An early freeze in California sours the lemon crop. Explain what happens to consumer surplus in the market for lemonade (since lemons are an input for lemonade).

8000 to 6000 sold

As a result of the tax, what has happened to the level of market activity?

fallen from 10 to 8

As a result of the tax, what has happened to the level of market activity?

B

At equilibrium, consumer surplus is represented by the area a. A. b. A+B+C c. D+H+F. d. A+B+C+D+H+F.

C

At equilibrium, producer surplus is represented by the area a.F. b.F+G. c.D+H+F. d.D+H+F+G+I.

C

At equilibrium, total surplus is represented by the area a.A+B+C. b.A+B+D+F. c.A+B+C+D+H+F. d.A+B+C+D+H+F+G+I.

The tax will cause a greater decline in the quantity sold when demand is elastic.

Congress and the president decide that the United States should reduce air pollution by reducing its use of gasoline. They impose a $0.50 tax for each gallon of gasoline sold.a. If the demand for gasoline were more elastic, would this tax be more effective or less effective in reducing the quantity of gasoline consumed?

The producers' complaint that their total revenue has declined is correct if demand is elastic. With elastic demand, the percentage decline in quantity would exceed the percentage rise in price, so total revenue would decline.

Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain.

With a price floor of $10, the new market price is $10 because the price floor is binding. At that price, only two million Frisbees are sold, because that is the quantity demanded.

Frisbee manufacturers persuade the government that Frisbee production improves scientists' understanding of aerodynamics and thus is important for national security. A concerned Congress votes to impose a price floor $2 above the equilibrium price. What is the new market price? How many Frisbees are sold?

The tax burden falls more heavily on the side of the market that is more inelastic.

How does elasticity affect the burden of a tax?

$2

How much of the tax will the buyers pay?

$3

How much of the tax will the buyers pay?

$1

How much of the tax will the sellers pay?

$2

How much of the tax will the sellers pay?

$1

How much will the buyer pay for the product after the tax is imposed?

$11

How much will the buyer pay for the product after the tax is imposed?

$6

How much will the seller receive after the tax is imposed?

$7

How much will the seller receive after the tax is imposed?

D

If a binding price ceiling is imposed on the computer market, then a. the quantity of computers demanded will increase. b. the quantity of computers supplied will decrease. c. a shortage of computers will develop. d. All of the above are correct.

The price will rise by less than $500. The burden of any tax is shared by both producers and consumersthe price paid by consumers rises and the price received by producers falls, with the difference between the two equal to the amount of the tax. The only exceptions would be if the supply curve were perfectly elastic or the demand curve were perfectly inelastic, in which case consumers would bear the full burden of the tax and the price paid by consumers would rise by exactly $500.

If the government places a $500 tax on luxury cars, will the price paid by consumers rise by more than $500, less than $500, or exactly $500? Explain.

C

If the government removes a binding price floor from a market, then the price paid by buyers will a. increase and the quantity sold in the market will increase. b. increase and the quantity sold in the market will decrease. c. decrease and the quantity sold in the market will increase. d. decrease and the quantity sold in the market will decrease.

B

If the government removes a binding price floor from a market, then the price received by sellers will a. decrease and the quantity sold in the market will decrease. b. decrease and the quantity sold in the market will increase. c. increase and the quantity sold in the market will decrease. d. increase and the quantity sold in the market will increase.

A

If the price were P1, producer surplus would be represented by the area a.F. b.F+G. c.D+H+F. d.D+H+F+G+I.

A

If the price were P3, consumer surplus would be represented by the area a.A. b.A+B+C. c.D+H+F. d.A+B+C+D+H+F.

C

In a competitive market free of government regulation, a. price adjusts until quantity demanded is greater than quantity supplied. b. price adjusts until quantity demanded is less than quantity supplied. c. price adjusts until quantity demanded equals quantity supplied. d. supply adjusts to meet demand at every price.

If the government purchases all the surplus cheese at the price floor, producers benefit and taxpayers lose. Producers would produce quantity Q3 of cheese, and their total revenue would increase substantially. However, consumers would buy only quantity Q2of cheese, so they are in the same position as before. Taxpayers lose because they would be financing the purchase of the surplus cheese through higher taxes.

In response to farmers' complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?

Since the demand curve represents the maximum price the marginal buyer is willing to pay for a good, it must also represent the maximum benefit the buyer expects to receive from consuming the good. Consumer surplus must take into account the amount the buyer actually pays for the good, with consumer surplus measured as the difference between what the buyer is willing to pay and what he/she actually paid. Consumer surplus, then, measures the benefit the buyer didn't have to "pay for."

In what way does the demand curve represent the benefit consumers receive from participating in a market? In addition to the demand curve, what else must be considered to determine consumer surplus?

If there's a price ceiling of $9, it has no effect, because the market equilibrium price is $8, which is below the ceiling. So the market price is $8 and the quantity sold is six million Frisbees.

Irate college students march on Washington and demand a reduction in the price of Frisbees. An even more concerned Congress votes to repeal the price floor and impose a price ceiling $1 below the former price floor. What is the new market price? How many Frisbees are sold?

If the price ceiling of $40 per ticket is below the equilibrium price, then quantity demanded exceeds quantity supplied, so there will be a shortage of tickets. The policy decreases the number of people who attend classical music concerts, because the quantity supplied is lower because of the lower price.

Lovers of classical music persuade Congress to impose a price ceiling of $40 per concert ticket. As a result of this policy, do more or fewer people attend classical music concerts?

Her consumer surplus at a price of $90 would be $200 − $90 = $110.

Melissa buys an iPod for $120 and gets consumer surplus of $80. If she had bought the iPod on sale for $90, what would her consumer surplus have been?

If the price of an iPhone was $250, Melissa would not have purchased one because the price is greater than her willingness to pay. Therefore, she would receive no consumer surplus.

Melissa buys an iPod for $120 and gets consumer surplus of $80. If the price of an iPod were $250, what would her consumer surplus have been?

Consumer surplus is equal to willingness to pay minus the price paid. Therefore, Melissa's willingness to pay must be $200 ($120 + $80).

Melissa buys an iPod for $120 and gets consumer surplus of $80. What is her willingness to pay?

When the price of a good falls, consumer surplus increases for two reasons. First, those buyers who were already buying the good receive an increase in consumer surplus because they are paying less (area B). Second, some new buyers enter the market because the price of the good is now lower than their willingness to pay (area C); hence, there is additional consumer surplus generated from their purchases. The graph should show that as price falls from P2 to P1, consumer surplus increases from area A to area A+B+C.

Other things equal, what happens to consumer surplus if the price of a good falls? Why? Illustrateusing a demand curve.

When the price of a good rises, producer surplus increases for two reasons. First, those sellers who were already selling the good have an increase in producer surplus because the price they receive is higher (area A). Second, new sellers will enter the market because the price of the good is now higher than their willingness to sell (area B); hence, there is additional producer surplus generated from their sales. The graph should show that as price rises from P1 to P2, producer surplus increases from area C to area A+B+C.

Other things equal, what happens to producer surplus when the price of a good rises? Illustrate your answer on a supply curve.

A rise in the demand for French bread leads to an increase in producer surplus in the market for French bread. The shift of the demand curve leads to an increased price, which increases producer surplus.

Suppose the demand for French bread rises.a. Explain what happens to producer surplus in the market for French bread

C

Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling, a. the demand curve for physicals shifts to the right. b. the supply curve for physicals shifts to the left. c. the quantity demanded of physicals increases and the quantity supplied of physicals decreases. d. the number of physicals performed stays the same.

$2.50

The amount of deadweight loss as a result of the tax is a. $2.50. b. $5 c. $7.50. d. $10.

$5

The amount of tax revenue received by the government is a. $2.50. b.$4. c.$5. d.$9.

$5

The amount of the tax on each unit of the good is a.$1. b.$4. c.$5. d.$9.

B

The efficient price-quantity combination is a.P1 and Q1. b.P2 and Q2. c.P3 and Q1. d.P4 and 0.

B

The equilibrium price is a.P1. b.P2. c.P3. d.P4.

surplus

The government has decided that the free-market price of cheese is too low. Suppose the government imposes a binding price floor in the cheese market. Is there a shortage or surplus of cheese?

increase by $3

The imposition of the tax causes the price paid by buyers to a.decrease by $2. b.increase by $3. c.decrease by $4. d.increase by $5.

decrease by $2

The imposition of the tax causes the price received by sellers to a.decrease by $2. b.increase by $3. c.decrease by $4. d.increase by $5.

decrease by 1 unit

The imposition of the tax causes the quantity sold to a. increase by 1 unit. b. decrease by 1 unit. c. increase by 2 units. d. decrease by 2 units.

The equilibrium price of Frisbees is $8 and the equilibrium quantity is six million Frisbees.

What are the equilibrium price and quantity of Frisbees?

Consumer surplus measures the benefit to buyers of participating in a market. It is measured as theamount a buyer is willing to pay for a good minus the amount a buyer actually pays for it. For anindividual purchase, consumer surplus is the difference between the willingness to pay, as shownon the demand curve, and the market price. For the market, total consumer surplus is the area underthe demand curve and above the price, from the origin to the quantity purchased.

What is consumer surplus, and how is it measured?

Producer surplus measures the benefit to sellers of participating in a market. It is measured as the amount a seller is paid minus the cost of production. For an individual sale, producer surplus is measured as the difference between the market price and the cost of production, as shown on the supply curve. For the market, total producer surplus is measured as the area above the supply curve and below the market price, between the origin and the quantity sold.

What is producer surplus, and how is it measured?

$3

What is the amount of the tax?

$5

What is the amount of the tax?

Because the supply curve shows the minimum amount sellers are willing to accept for a given quantity, the supply curve represents the cost of the marginal seller.

What is the relationship between the cost to sellers and the supply curve?

Because the demand curve shows the maximum amount buyers are willing to pay for a given market quantity, the price given by the demand curve represents the willingness to pay of the marginal buyer.

What is the relationship between the demand curve and the willingness to pay?

8, 8000

What was the equilibrium price and quantity in this market before the tax?

$5

What was the equilibrium price in this market before the tax?

J, K, L, M

if government imposes a tax from P' to P''', total surplus after tax is...

I, J, K, M, L, Y

if government imposes a tax from P' to P''', total surplus before tax is...