Micro Ch 6, 7, 9, 10

The table shows the demand for jeans. The price elasticity of demand between $60 and $80 is:

1.0

In Panel B of the figure provided, the loss to consumer surplus is:

CDP1P3.

GRAPH: 40 & 160 Only Kimiko knows; the question does not provide enough information.

Kimiko is planning a party to celebrate her birthday... Which good will Kimiko buy more of?

QUIZ Q's////////////////////////////////////////////////////////////////////// higher; higher

On a sparsely populated island, an additional minute of high-speed Internet service would have a _____ marginal utility than in New York City, while in New York City, quiet evenings would carry a _____ marginal utility than on a deserted island.

Higher consumption will always lead to higher utility

To say that you can't have too much of a good thing means that, for any good that you enjoy (for example, pizza):

The price elasticity of demand for fresh tomatoes has been estimated to be 2.22. If a new insecticide and fertilizer treatment yields a 20% increase in the nation's fresh tomato crop, how will that affect total revenue from fresh tomatoes, all other things unchanged?

Total revenue will rise.

Label demand as elastic, unit elastic, or inelastic for each scenario. Use the midpoint method when applicable to calculate the price elasticity of demand.

Unit Elastic Inelastic Elastic

A tax based on the ability-to-pay principle:

will distort incentives.

~ Over longer periods of time, demand tends to become ~ When there are fewer substitutes, demand tends to be

~ more elastic. ~ less elastic.

Which statement about the new equilibrium is most likely true?

GRAPH: (S) shifts UP one The quantity will fall and the price will rise by less than the tax.

rotate out keeping the horizontal intercept the same.

The graph shows different combinations of sun tan lotion and cowboy hats that Fred can buy. If the price of lotion increases, the budget line will:

a.) Burritos has decreased b.) Point B

The graph shows two budget lines (BL 1 and BL 2) and four consumption points of tacos and burritos (A, B, C, and D)... a.) If a consumer goes from BL 1 to BL 2, then the price of b.) If burritos are a Giffen good, a consumer will move from point A to which other point as the budget line changes from BL 1 to BL 2?

If the price of the textbook required for an economics class increases from $100 to $120 and the bookstore still supplies the same number of books, supply is:

perfectly inelastic.

Taxation according to the ability-to-pay principle is best illustrated in the United States by _____ taxes.

personal income

If the government wants to minimize the deadweight loss from taxes, it should tax goods for which the:

price elasticity of demand is low.

According to the benefits principle of tax fairness:

those who benefit from public spending should bear the burden of the tax that pays for that spending.

Which of the following types of tax causes the greatest sacrifice of efficiency?

progressive

A tax that takes a higher percentage of income as income rises is:

progressive.

Demand is perfectly inelastic when the:

quantity demanded does not respond at all to a change in price.

The figure provided shows the market for bicycles If an excise tax of $100 is imposed on the bicycle producers, the amount that producers receive after the tax will be:

$200

3.) Assume that the government imposes an excise tax of $3,000 per imported truck. ~ Calculate the government revenue raised by the excise tax. Government revenue:____million

$600

WORK IT OUT//////////////////////////////////////////////// 1.) In the absence of government interference, what is the equilibrium price of an imported truck? The equilibrium quantity? ~ Equilibrium Price: ~ Equilibrium Quantity:

$30,000 300 thousand

The table represents the market for used textbooks. If a $60 excise tax were imposed on the book sellers, consumers' share of the tax would be:

$40

In the graph, the deadweight loss is:

$50,000.

Suppose the price of university sweatshirts increases from $10 to $20 and the quantity supplied increases from 20 to 30. The price elasticity of supply, using the midpoint formula, is:

0.60.

QUIZ Q's///////////////////////////////////////////// If the price of a good increases by 20% and the quantity demanded changes by 15%, then the price elasticity of demand is equal to:

0.75.

(Table: Price Elasticity) Use Table: Price Elasticity. What is the price elasticity of demand (using the midpoint formula) between $1.25 and $1.00?

0.82

In Panel A of the figure provided, the tax rate is:

AC

Purchase more of the now less expensive good

According to the substitution effect, a decrease in the price of a product leads to an increase in the quantity of the product demanded because buyers:

200

Assume that the marginal utilities for the first three units of a good consumed are 200, 150, and 125, respectively. The total utility for the first unit is:

True or False: According to the benefits principle, people who are wealthy should pay more. This is _____.

False

increase.

If the price of a good decreases, its marginal utility per dollar will:

q4

Michelle has decreasing marginal utility for fast food, as each meal she eats at a restaurant brings less enjoyment than the last. Brian also has a decreasing marginal utility for running, each additional mile he runs during the marathon brings less enjoyment. At mile 10, he reached his maximum utility from running. As a student, you experienced increasing marginal utility while using this online homework software, as its ease of use and built in feedback made homework more enjoyable. Sheila has constant marginal utility for coffee as any additional drinks she consumes brings a uniform improvement in her total utility.

Label each scenario with the term that best describes it. Use the midpoint method when applicable.

Perfectly Inelastic Supply Perfectly Elastic supply Elastic Supply Unit- Elastic Supply Inelastic Supply

util

a util is a unit of utility

If demand is inelastic, then deadweight loss will:

be minimized if supply is also inelastic.

If demand and supply are both very inelastic, a decrease in the rate of an excise tax will likely:

decrease government revenue.

An excise tax:

is a tax charged on each unit of a good sold.

interest rate

when someone borrows money for a year, the interest rate is the price, calculated as a percentage of the amount borrowed, charged by the lender.

Blake eats two bags of potato chips each day. Blake's hourly wage increases from $7 to $15 , and he decides to stop eating generic chips and instead eats a name-brand potato chip. Use the midpoint method to calculate Blake's income elasticity of demand for generic potato chips. Round your answer to two decimal places. ~ This good is

~ -2.75 ~ an inferior good.

In the United States, taxes tend to be regressive at:

state and local levels.

A payroll tax depends on the value of:

earnings that an employer pays to an employee.

A men's tie store sold an average of 30 ties per day at $5 per tie but sold 50 of the same ties per day at $3 per tie. The price elasticity of demand, by the midpoint method, is:

equal to 1.

A tax system _____ when it minimizes the direct and indirect costs to the economy of tax collection.

is efficient

In the graph, the amount of tax revenue collected is:

$500,000.

Negative

The budget line has a(n) _____ slope.

Suppose the government imposes a $10 per month tax on cell phone service. If the demand curve for cell phone service is perfectly inelastic and the supply curve is upward-sloping, the monthly price for cell phone service will increase by:

$10.

The figure provided shows the market for bicycles. If an excise tax of $200 is imposed on the bicycle buyers, the amount that producers receive will be:

$150

The ___(1)__ of an excise tax depends on the ___(2)___ of the taxed good's supply and demand curves. The economic entity with the ___(3)___ in terms of their production and consumption ___(4)___ incur the largest burden of excise taxes.

(1) Incidence (2)Price Elasticity (3) Least Flexibility (4) Substitutes

The graphs show four markets in which a tax will be imposed. Put the proper label next to each graph according to how the tax will be shared between buyers and sellers once the tax is in place. (A) ; (B) ; (C) ; (D)

(A) Buyers pays the MAJORITY of the tax. (B) Buyers pay ALL of the tax. (C) Sellers pay ALL of the tax. (D) Sellers pay the MAJORITY of the tax.

If personal income up to and including $25,000 is not taxed, income of $25,001 to $50,000 is taxed at 10%, and income over $50,000 is taxed at 20%, then a family earning an income of $75,000 will pay a n AVERAGE tax rate of _____%.

10

If a 10% increase in the price of fiber-optic cable leads to a 12% increase in the quantity of fiber-optic cable supplied, the elasticity of supply for fiber-optic cable is (using one decimal place) _____.

1.2

If a 10% increase in the price of cranberries leads to an 18% increase in the quantity of cranberries supplied, the elasticity of supply for cranberries is (using one decimal place) _____.

1.8

The table represents the market for used textbooks. If a $60 excise tax is imposed on the book sellers, quantity sold will decrease by:

20

If the price elasticity of aspirin is 0.4 and the price increases by 60%, the quantity demanded decreases by _____%.

24

The table shows household income and spending subject to sales tax for low-income, middle-income, and wealthy households. If the sales tax is 8%, the middle-class family pays (use one decimal place) _____% of its annual income in sales tax.

7.2

Referring to the table, determine the impact of Nile.com's discount on total revenue. After the discount, the company's total revenue will ______ for group A and ______ for group B.

Decrease Increase

q7

Diminishing marginal utility occurs when consuming a unit improves utility, but it does not improve it by as much as the previous unit did. In other words, as a person receives more of a good, the marginal utility from each additional unit of the good is smaller than from the previous unit. In the graph, this occurs after the 4th unit.

q3

HEY MEMORIZE THAT ANSWER. learn the change in formula.

Greater than zero

If total utility is rising as more salsa is consumed, we can definitely say that marginal utility is:

Relatively price-elastic

If, because of a price change, both the income and substitution effects are strong for a normal good, this segment of the demand curve must be:

6

Jordan has $16 to spend on entertainment this week. It costs $4 to go to a movie and $2 to rent a video. If Jordan goes to 1 movie, she can rent _____ videos.

GRAPH: (BC) 20 & 5 Unaffordable: B D H Affordable and exhausts Maria's budget: C E Affordable with money left over: A F G

Maria is in school learning to be a welder. She spends long hours studying (and drinking coffee) and long hours practicing in the hot, dirty shop (and therefore takes frequent showers)... ~ Unaffordable ~ Affordable and exhausts Maria's budget ~ Affordable with money left over

$2

Sasha buys a cold soda and a slice of pizza. The marginal utility from a soda is 40, and the price of the soda is $1. The marginal utility from a slice of pizza is 80. Assume Sasha is successfully maximizing his utility. If this is the case, we know the price of a slice of pizza must be:

q6 no exact price nor exact quantity GIVE SOME VALUE. USE THE FORMULA

Since the price elasticity of demand is a ratio of PERCENTAGE CHANGES, the values are arbitrary. Since we know that the price has doubled from from week to week, we can say the price last week was $1 and the price of this week is $2. Since the amount spent on caviar did not change from week to week, we know that Michelle purchases half as much caviar this today than she did last week. To see this, take our arbitrarily chosen prices, $1 and $2, and remember that in both weeks she spent $30: P X Q = 1 X Q = 30 so Q = 30 also P X Q = 2 X Q = 30 so Q = 15 use the formula, then apply absolute value.

15.) What assumption about one of the elasticities you learned about in this chapter has to be true for poorer households to be disproportionately affected?

The income elasticity of demand for energy products is between zero and one.

marginal cost curve

The marginal cost curve shows how the cost of producing one more unit depends on the QUANTITY that has already been produced.

additional utility gained by spending one more dollar on that good or service.

The marginal utility per dollar spent on a good is the:

LEARNING CURVE/////////////////////////////////////////////// utility function.

The relationship between the total utility generated and a consumer's consumption bundle is known as a:

2

The table shows Carol's total utility from consuming cowboy hats and suntan lotion. Carol has $24 to spend. Hats cost $12 each and a bottle of suntan lotion costs $6. If Carol buys 1 hat, she can buy _____ bottles of suntan lotion.

Diminishing

Using your answer from question 1, assume Brenda consumes two cups of coffee. Her marginal utility exhibits ____ returns.

Which tax is based on the ability-to-pay principle?

a tax collected as a percentage of income earned

END OF CHAPTER///////////////////////////////////////// 1.) The accompanying table shows the supply and demand schedules for airline trips. The quantity demanded at the average price of $380 is actual data; the rest is hypothetical. a.) What is the government tax revenue in 2015 from the excise tax? Government revenue: $ million b.) On Jan. 1, 2016, the total excise tax increased to $6.20 per ticket. What is the equilibrium quantity of tickets transacted now? What is the average ticket price, to the penny, now? What is the 2016 government tax revenue? ~ Equilibrium number of seats:____million ~ Average ticket price: $ ~ Government revenue: $____million c.) Does this increase in the excise tax increase or decrease government tax revenue?

a.) $ 3922.30 = (6.10 x 643) b.) 642 ; 380.02 ; $ 3980.40 = (6.20 x 642) c.) Increase http://www.brookscollegeprep.org/sites/default/files/courses/krugmanchapter7solutions.pdf

...Under proposal B, individuals with higher incomes pay a greater proportion of their income in taxes. a.) Is the tax in proposal A progressive, proportional, or regressive? What about the tax in proposal B? ~ Proposal A is: ~ Proposal B is: b.) Is the tax in proposal A based on the ability‑to‑pay principle or on the benefits principle? What about the tax in proposal B? ~ Proposal A is based on the: ~ Proposal B is based on the: c.) In terms of efficiency, which tax is better and why?

a.) Regressive Progressive b.) Benefits Principle Ability-to-Pay Principle c.) The lump‑sum tax is more efficient because it creates a marginal tax rate of zero.

1.) Income 2.) More 3.) Substitution 4.) Less 5.) Unimportant 6.) Income 7.) Substitution 8.) Income

c.) Pam thinks that Spam is an inferior good. Yet, as the price of Spam rises, she decides to buy less of it. Since Pam considers Spam to be an inferior good, the __(1)__ effect would cause her to buy __(2)__ as its price rises. The __(3)__ effect leads her to buy __(4)__ as Spam becomes relatively more expensive than other goods. Spam is probably an __(5)__ item in her budget, so the __(6)__ effect will be small. Since we know that she buys less Spam, we also know that the __(7)__ effect is larger than the __(8)__ effect.

A major state university in the South recently raised tuition by 12%. An economics professor at this university asked his students, "How many of you will transfer to another university because of the increase in tuition?" One student in about 300 said that he or she would transfer. Based on this information, the price elasticity of demand for education at this university is:

highly inelastic.

q13

if authorities choose a policy that diverts demand, then the new equilibrium is reached by moving along the original supply curve. In this case, supply is relatively inelastic, which means that a small change in quantity will correspond with a large change in prices. This is not the desired policy. Alternatively, if supply is abated with a tax on SUV engines, then the new equilibrium is reached by moving along the relatively more elastic demand. This brings about a large reduction in quantity with a small price distortion. Hence, this policy is more effective at achieving the desired result.

The income elasticity of demand for eggs has been estimated to be 0.57. If income grows by 5% in a period, all other things unchanged, demand will:

increase by about 2.9%.

Assuming a normal upward-sloping supply curve and downward-sloping demand curve, if the government imposes a $5 excise tax on leather shoes and collects the tax from the suppliers, the price of leather shoes will:

increase by less than $5.

If the price of chocolate-covered peanuts increases and the demand for strawberry licorice twists increases, this indicates that these two goods are _____ goods.

substitute

Which of the following principles of tax fairness is most well illustrated by the Earned Income Tax Credit?

the ability-to-pay principle

q5 DO YOU KNOW THE FORMULA FOR THE PRICE OF ELASTICITY OF DEMAND?

unit-elastic calculation: STICK TO THE FORMULA ((QUANTITY NEW - QUANTITY OLD)/((QUANTITY NEW + QUANTITY OLD)/2))/PRICE STUFF. WRITE IT OUT. price elasticity of demand 0.5 which is smaller than 1. therefore inelastic TO CALCULATE, JUST STICK TO THE FORMULA.

Ebenezer Scrooge has just been elected the new President of Christmasland. As his first action, he is thinking of introducing an excise (or commodity) tax on either Santa hats or Christmas lights. ~ What would be the total deadweight loss of a $3 tax on Santa hats?$___. ~ What would be the total deadweight loss of a $3 tax on Christmas lights?$___. ~ The deadweight loss for Santa hats and the deadweight loss for Christmas lights are different because the graph with the higher deadweight loss has a more____.

~ $ 3,000 ~ $ 1,500 ~ elastic demand curve.

"How Much" versus "Either Or" Decisions

self explanatory

True or False: The benefit of a tax is the revenue it raises for the government to pay for goods and services. This is _____

True

True or False: The benefit of a tax is the revenue it raises for the government to pay for goods and services. This is _____.

True

The figure shows the demand curve for bicycles. If the price increases from $300 to $350, total revenue changes from $_____ to $_____, which means that demand is _____ in this price range.

12,000; 10,500; elastic

marginal utility curve

the marginal utility curve shows how marginal utility depends on the quantity of a good or service consumed

5

The table shows marginal and total utilities for various quantities of exercise for Mike. Mike's marginal utility of the third hour of exercise is:

13

The table shows marginal and total utilities for various quantities of exercise for Mike. Mike's total utility in the second hour of exercise is:

500

The table shows the total utility that Shanka derives from iPod shuffles and Birkenstocks. The price of the iPod shuffle is $50, and the price of the Birkenstocks is $100. Shanka's income is $300. If Shanka buys one iPod, her total utility is _____ utils.

250

The table shows the total utility that Shanka derives from iPod shuffles and Birkenstocks. The price of the iPod shuffle is $50, and the price of the Birkenstocks is $100. Shanka's income is $300. If Shanka buys one iPod, she will have $_____ left to spend.

1600

The table shows the total utility that Shanka derives from iPod shuffles and Birkenstocks. The price of the iPod shuffle is $50, and the price of the Birkenstocks is $100. Shanka's income is $300. If Shanka buys two iPods and two Birkenstocks, her total utility is _____ utils.

consumption bundle

an individual's consumption bundle is the collection of all the goods and services consumed by that individual.

utility function

an individual's utility function gives the total utility generated by his or her consumption bundle. it is a math function.

PRE-CLASS TUTORIAL///////////////////////////////////////// Suppose the government in your city imposes a $0.50 excise tax on gasoline. The burden of this tax falls on:

d) both buyers and sellers

6.) The economist working for the lobby for sufferers of second-hand smoke argues that this is an enormous overestimate and that the reduction in consumer surplus will be only $30 million per day, since after the imposition of the tax only 30 million packs of cigarettes will be bought and each of these packs will now cost $1 more. They are both wrong. Calculate the correct consumer surplus (𝐶𝑆) before and after the tax. ~ 𝐶𝑆before : $____million ~ 𝐶𝑆after : $____million

$ 80 = [1/2 x (8-4) x 40] $ 45 = [1/2 x (8-5) x 30]

4 ; 152

(Table: Optimal Choice of Milk and Honey) Use Table: Optimal Choice of Milk and Honey. The price of milk is $2 per gallon, and the price of honey is $4 per jar. Hal's income is $16. If he spends all of his income on honey, the most he can buy is _____ jars, and his total utility will be _____.

income.

A budget constraint requires that the cost of a consumer's consumption bundle be no more than the consumer's:

4.) How does the excise tax on imported trucks benefit American automakers? Whom does it hurt? How does inefficiency arise from this government policy? The excise tax leads to __(1)__ in the price of imported trucks. Since American trucks are ___(2)___ for imported trucks, the effect of the tax is to ___(3)__ the demand for American-made trucks, which leads to a ___(4)__ price for them. As a result, buyers of both domestic and foreign trucks pay ___(5)___ prices because of the tax on foreign trucks. Inefficiency arises because some mutually beneficial transactions no longer occur due to the ___(6)__ prices for trucks caused by the tax.

(1) An Increase (2) Substitutes (3) Increase (4) Higher (5) Higher (6) Higher

~ The nature of the tax system means that there is usually a trade-off between __(1)__ and __(2)__. ~ The __(3)__ principle pushes governments towards a __(4)__ tax system but __(5)__ considerations push them in the other direction. ~ A(n) __(6)__ tax, promotes economic efficency as it does not __(7)__.

(1) Equity (2) Efficiency (3) Ability-to-Pay (4) Progressive (5) Efficiency (6) Lump Sum (7) Distort Incentives

50 ; 0

(Scenario: Tom's Budget Constraint) Use Scenario: Tom's Budget Constraint. The combination of _____ music downloads and _____ movies lies ON Tom's budget line. Tom is trying to decide how to allocate his $50 budget for music downloads and online movie streaming when the price of a music download is $1 and the price of a movie is $5.

1 ; 6

(Table: Marginal Utility per Dollar II) Use Table: Marginal Utility per Dollar II. If Manuel has $18 to spend on potatoes and clams, then the utility-maximizing combination is _____ pound(s) of clams and _____ pound(s) of potatoes.

sixth

(Table: The Utility of Macaroni and Cheese) Use Table: The Utility of Macaroni and Cheese. Carmen loves eating macaroni and cheese on Thanksgiving. Carmen's marginal utility from eating macaroni becomes negative at the _____ serving.

Last year Stephen purchased 60 pounds of potatoes to feed his family of four when his income was $30,000. This year his income fell to $20,000, and he purchased 70 pounds of potatoes. Using the midpoint method, one decimal place, and the negative sign if necessary, Stephen's income elasticity for potatoes is _____.

-0.4

The price of gasoline increased by 30% and the quantity of large SUVs demanded decreased by 45%. Using one decimal place and the negative sign if necessary, the cross-price elasticity between gasoline and large SUVs is _____.

-1.5

The amount of jelly sold decreases from 100 jars to 50 jars when the price of peanut butter increases from $2 to $3. Using the midpoint method, the cross-price elasticity between peanut butter and jelly is _____.

-1.675

The price of peanut butter increased by 25% and the quantity of jelly demanded decreased by 50%. Using one decimal place and the negative sign if necessary, the cross-price elasticity between peanut butter and jelly is _____.

-2.0

If the price of golf clubs increases by 10% and the quantity of golf balls demanded decreases by 25%, then the cross-price elasticity, using one decimal place and the negative sign if necessary, between golf clubs and golf balls is _____.

-2.5

Gas prices recently increased by 25%. In response, purchases of gasoline decreased by 5%. According to this finding, the price elasticity of demand for gas is:

0.2.

Attina always spends 20 % of her income on dinglehoppers. Assume that her income increases by some percentage while the price of dinglehoppers remains constant (and that all dinglehoppers cost the same). What is her income elasticity of demand for dinglehoppers?

1

Last week, Michelle spent $30 on caviar. Today, Michelle still spends $30 on caviar even though its price has doubled. What is Michelle's price elasticity of demand for caviar? (Use the midpoint formula for your calculation.)

1

q2 QUESTION!! MORE ELASTIC = ELASTIC LESS ELASTIC = INELASTIC

1. cosmetic surgery is more elastic since it's much more of a luxury than an emergency surgery. 2. There are fewer dining options at 2:00 than at 7:00. Consequently, a cheeseburger has more substitute during regular dining hours than when it is late at night. This indicates that a cheeseburger at 7:00PM has a more ELASTIC DEMAND than a cheese burger at 2:00am. 3. Short term electricity consumption is less elastic than the LONG TERM, when more adjustments to behavior can take place. MORE TIME IS MORE ELASTIC. 4. Red cars are more elastic because of the greater availability of close substitutes. The utility most people receive from black or silver cars is almst the same as that from red cars, especially compared to the difference in utility between cars and motorcycle or public transportation. ANALYZE THIS. QUESTION!!!!!! 5. Demand for the Wall Street journal at the airport is less elastic since (like many other items at the airport) since it has less substitutes readily available.

1.) A 20% price increase for Product A causes a 10% decrease in its quantity demanded, but no change in the quantity demanded for Product B. ~ cross-price elasticity between A and B: relationship between A and B: 2.) Product C increases in price from $3 a pound to $4 a pound. This causes the quantity demanded for Product D to increase from 44 units to 85 units. ~ cross-price elasticity between C and D: relationship between C and D: 3.) When the price of Product E decreases 9% , this causes its quantity demanded to increase by 14% and the quantity demanded for Product F to increase 12% . ~ cross-price elasticity between E and F: relationship between E and F:

1.) 0 No Relationship 2.) 2.2 Substitutes 3.) -1.3 Complements

NEWS ANALYSIS///////////////////////////////////////////////// Based on the Washington Post article How Obama's Tobacco Tax Would Drive Down Smoking Rates, identify each of the statements as true or false. 1.) The Congressional Budget Office (CBO) estimates that a $1.00 per pack tax would reduce smoking by 1.4 million people by 2021. 2.) The CBO estimates that doubling the federal tobacco tax would reduce the number of children who smoke by 230,000. 3.) The CBO estimates that doubling the federal tobacco tax would reduce the number of adults 40 years old or older who smoke by about 1.5%. 4.) The CBO estimates that a higher cigarette tax would have its smallest impact on younger smokers, but the impact would grow with the smoker's age. 5.) Intense smokers are defined as people who smoke at least 100 cigarettes a day.

1.) False 2.) True 3.) True 4.) False 5.) False

After Sally's income increased from $12,000 to $16,000 per year, her purchases of CDs increased from 40 to 60 per year. Using the midpoint method, one decimal place, and the negative sign if necessary, her income elasticity for CDs is _____.

1.4

The figure shows the demand curve for bicycles. Increasing the price from $150 to $200 will change total revenue from $_____ to $_____, which means that demand is _____ in this price range.

10,500; 12,000; inelastic

1.) More 2.) Substitution 3.) Fallen 4.) Normal 5.) Less 6.) Income 7.) Reinforce

10.) In the following situation, describe the substitution effect and the income effect. In which direction does each of these effects move? Why? a.) Ed spends a large portion of his income on his children's education. Because tuition fees rise, one of his children has to withdraw from college. Since education is now relatively __(1)__ expensive than other goods, Ed will buy less of it. This is the __(2)__ effect. At the same time, Ed's purchasing power has __(3)__ , and higher education is __(4)__ good. Ed will,therefore, buy __(5)__ of it due to the __(6)__ effect. The two effects __(7)__ each other.

The figure shows the demand curve for bicycles. If the price decreases from $250 to $200, total revenue changes from $_____ to $_____, which means that demand is _____ in this price range.

12,500; 12,000; inelastic

No, because for a Giffen good, it is an increase in the quantity, not the expenditure, that matters.

12.) Scott finds that the higher the price of orange juice, the more money he spends on orange juice. Does that mean that Scott has discovered a Giffen good?

150

13.) Margo's marginal utility of one dance lesson is 100 utils per lesson. Her marginal utility of a new pair of dance shoes is 300 utils per pair. The price of a dance lesson is $50 per lesson. She currently spends all her income, and she buys her optimal consumption bundle. What is the price of a pair of dance shoes? A pair of dance shoes costs $___.

The graph shows the market for cameras. If a $30 excise tax is imposed on cameras, the deadweight loss is $_____ .

150

If the price elasticity of demand for tennis rackets is 2, then a 10% increase in the price of tennis rackets will result in a:

20% decrease in the quantity demanded.

If the elasticity of supply of umbrellas is 0.75, the price of umbrellas would need to increase by _____% (using one decimal place) in order to increase the quantity of umbrellas supplied by 15%.

20.0

2.) Assume that the government imposes an excise tax of $3,000 per imported truck. ~ How many imported trucks are now purchased? purchased:____thousands ~ What is the price? price: $ ~ How much does the foreign automaker receive per truck? $___thousand

200 $ 31,000 $ 28,000

The price of notebooks is $5, and at that price consumers demand 12 notebooks. If the price rises to $7, consumers will decrease quantity demanded to 4 notebooks. Using the midpoint formula, what is the price elasticity of demand for notebooks?

3

END OF CHAPTER//////////////////////////////////////// a.) On b.) Below c.) Above

3.) Bruno can spend his income on two different goods: smoothies and energy bars. For each of the following three situations, decide if the given consumption bundle is within Bruno's consumption possibilities by determining whether it is on, below, or above his budget line. a.) Smoothies cost $2 each, and energy bars cost $3 each. Bruno has income of $60. He is considering a consumption bundle containing 15 smoothies and 10 energy bars. This bundle is _____ Bruno's budget line. b.) Smoothies cost $2 each, and energy bars cost $5 each. Bruno has income of $110. He is considering a consumption bundle containing 20 smoothies and 10 energy bars. This bundle is _____ Bruno's budget line. c.) Smoothies cost $3 each, and energy bars cost $10 each. Bruno has income of $50. He is considering a consumption bundle containing 10 smoothies and 3 energy bars. This bundle is _____ Bruno's budget line.

The figure provided shows the market for bicycles. If an excise tax of $100 is imposed on the bicycle producer, the quantity of bicycles bought and sold will be:

4

If the tax rate on the first $30,000 of income is 15%; on the next $30,000 is 20%; on all income above $60,000 is 30%, then the tax payment on income of $30,000 is $_____.

4,500

GRAPH: 20 & 5

4.) Bruno is best friends with Bernie, who shares his love for energy bars and smoothies... The price of an energy bar is $2, the price of a smoothie is $4, and Bernie has $20 of income to spend. a.) Adjust the points in the accompanying graph to illustrate Bernie's budget line.

HOMEWORK////////////////////////////////// In anticipation of a major hurricane hitting the Gulf Coast, the quantity gasoline of sales rise from 360 million gallons to 375 million gallons. Based on this information, what is the percent change in gasoline sales? Please specify your answer to one decimal place and use the midpoint formula. change:

4.1%

1.) 32 2.) 8 3.) 6 4.) 3

4b.) Answer the following questions using this information. 1.) What is the marginal utility (MU) of the first smoothie? MU first smoothie : ___utils 2.) What is the marginal utility per dollar (MU/$) of the first smoothie? MU/$ first smoothie : ___utils per dollar 3.) What is the marginal utility (MU) of the 10th energy bar? MU 10th energy bar :___utils 4.) What is the marginal utility per dollar (MU/$) of the 10th energy bar? MU/$ 10th energy bar :____utils per dollar

a.) Is not ; Buy more sweaters and fewer sneakers. b.) Is ; Not change her purchases. c.) Is not ; Buy more of both goods.

5.) For each of the following situations, decide whether the bundle that Lakshani is considering is optimal or not. If it is not optimal, how could Lakshani improve her overall level of utility?... a.) Lakshani has $200 to spend on sneakers and sweaters. Sneakers cost $50 per pair, and sweaters cost $20 each. Lakshani ____ maximizing her utility. She should ____. b.) Lakshani has $5 to spend on pens and pencils. Each pen costs $0.50 and each pencil costs $0.10. Lakshani _____maximizing her utility. She should ____. c.) Lakshani has $50 per season to spend on tickets to football games and tickets to soccer games. Lakshani ____ maximizing her utility. She should _____.

(Table: Taxes, Spending, and Income) Use Table: Taxes, Spending, and Income. Suppose Governor Meridias initiates a tax of 10% on all income up to $50,000. Income above $50,000 is not taxed. An individual earning $75,000 will have a average tax rate of _____%.

6.67

If the tax rate on the first $30,000 of income is 15%; on the next $30,000 is 20%; on all income above $60,000 is 30%, then the tax on income of $50,000 is $_____.

8,500

1.) Right 2.) Movies 3.) The Gym 4.) Movies 5.) The Gym 6.) The Gym 7.) Movies

8.) Anna Jenniferson is an actress who currently spends several hours each week watching movies and going to the gym. On the set of a new movie she meets Damien, the consumer in Problem 7... Damien is __(1)__ Anna should go to __(2)__ more and __(3)__ less. This is because she values __(4)__ twice as much as __(5)__ , but they cost the same. Trading time at __(6)__ for more time at __(7)__ would increase her utility.

14.) What is the percentage decrease in gonorrhea cases? a decrease of___% What is the cross-price elasticity of demand between alcohol and the incidence of gonorrhea? Are alcohol and gonorrhea complements or substitutes?

??? ??? Complements

In the figure, the decrease in consumer surplus due to the tax is:

A + D.

q9

Acme Drug Inc is developing a new cancer suppressant drug, Limisol. Following clinical trials and the granting of a patent, the Food and Drug Administration has given the company permission to sell the drug. Below is a table showing the actual and projected costs and revenue for the firm, assuming an interest rate of 0%. All values are in hundreds of thousands. Acme is currently entering Year 4 of the development. Please specify all numerical answers to two decimal places. What is the total value of this project's sunk costs (in hundreds of thousands) 40+30+5+1.75+7.5 = 89.25 What are the total future costs 35+20+35+20+35+20=165 consider all relevant information, would you recommend the company to continue to manufacture this drug? YES REVENUE = 60+60+60 =180 --- Going forward, the sunk costs in years 1-3 are irrelevant. The only relevant information are the projected costs and revenues in years 4-6. The costs are calculated above. The revenues are, in hundreds of thousands: 60+60+60=180 As projected future revenues are higher than projected future costs, you should recommend that Acme Drug Inc continue to manufacture Linisol, as this activity will be profitable. ***REALIZE SUNK COST IN LIFE. Even though the profits are not high enough to recoup the R&D and other costs already paid, these costs cannot be recovered and should not factor into the decision moving forward.

2 Book and 30 Pencils

Adam has a monthly income of $20 that can be spent on books (B) and pencils (P). The price of a book is $5 and the price of a pencil is $0.50. Which bundle of books and pencils is NOT affordable for Adam?

q6

Albert owns a breakfast diner and decides to add a new item to his menu, the Peerless Omelet. Albert must decide how many eggs to include in each omelet so that he makes the highest profit. Please use the information in the chart below to answer the questions that follow. How many eggs should Albert include in the omelet?6 What kind of marginal cost does Albert have? constant --- Though not depicted on the chart, this is simply a case of marginal analysis. The marginal cost for each additional egg is $0.45, meaning that it costs this much for Albert to add one more egg. As he adds eggs, he also increased the price he charges for the omelet. The change in price from one size to another gives him his marginal benefit. Any rational producer would stop producing at the point where marginal cost exceeds marginal benefit, and for Albert, this point would be 6 eggs. If he produces omelets with 3, 4, or 5 eggs he would be missing out on profit he could earn by including more. Also, if he produced omelets with 7 or 8 eggs, he would face the situation of being able to increase his profit by reducing the number of eggs included and dropping his price. Six eggs in each omelet is his profit-maximizing point. Albert faces a constant marginal cost. The cost to add each egg is the same as the cost of the egg before it. Due to various market conditions he is unable to charge this same price increase for each omelet, and so demonstrates the principle of decreasing marginal cost and optimal quantity.

2

Amy has $12 to spend on food. Tacos cost $2 each and pizzas cost $6 each. If she spends all of her money on pizzas, she can buy _____ pizzas.

Change the slope of the budget line

An increase in a consumer's income will NOT:

q1

Angus works as a dairy farmer and loves his work. Because the dairy business hasn't been doing well lately, Angus is considering changing careers. He could work as a technician at the local diary plant, and earn $27,000 a year. Angus decides to make a list of the costs of staying in business as a farmer and asks you for help. Please sort Angus' costs below according to whether they are explicit costs or implicit costs. EXPLICIT COSTS: the wage he PAYS to his hired hand the feed he BUYS for his cows the gas he USES for his farm truck the COST OF VETERINARY CARE for his cows IMPLICIT COSTS: the TIME it takes him to milk all of his cows The 27000 annual salary he would receive from working at the dairy plant. --- Explicit costs are those that require the outlay of the MONEY. Implicit costs are measured by the value of the benefit foregone. The wages, feed, gas, an veterinary care are all items that Angus must continue to purchase if he wants to stay in business as a dairy farmer. All of these items require him to SPEND MONEY. The implicit costs DO NOT require him to spend money. The cost of these items is what he is giving up by not pursuing them. The time he spends milking cows is the time he could have been used on another activity. Lastly, by remaining a dairy farmer, Angus would be giving up the salary that he could have earned working at the dairy plant. While he DID NOT actually spend this money, he would be GIVING UP THE OPPORTUNITY TO EARN IT, and so it therefore stills counts as a cost.

the marginal utility per dollar spent on boots is greater than the marginal utility per dollar spent on gloves.

Antonio derives more utility from spending an additional dollar on boots than on gloves. We can assume that:

q16

Art can make $50 per hour, so if he works all 100 hours, he can make $5,000 per week. The other end of the budget constraint is 100 hours, the amount of leisure Art would have if he didn\'t work. The budget constraint crosses the preference line at (20 hours of leisure, $4,000). Subtract 20 from the 100 available hours to determine the number of hours Art chooses to work. Then we put Art\'s income of $4,000 into the right graph to figure out how much he will put into rent versus other consumption. The endpoints of the budget constraint for the second graph are $4,000 for each side. If Art doesn\'t spend any money on rent, he will have $4,000 for other consumption. If he spends all his money on rent, he will have $4,000 for rent. The point where the preference line crosses the budget constraint gives Art\'s most preferred point that he can also afford. In this case, their intersection is at ($3,000, $1,000). This means that he will spend $3,000 on rent. So what is the preference line? Economists use functions to describe the preferences of people, known as indifference curves. These provide a mathematical representation of how people value different combinations of goods. To figure out which combination a person will buy given their income and the prices of the goods, the function is maximized while still staying in the budget set. If you have taken calculus, this is the same as solving for the maximum of a function on a closed set, but in two (or more) dimensions. The preference line can be thought of as the points that would maximize this function for all budget constraints. In order for this to be the maximum for all possible prices, these would have to be perfect complements for Art. This just means that the ratio of income to leisure and rent to other consumption is constant. For a fixed ratio of prices, a preference line could also come from a wide range of well-behaved functions.

There are several close substitutes for Bayer aspirin but fewer substitutes for a complete medical examination. Therefore, all other things equal, you would expect the demand for:

Bayer aspirin to be more price-elastic than is the demand for medical examinations.

q18 qqqqqqqqqqqqqqqqq

Because the shift from BL 1 to BL 2 results in a change in the intercept on the horizontal axis (which measures burritos) but not in the vertical intercept, it can be inferred that the price of burritos has changed. Because the intercept is farther to the right with BL 2, more burritos can be purchased. If income has remained the same, this must be because the price of burritos has gone down. A Giffen good is a product for which people buy more of it as the price increases, meaning an upward sloping demand curve. Thus, a consumer will respond to a fall in the price of burritos by buying fewer of them, as in point B. OK.

Brenda's total utility is highest when she consumers 2 bagels and 2 cups of coffee.

Brenda now has to make a decision about how many bagels and how much coffee to have for breakfast. She has $8 of income to spend on bagels and coffee. Bagels cost $2 each and coffee costs $2 per cup. Which of the following combinations provides Brenda with the highest total utility and is within her budget?

The graph depicts five demand curves. Please rank each curve in terms of elasticity. A curve that is more elastic than another curve for any given quantity can be considered more elastic

C E B D A

(Figure: A Market with a Tax) Use Figure: A Market with a Tax. The deadweight loss arising from the imposition of this tax is equal to the areas:

C + F.

a.) substitution effect b.) income effect

Cameron receives some utility from consuming a bottle of store-brand soda (an inferior good) but would much rather purchase a name-brand soda (a normal good)... a.) Which effect causes Cameron's quantity demanded of a bottle of store-brand soda to decrease? b.) Which effect causes Cameron's quantity demanded of a bottle of store-brand soda to increase?

The table shown lists two goods along with their cross-price elasticities, where the percentage change in quantity is measured for Good 1 and the percentage change in price is for Good 2. Identify the relationship between each of the pairs of goods.

Complements Substitutes Complements Substitutes Substitutes

a.) 140 b.) 705 c.) 2

Cookie Monster loves cookies!... a.) Cookie Monster's marginal utility from the fourth cookie is____units b.) What is Cookie Monster's total utility when he eats 6 cookies?_____units c.) Cookie number __ tastes the best to Cookie Monster.

In the figure provided, which demand curve is elastic?

D : small negative slant

13 e.) Of the following four tax policies, which is likely to cause the worst incentive problems?

Each individual who earns more than $10,000 pays a lump sum tax of $10,000. If the individual's income is less than $10,000, that individual pays in taxes exactly what his or her income is.

PRE-CLASS TUTORIAL////////////////////////////////////////// b) 3 cat toys and 4 cat treats

Each month, you have $15 to spend on toys and treats for your cat. Cat toys cost $3 each, and cat treats cost $1.50 each. Which of the following combinations of toys and treats would appear on your budget line?

q11

Economic models are typically based on the principle that people behave rationally. However people do not always behave rationally. Which of the following is NOT a reason why economists still consider their models valid in spite of the irrationality of people? -people typically behave more rationally over time. really?!!! irrational behavior is kind of unusual. -because the existing models have been in place fro so long, they are considered untouchable, the equivalent of an economic law*** - ANSWER -for the sake of simplicity, it is easier to create models from generalizations rather than seemingly random irrational behavior -despite the flaws in the model, the models are still thorough predictors of market behavior. --- Economists, for a variety of reasons, choose to consider their models valid despite the irrationality of people. It is simpler to create broad generalizations of rational people than from sporadic irrational behavior. People also tend to behave more rationally as time goes on when they learn from prior mistakes. Although irrationality does introduce potential flaws into models, the models themselves still provide plenty of robust, useful information to economists. Just because an economic theory or model has been in place for a long time does not mean it cannot be disputed or proven wrong.

q1

Elasticity formula is a ratio of two percentage changes. the numerator is the percentage change in quantity computed using the midpoint method MEMORIZE THAT FORMULA. CHANGE IN QUANTITY DEMANDED = ((QUANTITY NEW - QUANTITY OLD)/((QUANTITY NEW + QUANTITY OLD)/2))x100 the denominator is the percentage change in price computed using the midpoint formula. CHANE IN PRICE = ((PRICE NEW - PRICE OLD)/((PRICE NEW + PRICE OLD)/2))x100 After dividing the numerator by the denominator, it is common practice to take the absolute value of this result for the price elasticity of demand, as the result will almost always be negative.

q7

FIND PRICE OF ELASTICITY OF DEMAND FOR EACH. REVENUE INCREASE: price increase AND demand is inelastic (people need it, price increase, increase revenue) REVENUE INCREASE: price decrease AND demand is elastic. (PEOPLE INCENTIVE BUY MOAR AT LOWER PRICE => REV INCREASE) Thus, lowering the fare for vacationers and increasing it for business travelers is the airlines' best option to increase revenue. 1. FIGURE OUT INELEASTICITY. if elastic, lower price => more quantity => more REVENUE if inelastic, raise price => more money => more REVENUE

LEARNING CURVE/////////////////////////////////////////// True or False: The price elasticity of demand is the % change in the quantity supplied divided by the% change in the quantity demanded. This is _____.

False

True or False: An excise tax causes a deadweight loss due to the amount of revenue that is collected for the government. This is _____.

False

True or False: Doubling the excise tax rate on a good or service will double the amount of tax revenue collected for the government. This is _____.

False

True or False: If the income elasticity of demand for computers is 3, computers are a necessity. This is _____.

False

True or False: The amount of tax revenue collected by the government from an excise tax is the entire area between the demand and supply curves. This is _____.

False

True or False: The benefits principle is based on the assumption that everyone receives the same benefit from government-provided goods and services. This is _____.

False

True or False: The incidence of a tax is a measure of how much government revenue is collected by the tax. This is _____.

False

True or False: The price elasticity of supply is the ratio of the percent change in the quantity supplied to the percent change in quantity demanded. This is _____.

False

True or False: When demand is perfectly inelastic, the quantity demanded changes by a large amount when price changes. This is _____.

False

True or False: When the demand curve is horizontal, demand is perfectly inelastic. This is _____.

False

10

Faruq spends all of his income on tacos and milkshakes. His income is $100, the price of tacos is $10, and the price of milkshakes is $2. Put tacos on the horizontal axis and milkshakes on the vertical axis. The horizontal intercept for Faruq's budget line is _____ tacos.

WORK IT OUT/////////////////////////////////////////////// 20 ; 8 ; 6 ; 4

Find Brenda's total utility and use that information to calculate her marginal utility (MU) from bagels as she goes from consuming 0 bagel to 1 bagel, from 1 bagel to 2 bagels, from 2 bagels to 3 bagels, and from 3 bagels to 4 bagels. Assume she consumes two cups of coffee. ~ MU first bagel ~ MU second bagel ~ MU third bagel ~ MU fourth bagel

What would be the new equilibrium quantity if instead of taxing consumers, the city taxed producers?____ thousand bottles

GRAPH: (D) shifts DOWN [one] ~ 4 bottles

GRAPH: Smokers 12 to 17 years old? GRAPH: Smokers 40 years old or older? ~ Which statement best explains why the new equilibriums are different?

GRAPH: (S) shifts UP GRAPH: (S) shifts UP The demand curves have different price elasticities.

HOMEWORK Q's/////////////////////////////////////////////// The graph illustrates the demand and supply curves for automobile tires before the excise tax. ~ What is the price consumers pay for a tire post tax? Round to the nearest 10. price paid by consumers: $ ~ What is the price producers receive for a tire net of taxes? Round to the nearest 10. price received by producers: $_____.

GRAPH: (S) shifts UP [twice] (Eq) set at (3 , 100) ~ $ 100 ~ $ 80

q19

Given their budget constraint, this person will maximize utility by consuming: This relationship holds here as expected. The marginal utility from the 3rd waffle is 60 and the price is $2.00. The marginal utility of the 2nd pancake is 30 and the price is $1.00 (60/2=30/1).

WORK IT OUT////////////////////////////////////// The accompanying table shows how the two groups respond to the discount. Using the midpoint method, calculate the price elasticity of demand for group A and B in the table.

Group A: 0.625 = [(1.65-1.55)/(1.65+1.55)/2] x 100 = (6.25/10%) Group B: 1.25 = [(1.7-1.5)/(1.7+1.5)/2] x 100 = (12.5/10%)

q17

HARD First, we will solve for the consumption bundles that Billy Bob can afford. We will focus on integer amounts of each good. Listed in the table below are the affordable bundles of the goods. Then the total utility from the bundle is calculated by adding the utility for each good. As we can then see, the maximum total utility will be given from the bundle of 2 camping stoves and 10 beef briskets. From the chart, of the combinations that are on the budget constraint, the combination of 2 camping stoves and 10 beef briskets gives the highest total utility of all the possible affordable combinations of the goods. This is Billy Bob\'s optimal consumption bundle. It is the highest utility he can get from any of the points he can afford.

cross-price elasticity of demand

I learned that the demand for a good is often affected by the prices of other, related goods - goods that are substitutes or complements. There I saw that a change in the price of a related good shifts the demand curve of the original good, reflecting a change in the quantiy demanded at any given price. THE STRENGTH OF SUCH a "cross" effect on demand can be measured by the cross-price elasticity of demand, defined as the RATIO OF THE PERCENT CHANGE IN THE QUANTITY DEMANDED OF ONE GOOD to THE PERCENT CHANGE IN THE PRICE OF THE OTHER change in quantity demanded of good A/change in price of good B. the cross-price elasticity of demand between two goods measure the effect of the change in one good's price on the quantity demanded of the other good. It is equal to the percent change in the quantity demanded of one good DIVIDED by the percent change in the other good's price.

decreasing.

If Frank's utility from listening to one hour of Dave Mathews is 20; two hours, 30; and three hours, 35, Frank's marginal utility for each additional hour of listening to Dave Mathews is:

q8

If Maria spends all $70.00 on soap, she can buy 20 bottles: $3.50 × 20 = $70.00 So one endpoint of the budget constraint belongs on the point (0, 20). If she spends all $70.00 on coffee, she can buy five pounds: $14.00 × 5 = $70.00 So the other endpoint belongs on the point (5, 0). Maria will choose a point on the line (a particular combination of soap and coffee) based on her preferences for the two goods. The budget constraint line separates the baskets of goods that are unaffordable from the ones that are affordable. Baskets of goods inside the line (B, F, and G) are affordable with money left over. Baskets outside the line (E, D, H) are unaffordable. Baskets right on the budget line (C and A) cost exactly the amount that Maria has. Try calculating the cost of the baskets to verify.

Decrease

If the price of a good increases, its marginal utility per dollar will:

Substitution effect

If the price of coffee cups falls and the consumer decides to buy more coffee cups solely because they are less expensive, this describes the:

q2

If this person has $18 and can afford 18 brownies if they spend all of their money on this good, the price of brownies must be $1 each. Similarly, the price of ice cream cones must be $2 each ($18/9=$2). Utility maximization occurs when: MARGINAL UTILITY(BROWNIES)/PRICE(BROWNIES = MARGINAL UTILITY(ICE CREAM CONE)/PRICE(ICE CREAM CONE) If the marginal utility per price is higher for one good than the other, more of that good should be consumed. Remember that the marginal utility decreases as the quantity consumed increases. Since price remains the same, a decrease in marginal utility will decrease the ratio of marginal utility to price. At point A, marginal utility/price is higher for brownies than for ice cream cones (10/1=10 for brownies; 18/2=9 for ice cream cones). To maximize utility, more brownies should therefore be consumed. To consume more brownies, fewer ice cream cones must be consumed because of the budget constraint.

q10 IMPORTANT CONCEPT ON DECISION MAKING MISTAKES

In each scenario below, please label which mistake they made in regard to economic decision making. -Alexander is heavily invested in the stock of Nortel, a telecommunications giant. However, Nortel has been in steady decline and despite the fact all signs point to the fact Nortel will likely go bankrupt, Alexander holds onto his stocks, unwilling to sell unless he makes back at least the money he invested into it. - LOSS AVERSION. SUNK COST IN RL -Jim is washing his laundry and as he checks his jean pockets, he finds an unexpected windfall of $50. Elated because it was $50 more than he had before, he decides to splurge on a lobster and filet mignon dinner. -MENTAL ACCOUNTING - Geneva is a researcher at Genentech, a biotech firm and faces decision paralysis every time a big question is posed to her. When her boss asks her what project she wants to work on, she says she is indifferent every time, so her boss just assigns her to a project. STATUS QUO BIAS -Tiffany lives in Alameda, CA. She recently got two job offers, one in Oakland and one in San Francisco.The San Francisco job pays $1000 more per year, so Tiffany accepts the job. However, she quickly realizes the travel time, which is an hour more each way, quickly becomes a burden. - MISPERCEIVING OPPORTUNITY COST - Steve is trying to diet. Each day he says the diet will begin today, but each time he eats a potato chip, he indulges in it. The next day, he promises his diet will really start, but the vicious cycle continues. OVERCONFIDENCE --- There are six common economic decision making mistakes: Loss aversion is the inability to acknowledge a loss has occured and to move on. RL! This is one of the predominant reasons why sunk costs are hard to ignore as it means that money you spent is unrecoverable. Alexander has a loss on his stocks, but instead of selling them to keep what money he has, he is unwilling to accept the loss. Counting dollars unequally tends to result in mental accounting, where values on certain money is more or less than others. Regardless where or what form the money is, $50 is still $50!!. Finding extra money does not make it more valuable than any other money in your bank account. Overconfidence also has a bearing on rational decision making, often resulting in rash decisions due to people thinking they know more than they actually do. Unrealistic expectations about future behavior also has a bearing on rational decision making. It is at its core, another form of overconfidence. Steve keeps saying he will eventually diet, but that day never seems to come. Misperceptions of opportunity costs occus when people have a tendency to ignore opportunity costs that do not involve money. Tiffany looked only at the salary as she made a job decision, but did not factor in the travel time and distance. Status quo bias is the tendency to avoid making a decision at all, or to colloquially put it, go with the flow. Geneva doesn\'t give any input on what project she works on, so her boss just decides to start assigning her to whatever needs work.

income elasticity of demand

Income elasticity of demand is a measure of how much the demand for a good is affected by changes in consumer's incomes. It allows us to determine whether a good is a normal or inferior good as well as to measure how intensely the demand for the good responds to changes in income ******income elasticity of demand = % change in quantity demanded/ % change in income goods can be normal goods, demand increases when income rises. inferior goods, demand decrease when income rises. these definitions relate directly to the sign of the income elasticity of demand: when the income elasticity of demand is positive, the good is a normal good-quantity demanded at any given price increases as income increases. when negative, the good is an inferior good-quantity demanded at any given price decreases as income increases. Most goods are normal goods, which have a positive income elasticity of demand. Normal goods may be either income-elastic, with an income elasticity of demand greater than 1, or income-inelastic, with an income elasticity of demand that is positive but less than 1 THE TERM INCOME-ELASTIC OR INCOME-INELASTIC ONLY APPLY TO NORMAL GOODS

Suppose the government in your City imposes a $0.50 excise tax on gasoline. If demand for gasoline is more inelastic than its supply, then the burden of this tax will be shared:

d) mostly by buyers of gasoline

c) No, the marginal utility per dollar from golf was higher than that for fishing.

Jon enjoys fishing (which costs $20) and golf (which costs $30). Last month, Jon fished four times and golfed twice. The last fishing outing provided Jon a marginal utility of 50, and the last round of golf provided a marginal utility of 120. Did Jon maximize his utility according to the utility maximization rule?

q12

Kimiko\'s consumption is determined by her preferences. There is no information in this graph or question that describes her preferences, so we cannot determine her consumption from this question. Kimiko\'s consumption is determined by her preferences. There is no information in this graph or question that describes her preferences, so we cannot determine her consumption from this question.

q5

Match the definitions below with the terms at the right that most closely align with the description. The cost of producing one more unit of a good or service: MARGINAL COST The situation where an additional unit of a good or service costs the same as each of the former units: CONSTANT MARGINAL COST The benefit experienced from undertaking one more unit of an activity: MARGINAL BENEFIT. a situation where the expense of producing one more unit of a good or service is greater than that of producing the previous unit: INCREASING MARGINAL COST the amount that, when produced or consumed, results in the greatest possible net gain. OPTIMAL QUANTITY The situation that occurs when the gain from an additional unit of a good or service is less than that gained from producing the previous unit. DECREASING MARGINAL BENEFIT. --- The marginal cost of a good or service is the cost of producing one more unit. It differs from total cost in that total cost is the sum of producing all units of a good or service, whereas the marginal cost is the cost of producing the most recent unit. This cost can be the same, greater than, or less than the cost of producing other units. Constant marginal cost is a situation in which the marginal cost remains the same for each unit produced. The situation often occurs when there are fixed per unit costs, such as buying raw supplies for a restaurant or in adding additional workers to your company who all earn the same wage. Marginal benefit is the benefit gained from producing one more unit of a good or service. Just like with costs, the term \"marginal\" refers to the benefit of the most recent unit while the term \"total\" indicates a focus on the accumulated benefits from all units consumed or produced. Increasing marginal cost occurs when the cost of an additional unit of a good or service is greater than the cost of the previous unit. This can occur when there is a change in the productivity of inputs. As firms produce more, they will experience increasing marginal costs if additional units of labor or capital aren\'t as productive as earlier units. The optimal quantity is the level of production at which the greatest possible benefit is obtained. If a firm produces any less than this, there is still benefit to be gained and it should rationally choose to produce more. If a firm produces any more than this, it can increase the benefit gained by reducing output. Decreasing marginal benefit occurs when an extra unit of a good or service produces less benefit than the unit that was produced before it. ***For example, if the first hour spent studying economics improves your exam score by a greater amount than the second hour of studying does, then you would have experienced a decreasing marginal benefit.

HOMEWORK////////////////////////////////////////////// a.) Marginal Utility b.) Diminishing Marginal Utility c.) Negative Marginal Utility d.) Utility

Match the terms listed with their definition. a.) The extra satisfaction a person obtains from consuming one more unit of a good or service b.) When the consumption of an additional unit of a good or service provides the person with a smaller increase in satisfaction than previous units c.) When the consumption of an additional unit of a good or service makes a person worse off d.) The satisfaction experienced from consuming a good or service

$ 720 GRAPH: 4 Unicycles

Mauricio has a circus act that involves monkeys on unicycles... What is Mauricio's budget for monkeys and unicycles? Mauricio's budget: $

GRAPH: (A) 6 (B) 8

Mauricio has a circus act, and he has a budget of $720 to spend on monkeys and unicycles. The cost of a unicycle is $120, and the cost of a monkey is $90. Please graph Mauricio's budget constraint on the graph.

a.) A fire truck b.) MUx/Px = MUy/Py

Miles is three years old and his grandparents have given him money to spend at the toy store as a birthday present... a.) If Miles buys only one toy, which should he buy to maximize his utility? b.) Which relationship between marginal utility (MU) and price (P) indicates that a consumer is maximizing his or her utility regarding spending on two goods?

q8

On your way home from Super Groceries your car breaks down. It is a hot summer day and you have nobody to call. With little time before the food soils, you decide to prioritize what to carry on the walk home. You choose to take three items with you. Since you will need all five items toady, you will replace the two abandoned items at the corner store near your house, Convenient Grocers. The table below contains prices you paid for each good at Super Groceries and the price you will need to pay at Convenient Grocers to replace the goods. Which three items should you save? Place them in the bin. Leave the rest of the items unplaced. BEEF, EGGS, FRUITS --- The important concept to remember here is that of sunk costs. In this case, the price that you paid for the items at the Super Groceries is a cost that you cannot recover. The only price that matters is the price it will cost you to replace the items. So you should ignore Super Groceries\' prices and save the three items with the highest price at Convenient Grocers, which are beef, eggs, and fruits. This means you only need to replace milk and vegetables at a cost of $2.75 and $2.95. Note that if you had saved beef, milk, and vegetables, which had cost you the most, you would have to replace eggs and fruits at a cost of $4.75 and $3.60.

q7

Patrick has chosen to double-major in finance and microbiology and studies 14 hours a day as a result. To make it through his studies. Patrick relies on GreenCow energy drinks. Below is a chart of his marginal costs (MC) and marginal benefits (MB) from consuming GreenCow. What is the optimal quantity of GreenCow drinks for patrick? 5 can obviously What occurs if Patrick consumes more than the optimal quantity? The extra benefits Patrick gets from another can are no longer worth the cost. --- The optimal quantity for Patrick to consume is 5 cans of GreenCow. This is the quantity where MARGINAL BENEFIT EQUALS MAGINAL COST. For all quantities up to the 5th, the marginal benefit is higher than the marginal cost. This means that Patrick's net benefit is increasing, and consuming all units up to this point make him better off. If Patrick were to consume any more than 5 cans of GreenCow, the cost of each additional can would be higher than the additional benefit (because the marginal cost curve is higher than the marginal benefit curve). Consuming any cans beyond the 5th therefore makes him worse off. It cannot be determined if the other answer choices are true based on the information provided here.

q4

Please match each of the following scenarios with the term below that best fits the description provided -Jackson manages his father's fruit stand. He takes an accounting of all the company's assets, including equipment, tools, financial assets and inventory. These items are examples of: CAPITAL -Abe owns a candy shop and at year end calculates his revenue minus his explicit cost. the result is an example of: ACCOUNTING PROFIT -Hailey decides to buy a pretzel from the cart outside her office. She pays 3.25 in cash for her lunch. The 3.25 is an example of : EXPLICIT COST ~ SUNK COST -Annabelle runs a tutoring company. In determining her costs and benefits from the venture, she includes her opportunity costs from choosing to open the tutoring business. She is evaluating the firm's ECONOMIC PROFIT -Sacha leaves his job as a nuclear engineer to become a train conductor. One day, while riding the rails, he considers the salary he could have earned had he remained an engineer. This is an example of: IMPLICIT COST Ginny works for an investment firm an after reviewing the investment decisions her firm made last year, considers other ways the funding could have used. She is considering her: IMPLICIT COST OF CAPITAL. --- The capital of a business is the combined value of all of its assets. These include its equipment, any buildings or facilities it may own, tools used for its business, inventory of its products and any financial assets it may have in its possessions. Jackson manages all of these assets for his father\'s company, and so manages the company\'s capital. Abe calculates the accounting profit for his candy shop. He takes the total revenue earned and subtracts his explicit costs, the ones for which he had to pay out money, and arrives at his accounting profit. An explicit cost is one for which money must be paid out. When Hailey pays for her pretzel, she is incurring an explicit cost. When Annabelle considers the opportunity costs for her business, she is calculating the economic profit. This takes into account the cost of what had to be given up in order to make the decision. In this case, she considers what was given up to open her tutoring company. Sacha is considering his implicit cost, the opportunity cost of making the decision to become a train conductor. He considers the dollar value of his salary had he remained as a nuclear engineer, and counts these lost potential benefits as a cost in his choice to become a train conductor. The implicit cost of capital is the opportunity cost of the capital. Ginny considers other ways that the capital her firm invested could have been used. When considering the total economic profit earned by these investments, Ginny will consider the benefits that could have been experienced from a different decision and consider these as an economic cost.

a.) Consume fewer than seven peppers and you will be better off b.) The consumption of the sixth pepper

Poppy likes to eat hot peppers... a.) Poppy asks if she should consume seven peppers. What would your advice be? b.) Marginal utility becomes negative with the consumption of which pepper?

increasing marginal cost

Production of a good or service has INCREASING MARGINAL COST when each additional unit costs more to produce than the previous one

a.) 6 b.) 6 c.) 4

Refer to the total utility curve in the accompanying graph to answer the questions. a.) Utility is maximized when how many units of the good are consumed?____units b.) How many units can be consumed before marginal utility becomes negative?____units c.) How many units can be consumed before diminishing marginal utility sets in?___units

Which of the following taxes is the largest source of revenue for state and local governments?

Sales Tax

q4

Shep buys one large latte everyday, no matter what the price is. On half price Mondays, lattes cost half of the normal cost, but even with this price decrease, he still only buys one large latte. Thus, no matter what the price is, the quantity demanded stays constant. This illustrate the case of zero (or perfect) inelasticity. The graph for this curve would be a vertical straight line, where Shep always purchases one large latte, no matter what the price is. Here, elasticity is the percentage change in quantity demanded over the percentage change in price. To calculate this numerically, let's say a large latte usually cost $4, but on Monday it costs $2. To calculate this: Q NEW - Q OLD = 1-1 = 0 = 0 = 0 = 0 notice that it doesn't matter what the price change would be. The elasticity remains zero in any case.

a.) 0.90 b.) Yes, Joe should choose fewer smoothies and more apps. c.) 281.30

Suppose that Joe consumes smoothies and apps. The price of smoothies is $5 per unit and the price of apps is $10 per unit... a.) Calculate the marginal utility per dollar of going from eight to nine apps. utils/$ b.) To increase total utility without increasing spending, should Joe change the amount of consumption of either good? c.) What is the total utility at the optimal consumption bundle?

4 ; 8

Suppose that Sam allocates his income between milk and cereal... As this is his optimal consumption bundle, Sam should purchase___gallons of milk and ___boxes of cereal

Determine whether each of the statements given is true or false.

TRUE: A Swiffer floor sweeper.... FALSE: When supply is perfectly inelastic... The short-run elasticity of supply... When the price increases... A key consideration as to whether...

consumers must give up some of one good to buy more of another.

The budget line has a negative slope because:

If Nile.com wants to increase its total revenue , should discounts be offered to group A or to group B, to neither group, or to both groups?

The discount should be offered only to group B.

Which elasticity number indicates an elastic supply?

The elasticity of supply of sleeping bags is 1.22.

D

The graph shows a budget line and some consumption bundles. Which bundle is affordable but does not use all of the consumer's income?

Shift in toward the origin

The graph shows different combinations of sun tan lotion and cowboy hats that Fred can buy. If Fred's income decreases, the budget line will:

rotate out keeping the vertical intercept the same.

The graph shows different combinations of sun tan lotion and cowboy hats that Fred can buy. If the price of cowboy hats decreases, the budget line will:

a.) D b.) F

The graph shows two budget lines and six consumption points (A, B, C, D, E, and F) for Pepsi and Dr Pepper... Assume that the consumer, Fred, attempts to maximize his utility and exhausts his budget on the two goods. a.) If Fred's income increases, the movement from point A to point ____ is consistent with Pepsi being a normal good and Dr Pepper being an inferior good. b.) If Fred's income increases, the movement from point A to point ____ is consistent with Dr Pepper being a normal good and Pepsi being an inferior good.

implicit cost of capital

The implicit cost of capital is the opportunity cost of the capital used by a business-the income the owner could have realized from that capital if it had been used in its next best alternative way.

True

The table shows Carol's total utility from consuming cowboy hats and suntan lotion. Carol has $24 to spend. Hats cost $12 each and a bottle of suntan lotion costs $6. True or False: If Carol buys two bottles of suntan lotion and one hat, she has maximized her total utility. This is _____.

4

The table shows Carol's total utility from consuming cowboy hats and suntan lotion. Carol has $36 to spend. Hats cost $12 each and a bottle of suntan lotion costs $6. If Carol buys 1 hat, she can buy _____ bottles of suntan lotion.

3

The table shows marginal and total utilities for various quantities of exercise for Mike. Mike's marginal utility of the fifth hour of exercise is _____ utils.

7

The table shows marginal and total utilities for various quantities of exercise for Mike. Mike's marginal utility of the first hour of exercise is _____ utils.

the income effect

The income effect of a change in the price of a good is the change in quantity of that good consumed that results from a change in the consumer's purchasing power due to the change in the price of the good. for the vast majority of goods, the substitution effect is pretty much the entire story behind the slopes of the individual market demand curves. There are, however, some goods, like food or housing, that account for a substantial share of many consumer's spending. In such cases, another effect, called the income effect, also comes into play. *the change in the quantity of a good consumed that results from a change in the overall purchasing power of the consumer due to a change in the price of that good is known as the income effect of the price change. EX: family spend 1/2 on housing. ALL housings raises prices. they move to another housing smaller and less expensive to maintain same price. however, it would have been smaller than before the housing price raise. family is made poorer/income buys less housing than before. the amount of income adjusted to reflect its true purchasing power is often termed "real income", in contrast to "money income" or "nominal income," which has not been adjusted. Most goods absorbs only a SMALL fraction of a consumer's spending. for such goods, the substitution effect of a price change is the only important effect of the price change on consumption. it causes individual demand curves to slope downward. When a good absorbs a large fraction of a consumer's spending, the income effect of a price change is present in ADDITION to the substitution effect. for normal goods, demand rises when a consumer is richer and falls when a consumer is poorer, so that the income effect reinforces the substitution effect.

net present value

The net present value of a project is the present value of current and future benefits minus the present value of current and future costs. NET PRESENT VALUE OF PROJECT = PRESENT VALUE OF CURRENT AND FUTURE BENEFITS - PRESENT VALUE OF CURRENT AND FUTURE COST

maximizes total utility given the budget constraint.

The optimal consumption bundle is the one that:

has the highest total utility of all affordable bundles.

The optimal consumption bundle:

1 ; 2

The price of bagels increases to $4, but the price of coffee remains at $2 per cup. Which bundle is her optimal bundle assuming she still has $8 of income? _____bagel(s) _____cup(s) of coffee

40

The price of popcorn is $0.50 per box and the price of peanuts is $0.25 per bag. You have $10 to spend on both goods. The maximum number of bags of peanuts that you can purchase is:

q9. can one love one thing for life? one person. you eventually get tired of it.?

The principle of diminishing marginal utility states that as people consume more of a good, their marginal utility eventually becomes smaller. In other words, people get tired of consuming a good and at some point begin to get less enjoyment from additional units of the good than they experienced from earlier units. Though diminishing marginal utility takes place at some point, it is also possible for marginal utility to be increasing, at least over some range of consumption. The stinky tofu scenario here is a good example of this. If stinky tofu is an acquired taste, than consumers will enjoy the dish more as they eat larger quantities. Perhaps the first bite doesn\'t taste so great, but after five bites of stinky tofu, it begins tasting good. This describes increasing marginal utility. However, even when a good is associated with increasing marginal utility for some range of consumption, diminishing marginal utility is still likely as consumers eventually tire of the good. A product like this is therefore likely to provide increasing marginal utility at first (as the taste is acquired) and then diminishing marginal utility as more and more of the good is consumed (as consumers get sick of eating stinky tofu).

300

The table shows Carol's total utility from consuming cowboy hats and suntan lotion. Carol has $24 to spend. Hats cost $12 each and a bottle of suntan lotion costs $6. If Carol buys one bottle of suntan lotion, her total utility is _____ utils.

50

The table shows Carol's total utility from consuming cowboy hats and suntan lotion. Carol has $24 to spend. Hats cost $12 each and a bottle of suntan lotion costs $6. The marginal utility per dollar of the first bottle of suntan lotion is:

False

The table shows Carol's total utility from consuming cowboy hats and suntan lotion. Carol has $24 to spend. Hats cost $12 each and a bottle of suntan lotion costs $6. True or False: If Carol buys 1 bottle of suntan lotion, she has maximized her total utility. This is _____.

200

The table shows the total utility that Shanka derives from iPod shuffles and Birkenstocks. The price of the iPod shuffle is $50, and the price of the Birkenstocks is $100. Shanka's income is $300. The marginal utility of the second pair of Birkenstocks is:

q15

To calculate the marginal utility (MU), subtract the total utility (TU) from consuming one more unit of a good from the total utility of consuming the current amount of the good. You can then use the MU to determine the MU per $ by dividing the MU by the price of the good. More specifically: To answer the second and third part of the question, to determine the optimal consumption bundle, you first need to determine where Joe can maximize their total utility. This can be conducted by calculating the total utility and determining where the maximum total utility is. This is accomplished in the table to the right. As can be seen, the maximum total utility occurs at 12 units of cupcakes and 12 units of pizzas, where the total utility is 281.3. As Joe is currently consuming 18 cupcakes and 9 pizzas, they could maximize their utility by decreasing the number of cupcakes to 12 and increasing the number of pizzas to 12. Another way to determine the optimal consumption bundle is to see where the MU/$ of cupcakes is equal to (or nearly equal to) the MU/$ of pizzas. You will need the numbers from the table in the hint to do this. Without doing all the calculations, we find that: With cupcakes, going from 11 units to 12, the MU/$=1.68 going from 12 units to 13, the MU/$=1.40 With pizzas, going from 11 units to 12, the MU/$=1.5 going from 12 units to 13, the MU/$=1.7 So again, we find that the optimal consumption bundle is somewhere very close to 12 units of cupcakes and 12 units of pizzas.

LEARNING CURVE/////////////////////////////////////////////// True or False: The tax wedge is the difference between the price paid by consumers and the price received by the producers. This is _____.

True

True or False: According to the ability-to-pay principle of tax fairness, those with greater ability to pay should pay more. This is _____.

True

True or False: Deadweight loss is zero if demand or supply is perfectly inelastic. This is _____.

True

True or False: Demand is perfectly inelastic when the quantity demanded does not respond at all to a change in price. This is _____.

True

True or False: If the supply curve is perfectly inelastic and the demand curve is elastic, producers bear the entire burden of the tax. This is _____.

True

True or False: In Panel A of the figure provided, most of the burden of the tax is paid by consumers. This is _____.

True

True or False: The incidence of a tax depends mainly on the price elasticity of demand and supply. This is _____.

True

False

True or False: Producer surplus is a measure of the satisfaction a consumer derives from consuming a good or service. This is _____.

False

True or False: The budget constraint requires that consumer's consumption bundle cannot cost more than their production possibilities. This is _____.

False

True or False: The collection of goods and services consumed by an individual is known as a utility function. This is _____.

q12 minimum wage, and unemployment

Unemployment is measured by the excess of supply of workers. The more elastic that supply and demand are, the higher the unemployment. Diagram shows unemployment when supply and demand are inelastic. Diagram other shows a higher level of unemployment when supply and demand labor are very elastic. Note that the unemployment rate is larger in b

What is the most effective way to balance equity and efficiency in the tax system?

Use the political process.

q5

Utility is a measure of how much enjoyment a person feels when engaging in an activity. Total utility measures how much total enjoyment a person experiences from consuming all units of a good. Marginal utility measures how much total utility changes when an additional unit is consumed. Cookie Monster\'s total utility increases each time he eats a cookie. The 4th cookie increases his total utility from 390 to 530, so the marginal utility of the 4th cookie is: 530-390=140 Cookie Monster\'s total utility from 6 cookies can be calculated by adding his total utility from 5 cookies with the marginal utility from the 6th cookie: 630+75=1=705 The cookie with the HIGHEST MARGINAL UTILITY provides cookie monster with the MOST ADDITIONAL \"ENJOYMENT\" and therefore tastes the best to him. Filling in the corresponding table completely shows us that the cookie with the highest marginal utility is the 2nd cookie, with a marginal utility of 150. This is a little unusual, as most people experience diminishing marginal utility with each unit, and so enjoy the first one the most. However, as we said, Cookie Monster really loves cookies, and so that first one just gets him started. Indeed, for most people, the marginal utility for any product or service eventually declines to 0 and then goes negative (when they\'ve \"had enough\"), but for Cookie Monster, the number of cookies for which this is the case has yet to be discovered.

q11

Utility is defined as the level of satisfaction, or pleasure, that people receive from their choices. Marginal utility is the additional utility provided by one additional unit of consumption. So your marginal utility from completing this problem measures how much better off you are from working the last problem in terms of satisfaction (which we hope is quite significant) compared to where you were before this problem. Marginal utility does not have to be positive or negative; it can be positive, negative or remain the same. For example, consuming something that you normally enjoy (such as pizza), but that gives you food poisoning this time, would make you worse off, which means utility is DECLINING, INDICATING A NEGATIVE marginal utility. Whereas getting another art project from your young son could be pleasurable for you; hence, your utility would increase. On the other hand, diminishing marginal utility is a common pattern that exists where each marginal unit of a good consumed provides less of an addition to utility than the previous unit. This occurs when the extra utility from consuming a good isn\'t as high as the extra utility experienced from earlier goods. For example, your first slice of pizza will improve your satisfaction a lot, but by the time you get to the third slice, you won\'t be as hungry as you were originally and your satisfaction won\'t increase as much. This is because of diminishing marginal utility. It is extremely difficult to measure utility, because each person is different and enjoys different things. You may like broccoli and french fries, but your friend may prefer mashed potatoes and lollipops. Thus, quantifying utility is difficult and often relies upon indirect methods, such as observing people\'s actions to see what they reveal about their preferences (e.g., somebody buying a hamburger with no cheese and no pickles instead of an equally-priced hamburger with cheese and pickles means that hamburgers with no cheese and no pickles gives them more utility).

q6

Utility is maximized at the highest point on this graph; at 6 utils (utils represent the value of utility). Marginal utility measures how much total utility changes when an additional unit is consumed. If consuming an additional unit improves utility, the slope of the total utility curve (aka, marginal utility) is positive. The total utility curve increases until the 6th unit, implying that units 1-6 increase utility. Units beyond the 6th decrease utility, and so exhibit negative marginal utility.

q1

Utility refers to the satisfaction experienced from consuming a good or service, whether you purchase and eat three pieces of pizza and one soda, you buy a couch to sit on in your living room, or you pay for someone to change the oil in your car. Diminishing Marginal Utility refers to the case where the consumption of an additional unit of a good or service provides the person with a smaller increase in satisfaction than previous units. For example, that first ice cream cone was really great, but you got pretty full after eating it. Therefore, the second ice cream cone is still yummy, but not as fulfilling as the first one. Marginal Utility refers to the extra satisfaction experienced from consuming one more unit of a good or service. For example, eating a third ice cream cone. The third ice cream cone can make you happy or it can make you sick (in that case, it would be a negative utility). Negative Marginal Utility is when the consumption of an additional unit of a good or service makes a person worse off. For example, if you eat that third ice cream cone and it does make you sick.

q3

Utility: Utility measures the amount of satisfaction that a consumer receives from consuming a good or service. Rational consumers want to maximize their total utility. In the graph above, the total utility curve increases to a point (about 5 peppers) and then begins to decrease. To maximize utility, Poppy should consume fewer than 7 peppers. Her total utility is higher if she eats fewer peppers. For most goods, utility increases as the quantity of the good consumed increases. People are generally more satisfied with a larger quantity of a good. In this case, however, the decrease (bending back down) of the utility curve shows us that the satisfaction Poppy receives from this good decreases if she consumes too much (after about 5 peppers). This is different than diminishing marginal utility. Diminishing Marginal Utility versus Decreasing Utility: Diminishing marginal utility tells us that each additional unit consumed will increase total utility by a smaller and smaller amount. For example, the third pepper increases total utility by less than the second pepper. Decreasing utility occurs when marginal utility is negative, not just decreasing. That is, the next additional unit consumed reduces total utility. Poppy actually gets less total satisfaction from increasing consumption of peppers. In this example, marginal utility becomes negative when Poppy eats the 6th pepper. Total utility decreases. Up until that point, additional consumption adds a positive amount (albeit less and less) to total utility.

q14

When Charmaine\'s income decreases from $16 to $10, her budget constraint will pivot inward. The amount of leisure she is able to choose will not change, but the amount of consumption that she is able to choose from changes. Instead of making $160 if she works all 10 hours, she will now only make $100 from working all 10 hours. The new y-intercept is 100 and the x-intercept remains the same. In order to determine Charmaine\'s consumption after the price change, we would need to know Charmaine\'s preferences. There is not enough information in this graph to determine that.

At a maximum

When marginal utility is zero, total utility is:

q15

When the price increases, the price effect tends to increase total revenue since each unit sells for a higher price. However, it si not always true that a price increase will actually lead to higher total revenue. If the quantity effect is stronger than the price effect and the number of units sold decreases dramatically as a result of the price increase, total revenue may go down In the long-run elasticity of supply is typically larger than the short-run elasticity of supply and not the other way around because in the long-run, producers have more time to react to price change: the more flexibility (here in planning and time), the more elastic the curve. The question of whether a good is a luxury item in the determining its relative elasticity is a factor that affects price elasticity of demand, not supply. When supply is perfectly inelastic, a change in demand does not have an effect on the price. On a straight vertical line, a shifted demand curve will create a new equilibrium price. it is quantity that doesn't change. On the other hand, with a perfectly elastic supply curve (a horizontal line), regardless of where the demand shift. the price remains the same.

quantity change due to the fact that the consumer will substitute relatively cheaper goods in place of more expensive ones.

When the price of a good changes, the substitution effect is the amount of the:

The price of pizzas decreases, so Lucy buys more pizzas and fewer hamburgers.

Which of the following best describes the substitution effect of a price decrease?

the marginal utility of one tub of yogurt divided by the price of the yogurt tub

Which value BEST describes the amount of utility that is gained by spending an additional dollar on yogurt?

q10

With a lower income, the trade-off between movie tickets and butter does not change. Since the relative prices are the same, the slope of the budget line remains the same. Nevertheless, with less available income, the set of affordable goods is reduced. Thus, Vanessa\'s budget line shifts downward and to the left, remaining parallel to the original line.

The graph shows the demand for bicycles. The price elasticity of demand between $350 and $300 is 1.86. This means that: content_hint: Refer to Equation 6-5.

a 1% change in price causes a 1.86% change in quantity demanded.

budget constraint

a budget constraint requires that the cost of a consumer's consumption bundle be no more than the consumer's income. YA CAN'T SPEND MORE THAN YA MAKE

budget line

a consumer's budget line shows the consumption bundles available to a consumer who spends all of his or her income. BUDGET LINE = LIMIT OF SPENDING. SPEND ALL HIS/HER INCOME

consumption possibilities

a consumer's consumption possibilities is the set of all consumption bundles that can be consumed given the consumer's income and prevailing prices. ALL I CAN BUY WITH WHAT I HAVE

optimal consumption bundle

a consumer's optimal consumption bundle is the consumption bundle that maximizes the consumer's total utility given his or her budget constraint. because sammy has a budget constraint, which means that he will consume a consumption bundle on the budget line, a choice to consume a given quantity of clams also determines his potato consumption, and vice versa. We want to find the consumption bundle-the point on the budget line-that MAXIMIZES SAMMY'S TOTAL UTILITY. GET MAX NUMBER OF UTIL.

sunk cost

a sunk cost is a cost that has already been incurred and is nonrecoverable. A sunk cost should be ignored in decisions about future actions. it should be ignored in decisions about future actions meaning the money has already been lost and irretrievable, therefore will not be useful for future use. sunk cost should be ignored in decisions regarding future actions. because they have already been incurred and are nonrecoverable, they have no effect on future costs and benefits.

Which of the following diagrams represent the good with the most price inelastic demand?

a) Graph A

Lorena considers coffee and tea to be substitutes. Therefore, the cross elasticity of demand between coffee and tea for Lorena must be:

a) positive

2.) For simplicity, assume that the tax was an excise tax of $6,000 per car. The accompanying figure shows hypothetical demand and supply curves for luxury cars. a.) Under the tax, what is the price paid by consumers? What is the price received by producers? What is the government tax revenue from the excise tax? ~ Paid by consumers: $ ~ Received by producers: $ ~ Government revenue: $

a.) $ 54,000 $ 48,000 $ 240,000,000

16.) a.) The cross-price elasticity is b.) According to the cross-price elasticity, Prii and regular gasoline are c.) Does the cross-price elasticity for these two goods make sense?

a.) 0.26 b.) Substitutes c.) Yes, because one of Prius buyers' primary concerns is fuel efficiency.

a.) Using the midpoint method, calculate the price elasticity of demand for winter wheat. Record your answer as an absolute value. b.) What was the total revenue for U.S. wheat farmers in 2014, to two decimal places? $____billion ~ What was the total revenue for U.S. wheat farmers in 2015, to two decimal places? $____billion c.) Did the bad harvest increase or decrease the total revenue of U.S. wheat farmers? How could you have predicted this from your answer to part a?

a.) 0.43 = [(2.0-2.2)/2.1] x 100=-9.5% ; [(4.26-3.42)/3.84] x 100=21.9%; (9.5/21.9) b.) $7.524 = (3.42 x 2.2) $ 8.52 = (4.26 x 2.0) c.) Increase, because demand was inelastic and the price rose.

a.) Calculate, using the midpoint method, the price elasticity of supply when the price increases from $900 to $1,100. Price elasticity of supply: b.) Suppose firms produce 1,000 more computers at any given price due to improved technology. As price increases from $900 to $1,100, is the price elasticity of supply now greater than, less than, or the same as it was originally? c.) Suppose a longer time period under consideration means that the quantity supplied at any given price is 20% higher than the figures given in the table. As price increases from $900 to $1,100, is the price elasticity of supply now greater than, less than, or the same as it was originally?

a.) 2 = [(12,000-8,000)/ {(8,000+12,000)/2} x 100]=40% = [(1,100-900)/{(900+1,100)/2} x 100=20% = (40%/20%) b.) Less Than = (36%/20%)={1.8% < 2%} c.) The Same = (40%/20%)={2% = 2%}

7.) a.) Calculate the price elasticity of demand when the price of a T‑shirt rises from $5 to $6, and the average tourist income is $20,000. $20,000 income, price elasticity: b.) Also, calculate the price elasticity of demand when the average tourist income is $30,000. $30,000 income, price elasticity: c.) Calculate the income elasticity of demand when the price of a T‑shirt is $4, and the average tourist income increases from $20,000 to $30,000. $4 price, income elasticity: d.) Also, calculate the income elasticity of demand when the price is $7. $7 price, income elasticity:

a.) 2.2 b.) 1.8 c.) 1.25 d.) 1.9

a.) The negative cross-price elasticity for air-conditioning units and kilowatts of electricity, and for SUVs and gasoline, means they are: The positive cross-price elasticity for Coke and Pepsi, McDonald's and Burger King burgers, and butter and margarine means they are: b.) Compare the absolute values of the cross-price elasticities and explain their magnitudes. For example, why is the cross-price elasticity of McDonald's burgers and Burger King burgers less than the cross-price elasticity of butter and margarine? c.) Use the information in the table to calculate, to two decimal places, how a 5% increase in the price of Pepsi affects the quantity of Coke demanded. The quantity demanded will change by_____% d.) Use the information in the table to calculate, to one decimal place, how a 10% decrease in the price of gasoline affects the quantity of SUVs demanded. The quantity demanded will change by___%

a.) Complements Substitutes b.) Since the cross-price elasticity of butter and margarine is larger than the cross-price elasticity of McDonald's burgers and Burger King burgers, butter and margarine are closer substitutes than are McDonald's and Burger King burgers. c.) 3.15% d.) 2.8% http://www.brookscollegeprep.org/sites/default/files/courses/chapter6solutions.pdf

5.) What can you conclude about the price elasticity of demand in each of the following statements? a.) "The pizza delivery business in this town is very competitive. I would lose half my customers if I raised the price by as little as 10%." Price elasticity of demand is b.) "I owned both of the Jerry Garcia-autographed lithographs in existence. I sold one on eBay for a high price. But when I sold the second one, the price dropped by 80%." Price elasticity of demand is c.) "My economics professor has chosen to use the Krugman/Wells textbook for this class. I have no choice but to buy this book." Price elasticity of demand is d.) "I always spend a total of exactly $10 per week on coffee." Price elasticity of demand is

a.) Elastic b.) Inelastic c.) Inelastic d.) Unit-Elastic

{SAME ANSWERs #6 & #7} ...Suppose that, in an attempt to lower blood pressure and reduce healthcare costs, the government imposes a $1.00 excise (or commodity) tax on potato chips. Scroll down to answer all 6 parts of the question a.) Suppose the government levies this tax on manufacturers for each bag of potato chips they produce. Please shift the curve(s) to illustrate this. {GRAPH} b.) What is the price paid per bag by consumers (Pc) after the production tax?$___. c.) What is the price received net of tax (Pp) per bag by producers after the production tax?$___. d.) Suppose the government, instead of leving the tax on producers, levies this tax on consumers for each bag of potato chips they purchase. Please shift the curve(s) to illustrate this.{GRAPH} e.) What is the effective price paid per bag by consumers (Pc) after the consumption tax?$___. f.) What is the price received net of tax (Pp) by producers after the consumption tax?$___.

a.) GRAPH: (S) shifts UP [two] b.) $ 2 c.) $ 1 d.) GRAPH: (D) shift DOWN [two] e.) $ 2 f.) $ 1

END OF CHAPTER///////////////////////////////////// 1.) Do you think the price elasticity of demand for Ford sport-utility vehicles (SUVs) will increase, decrease, or remain the same when each of the following events occurs? Explain your answers. a.) Other car manufacturers, such as General Motors, decide to make and sell SUVs. The answer above is correct because______. b.) SUVs produced in foreign countries are banned from the American market. The answer above is correct because______.

a.) Increase ; Consumers now have more substitutes form which to choose. b.) Decrease ; There will be fewer substitutes available for consumers.

10.) a.) During economic booms, the number of new personal care businesses, such as gyms and tanning salons, is proportionately greater than the number of other new businesses, such as grocery stores. b.) Cement is the primary building material in Mexico. After new technology makes cement cheaper to produce, the supply curve for the Mexican cement industry becomes relatively flatter. c.) Some goods that were once considered luxuries, like a telephone, are now considered virtual necessities. As a result, the demand curve for telephone services has become steeper over time. d.) Consumers in a less developed country like Guatemala spend proportionately more of their income on equipment for producing things at home, like sewing machines, than consumers in a more developed country like Canada.

a.) Luxury vs. Normal Goods b.) Supply Elasticity and competition c.) Availability of close substitutes d.) Normal vs. Inferior Goods

9.) a.) An increase in demand this summer for luxury cruises leads to a huge jump in the sales price of a cabin on the Queen Mary 2. b.) The price of a kilowatt of electricity is the same during periods of high electricity demand as during periods of low electricity demand. c.) Fewer people want to fly during February than during any other month. The airlines cancel about 10% of their flights as ticket prices fall about 20% during this month. d.) Owners of vacation homes in Maine rent them out during the summer. Due to the soft economy this year, a 30% decline in the price of a vacation rental leads more than half of homeowners to occupy their vacation homes themselves during the summer.

a.) Perfectly Inelastic b.) Perfectly Elastic c.) Inelastic, but not perfectly inelastic d.) Elastic, but not perfectly elastic

a.) A 10% increase in the price of a Beetle will reduce the quantity demanded by 20%. b.) An increase in consumer income will increase the price and quantity of Beetles sold.

a.) True: a 1% increase in price results in a 2% decrease in quantity demand, so a 10% increase in price results in a 20% decrease in quantity demanded. b.) True: the positive income elasticity means an increase in income will lead to an increase in quantity demanded at every price, shifting the demand curve to the right. At the new equilibrium, both price and quantity will be higher.

explicit costs and implicit costs

all costs are opportunity costs. They can be divided into explicit costs and implicit costs Companies report their accounting profit, which is not necessarily equal to their economic profit. (economic profit SMALLER THAN "<" accounting profit Due to the implicit cost of capital-the opportunity cost of a company's capital-the opportunity cost of the owner's time, economic profit is often substantially less than accounting profit.

PRE-CLASS TUTORIALS///////////////////////////////////// If the quantity demanded of personal computers increases by 5% every time the price of personal computers decreases by 10%, the price elasticity of personal computers is (remember to report the absolute value):

b) 0.5

7 b.) Consider the original market for pizza in Collegetown, illustrated in the accompanying table. Collegetown officials decide to impose an excise tax on pizza of $4 per pizza. By how much has the imposition of the tax reduced consumer surplus? ~ Reduction in consumer surplus: $ ~ By how much has it reduced producer surplus? Reduction in producer surplus: $ c.) How much does Collegetown earn from this tax? Collegetown earns: $ d.) What is the deadweight loss (DWL) from the tax? DWL: $

b.) $ 3 $ 3 c.) $ 4 d.) $ 2

2.) Over time, the tax on luxury automobiles was slowly phased out and completely eliminated in 2002. Suppose that the excise tax falls from $6,000 per car to $4,500 per car. b.) After the reduction in the excise tax from $6,000 to $4,500 per car, what is the price paid by consumers? What is the price received by producers? What is the tax revenue now? ~ Paid by consumers: $ ~ Received by producers: $ ~ Government revenue: $ c.) Compare the tax revenue created by the taxes in parts a and b. What accounts for the change in tax revenue from the reduction in the excise tax? ~ The government tax revenue ___ as a result of the reduction in the excise tax. This occurs because the supply of and the demand for luxury automobiles are both highly__.

b.) $ 53,000 $ 48,500 $ 270,000,000 c.) Increased ; Elastic

1.) Less 2.) Substitution 3.) Increases 4.) A Normal 5.) Income 6.) More 7.) Reinforce

b.) Homer spends much of his monthly income on home mortgage payments. The interest on his adjustable-rate mortgage falls, lowering his mortgage payments, and Homer decides to move to a larger house. The fall in interest rates makes larger homes relatively __(1)__ expensive, and Homer responds by buying a larger house. This is the __(2)__ effect. Since the change in interest rates also __(3)__ his purchasing power, and housing is __(4)__ good, the __(5)__ effect causes Homer to buy __(6)__ of it. The two effects __(7)__ each other.

If the quantity demanded of sunglasses decreases by 2% every time the price of sunglasses increases by 20%, we know the demand for sunglasses is price:

b.) Inelastic

Which of the following pairs of goods are most likely to have a negative cross-price elasticity?

bicycles and bicycle helmets

marginal benefit curve

the marginal benefit curve shows how the benefit from producing one more unit DEPENDS on the quantity that has already been produced.

c.) Due to ad campaigns, Americans believe that SUVs are much safer than ordinary passenger cars. The answer above is correct because_____. d.) The time period over which you measure the elasticity lengthens. During that longer time, new models, such as four-wheel-drive cargo vans, appear. The answer above is correct because_____.

c.) Decrease ; Consumers now consider themselves to have fewer close substitutes from which to choose. d.) Increase ; The price elasticity of demand increases over time.

A tax based on the benefits principle:

collects more revenue from those who benefit more from the government-provided good or service.

The price elasticity of demand can be found by:

comparing the percentage change in quantity demanded to the percentage change in price.

The price of pretzels increases and the demand for tortilla chips decreases, so we can assume that these two goods are:

complementary.

Explicit cost

cost that involves actually laying out money.

Which of the following goods probably has the highest price elasticity of supply?

d) blue pencils

You sell t-shirts in the street corner in order to support some of your tuition costs. Around the middle of the semester, your friend Carlos gives you the following advice: "if you increase the price of each t-shirt you sell you will be able to make a lot more money selling your t-shirts". For Carlos to be right, the price elasticity of t-shirts must be price:

d.) Inelastic

If the income elasticity for food is 0.6 and income decreases by 5%, the demand for food will _____ by _____%.

decrease; 3

The price elasticity of demand along a demand curve with a constant slope:

decreases in absolute value as quantity demanded rises.

An excise tax levied on consumers shifts the:

demand curve downward by the amount of the tax.

If a $2 per basket excise tax is imposed on apple consumers the:

demand curve will shift downward by $2.

QUIZ Q's/////////////////////////////////////////////// If an excise tax is imposed on automobiles and collected from consumers, the:

demand curve will shift downward by the amount of the tax.

(Figure: The Market for SUVs) Use Figure: The Market for SUVs. If the government imposes a $60,000 tax on SUVs and collects it from the consumers, the _____ curve will shift _____ by _____.

demand; downward; $60,000

Implicit cost

does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone.

If the elasticity of demand for gasoline is 0.4 and the elasticity of supply is 0.8, a $0.50 increase in the excise tax on gasoline will most likely:

increase government revenue.

If the Nerd Squad computer repair company is in the inelastic part of its demand curve, in order to increase total revenue it should:

increase prices.

marginal cost of producing a good

marginal cost of producing a good or service is the additional cost incurred by producing ONE more unit of that good or service.

marginal utility

marginal utility of a good or service is the change in total utility generated by consuming one additional unit of that good or service. The marginal utility curve shows how marginal utility depends on the quantity of a good or service consumed.

A tax is efficient if it:

minimizes the deadweight loss and the collection costs.

optimal quantity QQQQ

optimal quantity is the quantity that generates the MAXIMUM possible total net gain. EXAMPLE OF WINGS: she is best off choosing a serving size of 5 wings, the largest portion for which marginal benefit is at least as great as marginal cost. STOP QUANTITY AT LEVEL BEFORE NET GAIN FOR ITEM GOES NEGATIVE. MAKE SENS OPTIMAL QUANTITY = MARGINAL BENEFIT EQUAL TO MARGINAL COST. economists call this rule the principle of marginal analysis. optimal quantity is the quantity that generates the highest possible total net gain. It is the quantity at which marginal benefit is equal to marginal cost.

In Panel A of the figure provided, the part of the excise tax paid by producers is:

p1 to p3

Coke and Pepsi are considered to be substitutes by many consumers. Therefore, their cross-price elasticity should be:

positive

more on price elasticit of supply

price elasticity of supply is the percent change in the quantity supplied divided by the percent change in price. perfectly inelastic supply. quantity supplied is completely unresponsive to price and the supply curve is a vertical line. under perfectly elastic supply, the supply curve is horizontal at some specific prices. If the price falls below that level, the quantity supplied is 0. If the price rises below that level, the quantity supplied is infinite. price elasticity of supply depends on the availability of inputs, the ease of shifting inputs into and out of alternative uses, and on the period of time that has elapsed since the price change.

If a change in price causes total revenue to change in the same direction, we can conclude that the demand is:

price inelastic.

Suppose that an increase in the price of a good leads to an increase in total revenue. Ignoring other factors (like supply), at its current price the good must be:

price-inelastic.

(Figure: The Demand Curve for Oil) Use Figure: The Demand Curve for Oil. The price elasticity of demand between $20 and $21 is _____ since the price elasticity is _____.

price-inelastic; less than 1.

Suppose the price elasticity of demand is relatively elastic and the price elasticity of supply is relatively inelastic in a specific market. If an excise tax is imposed on this good, who will bear the greater burden of the tax?

producers

constant marginal cost

production of a good or service has constant marginal cost when EACH ADDITIONAL UNIT costs the SAME to produce as the previous one. marginal cost can be decreasing: the marginal cost of the 2nd wing is less than the marginal cost o the 1st. So we have a case of INCREASING TOTAL COST and DECREASING MARGINAL COST. This shows us that, infact, totals and marginals can sometimes move in opposite direction. What is true is that total cost increases whenever marginal cost is positive, regardless of whether it is increasing or decreasing.

marginal benefit

the marginal benefit of a good or service is the additional benefit derived from producing one more unit of that good or service.

q3

reggie owns and operates a cheese shop in the village of somerset. While Reggie has a degree in mechanical engineering and could easily go to work for his brother's company earning 76000 a year, his true passion is or cheese. Below is a list of Reggie's expenses from 2010, please use information provided to answer the questions that follow. What is Reggie's accounting profit? REVENUE - EXPENSES AND DEPRECIATION 90000-18000-6000-3000=63000 What is Reggie's economic profit? REVENUE - EXPENSES AND DEPRECIATION - IMPLICIT COSTS 90000-18000-60000-3000-76000 = -13000 ACCOUNTING PROFIT = REVENUE - EXPLICIT COST ECONOMIC PROFIT = ACCOUNTING PROFIT - IMPLICIT COST or REVENUE - EXPLICIT COSTS - IMPLICIT COSTS

Brianna and Jess must pay an income tax. Both Brianna and Jess pay $1,000 in taxes each year, but Brianna earns $20,000 and Jess earns $10,000. From this information, you can infer that this tax is:

regressive.

Taxes at the state and local level are generally:

regressive.

principle of marginal analysis

says that the optimal quantity is the quantity at which marginal benefit is equal to marginal cost

q13

self explanatory

The evidence suggests that taken collectively, taxes in the U.S. economy are:

somewhat progressive.

what factors determine the price elasticity of demand Q8

subsitutes. high elasticity if there is substitute, low if there are no close substitute necessity or luxury. low if something must have, life-saving medicine (INELASTIC) . high if luxury-something you can easily live without (ELASTIC). share of income spent on the good. low (INELASTIC) if small portion of consumer's income. (ELASTIC) high when significant portion of spending. time. (LONG TIME = ELASTIC) (SHORT TIME = INELASTIC) price elasticity of demand increase as consumers have more time to adjust to a price change. long-run price elasticity of demand is often higher than the short-run elasticity. gas increase now high, MAD MAD MAD (high elasticity), overtime, it's whatever, people adjust (low elasticity).

example of cross-price elasticity of demand

substitutes. hot dogs and hamburgers, cross-price elasticity of demand is POSITIVE. -> rise of price of hot dogs rise demand for hamburger. or rightward shift of the demand curve for hamburgers. for close substitute, cross-price elasticity will be positive and large. if not close substitute, cross-price elasticity will be positive and small. so when cross-price elasticity of demand is positive, its size is a measure of how closely substitute able the two goods are. complements. dogs and buns. cross-price elasticity is NEGATIVE . rise in price of dog lower demand for buns. leftward shift of demand curve for buns. size of cross-price elasticity of demand between two complements tells us how strongly complementary are: if cross-price elasticity is slightly below 0, weak complements. if it is very negative, strong complements. NOTE: in the case of the cross-price elasticity of demand, the SIGN (plus or minus) is VERY IMPORTANT: it tells us whether the two goods are complements or substitutes. so NO ABSOLUTE VALUE

An excise tax levied on producers shifts the:

supply curve upward by the amount of the tax.

The figure provided shows the market for bicycles. If an excise tax of $100 is imposed on the bicycle producers, the:

supply curve will shift upward by $100.

If a $2 per basket excise tax is imposed on apple producers the:

supply curve will shift upward by $2.

The revenue collected by the government from an excise tax is the:

tax rate times the number of units bought and sold.

Which of the following principles of tax fairness is the most well illustrated by a tax on individuals with very expensive health insurance plans?

the ability-to-pay principle

A lump-sum tax, such as the fee for a driver's license, does not take into consideration:

the ability-to-pay principle.

Which of the following principles of tax fairness is the most well illustrated by the Social Security system?

the benefits principle

Which of the following are two principles of tax fairness?

the benefits principle and the ability-to-pay principle

accounting profit

the business's revenue minus the explicit cost and depreciation PROFIT = REVENUE - EXPLICIT COST AND DEPRECIATION

economic profit

the business's revenue minus the opportunity cost of its resources. it is usually less than the accounting profit ECONOMIC PROFIT = REVENUE - OPPORTUNITY COST OF RESOURCES. (smaller than accounting profit)

capital

the capital of a business is the value of its assets - equipment, building, tools, inventory, and financial assets CAPITAL = ASSETS

answer for question 9 of 15

the cross-price elasticity of demand measures how a change in price of one good can affect the quantity demanded of another good. The formula to calculate the cross-price elasticity of demand using the midpoint method is given belo. CPEa,b refers to the cross-price elasticity between goods A and B, Qd refers to quantity demanded and P refers to price. CPEa,b = Percentage change in Qd of Good B/Percentage change in P of Good A. if you have the percentage changes already, such as in the first and third pairs of goods, you can just plug them into the formula. Otherwise, recall that the midpoint method is used to prevent different results when starting at the two different points: midpoint method of percentage changes = (value2-value1)/[(value1+value2)/2] for products A and B, there is no change in quantity demanded for product B. The numerator in the cross price-elasticity formula is thus 0, and the percentage change in price for Product A becomes irrelevant. This indicates that the quantity demanded for Product B is not responsive to price changes in Product A, so the two goods have no relationships. for product C and D, use the midpoint method (since we dont have percentage but we have values): CPEc,d = 0.571/0.75=0.8 the positive sign indicates that the quantity demanded of D reacts in the opposite direction as that of C. This indicate that the two goods are substitutes. lastly, for product E and F, the percentage changes are provided, so just make sure to use the price change of E (-9)and the quantity change in (+12) F. CPEe,f = 12/-9=-1.3 As the sign is negative, this indicates that the two goods are complements

The administrative costs of a tax are part of:

the inefficiency of the tax.

marginal utility per dollar

the marginal utility per dollar spent on a good or service is the additional utility from spending one more dollar on that good or service. UTILITY GAIN FROM ONE MORE CONSUME

q14

the most effective policy is such that the rent (price_ decreases and the change in the apartments rented is small. If supply is stimulated with a subsidy, this shift the supply curve, causing the equilibrium to shift along the relatively elastic demand curve, resulting in a large change in quantity for a small change in price, which is not desired here. If demand is redirected elsewhere (thus, reducing demand within the downtown area), this shifts the demand curve, causing the equilibrium to shift along the supply curve. Since the supply is relatively inelastic, a large change in price comes along with a small change in quantity, which was the stated goal. 2. In this example, demand is more elastic than supply (because the supply curve is more vertical, while the demand curve is more horizontal) 3. This policy involves shifting along the curve with lower elasticity (and thus, changes in price result in small changes in quantiy). The policy that increases supply is the one subsidizing low income apartments within the downtown area. Recall that rent control is a type of price control that creates a shortage, and thus, was not one of the two alternate policies considered.

optimal consumption rate

the optimal consumption rate says that when a consumer maximizes utility, the marginal utility per dollar spent must be the same for all goods and services in the consumption bundle. so if sammy has in fact chosen is optimal consumption bundle, his marginal utility per dollar spent on clams and potatoes must be equal (PER UNIT). this is a general principle, known as the optimal consumption rule: when a consumer maximizes utility in the fac of a budget constraint, the marginal utility per dollar spent on each good or service in the consumption bundle is the same. that is, for any two goods C and P the optimal consumption rule says that at the optimal consumption bundle MUc/Pc = MUp/Pp The optimal consumption bundle satisfy this rule. Whenever marginal utility per dollar is higher for one than for another, the consumer should spend $1 more on the good with the higher marginal utility per dollar and $1 less on the other. By doing this the consumer will move closer to his or her optimal consumption bundle.

the present value

the present value of 1 realized one year from now is equal to $1(1+r): the amount of money you must lend out today in order to have $1 in one year. It is the value to you today of $1 realized one year from now. this also means that if someone promises to pay me a sum of money one year in the future, I am willing to accept today $X in place of every $1 to be paid one year from now. WE CALCULATE DIS BY TAKING INTEREST INTO ACCOUNT. if interest were 10% or 10c for every $1, then r = 0.1 X = 1/(1+0.1) = 1/1.1 = .91 91cents today will worth $1 in 1 year at interest rate of 10%

price elasticity of supply

the price elasticity of supply is defined the same way the price elasticity of demand (although there is no minus sign to be eliminated here) *****price elasticity of supply: % change in quantity supplied/%change in price the only difference is that here we consider movement along the supply curve rather than movement along the demand curve. price elasticity of supply is a measure of the responsiveness of the quantity of a good supplied to the price of that good. It is the ratio of the percent change in the quantity supplied to the percent change in the price as we move along the supply curve. price elasticity of supply is zero. ->perfectly inelastic supply perfectly elastic supply. tiny change of price would lead to huge increase in quantity

price elasticity of supply moar q11

the price of elasticity of supply is very similar to the price elasticity of demand, with the main difference being that we are looking at changes in the supply curve instead of the demand curve, and the other difference being that we do not take the absolute value of the price elasticity of supply. The equation to calculate the price elasticity of supply is: PRICE ELASTICITY OF SUPPLY = CHANGE PERCENTAGE IN QUANTITY SUPPLIED / CHANGE PERCENTAGE IN PRICE Perfectly inelastic supply occurs when the price elasticity of supply is EQUAL TO 0. This occurs when price changes CAUSE NO CHANGE IN quantity supplied. Graphically, this is a vertical line and most common occurs when there is only a fixed quantity of the good. Here, since Duchamps is dead, he cannot produce anh more original works. Thus, there are a fixed number of art pieces making the supply perfectly inelastic. Perfectly inelastic supply occurs when a price fluctuation has an infinitely large impact on the quantity supplied. In our donut example, below $1, it is not profitable for Paul to sell the donuts, but at any price above $1, he would be more than glad to supply any number of donuts. As a result of this willingless to supply more when prices increases, the price elasticity of supply is essentially infinite, graphically represented by a horizontal line. Elasticity supply occurs when the price elasticity of supply is greater than 1 as shown in the case of Puff's. Unit-elastic supply occurs when the percentage change in quantity supplied is equal to the percent change in price, as in the case with the pens. Inelastic supply occurs when the price elasticity of supply between 0 and 1 as is the case with the light bulbs. Input availability is a big factor in the elasticity of supply, as the more readily available an input is, the easier it is to produce more of a good

principle of diminishing marginal utility

the principle of diminishing marginal utility says that each successive unit of a good or service consumed add less to total utility than the previous unit. The basic idea behind the principle of diminishing marginal utility is that the additional satisfaction a consumer gets from one more unit of a good or service declines as the amount of that good or service consumed rises. Or to put it slightly differently, the more of a good or service you consume, the closer you are to being satiated-reaching the point at which an additional unit of the good adds nothing to your satisfaction. The principle of diminishing marginal utility isn't always true. But it is true in the great majority of cases, enough to serve as a foundation for our analysis of consumer behavior.

the substitution effect

the substitution effect of a change in the price of a good is the change in the quantity of that good consumed as the consumer substitutes the good that has become relatively cheaper in place of the good that has become relatively more expensive. when the price of a good increases, consuming that good becomes a less attractive use of resources, an the consumer buys less. This effect of a price change on the quantity consumed is always present. It is known as the substitution effect-the change in the quantity consumed (due to price changes) as the consumer substitutes of the good that has become relatively cheaper in place of the good that has become relatively more expensive. (shift in consumption level between the 2 products)

The efficiency caused by a tax is:

the sum of the administrative costs and the deadweight loss.

For producers to bear most of the burden of the tax:

the supply curve must be relatively less elastic than the demand curve.

An excise tax causes deadweight loss because:

the tax prevents mutually beneficial transactions from occurring.

utility = consumption

the utility of a consumer is a measure of the satisfaction the consumer derives from consumption of goods and services.

decreasing marginal benefit

there is decreasing marginal benefit from an activity when each additional unit o the activity produces LESS BENEFIT than the previous unit.

Q2

what is the primary difference between accounting profit and economic profit? -Accounting profits IGNORE implicit costs (CASH); economic profits consider them (CASH AND NON-CASH). Russ owns a fried chicken stand that operates at the local beach. In calculating how much he earns from his business, Russ notices a difference between his economic and accounting profits. Why would Russ' economic profit differ from his accounting profit? -He may have implicit costs associated with operating the chicken stand in addition to explicit costs. --- The primary difference between accounting profit and economic profit concerns implicit costs. Accounting profit is taken after subtracting explicit costs from revenue and then adjusting the amount for depreciation. Thus, it deals only with funds that have actually been given and received. Economic profit, however, considers all opportunity costs, both explicit payments and implicit costs. As a result, the economic profit of an enterprise is almost always smaller than its accounting profit. Both accounting profit and economic profit occur when money is made, and if no money is made then this is a loss rather than a profit. Additionally, both types of profit consider capital in all its forms, not just financial assets. Lastly, it is accounting profit that requires the exchange of money. The most likely reason for a difference in Russ' accounting and economic profits is that he had implicit costs in addition to his explicit costs. While both types of profit would have factored in his explicit costs, the implicit costs would have only been considered in calculating economic profit. There is no information present about whether or not Russ earns a profit and this would not any explain any discrepancy because the type of profit is not defined. There is also no information regarding consumer demand, though this might have an impact on his profits if it was proven to be true. Lastly, accounting profit, as well as economic profit, considers the tax cost of operating the business, so this would not cause a discrepancy.

3.) All states impose excise taxes on gasoline. According to data from the Federal Highway Administration, the state of California imposes an excise tax of $0.40 per gallon of gasoline. In 2015, gasoline sales in California totaled 14.6 billion gallons. What was California's tax revenue from the gasoline excise tax? $_____billion ~ If California doubled the excise tax, would tax revenue double? Why or why not?

~ $ 5.84 = (0.40 x 14.6) ~ No; doubling the excise tax would reduce the amount of gasoline bought and sold, and tax revenue would less than double.

~ If the firm lowers DVD prices from $16 to $14 , what is the change in revenue, assuming quantity remains the same? In other words, focus only on the price effect. $_____. ~ What is the change in revenue that results just from the increased quantity at $14 ? In other words, focus only on the quantity effect. $____. ~ What is the overall net effect of this price decrease on the firm's total revenue? $____. ~ What is the price elasticity of demand?

~ $-400 ~ $1400 ~ $ 1000 ~ elastic

~ If the price of Product E decreasing by 2% causes its quantity demanded to increase by 14% and the quantity demanded for Product F to increase by 17% , what is the cross-price elasticity of demand? Round your answer to one decimal place. ~ What is the relationship between these goods?

~ -8.5 ~ complements

If a 25% price increase for Product A causes a 10% decrease in its quantity demanded, but no change in the quantity demanded for Product B, what is the cross-price elasticity of these goods? Round your answer to one decimal place. What is the relationship between these goods?

~ 0 ~ no relationship

13 b.) Tax Proposal: All income up to $10,000 is tax‐free. All income above $10,000 is taxed at a constant rate of 20%. ~ marginal tax rate; income is $5,000: % ~ marginal tax rate; income is $40,000: % ~ percentage paid on an income of $5,000: % ~ percentage paid on an income of $40,000: % ~ This tax is___.

~ 0 % ~ 20 % ~ 0 % ~ 15 % ~ Progressive

Lauren's salary decreases from $37,000 to $30,000. She decides to reduce the number of outfits she purchases each year from 20 to 19 . Use the midpoint method to calculate the income elasticity of demand for new outfits. Round your answer to two decimal places. ~ This good is

~ 0.245 ~ a normal good and income-inelastic.

7 a.) Consider the original market for pizza in Collegetown, illustrated in the accompanying table. Collegetown officials decide to impose an excise tax on pizza of $4 per pizza. ~ What is the quantity of pizza bought and sold after the imposition of the tax? Quantity: ~ What is the price paid by consumers? Paid by consumers: $ ~What is the price received by producers? Received by producers: $

~ 1 ~ $ 9 ~ $ 5

If Good C increases in price by 30 % a pound, and this causes the quantity demanded for Good D to increase by 40% , what is the cross-price elasticity of the two goods? Round your answer to one decimal place. What is the relationship between the two goods?

~ 1.3 ~ substitutes

13 c.) Tax Proposal: All income between $0 and $10,000 is taxed at 10%. All income between $10,000 and $20,000 is taxed at 20%. All income higher than $20,000 is taxed at 30%. ~ marginal tax rate; income of $5,000: % ~ marginal tax rate; income of $40,000: % ~ percentage paid on an income of $5,000: % ~ percentage paid on an income of $40,000: % ~ This tax is____.

~ 10 % ~ 30 % ~ 10 % ~ 22.5 % ~ Progressive

13 d.) Tax Proposal: All income between $0 and $10,000 is taxed at 10%. All income between $10,000 and $20,000 is taxed at 20%. All income higher than $20,000 is taxed at 30%. ~ marginal tax rate; income of $5,000: % ~ marginal tax rate; income of $40,000: % ~ percentage paid on an income of $5,000: % ~ percentage paid on an income of $40,000: % ~ This tax is___.

~ 100 % ~ 0 % ~ 100 % ~ 25 % ~ Regressive

13 a.) The following tax proposal has income as the tax base. Calculate the marginal tax rate for an income of $5,000 and an income of $40,000. Then, calculate the percentage of income paid in taxes for an individual with a pre‐tax income of $5,000 and for an individual with a pre tax income of $40,000. Classify the tax as being proportional, progressive, or regressive. Round answers to two places after the decimal, where applicable. Tax Proposal: All income is taxed at 20%. ~ marginal tax rate; income is $5,000: % ~ marginal tax rate; income is $40,000: % ~ percentage paid on an income of $5,000: % ~ percentage paid on an income of $40,000: % ~ This tax is____.

~ 20 % ~ 20 % ~ 20 % ~ 20 % ~ Proportional

~ What is Sally's tax rate?___% ~ What is Pat's tax rate?___% ~ What is the nature of this income tax system?

~ 33 % ~ 24 % ~ regressive

2.) Using the values from the graph, calculate the growth rates of each source between Q4 2007 and Q2 2017. Round answers to one place after the decimal. ~ Growth rate of contributions to government social insurance: _____ % ~ Growth rate of personal current taxes: _____ % ~ Growth rate of taxes on corporate income: _____% ~ Which has grown the most?

~ 34.1 % ~ 33.3 % ~ 8.9 % ~ contributions to government social insurance

For each scenario, calculate the income elasticity of demand, determine whether the good is inferior or normal, and classify the good's income elasticity. When calculating the income elasticity of demand, use the midpoint formula. Round your answers to the nearest hundredth.

~ 4.20 Normal Good Income Elastic ~ -1.10 Inferior Good Neither Income Elastic nor Income Inelastic

Sylvia's annual salary increases from $102,750 to $109,500. Sylvia decides to increase the number of vacations she takes per year from three to four. Use the midpoint method to calculate her income elasticity of demand for vacations. Round your answer to two decimal places. ~ This good is

~ 4.49 ~ a normal good and income-elastic.

Calculate the price elasticity of demand for cigarettes smoked per day for smokers who smoke 20 cigarettes per day and smokers who smoke 30 cigarettes per day when the price per pack increases by 25% . Enter your answers as absolute values rounded to two decimal places. ~ 20-cigarette-per-day-smoker elasticity: ~ 30-cigarette-per-day-smoker elasticity: ~ Which statement best describes the influence that the number of cigarettes smoked per day has on the price elasticity?

~ ?? ~ ?? ~ Smokers who initially smoke more cigarettes per day are more price sensitive than smokers who initially smoke fewer cigarettes per day.

~ Using the midpoint formula, calculate the elasticity of supply for hot cocoa. Please round to two decimal places. ~ Supply in the market for coffee is

~ ????? ~ less elastic than supply in the market for hot cocoa.

Calculate the absolute value of the price elasticity of demand for bus tickets using the simple percentage change method. Round your answer to one decimal place. ~ price elasticity of demand= ~ Which of the statements is true?

~ ?????? ~ Demand is elastic, so decreasing ticket prices will increase revenue.

The graph shows demand and supply in the market for airline tickets. The government decides to introduce an excise (or commodity) tax that pushes up the price for consumers from 𝑃e to 𝑃c and decreases the quantity supplied from 𝑄e to 𝑄1 . ~ Government Tax Revenue ~ Producer Surplus Before Tax ~ Producer Surplus After Tax ~ Consumer Surplus Before Tax ~ Consumer Surplus After Tax ~ Deadweight Loss After Tax

~ B C ~ C D G ~ D ~ A B F ~ A ~ F G

Identify whether the tax or payments listed are consistent with the benefits principle or the ability-to-pay principle of tax fairness. Please note that not all items need to be placed. ~ Benefits (received) principle: ~ Ability-to-pay principle:

~ Benefits (received) principle: Gasoline Taxes National Park Entrance Fees Carbon Tax Cigarette Tax ~ Ability-to-pay principle: Income Tax Progressive Property Tax Luxury Tax

10.) Determine whether the four tax policies are based on the benefits principle or the ability‐to‐pay principle. ~ Benefits principle ~ Ability‐to‐pay principle

~ Benefits principle: A tax on gasoline that finance... Airline flight landing fees.. ~ Ability‐to‐pay principle: An 8% tax on imported goods valued... A reduction in the amount of income tax paid...

Label the scenarios as examples of elastic, inelastic, or unit elastic demand. ~ When Ruko, a device used to stream movies at home, increases prices by 42 %, total revenue decreases by 59 %. ~ When Cinema Supreme decreases ticket prices by 19 %, total revenue does not change. ~ When Bluebox, a DVD rental kiosk, increases its prices by 53 %, total revenue increases by 28 %.

~ Elastic ~ Unit Elastic ~ Inelastic

Identify whether the statements about the economics of taxes are true or false. ~ The incidence of a tax is determined by which group (buyers or sellers) must actually pay the government. ~ When demand is inelastic and supply is elastic, the burden of a tax falls mainly on producers. ~ When demand is elastic and supply is inelastic, the burden of a tax falls mainly on consumers. ~ An excise tax can distort incentives and create missed opportunities for mutually beneficial transactions.

~ False ~ False ~ False ~ True

Identify whether the scenarios are examples of regressive or progressive taxes. ~ a sales tax on food and clothing ~ an additional sales tax on cars bought for over $50,000 ~ a flat rate income tax of 20 %, with no additional tax being paid on earnings above $1,000,000 ~ an income tax system using tax brackets, in which the percentage tax rate increases with income ~ a fixed-poll, or lump-sum, tax on citizens and residents

~ Regressive ~ Progressive ~ Regressive ~ Progressive ~ Regressive

3.) Use the graph to explain how the three sources of government revenue have changed over time and what happened to each source of revenue as a percentage of total revenue during the Great Recession. ~ From the mid-1950s to the present, the percentage of government revenue from personal current taxes has ~ From the mid-1950s to the present, the percentage of government revenue from contributions to government social insurance has ~ From the mid-1950s to the present, the percentage of government revenue from taxes on corporate income has ~ During the Great Recession,

~ Remained relatively unchanged ~ A positive trend ~ A negative trend ~ the percentages of total revenue from personal current taxes and corporate income fell, whereas the percentage from contributions to government social insurance rose.

DISCOVERING DATA///////////////////////////////////////////////// 1.) Using data from the graph, which source of government revenue was the largest in 2016? ~ How have revenue sources changed from 1970 to 2017? With the exception of a few years, ____ have exceeded all other revenue sources. ~ Compared to personal current tax revenue, corporate income tax revenue ____.

~ personal current taxes ~ personal current taxes ~ has increased at a smaller rate