Microeconomics chapter 7

Refer to the graph shown. If the price were at the market equilibrium price, the total surplus would be the combination of the areas: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q120_Col.png

a through f (Areas A through F reflect both consumer surplus and producer surplus.)

A general rule of political economy in a democracy is that when small groups are helped by a government action and large groups are hurt by that action by an equal and offsetting amount, policies tend to reflect:

the small group's interest. (Because each person in the smaller group benefits more, each person in that smaller group has an incentive to lobby harder.)

Given the same supply elasticity, the burden of a 10 percent tax on suppliers would be greatest on consumers within what price range? Price Quantity $2.00 26 4.00 22 6.00 18 8.00 14 10.00 10

$2 and $4. (Elasticity rises as price rises along a straight-line demand curve. Thus, the lowest range is the most likely candidate. Doing the calculations, we find that elasticity between $2 and $4 is [(26 - 22)/24]/[(4 - 2)/3] = (4/24)/(2/3) = (1/6)/(2/3) = 3/12 = .25 and is lower than in all the other ranges.)

Refer to the graph shown. After an increase in supply, the market is in equilibrium where the demand curve intersects S1. In this new equilibrium, producer surplus is equal to: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q151_Col.png

1,260 (When price is 3 and quantity is 840, producer surplus is [3 - 0] × 840 × (1/2).)

Refer to the graph shown. Initially, the market is in equilibrium where the demand curve intersects S0. In the initial equilibrium, consumer surplus is equal to: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q151_Col.png

1,500 (Consumer surplus is [10 - 5] × 600 × (1/2).)

Refer to the graph shown. If price is increased from $3 to $4, consumer surplus will fall by: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q30_Col.png

125 (Consumer surplus falls by [$4 - $3] × 100 + [$4 - $3] × 50 × (1/2).)

Refer to the graph shown. Assume that the market is initially in equilibrium at a price of $10 and a quantity of 500 units. If the government imposes a $4 per-unit tax on this product, consumer surplus will fall from: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q58_Col.png

2,500 to 1,600. (In equilibrium, consumer surplus is 2,500. After the tax, consumer surplus is [20 - 12] × 400 × (1/2).)

Refer to the graph shown. In equilibrium, producer surplus is equal to: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q17_Col.png

600 (Producer surplus is the area between the supply curve and the price of $5.00 per unit. This area is equal to (5 - 2) × (400) × (1/2).)

Refer to the graph shown. When the market is in equilibrium, producer surplus is equal to: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q36_Col.png

750 (Producer surplus is [10 - 5] × 300 × (1/2).)

Refer to the graph shown. If the price of this product fell from $10 to $8, producer surplus would fall from: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q36_Col.png

750 to 270. (At $10, producer surplus is 750. At $8, producer surplus is [8 - 5] × 180 × (1/2).)

Refer to the graph shown. When the market is in equilibrium, total surplus is area: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q24_Col.png

A plus area F. (Total surplus is the sum of consumer surplus and producer surplus. Consumer surplus is the area between the vertical axis, the demand curve, and the horizontal line through equilibrium price, and producer surplus is the area between the vertical axis, the supply curve, and the horizontal line through the equilibrium price.)

Refer to the graph shown. Which statement best characterizes the difference between the effect of a price ceiling in the short run and the long run? http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q163_Col.png

A price ceiling of P2 will create a shortage of (Q3 - Q1) in the short run, but a greater shortage of (Q3 - Q0) in the long run. (In the long run, supply becomes more elastic (shown here rotating from S0 to S1) so that a price ceiling P2 creates a larger shortage in the long run.)

Refer to the graph shown. Given the same supply elasticity, the burden of a 10 percent tax would be borne the most by the consumer in segment: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q100_Col.png

DE (From A to E, elasticity declines. The tax borne the most by consumers is along the segment with the lowest elasticity, DE.)

Suppose elasticity of demand is 0.2, elasticity of supply is 0.7, and a 10 percent excise tax is levied on producers. Which of the following changes will reduce the share of the tax paid by consumers?

Elasticity of supply falls to 0.3. (The less elastic the supply, the smaller the burden borne by consumers.)

Refer to the graph shown. Assume the market is initially in equilibrium at point b in the graph but the imposition of a per-unit tax on this product shifts the supply curve up from S0 to S1. The lost consumer surplus of this tax is equal to the area: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q53_Col.png

P2P1bc. (After the tax, equilibrium is at point c, resulting in this lost consumer surplus.)

Refer to the graphs shown. The burden of the tax is borne entirely by consumers in graphs: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q83_Col.png

b and c (Price rises by the full amount of the tax when demand is perfectly inelastic and when supply is perfectly elastic.)

Refer to the graphs shown. Deadweight loss is the least with the imposition of a given per-unit tax on producers in graphs: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q83_Col.png

b and d (Since quantity sold doesn't change when supply or demand is inelastic, there is no deadweight loss.)

Refer to the graph shown. When market supply shifts from S0 to S1, the revenue gain to suppliers resulting from increased quantity demanded is shown by area: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q151_Col.png

c (Area C shows the increased revenue resulting from the greater quantity sold.)

Refer to the graph shown. An effective price floor at Pf causes producer surplus to: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q120_Col.png

change from areas C + D + F to areas B + C + D. (The price floor reduces quantity and transfers area B from consumers to producers.)

Refer to the graph shown. With an effective price floor at Pf, the effect is an implicit tax on: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q120_Col.png

consumers shown by area B and a subsidy to suppliers of that area. (Area B was part of consumer surplus in equilibrium; with the price floor, this area becomes part of producer surplus.)

Refer to the graph shown. If the government imposed a price ceiling of $4, the quantity purchased by consumers in this market would: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q116_Col.png

decline from 4 to 2 (Although quantity demanded at $4 is 6, consumers can buy only what producers are willing and able to sell.)

There would be no deadweight loss if:

demand was perfectly inelastic. (Deadweight loss is caused by changes in behavior. If demand is perfectly inelastic, quantity demanded doesn't change and there is no deadweight loss.)

If the supply curve is perfectly inelastic, the burden of a tax on suppliers is borne:

entirely by the suppliers. (When the supply curve is perfectly inelastic, the entire burden of the tax falls on the suppliers.)

Refer to the graph shown. An effective price floor at $8 causes consumer surplus to: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q141_Col.png

fall from 62.50 to 10. (The price floor reduces quantity and transfers some surplus from consumers to producers. Without the price floor, consumer surplus is [10 - 5] × 25 × (1/2). With the price floor, it is [10 - 8] × 10 × (1/2).)

Refer to the graph shown. With an effective price ceiling at Pc, the quantity supplied: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q120_Col.png

falls from Q1 to Q2. (Q1 is equilibrium quantity; when price falls to Pc, quantity supplied falls to Q2.)

When demand is highly inelastic and supply shifts to the right, price:

falls, quantity sold increases, and total revenue decreases. (Because demand is highly inelastic, the decrease in price is proportionately larger than the increase in quantity, and so total revenue falls.)

Assuming a binding price floor, the more elastic the supply and demand curves are, the:

greater the surplus a price floor will create. (Price floors create surpluses, and more elastic supply and demand curves will worsen the problem because quantity demanded and quantity supplied will be much more influenced by small price changes.)

Refer to the graph shown. The segment of the demand curve between the initial equilibrium price of $5.00 and the new equilibrium price of $3.00 is: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q151_Col.png

inelastic (Since total revenue fell when price fell (area A is larger than area C), we know that demand is inelastic for this segment.)

Refer to the graph shown. Initially, the market is in equilibrium with price equal to $3 and quantity equal to 100. Government imposes a tax on suppliers of $1 per unit. The effect of the tax is to: http://ezto.mheducation.com/extMedia/bne/colander10e/CH07_Q71_Col.png

raise the price consumers pay from $3 to $4. (Since demand is perfectly inelastic, the price consumers pay increases by the amount of the tax, but sellers keep the same amount after paying the tax.)

A local government is considering a 10 percent tax on items A, B, and C. They want to tax only those goods for which the burden of the tax is lowest on suppliers. They know that the elasticity of supply of all the suppliers in question is about equal and have observed that when the price of A , B, and C rose 10 percent, total sales receipts for A and B rose 2 percent but declined 2 percent for C. From this information, they should:

tax A and B but not C. (For A and B, revenue rose when price increased. Therefore, demand must be inelastic for those goods. Thus, the tax burden would be greatest for consumers (lowest for suppliers) for A and B.)