Midterm 2- Microeconomics

*see image 1 The amount of deadweight loss as a result of the tax is

$2.50

How do taxes affect consumer surplus, producer surplus and total surplus?

-drives a wedge between the price buyers pay and the price sellers receive. - raises the price buyers pay and lowers the price sellers receive. - reduces the quantity bought & sold

Under what condition do we have an efficient allocation of resources?

1.The goods are consumed by the buyers who value them most highly 2. The goods are produced by the producers with the lowest costs 3. Raising or lowering the quantity of a good would not increase total surplus

How do price ceilings and price floors affect market outcomes?

A price ceiling will only affect the market if the ceiling is set below the market-equilibrium. A price floor will only affect the market if the floor is set above the market-equilibrium

How does tariff affect consumer surplus, producer surplus and total surplus?

A tariff benefits producers and generates revenue for the government, but the losses to consumers exceed these gains.

*see image 3 Consumer surplus with the tariff is...

A+B

*see image 2 Consumer surplus in this market after trade is...

A+B+D

How does the size of the tax affect tax revenue and deadweight loss?

As the size of the tax increases the tax revenue increases initially then decreases, the higher tax it drastically reduces the size of the market. As the size of the tax increases the deadweight loss increases, even more rapidly than the size of tax.

*see image 1 The imposition of the tax causes the price received by sellers to...

Decrease by $2

Sellers of a product will bear the larger part of the tax burden, and buyers will bear a smaller part of the tax burden, when the...

Demand for the product is more elastic than the supply of the product

T/F: The effects on P and Q, and the tax incidence depends on whether the tax is imposed on buyers or sellers.

False

*see image 2 Will this country import or export?

Import

What is a price ceiling?

Legal maximum on the price at which a good can be sold

*see image 2 With trade, what is price for domestic buyers?

P1

What is rent control an example of?

Price ceiling

What is minimum wage an example of?

Price floor

Suppose the equilibrium price of a tube of toothpaste is $3, and the government imposes a price floor of $2 per tube. As a result of the price floor, the...

Quantity supplied of toothpaste stays the same (it is not binding so it does not have an affect)

What is economies of scale?

The average total cost decreases as quantity decreases. To produce something in large quantities with fewer inputs

What is willingness to pay?

The maximum amount that a buyer will pay for a good, how much the buyer values the good

Does quota have same effect as tariff?

True; raises price, reduces quantity of imports, reduces buyers' welfare and increases sellers' welfare

What does the small market assumption refers to?

When a small economy engages in free trade, the world price is the only relevant price, it actions have no effect on the world price.

*see image 1 Total surplus without the tax is...

$10, and total surplus with the tax is $7.50

*see image 1 Producer surplus without the tax is..

$4, and producer surplus with the tax is $1

Suppose Lauren, Leslie and Lydia all purchase bulletin boards for their rooms for $15 each. Lauren's willingness to pay was $35, Leslie's willingness to pay was $25, and Lydia's willingness to pay was $30. Total consumer surplus for these three would be...

$45

*see image 1 The amount of tax revenue received by the government is...

$5

Suppose Lauren, Leslie and Lydia all purchase bulletin boards for their rooms for $15 each. Lauren's willingness to pay was $35, Leslie's willingness to pay was $25, and Lydia's willingness to pay was $30. Total consumer surplus for these three would be...

$5

Under what condition will a country export/import?

-A country will export a good if the world price of the good is higher than the domestic price without trade. Trade raises producer surplus, reduces consumer surplus, and raises total surplus. -A country will import a good if the world price is lower than the domestic price without trade. Trade lowers producer surplus but raises consumer and total surplus.

How does international trade affect consumer surplus, producer surplus and total surplus?

-Consumers: increased variety of goods - Producers: lower costs - economies of scale -Total surplus- increases

What is consumer surplus?

Amount a buyer is willing to pay minus the amount the buyer actually pays (WTP-P)

What is producer surplus?

Amount a seller is paid for a good minus the seller's cost of providing it (P-WTS)

How do taxes affect market outcomes?

Because of the tax on buyers it makes them not want to buy the products, because the sellers sell less and the buyers buy less cause a left shift in the demand curve (lower quants at higher prices)

How do we measure willingness to pay and consumer surplus in a supply and demand diagram?

Consumer surplus equals buyers' willingness to pay for a good minus the amount they actually pay, and it measures the benefit buyers get from participating in a market. Consumer surplus can be computed by finding the area below the demand curve and above the price.

*see image 3 Asaresultofthetariff,thereisadeadweightlossthat amounts to

D+F

*see image 2 The change in total surplus in this market because of trade is...

D, and this area represents a gain in total surplus

What is a price floor?

Legal minimum on the price at which a good can be sold

What determines tax incidence?

Manner in which the burden of a tax is shared among participants in a market, determined by the price elasticities of supply and demand NOT whether the tax is imposed on buyers or sellers

How does deadweight loss depend on elasticity of demand and elasticity of supply?

More elastic supply curve, larger deadweight loss More elastic demand curve, larger deadweight loss

How do we measure cost and producer surplus in a supply and demand diagram?

Producer surplus equals the amount sellers receive for their goods minus their costs of production, and it measures the benefit sellers get from participating in a market. Producer surplus can be computed by finding the area below the price and above the supply curve.

*see image 3 A result of the tariff is that ,relative to the free-trade situation, the quantity of saddles imported decreases by...

Q4-Q3+Q2-Q1

Suppose the equilibrium price of a tube of toothpaste is $2, and the government imposes a price floor of $3 per tube. As a result of the price floor, the...

Quantity demanded of toothpaste decreases, and the quantity of toothpaste that firms want to supply increases. (supply and demand curves don't shift