601 Module 2

Jill's Sausage Dog Stand projects the following demand for Jill's sausage dogs: Price Quantity Purchased ($) (per Day) 4 55 8 35 12 15 Calculate the price elasticity of demand between $4 and $8 to complete the following statements. (Hint: Be sure to take the absolute value of your answer.) The price elasticity of demand between $4 and $8 is_____. This means the demand between the prices of $4 and $8 is_______. Calculate the price elasticity of demand between $8 and $12 to complete the following statements. (Hint: Be sure to take the absolute value of your answer.) The price elasticity of demand between $8 and $12 is______.This means the demand between the prices of $8 and $12 is_______.

.6667, inelastic (55-35)/(55+35) _______________________ (4-8)/(4+8) 2, elastic (35-15)(35+15) __________________ (8-12)/(8+12)

Suppose Andrew, the owner-manager of a local hotel, projects the following demand for his rooms: Price Quantity Purchased ($) (per Day) 90 200 135 180 180 140 The price elasticity of demand between $90 and $135 is______in absolute value. This means that if Andrew raises the price from $90 to $135, his total revenue will_______ The price elasticity of demand between $135 and $180 is_______in absolute value. This means that if Andrew raises the price from $135 to $180, his total revenue will______

0.2632, rise 0.875, rise

What is the difference between a price ceiling and a price floor? Check all that apply. A price ceiling is a legal shortage. A price floor is a legal surplus. A price floor is a legally established minimum price buyers must pay for a good or resource. A price ceiling is a legally established maximum price sellers can charge for a good or resource.

A price floor is a legally established minimum price buyers must pay for a good or resource. A price ceiling is a legally established maximum price sellers can charge for a good or resource

What is meant by economic efficiency? The difference between the maximum price consumers are willing to pay and the price they actually pay. A situation in which all of the potential gains from trade have been realized. A situation in which the biggest potential gains from trade have been realized. The difference between the price that suppliers actually receive and the minimum price they would be willing to accept.

A situation in which all of the potential gains from trade have been realized.

Which of the following are functions of the entrepreneur? Check all that apply. Convert and rearrange resources in a manner that will increase their value. Motivate producers to supply more of the good. Organize the production of new products. Take on significant risk in deciding what to produce and how to produce it.

Convert and rearrange resources in a manner that will increase their value. Organize the production of new products. Take on significant risk in deciding what to produce and how to produce it.

True or False: A 10% reduction in price that leads to an 8% increase in the amount purchased indicates a price elasticity of more than 1 (in absolute value). True False

False

Suppose the government subsidizes the production and sale of spinach. Evaluate the following statement. True or False: Only spinach producers would benefit from this subsidy, whereas buyers would lose. True False

False A subsidy is a payment the government makes to either the buyer or the seller, usually on a per-unit basis, when a good or service is purchased or sold. The division of the benefit of a subsidy is determined by the relative elasticities of demand and supply rather than by who is paid the subsidy. For example, when the buyers of a good are subsidized, the subsidy will increase demand and lead to higher prices. If the supply is more inelastic than the demand, the providers of the good will derive most of the benefits, even though the subsidy was granted to the purchasers. Indeed, provided that neither demand nor supply is perfectly inelastic, the subsidy will benefit both sides of the market to some degree, with the precise allocation of benefits determined by the relative elasticities of supply and demand. In this case, if the government subsidizes the production and sale of spinach, this should result in greater output of spinach and lower prices, which benefits both producers and buyers. See section: Elasticity and the benefit of government subsidy programs.

Students are the main beneficiaries of government aid in the form of grants and low-interest loans because they make it more economical for them to attend college. True False

False Because government aid in the form of grants and low-interest loans makes college more affordable for students, the demand for college education is thereby raised. Thus, colleges themselves are major beneficiaries of student subsidies. See section: Real-world subsidy programs.

True or False: If you want to succeed, you should continue studying until you are sure you will earn 100% of the possible points in your economics class. True False

False he correct answer is False. The law of diminishing marginal utility explains why, as you increase your consumption of any good, the utility you derive from each additional unit will become smaller and smaller, until it is less than the price. At that point, you will not want to purchase any more units of the good. This same reasoning can be applied to how you spend your time. Even though you may enjoy the higher grade that will result from an additional hour of studying, the law of diminishing marginal utility predicts that your additional benefit from these grade increases will become smaller and smaller. Eventually, the marginal benefit of the next hour of studying will not be worth the additional cost of your time, at which point should not continue studying for your economics course. See section: Marginal utility, consumer choice, and the demand curve of an individual.

Which of the following would increase the current demand for beef? Check all that apply. An increase in the price of beef Widespread outbreak of mad cow or hoof-and-mouth disease Higher consumer income, assuming that beef is a normal good Higher prices of feed grains used to feed cattle Higher pork prices

Higher consumer income, assuming that beef is a normal good Higher pork prices

What is being held constant when the supply curve is constructed for a specific good such as pizza or automobiles? Level of technology Consumers' tastes Consumers' income None of the above

Level of technology

Are prices an accurate measure of a good's total value? Yes, prices are an accurate measure of a good's total value. No, prices are the total benefit consumers derive from all units consumed. No, prices depend on the elasticity of supply and demand. No, prices reflect marginal value, not total value.

No, prices reflect marginal value, not total value.

Will producers continue to supply a good or service if consumers are unwilling to pay a price sufficient to cover the cost? Yes. In a market economy, businesses will continue to supply a good or service if the revenues from the sale of the product do not cover the cost of production, since revenues will eventually expand to cover production costs, yielding a profit. No. In a market economy, businesses will continue to supply a good or service only if the revenues from the sale of the product are sufficient to cover the cost of the resources required for its production, since at that point, profit is maximized.

No. In a market economy, businesses will continue to supply a good or service only if the revenues from the sale of the product are sufficient to cover the cost of the resources required for its production, since at that point, profit is maximized.

Sue loves ice cream but cannot stand frozen-yogurt desserts. In contrast, Carole likes both foods and can hardly tell the difference between the two. _______will have the more inelastic demand for frozen yogurt.

Sue he correct answer is Sue. The most important factor that influences the price elasticity of demand is the availability of substitutes. When close substitutes for a good or service are available, a price increase induces many consumers to purchase other products instead. In such a case, demand for the good that experienced the price increase would be elastic. On the other hand, when close substitutes for a good are not available, the demand for that good will be inelastic. In this case, frozen yogurt and ice cream are close substitutes for Carole. Thus, her demand for both frozen yogurt and ice cream will be elastic, since a close substitute is available in either case. For Sue, frozen yogurt and ice cream are not close substitutes. Thus, her demand for either good will be inelastic. Thus, Carole will have the more elastic demand for both ice cream and frozen yogurt, while Sue will have the more inelastic demand for these goods. See section: Elasticity of demand.

What are the important implications of the Laffer curve? Check all that apply. Tax revenues will be low at both very high and very low tax rates. When tax rates are quite high, lowering them can increase tax revenue. Tax revenues will be high at both very high and very low tax rates. Tax revenues will be higher at very high tax rates.

Tax revenues will be low at both very high and very low tax rates. When tax rates are quite high, lowering them can increase tax revenue.

What is the nature of the deadweight loss accompanying taxes? The deadweight loss results from higher tax rates, which reduce the level of the tax base making the activity less attractive. The deadweight loss imposes a burden over and above the actual payment of the tax only on sellers. The deadweight loss occurs only as a result of a per-unit tax. The deadweight loss imposes a burden on both buyers and sellers over and above the actual payment of the tax.

The deadweight loss imposes a burden on both buyers and sellers over and above the actual payment of the tax

Which of the following best defines consumer surplus? The difference between the price that suppliers actually receive and the minimum price they would be willing to accept. The difference between the minimum price consumers are willing to pay and the price they actually pay. A situation in which all of the potential gains from trade have been realized. The difference between the maximum price consumers are willing to pay for a good and the price they actually pay.

The difference between the maximum price consumers are willing to pay for a good and the price they actually pay.

Which of the following best defines producer surplus? The difference between the maximum price consumers are willing to pay and the price they actually pay. The difference between the price that suppliers actually receive and the maximum price they would be willing to accept. A situation in which all of the potential gains from trade have been realized. The difference between the price that suppliers actually receive and the minimum price they would be willing to accept.

The difference between the price that suppliers actually receive and the minimum price they would be willing to accept.

Suppose that college students in your town persuaded the town council to enact a law setting the maximum price for rental housing at $400 per month. This will hurt college students who rent housing for the following reasons: Check all that apply. The quality of housing will improve, benefiting tenants. The price ceiling will create a housing shortage. The quality of housing will deteriorate, making it difficult for students to find quality housing. Over time, more affordable housing will be created.

The price ceiling will create a housing shortage. The quality of housing will deteriorate, making it difficult for students to find quality housing.

What factors determine the cost of producing a good or service? Check all that apply. The prices of resources used to make the good Taxes Technology The price of the good

The prices of resources used to make the good Taxes Technology

If a price ceiling for a good is set below the market equilibrium, what will happen to the quality and future availability of the good? The quality will improve whereas future availability of the good will increase. The quality will deteriorate whereas future availability of the good will decline. The quality will improve whereas future availability of the good will decline. The quality will deteriorate whereas future availability of the good will increase.

The quality will deteriorate whereas future availability of the good will decline.

Which of the following accurately explains why professional wrestlers earn more than nurses? The supply of nurses is large relative to professional wrestlers, and price is determined by marginal value (not total value). The supply of nurses is large relative to professional wrestlers, and price is determined by total value (not marginal value).

The supply of nurses is large relative to professional wrestlers, and price is determined by marginal value (not total value).

A consumer is currently purchasing three pairs of jeans and five T-shirts per year. The price of jeans is $50, and shirts cost $30. At the current rate of consumption, the marginal utility of jeans is 250, and the marginal utility of shirts is 150. Based on the model of consumer choice, what should this consumer do to maximize utility? Purchase only jeans. Purchase only shirts. Purchase fewer shirts and more jeans. This consumer is already maximizing utility. Purchase more shirts and fewer jeans.

This consumer is already maximizing utility.

Colleges themselves are major beneficiaries of the student subsidies because subsidies increase the demand for college education and thereby push up its price. True False

True

The tax on cigarettes in New York City is one of the highest in the nation—$5.85 per pack. Evaluate the following statement. People will engage in illegal exchanges in order to evade taxes. The $5.85 per-pack cigarette tax in New York City has made cigarette smuggling into that city a thriving business. True False

True

True or False: A 10% increase in price that leads to a 2% decrease in total expenditures (or total revenue) indicates a price elasticity of more than 1 (in absolute value). True False

True

True or False: The invisible hand principle indicates that market prices direct individuals pursuing their own interests to engage in activities promoting the economic well-being of society.

True

True or False: The law of supply is a direct positive relationship between the price of a good or service and the quantity of it that producers are willing to supply. The height of the supply curve at any quantity shows the minimum price necessary to induce suppliers to produce that unit.

True

True or False: There is a tendency for the price in a market to move toward the price that brings the two into balance.

True

True or False: When a demand curve for a specific product (ice cream or cell phones, for example) is constructed, changes in the number of consumers in the market are held constant.

True

The person statutorily responsible for the tax may not be the one who actually bears the tax burden. True False

True The government can make either the buyer or the seller legally responsible for payment of the tax. The legal assignment is called the statutory incidence of the tax. However, the person statutorily responsible for the tax is not always the one who bears the tax burden, which is determined by the relative elasticities of demand and supply rather than on whom the tax is legally imposed. See section: The impact of a tax.

"We should impose a 20 percent luxury tax on expensive automobiles (those with a sales price of $75,000 or more) in order to collect more tax revenue from the wealthy." True or False: The burden of this tax will fall primarily on the luxury car makers because the supply of luxury cars is inelastic, whereas the demand is elastic. True False

True When demand is relatively inelastic, or supply is relatively elastic, buyers will bear the larger share of the tax burden. Conversely, when demand is relatively elastic and supply is inelastic, more of the tax burden will fall on sellers. Because the demand for luxury car is more elastic than the supply, the luxury-car tax will not fall primarily on wealthy purchasers of such vehicles. Instead, it will have an adverse impact on sales and employment in the luxury cars industry. See section: Elasticity and the incidence of tax.

True or False: Even if you really like pizza, that does not mean you should spend your entire income on pizza. True False

True he correct answer is True. The law of diminishing marginal utility implies that a consumer's marginal benefit falls as the quantity consumed increases. This is true even for goods that most of us enjoy, like pizza. Therefore, eventually, the cost of additional units of pizza will exceed the benefits, and you would be better served to stop consuming additional pizza. In particular, you would be better served to stop consuming pizza at the point at which the marginal benefit of the next slice would be less than the price. See section: Marginal utility, consumer choice, and the demand curve of an individual.

Which of the following would decrease the current demand for beef? Check all that apply. Higher pork prices An increase in the price of beef Widespread outbreak of mad cow or hoof-and-mouth disease Higher prices of feed grains used to feed cattle Lower consumer income, assuming that beef is a normal good

Widespread outbreak of mad cor or hoof-and-mouth disease Lower consumer income, assuming that beef is a normal good

Suppose that Kathy and Rachel face the following two transportation options: Mode of Transportation Travel Time Cost of Ticket (Hours) ($ per Ticket) Airplane 8575 Train 38125 Suppose that Kathy values her time at $20 per hour, while Rachel values her time at $12 per hour. Based on this information, Kathy will take the_____, and Rachel will take the_____

airplane, train

"We should impose a 20 percent luxury tax on expensive automobiles (those with a sales price of $75,000 or more) in order to collect more tax revenue from the wealthy." The burden of the this tax will fall primarily on the______because the demand for luxury cars is______, whereas the supply of luxury cars is______.

car makers, elastic, inelatic

Suppose that the minimum wage has increased from the current level to $15 per hour. Employment of people previously earning less than $15 per hour will_______ The availability of on-the-job training for low-skilled workers will_______

decrease decrease

How does economic efficiency relate to the gains of consumers and producers? In a market economy, when the demand for a good increases, its price will be efficient, which will motivate consumers to search for substitutes and cut back on additional purchases of the good. The equilibrium reached by a market satisfies economic efficiency, and the total gains from trade represented by the combined area of consumer and producer surplus are maximized. The equilibrium reached by a market satisfies economic efficiency and the difference between consumer and producer surplus is minimized. In a market economy, when the demand for a good increases, its price will rise, which will motivate producers to supply more of the good.

he equilibrium reached by a market satisfies economic efficiency, and the total gains from trade represented by the combined area of consumer and producer surplus are maximized.

Compared with legal markets, black markets are characterized by a_______incidence of defective products,_________profit rates and________violence.

higher, higher, more

Suppose that the minimum wage has increased from the current level to $15 per hour. The unemployment rate of teenagers will_______ The demand for high-skilled workers who are good substitutes for low-skilled workers will__________

increase increase

If the percentage change in price is more than the resultant percentage change in quantity demanded, demand is______

inelastic

Suppose that Nowhere State University (NSU) seeks to increase its total revenue from tuition paid by students. To do this, NSU decides to increase the tuition it charges to students. In order for this strategy to work, the demand for NSU education must be_______ Suppose the true price elasticity of demand for NSU education is 0.8. To expand revenue earned by NSU, the university should_______the tuition it charges students.

inelastic raise