chapters 4, 6, 40
Because the federal government typically provides disaster relief to farmers, many farmers do not buy crop insurance even through it is federally subsidized. This illustrates:
the moral hazard problem.
If a firm can sell 3,000 units of product A at $10 per unit and 5,000 at $8, then:
the price elasticity of demand is 2.25.
A perfectly inelastic demand schedule:
the quantity purchased won't change no matter what the price is.
Revenue tariff
usually applied to a product that is not being produced domestically, for example, tin, coffee, or bananas in the case of the United States. Rates on revenue tariffs tend to be modest and are designed to provide the Federal government with revenue.
Canada largest U.S. trade partner Trade deficit with China
$366 billion in 2015
U.S. trade deficit in goods
$529 billion in 2015
Alex, Kara, and Susie are the only three people in a community and Alex is willing to pay $20 for the fifth unit of a public good; Kara, $15; and Susie, $25. Government should produce the fifth unit of the public good if the marginal cost is less than or equal to: A. $25.
$60
GDP
= C + I + G + (Ex - Im) C = total expending by consumers I = total investment (expending on goods and services) by businesses G = total expending by government (federal, state and local) (Ex-Im) = net exports (exports and imports)
From society's perspective, in the presence of a supply-side market failure, the last unit of a good produced typically:
costs more to produce than it provides in benefits.
For a linear demand curve:
demand is elastic at high prices.
If the relative change in price is greater than the relative change in the quantity demanded associated with it then,
demand is inelastic
Land-intensive goods
grains, wool, and, meat
Demand tends to be elastic at
high prices and inelastic at low prices.
Refer to the data. The price elasticity of demand is unity: price Q. Demanded 6 1 5 2 4 3 3 4 2 5 1 6
in the $4-$3 price range only.
Nontariff barrier (NTB)
includes onerous licensing requirements, unreasonable standards pertaining to product quality, or simply bureaucratic hurdles and delays in customs procedures.
Voluntary export restriction (VER)
includes onerous licensing requirements, unreasonable standards pertaining to product quality, or simply bureaucratic hurdles and delays in customs procedures.
The diagram concerns supply adjustments to an increase in demand (D1 to D2) in the immediate market period, the short run, and the long run. In the immediate market period, the increase in demand will:
increase equilibrium price but not equilibrium quantity.
If the price elasticity of demand for a product is 2.5, then a price cut from $2.00 to $1.80 will
increased quantity demanded by 25%
A public good:
is available to all and cannot be denied to anyone
Protective tariff
is implemented to shield domestic producers from foreign competition. These tariffs impede free trade by increasing the prices of imported goods and therefore shifting sales toward domestic producers.
An efficiency loss (or deadweight loss):
is measured as the combined loss of consumer surplus and producer surplus.
At the optimal quantity of a public good
marginal benefit equals marginal cost.
. The market system does not produce public goods because
private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them.
Gigantic State University raises tuition for the purpose of increasing its revenue so that more faculty can be hired. GSU is assuming that the demand for education at GSU is
relatively inelastic.
A positive externality or spillover benefit occurs when:
the benefits associated with a product exceed those accruing to people who consume it
We would expect:
the demand for Coca-Cola to be more price elastic than the demand for soft drinks in general.
If a firm finds that it can sell $13,000 worth of a product when its price is $5 per unit and $11,000 worth of it when its price is $6, then
the demand for the product is elastic in the $6-$5 price range.
It takes a considerable amount of time to increase the production of pork. This implies that:
the short-run supply curve for pork is less elastic than the long-run supply curve for pork.
Graphically, if the supply and demand curves are linear, consumer surplus is measured as the triangle:
under the demand curve and below the actual price.
Suppose that the Anytown city government asks private citizens to donate money to support the town's annual holiday lighting display. Assuming that the citizens of Anytown enjoy the lighting display, the request for donations suggests that:
resources are currently underallocated to the provision of holiday lighting in Anytown.
U.S. trade surplus in services
$220 billion in 2015
The price elasticity of demand is generally
negative, but the minus sign is ignored
Labor-intensive goods
textiles, electronics, apparel, toys, and sporting goods
GATT
-Equal, nondiscriminatory trade between member nations -Reduction in tariffs -Elimination of import quotas
WTO
-Established by Uruguay Round of GATT -161 member nations in 2015 -Oversees trade agreements and rules on disputes -Critics argue that it may allow nations to circumvent environmental and worker-protection laws
multilateral trade agreements
-General Agreement on Tariffs and Trade (GATT) -World Trade Organization (WTO) -European Union (EU) -North American Free Trade Agreement (NAFTA)
A supply curve that is a vertical straight line indicates that:
. a change in price will have no effect on the quantity supplied.
Where there is asymmetric information between buyers and sellers: A. product shortages will occur at the equilibrium price.
. markets can produce inefficient outcomes.
. Market failure is said to occur whenever:
. private markets do not allocate resources in the most economically desirable way.
Suppose that Mick and Cher are the only two members of society and are willing to pay $10 and $8, respectively, for the third unit of a public good. Also, assume that the marginal cost of the third unit is $17. We can conclude that:
. the third unit should be produced
Suppose the price of local cable TV service increased from $16.20 to $19.80 and as a result the number of cable subscribers decreased from 224,000 to 176,000. Along this portion of the demand curve, price elasticity of demand is:
1.2
Suppose that as the price of Y falls from $2.00 to $1.90, the quantity of Y demanded increases from 110 to 118. Then the price elasticity of demand is:
1.37
Suppose the price elasticity of demand for bread is 0.20. If the price of bread falls by 10 percent, the quantity demanded will increase by
2 percent and total expenditures on bread will fall
The price elasticity of demand for widgets is 0.80. Assuming no change in the demand curve for widgets, a 16 percent increase in sales implies a:
20% reduction in price
comparative advantage
ASSUMPTIONS Two nations Same size labor force Constant costs in each country Different costs between countries U.S. absolute advantage in both OPPORTUNITY COST RATIO -Slope of the curve -Vegetables sacrificed per ton of beef
import quota
An import quota is a limit on the quantities or total values of specific items that are imported in some period.
Principal U.S. exports include:
Chemicals Agricultural products Consumer durables Semiconductors Aircraft
impact of tarrifs
Direct effects -Decline in consumption -Increase in domestic production -Decline in imports -Tariff revenue Indirect -Decline in consumption -Increase in domestic production -Decline in imports -Quotas do not provide for any government revenue but instead transfer it to foreign producers
If quantity demanded is completely unresponsive to price changes, demand is
Perfectly inelastic
Principal U.S. imports include:
Petroleum Automobiles Metals Household appliances Computers
. private markets do not allocate resources in the most economically desirable way.
Supply-side market failure.
Which of the following conditions does not need to occur for a market to achieve allocative efficiency?
The sum of producer and consumer surplus is maximized.
Jennifer buys a piece of costume jewelry for $33 for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences
a consumer surplus of $9 and Nathan experiences a producer surplus of $3.
. If demand is elastic
a decrease in price will increase total revenue.
Graphically, producer surplus is measured as the area:
above the supply curve and below the actual price.
Capital-intensive goods
airplanes, automobiles, agricultural equipment, machinery, and chemicals
When the percentage change in price is greater than the resulting percentage change in quantity demanded
an increase in price will increase total revenue.
Export subsidy-
consists of a government payment to a domestic producer of export goods and is designed to aid that producer.
People enjoy outdoor holiday lighting displays and would be willing to pay to see these displays but can't be made to pay. Because those who put up lights are unable to charge others to view them, they don't put up as many lights as people would like. This is an example of a
demand-side market failure.
The total revenue test for elasticity:
does not apply to supply because price and total revenue always move together
Refer to the diagram, which is a rectangular hyperbola, that is, a curve such that each rectangle drawn from any point on the curve will be of identical area. If this rectangular hyperbola was a demand curve, we could say that it would be:
elastic at low prices and inelastic at high prices.
Suppose the total revenue curve is derived from a particular linear demand curve. That demand curve must be
elastic for price increases that reduce quantity demanded from 4 units to 3 units.
Supply curves tend to be:
more elastic in the long run because there is time for firms to enter or leave the industry.
The two main characteristics of a public good are
nonrivalry and nonexcludability
Total revenue will not change for price e if
price varies within a range where the elasticity coefficient is unity.