eco 1305 exam 2
Without free trade, the domestic price of a good must be equal to the world price of a good. T or F?
false
deadweight loss
results from a tax (or any market distortion), takes away from TS
What does a tax on buyers do?
shifts demand curve down by the amount of the tax
Laffer Curve
shows the relationship between the size of the tax and tax revenue
market distortions
taxes, monopolies, price floors/ceilings, tariffs, etc.
a tax on sellers decreases supply T or F?
true
Tax Equation
(new price buyers pay - old price buyers pay) + (old price sellers received - new price sellers receive) - Buyers burden(BB)+ sellers burden (BS)
Q imports formula
Qdt - Qst
Suppose Yolanda needs a dog sitter so that she can travel to her sister's wedding. Yolanda values dog sitting for the weekend at $200. Rebecca is willing to dog sit for Yolanda so long as she receives at least $175. Yolanda and Rebecca agree on a price of $185. Suppose the government imposes a tax of $30 on dog sitting. What is the deadweight loss of the tax?
The lost benefit to Yolanda and Rebecca because after the tax, Rebecca will not dog sit for Yolanda
where is CS on a graph
above the equilibrium, below the demand curve
unemployment
amount of people seeking jobs < people hiring
Long lines
are an inefficient rationing mechanism because they waste buyers' time, and discrimination according to seller bias is an inefficient rationing mechanism because the good does not necessarily go to the buyer who values it most highly.
where is PS on the graph
below the equilibrium, above the supply curve
Total surplus formula
consumer surplus + producer surplus
When a country that imports a particular good imposes an import quota on that good
consumer surplus decreases and total surplus decreases in the market for that good.
The decrease in total surplus that results from a market distortion, such as a tax, is called a
deadweight loss
consumer surplus formula
maximum price willing to pay - actual market price
Motor oil and gasoline are complements. If the price of motor oil decreases, consumer surplus in the gasoline market
may increase, decrease, or remain unchanged
When a tax is placed on the sellers of a product, generally, buyers pay
more, and sellers receive less than they did before the tax.
If a tax is levied on the sellers of a product, then the demand curve will
not shift
Total WTP (taxes)
price + tax
Pnt
price w/o tax
Which of the following would be the most likely result of a binding price ceiling imposed on the market for rental cars?
slow replacement of old rental cars with newer ones
A tax levied on the sellers of a good shifts the
supply curve upward by the size of the tax.
The government's benefit from a tax can be measured by
tax revenue
Pd
the domestic price of a good
revenue
the total amount of income generated by the sale of goods or services related to the company's primary operations.
Pw
the world price of a good, the price that prevails in world markets
producer surplus formula
total revenue - total cost
A tax on buyers shifts the demand curve to the left. t or f?
true
All else equal, an increase in demand will cause a decrease in producer surplus.
true
Suppose you sell a kayak for $600, but you were willing to sell it for $450. The buyer was willing to pay $650. The total surplus is $200. T or F?
true
Taxes create deadweight losses. t or f?
true
Suppose prices of personal computers fall significantly and consumers respond by buying more personal computers. The consumer price index
understates this price decrease due to the substitution bias.
free market
what someone is willing to accept (WTA)
WTA
willingness to accept (selling price for sellers)
Quotas
-limit the number of imports allowed into a country -similar to tariffs
What generally happens to the total surplus in a market when the government imposes a tax?
total surplus decreases
Area of a triangle
A=1/2bh
Consumer surplus can be measured as the area between the demand curve and the equilibrium price. T or F?
true
When the supply of a good increases and the demand for the good remains unchanged, consumer surplus
increases
buyers burden
new price buyers pay - old price buyers pay
all sellers sell at this price
world price (Pw)
shortage
- Quantity demand w/trade > Quantity supplied w/trade -Quantity supplied w/o trade > Quantity supplied w/trade -Quantity demand w/trade > Quantity demand w/o trade
Suppose a tax of $5 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 200 units to 100 units. The tax decreases consumer surplus by $450 and decreases producer surplus by $300. The deadweight loss from the tax is
$250
Ronnie operates a lawn-care service. On each day, the cost of mowing the first lawn is $10, the cost of mowing the second lawn is $12, and the cost of mowing the third lawn is $15. His producer surplus on the first three lawns of the day is $53. If Ronnie charges all customers the same price for lawn mowing, that price is
$30
Assume, for Vietnam, that the domestic price of textiles without international trade is higher than the world price of textiles. This suggests that, in the production of textiles,
other countries have a comparative advantage over Vietnam and Vietnam will import textiles.
surplus
- Quantity supplied w/o trade < Quantity supplied w/trade - Quantity demand w/trade < Quantity demand w/o trade - Quantity demand w/trade < Quantity supplied w/trade
tariff/quota revenue
-politically useful -"appears" to be paid by foreigners, not by citizens
price floors
A legal minimum on the price at which a good can be sold Ex. Minimum wage
tariff
A tax on an imported good is called a
One economist has argued that rent control is "the best way to destroy a city, other than bombing." Why would an economist say this?
He fears that rent control will eliminate the incentive to maintain buildings, leading to a deterioration of the city.
Which of the following statements regarding a Laffer curve is the most plausible?
Reducing a high tax rate is more likely to increase tax revenue than is reducing a low tax rate.
Which of the following quantities decrease in response to a tax on a good?
The equilibrium quantity in the market for the good, producer surplus, and the well-being of buyers of the good
Suppose the government has imposed a price floor on the market for soybeans. Which of the following events could transform the price floor from one that is not binding into one that is binding?
The number of consumers buying soybeans increases.
A shortage results when a
binding price ceiling is imposed on a market.
If the government removes a binding price floor from a market, then the price received by sellers will
decrease, and the quantity sold in the market will increase.
The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium price of chocolate
decreases, and producer surplus decreases.
disputed surplus
domestic consumers and producers both want the area
Qst
domestic quality supplied with trade
Qdt
domestic quantity demanded with trade
Qdnt
domestic quantity demanded without trade
Qsnt
domestic quantity supplied without trade
Inflation Rate Formula
ending cost (2019) - starting cost (2018) / starting cost x 100
Suppose you buy an iPod for $100. If your consumer surplus is $30, your willingness to pay is $70. T or F?
false, WTP = 130
If the government imposes a binding price floor in a market, then the consumer surplus in that market will increase. T or F?
false, it will decrease
Under rent control, bribery is a mechanism to
force the total price of an apartment (including the bribe) to be less than the market price.
tax incidence
how the burden of a tax is shared among market participants
The nation of Wheatland forbids international trade. In Wheatland, you can buy 1 pound of corn for 3 pounds of fish. In other countries, you can buy 1 pound of corn for 2 pounds of fish. These facts indicate that
if Wheatland were to allow trade, it would import corn.
Tariff Revenue
number of imports
sellers burden
old price sellers received - new price sellers receive
Zelzar has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs. Which groups in Zelzar are better off as a result of the new free-trade policy?
producers of steel and consumers of incense
Qnt
quantity w/o tax
why do we have taxes?
raising revenues, transfer payments, financing operations, correcting market failures
What does a tax on sellers do?
shifts the supply curve up by the amount of the tax
An alternative to rent-control laws that would not reduce the quantity of housing supplied is
the payment by government of a fraction of a poor family's rent.
GDP
the total market value of all final goods and services produced within a country in a given period of time
WTP
willingness to pay (buyers)
price ceiling
"price gouging" a legal maximum on the price of a good or service ex. rent control
Suppose that Firms A and B each produce high-resolution computer monitors, but Firm A can do so at a lower cost. Cassie and David each want to purchase a high-resolution computer monitor, but David is willing to pay more than Cassie. If Firm A produces a monitor that Cassie buys but David does not, then the market outcome illustrates which of the following principles? (i) Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay. (ii) Free markets allocate the demand for goods to the sellers who can produce them at the least cost.
1 and 2
What happens to consumer surplus in the iPod market if iPods are normal goods and buyers of iPods experience an increase in income?
Consumer surplus may increase, decrease, or remain unchanged
The world price of a pound of almonds is $4.50. Before Uruguay allowed trade in almonds, the price of a pound of almonds there was $3.00. Once Uruguay began allowing trade in almonds with other countries, Uruguay began
exporting almonds and the price per pound in Uruguay increased to $4.50
When a tax is imposed on a good, the resulting decrease in consumer surplus is always larger than the resulting decrease in producer surplus. t or f?
false, it's smaller
If the government imposes a $3 tax in a market, the buyers and sellers will share an equal burden of the tax. t or f?
false, the buyers suffer more
Because taxes distort incentives, they cause markets to allocate resources inefficiently. t or f?
true
