ECO 215 Test 2
Karen sharpens knives in her spare time for extra income. Buyers of her service are willing to pay $2.50 per knife for as many knives as Karen is willing to sharpen. On a particular day, she is willing to sharpen the first knife for $1.75, the second knife for $2.25, the third knife for $2.75, and the fourth knife for $3.25. Assume Karen is rational in deciding how many knives to sharpen. Her producer surplus is
$1.00
Donald produces nails at a cost of $200 per ton. If he sells the nails for $350 per ton, his producer surplus per ton is
$150
Sarah buys a new MP3 player for $135. She receives consumer surplus of $25 on her purchase if her willingness to pay is
$160
Kelly is willing to pay $68 for a pair of shoes for a wedding. She finds a pair at her favorite outlet shoe store for $48. Kelly's consumer surplus is
$20
If Roberta sells a shirt for $30, and her producer surplus from the sale is $23, her cost must have been
$7
Suppose the price of Twinkies decreases from $1.45 to $1.25 and, as a result, the quantity of Twinkies demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for Twinkies in the given price range is
0.64
If the price elasticity of supply is 1.5, and a price increase led to a 1.8% increase in quantity supplied, then the price increase amounted to
1.20%
If a 15% increase in price for a good results in a 20% decrease in quantity demanded, the price elasticity of demand is
1.33
If a 25% change in price results in a 40% change in quantity supplied, then the price elasticity of supply is
1.60, and supply is elastic.
On a certain supply curve, one point is (quantity supplied = 200, price = $4.00) and another point is (quantity supplied = 250, price = $4.50). Using the midpoint method, the price elasticity of supply is about
1.89
At a price of $1.00, a local coffee shop is willing to supply 100 cinnamon rolls per day. At a price of $1.20, the coffee shop would be willing to supply 150 cinnamon rolls per day. Using the midpoint method, the price elasticity of supply is
2.20
If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a
40 percent decrease in the quantity demanded.
If the price elasticity of demand for a good is 0.25, then a 20 percent decrease in price results in a
5 percent increase in the quantity demanded.
Suppose buyers of liquor are required to send $1.00 to the government for every bottle of liquor they buy. Further, suppose this tax causes the effective price received by sellers of liquor to fall by $0.80 per bottle. Which of the following statements is correct?
All of the above are correct.
Producer surplus equals
Amount received by sellers - Costs of sellers.
All else equal, what happens to consumer surplus if the price of a good increases?
Consumer surplus decreases.
A minimum wage that is set below a market's equilibrium wage will result in
None of the above is correct.
The deadweight loss from a tax
Total surplus = Value to sellers - Cost to sellers
What happens to the total surplus in a market when the government imposes a tax?
Total surplus decreases.
Elasticity is
a measure of how much buyers and sellers respond to changes in market conditions.
If a binding price ceiling is imposed on the computer market, then
a shortage of computers will develop.
Which of the following causes the price paid by buyers to be different than the price received by sellers?
a tax on the good
A price floor will be binding only if it is set
above the equilibrium price.
On a graph, consumer surplus is represented by the area
below the demand curve and above price.
A price ceiling will be binding only if it is set
below the equilibrium price.
Total surplus is represented by the area
between the demand and supply curves up to the point of equilibrium.
When a tax is imposed on a good for which the supply is relatively elastic and the demand is relatively inelastic,
buyers of the good will bear most of the burden of the tax.
Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten-year period because
buyers tend to be much more sensitive to a change in price when given more time to react.
A tax affects
buyers, sellers, and the government.
A legal maximum on the price at which a good can be sold is called a price
ceiling.
If a consumer places a value of $15 on a particular good and if the price of the good is $17, then the
consumer does not purchase the good.
Which of the following is likely to have the most price inelastic demand?
cookies
The decrease in total surplus that results from a market distortion, such as a tax, is called a
deadweight loss.
When the price of bubble gum is $0.50, the quantity demanded is 400 packs per day. When the price falls to $0.40, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for bubble gum is
elastic.
When a tax is imposed on a good, the
equilibrium quantity of the good always decreases.
When a good is taxed, the burden of the tax
falls more heavily on the side of the market that is more inelastic.
Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the
flatter the demand curve will be.
A legal minimum on the price at which a good can be sold is called a price
floor.
Welfare economics is the study of
how the allocation of resources affects economic well-being.
If the government levies a $500 tax per car on buyers of cars, then the price paid by buyers of cars would
increase by less than $500.
Over time, housing shortages caused by rent control
increase, because the demand for and supply of housing are more elastic in the long run.
Suppose that quantity demand rises by 10% as a result of a 15% decrease in price. The price elasticity of demand for this good is
inelastic and equal to 0.67.
Consumer surplus
is the amount a consumer is willing to pay minus the amount the consumer actually pays.
Demand is inelastic if elasticity is
less than 1.
The imposition of a binding price floor on a market causes quantity demanded to be
less than quantity supplied.
The price elasticity of demand changes as we move along a
linear, downward-sloping demand curve.
Goods with many close substitutes tend to have
more elastic demands
If the government removes a tax on buyers of a good and imposes the same tax on sellers of the good, then the price paid by buyers will
not change and the price received by sellers will not change.
Economists compute the price elasticity of demand as the
percentage change in quantity demanded divided by the percentage change in price.
The price elasticity of demand measures how much
quantity demanded responds to a change in price.
In the housing market, rent control causes
quantity supplied to fall and quantity demanded to rise.
A tax imposed on the buyers of a good will
raise the price paid by buyers and lower the equilibrium quantity.
For a good that is taxed, the area on the relevant supply-and-demand graph that represents government's tax revenue is a
rectangle.
When a tax is levied on a good, the buyers and sellers of the good share the burden,
regardless of how the tax is levied.
A supply curve can be used to measure producer surplus because it reflects
sellers' costs.
When a binding price ceiling is imposed on a market to benefit buyers,
some buyers benefit and some buyers are harmed.
If the quantity supplied responds only slightly to changes in price, then
supply is said to be inelastic.
One result of a tax, regardless of whether the tax is placed on the buyers or the sellers, is that the
tax reduces the welfare of both buyers and sellers.
For a good that is a luxury, demand
tends to be elastic.
For a good that is a necessity, demand
tends to be inelastic.
Producer surplus is
the amount a seller is paid minus the cost of production.
When a tax is placed on the buyers of lemonade,
the burden of the tax will be shared by the buyers and the sellers, but the division of the burden is not always equal.
Suppose there is currently a tax of $50 per ticket on airline tickets. Buyers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then
the demand curve will shift upward by $20, and the effective price received by sellers will increase by less than $20.
There are very few, if any, good substitutes for motor oil. Therefore,
the demand for motor oil would tend to be inelastic.
If a price floor is not binding, then
the equilibrium price is above the price floor.
An example of a price floor is
the minimum wage.
Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling,
the quantity demanded of physicals increases and the quantity supplied of physicals decreases.
If the minimum wage exceeds the equilibrium wage, then
the quantity supplied of labor will exceed the quantity demanded.
The price elasticity of supply measures how much
the quantity supplied responds to changes in the price of the good.
When a tax is placed on the sellers of cell phones,
the size of the cell phone market decreases, but the price paid by buyers increases.
When a supply curve is relatively flat,
the supply is relatively elastic.
If a price ceiling is not binding, then
there will be no effect on the market price or quantity sold.
We can say that the allocation of resources is efficient if
total surplus is maximized.
When a tax is imposed on the sellers of a good, the supply curve shifts
upward by the amount of the tax.
Total surplus is equal to
value to buyers - cost to sellers.
If a tax is levied on the buyers of a product, then the demand curve
will shift down.
Suppose Chris and Laura attend a charity benefit and participate in a silent auction. Each has in mind a maximum amount that he or she will bid for an oil painting by a locally famous artist. This maximum is called
willingness to pay.