ECO201 Midterm 2
What is the formula for elasticity?
% change in QD of X / % change in price of X
How do you calculate % change in quantity?
( Change / average quantity ) x 100
What are factors that affect the magnitude of elasticity?
- Availability of substitutes - Percentage of a consumer's budget - Time period of adjustment
A price ceiling is
A legal maximum on the price at which a good can be sold
A shift in the supply curve to the left represents what kind of externality?
A negative externality
A shift in the demand curve to the right represents what kind of externality?
A positive externality
On a graph, producer surplus is represented by the area
Below price and above the supply curve
On a graph, consumer surplus is represented by the area
Below the demand curve and above price
The price elasticity of demand measures
Buyers' responsiveness to a change in the price of a good
Price ceilings and price floors that are binding
Cause surpluses and shortages to persist because price cannot adjust to the market equilibrium price
If the government were to limit the release of air pollution produced by a glue factory to 75 parts per million, the policy would be considered a
Command-and-control policy
Negative externalities lead markets to produce
Greater than efficient output levels
If the price elasticity of supply is 1.2, and price increased by 5 percent, quantity supplied would
Increase by 6 percent
If a good has an elasticity <1, what type of good is it?
Inferior good
What can you say about the elasticity of demand of a good with many close substitutes?
It is more elastic
To say that a price ceiling is nonbonding says what about its relationship to the equilibrium price?
It is set above the equilibrium price
If a good is elastic, how can you adjust the price to increase revenue?
Lower the price to increase total revenue
For cross-price elasticity, what does the outcome say about the relationship between the two products?
Negative elasticity = complements, Positive elasticity = substitutes
If a good has an elasticity = 0, what type of good is it?
Neutral good
If a good has an elasticity >1, what type of good is it?
Normal good
An externality is the uncompensated impact of
One person's actions on the well-being of a bystander
If the price of natural gas rises, when is the price elasticity of demand likely to be the highest?
One year after the price increase
What is the difference between positive and normative statements?
Positive statements are supported by facts and can be tested, whereas normative statements are based off of opinion and cannot be tested
What happens to quantity demanded if the price of X increases?
QD goes down
What happens to quantity demanded if the price of X decreases?
QD goes up
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. What happens to the quantities demanded and supplied?
Quantity demanded increases, and quantity supplied decreases
How does time period of adjustment impact elasticity?
Shorter time = smaller elasticity, Longer time = larger elasticity
Positive externalities lead markets to produce
Smaller than efficient output levels
Suppose that in a particular market, the supply curve is highly elastic and the demand curve is highly inelastic. If a tax is imposed in this market, who will bear a greater burden of the tax?
The buyers will bear a greater burden than the sellers
According to the Coast theorem, private parties can solve the problem of externalities if
The cost of bargaining is small
The term tax incidence refers to
The distribution of the tax burden between buyers and sellers
Suppose that in a particular market, the supply curve is highly inelastic and the demand curve is highly elastic. If a tax is imposed in this market, who will bear a greater burden of the tax?
The sellers will bear a greater burden than the buyers
