Econ 101 Exam 2 (chapters 7&8)

Jeff decides that he would pay as much as $2,000 for a new laptop computer. He buys the computer and realizes a consumer surplus of $300. How much did Jeff pay for his computer?

$1,700.

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.

With linear demand and supply curves in a market, suppose a tax of $0.20 per unit on a good creates a deadweight loss of $40. If the tax is increased to $0.50 per unit, the deadweight loss from the new tax will be

$250.

Roland mows Karla's lawn for $25. Roland's opportunity cost of mowing Karla's lawn is $20, and Karla's willingness to pay Roland to mow her lawn is $28.

$3.

Bill created a new software program he is willing to sell for $200. He sells his first copy and enjoys a producer surplus of $150. What is the price paid for the software?

$350.

George produces cupcakes. His production cost is $10 per dozen. He sells the cupcakes for $16 per dozen. His producer surplus per dozen cupcakes is

$6

In 1776, the American Revolution was sparked by anger over

British taxes imposed on the American colonies.

Who once said that taxes are the price we pay for a civilized society?

Oliver Wendell Holmes, Jr.

Which of the following statements is correct regarding a tax on a good and the resulting deadweight loss?

The greater are the price elasticities of supply and demand, the greater is the deadweight loss.

The "invisible hand" is

a concept developed by Adam Smith to describe the virtues of free markets.

Consumer surplus is the

amount a consumer is willing to pay minus the amount the consumer actually pays.

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.

A tax levied on the buyers of a good shifts the

demand curve downward (or to the left).

If the tax on gasoline increases from $2 to $4 per gallon, the deadweight loss from the tax increases by a factor of

four

The particular price that results in quantity supplied being equal to quantity demanded is the best price because it

maximizes the combined welfare of buyers and sellers.

Consumer surplus

measures the benefit buyers receive from participating in a market.

The benefit to sellers of participating in a market is measured by the

producer surplus.

Externalities are

side effects passed on to a party other than the buyers and sellers in the market.

Consider a good to which a per-unit tax applies. The size of the deadweight that results from the tax is smaller, the

smaller is the price elasticity of supply.

Buyers of a product will bear the larger part of the tax burden, and sellers will bear a smaller part of the tax burden, when the

supply of the product is more elastic than the demand for the product.

The benefit that government receives from a tax is measured by

tax revenue.

The "invisible hand" refers to

the marketplace guiding the self-interests of market participants into promoting general economic well-being.

Producer surplus directly measures

the well-being of sellers.

At the equilibrium price of a good, the good will be purchased by those buyers who

value the good more than price.

Celine buys a new MP3 player for $90. She receives consumer surplus of $15 on her purchase if her willingness to pay is

$105.

Ray buys a new tractor for $118,000. He receives consumer surplus of $13,000 on his purchase. Ray's willingness to pay is

$131,000.

Brock is willing to pay $400 for a new suit, but he is able to buy the suit for $250. His consumer surplus is

$150.

Donald produces nails at a cost of $350 per ton. If he sells the nails for $500 per ton, his producer surplus is

$150.

Cameron visits a sporting goods store to buy a new set of golf clubs. He is willing to pay $750 for the clubs but buys them on sale for $575. Cameron's consumer surplus from the purchase is

$175.

Tom tunes pianos in his spare time for extra income. Buyers of his service are willing to pay $155 per tuning. One particular week, Tom is willing to tune the first piano for $120, the second piano for $125, the third piano for $140, and the fourth piano for $160. Assume Tom is rational in deciding how many pianos to tune. His producer surplus is

$80.

Assume that for good X the supply curve for a good is a typical, upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. If the good is taxed, and the tax is tripled, the

*base of the triangle that represents the deadweight loss triples. *height of the triangle that represents the deadweight loss triples. *deadweight loss of the tax increases by a factor of nine.

Inefficiency can be caused in a market by the presence of

*market power *externalities *imperfectly competitive markets

A seller's willingness to sell is

*measured by the seller's cost of production. * related to her supply curve, just as a buyer's willingness to buy is related to his demand curve. *less than the price received if producer surplus is a positive number.

Suppose a tax of $3 per unit is imposed on a good. The supply curve is a typical upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. The tax decreases consumer surplus by $3,900 and decreases producer surplus by $3,000. The tax generates tax revenue of $6,000. The tax decreased the equilibrium quantity of the good from

2,600 to 2,000

A seller's opportunity cost measures the

value of everything she must give up to produce a good.

To measure the gains and losses from a tax on a good, economists use the tools of

welfare economics.

Suppose Larry, Moe, and Curly are bidding in an auction for a mint-condition video of Charlie Chaplin's first movie. Each has in mind a maximum amount that he will bid. This maximum is called

willingness to pay.

Suppose Raymond and Victoria 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.

The maximum price that a buyer will pay for a good is called

willingness to pay.

The marginal seller is the seller who

would leave the market first if the price were any lower.

If the price a consumer pays for a product is equal to a consumer's willingness to pay, then the consumer surplus relevant to that purchase is

zero.

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.

Which of the following events would increase producer surplus?

Sellers' costs stay the same and the price of the good increases.

Welfare economics explains which of the following in the market for televisions?

The market equilibrium price for televisions maximizes the total welfare of television buyers and sellers.

If an allocation of resources is efficient, then

all potential gains from trade among buyers are sellers are being realized.

On a graph, consumer surplus is represented by the area

below the demand curve and above price

Suppose that the market price for pizzas increases. The increase in producer surplus comes from the benefit of the higher prices to

both existing sellers who now receive higher prices on the pizzas they were already selling and new sellers who enter the market because of the higher prices.

When a tax on a good is enacted,

buyers and sellers share the burden of the tax regardless of whether the tax is levied on buyers or on sellers.

Which tools allow economists to determine if the allocation of resources determined by free markets is desirable?

consumer and producer surplus

On a graph, the area below a demand curve and above the price measures

consumer surplus.

Oil is used to produce gasoline. If the price of oil increases, consumer surplus in the gasoline market

decreases.

Sellers of a product will bear the larger part of the tax burden, and buyers will bear a smaller part of the tax burden, when the

demand for the product is more elastic than the supply of the product.

Total surplus is

equal to the total value to buyers minus the total cost to sellers.

The decisions of buyers and sellers that affect people who are not participants in the market create

externalities.

Consider a good to which a per-unit tax applies. The greater the price elasticities of demand and supply for the good, the

greater the deadweight loss from the tax.

If the labor supply curve is very elastic, a tax on labor

has a large deadweight loss.

Welfare economics is the study of

how the allocation of resources affects economic well-being.

Suppose consumer income increases. If grass seed is a normal good, the equilibrium price of grass seed will

increase, and producer surplus in the industry will increase.

If the cost of producing sofas decreases, then consumer surplus in the sofa market will

increase.

If the tax on a good is increased from $0.30 per unit to $0.90 per unit, the deadweight loss from the tax

increases by a factor of 9.

Market power and externalities are examples of

market failure.

A result of welfare economics is that the equilibrium price of a product is considered to be the best price because it

maximizes the combined welfare of buyers and sellers.

Inefficiency exists in a market when a good is

not being consumed by buyers who value it most highly.

The welfare of sellers is measured by

producer surplus.

Consumer surplus is a good measure of economic welfare if policymakers want to

respect the preferences of buyers

Consumer surplus is a good measure of economic welfare if policymakers want to

respect the preferences of buyers.

When a tax is imposed on a good for which the demand is relatively elastic and the supply is relatively inelastic,

sellers of the good will bear most of the burden of the tax.

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.

Suppose Rebecca needs a dog sitter so that she can travel to her sister's wedding. Rebecca values dog sitting for the weekend at $200. Susan is willing to dog sit for Rebecca so long as she receives at least $175. Rebecca and Susan 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 Rebecca and Susan because after the tax, Susan will not dog sit for Rebecca

The amount of deadweight loss that results from a tax of a given size is determined by

the price elasticities of demand and supply.

When a tax is levied on a good,

there is a decrease in the quantity of the good bought and sold in the market.