Econ 102 exam 2
Prior to the 1997 federal tobacco settlement a pack of cigarettes sold for $2.48. The terms of the settlement required a decrease in teenage smoking of 60 percent. If the elasticity of cigarette demand for teenagers is about 1.3 then the price of cigarettes should rise to __________ in order to achieve the target reduction of 60 percent.
$3.62
Income Elasticity of Demand
% Change in QD as a result of increase/decrease in income
2.0
% change in price of milk = ($2.20 - $2.00)/$2.00 = .10 or 10% increase. The percentage change in quantity supplied is: % change in quantity supplied = (120 - 100)/100 = 20%. The elasticity of supply = 20/10 = 2.0
Formula for demand elasticity
% change in quantity demanded / % change in price
formula for supply elasticity
% change in quantity supplied / % change in price
Necessities have a positive elasticity that is between
0 and 1
Luxuries have a positive elasticity greater than
1
5 Determinants of Price Elasticity of Demand?
1) Availability of Close Substitutes 2) Passage of Time 3) Luxuries vs Necessities 4) Definition of the Market 5) Share of Goods in a Consumer Budget
5 Reasons why LRAC (Long Run Avg Cost) falls as quantity increases:
1) Division of Labor 2) Specialization 3) Quantity Discounts on Inputs 4) Larger Q = Lower Interest Rates = Cost Savings on Interest 5) Power of Buyers over Supplier
2 Reasons that Marginal Product of Labor rises in the Beginning?
1) Division of Labor - Many Workers to reduce time 2) Specialization - Focus of fewer tasks = more efficient
3 Common Pitfalls that consumers fall into preventing them from making optimal decisions:
1) Fail to Include Opp. Cost 2) Fail to Ignore Sunk Cost 3) Fail to be Realistic in Future Behavior
Determinants of supply elasticity:
1. how costly is it to produce more output units when more inputs are needed 2. time
The current price of wheat is $1.00 per bushel, and the price elasticity of demand for wheat is known to be 0.50. A bad harvest causes the supply of wheat to decrease and as a result the price of wheat rises by 20%. What will be the percentage change in quantity demanded for wheat and will farm revenues rise or fall?
10%, rise
What is the elasticity of demand if change in quantity is 20% and the change in price is negative 10%?
2
price ceilings
A legal maximum on the price at which a good can be sold
price floor
A legal minimum on the price at which a good can be sold
Availability of Close Subs
More Subs = More Elastic (low fluctuation in P) Fewer Subs = More Inelastic (more fluctuation in P)
if price elasticity of demand is unit elastic... revenue can be increased by
CANT! revenue already at max
marginal cost
Change in cost when a additional unit of a good is produced
Are consumers only interested in making themselves as well off as possible in a material sense?
Consumers are also concerned with fairness as exemplified by tipping in restaurants that will never be visited again
Variable costs
Costs that change as output (Q) changes
Is utility measurable?
No
normal good v. inferior good
Normal Goods: any goods for which demand increases and falls when income decreases but price stays constant. Inferior Good: a good that decreases in demand when consumer income rises
Find the consumer surplus when x=40 The demand function, in dollars per unit, for a commodity is given by D(x)=3000-0.6x^2 where x is the number of units demanded.
D = 3000 - 0.6x^2 x= 40 3000 -(3/5)40^2 =3000 - (3/5)1600= 3000-960 = 2040 $20.40 is the price when 40 are sold consumer surplus is the area below the demand curve and above P=20.40 It's a right triangle from 3000-2040 = 960 as the height, base = 40 area =bh/2 = 40(960)/2 = 20(960) = 19200 = $192 consumer surplus
For a linear curve
Demand is elastic at high prices
point elasticity formula:
Ed = change in Q / change in P x P/Q or 1/slope x P/Q
The opponents of globalization contend that
Globalization destroys cultures
The more substitutes that exist for a particular product, the __________ the price elasticity of demand.
Greater
An increase in the price of a substitute for iPads will lead to __________ in the quantity demanded of iPads so the cross-price elasticity of demand will be __________.
Increase, positive
In general, which good is going to be more price inelastic, insulin or yachts?
Insulin
The following excerpt is from a letter sent to a financial advice columnist: "My wife and I are trying to decide how to invest a $250,000 windfall. She wants to pay off our $114,000 mortgage, but I'm not eager to do that because we refinanced only nine months ago, paying $3,000 in fees and costs."
It is a sunk cost and should not be taken into account when deciding to pay off the mortgage
Implicit costs
Opportunity costs associated with an activity
Passage of Time
Passage of Time creates substitutes More Time = More Subs = More Elastic
total revenue is
Price x Quantity
Technology
Process turning inputs to outputs
Budget Constraint
Purchased goods/services within a given income
Why don't we reley on slope for elasticity measurements
Slope depends on units and if you change the units the demand curve changes and so does the slope, but elasticity won't change
Total costs
TC = FC + VC costs that change as output changes
Total Revenue
TR = P x Q total $$$ from selling a good/service
marginal benefit
The maximum price a consumer will be willing to pay for an additional unit of a product. It is the dollar value of the consumer's marginal utility from the additional unit, and therefore it falls as consumption increases.
Law of Diminishing Marginal Utility (DMU)
The more one consumes of something, the less satisfied they are about it over a period of time.
inelastic demand
The percentage change in quantity demanded is less than the percentage change in price. Elasticity is less than 1 in absolute value
perfect elastic demand
The quantity demanded will increase to infinity when the price decreases, and quantity demanded will decrease to zero when price increases.
Which of the following is a source of comparative advantage?
The relative abundance of capital and labor
Elastic Demand in terms of slope
The smaller the slope, the more elastic is the product
Network Externality
The usefulness of a product Increases as the # of people using the product increases
The Only Determinant of Price Elasticity of Supply
Time
opportunity cost
Trade offs
What values make elasticity elastic?
Values> |1|
Inealistic demand
When a product has inelastic demand it is not sensitive to a change in price. As you can see the quantity demanded remains constant at 20 for the curve on the left regardless of price.
elastic demand
When percentage change in quantity is greater than the percentage change in price. Price is elastic when the price elasticity is greater than 1 in absolute value.
What is the cross-price elasticity of demand for two goods that are unrelated?
Zero
sunk cost
a cost that has already been committed and cannot be recovered
Indifference Curve
a curve that shows the combinations of consumption bundles that give the consumer the same utility
Black markets
a market in which goods or services are bought and sold illegally, either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling
The income elasticity for peanut butter is -3. This defines peanut butter as what type of good?
an inferior good
A perfectly inelastic supply curve:
indicates the quantity supplied does not respond to a change in price
If the cross-price elasticity of demand between two products is -3.0, then the two products are:
complements
explicit costs
costs that managers must take account of because they must be paid wages, taxes, raw materials, insurance
fixed costs
costs that remain the same as output (Q) changes
explicit costs
costs that require a firm to spend money ( anything you have to pay money for)
if price increases, quantity demanded will
decrease
perfect inelastic demand
demand in which quantity demanded does not change at all to a change in price
Which of the following refers to a flow of funds from savers to firms through financial markets?
direct finance
The flatter the curve the more (
elastic
passage of time: long run = more ___ short run = more ____
elastic and inelastic
implicit costs
expenses that managers do not have to pay out of pocket and hence do not normally explicitly calculate no direct payment
The more substitutes that exist for a particular product, the __________ the price elasticity of demand.
greater
what does share of income mean? how does it effect price elasticity?
how much of my wallet do I have to give up? cars, houses --> elastic gum, candy --> inelastic (if price change, not a big deal will still buy)
One determinant of price elasticity of supply is
how rapidly costs increase when a firm increases its output.
The disappearance of the family farm can be partially attributed to the fact that the elasticity of demand for wheat is __________, while at the same time, the income elasticity for wheat is __________.
inelastic, low
The income elasticity for peanut butter is -3. This defines peanut butter as what type of good?
inferior good
Along a linear demand curve, the slope __________ while the price elasticity of demand __________.
is constant, changes from one point to another
supply elasticity: how costly is it to produce more output units when more inputs are needed?
low increase in costs to increase production = elastic supply high increase in costs to increase production = inelastic supply
what is perfectly inelastic mean? what does the graph look like?
no matter what happens to price, you will always buy the same amount of good example: life saving drugs, surgery vertical slope
Economists avoid confusion over units in the computation of elasticity by using:
percentage changes
Which of the following goods is probably the most highly income elastic?
private education
Behavioral Economics
psychological, social, emotional factors of decisions.
A numerical limit on the quantity of a good that can be imported is a:
quota
if price elasticity of demand is elastic... revenue can be increased by
selling more units at a lower price
for a linear demand function
slope is constant, but Ed changes
When the elasticity of demand for a product is __________ the elasticity of supply, consumers pay __________ of the tax on the product.
smaller than, the majority
consumer surplus
the amount a buyer is willing to pay for a good and the actual amount the buyer actually pays for it
producer surplus
the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives
tax incidence
the division of the burden of a tax between buyers and sellers
short run
the period of time during which at least one of a firm's inputs is fixed
dead weight loss
the reduction in economic surplus resulting from a market not being in competitive equilibrium
economic surplus
the sum of consumer surplus and producer surplus
Endowment Effect
the tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it
long run
the time period in which all inputs can be variable
Inelastic goods examples
toothpicks, insulin, salt, alcohol, tobacco
An agreement negotiated between two countries that places a numerical limit on the quantity of a good that can be imported by one country from another country is known as a(n):
voluntary export restraint
In order to maximize utility what two conditions must be met?
would be the number of units of utility that a consumer gains from consuming a given quantity of a good, service, or activity during a particular time period. The higher a consumer's total utility, the greater that consumer's level of satisfaction.
what is perfectly elastic mean? what does the graph look like?
you will only buy this good at one price, any increase in price means you will buy none of this good example: $10 bill horizontal; slope = 0
