ECON 2 prep
Refer to the graph shown. Assume that the market is initially in equilibrium at a price of $6 and a quantity of 40 units. If the government imposes a $2 per-unit tax on this product, it will collect tax revenue in the amount of:
$60. Tax revenue is $2 × 30, since the tax causes equilibrium quantity to fall from 40 to 30.
Refer to the following table to answer the question. Demand is most elastic between:
$8 and $10. Elasticity rises as price rises along a straight-line demand curve. The highest price range is the most likely candidate. Doing the calculations, we find that elasticity between $8 and $10 is 1.5 and is less than 1 (inelastic) in all the other ranges.
Refer to the graph shown. Calculate the approximate elasticity of demand for the line segment BD:
0.5. ED Formula=((Q1-Q0)/(Q1+Q0))*((P1+P0)/(P1-PO)) Elasticity is [(9 - 3)/(12)]/[(0+12)/(0-12)] = -0.5. We state elasticity of demand as positive.
If average movie attendance is 250 million when prices are $7 a ticket and 200 million when prices are $9 a ticket, the elasticity of demand for movie tickets is about:
0.9. Elasticity = [(Q1-Q0)/(Q1+Q0)]/[(P1+P0)/(P1-PO)] [(250 - 200)/(450)]/[(7+9)/(7-9)] = 0.9. We state elasticity of demand as positive.
Refer to the graph shown. If consumers had to pay $7.50 per unit for this product instead of $5.00 per unit (because of a price floor or a shift in supply), consumer surplus would fall from:
1,000 to 250. At $5, consumer surplus is 1,000. At $7.50, consumer surplus is [10 - 7.5] × 200 × (1/2).
Refer to the graph shown. When the market is in equilibrium, consumer surplus is equal to:
1,000. Consumer surplus is [10 - 5] × 400 × (1/2).
Refer to the graph shown. If consumers had to pay $13 per unit for this product instead of $10 per unit, consumer surplus would fall from:
1,125 to 405. At $10, consumer surplus is 1,125. At $13, consumer surplus is [17.5 - 13] × 180 × (1/2).
Refer to the graph shown. Assume that the market is initially in equilibrium at a price of $6 and a quantity of 40 units. If the government imposes a $2 per-unit tax on this product, the deadweight loss from the tax will be:
10. Total lost surplus is 70, but 60 of this becomes tax revenue. We assume that the tax revenue produces enough welfare to replace the 60 units of lost surplus. The area of the welfare loss triangle is 10.
Refer to the graph shown. If price is increased from $3 to $4, consumer surplus will fall by:
125. When the price is $3, CS=.5(150)*(Y-3) The price intercept (Y), is not given so we don't know exactly what CS is when the price is $3. However, we know that it will be reduced if the price goes up to $4. The reduction equals the rectangle and the triangle between the $4 and $3 price lines: CS REDUCTION= [(L*W)] + [(.5*BASE*HEIGHT)] =[(4-3)*(100)] + [(.5)*(150-100)*(4-3)] =100+25 =125
The short-run elasticity of demand for gasoline sold at gasoline stations is 0.20. If terrorism causes the supply of gasoline to fall, resulting in a 5 percent drop in quantity, if other things remain the same, the price per gallon will increase by:
25 Percent. Price elasticity of demand = % change in quantity/% change in price, implying that 0.2 = 5%/x. Solving for the percentage change in price, or x, yields the prediction of a 25 percent change in price.
Joe is maximizing utility by consuming three colas at $2 apiece and four hot dogs at $3 apiece. The last cola gave him 200 units of utility. How many units of utility did the last hot dog give him?
300. Joe is maximizing utility when MU/P of hot dogs = MU/P of colas. Solve the following for X to find marginal utility of the last hot dog for Joe: X/3 = 200/2, X = 3 * (200/2) = 300.
If the price elasticity of supply is 0.5, a 10 percent increase in price will cause a:
5 percent increase in quantity supplied. According to the law of supply, an increase in price causes an increase in quantity supplied. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price (0.5 = 5%/10%).
The following table lists the utility that Steve receives from consuming oranges at $0.50 apiece. What is the marginal utility of increasing consumption from two to three oranges?
6. Marginal utility is the additional utility of consuming each product. For the third orange, that is 15 - 9 = 6.
Refer to the following table. Fill in the table and answer the following question. What is the marginal utility of the fourth can of soda?
8 units of utility. The marginal utility is the change in total utility. From three to four cans, this is 44 - 36 = 8.
The following table describes utility for consuming cans of soda. At what point does the law of diminishing marginal utility set in?
Between three and four cans. Diminishing marginal utility sets in where total utility rises at a decreasing rate (where marginal utility falls). Marginal utility is 16 for the second can, 17 for the third can, and 10 for the fourth can.
If the price of corn goes up by $1 a bushel and the quantity supplied rises by 100 bushels, the price elasticity of supply has to be 100.
FALSE. Elasticity is the percentage change in quantity divided by the percentage change in price. You cannot calculate elasticity with the information given in the question because it is not given in percentage changes. We need to know the prices and quantities at which the above changes occur to calculate percentages.
Joan is deciding where to spend her spring break. If she goes to Cancún, Mexico, the trip will give her 9,000 units of utility and will cost her $300. If she travels to Florida instead, the trip will give her 8,000 units of utility and will cost her only $200. Joan will do best going to:
Florida because her pleasure per dollar will be greater. Individuals choose the good that has the highest marginal utility per dollar.
Refer to the graph shown. Assume the market is initially in equilibrium at point b in the graph but the imposition of a per-unit tax on this product shifts the supply curve up from S0 to S1. The effect of the tax is to raise equilibrium price from:
P1 to P2. The initial equilibrium is at point b. After the tax, equilibrium is at point c.
Refer to the graph shown. Assume the market is initially in equilibrium at point b in the graph but the imposition of a per-unit tax on this product shifts the supply curve up from S0 to S1. The lost producer surplus of this tax is equal to the area:
P1(P2 - t)ab. After the tax, sellers will actually keep P2 - t per unit, so from the sellers' perspective, it is as if equilibrium changed from point b to point a.
Refer to the graph shown. Assume the market is initially in equilibrium at point b in the graph but the imposition of a per-unit tax on this product shifts the supply curve up from S0 to S1. The lost consumer surplus of this tax is equal to the area:
P2P1bc. After the tax, equilibrium is at point c, resulting in this lost consumer surplus.
As long as total utility is increasing, we know that marginal utility is:
POSITIVE. Total utility is the sum of marginal utilities. If total utility is increasing, marginal utility must be positive. The fact that total utility is increasing does not tell us whether marginal utility is increasing or decreasing.
Kraft Foods Inc.'s Folgers and Maxwell House coffees tend to be much more price-elastic than Starbucks' coffees. This information about elasticities is telling us that:
Starbucks' customers are not as responsive to price changes as are the customers of the Kraft brands
If the price of a good goes up by 20 percent and the quantity demanded falls by 40 percent, the price elasticity of demand is 2.
TRUE. Elasticity of demand = % change in quantity/% change in price = 40/20 = 2. We conventionally give elasticity of demand as a positive number, which is why we used the absolute values of the numerator and denominator in the above equation (we have taken 40 percent instead of -40 percent).
Refer to the graph shown. Assume the market is initially in equilibrium at point b in the graph but the imposition of a per-unit tax on this product shifts the supply curve up from S0 to S1. The welfare loss triangle from this tax is represented by area:
abc. Area abc is the welfare loss triangle, as defined in the text.
Refer to the graph shown. Assume the market is initially in equilibrium at point b in the graph but the imposition of a per-unit tax on this product shifts the supply curve up from S0 to S1. The amount of revenue government will collect from this tax is equal to the:
amount of the per-unit tax multiplied by Q2. The tax reduces quantity to Q2.
When marginal utility is zero, total utility is:
at its maximum. Total utility is the sum of marginal utilities. Since marginal utility is negative to the right of where it crosses the x-axis (zero), total utility is at its maximum.
A Big Mac meal costs $3.00 and gives you an additional 5 units of utility; a meal at the Four Seasons Hotel costs $27.00 and gives you an additional 45 units of utility. Based only on the information you have, using the theory of rational choice, you most likely would:
be indifferent between eating the Big Mac and eating at the Four Seasons Hotel.
According to Thorstein Veblen, a successful businessman would be most likely to demonstrate his worth to others by:
buying expensive jewels for his trophy wife and showing her off at parties. Veblen developed the concept of "conspicuous consumption," believing that the rich are very concerned with showing off their wealth to prove their success. One famous example is a busy businessman using his wife to show off his wealth.
Suppose that a haircut will give Dawn 2,000 units of utility and cost her $40, whereas a set of acrylic nails costs $25 and yields 1,000 units of utility. Most likely Dawn should:
choose the haircut because she will receive 50 units of utility per dollar compared with 40 units of utility per dollar for the nails. Individuals choose that good that has the highest marginal utility per dollar. The haircut provides 50 units of utility per dollar, and the nails provide 40 units of utility per dollar.
The price of a McDonald's dinner is $5; the price of a Burger King dinner is $5. The marginal utility you would get from the next McDonald's dinner is 15; the marginal utility you would get from the next Burger King dinner is 20. You should:
consume more Burger King dinners. Since MU/P of a McDonald's dinner = 3 is smaller than MU/P of a Burger King dinner = 4, according to the principle of rational choice, one should choose to consume more Burger King dinners.
If price is increased by law from a market equilibrium value of $5 to a higher value of $6:
consumer surplus will decrease and there will be some lost surplus. Consumer surplus falls as a result of the higher price. The lost surplus is the result of fewer units bought and sold.
The distance between the demand curve and the price the consumer has to pay for a product (given quantity demanded) is referred to as:
consumer surplus. The demand curve shows how much an individual would be willing to pay. If the consumer pays less than that, it represents a net gain. Economists call this gain consumer surplus.
Refer to the following table. At this level of consumption of goods A and B, the consumer:
could increase total satisfaction for a given expenditure by increasing the consumption of B and decreasing that of A. Since MU/P of good A < MU/P of good B, the consumer should consume more of B and less of A.
When government imposes a per-unit tax on a product, the net price producers actually receive for the product (after all taxes) typically:
decreases by less than the amount of the per-unit tax. As long as demand is downward-sloping and supply is upward-sloping, the price producers keep after paying the tax decreases by less than the amount of the per-unit tax. As long as demand is not perfectly inelastic, consumers will bear part of the per unit tax.
If a $100 drop in the price of a $10,000 car resulted in an increase in the quantity of cars purchased from 100 to 110 and a $100 drop in the price of a $1,000 vacation rental resulted in an increase in the quantity of weekly vacation homes rented from 100 to 110, the price elasticity of demand is:
greater for the car. The percentage rise in quantity was the same for both, but the percentage fall in price was greater for the vacation rental. Therefore, its elasticity of demand is smaller than that of the car.
In choosing between two products, a rational consumer will choose the product that gives her the:
lowest cost per additional unit of utility. The principle of rational choice states that individuals will select the good for which marginal utility per dollar is greatest or the cost of an additional unit of utility is smallest.
Refer to the graph shown. Between points B and D, marginal utility is:
positive, and so total utility is increasing. The fact that marginal utility is positive tells us that total utility is increasing.
A price elasticity of demand for a good or service of 1.8 tells us that:
quantity demanded falls by 1.8 percent when price rises by 1 percent. Price elasticity tells us the percentage change in quantity in response to a percentage change in price.
A per-unit tax on coffee paid by the seller causes the:
supply of coffee curve to shift upward by the amount of the per-unit tax. Sellers will attempt to raise prices as a result of the tax, and so the supply curve shifts upward. The demand curve would shift if the tax were paid by the consumer.
If the amount of land supplied remains the same even when the price of land increases, the:
supply of land must be perfectly inelastic. The supply is perfectly inelastic when quantity supplied remains unchanged after a change in price.
The slower the marginal utility declines as more of a good is consumed:
the greater the elasticity of demand. The law of demand is explained by the fact that when price of a good declines, MU/P for that good increases, and consumers who have been in equilibrium between a combination of the good and its alternative must readjust their consumption so that that MU/P returns to equilibrium. To do so, a consumer must increase her consumption so that MU falls. If MU declines slowly, a large increase in consumption is necessary to make MU fall by a sufficient amount to get the same ratio as before, given the decrease in price.
According to the law of diminishing marginal utility, after some point:
the more we consume of something, the less each additional unit adds to our satisfaction. The principle of diminishing marginal utility states that as you consume more of a good, after some point, you enjoy the additional units less than you did the previous units.
The faster marginal utility declines:
the smaller the elasticity of demand.
Excise taxes cause deadweight loss because:
they change people's behavior.
If the marginal utilities are constant for travel and food and the marginal utility per dollar of travel is 50 and the marginal utility per dollar of food is 30:
we can gain 20 units of utility net by spending one less dollar on food and one more dollar on travel. By spending one less dollar on food, one gives up 30 units of utility but gains 50 units of utility by spending that dollar on travel. The net gain is 20 units of utility.
