Econ 2020 exam 2
You are offered a free ticket to see the Chicago Cubs play the Chicago White Sox at Wrigley Field. Assume the ticket has no resale value. Willie Nelson is performing on the same night, and his concert is your next-best alternative activity. Tickets to see Willie Nelson cost $40. On any given day, you would be willing to pay up to $50 to see and hear Willie Nelson perform. Assume there are no other costs of seeing either event. Based on this information, at a minimum, how much would you have to value seeing the Cubs play the White Sox to accept the ticket and go to the game?
$10
If the price elasticity of demand for a good is 0.4, then a 10 percent increase in price results in a
4 percent decrease in the quantity demanded.
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.
What is the relationship between the demand curve and the willingness to pay?
Because the demand curve shows the maximum amount buyers are willing to pay for a given market quantity, the price given by the demand curve represents the willingness to pay of the marginal buyer.
What is the relationship between the cost to sellers and the supply curve?
Because the supply curve shows the minimum amount sellers are willing to accept for a given quantity, the supply curve represents the cost of the marginal seller.
Suppose that Bill wants to dine at a fancy restaurant, but the only available table is in the smoking section. Bill dislikes the smell of cigarette smoke. He notices that only one person, Peter, is smoking in the smoking section. Bill values the absence of smoke at $15. Peter values the ability to smoke in the restaurant at $5. Which of the following represents an efficient solution in the absence of transaction costs?
Bill offers Peter between $5 and $15 not to smoke. Peter accepts, and both parties are better off.
Consider the following pairs of goods. For which of the two goods would you expect the demand to be more price elastic? Why? Food in general or Breakfast cereal
Breakfast cereal has more substitutes than does food in general. Therefore, breakfast cereal has the more elastic demand.
What is consumer surplus, and how is it measured?
Consumer surplus measures the benefit to buyers of participating in a market. It is measured as the amount a buyer is willing to pay for a good minus the amount a buyer actually pays for it. For an individual purchase, consumer surplus is the difference between the willingness to pay, as shown on the demand curve, and the market price. For the market, total consumer surplus is the area under the demand curve and above the price, from the origin to the quantity purchased.
Consider the following pairs of goods. For which of the two goods would you expect the demand to be more price elastic? Why? Water or diamonds
Diamonds are luxuries, and water is a necessity. Therefore, diamonds have the more elastic demand.
Consider the following pairs of goods. For which of the two goods would you expect the demand to be more price elastic? Why? Insulin or nasal decongestant spray
Insulin has no close substitutes, but decongestant spray does. Therefore, nasal decongestant spray has the more elastic demand.
What is producer surplus, and how is it measured?
Producer surplus measures the benefit to sellers of participating in a market. It is measured as the amount a seller is paid minus the cost of production. For an individual sale, producer surplus is measured as the difference between the market price and the cost of production, as shown on the supply curve. For the market, total producer surplus is measured as the area above the supply curve and below the market price, between the origin and the quantity sold.
Dusty Rags, Inc. provides janitorial services to retail stores. Dusty had been charging $10 per hour and selling 400 hours of service per week at that rate. When he raised his price to $15 per hour, his customers cut back to 300 weekly hours of service. Which of the following is true?
Revenue went from $4,000 per week to $4,500 per week, indicating that the demand for his services must be inelastic.
In what way does the demand curve represent the benefit consumers receive from participating in a market? In addition to the demand curve, what else must be considered to determine consumer surplus?
Since the demand curve represents the maximum price the marginal buyer is willing to pay for a good, it must also represent the maximum benefit the buyer expects to receive from consuming the good. Consumer surplus must take into account the amount the buyer actually pays for the good, with consumer surplus measured as the difference between what the buyer is willing to pay and what he/she actually paid. Consumer surplus, then, measures the benefit the buyer didn't have to "pay for."
John lives in an apartment building and gets a benefit from playing his stereo. Mary, who lives next door to John and often loses sleep due to the loud music coming from John's stereo, bears a cost from the noise. Mary is threatening to call the police to force John to turn down his stereo. Under which of the following conditions would John be able to offer Mary some amount of money to keep her from calling the police and to allow him to continue to play his stereo loudly?
The benefit of the music to John must exceed the cost of the noise to Mary.
Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the railroad is not liable for any damage caused to the crops. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome?
The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.
Consider the following pairs of goods. For which of the two goods would you expect the demand to be more price elastic? Why? Gasoline over the course of a week or gasoline over the course of a year
The longer the time period, the more elastic demand is. Therefore, gasoline over the course of a year has the more elastic demand.
For a particular good, a 3 percent increase in price causes a 10 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?
There are many close substitutes for this good.
Consider the following pairs of goods. For which of the two goods would you expect the demand to be more price elastic? Why? Personal computers or IBM personal computers
There are more substitutes for IBM personal computers than there are for personal computers. Therefore, IBM personal computers have the more elastic demand.
Other things equal, what happens to consumer surplus if the price of a good falls? Why? Illustrate using a demand curve.
When the price of a good falls, consumer surplus increases for two reasons. First, those buyers who were already buying the good receive an increase in consumer surplus because they are paying less (area B). Second, some new buyers enter the market because the price of the good is now lower than their willingness to pay (area C); hence, there is additional consumer surplus generated from their purchases. The graph should show that as price falls from P2 to P1, consumer surplus increases from area A to area A+B+C.
Other things equal, what happens to producer surplus when the price of a good rises? Illustrate your answer on a supply curve.
When the price of a good rises, producer surplus increases for two reasons. First, those sellers who were already selling the good have an increase in producer surplus because the price they receive is higher (area A). Second, new sellers will enter the market because the price of the good is now higher than their willingness to sell (area B); hence, there is additional producer surplus generated from their sales. The graph should show that as price rises from P1 to P2, producer surplus increases from area C to area A+B+C
Which of the following statements is not correct?
Without government intervention, the market will tend to undersupply products that produce negative externalities.
If price elasticity of demand is -0.5
a 1% decrease in price leads to a 0.5% increase in quantity demanded
The term market failure refers to
a market that fails to allocate resources efficiently
Suppose that the equilibrium price in the market for widgets is $5. If a law reduced the maximum legal price for widgets to $4,
any possible increase in consumer surplus would be smaller than the loss of producer surplus
Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price for widgets to $6
any possible increase in producer surplus would be smaller than the loss of consumer surplus.
You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles, yours would
be positive, and your roommate's would be negative.
Suppose the demand for macaroni is inelastic, the supply of macaroni is elastic, the demand for cigarettes is inelastic, and the supply of cigarettes is elastic. If a tax were levied on the sellers of both of these commodities, we would expect that the burden of
both taxes would fall more heavily on the buyers than on the sellers.
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.
If the government removes a binding price floor from a market, then the price paid by buyers will
decrease and the quantity sold in the market will increase.
If the government removes a binding price floor from a market, then the price received by sellers will
decrease, and the quantity sold in the market will increase.
A drought in California destroys many red grapes. As a result of the drought, the consumer surplus in the market for red grapes
decreases, and the consumer surplus in the market for red wine decreases.
The mayor of Workerville proposes a local payroll tax to fund a new water park for the city. The mayor proposes to collect half the tax from workers and half the tax from firms. The mayor will be able to successfully divide the burden of the tax equally if the
demand for labor and supply of labor are equally elastic.
Suppose that a tax is placed on books. If the buyers pay the majority of the tax, then we know that the
demand is more inelastic than the supply.
Market failure can be caused by
externalities
If the world price of textiles is higher than Vietnam's domestic price of textiles without trade, then Vietnam
has a comparative advantage in textiles.
Wheat farmers in Kansas would benefit from a devastating crop failure in North Dakota (another major wheat-producing state) if the U.S. demand for wheat is
inelastic
An externality is an example of
market failure
In a market economy, government intervention
may improve market outcomes in the presence of externalities.
Last year, Joan bought 50 pounds of hamburger when her household's income was $40,000. This year, her household income was only $30,000 and Joan bought 60 pounds of hamburger. All else constant, Joan's income elasticity of demand for hamburger is
negative, so Joan considers hamburger to be an inferior good.
When externalities exist, buyers and sellers
neglect the external effects of their actions, and the market equilibrium is not efficient.
In a competitive market free of government regulation,
price adjusts until quantity demanded equals quantity supplied
Demand is said to be unit elastic if
quantity demanded changes by the same percent as the price.
When the nation of Duxembourg allows trade and becomes an importer of software
residents of Duxembourg who produce software become worse off; residents of Duxembourg who buy software become better off; and the economic well-being of Duxembourg rises.
Suppose that in a particular market, the demand curve is highly elastic, and the supply curve is highly inelastic. If a tax is imposed in this market, then the
sellers will bear a greater burden of the tax than the buyers
Assume, for the U.S., that the domestic price of beef without international trade is lower than the world price of beef. This suggests that, in the production of beef,
the U.S. has a comparative advantage over other countries and the U.S. will export beef.
Suppose that when the price of good X falls from $10 to $8, the quantity demanded of good Y rises from 20 units to 25 units. Using the midpoint method,
the cross-price elasticity of demand is -1.0, and X and Y are complements.
When a country allows trade and becomes an exporter of a good,
the gains of the domestic producers of the good exceed the losses of the domestic consumers of the good
Demand is said to be inelastic if
the quantity demanded changes only slightly when the price of the good changes.
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 a binding price ceiling is imposed on the computer market, then
the quantity of computers demanded will increase, the quantity of computers supplied will decrease, and a shortage of computers will develop
If the demand for swordfish is price elastic and the price of swordfish increases, then
the total revenue from swordfish sales will decrease
If, for two goods, the cross-price elasticity of demand is 1.25, then
the two goods are substitutes
In the absence of externalities, the "invisible hand" leads a market to maximize
total benefit to society from that market
Jean-Paul says that he will spend exactly 75 cents a day on M&Ms, regardless of the price of M&Ms. Jean- Paul's demand for M&Ms is
unit elastic.
