econ 2020 exam 2
Equilibrium with tax =
$T per unit Buyers pay = Pb Sellers receive = Ps Quantity = Qt
revenue from tax =
$T x Qt
cross-price elasticity of demand =
% change in Qd for good 1 / % change in price of good 2
income elasticity of demand =
% change in quantity demanded / % change in income
price elasticity of demand =
% change in quantity demanded / % change in price
price elasticity of supply =
% change in quantity supplied / % change in price
allocation of resources
-how much of each good is produced -which producers produce it -which consumers consume it
two reasons for the fall in CS
1. buyers leaving market 2. remaining buyers paying higher P
rationing mechanisms
1. long lines 2. discrimination according to seller's biases
two reasons for the fall in PS
1. sellers leaving market 2. remaining sellers getting lower P
For the typical worker, the marginal rate tax is about ____%
40
Consider the market for theater tickets. Theater tickets and TV tickets (tickets to a live screening of a TV show) are substitutes. When the price of TV tickets (tickets to a live screening of a TV show) decreases, what happens to producer surplus in the market for theater tickets? A. Producer surplus decreases. B. Producer surplus increases. C. Producer surplus will not change, only consumer surplus changes. D. Not enough information to answer this question.
A
If the price of sheet metal (an input for washing machines) decreases, what happens to consumer surplus in the market for washing machines? a. Consumer surplus increases. b. Consumer surplus decreases. c. Consumer surplus will not change, only producer surplus changes. d.Not enough information to answer this question.
A
price ceiling
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
Price Quantity $0 1,000 3 800 6 600 9 400 12 200 15 0 Using the midpoint method, demand between $0 and $3 is A. elastic B. inelastic C. unit elastic D. perfectly inelastic E. perfectly elastic
B
Price, QD, QS $12.00 0 36 $10.00 3 30 $8.00 6 24 $6.00 9 18 $4.00 12 12 $2.00 15 6 $0.00 18 0 At a price of $2.00, total surplus is a. Larger than it would be at the equilibrium price. b. Smaller than it would be at the equilibrium price. c. The same as it would be at the equilibrium price. d. There is not enough information to make this determination.
B
Good A, B Price Elasticity of Demand 0.5, 1.9 Which of the following is consistent with the elasticities given in the above table? A. A has more substitutes than B B. A is a good after an increase in income and B is that same good after a decrease in income C. A is a luxury B is a necessity D. A is a good immediately after a price increase and B is that same good 3 years after the price increase
D
Price, QD, QS $12.00 0 36 $10.00 3 30 $8.00 6 24 $6.00 9 18 $4.00 12 12 $2.00 15 6 $0.00 18 0 Both the demand curve and the supply curve are straight lines. At equilibrium, consumer surplus is a. $24 b.$36 c.$42 d.$48 e. None of the above.
D
the more elastic supply is the easier it is for firms to leave the market when the tax reduces Ps, the greater Q falls below the surplus maximizing quantity
DWL is greater when
supply is inelastic (harder for firms to leave the market when tax reduces Ps) so the tax only reduces Q a little
DWL is small when
Efficiency means
Goods are consumed by buyers who value them most highly. Goods are produced by producers with lowest costs. Raising or lowering quantity of good would not increase total surplus.
normal goods
Goods for which demand goes up when income is higher and for which demand goes down when income is lower.
inferior goods
Goods for which demand tends to fall when income rises.
Laissez-faire
Idea that government should play as small a role as possible in economic affairs french for "allow them to do"
Producer Surplus (PS) =
P-Cost
Demand is perfectly elastic when
Price elasticity of demand = infinity Demand curve is horizontal
total revenue
Price x Quantity
the laffer curve shows the relationship between
Size of the Tax and Tax Revenue
demand is unit elastic
TR remains constant when P changes
Total revenue when demand is inelastic.
There is a direct relationship between price and total revenue when demand is inelastic.
total revenue when demand is elastic
There is an inverse relationship between price and total revenue when demand is elastic.
market failures occur when
a buyer or seller has market power—the ability to affect the market price transactions have side effects, called externalities, that affect bystanders
Supply is elastic when
a change in price leads to a relatively larger change in quantity supplied
income elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in consumers' income
price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good
cross-price elasticity of demand
a measure of how much the quantity demanded of one good responds to a change in the price of another good
price elasticity of supply
a measure of how much the quantity supplied of a good responds to a change in the price of that good
Elasticity
a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
supply is inelastic when
a small increase in price causes little change in supply
linear demand curve
a straight-line curve; such as a demand curve has a constant slope but usually has a varying price elasticity
the CS is the
area under the D curve above the price, from 0 to Q
Kate's Hot Yoga Studio provides hot yoga classes. They had been charging $10 per class and selling 400 classes per month at that price. When they raised their price to $15 per class, their customers cut back to 300 classes per month. Which of the following is true? a. Revenue went from $4,000 per month to $4,500 per month, indicating that the demand for their good must be elastic. b. Revenue went from $400 per month to $300 per month, indicating that demand for their good must be elastic. c. Revenue went from $4,000 per month to $4,500 per month indicating that the demand for their good must be inelastic. d. Revenue went from $400 per month to $300 per month indicating that demand for their good must be inelastic. e. Revenue went from $10 to $15 per month, indicating that demand for their good must be inelastic.
c
government can or cannot raise total surplus by changing the market's allocation of resources
cannot
the fall in total surplus is called the
deadweight loss (DWL) of the tax
a tax
drives a wedge between price buyers pay and the price sellers receive raises the price buyers pay and lowers the price sellers receive reduces the quantity bought and sold
Jack and Rebecca have different preferences when it comes to consuming lemonade and iced tea. Jack likes to consume either lemonade or iced tea (separately). Rebecca likes to consume lemonade and iced tea together (otherwise known as, an "Arnold Palmer"). Which of the following is true? a. Lemonade and iced tea are complements for Jack, meaning they have a positive cross-price elasticity of demand. b. Lemonade and iced tea are complements for Rebecca, meaning they have a positive cross-price elasticity of demand. c. Lemonade and iced tea are substitutes for Jack, meaning they have a negative cross-price elasticity of demand. d. Lemonade and iced tea are substitutes for Rebecca, meaning they have a negative cross-price elasticity of demand. e. Lemonade and iced tea are substitutes for Jack, meaning they have a positive cross-price elasticity of demand.
e
Toby and Randall each eat 4 packages of rice a week. Their income has tripled in the past month. Toby now buys 6 packages of rice a week while Randall now buys 2 packages of rice a week. Which of the following is true? a. Rice is an inferior good for Toby, meaning it has a negative income elasticity of demand. b. Rice is an inferior good for Randall, meaning it has a positive income elasticity of demand. c. Rice is a normal good for Toby, meaning it has a negative income elasticity of demand. d. Rice is a normal good for Randall, meaning it has a positive income elasticity of demand. e. None of the above statements are true.
e
linear demand curve- price rises and quantity drops
elastic demand
luxuries
elastic demand
Demand is elastic when
elasticity is greater than 1
demand is inelastic when
elasticity is less than 1
cost is the value of
everything a seller must give up to produce a good
When the tax is larger, increasing it causes tax revenue to _____
fall
Prices are signals that
guide the allocation of society's resources, which is altered by policymakers restrictive prices
higher elasticities imply
higher DWL's
the price elasticities of demand and supply measure
how much buyers and sellers respond to price changes
Welfare economics is the study of
how the allocation of resources affects economic well-being
the incidence of tax
how the burden of a tax is shared among market participants
Demand is more elastic
in the long run
linear demand curve- price drops and quantity rises
inelastic demand
necessities
inelastic demand
Any Q height of D curve
is the WTP of marginal buyer
a tax has a DWL because
it causes consumers to buy less and producers to sell less, thus shrinking the market below the level that maximizes total surplus
When demand is inelastic
it's harder for consumers to leave the market when the tax raises PB so, the tax only reduces Q a little and DWL is small.
Goods with no close substitutes
less elastic demand
Goods with close substitutes
more elastic demand
Narrowly defined markets
more elastic demand
Doubling the tax causes the DWL to
more than double
discrimination according to seller's biases are
often unfair and inefficient
demand is elastic then P and TR
opposite directions
Markets are usually a good way to
organize economic activity
Equilibrium with no tax
price = Pe quantity = Qe
Demand is perfectly inelastic when
price elasticity of demand = 0 demand curve is a vertical line
Demand has unit elasticity when
price elasticity of demand = 1
supply is perfectly inelastic when
price elasticity of supply = 0 supply curve is vertical
supply is unit elastic when
price elasticity of supply = 1
supply is perfectly elastic when
price elasticity of supply = infinity supply curve is horizontal
the demand for a good is inelastic when
quantity demanded responds only slightly to changes in price
The demand for a good is elastic when
quantity demanded responds substantially to changes in price
When the tax is small, increasing it causes tax revenue to _____.
rise
an increase in the size of a tax causes revenue to
rise at first, but eventually revenue falls b/c the tax reduces the size of the market
demand is inelastic then P and TR
same direction
with a shortage
sellers must ration the goods among buyers
if labor supply is inelastic then DWL is
small
Consumer Surplus (CS) =
the amount a buyer is willing to pay for a good - the amount the buyer actually pays for it
which buyers consume the good?
the buyers who value the good most highly are the ones who consume it
more elastic demand
the easier for buyers to leave the market when the tax increases PB, the more Q falls below the surplus maximizing quantity and the greater the DWL
Deadweight Loss (DWL)
the fall in total surplus that results from a market distortion, such as a tax
taxes
the government can make buyers or sellers pay a specific amount on each unit
The flatter the demand curve
the greater the price elasticity of demand
Does Equilibrium Maximize Total Surplus?
the market equilibrium quantity maximizes total surplus at any other quantity, can increase total surplus by moving toward the market equilibrium quantity
Willingness to Pay (WTP)
the maximum amount that a buyer will pay for a good
A seller will produce and sell the good/service only if
the price exceeds his/her cost. so cost is a measure of willingness to sell
which sellers produce the good?
the sellers with the lowest cost produce the good
Which goods or services should govt tax to raise the revenue it needs?
those with the smallest DWL
complements
two goods for which an increase in the price of one leads to a decrease in the demand for the other negative cross-price elasticity
Substitiutes
two goods for which an increase in the price of one leads to an increase in the demand for the other positive cross-price elasticity
A tax on sellers shifts the S curve
up by the amount of the tax
total surplus =
value to buyers - cost to sellers
