Econ test #2
Last year, Shelley bought 6 pairs of designer jeans when her income with 40,000. This year, her income is $50,000, and she purchased 10 pairs of designer jeans. Holding other factors constant, it followers that Shelley
Considers designer jeans to be a normal good
All else equal, what happens to consumer surplus if the price of a good increases?
Consumer surplus decreases
When a tax is placed on the buyers of tennis racquets, the size of the tennis racquet market
Decreases, but the price paid by the buyer increases
inelastic
Describes demand that is not very sensitive to a change in price
Denise values a stainless steel dishwasher for her new house at $500. The actual price of the dishwasher is $650. Denise
Does not buy the dishwasher, and on her purchase she experiences a consumer surplus of $0
When a tax is imposed on the buyers of a good, the demand curve shifts
Downward by the amount of the tax
Suppose the cross-price elasticity of demand between hot dogs and mustard is -2.00. This implies that a 20 percent increase in the price of hot dogs will cause the quantity of mustard purchased to
Fall by 40 percent
In general, elasticity is a mesure of
How much buyers and sellers respond to changes
If an increase in income results in a decrease in the quantity demanded of a good, then for that good, the
Income elasticity of demand is negative
if the price elasticity of supply is 1.2, and price increased by 5% quantity supplied would
Increase by 6%
An increase in price from $20 to $30 would
Increase total revenue by 1,000
If the demand for donuts is elastic than a decrease in the price of donuts will
Increase total revenue of donut sellers
Over time, housing shortages caused by rent control
Increases, because the demand for, and supply of, housing are MORE elastic in the long run
An increase in price causes an increase in total revenue when demand is
Inelastic
A result of welfare economics is that the equilibrium price of a product is considered to be the best price because it
Maximizes both the total revenue for firms and the quantity supplied of the product
When a tax is placed on the sellers on of a product, buyers pay
More, and sellers receive less than they did before the tax
Suppose a tax is imposed on the buyers of a good or service The burden of the tax will fall
On both the buyers and the sellers
if 2 goods are substitutes, their cross-price elasticity will be
Positive
Suppose goods A and B are substitutes for each other. We would expect the cross- price elasticity between these two goods to be
Postive
when government imposes a price ceiling or a price floor
Price no longer serves as a rationing device
total revenue
Price x Quantity
A tax imposed on the sellers of a good will
Raise the price paid by buyers and lower the equilibrium quanity
If a binding price ceiling is imposed on the baby formula market, then
Shortage
discrimination
When other factors influence who gets the house its called
If you tax buyers
demand is effected
Suppose that when the price of corn is $2 per bushel, farmers can sell 10 million bushels. When the price of corn is $3 per bushel, farmers can sell 8 million bushels. Which of the following statements is true?
The demand for corn is price inelastic, and so an increase in the price of corn will increase the total revenue of corn farmers.
If a change in the price of a good results in no change in total revenue then
The demand for the good must be elastic
Price Floor in the Labour Market
minimum wage
Good with many close substitutes tend to have
more elastic demands
In the case of perfectly inelastic demand
quantity demanded stays the same whenever price changes.
price goes up
quantity goes down
If corn farmers know that the demand for corn is inelastic, and they want to increase their total revenue, they should all
reduce the number of acres they plant in corn.
When a tax is levied on a good, the buyers and sellers of the good share the burden,
regardless of how the tax is levied.
total revenue
remains uncharged as price increases when demand is unit elastic
a ceiling is a
shortage
If you tax sellers
supply is effected
If a supply curve is horizontal then
supply is said to be perfectly elastic and the price elasticity of supply approaches infinity.
tax sellers
supply moves up by the amount of tax
a floor is a
surplus
What is consumer surplus?
the monetary difference between what a consumer is willing to pay for the good and price paid
it would be best for society if
the person who values the thing the most gets it
Income elasticity of demand measures how
the quanity demanded charges as consumer income changes
the price elasticity of supply measures how much
the quanity supplied responds to changes in the price of the good
At a minimum wage that exceeds the equilibrium wage
the quantity SUPPLIED of labor will exceed the quantity demanded
Which of the following is not a determinant of the price elasticity of demand for a good?
the steepness or flatness of the supply curve for the good
Efficiency in a market is achieved when
the sum of producer surplus and consumer surplus is maximized.
If a price ceiling is not binding, then
there will be no effect on the market price or quantity sold.
To measure the gains and losses from a tax on a good, economists use the tools of
welfare economics.
Willingness to Pay (WTP)
when its less than your surplus
when finding if it is elastic or inelastic
you take the absolute average
Consumer surplus
economic well being of consumers
If a person only occasionally buys a cup of coffee, his demand for coffee is probably
elastic
When quantity demanded responds strongly to changes in price, demand is said to be
elastic
price of item before the good was taxed and how many were sold
equilibrium
How much of the tax are sellers paying
equilibrium - b
Normal goods have negative income elasticities of demand, while inferior goods have positive income elasticities of demand.
false
Demand is elastic if elasticity is
greater than 1.
The greater the price elasticity of demand, the
greater the responsiveness of quantity demanded to a change in price.
A consumers willingness to pay directly measures
how much a buyer values a good
If Gina sells a shirt for $40, and her producer surplus from the sale is $32, her cost must have been
$8
calculating the price elasticity of demand
% change in quantity demanded / % change in price
Calculating percentage change in price or quanity
(mid point method)
if a 40% change in price results in 25% change in quantity supplied, then the price elasticity of supply is about
0.63 and supply is inelastic
A price ceiling is
A legal maximum on the price at which a good can be sold
The greater the price elasticy of demand the
Greater responsiveness of quantity demanded to a change in price
A city wants to raise revenues to build a new municipal swimming pool next year. The mayor suggests that the city
They mayor would be correct if demand were price inelastic; the city manager would be correct if demand were price elastic
When demand is perfectly inelastic, the demand curve
Vertical, because buyers purchase the same amount t as before whenever the price rises or falls
new price that the sellers keep
b
On a graph, consumer surplus is the area
below the demand curve and above the price
The price elasticity of demand measures
buyers' responsiveness to a change in the price of a good.
A legal minimum price at which a good can be sold
called a price floor.
total surplus
can be used to measure a markets efficiency, is the sum of consumer and producer surplus, is the value to buyers minus the cost to sellers
in the long run, the quanity supplied of most goods
can respond substantially to a change in price
total surplus
consumer surplus + producer surplus
Dallas buys strawberries, and he would be willing to pay more than he now pays. Suppose that Dallas has a change in his tastes such that he values strawberries more than before. If the market price is the same as before, then
dallas consumer surplus would increase
the loss in total surplus resulting from tax is called
deadweight loss
Eric produces jewelry boxes. If the demand for jewelry boxes is elastic and Eric wants to increase his total revenue, he should
decrease the price of his jewelry boxes
if we tax buyers
demand curve goes down by the tax amount
Technological advances in wheat production can lower farmers' total revenue because the
demand for wheat is inelastic
If the demand for donuts is elastic, then a decreases in the price of donuts will
increase total revenue of donut sellers
if its elastic
it is greater than one
if we tax something sellers get to keep
less
what determines who pays more on the tax when its not even
less responsive party pays more of the tax
if its inelastic it is
less than one
demand curve reflects a consumers
marginal willingness to pay
Motor oil and gasoline are complements. If the price of motor oil increases, consumer surplus in the gasoline market
may increase, decrease, or remain unchanged.
producer surplus
measure of producer well-being
Cross-price elasticity of demand
measures how the quantity demanded of one good changes as the price of another good changes.
An example of a price floor
minimum wage
if you tax a Big Mac that's 2 dollars a $1 what will the new price be
more than $2 less than $3
normal good
negitive
mid point method
new-old/average
unit elastic
one
The demand for Chocolate Chip Cookie Dough ice cream is likely quite elastic because
other flavors of ice cream are good substitutes for this particular flavor.
Economists compute the price elasticity of demand as the
percentage change in quantity demanded divided by the percentage change in price.
Since the amount of land is fixed, the total supply of land is
perfectly inelastic
inferior
positive
shortage
quantity demanded is greater than quantity supplied
a key determant of the price elasticity of supply is
the ability of sellers to change the amount of the good they produce
A key determinant of the price elasticity of supply is
the ability of sellers to change the amount of the good they produce.
There are very few, if any, good substitutes for motor oil. Therefore,
the demand for motor oil would tend to be inelastic.
Taxes
the government can make buyers or sellers pay a specific amount on each unit
consumer surplus
top triangle to the left
if its elastic
total rev will always go down
if it is inelastic
total revenue prises go up
If a change in the price of a good results in no change in total revenue, then
unit elastic
consumer surplus
wanted to pay $2 he's only paying 0.5 cents so the consumer surplus is 1.50
Amount of tax
what the buyers pay and what the sellers receive
Shannon buys a new CD player for her car for $135. She receives consumer surplus of $25 on her purchase if her willingness to pay is
160
Muriel's income elasticity of demand for football tickets is 1.50. All else equal, this means that if her income increases by 20 percent, she will buy
30% more football tickets
If the price of elasticity of demand for a good is -1.5, then a 3 percent decrease in price results in a
4.5 percent increase 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.
Area of a triangle
A=1/2bh
Alice says that she would buy one banana split a day regardless of the price. If she is telling the truth,
Alice's demand for banana splits is perfectly inelastic.
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 sensitives to a change in price when given more time to react
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 roommates would be negative
new price of buyers after the tax
a
How much of the tax buyers are paying
a - equilibrium
how much is the tax
a and b
economics generally believe that rent control is
a highly inefficient way to help the poor raise their standard of living
Equilibrium
a state in which opposing forces or influences are balanced.
Producer surplus is the
amount a seller is paid minus the cost of production.
A perfectly elastic demand implies that
any rise in price above that represented by the demand curve will result in a quantity demanded of zero.
An increase in price causes an increase in total revenue when
demand is inelastic
For a good that is necessity
demand tends to be inelastic
For a good that is a necessity,
demand tends to be inelastic.
elastic
describes demand that is very sensitive to a change in price
Denise values a stainless steel dishwasher for her new house at $500. The actual price of the dishwasher is $650. Denise
does not buy the dishwasher and on her purchase she experiences a consumer surplus of $0 on her non-purchase.
When a tax is imposed on the buyers of a good, the demand curve shifts
down