Macro econ chapter 4
Producer surplus is How does producer surplus change as the equilibrium price of a good rises or falls?
the difference between the lowest price a firm would be willing to accept and the price it actually receives. As the price of a good rises, producer surplus INCREASES , and as the price of a good falls, producer surplus DECREASES .
Producer surplus is How does producer surplus change as the equilibrium price of a good rises or falls?
the difference between the lowest price a firm would be willing to accept and the price it actually receives. As the price of a good rises, producer surplus INCREASES , and as the price of a good falls, producer surplus DECREASES.
Deadweight loss is Economic surplus is maximized when
the reduction in economic surplus resulting from a market not being in competitive equilibrium. the marginal benefit of consumption is equal to the marginal costs of production.
Briefly explain whether you agree with the following statement: "A lower price in a market always increases economic efficiency in that market."
I disagree, because economic efficiency declines if price falls below the market equilibrium.
Briefly explain whether you agree with the following statement: "If consumer surplus LOADING... in a market increases, producer surplus LOADING... must decrease."
The statement is incorrect. Consumer surplus (and producer surplus) could increase by decreasing deadweight loss.
The figure to the right illustrates the market for a breast cancer-fighting drug, without which breast cancer patients cannot survive. What is the consumer surplus LOADING... in this market? Consumer surplus is equal to How does it differ from the consumer surplus in the markets you have studied up to this point? Unlike in most other examples, in this case,
infinity the highest price a consumer is willing to pay is infinite.
Do producers tend to favor price floors or price ceilings? Why? Producers favor
price floors because, when binding, price floors increase price above the equilibrium and may increase producer surplus.
Writing in the New York Times, economist Paul Krugman commented on an article he read that concerned the trials of people who were searching for apartments in San Francisco. Krugman recounted the story's "tales of would-be renters, pounding the pavement, of dozens of desperate applicants arriving at a newly offered apartment, trying to impress the landlord with their credentials. And yet there was something .... missing .... two words I knew had to be part of the story." Source: Paul Krugman, "Reckonings; A Rent Affair," New York Times, June 7, 2000. What two words do you think were missing from the story?
rent controls
Why would economists use the term deadweight loss to describe the impact on consumer and producer surplus from a price control? Deadweight loss measures the amount of surplus
that is lost, being transferred to noone, as a result of a price control.
According to economists, an efficient tax is one that
imposes a small deadweight loss relative to the tax revenue it raises.
A student makes the following argument: "When a market is in equilibrium, there is no consumer surplus LOADING... . We know this because in equilibrium, the market price is equal to the price consumers are willing to pay for the good." Briefly explain whether you agree with the student's argument.
The student is incorrect because the price consumers are willing to pay and the market price are only equal for the last unit consumed.
Some economists studying the effects of the minimum wage law have found that it tends to reduce the employment of black teenagers relative to white teenagers. Does the graph to the right provide some help in understanding why black teenagers have been disproportionately affected by the minimum wage? Briefly explain.
raise the legal minimum wage and create a surplus of workers, allowing discriminating employers to hire only whites, leaving blacks unemployed.
Why is the demand curve referred to as a marginal benefit curve?
It shows the willingness of consumers to purchase a product at different prices.
When the government imposes price floors or price ceilings,
When the government imposes price floors or price ceilings, three important results occur: 1. Some people win. 2. Some people lose. 3. There is a loss of economic efficiency. some people win, some people lose, and there is a loss of economic efficiency.
The graph to the right illustrates the markets for two different types of labor (labor market 1 with demand curve Upper D 1D1 and labor market 2 with demand curve Upper D 2D2). Suppose an identical minimum wage is imposed in both markets. In which market will the minimum wage have the largest impact on employment? Why? The minimum wage will
decrease employment more in labor market 1 because D1 is flatter
Suppose that a frost in Florida reduces the size of the orange crop, which causes the supply curve to shift to the left (from Supply 1Supply1 to Supply 2Supply2). As a result, consumer surplus LOADING... Produce surplus
decreases by areas B, C, and D. increases by area B and decreases by areas F and G.
A study estimates that total consumer surplus to people participating in auctions on eBay in a recent year was $7 billion. Is it likely that the total consumer surplus for the items bought in these auctions was higher or lower than it would have been if the items had been purchased for fixed prices in retail stores? Source: Ravi Bapna, Wolfgang Jank, and Galit Shmueli, "Consumer Surplus in Online Auctions," Information Systems Research, Vol. 19, No. 4, December 2008, pp. 400-416. Compared to what consumer surplus would have been if the eBay items had been purchased for fixed prices in retail stores, consumer surplus from eBay auctions was likely
lower because the bids of auction winners are often higher than the retail prices paid by all consumers.
The figure to the right illustrates the market for seats at a concert, which will be held in a local stadium that seats 20 comma 00020,000 people. What is the value of producer surplus LOADING... in this market? How does it differ from the producer surplus in the markets you have studied up to this point? Unlike in most other examples, in this case,
the firm's total revenue equals producer surplus.
The following newspaper article describes a journalist's experience renting an apartment about thirteen years ago: "...[A] lawyer suggested that I withhold my rent because my landlord had consistently failed to provide adequate heat, and my building was infested with mice and roaches. When the landlord took me to court for not paying rent....I won an abatement and did not have to pay any rent for six months. [I didn't realize] that allowing the landlord to take me to Housing Court would make it almost impossible for me to rent another apartment...anywhere in the United States." Source: Susan Lippman, "Blacklist Blues: Landlords Use Dodgy Database to Fend Off Feisty Tenants," The Indypendent, December 12, 2008. Is it more likely that a tenant will be "blacklisted" in a city with rent control or one without rent control? Briefly explain. It is more likely that tenants will be blacklisted in a city
with rent control because there will be a shortage of apartments.
A newspaper headline reads: "State Officials Take on Pricing Regulations to Try to Provide Better, Dependable Income to Dairy Farmers." Source: Tim Darragh, "Thirsty for More Milk," Morning Call (Allentown, PA), July 12, 2010. Is providing dependable income to dairy farmers a good policy goal for government officials? Government officials are likely to try to achieve this goal using pricing regulations by establishing Should government officials use regulations to try to provide dependable incomes to every business in the country?
Maybe, but only if doing so promotes economic efficiency. a price floor for milk. It is very difficult to concieve of any scenario in which such an effort would improve economic efficiency.
Does it matter whether buyers or sellers are legally responsible for paying a tax?
No, the market price to consumers and net proceeds to sellers are the same independent of who pays the tax.
Does an increase in economic surplus LOADING... in a market always mean that economic efficiency LOADING... in the market has increased? Briefly explain.
If the marginal cost of production decreasesmarginal cost of production decreases but market output remains unchanged, then economic surplus and deadweight loss would both increase, decreasing economic efficiency.
A black market is Black markets may arise
a market in which buying and selling occur at prices that violate government price regulations. in reaction to binding price ceilings.
A black market is Black markets may arise
a market in which buying and selling occur at prices that violate government price regulations. in reaction to binding price ceilings
The figure to the right illustrates the market for seats at a concert, which will be held in a local stadium that seats 10 comma 00010,000 people. What is the value of producer surplus LOADING... in this market? How does it differ from the producer surplus in the markets you have studied up to this point? Unlike in most other examples, in this case,
70,000 the firm's total revenue equals producer surplus.
Suppose five construction companies have the ability to build a factory overseas to produce a manufactured good. The marginal cost of building a factory for each construction company is shown in the table below: Producer Marginal Cost Company 1 $1,000,000 Company 2 $1,250,000 Company 3 $1,300,000 Company 4 $1,350,000 Company 5 $1,500,000 If the market price of an overseas factory is $1 comma 440 comma 0001,440,000, what is the surplus for these five companies?
860,000 FACTORY-C1 FACTORY-C2 FACTORY-C3 FACTORY-C4 ADD=SURPLUS
Economic efficiency Economists define economic efficiency in this way
A. is a market outcome in which the sum of consumer surplus and producer surplus is at a maximum. B. is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production. A. to illustrate the benefits of a competitive market equilibrium. B. to help policymakers understand the negative consequences of price floors. C. to help policymakers understand the negative consequences of taxes. D. to help policymakers understand the negative consequences of price ceilings.
The market supply and market demand curves for a magazine highlighting events and happenings for a metropolitan area are illustrated in the figure to the right. If the magazine publisher charges a weekly subscription price of $3.503.50, what will be the resulting deadweight loss, if any?
Deadweight loss will be $ 2thousand
Can economic analysis provide a final answer to the question of whether the government should intervene in markets by imposing price ceilings and price floors? Why or why not?
Economic analysis cannot provide such an answer because it seeks to address positive questions such as "what is."
An advocate of medical care system reform makes the following argument: "The 15,000 kidneys that are transplanted in the United States each year are received for free from organ donors. Despite this, because of hospital and doctor fees, the average price of a kidney transplant is $250,000. As a result, only rich people or people with very good health insurance can afford these transplants. The government should put a ceiling of $100,000 on the price of kidney transplants. That way, middle-income people will be able to afford them, the demand for kidney transplants will increase, and more kidney transplants will take place." Do you agree with the advocate's reasoning? Use the demand and supply graph to help determine your answer.
No. Without the price ceiling, Upper Q 1Q1 kidneys will be transplanted; with the price ceiling, Upper Q 2Q2 kidneys will be transplanted, and there will be a shortage of operations.
If the price consumers pay and the price sellers receive are not affected by whether consumers or sellers collect a tax on a good or service, why does the government usually require sellers and not consumers to collect a tax? It would be difficult for buyers to keep track of their purchases and the amount of tax they owe the government on these purchases
TRUE
Briefly explain whether you agree or disagree with the following statement: "If there is a shortage of a good, it must be scarce, but there is not a shortage of every scarce good."
The statement is correct because every good (except undesirable things) is scarce.
Dissolvable tobacco products contain less nicotine than cigarettes and can help people quit smoking. Suppose the figure to the right illustrates five consumers' willingness to pay for tobacco lozenges. If the price of a pack of tobacco lozenges is $3.503.50, what is the consumer surplus for these consumers?
factory-price in reach add=surplus
Tax incidence indicates Do the people who are legally required to pay a tax always bear the burden of the tax? Briefly explain.
the actual division of the burden of a tax. No. Whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government.
Marginal benefit is
the additional benefit from consuming one more unit.
Marginal cost is Why is the supply curve referred to as a marginal cost curve?
the additional cost of producing one more unit. It shows the willingness of firms to supply a product at different prices.
The Making the Connection states that the value of the area representing consumer surplus from broadband Internet service is $890.5 million. Use the information from the graph in the Making the Connection to show how this value was calculated. Consumer surplus is equal to
the area of the blue triangle, which is one-half times a base of 47 million times a height of $37.89.
Consumer surplus is How does consumer surplus change as the equilibrium price of a good rises or falls?
the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. As the price of a good rises, consumer surplus DECREASES , and as the price of a good falls, consumer surplus INCREASES
Economic efficiency Economists define economic efficiency in this way
A. is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production. B. is a market outcome in which the sum of consumer surplus and producer surplus is at a maximum. A. to help policymakers understand the negative consequences of taxes. B. to illustrate the benefits of a competitive market equilibrium. C. to help policymakers understand the negative consequences of price ceilings. D. to help policymakers understand the negative consequences of price floors.
Producer surplus differs from the total benefit producers receive from producing products because it measures
A. only the net benefit to producersproducers from participating in the market. B. the total revenue received from consumersrevenue received from consumers less the cost incurred to producecost incurred to produce the products. ProducerProducer surplus will equal the total revenue received by firms from sellingrevenue received by firms from selling a product in the special case when cost is zero
The competitive equilibrium rent in the city of Lowell is currently $1,000 per month. The government decides to enact rent control and to establish a price ceiling for apartments of $750 per month. Briefly explain whether rent control is likely to make each of the following people better or worse off. Someone currently renting an apartment in Lowell Someone who will be moving to Lowell next year and who intends to rent an apartment A landlord who intends to abide by the rent control law A landlord who intends to ignore the law and illegally charge the highest rent possible for his apartments
A. will be better off if they keep their apartment because rent is lower due to the price ceiling. B. will be worse off if they lose their apartment. A. will be better off if they are able to find an apartment to rent because rent is lower due to the price ceiling. B. will be worse off if they are unable to find an apartment to rent. will be worse off because he will be receiving less rent. A. will be better off if he does not get caught because that amount will be above the equilibrium. B. will be worse off if he gets caught.
Why do some consumers tend to favor price controls while others tend to oppose them?
Price ceilings generate shortages. Consequently, consumers who obtain the product at a lower price win, but consumers who would like to purchase the product but are unable to lose.
Suppose you were assigned the task of choosing a price that maximized economic surplus. What price would you choose? Why?
Choose the price where the quantity demanded equals the quantity supplied because that is the equilibrium condition.
Briefly explain whether you agree with the following statement: "If at the current quantity marginal benefit LOADING... is greater than marginal cost LOADING... , there will be deadweight loss in the market. However, there is no deadweight loss when marginal cost is greater than marginal benefit."
The statement is incorrect. If marginal cost is greater than marginal benefit (just as when marginal benefit is greater than marginal cost), there will be deadweight loss.
Suppose that a frost in Florida reduces the size of the orange crop, which causes the supply curve to shift to the left (from Supply 1Supply1 to Supply 2Supply2). As a result, consumer surplus LOADING... Producer surplus
decreases by areas B, C, and D. increases by area B and decreases by areas F and G.
Consumer surplus is used as a measure of a consumer's net benefit from purchasing a good or service. Explain why consumer surplus is a measure of net benefit. Consumer surplus gives us the benefit to consumers
that remains after subtracting the price.
In a linear demand equation, what economic information is conveyed by the intercept on the price axis? In a linear demand equation, the intercept on the price axis tells us Similarly, the intercept on the price axis in a linear supply equation gives the
the lowest price at which the quantity demanded will be zero. the lowest price at which the quantity supplied will be zero.
