Micro Ch 4

Suppose that Michelle buys a cappuccino from Paul's cafe and bakery for $6.25. Michelle was willing to pay $7.5 for the cappuccino, and Paul's was willing to accept $2.25 for the cappuccino. Michelle's consumer surplus: Paul's cafe and bakery producer surplus:

$1.00 $4.00 CS= $willing to pay - $P =$7.25-$6.25 = $1.00 PS= $P - $willing to pay = $6.25 - $2.25 = $4.00

Though they may face higher P, consumers usually see an increase in product Q when P ceilings are imposed

False

True statements

Market failure occurs when either external costs of benefits are present market failure is when free markets provide a suboptimal amount of goods and services Govt sometimes intervenes when market failure occurs

What is the deadweight loss associated with the P floor for the graph?

$25 DWL is the reduction in total surplus when the P floor is imposed The coordinates are (4,15), (9,10), and (4,5) rep the DWL. The value of the DWL is the area of the triangle. 1/2(b*h) DWL= 1/2(15-5)(9-4) = 1/2 (10*5) = 1/2(50) = 25

Examples of P gouging: At what level would you expect P to settle during a period of P gouging?

A deadly tornado strikes OKC, destroying the homes of 50% of its population. Immediately afterward the P of sleeping bags increases by 150% above the pre-gouging market P price gouging is in response to crisis or disaster

Use the line segment in the accompanying graphs to show a binding price floor and a binding price ceiling

Binding P floor - above eq Binding P ceiling - below eq P floor is min P P ceiling is max P

Jeff finds some steaks for $16 for which he would have been willing to pay $20. The butcher notices the meat is near the expiration date and gives him an extra 75% off. Jeff experiences a: Jeff's surplus:

CS $16 = $20 - ($16*$0.25) = $16

Alice is willing to spend $30 on a pair of jeans, and has an online coupon for $10 off. She buys a pair of jeans which cost $35 pre-discount. Alice experiences a: Alice's surplus:

CS $5 =$30-($35-$10) = $5

A problem with P ceilings is that they lead to surpluses

False

P ceilings result in resources being allocated to activities with the highest possible value

False

P ceiling: CS: P floor: DWL:

Govt making it illegal to charge a P above a certain threshold The diff between what a person is willing to pay for a good and what the person actually pays When the P of a good is forced above the eq P A measure of the reduction in social welfare associated with an inefficient outcome

False statements

Market failure occurs when external costs are present but not when external benefits are present market failure occurs when external benefits are present but not when external costs are present market failure can occur only in the presence of external costs

Candis and Luke are sick of the rain in their home state of Oregon. Bc they both work for min wage, they want to relocate to a state with a min wage higher than Oregon's. Place the min wage line to show a binding price floor According to the textbook, which state has a min wage higher than Oregon?

Min wage line is 1 block up from eq Washington A P floor is a level P cannot travel legally. A P floor is binding when it's set above the eq P

Suppose the graph depicts a hypothetical market for concert tix at a local college venue. Bc students are paying such high P, a P ceiling of $40 per concert is being considered. Move the P ceiling line to correctly depict the P ceiling of $40 By how much does CS change if the P ceiling is imposed? By how much does the PS decrease if the P ceiling is imposed? What is the value of the DWL associated with this P ceiling?

P ceiling line is below eq at $40 $250 $350 $100 Before the P ceiling, the eq P is $50 per tix and the eq Q is 40 tix. After the P ceiling, the P is $40 per tix and 30 tix are sold. CS= 0.5*(90-50)*40 = 0.5*40*40 = 800 after the P ceiling, CS is rep by area under D curve and above the new P of $40, extending from 0 to 30 tix. To calculate CS, separate area into a rectangle (area between $60 and $40 and 0 to 30 tix) and a triangle (area between the D curve and above the P of $60). Summing these areas, CS after the P ceiling is $1050. $1050-$800 = $250 P ceiling increases CS by $250 Before P ceiling, PS is $800. (1/2*($50-$10)*40 tix). After the P ceiling, PS= 0.5*(40-10)*30 = 0.5*30*30 = $450 $450-$800 = $350 P ceiling causes PS to fall by $350 DWL ($100) is the reduction in total surplus with P ceiling. Bc PS decreases by $100 more than CS increases, the DWL is $100.

Nicole has a hockey puck from the 2018 Winter Olynpic Games and puts it up for sale on eBay. She will only seel the puck if the winning bid is greater than or equal to $500. After bidding closes, the last bid stands at $501. Nicole experiences a: Nicole's surplus:

PS $1 PS = P received - willing to sell =$500-$501 = $1

P ceilings result in a reduction in mutually beneficial exchanges

True

When P ceilings are imposed, consumers pay lower explicit P but often face higher costs in terms of waiting in line for goods and services

True

Suppose that policy makers are worried about the P of corn becoming too high. What type of P control would policy makers use to keep the P of corn from getting too high? Suppose the govt does implement the appropriate P control. Which of these P would be binding?

a price ceiling $5 P ceiling is a legal max set price. For P control to be binding it must make an impact. $6 or $7 would be at eq.

Emma wants to sell her motorcycle, and Roderick is looking for a use motorcycle to buy. Roderick takes it for a test drive. Emma knows that the clutch is going out on her motorcycle, the fuel filter is leaking, and the tires will need to be replaced soon. If she doesn't disclose this info to Roderick and he cannot tell from his test drive, this is an ex. of:

asymmetric information when one party to a transaction has more info than the other

The least on Allison's apt will expire next month and she wants to move closer to campus. There are 2 apts that she likes. Both are close to campus and in her P range. The first one is next door to a garage where local bands often practice late at night. The second one is next door to a donut shop that opens at 5am. If she likes to stay up late and loves listening to all kinds of music, she will view the bands practicing as a(n) If she is a morning person and loves the smell of donuts, she will view the donut shop as a(n): If her roommate hates loud music and the smell of donuts make her sick, she will reject both apts due to what she sees as

external benefit external benefit external cost Viewing as a good thing = external benefit Viewing as a bad thing = external cost

Rivalrous, nonrivalrous, excludable, or nonexcludable. A sports team t-shirt: The air we breathe: Atlantic bluefin tuna in the Mediterranean Sea: A toll road in normal traffic:

rivalrous and excludable nonrivalrous and nonexcludable rivalrous and nonexcludable nonrivalrous and excludable

Producer surplus is the diff between: Producer surplus is shown graphically as the area:

the market P and the min P a seller is willing to accept above the S curve and below the market P

Consumer surplus (CS) is equal to the diff between: Consumer surplus (CS) is shown graphically as the area:

the max P a buyer is willing to pay and the market P under the D curve and above the market P