Micro HW 3: CH 4
Suppose the government imposes a $3 per pack tax on cigarettes.
*Refer to HW
Use the information on the kumquat market in the following table to answer the questions. (Quantities are given in millions of crates per year.)
*Refer to HW
The figure to the right illustrates the market for apples in which the government has imposed a price floor of $11 per crate. How many crates of apples will be sold after the price floor has been imposed?
24 millions of crates per year -go to the supply curve and the price floor intersection to find the quantity supplied
Suppose the federal government decides to levy a sales tax on pizza of $1.00 per pie. A representative of the pizza industry makes the following statement: "The pizza industry is very competitive. As a result, pizza sellers will have to pay the whole tax because they are unable to pass any of it on to customers in the form of higher prices. Therefore, a sales tax of $1.00 per pie will result in pizza sellers receiving $1.00 less on each pie sold, after paying the tax." Show how a $1.00 tax on pizza to be paid by producers affects the market for pizza, illustrated in the figure. Use the line drawing tool to draw either a new pizza supply curve or a new pizza demand curve. Properly label this line.
A new supply line that is perfectly elastic is drawn $1 price higher than the original perfectly elastic line.
In the diagram to the right, illustrating a binding price floor at P1, the amount of consumer surplus transferred to producers is represented by area _____ and the deadweight loss is equal to areas _____.
B; C and E -Price floor at P1 is above the equilibrium price
Deadweight loss is the reduction in economic surplus resulting from a market not being in competitive equilibrium. In the diagram to the right, deadweight loss is equal to the area(s):
C & E
In the diagram to the right, illustrating a binding price ceiling at P3, the amount of producer surplus transferred to consumers is represented by area _____ and the deadweight loss is equal to areas _____.
C; B and D -Price ceiling at P3 is found below the equilibrium price
In the diagram to the right, illustrating a per-unit tax equal to P2 minus P3, tax revenue is represented by the areas _____ and the deadweight loss generated as a result of the tax is represented by areas _____.
D and F; E and G -tax revenue area is found by going down from new equilibrium from tax to the original supply curve.
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.
Economic efficiency is
a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.
_____ surplus is the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. This component of economic surplus is illustrated in the diagram to the right by area _____
consumer, A
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 1 to Supply 2). As a result, consumer surplus _____. Producer surplus _____.
decreases by areas B, C, and D. increases by area B and decreases by areas F and G.
A price ceiling _____.
does not increase the amount of the product that consumers buy because it creates a shortage. *Refer to HW
In the diagram to the right, marginal benefit ______ marginal cost at output level Q3. This output level is considered economically ______.
is less than; inefficient -At Q3, supply is greater than demand
A price ceiling is a legally determined _____ price that sellers may charge. A price floor is a legally determined _____ price that sellers may receive.
maximum, minimum
Consumer and producer surplus measure the _____ benefit rather than the _____ benefit.
net, total
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.
_____ surplus is the difference between the lowest price a firm would be willing to accept and the price it actually receives. This component of economic surplus is illustrated in the diagram to the right by area _____
producer, B
When the government imposes price floors or price ceilings,
some people win, some people lose, and there is a loss of economic efficiency.
Tax incidence is
the actual division of the burden of a tax between buyers and sellers in a market.
Marginal benefit is _____. Why is the demand curve referred to as a marginal benefit curve?
the additional benefit from consuming one more unit. It shows the willingness of consumers to purchase a product at different prices.
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 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
will be better off if they keep their apartment because rent is lower due to the price ceiling. will be worse off if they lose their apartment. will be better off if they are able to find an apartment to rent because rent is lower due to the price ceiling. 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. will be better off if he does not get caught because that amount will be above the equilibrium. will be worse off if he gets caught.
Economic surplus in a market is the sum of _____ surplus and _____ surplus. In a competitive market, with many buyers and sellers and no government restrictions, economic surplus is at a _____ when the market is in _____.
consumer; producer; maximum; equilibrium