Microeconomics Chapter 4
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.
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.
Do the people who are legally required to pay a tax always bear the burden of the tax? Briefly explain.
No. Whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government.
As a result, a tax on production reduces consumer surplus because ________ lose the _____________ of the _______ quantity caused by the tax
consumers; marginal benefits minus marginal cost; decreased
According to economists, an efficient tax is one that
imposes a small deadweight loss relative to the tax revenue it raises.
Considering this explanation of economic efficiency, why does a tax creates deadweight loss (i.e. reduce surplus)? What is the impact of a production tax on the equilibrium price? The equilibrium price
rises and the equilibrium quantity falls
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 no one, as a result of a price control.
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
Tax incidence indicates
the actual division of the burden of a tax
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
the lowest price at which the quantity demanded will be zero.
Similarly, the intercept on the price axis in a linear supply equation gives the
the lowest price at which the quantity supplied will be zero.
