Microeconomics Exam 2

effects of rent control

-Housing shortage -non-price rationing- first come first serve -quality of housing lowers

price ceiling

A legal maximum on the price at which a good can be sold

price floor

A legal minimum on the price at which a good can be sold

binding price ceiling

A maximum legal price that is set below the existing equilibrium price. causes shortage Pc<Peqm

binding price floor

A minimum legal price that is set above the existing equilibrium. Pf>Peqm surplus

What is the relationship between the demand curve and the willingness to pay?

Because the demand curve shows the maximum amount buyers are willing to pay for a given market quantity, the price given by the demand curve represents the willingness to pay of the marginal buyer.

What is the relationship between the cost to sellers and the supply curve?

Because the supply curve shows the minimum amount sellers are willing to accept for a given quantity, the supply curve represents the cost of the marginal seller.

What is consumer surplus, and how is it measured?

Consumer surplus measures the benefit to buyers of participating in a market. It is measured as the amount a buyer is willing to pay for a good minus the amount a buyer actually pays for it. For an individual purchase, consumer surplus is the difference between the willingness to pay, as shown on the demand curve, and the market price. For the market, total consumer surplus is the area under the demand curve and above the price, from the origin to the quantity purchased.

fixed costs

Costs that do not vary with the quantity of output produced

What is producer surplus, and how is it measured?

Producer surplus measures the benefit to sellers of participating in a market. It is measured as the amount a seller is paid minus the cost of production. For an individual sale, producer surplus is measured as the difference between the market price and the cost of production, as shown on the supply curve. For the market, total producer surplus is measured as the area above the supply curve and below the market price, between the origin and the quantity sold.

non-binding price floor

Set below the equilibrium price No effect on the market

In what way does the demand curve represent the benefit consumers receive from participating in a market? In addition to the demand curve, what else must be considered to determine consumer surplus?

Since the demand curve represents the maximum price the marginal buyer is willing to pay for a good, it must also represent the maximum benefit the buyer expects to receive from consuming the good. Consumer surplus must take into account the amount the buyer actually pays for the good, with consumer surplus measured as the difference between what the buyer is willing to pay and what he/she actually paid. Consumer surplus, then, measures the benefit the buyer didn't have to "pay for."

Given the following two equations: 1)Total Surplus = Consumer Surplus + Producer Surplus 2)Total Surplus = Value to Buyers - Cost to Sellers Show how equation (1) can be used to derive equation (2).

Start with the equation: Total Surplus = Consumer Surplus + Producer Surplus. Then, since Consumer Surplus = Value to buyers - Amount paid by buyers, and since Producer Surplus = Amount received by sellers - Costs of sellers, Total Surplus can be written as: Value to buyers - Amount paid by buyers + Amount received by sellers - Costs of sellers. Since the Amount paid by buyers equals the Amount received by sellers, the middle two terms cancel out and the result is: Total Surplus = Value to buyers - Costs of sellers.

total surplus

TS= WTP-Cost

Other things equal, what happens to consumer surplus if the price of a good falls? Why?

When the price of a good falls, consumer surplus increases for two reasons. First, those buyers who were already buying the good receive an increase in consumer surplus because they are paying less (area B). Second, some new buyers enter the market because the price of the good is now lower than their willingness to pay (area C); hence, there is additional consumer surplus generated from their purchases. The graph should show that as price falls from P2 to P1, consumer surplus increases from area A to area A+B+C.

Assume that price elasticity of demand and price elasticity of supply are positive. When a tax is placed on the sellers of energy drinks, the a. burden of the tax will be shared by the buyers and the sellers, but the division of the burden is not always equal. b.sellers bear the entire burden of the tax. c. buyers bear the entire burden of the tax. d. burden of the tax will be always be equally divided between the buyers and the sellers

a

If a tax is imposed on a market with inelastic supply and elastic demand, then a. sellers will bear most of the burden of the tax. b. buyers will bear most of the burden of the tax. c. it is impossible to determine how the burden of the tax will be shared. d. the burden of the tax will be shared equally between buyers and sellers.

a

If the government removes a binding price ceiling from a market, then the price paid by buyers will a) increase, and the quantity sold in the market will increase. b)increase, and the quantity sold in the market will decrease. c) decrease, and the quantity sold in the market will increase. d) decrease, and the quantity sold in the market will decrease.

a

Producer surplus equals the a. amount received by sellers minus the cost to sellers. b. value to buyers minus the amount paid by buyers. c. value to buyers minus the cost to sellers. d. amount received by sellers minus the amount paid by buyers.

a

Seller Cost Abby $1,500 Bobby . $1,200 Carlos $1,000 Dianne $750 Evalina $500 If the market price is $900, the producer surplus in the market is a. $550. b. $350. c. $1,000. d. $750.

a

The following table represents the costs of five possible sellers. Seller Cost Abby $1,500 Bobby . $1,200 Carlos $1,000 Dianne $750 Evalina $500 Who is a marginal seller when the price is $1,200? a.Bobby b. Carlos, Dianne, and Evalina c. Carlos, Dianne, Evalina, and Bobby d. Bobby and Abby

a

Under rent control, tenants can expect a. lower rent and lower quality housing. b. lower rent and higher quality housing. c. higher rent and a shortage of rental housing. d. higher rent and a surplus of rental housing.

a

Welfare economics is the study of a. how the allocation of resources affects economic well-being. b. the effect of income redistribution on work effort. c. the well-being of less fortunate people. d. welfare programs in the United States.

a

Measuring producer surplus with supply curve

area below the price and are above the supply curve measures producer surplus in a market

A nonbinding price floor (i)causes a surplus. (ii)causes a shortage. (iii)is set at a price above the equilibrium price. (iv)is set at a price below the equilibrium price. a) (iii) only b) (iv) only c) (i) and (iii) only d) (ii) and (iv) only

b

A tax burden falls more heavily on the side of the market that a) has a fewer number of participants. b) is more inelastic. c) is more elastic. d) is less inelastic.

b

Buyer Willingness To Pay Calvin $150.00 Sam $135.00 Andrew $120.00 Lori $100.00 If the market price is $105, a. Calvin's consumer surplus is $45 and total consumer surplus is $85. b. Sam's consumer surplus is $30 and total consumer surplus is $90. c. Andrew's consumer surplus is $15 and total consumer surplus is $67.50. d. Lori's consumer surplus is $2 and total consumer surplus is $100

b

Buyer Willingness To Pay Lori $50.00 Audrey $30.00 Zach $20.00 Calvin $10.00 If the price of the product is $18, then the total consumer surplus is a. $42. b. $46. c. $38. d. $72.

b

Buyer Willingness To Pay Lori $50.00 Audrey $30.00 Zach $20.00 Calvin $10.00 If the price of the product is $15, then who would be willing to purchase the product? a. Lori, Audrey, Zach, and Calvin b. Lori, Audrey, and Zach c. Lori d. Lori and Audrey

b

If a price ceiling is not binding, then a) the equilibrium price is above the price ceiling. b) the equilibrium price is below the price ceiling. c)it has no legal enforcement mechanism. d)None of the above is correct because all price ceilings must be binding.

b

Kelly is willing to pay $5.20 for a gallon of gasoline. The price of gasoline at her local gas station is $3.80. If she purchases ten gallons of gasoline, then Kelly's consumer surplus is a. $1.40. b. $14. c. $3.80. d. $52.

b

Suppose the government has imposed a price ceiling on laptop computers. Which of the following events could transform the price ceiling from one that is not binding into one that is binding? a) Improvements in production technology reduce the costs of producing laptop computers. b) The number of firms selling laptop computers decreases. c) Consumers' income decreases, and laptop computers are a normal good. d) The number of consumers buying laptop computers decreases.

b

When a tax is placed on the buyers of tennis racquets, the size of the tennis racquet market a) and the price paid by buyers both decrease. b) decreases, but the price paid by buyers increases. c)increases, but the price paid by buyers decreases. d)and the price paid by buyers both increase.

b

A nonbinding price floor (i)causes a surplus. (ii)causes a shortage. (iii)is set at a price above the equilibrium price. (iv)is set at a price below the equilibrium price. a. (i) and (iii) only b. (ii) and (iv) only c. (iv) only d. (iii) only

c

Buyer Willingness To Pay Calvin $150.00 Sam $135.00 Andrew $120.00 Lori $100.00 If the price of the product is $110, then who would be willing to purchase the product? a.Calvin b.Calvin and Sam c.Calvin, Sam, and Andrew d.Calvin, Sam, Andrew, and Lori

c

In a competitive market free of government regulation, a) price adjusts until quantity demanded is greater than quantity supplied. b) price adjusts until quantity demanded is less than quantity supplied. c)price adjusts until quantity demanded equals quantity supplied. d) supply adjusts to meet demand at every price.

c

Tax incidence a. depends on the legislated burden. b. is entirely random. c. depends on the elasticities of supply and demand. d. falls entirely on buyers or entirely on sellers.

c

The demand for salt is inelastic, and the supply of salt is elastic. The demand for caviar is elastic, and the supply of caviar is inelastic. Suppose that a tax of $1 per pound is levied on the sellers of salt, and a tax of $1 per pound is levied on the buyers of caviar. We would expect that most of the burden of these taxes will fall on a. sellers of salt and the buyers of caviar. b.sellers of salt and the sellers of caviar. c. buyers of salt and the sellers of caviar. d.buyers of salt and the buyers of caviar.

c

variable costs

costs that vary with the quantity of output produced

A binding price ceiling (i)causes a surplus. (ii)causes a shortage. (iii)is set at a price above the equilibrium price. (iv)is set at a price below the equilibrium price. a) (ii) only b) (iv) only c) (i) and (iii) only d (ii) and (iv) only

d

A key lesson from the payroll tax is that the a. tax is a tax solely on workers. b. tax is a tax solely on firms that hire workers. c. tax eliminates any wedge that might exist between the wage that firms pay and the wage that workers receive. d. true burden of a tax cannot be legislated.

d

Opponents of the minimum wage point out that the minimum wage a) encourages teenagers to drop out of school. b)prevents some workers from getting needed on-the-job training. c)contributes to the problem of unemployment. d)All of the above are correct.

d

Welfare economics is the study of a. taxes and subsidies. b.how technology is best put to use in the production of goods and services. c.government welfare programs for needy people. d.how the allocation of resources affects economic well-being.

d

When a buyer's willingness to pay for a good is equal to the price of the good, the a.buyer's consumer surplus for that good is maximized. b.buyer will buy as much of the good as the buyer's budget allows. c.price of the good exceeds the value that the buyer places on the good. d.buyer is indifferent between buying the good and not buying it.

d

Which of the following will cause a decrease in consumer surplus? a. an increase in the number of sellers of the good b. a decrease in the production cost of the good c. sellers expect the price of the good to be lower next month d. the imposition of a binding price floor in the market

d

how price affects producer surplus

higher price increases producer surplus

tax burden on supply

if demand is more elastic then supply will bear most of the burden

tax burden on demand

if supply is more elastic then demand will bear most of the tax burden

implicit costs

input costs that do not require an outlay of money by the firm

explicit costs

input costs that require an outlay of money by the firm

how price affects consumer surplus

lower price increases consumer surplus

tax on buyers

shifts the D curve down by the amount of the tax

tax on sellers

shifts the supply curve up by the amount of the tax

marginal product of labor

the additional output a firm produces as a result of hiring one more worker change in quantity/change in labor

Consumer Surplus (CS)

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it CS=WTP-P lower price raises consumer surplus

Producer Surplus (PS)

the amount a seller is paid for a good minus the seller's cost PS=P-cost higher price raises producer surplus

Measuring Consumer Surplus with the Demand Curve

the area below the demand curve and above the price measures the consumer surplus in a market

Marginal Cost (MC)

the change in total costs associated with a one-unit change in output Change in TC/ Change in Q

marginal product

the increase in output that arises from an additional unit of input

tax incidence

the manner in which the burden of a tax is shared among participants in a market (buyers and sellers)

total cost

the market value of the inputs a firm uses in production

Willingness to Pay (WTP)

the maximum amount that a buyer will pay for a good

Efficiency

the property of a resource allocation of maximizing the total surplus received by all members of society highest value buyers buy the good lowest cost sellers produce the good raising or lowering Q will not increase total surplus

Equality

the property of distributing economic prosperity uniformly among the members of society

diminishing marginal product

the property whereby the marginal product of an input declines as the quantity of the input increases

efficient scale

the quantity of output that minimizes average total cost

production function

the relationship between quantity of inputs used to make a good and the quantity of output of that good

welfare economics

the study of how the allocation of resources affects economic well-being

total revenue

the total amount of money a firm receives by selling goods or services

cost

the value of everything a seller must give up to produce a good

average total cost (ATC)

total cost divided by the quantity of output AFC + AVC = ATC usually U shaped

Average Fixed Cost (AFC)

total fixed costs divided by quantity of output FC/Q

profit

total revenue minus total cost

economic profit

total revenue minus total cost, including both explicit and implicit costs

accounting profit

total revenue minus total explicit cost

Average Variable Cost (AVC)

total variable costs divided by quantity of output VC/Q

non-binding price ceiling

when a price ceiling is above the equilibrium price Pc>Peqm no effect on market outcome