question
A 4 percent increase in the price of beer will cause a 1 percent decline in the quantity of beer demanded. what is the elasticity of demand for this change? (elastic, inelastic, or unit-elastic)
answer
.1/4=0.25 => 0.25<1 => inelastic
question
What is the midpoint formula for elasticity?
answer
new-old/(new+old/2) ; Qd/Qp
question
if Ed < 1 then it is
answer
inelastic
question
if Ed > 1 then it is
answer
elastic
question
if Ed = 1 then it is
answer
unit elastic
question
In a shorter period of time goods are more elastic or inelastic?
answer
inelastic - we are unsure of price change
question
In a longer period of time goods are more elastic or inelastic?
answer
more elastic
question
The elasticity for a good is -.75. A 4 percent increase in price will cause what percent change in quantity?
answer
3%
question
If the price elasticity of supply is 0.75, then when the price of Good Y falls by 10 percent
answer
the quantity supplied of Good Y falls by 7.5 percent (it's inelastic, so TR and price move in same direction)
question
in general what is the price elasticity of Gas (long-run) elastic, inelastic, or unit-elastic?
answer
inelastic
question
When the demand is inelastic, then does the total revenue increase or decrease with the increase in price
answer
increases (inelastic=moves IN same direction)
question
Why is the demand curve for oil rather inelastic?
answer
There are few widely available good substitutes for oil
question
At the present level of consumption, 4,000 movie tickets, and at the current price, $5 per ticket the price elasticity of demand for movie tickets is 1. Using the midpoint method, calculate the percentage by which the owners of movie theaters must reduce price in order to sell 5,000 tickets
answer
22%
question
Would you think of a demand curve for cigarettes to be elastic, unit-elastic, or inelastic? How about the elasticity of demand of life saving prescription drugs?
answer
both will be inelastic because cigarette users are addicted and life saving drugs are a necessity => both are necessities to users
question
What will a perfectly inelastic demand curve look like on a graph
answer
it will be a vertical line
question
If the price of Good Y falls from $10 to $8, and the quantity of demand rises from 1,000 to 1,200 units the price elasticity of demand is
answer
0.81
question
Which of the following factors causes a demand curve to become more elastic over time?
A. new substitutes for the product are discovered
B. new and important uses for the product are discovered
C. More producers begin to produce the product
D. More consumers acquire a desire for the product
A. new substitutes for the product are discovered
B. new and important uses for the product are discovered
C. More producers begin to produce the product
D. More consumers acquire a desire for the product
answer
A. new substitutes are discovered
question
If the price elasticity of demand is 2 in absolute value then when the price of Good X rises by 25 percent
answer
the quantity demanded falls by 50 percent
question
If the price of cigars is $10, with a quantity demanded of 1,000 per day. If the price increases to $12, the quantity demanded declines to 800 per day. What is the absolute value of elasticity of demand?
answer
Ed= 1.22>1 => elastic
question
fixed also means
answer
perfectly inelastic
question
Assume that the supply curve for a good is fixed at 100 units. Now suppose that the demand curve for the good increases such that the equilibrium price rises from $20 to $30. How does total revenue for the sale of this product change?
answer
1,000
question
What happens to total revenue when demand is unit elastic and the price changes
answer
Ed = 1, change = 0
question
When a demand for a good is estimated to be ______, then firms producing the good will experience an increase in total revenue if prices fall
answer
elastic, Ed > 1
question
What is price effect
answer
change in TR generated solely by change in price (change in price)
question
What is quantity effect
answer
change in TR generated solely by change in quantity
question
Change in TR is
answer
price effect + quantity effect (change in price + change in quantity)
question
Market equilibrium before tax is given by a $4 price per unit and 100 units of quantity. Now assume that a $3 tax per unit is imposed in the market such that buyers pay $4.25 and sellers receive $1.25.
a. how much of the tax burden falls on buyers?
b. sellers?
c. who absorbs a greater burden of the tax?
d. which curve is relatively more inelastic?
a. how much of the tax burden falls on buyers?
b. sellers?
c. who absorbs a greater burden of the tax?
d. which curve is relatively more inelastic?
answer
a. $0.25
b. $2.75
c. sellers
d. supply curve
b. $2.75
c. sellers
d. supply curve
question
Without taxes, the market price per bag of apples is $5. With a $2 tax per bag of apples, buyers now pay $5.75 per bag. What is the final price per bag of apples received by sellers?
answer
$3.75 (t=Pb-Ps)
question
what is the formula for tax?
answer
t = Pb-Ps
question
The question of who pays the greater amount of a commodity tax is determined by
answer
the relative elasticities of demand and supply
question
A tax on sellers of popcorn will
answer
reduce the size of the popcorn market
question
Which of the following is correct concerning the burden of a tax imposed on coffee mugs?
answer
buyers and sellers share the burden of the tax
question
What is the formula for Dead Weight Loss
answer
DWL = 1/2 (t x change in quantity) (area of tax triangle)
question
How do you calculate tax burden?
answer
On buyers: Pb-P*
On sellers: P*-Ps
On sellers: P*-Ps
question
If a tax is imposed on sellers of a product the demand curve will
answer
not shift (imposed on sellers not buyers)
question
Suppose there is a tax of $50 on bicycles. The supply curve for bicycles slopes upward. The demand curve for bicycles slopes downward. Sellers are required by law to pay the tax. If the tax is reduced from $50 to $10 per bicycle, then the:
answer
supply curve will shift downward by $40 (Sellers are required to pay)
question
(Imposition of a Tax) Refer to the figure. After the imposition of a $4 the government collects revenues of
answer
$100 (4x25)
question
Where is Consumer Surplus on a graph
answer
above P*
question
Where is Producer Surplus on a graph
answer
below P*
question
How do you calculate tax revenue?
answer
change in price x Q* (the rectangle between Pb and Ps)
question
In a subsidy wedge is Ps on top or bottom?
answer
top
question
A subsidy will cause the biggest deadweight loss when
answer
supply is INELASTIC and demand is ELASTIC
question
What is a price ceiling
answer
maximum price allowed by law
question
What is a price floor?
answer
minimum price allowed by law
question
What are the 5 problems with price ceilings
answer
1. shortages
2. reduction in product quality
3. wasteful lines + search costs
4. loss gains from trade
5. misallocation of resources
2. reduction in product quality
3. wasteful lines + search costs
4. loss gains from trade
5. misallocation of resources
question
What are the 4 problems with price floors
answer
1. surpluses
2. lost gains from trade
3. wasteful increases in quality
4. a misallocation of resources
2. lost gains from trade
3. wasteful increases in quality
4. a misallocation of resources
question
When Qs < Qd there is a
answer
shortage
question
Price ceilings are above or below equilibrium price
answer
below
question
Price floors are above or below equilibrium price
answer
above
question
Formula for profit
answer
profit/pi = TR-TC (total revenue-total cost) OR
(price - AC)Q
(price - AC)Q
question
Formula for Marginal Revenue
answer
MR = change in TR/change in quantity
question
Formula for Total Cost
answer
TC = FC+VC (variable cost+fixed costs)
question
Formula for Marginal Cost
answer
MC = change in VC/change in quantity
question
Formula for Average Cost
answer
AC = TC/Q
question
Formula for TR
answer
TR = P x Q
question
What are externalities
answer
costs/benefits that fall on people that aren't buyers or sellers
question
What is social surplus
answer
consumer surplus + producer surplus + everyone else's surplus
question
What is the equation for social cost
answer
market price + external cost
question
What is efficient quantity
answer
quantity that maximizes social surplus
question
A private cost is
answer
a cost paid by the consumer or the producer trading in the market
question
What is marginal social cost
answer
market price/marginal cost to sellers + external cost
question
What is efficient equilibrium
answer
price and quantity that maximizes social surplus (maximizes marginal benefit to buyers)
question
If the social cost of an activity equals the private cost, what kind of externality exists?
answer
there is no externality
question
When a tax is imposed when demand is inelastic, who bears most of the burden of the tax
answer
buyers
question
Formula for subsidies
answer
S = Ps - Pb
question
Accounting Profit formula
answer
TR-explicit cost
question
Economic Profit formula
answer
TR - Implicit Cost - Explicit Cost
question
Quantity of Golden Rule Production occurs at
answer
P = MR = MC
question
What are the rules on a MC graph
answer
MC = Min AC
AC falls when MC < AC
AC rises when MC > AC
AC falls when MC < AC
AC rises when MC > AC
question
Break even price on an MC graph is at
answer
min AC
question
When a firm expands output from 10 to 11 units and the total revenue increases from $100 to $110, marginal revenue of the 11th unit is
answer
$10 (MR = change in TR/change in Q)
question
Stating that TR=TC is equivalent to stating that
a. MR = MC
b. P = Average fixed cost
c. MR = P
d. P = AC
a. MR = MC
b. P = Average fixed cost
c. MR = P
d. P = AC
answer
d. P = AC (TR = TC => TR = P x Q = TC => P = TC/Q)
question
3 Characteristics of Perfect Competition
answer
1. there are many sellers in a given market
2. there are many buyers in a given market
3. the output produced by each sellers is identical to the output produced by other sellers (quality is similar, not quantity)
2. there are many buyers in a given market
3. the output produced by each sellers is identical to the output produced by other sellers (quality is similar, not quantity)
question
A flat firm-level demand curve means
answer
no market pricing power
question
An industry is said to be perfectly competitive when:
a. demand in the industry is very high
b. each firm virtually has no influence over the price
c. there are many buyers and sellers, and each is large relative to the total market
d. supply in the industry is highly elastic
a. demand in the industry is very high
b. each firm virtually has no influence over the price
c. there are many buyers and sellers, and each is large relative to the total market
d. supply in the industry is highly elastic
answer
b. each firm virtually has no influence over price
question
If Homer operates a small bakery and sells donuts for $4/dozen, he should:
a. sell an additional dozen donuts as long as the marginal cost for producing an additional dozen is less than $4
b. sell an additional dozen donuts as long as the total cost of producing an additional dozen donuts is less than $4
c. only sell more donuts if his total revenue is greater than his total cost
d. sell an additional dozen donuts so long as fixed cost of production is greater than $4
a. sell an additional dozen donuts as long as the marginal cost for producing an additional dozen is less than $4
b. sell an additional dozen donuts as long as the total cost of producing an additional dozen donuts is less than $4
c. only sell more donuts if his total revenue is greater than his total cost
d. sell an additional dozen donuts so long as fixed cost of production is greater than $4
answer
a. sell an additional dozen as long as marginal cost is less than $4
question
The marginal revenue (MR) for a firm is a constant $45, and the firm's marginal cost (MC) is given by MC = 1.5Q. What is the firm's profit maximizing level of output?
answer
30
question
Damien produces 400 gallons of milk a day in a very competitive industry. The market price for a gallon of milk is $2. Damien's marginal revenue per gallon of milk is:
answer
$2
question
Price times quantity minus total cost equals
a. total revenue
b. fixed cost
c. marginal revenue
d. profit
a. total revenue
b. fixed cost
c. marginal revenue
d. profit
answer
TR - TC = Profit
question
As the price of a good fluctuates, a profit-maximizing firm will expand or contract production along its:
a. average cost curve
b. average product curve
c. marginal cost curve
d. marginal product curve
a. average cost curve
b. average product curve
c. marginal cost curve
d. marginal product curve
answer
c. marginal cost curve
question
Formula for change in profit
answer
MR - MC = Change in Profit
question
Economic profit differs from accounting profits because of its inclusion of
answer
implicit costs
question
Marcie quit her job as a preschool teacher, which paid an annual salary of $28,000, and became a street food vendor. She used $8,000 out of her savings account that paid a 4% annual interest rate to buy a street cart to sell food. In her first year of operations, she spent $10,000 on food and supplies and earned total revenue of $45,000. Marcie's accounting profit is ______ and economic profit is ______.
answer
accounting: 45,000 - 10,000 = 35,000
economic: 45,000 - 28,000 - (8,000x.04) - 10,000 = 6,680
economic: 45,000 - 28,000 - (8,000x.04) - 10,000 = 6,680
question
market price is equal to what when quantity is 1
answer
total revenue
question
fixed cost is equal to ______ when quantity is 0
answer
total cost
question
Formula for market revenue
answer
new TR - old TR
question
Julius chair equation
answer
MC = 50 + 25(Q-1)
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