Price Elasticity of Demand measures |
the quantity demanded responds to a change in price |
The price elasticity of supply measures how much |
the quantity supplied responds to changes in the price of the good |
A decrease in supply will cause the largest increase in price when |
both supply and demand are inelastic |
Elasticity is a measure of |
how much buyers and sellers respond to changes in market conditions |
Price elasticity of supply measures how responsive |
sellers are to a change in price |
Price elasticity of demand is defined as |
the percentage change in quantity demanded divided by the percentage change in price |
When consumers face rising gasoline prices, they typically |
reduce their quantity demanded more in the long run than in the short run |
In general, demand curves for necessities tend to be |
inelastic |
A key determinant of the price elasticity of supply is the time period under consideration |
The number of firms in a market tends to be more variable over long periods of time than over short periods of time |
If demand is price inelastic, then |
buyers do not respond much to a change in price |
Demand is said to be inelastic if |
the quantity demanded changes only slightly when the price of the good changes |
A key determinant of the price elasticity of supply is the |
time horizon |
Goods with close substitutes tend to have more or less elastic demands than do goods without close substitutes? |
more |
The demand for Rice Krispies is more or less elastic than the demand for cereal in general |
more |
The demand for soap is more or less elastic than the demand for Dove soap |
less |
If the price elasticity of supply for wheat is less than 1, then the supply of wheat is |
inelastic |
In a competitive market free of government regulation |
price adjusts until quantity demanded equals quantity supplied |
If the government removes a tax on a good, then the quantity of the good sold will |
increase |
If the government removes a tax on a good, then the price paid by buyers will |
decrease, and the price received by sellers will increase. |
In a free, competitive market, what is the rationing mechanism? |
price |
A tax on the sellers of coffee mugs |
decreases the size of the coffee mug market |
Rent-control laws dictate |
maximum rent that landlords may charge tenants |
When a tax is placed on the sellers of a product, buyers pay |
more, and sellers receive less than they did before the tax |
A legal maximum on the price at which a good can be sold is called a price? |
ceiling |
A tax imposed on the sellers of a good will raise the |
price paid by buyers and lower the equilibrium quantity |
If a price ceiling is not binding, then |
the equilibrium price is below the price ceiling |
Price controls |
can generate inequities of their own |
If the government levies a $1,000 tax per boat on sellers of boats, then the price paid by buyers of boats would |
increase by less than $1,000. |
If the government levies a $500 tax per car on sellers of cars, then the price received by sellers of cars would |
decrease by less than $500. |
A price ceiling will be binding only if it is set |
below the equilibrium price |
Which of the following observations would be consistent with the imposition of a binding price ceiling on a market? After the price ceiling becomes effective, |
a smaller quantity of the good is bought and sold |
When a tax is placed on the sellers of cell phones, the size of the cell phone market |
and the effective price received by sellers both decrease |
Suppose the government has imposed a price ceiling on sliced sandwich bread. Which of the following events could transform the price ceiling from one that is binding to one that is not binding? |
A decease in the price of unsliced bread, which people consider as a substitute for sliced bread |
Suppose sellers of perfume are required to send $1.00 to the government for every bottle of perfume they sell. Further, suppose this tax causes the price paid by buyers of perfume to rise by $0.60 per bottle. Which of the following statements is correct? |
The effective price received by sellers is $0.40 per bottle less than it was before the tax |
When a binding price ceiling is imposed on a market, |
price no longer serves as a rationing device |
When a binding price ceiling is imposed on a market to benefit buyers, |
some buyers benefit, and some buyers are harmed |
If a tax is levied on the sellers of a product, then there will be a(n) |
decrease in quantity demanded |
A binding price ceiling causes quantity demanded to be more or less than quantity supplied |
more |
A price ceiling set above the equilibrium price causes quantity demanded to exceed quantity supplied |
false |
To say that a price ceiling is binding is to say that the price ceiling |
causes quantity demanded to exceed quantity supplied |
If the government levies a $0.25 tax per MP3 music file downloaded on buyers of MP3 music files, then the price received by sellers of MP3 music files would |
decrease by less than $0.25 |
The maximum price that a buyer will pay for a good is called |
willingness to pay |
A seller’s opportunity cost measures the |
value of everything she must give up to produce a good |
Economists typically measure efficiency using |
total surplus |
Consumer surplus equals the |
value to buyers minus the amount paid by buyers |
A supply curve can be used to measure producer surplus because it reflects |
sellers’ costs |
Producer surplus equals the |
amount received by sellers minus the cost to sellers |
A consumer’s willingness to pay directly measures |
how much a buyer values a good |
Total surplus |
can be used to measure a market’s efficiency is the sum of consumer and producer surplus is the value to buyers minus the cost to sellers |
consumer surplus |
the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (i.e. the market price) |
When a buyer’s willingness to pay for a good is equal to the price of the good, the |
buyer is indifferent between buying the good and not buying it |
Producer surplus measures the |
benefits to sellers of participating in a market |
Consumer surplus can be measured as the area between the demand curve and the supply curve |
false |
The particular price that results in quantity supplied being equal to quantity demanded is the best price because it |
maximizes the combined welfare of buyers and sellers |
On a graph, the area below a demand curve and above the price measures |
consumer surplus |
If the government imposes a binding price floor in a market, then the consumer surplus in that market will decrease |
true |
All else equal, an increase in demand will always increase consumer surplus |
false |
At the equilibrium price of a good, the good will be purchased by those buyers who |
value the good more than price |
In a market, the marginal buyer is the buyer |
who would be the first to leave the market if the price were any higher |
At the equilibrium price of a good, the good will be sold by those sellers |
whose cost is less than price |
The lower the price, the lower the consumer surplus, all else equal |
false |
When a tax is levied on a good, the buyers and sellers of the good share the burden |
regardless of how the tax is levied |
A decrease in the size of a tax is most likely to increase tax revenue in a market with |
elastic demand and elastic supply |
Total surplus is always equal to the sum of consumer surplus and producer surplus |
false |
Taxes are costly to market participants because they |
distort market outcomes. transfer resources from market participants to the government. alter incentives. |
Total surplus in a market does not change when the government imposes a tax on that market because the loss of consumer surplus and producer surplus is equal to the gain of government revenue |
false |
An increase in the size of a tax is most likely to increase tax revenue in a market with |
inelastic demand and inelastic supply |
A tax on a good |
raises the price that buyers effectively pay and lowers the price that sellers effectively receive |
The price elasticities of supply and demand affect |
both the size of the deadweight loss from a tax and the tax incidence |
If the size of a tax increases, tax revenue |
may increase, decrease, or remain the same |
The size of the deadweight loss generated from a tax is affected by the |
elasticities of both supply and demand |
The government’s benefit from a tax can be measured by |
tax revenue |
When a tax is imposed on sellers, consumer surplus and producer surplus both decrease |
true |
What happens to the total surplus in a market when the government imposes a tax? |
Total surplus decreases |
Buyers of a product will bear the larger part of the tax burden, and sellers will bear a smaller part of the tax burden, when the |
supply of the product is more elastic than the demand for the product |
When a good is taxed |
both buyers and sellers of the good are made worse off |
Sellers of a product will bear the larger part of the tax burden, and buyers will bear a smaller part of the tax burden, when the |
demand for the product is more elastic than the supply of the product |
Taxes affect market participants by increasing the price paid by the buyer and received by the seller |
false |
When a tax is imposed on a good for which the supply is relatively elastic and the demand is relatively inelastic |
buyers of the good will bear most of the burden of the tax |
When a tax is imposed on a good, the |
equilibrium quantity of the good always decreases |
When a tax is imposed on a good for which the demand is relatively elastic and the supply is relatively inelastic |
sellers of the good will bear most of the burden of the tax |
When a tax on a good is enacted, |
buyers and sellers share the burden of the tax regardless of whether the tax is levied on buyers or on sellers |
The amount of deadweight loss from a tax depends upon the |
amount of the tax per unit price elasticity of supply price elasticity of demand |
Rationing mechanisms |
(1) Long lines ? (2) Discrimination according to sellers’ biases |
Rationing mechanisms are often unfair, and inefficient |
the goods do not necessarily go to the buyers who value them most highly |
when prices are not controlled, ?the rationing mechanism is efficient and impersonal |
the goods ?go to the buyers that value them most highly |
Allocation of resources |
how much of each good is produced which producers produce it which consumers consume it |
Welfare economics |
studies how the allocation of resources affects economic well-being |
Laissez faire |
(French for "allow them to do"): ?the notion that govt should not interfere with the market. |
An allocation of resources is efficient if it maximizes total surplus |
true |
Efficiency means: |
The goods are consumed by the buyers who value them most highly. The goods are produced by the producers with the lowest costs. Raising or lowering the quantity of a good ?would not increase total surplus. |
ECON 210 TEST 2
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