ECON 210 TEST 2

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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.

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