Econ ch 4

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Marginal Benefit is

the additional benefit from consuming one more unit.

Why is the demand curve referred to as a marginal benefit curve?

it shows the willingness of consumers to purchase a product at diff prices

Marginal Cost is

the additional cost of producing one more unit.

Why is the supply curve reffered to as the marginal cost curve?

it shows the willingness of firms to supply a product at diff prices

Consumer surplus is

the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.

How does a consumer surplus change as the equilibrium price of a good falls and rises?

As the price of a good rises the consumer surplus decreases, as the price of a good falls the consumer surplus increases.

Producer Surplus

the difference between the lowest price a firm would be willing to accept and the price it actually receives.

How does the producer surplus change as the equilibrium price of a good falls and rises?

As the price of a good rises the producer surplus increases, as the price of a good falls the producer surplus decreases.

Producer surplus differs from the total benefit producers receive from producing products bc it measures.

the total revenue recieved from consumers less the cost incurred to produce the products, only the net benefit to producers from participating in the market.

Producer surplus will equal the total revenue received by firms from selling a product in the special case when

cost is zero

in this statement ..When a market is in equilibrium there is no consumer surplus, we know this bc in equilibirum, the market price is equal to the price the consumer is willing to pay. Correct or Incorrect?

This is incorrect bc the $ the consumers are willing to pay and the market price are only equal for the last unit consumed.

Deadweight loss is

the reduction in economic surplus resulting form a market not being competitive equilibrium.

Economic surplus is

the sum of consumer surplus and producer surplus.

Economic surplus is maximized when

marginal benefit of consumption is equal to marginal costs of production.

Economic Efificiency is

a market outcoe where the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production AND which the sum of consumer surplus and producer surplus is at a maximum.

Economists define Economic Efficiency this way to

help policy makers understand the negative consequences of taxes, price ceilings, & price floors and to illustrate the benefits of a competitive market equilibrium.

A lower price on a market always increases the economic efficiency in that market….

disagree.. bc economic efficiency declines if prices falls below the market eqlbrm.

If at the current quantity marginal benefit is greater than marginal costs, there will be deadweight loss in the market. However there is no deadweight cost when marginal cost is greater than the marginal benefit.

Incorrect. If marginal cost is greater than marginal benefit there will be a deadweight loss.

If consumer surplus in a market increasrs, producer surplus must decrease.?

Incorrect. Consumer surplus (and producer surplus) could increase by decreasing dead weight loss.

Does and increase in an economic surplus in a market always mean that economic efficiency in the market has increased?

If the marginal benefit of consumption increases but market output remain unchanged, then economic surplus and deadweight loss would both increase, decreasing economic efficiency.

q1 q2 greater than.. not be…

q3 q2 greater than .. be

if market in = consmr sur abc produc sur def
if price p1 new cons surplus abd prod F
deadweight loss ce

Why do some consumers tend to favor price control while others oppose them?

Price ceilings generate shortages. Consequently, consumers who obtain the product at a lower price win, but consumers who would like to purchase product but are unable to lose.

Do producers tend to favor price ceilings or floors? Why?

price floors bc when binding, price floors increase price above the equilibrium and may increase producer surplus.

A black market is

a market in which buying and selling occur at prices that violate govt price regualtions.

black market may arise

a reaction in binding price floors.

Can economic analysis provide a final answer to the ? of whether should intervenein markets by opposing price ceilings and price floors? Why, why not?

Economic Analysis cannot provide such an answer bc it seeks to address positive aquestions such as "what is".

Is providing dependable income to dairy farmers a good policy goal for govt officials?

Maybe but only if doing so promotes economic efficiency.

Govt officials are likely to try and achieve this goal using price regulations by establishing

a price floor for milk.

Should govt officials set regualtions to try and provide dependable incomes to every business in america

it is very difficult to conceive any scenario in which an effort would produce an economic efficiency.

Two words missing from the tenant and landlord story

rent control

If there is a shortage of a good it must be scarce but there is not a shortage of every scarce good. agree or disagree?

correct bc every good (except undesirable things) is scarce.

If the competitive equilibrium rent in the city is currently 1000/mo the govt decided to enact rent control and establish price ceiling for apts $750/ mo. Will rent control make people better off or worse?

Will be better off bc their rent is lower but worse off if they lose their apt. Someone who intend to move to Lowell next year and rent an apt? Better off bc rent is lower and worse off if they cnt find an apt. A landlord who intends to abide by the rent control? Worse off bc rent is lower due to ceiling. A landlord who ignores the Price ceiling law? will be better off bc its above the equilibrium nd worse off if he gets caught.

It is more likely and tenant will be black listed in a cty with rent control or without rent control?

WITH rent control bc their will be a shortage of apts.

Price floor on apples there will 16 million after the price floor.(OR 18 & surplus of 6 il) there will be a surplus of 12 mill. all of the above

Tax incidence indicates

the actually division of the burden of tax

Do the people who are legally required to pay a tax always bear the burden of the tax?

No. whoever bears the burden of tax is not affected by who legally is required to pay the tax to the govt.

According to economist, efficient tax is one that

imposes a small deadweight loss relative to the tax revenue it raises.

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

It would be difficult for buyers to keep track of their purchases and the amount of tax they owe to the govt on these purchases.


If taxes were collected from the buyers of cigarettes the graph would differ from the one shown here bc

demand shift down by the tax per pack instead of supply shifting up by the tax per pack.

With the tax being collected from the buyers instead of the producers, the new eqlbrm price would pay the producers will


Including the 1.25 per pack tax the ttl amount that cig buyers would pay per pack would be


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