Chapter 4 - Economic Efficiency, Government Price Setting, and Taxes

Question 1

Price ceiling

Answer 1

A legally determined maximum price

that sellers may charge

Question 2

Price floors

Answer 2

A legally determined minimum price

that sellers may receive

Question 3

What happens when government imposes a price ceiling or price floor?

Answer 3

The amount of economic surplus in a

market is reduced

Question 4

Consumer surplus

Answer 4

The difference between the highest price a consumer is willing to pay for a good or service and the price the consumer actually pays.

Consumer surplus represents the benefit to consumers in excess of the price they paid to purchase the product

Question 5

Marginal benefit

Answer 5

The additional benefit to a consumer from consuming one more unit of a good or service.

Consumers are willing to purchase a product up
to the point where the marginal benefit of
consuming a product is equal to its price

Question 6

Consumer surplus in graphs

Answer 6

The total amount of consumer surplus in a market is equal to the area below the demand curve and above the market price

Question 7

Producer surplus

Answer 7

The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives.

Producer surplus represents the benefit to sellers in excess of the price they paid to produce the product

Question 8

Marginal cost

Answer 8

The additional cost to a firm of producing one more unit of a good or service

Question 9

Producer surplus in graphs

Answer 9

The total amount of producer surplus in a market is equal to the area above the market supply curve and below the market price

Question 10

What happens if MB = MC?

Answer 10

At MB = MC, the supply curve and demand curve will both be at the same point in a graph which means an economically efficient level of output.

In this case, quantity supplied equals quantity delivered. Marginal benefit (MB) is represented by every point on the demand curve while marginal cost (MC) is represented by every point on the supply curve.

Question 11

What happens if MB > MC?

Answer 11

When MB > MC, the cost increases, the demand decreases and supply increases. There is a surplus in quantity and lowering the price is recommended.

This output is inefficiently low.

Question 12

What happens if MB < MC?

Answer 12

When MB < MC, the cost decreases, the demand increases and supply decreases. There is a shortage in quantity and increasing the price is recommended.

This output inefficiently high.

Question 13

Economic surplus

Answer 13

The sum of consumer surplus and producer surplus

Question 14

Economic efficiency

Answer 14

A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum

Question 15

Deadweight loss

Answer 15

The reduction in economic surplus resulting from a market not being in competitive equilibrium.

If a market is not in equilibrium, there is deadweight loss

Question 16

What happens if there is a surplus due to the government raising the price floor?

Answer 16

Sometimes government buys surplus of a good to store and sell later

Ex. If the government raises the price of milk from $1 to $1.50 and it creates a surplus

Question 17

Black market

Answer 17

A market in which buying and selling take place at prices that violate government price regulations

Question 18

What 3 results occur when the government imposes price floors or price ceilings

Answer 18

• Some people win
• Some people lose
• There is a loss of economic efficiency

Question 19

Excess burden

Answer 19

Deadweight loss from a tax

Question 20

When is tax efficient?

Answer 20

A tax is efficient if it imposes a small excess burden relative to the tax revenue it raises

Question 21

Tax incidence

Answer 21

The actual division of the burden of a tax between buyers and sellers in a market

Question 22

“If the federal government raises the sales tax on gasoline by $0.25, then the price of gasoline will rise by $0.25. Consumers can’t get by without gasoline, so they have to pay the whole amount of any increase in the sales tax.”

Under what circumstances will the student’s statement be true?

Answer 22

This statement will only be true if the demand curve is a vertical line, meaning quantity doesn’t change. But that is not the case because the demand curve for gasoline is not vertical therefore the statement is incorrect.

When the price of gasoline goes up, demand will go down. Examples of vertical demand curves are parking spots in a parking lot or seats in a movie theatre.

Question 23

Does It make a difference whether the government

collects a tax from buyers or sellers?

Answer 23

No! Because buyers and sellers will always share the burden of the tax.