econ final elzenga section 12

Question 1

Factors that affect the number of substitutes a good has:

Answer 1

o Time period being considered-there are more substitutes in the long run than short run; more elastic in long run
o Degree to which a good is a luxury-luxury goods have more substitutes
o The market definition-the more defined a good is the more elastic it is
o The importance of the good in one’s budget-the larger portion of a budget the good represents, the more elastic it is

Question 2

Elasticity of Demand > 1

Answer 2

Price and Revenue move in opposite directions; don’t change price

Question 3

Elasticity of Demand < 1

Answer 3

Price and Revenue move in same direction

Question 4

Elasticity of Demand = 1

Answer 4

Revenue doesn’t change

Question 5

Price Discrimination:

Answer 5

when firms separate out people with less elastic demand and charge them a higher price

Question 6

Income elasticity of demand:

Answer 6

the percentage change in demand divided by the percentage change in income; tells the responsiveness of demand changes to changes in income

Question 7

Inferior goods:

Answer 7

goods whose consumption decreases when income increases; negative income elasticity

Question 8

Luxuries:

Answer 8

goods that have an income elasticity greater than 1

Question 9

Necessity:

Answer 9

a good that has an income elasticity between 0 and 1

Question 10

Cross price elasticity of demand:

Answer 10

the percentage change in demand divided by the percentage change in the price of a related good

Question 11

Substitutes:

Answer 11

goods that can be used in place of one another; positive cross price elasticity of demand

Question 12

Complements:

Answer 12

goods that are used in conjunction with other goods; cross price elasticity will be negative

Question 13

Elastic Demand

Answer 13

when to not raise prices

Question 14

Deadweight loss:

Answer 14

the loss of consumer and producer surplus from a tax

Question 15

Welfare loss triangle:

Answer 15

a geometric representation of the welfare cost in terms of misallocated resources caused by a deviation from supply and demand equilibrium

Question 16

Shared by Consumers and Producers (uneven to whichever is more inelastic)

Answer 16

When demand is elastic and supply is elastic, this group bears the burden of taxation

Question 17

Difference between taxes and price controls:

Answer 17

o Price ceilings create shortages, taxes don’t
o Price controls often create black markets, taxes can but don’t often

Question 18

Rent-seeking activities:

Answer 18

activities designed to transfer surplus from one group to another

Question 19

General rule of political economy:

Answer 19

small groups that are significantly affected by a government policy will lobby more effectively than large groups that are equally affected by the same policy

Question 20

Choose to consume an additional unit of good x

Answer 20

If (MUx/Px) > (MUy/Py)

Question 21

General Utility-maximizing rule:

Answer 21

(MUx/Px) = (MUy/Py) = (MUz/Pz)

Question 22

Income effect:

Answer 22

reduction in quantity demanded because we are poorer

Question 23

Substitution Effect:

Answer 23

the reduction in quantity demanded because relative price has risen

Question 24

Opportunity Cost:

Answer 24

the benefit forgone of the next-best alternative