Exam 2 (CH 4 and 5 and 6)

Question 1

Consumer Surplus

Answer 1

the difference between what consumers would be willing to pay and the market price

Question 2

Consumer’s willingness to pay

Answer 2

is the max price at which he or she would buy that good

Question 3

Consumer surplus is the are beneath the ______ and the area above the _______

Answer 3

demand curve; price

Question 4

Consumer surplus ________ with a fall in price

Answer 4

rises

Question 5

Producer surplus

Answer 5

the difference between the market price and the lowest price at which sellers are willing to supply the product (which is = cost of product)

Question 6

Producer surplus is the are beneath the ______ and the area above the _______

Answer 6

price; supply curve

Question 7

If the price increases, the producer surplus ______

Answer 7

rises

Question 8

Total surplus

Answer 8

the sum of the producer and consumer surpluses

Question 9

Price controls

Answer 9

legal restrictions on how high or low a market price may go

Question 10

Price ceiling

Answer 10

a max price sellers are allowed to charge (usually set below the equilibrium)

Question 11

Price floor

Answer 11

a minimum price buyers are required to pay (usually set above equilibrium)

Question 12

If a price ceiling is set above equilibrium…

Answer 12

then it will have no effect (called nonbinding)

Question 13

Binding or effective price ceiling

Answer 13

a price ceiling that forces price below equilibrium and has an effect

Question 14

Deadweight loss

Answer 14

the loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the market equilibrium quantity

Question 15

Deadweight loss is measured in

Answer 15

dollars

Question 16

Who wins and loses in rent control example?

Answer 16

Producers lose; some lucky renters gain; some unlucky but willing renters don’t get a place at all

Question 17

If a price floor is set below the equilibrium …

Answer 17

then it will have no effect (nonbinding)

Question 18

Binding or effective price floor

Answer 18

a price floor that forces price above equilibrium will have an effect

Question 19

price floors encourage

Answer 19

• Waste

- Black markets

Question 20

Why are there price ceilings and floors?

Answer 20

• benefit some people (who are more vocal than those harmed)
• they’ve been around so long that people are used to them
• Gov officials don’t understand economics

Question 21

Price elasticity of demand

Answer 21

measures how responsive consumers are to changes in price

Question 22

If the demand curve is elastic

Answer 22

an increase in price reduces the quantity demanded a lot (and vice versa)

Question 23

If the demand curve is inelastic

Answer 23

same increase in price reduces QD by just a little

Question 24

Elasticity rule

Answer 24

• Elasticity does not equal slope
• If 2 linear demand (or supply) curves run through a common pain, then at any given Q, the curve that is flatter is more elastic

Question 25

Price Elasticity of demand Equation

Answer 25

(% change in QD) / (% change in P)

Question 26

If the price of oil increases by 10% and the QD decreases by 5% then what is the price elasticity of demand for oil?

Answer 26

(-5%) / (10%) = -0.5 (we usually drop the negative)

Question 27

Midpoint method for calculating % changes

Answer 27

% change in x = (change in x) / (average value of x) * 100

Question 28

Calculate average value of x

Answer 28

(starting value of x + Final value of x) / 2

Question 29

Cross-price elasticity of demand definition

Answer 29

measures how sensitive the quantity demanded of good A is to the price of good B

Question 30

Cross-price elasticity of demand for substitutes

Answer 30

cross-price elasticity of demand is positive | Ex: increase in price of 1 brand of cookie will increase the demand for the other brands

Question 31

Cross-price elasticity of demand for compliments

Answer 31

Cross-price elasticity of demand is negative | Ex: increase in the price of milk causes a decrease in the demand for Oreos

Question 32

When does cross-price elasticity of demand = 0?

Answer 32

when the products are not related

Question 33

Income elasticity of demand definition

Answer 33

measures how sensitive the quantity demanded of a good is to changes in income

Question 34

Income elasticity of demand for normal goods

Answer 34

Income elasticity of demand is positive

Question 35

Income elasticity of demand for inferior goods

Answer 35

Income elasticity of demand is negative

Question 36

Price elasticity of Supply definition

Answer 36

how sensitive producers are to changes in price of product

Question 37

If the supply curve is: elastic

Answer 37

a rise in price increases the quantity supplied a lot (and vice versa)

Question 38

If the supply curve is: inelastic

Answer 38

a rise in price increases the quantity supplied just a little (and vice versa)

Question 39

|elasticity| < 1

Answer 39

demand curve is inelastic

Question 40

|elasticity| > 1

Answer 40

demand curve is elastic

Question 41

|elasticity| = 0

Answer 41

demand curve is unit elastic

Question 42

Perfectly Inelastic Demand def

Answer 42

price elasticity of demand = 0; consumers are not at all sensitive to changes in price

Question 43

Perfectly Inelastic Demand (what does it look like on a graph?)

Answer 43

vertical line -- any increase in price doesn't change QD

Question 44

Perfectly elastic Demand def

Answer 44

price elasticity of demand = infinity; consumers are ultra sensitive to any change in price

Question 45

Perfectly elastic Demand (what does it look like on a graph?)

Answer 45

horizontal line -- at exactly one price all customers are willing to buy any quantity

Question 46

What factors determine the price elasticity of demand?

Answer 46

1. Availability of close substitutes - if there are a lot of substitutes = elastic - the fewer substitutes the more inelastic demand is 2. Whether the good is a necessity or a luxury - Necessity: less sensitive to changes in P (inelastic) - Luxury: more sensitive to changes in P (elastic) 3. Share of income spent on the good - Price changes when good feels cheap (inelastic) - Price changes when good feels expensive (elastic) 4. Length of time elapsed since the price changed - Less time to adjust (inelastic) - More time to adjust = ability to adjust behavior and find close substitutes (elastic)

Question 47

Total Revenue equation

Answer 47

Price times quantity

Question 48

When demand is inelastic, what happens to total revenue?

Answer 48

total revenue will rise when the price rises (and vice versa)

Question 49

When demand is elastic, what happens to total revenue?

Answer 49

total revenue will fall when price rises

Question 50

When demand is unit elastic, what happens to total revenue?

Answer 50

total revenue does not change