Exam 3 (7, 9, and 10) Flashcards
Excise Tax (def)
$ per unit sold/bought
Incidence of tax (def)
a measure of who really pays the tax
If tax is imposed on producers
supply curve shifts left by the amount of the tax
- Effective price received by producers = market price - tax
- Effective price paid by consumers = market price
- Equilibrium price rises
- Equilibrium quantity decreases
If tax is imposed on consumers
demand curve shifts left by the amount of the tax
- Effective price received by producers = market price
- Effective price paid by consumers = market price + tax
- Equilibrium price falls
- Equilibrium quantity falls
When the price elasticity of demand is low and the price elasticity of supply is high then the burden of an excise tax falls mainly on …
the consumers
When the price elasticity of demand is high and the price elasticity of supply is low then the burden of an excise tax falls mainly on …
producers
The sides of the market that is relatively _____ sensitive to price changes bears _____ of the tax burden
less; more
Total Tax Revenue =
tax * quantity
Total Surplus (after tax is imposed) =
PS + CS + Tax Rev
DWL is larger when demand is
elastic (more of a response b/c consumers are more sensitive)
DWL is smaller when demand is
inelastic (less of a response b/c consumers are less sensitive)
DWL is larger when supply is
elastic
DWL is smaller when supply is
inelastic
If the goal is efficiency (to reduce DWL) then policymakers should
choose the goods with the lowest elasticities
-Tax on insulin would be efficient but not fair
The benefits principle
those who benefit from public spending should bear the burden of the tax that pays for that spending
The ability to pay principle
those with greater ability to pay a tax should pay more tax
–Ex: income tax
Explicit cost
direct monetary cost (cost of books)
implicit cost
the value in $ terms of benefits that are forgone (wages forgone b/c of being a full-time student)
accounting profit
revenue - explicit cost
economic profit
revenue - explicit cost - implicit cost
“Either or” decision
choose the one with positive economic profit
“How much” decision
use marginal analysis: compare the additional costs and benefits of each increase
Marginal cost
the additional cost incurred by producing one more unit of the good or service
Marginal benefit
the additional benefit derived from producing one more unit of the good or service
Optimal quantity
the largest quantity at which the marginal benefit is greater than or equal to marginal cost
-Q at which the 2 curves intersect
How to maximize profit:
set marginal benefit and marginal cost (not total) equal to each other
Sunk cost
a cost that has already been incurred and is not recoverable
- Should be ignored in decisions about future actions
- if you lose your concert tickets, the $80 you’ve already spent on them is irrelevant to the decision of whether to replace them - it is a sunk cost
Utility
measure of satisfaction from consumption
Marginal utility
change (pos or neg) in utility from consuming an additional unit
Diminishing marginal utility
each additional unit of a good adds less to utility than the previous unit
At the point when MU drops below 0
utility starts t slope down
2 constraints
- Goods usually have prices
2. Consumers can only spend as much money as their income allows
budget constraint
shows all combinations of goods (consumption bundles) that a consumer can afford given his/her income and the price
Bundles that exhaust your entire income
lie on the budget line
affordable bundles
anything below the budget line
unaffordable bundles
anything above the budget line
Optimal consumption bundle
is the one that maximizes a consumer’s total utility given his or her budget constraint
Marginal comparison using prices
at the optimal consumption bundle, MU per $ spent on each good must be the same for both goods
-do (MU / Price) of one good = (MU/Price) of another good
