Exam 3 (7, 9, and 10)

Question 1

Excise Tax (def)

Answer 1

$ per unit sold/bought

Question 2

Incidence of tax (def)

Answer 2

a measure of who really pays the tax

Question 3

If tax is imposed on producers

Answer 3

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

Question 4

If tax is imposed on consumers

Answer 4

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

Question 5

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 …

Answer 5

the consumers

Question 6

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 …

Answer 6

producers

Question 7

The sides of the market that is relatively _____ sensitive to price changes bears _____ of the tax burden

Answer 7

less; more

Question 8

Total Tax Revenue =

Answer 8

tax * quantity

Question 9

Total Surplus (after tax is imposed) =

Answer 9

PS + CS + Tax Rev

Question 10

DWL is larger when demand is

Answer 10

elastic (more of a response b/c consumers are more sensitive)

Question 11

DWL is smaller when demand is

Answer 11

inelastic (less of a response b/c consumers are less sensitive)

Question 12

DWL is larger when supply is

Answer 12

elastic

Question 13

DWL is smaller when supply is

Answer 13

inelastic

Question 14

If the goal is efficiency (to reduce DWL) then policymakers should

Answer 14

choose the goods with the lowest elasticities

-Tax on insulin would be efficient but not fair

Question 15

The benefits principle

Answer 15

those who benefit from public spending should bear the burden of the tax that pays for that spending

Question 16

The ability to pay principle

Answer 16

those with greater ability to pay a tax should pay more tax

–Ex: income tax

Question 17

Explicit cost

Answer 17

direct monetary cost (cost of books)

Question 18

implicit cost

Answer 18

the value in $ terms of benefits that are forgone (wages forgone b/c of being a full-time student)

Question 19

accounting profit

Answer 19

revenue - explicit cost

Question 20

economic profit

Answer 20

revenue - explicit cost - implicit cost

Question 21

“Either or” decision

Answer 21

choose the one with positive economic profit

Question 22

“How much” decision

Answer 22

use marginal analysis: compare the additional costs and benefits of each increase

Question 23

Marginal cost

Answer 23

the additional cost incurred by producing one more unit of the good or service

Question 24

Marginal benefit

Answer 24

the additional benefit derived from producing one more unit of the good or service

Question 25

Optimal quantity

Answer 25

the largest quantity at which the marginal benefit is greater than or equal to marginal cost
-Q at which the 2 curves intersect

Question 26

How to maximize profit:

Answer 26

set marginal benefit and marginal cost (not total) equal to each other

Question 27

Sunk cost

Answer 27

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

Question 28

Utility

Answer 28

measure of satisfaction from consumption

Question 29

Marginal utility

Answer 29

change (pos or neg) in utility from consuming an additional unit

Question 30

Diminishing marginal utility

Answer 30

each additional unit of a good adds less to utility than the previous unit

Question 31

At the point when MU drops below 0

Answer 31

utility starts t slope down

Question 32

2 constraints

Answer 32

1. Goods usually have prices

2. Consumers can only spend as much money as their income allows

Question 33

budget constraint

Answer 33

shows all combinations of goods (consumption bundles) that a consumer can afford given his/her income and the price

Question 34

Bundles that exhaust your entire income

Answer 34

lie on the budget line

Question 35

affordable bundles

Answer 35

anything below the budget line

Question 36

unaffordable bundles

Answer 36

anything above the budget line

Question 37

Optimal consumption bundle

Answer 37

is the one that maximizes a consumer’s total utility given his or her budget constraint

Question 38

Marginal comparison using prices

Answer 38

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