Lecture 5 - Economic Efficiency, Government Price Setting, and Taxes

Question 1

Consumer Surplus

Answer 1

The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays; net benefit to consumers from participating in a market

Question 2

Reservation Price

Answer 2

The highest price a consumer is willing to pay for a good or service

Question 3

Marginal Benefit

Answer 3

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

Question 4

The demand curve is also called the

Answer 4

marginal benefit curve

Question 5

What area on a graph represents the consumer surplus?

Answer 5

The area under the demand curve and above the price

Question 6

Producer Surplus

Answer 6

The difference between the lowest price a firm is willing and able to accept for a good or service and the price it actually receives

Question 7

What is the lowest price a firm is willing to accept for a good or service?

Answer 7

Marginal cost

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 is equal to

Answer 9

Total amount firms receive from consumers minus the cost of producing the good or service

Question 10

Consumer Surplus is equal to

Answer 10

The total benefit received by consumers minus the amount they must pay to purchase a good or service

Question 11

The supply curve is sometimes called the

Answer 11

Marginal Cost curve

Question 12

What area on the graph represents the Producer Surplus?

Answer 12

The area above the supply curve and below the price

Question 13

Economic surplus

Answer 13

The sum of producer and consumer surpluses

Question 14

Allocative Efficiency

Answer 14

Marginal benefit to consumers is equal to the marginal cost of producing

Question 15

When is economic surplus maximized?

Answer 15

When a market is allocatively efficient

Question 16

What happens in competitive equilibrium?

Answer 16

Marginal benefit is equal to marginal cost

Question 17

Deadweight Loss

Answer 17

the reduction in economic surplus resulting from a market not being in competitive equilibrium; a measure of inefficiency

Question 18

Price Ceiling

Answer 18

A legally determined maximum price that a firm may charge for a good or service

Question 19

What is an example of a price ceiling?

Answer 19

Rent Control

Question 20

Price Floor

Answer 20

A legally determined minimum price that a firm may charge for a good or service

Question 21

What are two examples of a price floor?

Answer 21

Minimum Wage, Agricultural Price Supports

Question 22

Black Market

Answer 22

A market in which buying and selling takes place at prices that violates government price regulations

Question 23

True or False: Economic Efficiency suffers due to price controls

Answer 23

True

Question 24

What is the motivation for levying a tax?

Answer 24

Increase governmental revenue which increases the provision of governmentallly supplied goods and services

Question 25

Sin Tax

Answer 25

A tax levied on a proscribed good or service, with the intent of reducing consumption

Question 26

Tax Incidence

Answer 26

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

Question 27

If demand for a product is inelastic, who will bear most of the burden of a tax?

Answer 27

Consumers

Question 28

If demand for a product is elastic, who will bear most of the burden of a tax?

Answer 28

Producers

Question 29

How is tax incidence determined?

Answer 29

The relative price elasticities of supply and demand

Question 30

True or False: tax incidence depends on who has the legal obligation to pay a tax

Answer 30

False

Question 31

What do the curves of perfectly elastic and perfectly inelastic demand look like?

Answer 31

Perfectly inelastic demand curve is vertical; Perfectly elastic demand curve is horizontal