MIDTERM TWO PRACTICE QUESTIONS Flashcards
producer surplus is
the amount a seller is paid - the cost of production
Total surplus is measured as
the area below the demand curve and above the supply curve, up to the equilibrium quantity
Efficiency in a market is achieved when
the sum of producer surplus and consumer surplus is maximized
For a good that is a luxury, demand tends to be…
elastic
If a shortage exists in a market, then the actual price is..
below the equilibrium price and quantity demanded is greater than quantity supplied
A consumer’s willingness to pay directly measures the extent to which advertising and other external forces have influenced the consumer’s preference
how much a buyer value a good
As the size of a tax rises, the deadweight loss
rises and the tax revenue first rises and then falls
The Laffer curve illustrates that
deadweight loss rises by the square of the increase in a tax
deadweight loss rises exponentially as a tax increase
What will likely have the most price inelastic demand?
salt
Demand is perfectly elastic and supply of the good in question decreases
the equilibrium quantity decreases, the equilibrium price is unchanged
Goods with many close substitutes tend to have
more elastic demands
An increase in price causes an increase in total revenue when demand is
inelastic
Demand is inelastic if the price elasticity of demand is
less than 1
For a good that is a necessity, demand tends to be
inelastic
As we move downward and to the right along a linear, downward sloping curve
the slope remains constant but elasticity changes
When a demand is elastic a decrease in price will cause
a decrease in total revenue
When demand is unit elastic, price elasticity of demand equals
1 and total revenue does not change when price changes
Price controls are usually enacted
when policymakers believe that the market price of a good/service is unfair to buyers/sellers
A 2.00 tac levied on the sellers of birdhouses will shift the supply curve
upward by exactly $2.00
A price floor is binding when it is set
above the equilibrium price, causing a surplus
a tax levied on buyers shift the demand curve….
downward
a tax levied on levied on sellers shift the supply curve
upward
taxes do what to the price paid by buyers?
raises the price
taxes do what to the price recieved by sellers?
reduces the rpdice
why is there a deadweight loss?
people respond to incentives (buyers are motivated to buy less and producers are motivated to make less)
A tax on a good has a deadweight loss if…
the tax revenue is greater than the reduction in consumer and producer surplus
What does the deadweight loss represent?
the surplus that is lost because the tax discourages mutually advantageous trades between buyers and sellers
deadweight loss measures the loss
in a market to buyers and sellers that is not offset by an increase in government revenue
when supply is relatively inelastic, the deadweight loss of a tax…
is smaller than when supply is relatively elastic
total surplus includes…
the deadweight loss (all of the triangle)
What happens to consumer surplus if the price of a good increases?
consumer surplus decreases
Demand is said to be inelastic if
the quantity demanded changes only slightly when the price of the good changes
If the price of a good gets smaller, then the total surplus will be
smaller than it would be at the equilibrium price
Total surplus is measured as the area
below the demand curve and above the supply curve
