PE Chapter 7+8+9 Review Flashcards
PS 3
A result of welfare economics is that the equilibrium price of a product is considered to be the best price because it
a. Maximizes total revenue for firms and maximizes the quantity supplied of the product
b. Maximizes the combined welfare of buyers and sellers
c. Minimizes costs and maximizes profit of sellers
d. Minimizes the level of welfare payments to those who no longer live below the poverty line
b. Maximizes the combined welfare of buyers and sellers
In welfare economics, the equilibrium price is considered the most efficient price because it balances supply and demand in a way that maximizes total surplus - the combined welfare of both consumers (consumer surplus) - and producers (producer surplus). This ensures that resources are allocated efficiently, benefiting both buyers and sellers
Consider a good to which a per-unit tax applies. The size of the deadweight that results from the tax is smaller, the
a. Less elastic is the demand for the good
b. Less elastic is the supply of the good
c. Smaller is the amount of the tax
d. All of the above are correct
d. All of the above are correct
Deadweight loss (DWL) from taxation is smaller when:
- Demand is less elastic - consumers do not significantly reduce quantity demanded when the price increases due to the tax
- Supply is less elastic - producers do not significantly reduce quantity supplied when the tax is implied
- The tax is smaller - A smaller tax leads to less disortion in the market
Suppose Halti has a comparative over other countries in producing sugar, but other countries have an absolute advantage over Halti in producing sugar is allowed, Halti
a. Will import sugar
b. Will export sugar
c. Will either export sugar or import sugar, but it is not clear from the given information
d. Would have nothing to gain either from exporting or importing sugar
b. Will export sugar
- Comparative advantage means a country can produce a good at a lower opportunity cost than others
- Absolute advantage means a country can produce a good more efficiently (using fewer resources) than others
Even if other countries have an absolute advantage in producing sugar, Halti has a comparative advantage, meaning it can still benefit from trade by exporting sugar to other countries where the opportunity cost of producing sugar is higher.
When a country allows trade and becomes an exporter of a good,
a. Consumers surplus and producer surplus both increase
b. Consumer surplus and producer surplus both decrease
c. Consumer surplus increases and producer surplus decreases
d. Consumer surplus decreases and consumer surplus increases
d. Consumer surplus decreases and consumer surplus increases
When a country allows trade and becomes an exporter of a good, the price of that good in the domestic market rises to match the world price.
- Producers benefit because they can sell their goods at a higher price, leading to an increase in producer surplus
- Consumers lose because they now have to pay a higher price for the good, leading to a decrease in consumer surplus
When the nation of Econoland allows trade and becomes an exporter of televisions
a. Residents of Econoland who produce televisions become worse off, residents of Econoland who buy televisions become better off, and the economic well-being of Econoland rises
b. Residents of Econoland who produce televisions become worse-off, residents of Econoland who buy televisions become better off, and the economic well-being of Econoland falls
c. Residents of Econoland who produce televisions become better off, residents of Econoland who buy televisions become worse off, and the economic well-being of Econoland rises
d. Residents of Econoland who produce televisions become better off, residents of Econoland who buy televisions become worse off, and the economic well-being of Econoland falls
c. Residents of Econoland who produce televisions become better off, residents of Econoland who buy televisions become worse off, and the economic well-being of Econoland rises
When Econoland allows trade and becomes an exporter of televisions, the domestic price of televisions rises to match the world price.
- Producers in Econoland benefit because they can sell televisions at a higher price, increasing their revenue and becoming better off.
- Consumers in Econoland lose because they now have to pay more for televisions, becoming worse off
- Overall economic well-being rises because the gains from trade (higher producer surplus) exceed the losses from higher prices for consumers
Suppose the United States exports cars to France and imports cheese from Switzerland. This situation suggests that
a. The United States has a comparative advantage relative to Switzerland in producing cheese, and France has a comparative advantage relative to the United States in producing cars
b. The United States has a comparative advantage relative to France in producing cars, and Switzerland has a comparative advantage relative to the United States in producing cheese
c. The United States has an absolute advantage relative to Switzerland in producing cheese, and France has an absolute advantage relative to United States in producing cars
d. The United States has an absolute advantage relative to France in producing cars, and Switzerland has an absolute advantage relative to the United States relative to the United States in producing cheese
b. The United States has a comparative advantage relative to France in producing cars, and Switzerland has a comparative advantage relative to the United States in producing cheese
- The US exports cars to France, meaning it has a comparative advantage in car production relative to France
- The US imports cheese from Switzerland, meaning Switzerland has a comparative advantage in cheese production relative to the US
Comparative advantage is based on opportunity costs, not absolute prductivity. The country that sacrifies less of other goods to produce a product has the comparative advantage
Marginal buyers/ sellers
marginal buyers will be the first one to leave the market when the price increases. Marginal sellers will be the first one to leave the market if the price decrease. When the price change again, the previous marginal buyers are not considered
