quiz 1 - exchange and markets

Question 1

what do consumer and producer surplus represent?

Answer 1

the gains made from trade

also, the added welfare to society from trading

Question 2

when is economic surplus maximized

Answer 2

economic surplus = consumer + producer surpluses

it is maximized at equilibrium

this says nothing of surplus to individuals; it’s talking about the aggregate surplus/welfare benefit to society

Question 3

for taxes in competitive equilibrium, how should you model them?

Answer 3

either shift the supply curve left by the amount of the tax

or shift the demand curve left by the amount of the tax

both will produce the same result

Question 4

if a tax is imposed, who pays more of it, buyers or sellers?

Answer 4

it depends on the elasticity of the supply and demand curves

if the demand curve is steeper (more inelastic) than supply curve, consumers pay more of the tax

if the supply curve is steeper (more inelastic) than demand curve, producer pay more of the tax

in the extreme event that the demand curve is perfectly inelastic, the buyers will pay the entire tax and sellers will pay none

Many of the items that are heavily taxed tend to have inelastic demand curves (cigarettes, gasoline, etc.) which means that consumer end up paying more of the tax, though typically sellers must also pay some of the tax

tax incidence (how much of the tax the consumers pay relative to producers and vice versa) is the same no matter who the tax is collected from