Test #2

Question 1

Total surplus

Answer 1

consumer surplus + producer surplus

Question 2

consumer surplus

Answer 2

Suppose you are in the market for a new smartphone, and you value the latest model at $800, meaning that is the highest price you are willing to pay for it. If you find it on sale for $600, your consumer surplus is $200.

Question 3

producer surplus

Answer 3

Imagine a farmer who grows strawberries. If the farmer is willing to sell strawberries at $2 per pound but the market price is $3 per pound, the difference of $1 per pound represents the farmer’s producer surplus for each pound sold.

Question 4

Taxes

Answer 4

discourage bad behavior

Question 5

Subsidies

Answer 5

encourage good behaviors

Question 6

per unit taxes

Answer 6

The government collects revenue from the tax, in this example, $0.50 for each of the 950 packs sold per day, totaling $475 per day.

Question 7

ad valorem taxes

Answer 7

If you buy a laptop for $1,000 and the sales tax rate is 7%, the ad valorem tax would be $70 (7% of $1,000), making the total cost of the laptop $1,070.

Question 8

lump sum taxes

Answer 8

ex) license registration fees

Question 9

dead weight loss

Answer 9

The decrease in total surplus
caused by market distortions

Deadweight loss occurs when the total surplus (sum of consumer and producer surplus) in a market is not maximized.

Question 10

Statutory incidence

Answer 10

Statutory incidence of a tax refers to the legal obligation to pay the tax, as specified by law. It indicates who, according to the tax law or statute, is responsible for the remittance of the tax to the government. This is distinct from the economic incidence of a tax, which looks at who actually bears the burden of the tax through changes in market prices and quantities sold.

Question 11

Tax Incidence

Answer 11

does not depend on the whether the government levies the tax on producers or consumers

Question 12

What determines tax incidence?

Answer 12

relative price elasticities of demand and supply

Question 13

Does inelastic or elastic bear more of the burden?

Answer 13

inelastic

Price increases where people are less responsive and therefore tax revenue is higher

Question 14

Laffer Curve

Answer 14

The Laffer curve illustrates the relationship between rates of taxation and the resulting levels of the government’s tax revenue

Question 15

If a government wants to raise revenue while minimizing deadweight loss, which good
would it tax?

Answer 15

Good with inelastic demand

Question 16

A government wants to discourage the consumption of goods that impose costs on others, so it imposes a tax of $5 per unit. For which good will the tax reduce consumption
the most?

Answer 16

Good with relatively elastic demand

Question 17

How can a government increase the effectiveness of taxes on “bad” behaviors?

Answer 17

Alternatives

Question 18

Price Floor

Answer 18

min price that can be charged

Question 19

Changing price and behavior

Answer 19

Impossible to change just one price

Impossible to change just one behavior!

Question 20

If demand increases

Answer 20

at all prices there is a higher quantity demanded.

Question 21

The opportunity cost of reading a single chapter from a textbook

Answer 21

has nothing to do with the price you paid for the book.

Question 22

A regulation is designed to alter the behavior of individuals

Answer 22

by introducing a cost or benefit that encourages them change their behavior in the intended way.

Question 23

Equilibrium price

Answer 23

no excess supply or demand

no pressure for quantity to change

Question 23

Where there is currently a shortage in a market

Answer 23

one should expect the quantity demanded to fall.

Question 23

Where there is currently a surplus in a market

Answer 23

one should expect the quantity supplied to fall.

Question 24

In terms of being able to predict behavior, the value of a good is best thought of as

Answer 24

what one is willing to give up in order to acquire the good.

Question 25

Opportunity cost

Answer 25

next best alternative

Question 25

If we increase the price for winning a tournament,

Answer 25

we have also increased the reward associated with sabotaging others.

Question 26

Every human cost

Answer 26

has a cost associated with it

Question 27

Scarcity

Answer 27

not having enough of what is desirable

Question 28

When there are more substitutes available

Answer 28

we expect demand to be less inelastic.

Question 29

Imposing a binding price ceiling

Answer 29

results in a decrease in the quantity supplied to the market. A binding price ceiling is set below the equilibrium price, causing a shortage because it increases the quantity demanded while simultaneously decreasing the quantity suppliers are willing to provide at that lower price. This imbalance between higher demand and lower supply leads to shortages of the good or service in the market.

Question 30

Removing a tax

Answer 30

Removing a per-unit tax on production would decrease the cost of production, which could be passed on to consumers in the form of lower prices.

Question 31

Area under the demand curve and above the equilibrium price

Answer 31

consumer surplus

Question 32

Fewer substitutes available means that

Answer 32

prices will change more

Question 32

Imposing a binding price ceiling

Answer 32

results in a decrease in the quantity supplied to the market.

Question 33

Lead pencils and ink pens are substitutes. When the government bans the use of lead
in pencils, which of the following would you expect to happen in the market for pens?

Answer 33

The equilibrium price of pens will go up.

Question 34

If a price ceiling is imposed above the equilibrium price, is the outcome efficient?

Answer 34

Yes

Question 35

If a $5 per-unit tax on the production of tires were removed, one would expect the
price of tires

Answer 35

to decrease by less than $5

Question 36

As the product of one firm becomes increasingly different from those of other firms we
expect that

Answer 36

the demand curve facing the firm will be less elastic