Topic 3.3

Question 1

Define reservation price for a) a buyer and b) a seller?

Answer 1

a) the maximum price they will pay for a good

b) the minimum price they will accept for a good

Question 2

See top of page 2 about discreet goods and learn it

What is the area under the DC equal to?

Answer 2

now

gross benefit

Question 3

Define gross benefit?

Answer 3

Utility from consuming goods

Question 4

Why do we use a demand curve for continuous goods?

Answer 4

Difficult to estimate the reservation-price curve for a continuous good

Question 5

What is is meant by consumer’s surplus measure of net utility gain?

Answer 5

It means approximating the net utility gain area under the RP curve by the corresponding area under the normal demand curve

Question 6

What is the difference between the RP curve and the DC due to? When is there no difference between them?

Answer 6

Due to income effects

BUT if consumer’s utility function is quasilinear in income then there’s no difference (see slide 95)

Question 7

Market demand curve = ?

Answer 7

Horizontal sum of individual consumers demand curves (see and draw diagrams in notes)

Question 8

Why is there sometimes a kink in the market demand curve?

Answer 8

Since there are no negative quantities of goods, therefore at some levels of quantity consumers will demand none rather than -ve -> kink

Question 9

What does elasticity measure?

Answer 9

The ‘sensitivity’ of one variable wrt another

Question 10

Advantage of using elasticity measure?

Answer 10

It is a ratio of percentages tf has no units

Question 11

Draw diagram showing the change in absolute value of PED at different points?

Answer 11

See notes

Question 12

What happens to revenue if you increase price when PED is:

a) between 0 and -1
b) equal to -1
c) less than -1

Answer 12

a) inelastic tf increase p -> increase rev
b) unit elasticity tf no change in rev
c) elastic tf decrease in rev

Question 13

Define PED?

Answer 13

A measure of responsiveness of demand after a change in products own price

Question 14

What happens to marginal revenue when PED is:

a) between 0 and -1
b) equal to -1
c) less than -1

Answer 14

a) MR<0
b) MR=0
c) MR>0

Question 15

See market equilibrium bit in notes

Answer 15

now

Question 16

How are P and Q determined when:

a) normal D and S curves
b) S is fixed and independent of p
c) S is very sensitive to change in p?

Answer 16

a) when Q(d)=Q(s)
b) DC determines price, supply determines quantity
c) equilibrium price determined by supply curve

Question 17

See

Answer 17

Slides 119-120 and check i know definitions for PS, CS and TS

Question 18

Define quantity tax? What is it called if its levied on sellers? and on buyers?

Answer 18

A rate t of tax is paid on each unit traded
Sellers - Excise tax
Buyers - Sales tax

Question 19

What determines the incidence of a tax?

Answer 19

The own-price elasticity of the supply and demand curves

Tf doesn’t make a difference if an excise or sales tax is levied if they are levied at the same rate t

Question 20

How do excise taxes and sales taxes affect the D and S diagram? Draw both diagrams

Answer 20

Excise shifts market supply left
Sales shifts market demand down
See notes for diagrams

Question 21

See and learn algebraic quantity taxes and market eq, also see slides 129-134

Answer 21

Now

Question 22

Define tax incidence?

Answer 22

The division of tax between buyers and sellers

Question 23

Note

Answer 23

The fraction of a Q tax t paid by buyers rises as supply becomes more own-price elastic or as demand becomes more own-price elastic (and vice versa)

Question 24

What does a quantity imposed on a competitive market do?

Answer 24

It reduces the quantity traded and tf reduces the gains-to-trade

Question 25

Define gains-to-trade?

Answer 25

The increase in total surplus arising from lower taxes or otherwise liberalizing trade

Question 26

Gains to trade = ?

Answer 26

The sum of CS, PS and tax collected by government

Question 27

When elasticity of demand=0, what will be the DWL when a quantity tax is imposed?

Answer 27

0 (show in a diagram)

Question 28

When elasticity of supply=0, what will be the DWL when a quantity tax is imposed?

Answer 28

0 (show in a diagram)

as PED/PES becomes more elastic, the DWL from a quantity tax will increase

Question 29

Draw diagrams and explain how a price ceiling/rationing may affect a market and welfare?

Answer 29

Now (see notes)

price of a ration coupon=pe(1)-pc

Question 30

What does a ration coupon do?

Answer 30

Allows each consumer to purchase a certain amount of a product