Micro Chapter 5-11 – Flashcards
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Price elasticity of demand
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A measure of how much the quantity demanded of a good responds to a change in the price of that good
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Relationship between total revenue and price elasticity of demand (3 part)
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When demand is inelastic, a price increases raises total revenue (decrease lowers T.R.). When elastic, a price increase reduces T.R. (decrease raises T.R.). When demand is unit elastic, change in price does not effect T.R.
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Price elasticity of supply
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A measure of how much the quantity supplied of a good responds to a change in the price of that good
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Why price elasticity of supply might be different in the long run/short run for a product
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It is hard to change the quantity produced in the short run quickly, but in the long run it can be changed
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How could the destruction of half of all farm crops be bad for farmers?
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If the good is in inelastic supply, the price increase will raise total revenue
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Why don't they destroy their own crops to make this happen?
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They can't because they have to take the market price as given.
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Price elasticity of demand
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How much quantity demanded responds to a change in price
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Income elasticity of demand
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How much quantity quantity demanded responds to changes in consumers' income
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4 determinants of price elasticity
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1) availability of substitutes (2) whether it is a luxury good or necessity (3) how narrowly defined a market is (4) and time horizon
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if elasticity is greater than one?
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the demand is elastic
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if elasticity is 0?
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demand is perfectly inelastic
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if demand is elastic, how will an increase in price change total revenue?
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it reduces total revenue
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What do we call a good with an income elasticity less than 0?
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It is an inferior good
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How is price elasticity of supply calculated?
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%change in quantity supplied divided by %change in price, it measures how much quantity supplied responds to changes in price
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If a fixed quantity of a good is available, and no more can be made, what is the price elasticity of supply?
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the price elasticity of supply is 0
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When half the fava bean crop is destroyed, what happens?
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It is bad for farmers because the increase in price will decrease demand more than revenue will increase
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Price ceiling
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Legal maximum of the price at which a good can be sold, leads to a shortage
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Price floor
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Legal minimum of the price at which a good can be sold, leads to a surplus
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Example of price ceiling
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Rent control
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Example of price floor
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minimum wage
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What mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium?
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if there is a surplus, sellers must appeal to buyers in other ways. if there is a shortage, sellers must ration the good
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Why do economists usually oppose controls on prices?
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Because they do not let supply and demand take effect and therefore their job is harder.
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What determines how the burden of a tax is divided between and sellers, why?
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The elasticities of supply/demand determines this. The side with fewer alternatives bears more burden of the tax.
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See #15
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C
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See #16
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A
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17 An entrepreneur's motivation to start a business arises from a. an innate love for the type of business that he or she starts. b. a desire to earn a profit. c. an altruistic desire to provide the world with a good product. d. All of the above could be correct.
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D
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18 Bubba is a shrimp fisherman who used $2,000 from his personal savings account to buy a boat and equipment for his shrimp business. The savings account paid 2% interest. What is Bubba's annual opportunity cost of the financial capital that he invested in his business? a. $20 b. $40 c. $200 d. $400
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B
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19 Walter used to work as a high school teacher for $40,000 per year but quit in order to start his own painting business. To invest in his painting business, he withdrew $20,000 from his savings, which paid 3 percent interest, and borrowed $30,000 from his uncle, whom he pays 3 percent interest per year. Last year Walter paid $25,000 for supplies and had revenue of $60,000. Walter asked Tyler the accountant and Greg the economist to calculate his painting business's costs. a. Tyler says his costs are $25,900, and Greg says his costs are $66,500. b. Tyler says his costs are $25,000, and Greg says his costs are $65,000. c. Tyler says his costs are $66,500, and Greg says his costs are $66,500. d. Tyler says his costs are $75,000, and Greg says his costs are $41,500.
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A
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See #20
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264 (a) graph
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1. Price controls are usually enacted a. as a means of raising revenue for public purposes. b. when policymakers believe that the market price of a good or service is unfair to buyers or sellers. c. when policymakers tax a good. d. All of the above are correct.
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B
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2. A price ceiling is a. often imposed on markets in which "cutthroat competition" would prevail without a price ceiling. b. a legal maximum on the price at which a good can be sold. c. often imposed when sellers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price ceiling. d. All of the above are correct.
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B
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3. Which of the following is the most likely explanation for the imposition of a price floor on the market for corn? e. Policymakers have studied the effects of the price floor carefully, and they recognize that the price floor is advantageous for society as a whole. f. Buyers and sellers of corn have agreed that the price floor is good for both of them and have therefore pressured policy makers into imposing the price floor. g. Buyers of corn, recognizing that the price floor is good for them, have pressured policymakers into imposing the price floor. h. Sellers of corn, recognizing that the price floor is good for them, have pressured policymakers into imposing the price floor.
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H
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4. Suppose the government has imposed a price floor on cellular phones. Which of the following events could transform the price floor from one that is binding to one that is not binding? i. Cellular phones become less popular. j. Traditional land line phones become more expensive. k. The components used to produce cellular phones become less expensive. l. Firms expect the price of cellular phones to fall in the future.
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I
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see #5
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N
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6. Consumer surplus a. is the amount of a good that a consumer can buy at a price below equilibrium price. b. is the amount a consumer is willing to pay minus the amount the consumer actually pays. c. is the number of consumers who are excluded from a market because of scarcity. d. measures how much a seller values a good.
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B
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see #7
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B
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8. Tom tunes pianos in his spare time for extra income. Buyers of his service are willing to pay $155 per tuning. One particular week, Tom is willing to tune the first piano for $120, the second piano for $125, the third piano for $140, and the fourth piano for $160. Assume Tom is rational in deciding how many pianos to tune. His producer surplus is a. $95. b. $80. c. $75. d. $60.
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B
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9. At Nick's Bakery, the cost to make a cheese danish is $1.50 per danish. As a result of selling ten danishes, Nick experiences a producer surplus in the amount of $20. Nick must be selling his danishes for a. $2.00 each. b. $0.50 each. c. $3.50 each. d. $5.00 each.
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C
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10 If a tax shifts the supply curve upward (or to the left), we can infer that the tax was levied on a. buyers of the good. b. sellers of the good. c. both buyers and sellers of the good. d. We cannot infer anything because the shift described is not consistent with a tax.
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D
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11 A tax placed on buyers of tuxedoes shifts the e. demand curve for tuxedoes downward, decreasing the price received by sellers of tuxedoes and causing the quantity of tuxedoes to increase. f. demand curve for tuxedoes downward, decreasing the price received by sellers of tuxedoes and causing the quantity of tuxedoes to decrease. g. supply curve for tuxedoes upward, decreasing the effective price paid by buyers of tuxedoes and causing the quantity of tuxedoes to increase. h. supply curve for tuxedoes upward, increasing the effective price paid by buyers of tuxedoes and causing the quantity of tuxedoes to decrease.
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F
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see #12
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A
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see #13
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J
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14 Suppose Brazil has a comparative advantage over other countries in producing almonds, but other countries have an absolute advantage over Brazil in producing almonds. If trade in almonds is allowed, Brazil a. will import almonds. b. will export almonds. c. will either import almonds or export almonds, but it is not clear from the given information. d. would have nothing to gain either from exporting or importing almonds.
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B