Microeconomics Ch 5-8 Review

Suppose the price of a bag of frozen chicken nuggets decreases from $6.50 to $5.75 and, as a result, the quantity of bags demanded increases from 600 to 800. Using the midpoint method, the price elasticity of demand for frozen chicken nuggets in the given price range is

2.33

Change in price:
(5.75-6.5)/6.125=0.1224
Change in quantity demanded:
(800-600)/700=0.2857

0.1224/0.2857=2.33

When demand is elastic, a decrease in price will cause

an increase in total revenue

Goods with many close substitutes tend to have

more elastic demands

Total revenue when the price is P2 is represented by the area(s)

A+B

An increase in price causes an increase in total revenue when demand is

inelastic

Demand is inelastic if the price elasticity of demand is

less than 1

Total revenue will be at its largest value on a linear demand curve at the

midpoint of the curve

Demand is said to be inelastic if

the quantity demanded changes only slightly when the price of the good changes

As price falls from Pa to Pb, which demand curve represents the most elastic demand?

D1

Total revenue when the price is P1 is represented by the area(s)

B+D

Demand is said to be unit elastic if quantity demanded

changes by the same percent as the price

Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result,

the equilibrium quantity decreases, and the equilibrium price is unchanged

When the price of chai tea lattés is $5, Maxine buys 20 per month. When the price is $4, she buys 30 per month.

elastic, and her demand curve would be relatively flat

As we move downward and to the right along a linear, downward-sloping demand curve,

slope remains constant but elasticity changes

When demand is unit elastic, price elasticity of demand equals

1, and total revenue does not change when price changes

Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the

flatter the demand curve will be

If rectangle D is larger than rectangle A, then
A. demand is elastic between prices P1 and P2
B. a decrease in price from P2 to P1 will cause an increase in total revenue
C. the magnitude of the percent change in price between P1 and P2 is smaller than the magnitude of the corresponding percent change in quantity demanded
D. All of the above are correct

D

Between point A and point B, price elasticity of demand is equal to

1.5

Suppose the point labeled B is the "halfway point" on the demand curve and it corresponds to a price of $5.00. Then, between prices of $4.99 and $5.01, the price elasticity of demand is

equal to 1

For a good that is a necessity, demand

tends to be inelastic

Which of the following is likely to have the most price inelastic demand?

salt

The demand for Godiva mint chocolates is likely quite elastic because
A. there are many close substitutes
B. the market is narrowly defined
C. All of the above are correct
D. this particular type of chocolate is viewed as a luxury by many chocolate lovers

C

When demand is inelastic, a decrease in price will cause

a decrease in total revenue

For prices below $5, demand is price

inelastic, and raising price will increase total revenue

Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 2. Which of the following events is consistent with a 0.1 percent increase in the price of the good?

The quantity of the good demanded decreases by 0.2 percent

?/0.1=2
?=2*0.1
?=0.2

Suppose that Janet likes Sprite so much that she consumes one can every day. Although she enjoys gourmet cheese, she consumes it sporadically. If the price of Sprite rises, Jane decreases her consumption by only a very small amount. But if the price of gourmet cheese rises, Jane decreases her consumption by a lot. These examples illustrate the importance of

a necessity versus a luxury in determining the price elasticity of demand

For a good that is a luxury, demand

tends to be elastic

For prices above $5, demand is price

elastic, and lowering price will increase total revenue

The price elasticity of demand for bread
A. is computed as the percentage change in quantity demanded of bread divided by the percentage change in price of bread
B. depends, in part, on the availability of close substitutes for bread
C. reflects the many economic, social, and psychological forces that influence consumers' tastes for bread
D. All of the above are correct.

D

When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7, the quantity demanded is 80 units per month. Using the midpoint method, the price elasticity of demand is about

0.67

Change in price:
(7-5)/6=0.3333
Change in quantity demanded:
(80-100)/90=0.2222

0.2222/0.3333=0.67

For prices below $8, demand is price

inelastic, and total revenue will rise as price rises

Which of the following could be the price elasticity of demand for a good for which a decrease in price would increase revenue?

4

If the price elasticity of demand for a good is 0.5, then a 5 percent increase in price results in a

2.5 percent decrease in the quantity demanded

The demand for grape flavored Hubba Bubba bubble gum is likely

elastic because there are many close substitutes for grape-flavored Hubba Bubba

If the price elasticity of demand for a good is 2.0, then a 10 percent increase in price results in a

20 percent decrease in the quantity demanded

Which of the following could be the price elasticity of demand for a good for which an increase in price would decrease revenue?

2.6

Elasticity is

a measure of how much buyers and sellers respond to changes in market conditions

Which of the following is likely to have the most price elastic demand?

diamond earrings

For a particular good, a 2 percent increase in price causes a 12 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?

The good is a luxury

There are very few, if any, good substitutes for motor oil. Therefore, the

demand for motor oil would tend to be inelastic

When consumers face rising gasoline prices, they typically

reduce their quantity demanded more in the long run than in the short run

For prices above $8, demand is price

elastic, and total revenue will fall as price rises

Which of the following could be the price elasticity of demand for a good for which an increase in price would increase revenue?

0.3

When a binding price floor is imposed on a market to benefit sellers,

some sellers will not be able to sell any amount of the good.

If the government levies a $500 tax per car on sellers of cars, then the price received by sellers of cars would

decrease by less than $500.

If the government removes a $2 tax on buyers of cigars and imposes the same $2 tax on sellers of cigars, then the price paid by buyers will

not change, and the price received by sellers will not change.

The vertical distance between points A and B represents the tax in the market. The amount of the tax per unit is

$14

In response to a shortage caused by the imposition of a binding price ceiling on a market, price will no longer
A) be the mechanism that rations scarce resources.
B) long lines of buyers may develop.
C) sellers could ration the good or service according to their own personal biases.
D) All of the above are correct.

D) All of the above are correct.

Price controls

can generate inequities of their own.

The price ceiling

causes a shortage of 85 units.

A government imposed price of $24 in this market is an example of a

binding price floor that creates a surplus.

A government-imposed price floor of $12 in this market results in

a surplus of 4 units.

Price controls are usually enacted

when policymakers believe that the market price of a good or service is unfair to buyers or sellers.

When a tax is placed on the sellers of a product, buyers pay

more, and sellers receive less than they did before the tax.

The vertical distance between points A and B represents the tax in the market. The effective price that sellers receive after the tax is imposed is

$10

Suppose a tax of $2 per unit is imposed on this market. How much will sellers receive per unit after the tax is imposed?

between $3 and $5

Which of the following is not correct?

Taxes levied on sellers and taxes levied on buyers are not equivalent.

Which of the following statements is not correct?

When the price is $6, there is a surplus of 8 units.

When a tax is levied on buyers of tea,

buyers of tea and sellers of tea both are made worse off.

The price ceiling shown above

creates a shortage.

A binding price ceiling is shown in

panel (b) only

If the government wants to reduce the burning of fossil fuels, it should impose a tax on

either buyers or sellers of gasoline.

A government-imposed price of $6 in this market is an example of a

binding price ceiling that creates a shortage.

The vertical distance between points A and B represents the tax in the market. The per-unit burden of the tax on buyers is

$8

Suppose a tax of $2 per unit is imposed on this market. Which of the following is correct?

One-half of the burden of the tax will fall on buyers, and one-half of the burden of the tax will fall on sellers.

The imposition of a binding price floor on a market

causes quantity demanded to be less than quantity supplied.

Suppose a tax of $2 per unit is imposed on this market. What will be the new equilibrium quantity in this market?

between 50 units and 100 units.

When a tax is placed on the buyers of a product, buyers pay

more and sellers receive less than they did before the tax.

When a binding price floor is imposed on a market,

price no longer serves as a rationing device.

A price floor is binding when it is set

above the equilibrium price, causing a surplus.

A price ceiling is

a legal maximum on the price at which a good can be sold.

Under rent control, tenants can expect

lower rent and lower quality housing.

If the horizontal line on the graph represents a price floor, then the price floor is

not binding, and there will be no surplus or shortage of the good.

A $2.00 tax levied on the sellers of birdhouses will shift the supply curve

upward by exactly $2.00.

A nonbinding price floor is shown in

panel (a) only

If the government removes a binding price floor from a market, then the price paid by buyers will

decrease, and the quantity sold in the market will increase.

The price ceiling

makes it necessary for sellers to ration the good.

The vertical distance between points A and B represents the tax in the market. The price that buyers pay after the tax is imposed is

$24

In a competitive market free of government regulation,

price adjusts until quantity demanded equals quantity supplied.

Suppose a tax of $2 per unit is imposed on this market. How much will buyers pay per unit after the tax is imposed?

between $5 and $7

The vertical distance between points A and B represents the tax in the market. The per-unit burden of the tax on sellers.

$6

At the equilibrium price, consumer surplus is

$100
=20*10/2

Suppose that Firms A and B each produce high-resolution computer monitors, but Firm A can do so at a lower cost. Cassie and David each want to purchase a high-resolution computer monitor, but David is willing to pay more than Cassie. Which of the following market outcomes is efficient?

Firm A produces a monitor that David buys.

If the current allocation of resources in the market for wallpaper is efficient, then it must be the case that
a. producer surplus equals consumer surplus in the market for wallpaper.
b. the market for wallpaper is in equilibrium.
c. on the last unit of wallpaper that was produced and sold, the value to buyers exceeded the cost to sellers.
d. all of the above

b. the market for wallpaper is in equilibrium.

Which area represents consumer surplus at a price of P1?

BDF

For quantities less than M, the value to the marginal buyer is

greater than the cost to the marginal seller, so increasing the quantity increases total surplus.

For each of three potential buyers of oranges, the table displays the willingness to pay for the first three oranges of the day. Assume Allison, Bob, and Charisse are the only three buyers of oranges, and only three oranges can be supplied per day. If the market price of an orange is $0.65, then consumer surplus amounts to

$3.60
=(2-0.65)+(1.5-0.65)+(0.75-0.65)+(1.5-0.65)+(1-0.65)+(0.75-0.65)

Which area represents consumer surplus at a price of P2?

AFG

If the government imposes a price floor of $110 in this market, then consumer surplus will decrease by

$600
=(10*40/2)+(10*40)

Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book?

$8
=price + CS = 6+2

Steak and chicken are substitutes. A sharp reduction in the supply of steak would

decrease consumer surplus in the market for steak and increase producer surplus in the market for chicken.

Both the demand curve and the supply curve are straight lines. At equilibrium, producer surplus is

$24
=12*4/2

At the equilibrium price, total surplus is

$250
=(30*10/2)+(20*10/2)

All else equal, what happens to consumer surplus if the price of a good increases?

Consumer surplus decreases

At the equilibrium price, consumer surplus is

$800
=80*20/2

When the price is P1, consumer surplus is

A+B+C

For each of three potential buyers of oranges, the table displays the willingness to pay for the first three oranges of the day. Assume Allison, Bob, and Charisse are the only three buyers of oranges, and only three oranges can be supplied per day. If the market price of an orange is $0.40, then

7 oranges are demanded per day, and consumer surplus amounts to $5.30
7 people have a WTP higher than $0.40, find CS for those 7 people only

For each of three potential buyers of apples, the table displays the willingness to pay for the first three apples of the day. Assume Xavier, Yadier, and Zavi are the only three buyers of apples, and only three apples can be supplied per day. If the market price of an apple increases from $1.40 to $1.60, then consumer surplus

decreases by $0.45
=CS at $1.40 - CS at $1.60
=0.60-0.15

In a market, the marginal buyer is the buyer

who would be the first to leave the market if the price were any higher.

Both the demand curve and the supply curve are straight lines. At equilibrium, total surplus is

$72