ECON22003 Principles of Microeconomics Spring 2025 Exam II Review

This is a set of practice flashcards designed to help students review important concepts in Principles of Microeconomics, focusing on elasticity, demand, total revenue, price regulations, market failures, and externalities.

What is total revenue when a box of Oreo Cookies is sold at $4 and 150 boxes are sold per week?

$600 per week.

How much is the price increase of a box of Oreo Cookies?

20%.

If the price is raised from $4 to $5, how do you expect the quantity demanded to change?

Quantity demanded will fall by about 10%.

After a price increase to $5, how many boxes of Oreos do you predict you will sell per week?

135 boxes.

What happens to total revenue after raising the price of Oreos?

Total revenue will rise since demand is inelastic.

What is the new total revenue per week after the price increase?

$675 per week.

What does the mayor believe about the demand for day passes at the aquatic center?

The mayor thinks demand is inelastic.

What does the city manager believe about the demand for day passes at the aquatic center?

The city manager thinks demand is elastic.

If demand for farm crops is inelastic, what happens to farm revenues during a good harvest?

Farm revenues decrease because of a percentage fall in price greater than the percentage increase in quantity sold.

What is a binding price floor?

A price that is set above the equilibrium price and causes a surplus.

What result does a binding price floor in the apple market cause?

A surplus of apples.

What is an example of a binding price floor in the coffee market?

The city council makes it illegal to sell coffee at any price lower than $1.50.

What does a binding price ceiling do?

Sets the price below equilibrium, causing a shortage.

What is the relationship between buyers and sellers in the market for gasoline concerning price controls?

Buyers would lobby for a price ceiling, whereas sellers would lobby for a price floor.

Provide an example of a price ceiling.

Rent control.

What indicates the presence of price control in a market?

Policymakers believe the current price is unfair.

What does a minimum wage of $6 create in a labor market?

It creates unemployment.

What is the effect of excessive pollution by a sawmill on local residents?

Local residents are affected by the negative externality of noise.

What is the economic problem caused by the mining and burning of coal?

Negative externalities exist.

What do private costs of mining and burning coal consist of?

Labor and equipment costs, as well as replanting and pollution control costs.

What is the expected market position if no negative consequences are accounted for?

Price and quantity will both be higher than the efficient price and quantity.

Define market failure.

It occurs when markets cannot find the socially optimal level of quantity.

What is a classic example of a negative externality?

Pollution from burning coal.

In terms of externalities, what can the presence of a price control indicate?

That the market is not allocating resources effectively.

According to the Coase theorem, what would be a successful negotiation between Zaria and Hannah regarding smoking?

Hannah offers Zaria $20 not to smoke, and Zaria accepts.

What action is often needed when a sawmill creates too much noise?

Government can raise well-being through noise-control regulations.

What is the basic principle of a tax on cell phone sellers?

It decreases the size of the market and the effective price received by sellers.

How does an increase in the price of tables affect consumer surplus?

It decreases consumer surplus.

When a tax is imposed on a market, what is a possible outcome for sellers?

Sellers may face a decrease in their effective price.

What occurs when the price elasticity of demand is elastic?

A price increase leads to a smaller increase in total revenue.

Define total surplus in economics.

The sum of consumer surplus and producer surplus.

What happens when a demand curve shifts to the right?

Consumer surplus may increase.

Describe the expected burden of the tax on buyers for inelastic demand.

The majority of the tax burden tends to fall on buyers.

If total surplus is maximized, what does that indicate about a market?

Efficiency is achieved.

Explain market equilibrium.

It is where supply equals demand.

How does external cost affect market outcomes?

It can lead to a higher equilibrium quantity than socially optimal quantity.

What can serve as an incentive to reduce pollution in a market?

A tax on pollution.

How does consumer surplus change when prices decrease?

Consumer surplus increases.

What defines the socially optimal quantity of output in a market with externalities?

It's the level that considers both private and external costs.

How does a payroll tax impact employers?

They must pay additional costs for each employee hired.

In a market where demand is highly elastic and the supply is inelastic, what would happen with a tax?

The price paid by buyers would increase significantly.

What implication does a tax on sellers have for supply?

It shifts the supply curve leftward.

What is the result of demand being highly elastic and supply being inelastic regarding tax burden?

The tax burden falls more on consumers.

How is the consumer surplus represented graphically?

By the area under the demand curve and above the price level.

If the cost of a good rises and demand remains constant, what happens to total surplus?

Total surplus may decrease.

What does a negative externality indicate about market supply?

Supply is not accounting for external costs.

What is an outcome of a successfully negotiated agreement under the Coase theorem?

Resolution of externalities through private agreements.

How does a tax affect the equilibrium quantity in a market?

It typically reduces the equilibrium quantity.

What occurs when supply decreases due to a tax?

Prices rise, and quantity sold falls.

Define the concept of efficiency in terms of economic welfare.

It is achieved when total surplus is maximized.

What effect does a binding price floor have on a market?

It leads to a surplus.

What would be a sign of market failure in a situation involving negative externalities?

A mismatch between private costs and social costs.

What are the consequences of a tax being placed on consumers?

It raises the market price and decreases quantity sold.

When dealing with externalities, what should policymakers consider?

The effects on third parties.

How does the market handle external costs without government intervention?

Usually inefficiently, leading to overproduction.

What is required to achieve socially optimal output in cases of externalities?

Inclusion of external costs in decision-making.

What happens when consumer surplus decreases due to an increase in price?

The total welfare in the market decreases.

What is the relationship between elasticity and total revenue?

Elasticity affects how total revenue changes with price changes.

In the presence of a negative externality, what is usually true about quantity supplied?

It exceeds the socially optimal level.

When a good is sold at a price below its equilibrium, what is the result?

A shortage occurs.

What does an increase in effective price mean for sellers after a tax is implemented?

Their revenue per unit decreases.

What happens to total surplus when a tax is applied to a market?

It generally decreases total surplus.

Define deadweight loss in economics.

The loss of economic efficiency when equilibrium is not achieved or not achievable.

How does a luxury tax impact the rich compared to the middle class?

It often falls more on the rich.

What is true about demand for goods that have inelastic demand?

Price increases do not significantly reduce the quantity demanded.

Describe the impact of a surplus on the market.

It leads to downward pressure on prices.

What factors determine elasticity of demand?

Availability of substitutes and necessity versus luxury.

What role does consumer willingness to pay play in market dynamics?

It influences demand and affects pricing strategies.

What happens if the demand for a good becomes more elastic?

Producers may need to lower prices to maintain sales.

What characterizes a market with a positive externality?

It leads to an underproduction of goods compared to the socially optimal level.

How does an increase in production costs affect supply decisions?

Producers may reduce output or increase prices.

What can be concluded about the equilibrium price in the presence of a price ceiling?

It will typically be set below the equilibrium price.

In terms of market interventions, what is often a controversial topic?

Government price controls.

How does a tax shift the burden between consumers and producers?

It is shared, depending on the elasticity of demand and supply.

What is the importance of understanding demand elasticity for businesses?

It helps in pricing strategies and revenue predictions.

When a market is efficient, what does it imply about resource allocation?

Resources are allocated where they are most valued.

What does consumer surplus represent on a graph of demand and price?

The area between the demand curve and the market price above the equilibrium.

What is a primary objective of taxation in economics?

To generate revenue while potentially correcting market failures.

How do consumers respond to a decrease in the price of a good?

Increase their quantity demanded.

What does the area above the supply curve and below price indicate?

Producer surplus.