Micro Exam 2

What is Consumer surplus?

The difference between the maximum price consumers are willing and able to pay for a good or service and the price they actually pay.

When a person thinks to themselves "I would pay $100 for that and its actually $20 then it is an example of what?

Consumer surplus; with a surplus of $80

What is producer surplus?

The difference between the price producers receive for a good or service and the minimum price they are willing and able to accept.

If someone says I'd pay $50 for that hat but the seller was actually going to sale it for 15 then that is an example of?

Producer surplus, with a surplus of 35

What is Total Economic Surplus - where is it Maximized?

Measuring how much both sides are gaining, or the total benefits towards the producers and consumers. The sum of producer and consumers surplus. The "double thank you" The overall gain.

Maximized at equilibrium

Michael buys a handmade sweater for $60, although he was willing to pay $85. The minimum acceptable price to the seller, Susan, was $45. Michael experiences a:

a consumer surplus of $25 and Susan experiences a producer surplus of $15.
producer surplus of $15 and Susan experiences a consumer surplus of $25.
consumer surplus of $15 and Susan experiences a producer surplus of $15.
a producer surplus of $25 and Susan experiences a consumer surplus of $15.

A

When the quantity of an output produced in a Market is not equal to the competitive equilibrium quantity what does this cause?

Deadweight Loss

whenever the price does not equal the equilibrium price one side of the market does not want to trade as much as the other side, and the result is:

less surplus and deadweight loss

A deadweight loss _____________ as tax rates change.
stays the same
is eliminated
does not occur
changes

changes

Suppose the equilibrium price is $50. If the actual price paid by the buyer is $60 for one item, and the minimum acceptable price to the seller is $40, then:
the consumer surplus and producer surplus are both $10 each.
there is a deadweight loss.
consumer and producer surplus is maximized.
there is no deadweight loss.

There is a deadweight loss, because the buyer paid more than wanted and will cause them to purchase less

What is Productive Efficiency—when does it occur in Markets?

Producing output at the lowest possible average total cost of production; using fewest resources as possible

What is Allocative efficiency—where does it occur in a Market?

Producing the goods and services that are most wanted by consumers in such a way that their marginal benefit equals their marginal cost; Production is allocatively efficient if goods and services are produced in the mix that consumers prefer.

Which of the following is not correct when describing allocative efficiency?
It occurs where marginal benefit equals marginal cost
It occurs when the right amount of goods and services are produced.
It occurs when total surplus is maximized.
It occurs when firms produce at the lowest possible average total cost.

D; that is productive efficiency

If the market is in equilibrium, which of the following occurs?

Gains from trade are maximized, economic surplus is maximized, allocative efficiency is achieved, and productive efficiency is achieved.

Gains from trade are maximized, economic surplus is maximized, allocative efficiency is not achieved, and productive efficiency is achieved.

Gains from trade are maximized, economic surplus is maximized, allocative efficiency is achieved, and productive efficiency is not achieved.

Gains from trade are lowered, economic surplus is reduced, allocative efficiency is achieved, and productive efficiency is achieved.

A

What are Price Ceilings—who are the Government trying to help with them?
What are Examples of them

Price ceiling is a legally determined maximum price that sellers can charge. A binding price ceiling reduces the quantity traded of a good, service, or resource and creates a shortage in the market. The market price is less than the equilibrium price, and the quantity of trades that occur is lower than the equilibrium quantity. As a result, the economic surplus generated by the market is less than what would be generated if the market were in equilibrium. The difference between economic surplus in equilibrium and economic surplus with the price ceiling is called deadweight loss. Price Ceiling help the govt with rent control and they benefit consumers by preventing sellers from overcharging in the long run will ensure viable and affordable homes.

Which of the following correctly describes the social welfare impact of a price ceiling?
All consumers win.
A deadweight loss occurs.
All producers win.
Total surplus is increased

B

What are Price Floors—who are the Government trying to help with them?
What are Examples of them?

Price floor is a legally determined minimum price that sellers may receive. A binding price floor reduces the quantity traded of a good, service, or resource and creates a surplus in the market. The market price is greater than the equilibrium price, and the quantity traded is lower than the equilibrium quantity. As a result, the economic surplus generated by the market is less than what would be generated if the market were in equilibrium. The difference between economic surplus in equilibrium and economic surplus with the price floor is called deadweight loss. Price Floors help the govt with minimum wage.

Discuss the impact of both a price ceiling and price floor on economic welfare using the context of consumer and producer surplus.

Competitive markets produce an equilibrium price that clears the market, producing equilibrium which maximizes total surplus with no deadweight loss. If a price ceiling (a price set lower than the equilibrium price) is instituted, then total surplus decreases. Some consumers lose: those that can't find the product at the now lower price. Some consumers win: those who do find the product at the now lower price. Suppliers or producers are worse off. They now receive a lower price for the product. The net result is a deadweight loss and a decrease in total surplus. If a price floor (a price set higher than the equilibrium price) is instituted, then total surplus decreases. All consumers lose as the product now has a higher price. Some producers benefit: those who receive the higher price. Some suppliers are worse off due to the decrease in demand at the higher price. The net result is a deadweight loss and a decrease in total surplus.

Which of the following correctly describes the social welfare impact of a price floor?
Total surplus is decreased.
All producers lose.
There is no deadweight loss.
All consumers win.

A

If a price ceiling is set below the equilibrium price in a market?

rationing will be unnecessary.
surpluses of the commodity will develop.
the quantity demanded will exceed the quantity supplied.
the quantity supplied will exceed the quantity demanded.

C

Which of the following is an example of a price ceiling?

Limits on interest rates charged by credit card companies.
Subsidies for apartment rent in major cities.
Minimum-wage laws for unskilled workers.
Price supports for agricultural products.

A

The value that consumers get (from consuming a product) over and above what they actually paid for the product is called

consumer surplus

Charlie is willing to pay $10 for a T-shirt that is priced at $9. If Charlie buys the T-shirt, then his consumer surplus is

$1

What is the formula to find out the total consumer or producer or deadweight loss surplus from a graph?

1/2 X difference between the quanties X the subtraction of price to other price

The amount of revenues that sellers actually receive over and above the minimum acceptable amount that they are willing to receive for selling a product is called

producer surplus

The market supply curve indicates the
rev: =


minimum acceptable prices that sellers are willing to accept for the product.
maximum prices that buyers are willing and able to pay for the product.
total revenues that sellers would receive from selling various quantities of the product.
total amount that buyers will pay in buying a given quantity of the product.

A

When a competitive market maximizes economic surplus, it implies that the

marginal benefit of having the product is greater than the marginal cost.
buyers are getting the maximum consumer surplus from the product.
combined consumer and producer surplus is maximized.
quantity demanded is lower than the quantity supplied.

C

What are we measuring when we calculate Price Elasticity of Demand and Supply?

Sensitivity Responsiveness, of changes in variables

For Price Elasticity of Demand:
o What do call Elasticity > 1
o What do these values mean?

>1 is the same thing as %∆Qd > %∆P and it is called sensitive consumers. If demand is elastic, a reduction in price has a relatively large effect on the quantity demanded, so total revenue increases. On the other hand, an increase in price results in a decrease in total revenue.
PERCENTAGE CHANGE IN QUALITY DEMANDED IS GREATER THAN PERCENTAGE CHANGE IN PRICE: ELASTIC. MORE HORIZONTAL LOOKING.

For Price Elasticity of Demand:
o What do call Elasticity <1
o What do these values mean?

same thing as %∆Qd < %∆P called insensitive consumers
If the absolute value of that elasticity is less than 1, the demand is inelastic. In this case, quantity demanded is relatively less responsive to a change in price, meaning that consumers are relatively less sensitive to price changes.
PERCENTAGE CHANGE IN QUALITY DEMANDED IS LESS THAN PERCENTAGE CHANGE IN PRICE: INELASTIC. MORE VERTICAL LOOKING.

For Price Elasticity of Demand:
o What do call Elasticity =1
o What do these values mean?

same thing as %∆Qd = %∆P
Called Unitary elastic
PERCENTAGE CHANGE IN QUALITY DEMANDED IS EQUAL TO PERCENTAGE CHANGE IN PRICE: UNITARY ELASTIC. MORE L SHAPED LOOKING. EFFECTS ARE UNCHANGED

How do Factors such as Availability of Substitutes, Proportion of Income spent and Time period effect Price Elasticity of Demand?

Demand is more elastic when more substitutes are available
Demand is more elastic when the proportion of income is larger
The more time one has to adjust, the more elastic the demand curve becomes.

The more a good is considered to be a luxury, the more elastic its demand is.
TRUE OR FALSE

TRUE!!!

When Demand is Inelastic what happens to Total Revenue when Price Changes?

Rises;If demand is inelastic, reducing price has a relatively small effect on the quantity demanded, so total revenue actually decreases. When demand is inelastic, increasing price will actually increase the firm's total revenue. It sells fewer units of output, but the percentage price increase is more than enough to make up for the revenue lost through the percentage decrease in quantity demanded.

When Demand is Elastic what happens to Total Revenue when Price Changes?

If demand is elastic, a reduction in price has a relatively large effect on the quantity demanded, so total revenue increases. On the other hand, an increase in price results in a decrease in total revenue.

What do we call it and what does it mean when: Income Elasticity>0?
What do we call it and what does it mean when: Income Elasticity<0?

Normal and Necessities= Positive and less than 1

Normal and Luxury= Positive and greater than 1

Inferior= Negative

cross-price elasticity of demand
Complements Value?
Substitutes Value?

𝐸𝐵/𝐴=(%∆𝑄_𝑑,𝐵)/(%∆𝑃𝐴)

𝐸𝐵/𝐴=−
Complementary Goods

𝐸𝐵/𝐴=+
Substitute Goods

For Price Elasticity of Supply:
o What do call Elasticity > 1, Elasticity =1, Elasticity <1?
o What do these values mean?

>1 Inelastic -If the value of that division is less than 1, the supply is inelastic. In this case, quantity supplied is relatively less responsive to a change in price, meaning that producers are relatively less sensitive to price changes.


=1 Unit Elastic - When the value of the price elasticity of supply is equal to 1, percentage changes in prices and quantities supplied are equal to each other.

<1Elastic -If the price elasticity of supply is greater than 1, the supply is elastic. In this case, quantity supplied is relatively more responsive to a change in price, meaning that producers are relatively more sensitive to price changes.

What is main goal of firm?

To Maximize Profits

economic profit formula

Economic Profit= Total Revenue - Total Economics Costs (Explicit + Implicit Costs)

Look at Business Example for next four questions:

Item $ Value
Total Revenue 500,000
Materials (E) 50,000
Wages (E) 400,000
Other Costs (E) 20,000
Foregone Salary(I) 50,000
Foregone Rent (I) 10,000
Foregone Interest(I) 5,000

What are Total Explicit Costs:

Monetary payments made by individuals, firms, and governments for the use of resources owned by others; Materials, Wages, Other Costs

What are Total Implicit Costs:

The opportunity costs of using owned resources; Foregone Salary, Foregone Rent, and Foregone Interest

What is Economic Profit?

Total revenue - Economic Costs ( Explicit and Implicit Costs)
500,000- 535,000 = -35,000

Should the firm stay in Business?

No, the firm should not stay in business

Short Run

time frame when quantities of some Resources are Fixed (only Labor Variable)

Long Run

time frame when Quantities of all Resources can be changed

Be able to calculate Marginal and Average Productivity

Marginal Product--change in Total product from a one-unit increase in Quantity of Labor employed
Average Product (Productivity) = Total product / Quantity of Labor

The table gives the data for Bob's MP3 Players (a small MP3 player making firm). Use the table in the table below to calculate the Average Productivity (AP) the Marginal Productivity (MP) of Various amounts of Labor, in terms of MP3 Units per hour.
PH= Per Hour

Labor Output MP AP


0 0 ------
1 50 50 50
2 90 40 45
3 120 30 40
4 130 10 32.5
5 130 0 26

Short Run Costs:

Total Cost (TC) is sum of Total Fixed Cost and Total Variable Cost (EG1)
Total Fixed cost—stays same no matter the Quantity (EG1)
Total Variable cost—increases with output -- values will be given in number examples (EG1)
Marginal Cost (MC) --change in Total Cost from a one-unit increase in Output (EG2)
Average Total Cost (ATC) = Total Cost units of Output (EG2)

EG1: All Labor and Costs are per hour.
Be able to calculate Total Cost

Output Total Fixed Cost Total Variable Cost Total Cost
gal per hour $ per gallon $ per gallon $ per gallon
0 10 0 10
1 10 10 20
2 10 15 25
3 10 20 30
4 10 30 40
5 10 50 60

Given Output and Total Cost be able to Calculate Marginal and Average Total Cost—What Output level does the firm Cost-Minimize at?

Output Total Cost Marginal Cost Average Total Cost
Gal per hour $ per gallon $ per gallon $ per gallon
0 25 - -
1 30 5 35
2 36 6 18
3 45 9 15
4 80 35 20

- The output level of the firm minimizes at the 3rd output where the marginal cost is $9 per gallon and the average total cost is $15 per gallon