IU Econ-B251 midterm 2

Which of the following would not create a deadweight loss?

a. A tax on a good with no externalities

b. A subsidy on a good with no externalities

c. A price floor above equilibrium price

d. A price floor below equilibrium price

d. a price floor below equilibrium price

Which of the following would most likely result in high government tax revenue, ceteris paribus?

A good with inelastic supply and inelastic demand

Is inelastic steep or flat?

steep

Is elastic steep or flat?

flat

price floor?

Sets a minimum price that you can't pay below

Who bears most of the burden of the tax?

Consumers will always bear more of a burden because they are more desperate to buy than producers are to produce. (demand is steeper which makes it more inelastic which makes consumers less responsive to price changes)

graphically, consumer surplus is:

the area above price but below demand

in terms of total surplus, which of the following outcomes does not create a deadweight loss:

when the quantity in the market is equal to equilibrium quantity

in our model price allocation and equilibrium mechanisms:

result in efficiency but do not guarantee equity

graphically, producer surplus is:

the area below price but above supply

graphically, total surplus is:

the area above supply but below demand

agricultural price supports, which mandate a minimum price for certain agricultural products are an example of:

price floors

if demand is relatively elastic and supply is relatively inelastic, who would we expect to bare most of the cost of a tax?

producers

a subsidy will cause

overproduction which will create a deadweight loss

the marginal social cost curve is:

marginal private cost plus marginal external costs

for a good with a positive externality, the marginal social benefit curve will always be:

to the right of the marginal private benefit curve

without any government intervention, if a good has a negative externality the market will tend to produce:

too much of a good at too low a price

free ridership most likely occur for a good that is:

non-excludable

economists tend to consider over the air radio a public good because:

an additional person listening to the radio does not diminish the benefit of those already listening and its difficult to prevent people with an antenna from listening to the radio

a positive externality tends to

produce a deadweight loss because it is underproduced at too low a price

according to coast theorem:

negative externalities can be privately solved under certain conditions

economists assume that as you consume more of a good

utility increases at a decreasing rate

total utility derived from a good is maximized when

marginal utility is zero

if the marginal utility of yams/price of yams is greater than the marginal utility of zucchinis/price of zucchini's, ceteris paribus, we would expect consumers to

consume more yams

assume a consumer consumed only carrots and daikon radishes and the price of carrots decreases. if this price change causes an income effect that is stronger than the substitution effect:

consumers will buy more daikon radishes

Maximum willingness to pay:

the exact amount would pay where they are indifferent between having their money or having a good.

Consumer surplus:

if we add up the gains at every quantity we can measure the consumer surplus as the area under the demand curve up to the equilibrium quantity and above the equilibrium price. A=1/2BH

Producer surplus:

the value to producers of their sales above their cost of production

Total suplus:

consumer surplus + producer surplus

Social surplus:

the sum of consumer and producer surplus at some quantity and price of output. Moving sides of equilibrium

Price ceilings

a legal maximum price for a product

Binding:

above equilibrium

Nonbinding:

below equilibrium

Price floors:

legal minimum price you could pay for a good

Externalities:

the uncompensated impact of one person's actions on the well-being of a bystander

Negative externalities:

spread out and hurt/cost people who do not even necessarily be the good/service

Positive externalities:

"distribute" goods/services you cannot charge for

Effluent (or pollution) charge:

a tax that is imposed on the quality of pollution that a firm emits.

Excludable and Rival:

private goods, food, clothing, housing

Excludable and non-rival:

club goods, cable tv, internet

Non-excludable and rival:

common resources, parks, fisheries, busy highways

Non-excludable and non-rival:

public goods, national defense, empty highways, firework shows

Nonexcludable:

meaning that it is costly or impossible to exclude someone from using the good

Nonrivalrous:

meaning that when one person uses the public good, another can also use it

Free rider:

people who have an incentive to let others pay for the public good and then to free ride on the purchases of others

Common resources:

fisheries, the tragedy of the commons, there is no way to prevent other people from fishing in the same spots, rivalrous

Coase theorem:

private parties can bargain without cost over the allocation of resources

Consumer choice:

the combination of goods and services a consumer purchases

Utility:

the satisfaction or happiness a person gets from consuming a good or service

Consumer equilibrium:

comparing the trade offs between one affordable combination with all the other affordable combinations.