[ch.1]
The 10 Principles
The 10 Principles
A _________ change is one that incrementally alters an existing plan.
marginal
True or False: If the demand for notebooks is perfectly inelastic, an increase in the supply of notebooks only lowers the price of notebooks and does not affect the quantity produced and sold.
True
A good tends to have a small price elasticity of demand if _______.
the good is a necessity
Alexis, Bruno, and Camila each want an ice-cream cone. Alexis is willing to pay $12, Bruno is willing to pay $8, and Camila is willing to pay $4. The market price is $6. Consumer surplus equals _________.
$8
A tax on a good has a deadweight loss if _______.
the reduction in consumer and producer surplus is greater than the tax revenue
Economics is the study of how ________.
society manages its scarce resources
An increase in the minimum wage reduces the total amount paid to the affected workers if the price elasticity of ________ is ________ than one.
demand; greater
The price of a good rises from $16 to $24, and the quantity supplied rises from 90 to 110 units. Calculated with the midpoint method, the price elasticity of supply is _______.
1/2
The demand curve for cookies slopes downward. When the price is $3 per cookie, the quantity demanded is 100. If the price falls to $2, what happens to consumer surplus?
It ______ by ______ than $100
It rises by more than $100
Donna runs an inn and charges $300 a night for a room, which equals her cost. Sam, Harry, and Bill are three potential customers willing to pay $500, $325, and $250, respectively. When the government levies a tax on innkeepers of $50 per night of occupancy, Donna raises her price to $350. The deadweight loss of the tax is _______.
$25
NAME and the YEAR of the Adam Smith book where he coined the phrase "invisible hand":
The Wealth of Nations; 1776
Within the supply-and-demand model, a tax collected from the sellers of a good shifts the ________.
supply curve upward
If the price elasticity of supply is zero, the supply curve is _______.
vertical
Megan buys an iPhone for $150 and gets a consumer surplus of $200.
Her willingness to pay for an iPhone is $___
If she had bought the iPhone on sale for $100, her consumer surplus would have been $___
If the price of the iPhone had been $450, her consumer surplus would have been $___
$350
$250
$0
Sophie pays Sky $50 to mow her lawn every week. When the government levies a mowing tax of $10 on Sky, he raises his price to $60. Sophie continues to hire him at the higher price.
What is the change in producer surplus, change in consumer surplus, and deadweight loss?
$0
-$10
$0
You are selling your Mustang. You have already spent $1000 on repairs. At the last minute, the transmission dies. You can pay $600 to have it repaired, or sell the car “as is.”
In each scenario, is it worthwhile to have the transmission repaired? Explain.
A. Blue book value is $6500 if transmission works, $5700 if it doesn’t
B. Blue book value is $6000 if transmission works, $5500 if it doesn’t
A. Benefit of fixing the transmission = $800
($6500 – 5700).
It’s worthwhile to have the transmission fixed.
B. Benefit of fixing the transmission is only $500.
Paying $600 to fix transmission is not worthwhile.
Which of the following takes place when a tax is placed on a good?
A(n) ________ in the price buyers pay, a(n) _______ in the price sellers receive, and a(n) _________ in the quantity sold
increase; decrease; decrease
If the cross-price elasticity between two goods is negative, the two goods are likely to be ________.
complements
[consumer surplus/producer surplus/neither]
1. Even though I was willing to pay as much as $39 for a used record, I bought a used record for just $34.
2. Yesterday I paid $37 for a polaroid camera. Today, the same store is selling cameras for $34.
3. I sold a crew neck for $31, even though I was willing to accept as little as $25 in exchange for it.
1. Consumer Surplus
2. Neither
3. Producer Surplus
1. Which of the following would likely cause the greatest deadweight loss? [tax on jewelry, gas, cigarettes, or salt]
2. If a tax on a good is doubled, the deadweight loss from the tax _______. [stays the same, 2x, could rise or fall, or 4x]
3. Deadweight loss is greatest when both supply and demand are relatively _______.
4. If the corporate income tax induces businesses to reduce their capital investment, then _______ bear some of the burden of the tax.
1. Tax on jewelry
2. 4x
3. elastic
4. workers
You have spent $1,000 building a snow cone stand based on estimates of sales of $2,000. The snow cone stand is nearly completed, but now you estimate total sales to be only $800. You estimate that you can complete the snow cone stand for another $300. (Assume that snow cones cost you nothing.)
Your decision rule should be to complete the snow cone stand as long as the cost to complete the stand is less than ________.
$800
Suppose a technological improvement has lowered the cost of manufacturing cell phone batteries. This would lead to __1__ in the supply of cell phones, causing the price of cell phones to __2__. Because cell phones and landline telephones are __3__, this change in price would cause the demand for landline telephones to __4__. However, cell phones and cell phone applications are __5__, so the change in the price of cell phones would ___6___ the demand for cell phone applications.
1. an increase
2. fall
3. substitutes
4. decrease
5. compliments
6. increase
Consider public policy aimed at smoking. Studies indicate that the price elasticity of demand for cigarettes is about 0.8.
If a pack of cigarettes currently costs $5 and the government wants to reduce smoking by 20%, it should increase the price by __%
If the government permanently increases the price of cigarettes, the effect on smoking 1 year from now will be _____ than the effect 5 years from now.
25%
Smaller
A friend of yours is considering two movie streaming services. Provider A charges $120 per year for the service regardless of the number of movies streamed. Provider B does not have a fixed service fee but instead charges $1 per movie. Your friend's annual demand for movies is given by the equation QD=150−50P, where P is the price per movie.
With Provider A, the cost of an extra movie is $__1__. With Provider B, the cost of an extra movie is$__2__. Given your friend's demand for movies and the cost of an extra movie with each provider, if your friend used Provider A, he would watch __3__ movies, and if he used Provider B, he would watch __4__ movies. This means your friend would pay $__5__for service with Provider A and $__6__ for service with Provider B.
1. $0
2. $1
3. 150
4. 100
5. 120
6. 100
(True or False)
1. When the supply of the goods is perfectly elastic, the government can raise tax revenue without creating deadweight loss by taxing the consumers.
2. A tax that raises no revenue for the government can create deadweight loss.
3. The deadweight loss from this tax would likely be larger in the fifth year after it is imposed than in the first year as demand for heating oil becomes more elastic.
After economics class, your friend suggests that taxing food would be a good way to raise revenue because the demand for food is quite inelastic.
4. A tax on food leads to larger deadweight loss than a tax on goods with more elastic demand.
5. Taxing food is a bad way to raise revenue from an equality point of view because poor people spend a higher proportion of their income on food.
1. False
2. True
3. True
4. False
5. True