Evaluating Policy Interventions. Willingness to Pay and Demand. Consumer Surplus (CS) Market Basics - Econ of NA - RIT - Dr.

Size: px
Start display at page:

Download "Evaluating Policy Interventions. Willingness to Pay and Demand. Consumer Surplus (CS) Market Basics - Econ of NA - RIT - Dr."

Transcription

1 Evaluating Policy Interventions Market Basics - Econ of NA - RIT - Dr. Jeffrey Burnette In economics we like to measure the impact government policies have on the economy and separate winners and losers. This way we can properly assess the effectiveness of the policy and determine whether it is having its intended result. Marginal Benefit - the extra happiness that a person receives from consuming one more unit of a good or service. Marginal Cost - the additional cost (including opportunity cost) of producing one more unit of a good or service. Willingness to Pay and Demand Since we derived the demand curve by asking the question: If the price of the product is $x how many units would you like to buy? Therefore, the demand curve is the maximum amount that an individual is willing to pay for the last unit of a good or service consumed. The maximum amount they are willing to pay for a particular unit is equal to the marginal benefit they receive from consuming that unit. Consumer Surplus (CS) Since people are not forced to pay the maximum price they are willing to pay for each unit, they receive a consumer surplus. The value of a good minus the price paid for each unit consumed. Consuming Infinitely Divisible Units Vs. Whole/Partial Units Products are sold in either infinitely divisible units or whole units only. Products like gasoline can be purchased in the exact amount you would like; these are infinitely divisible. Other products can only be purchased in specific increments. It s not possible to purchase half a bottle of soda or half of a slice of pizza. 1

2 Consumer Surplus with Whole Units CS n = n (MB i P ) i=1 Assume Q D = 10 - P and the P = $7 If the price of the product is $7 then the consumer will buy 3 units. The individual is willing to pay $9 for the first unit, $8 for the second unit and $7 for the third unit. However she pays only $5 for each unit. Therefore, the consumer surplus will be CS 3 = 3 i=1 (MB i P ) = (9-7) + (8-7) + (7-7) = $3. Consumer Surplus with Infinitely Divisible Units If however, the individual can consume infinitely divisible units then we calculate the Consumer Surplus as the area of the triangle between the demand curve and the price paid for the product. Often times this is a triangle or trapezoid but this is not always the case. 2

3 Producer Surplus (PS) Since firms are not forced to receive the minimum price for which they are willing to sell each unit, they receive a producer surplus. The producer surplus is the price of the good received minus the minimum supply price for each unit consumed. Producer Surplus with Whole Units P S n = n (P MC i ) i=1 Assume Q s = P and the P = $3 If the price of the product is $3 then the firm will sell 3 units. The firm is willing to sell the first unit for $1, the second unit for $2 and the third unit for $3. However it receives $3 for each unit. Therefore, the producer surplus will be P S 3 = 3 i=1 (P MC i) = (3-1) + (3-2) + (3-3) = $3. 3

4 Producer Surplus with Infinitely Divisible Units If however, the firm can sell infinitely divisible units then we calculate the Producer Surplus as the area of the triangle between the supply curve and the price received for the product. Social Welfare 1 (SW) - The aggregate benefit to society due to the existence of a good or service. In the previous cases there are only two types of actors in the market consumers and firms therefore Social Welfare is given by the following equation, SW = CS + PS. In later cases government will levy a tax or provide a subsidy changing the Social Welfare to the following equation, SW = CS + PS + TAX or SW = CS + PS - SUB. 1 Note: When determining the social welfare for a particular market you need to remember to include all participants in the market and measure the amount of happiness they receive because the market exists. 4

5 Underproduction When the market produces a quantity less than the equilibrium quantity then the MSB>MSC. Conceivably, we could pay firms a lump-sum to increase production. Overproduction When the market produces a quantity greater than the equilibrium quantity then the MSC>MSB. If firms produce a lower quantity than equilibrium then a social planner could make society better off by reducing the quantity produced. Deadweight Loss - the decrease in social welfare that results from producing an inefficient quantity. The Minimum Wage The minimum wage is a price floor is imposed by the government. When binding, it forces firms to pay a higher wage than what would have been determined in equilibrium. Since firms are forced to pay a higher wage there is a decrease in the quantity of labor demanded. Likewise, this higher wage induces individuals to increase their quantity of labor supplied, creating an excess supply (or surplus) of labor and causes unemployment. Under normal circumstances the wage would lower to achieve equilibrium, but due to governmental policy this is prevented. Instead, firms decide to decrease the quantity of labor demanded leaving a number of those who had jobs unemployed. In addition, since the number of people looking for a job has increased and the number of available jobs has decreased it will be even more difficult to move from being unemployed to employed. Fair Labor Standards Act of 1938 Established federal minimum wage at $0.25 an hour. Increased or expanded coverage to additional workers 29 times. Last change effective July 24, 2009 raised the minimum wage from $6.55 to $7.25 an hour. Each state may set its minimum wage higher than the federal minimum. Currently the minimum wage in New York State is $8 per hour. It will increase to $8.75 per hour starting January 1, 2014 and to $9.00 per hour starting January 1,

6 Taxes In the previous discussion of equilibrium the price paid by consumers to purchase a product was equal to the price received by firms. When taxes are imposed the price paid by the individual consumer (P P ) is greater than that received by the selling firm (P R ). The relationship between the price paid and that received is: where T is the per unit tax levied on consumers. P P = P R + T (1) If the government imposes a per unit tax on firms the relationship is: P R = P P T (2) Government Imposes a Tax on Consumers If government levies a per unit tax on consumers then we need to substitute Equation (1) into the demand equation and then solve for equilibrium. To illustrate this we will use the following information: 6

7 10 P P = P R (4) Market Basics - Econ of NA - RIT - Dr. Jeffrey Burnette Q D = 10 P P Q S = P R T = 2 (3) From before we know that the equilibrium price is $5 and that the equilibrium quantity is 5 units. Setting supply and demand equal results in: Q D = Q s At this point we have 1 equation and 2 unknowns (P P, P R ). This is where we need the information on taxes. Since, the tax is imposed on the buyer we use Equation (1). 10 (P R + 2) = P R 10 P R 2 = P R 8 = 2P R P R = 4 Now that we know the price that sellers receive we can plug this into the supply equation to calculate the equilibrium level of output. (Q T = 4) We can also find out the price purchasers pay. (P P = P R + 2 = 6) Revenue raised from the tax is equal to T Q T. (TR = $8) 7

8 Government Imposes a Tax on Firms When government enacts a per unit tax to be paid by firms we have to modify the supply function by substituting Equation (2) into the supply equation. This is just like what we did when calculating equilibrium with a tax on buyers. Using the same information we now impose a $2 tax on firms. 10 P P = P R 10 P P = (P P 2) 12 P P = P P 12 = 2P P P P = 6 Now that we know the price that consumers pay we can plug this into the demand equation to calculate the equilibrium level of output. (Q T = 4) We can also calculate the price firms receive. (P R = P P - 2 = 4) Revenue raised from the tax is equal to T Q T. (TR = $8) You should notice that it makes no difference if the tax is imposed on consumers or firms. Consumers end up paying $6 and firms end up receiving $4 with an equilibrium quantity of 4 units. Furthermore, in this instance consumers and firms end up dividing the tax equally. Consumers used to pay $5 for the product and are now forced to pay $6. So, they are paying $1 more for the same product and therefore $1 of the $2 tax. Firms used to receive $5 for their product but now they only get $4. So, they also pay $1 of the $2 tax. In general, the largest tax burden is borne by the group that is less sensitive to price changes, the elasticity of demand relative to that of supply. In this example the slope of the demand curve (-1) is the same magnitude as that of the supply curve (1). This is why the tax is 8

9 divided equally. 2 If the slope of the supply curve were greater than 1 in magnitude then consumers would bear a larger portion of the tax. Social Welfare and Taxes Earlier we analyzed the social benefit due to the existence of a market. Social benefit was initially separated into consumer and producer surplus. In the diagram above, the consumer surplus is the area of the upper left triangle ($12.50) while the producer surplus is the area of the lower left triangle ($12.50). Social welfare is the sum of all participants in the market ($ $12.50 = $25) The addition of taxes causes each consumer to pay a higher price for the same product and purchase fewer units. This means that the consumer surplus has decreased. (The new consumer surplus is now $8) Likewise, the producer surplus decreases because firms receive a lower price for their product and sell fewer units. (The new producer surplus is now $8.) This reduction in consumer and producer surplus is illustrated in the graph below. 2 While it s true that slope and elasticity are different measurements and we generally can t compare them it is possible in this instance because the units on both the x and y axis are exactly the same. 9

10 The imposition of a tax causes a new participant to gain from the market s existence, government is going to generate tax revenue. (The amount of tax revenue generated is $8) When tax revenue is added to the new consumer surplus and producer surplus the total benefit to society is now $24. This is $1 less than the social welfare without the tax, so society is worse off because of this policy. The lost $1 of social welfare is called the deadweight loss, and is illustrated in the above diagram by the 2 very small triangles just to the left of the intersection of the supply and demand curves. Subsidies In the previous discussion, taxes were imposed and the price paid by the individual consumer (P P ) is greater than that received by the selling firm (P R ). In the case of a subsidy we get the opposite relationship, the price received by the firm is greater than the price paid by the consumer. The relationship between the price paid and that received is: where S is the per unit subsidy given to firms. P R = P P + S (5) If the government gives a per unit subsidy to consumers the relationship is: P P = P R S (6) 10

11 Government Gives a Subsidy to Firms When government gives a per unit subsidy to firms we have to modify the supply function by substituting Equation (5) into the supply equation. This is just like what we did when calculating equilibrium with a tax. Using the same information as the tax example we now give a $2 subsidy to firms. 10 P P = P R 10 P P = (P P + 2) 8 P P = P P 8 = 2P P P P = 4 Now that we know the price that consumers pay, we can plug this into the demand equation to calculate the equilibrium level of output. (Q S = 6) We can also find out the price firms receive. (P R = = 6) The total amount of the subsidy given is equal to S Q S. (Total subsidy = $12) You should notice that a subsidy has the opposite effect as a tax on quantity produced. However, like taxes where the burden was split, the benefit of a subsidy is also divided up between firms and consumers based upon the relative elasticities of supply and demand. Here consumers used to pay $5 for the product and now only pay $4. So, they are receiving $1 of the $2 subsidy. Firms used to receive $5 for their product but now receive $6. So, they are getting $1 of the $2 subsidy. 11

12 Social Welfare and Subsidies A subsidy causes each consumer to pay a lower price for the same product and therefore she purchases more units. This means that the consumer surplus increases. (The new consumer surplus is now $18) Likewise, the producer surplus increases because they receive a higher price for their product and sell more units. (The new producer surplus is now $18.) Initially it might appear that society is better off and should therefore subsidize every product however remember the government had to spend money increase production. When the amount of the subsidy is subtracted from the sum of the new consumer surplus and producer surplus the total benefit to society is now $24. ($18 + $18 - $12 = $24) This is $1 less than the social welfare without the tax, so society is also worse off by this policy. The deadweight loss is again $1 and is illustrated in the above diagram by the 2 small triangles just to the right of the intersection of the supply and demand curves. 12

Market Equilibrium and Applications

Market Equilibrium and Applications Market Equilibrium and Applications I. Market Equilibrium In the previous chapter, we discussed demand and supply, both for individual consumers and firms and for markets. In this chapter, we will combine

More information

I. Introduction to Taxation

I. Introduction to Taxation University of Pacific-Economics 53 Lecture Notes #17 I. Introduction to Taxation Government plays an important role in most modern economies. In the United States, the role of the government extends from

More information

Consumer and Producer Surplus. Consumer and Producer Surplus. Consumer Surplus. Consumer Surplus. Consumer Surplus Individual consumer surplus

Consumer and Producer Surplus. Consumer and Producer Surplus. Consumer Surplus. Consumer Surplus. Consumer Surplus Individual consumer surplus Consumer and Consumer and February 6, 2007 Reading: Chapter 6 Introduction Consumer surplus Producer surplus Efficiency and the gains from trade s 2 Introduction Connections to: Opportunity costs to consumers

More information

CH 7. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question.

CH 7. Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question. Class: Date: CH 7 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. A price ceiling a. is an illegal price. b. is the price that exists in a black market.

More information

Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay. Lecture - 14 Elasticity of Supply

Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay. Lecture - 14 Elasticity of Supply Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay Lecture - 14 Elasticity of Supply We will continue our discussion today, on few more concept of

More information

Economic Efficiency, Government Price Setting, and Taxes

Economic Efficiency, Government Price Setting, and Taxes CHAPTER 4 Economic Efficiency, Government Price Setting, and Taxes Modified by: Changwoo Nam 1 Economic Efficiency, Government Price Setting, and Taxes A legally determined maximum price that sellers may

More information

INTRODUCTORY MICROECONOMICS Instructor: Filip Vesely 12

INTRODUCTORY MICROECONOMICS Instructor: Filip Vesely 12 INTRODUCTORY MICROECONOMICS Instructor: Filip Vesely 12 MIDTERM EXAM will be on March 29 Everything you earn and many things you buy are taxed. Who really pays these taxes? Tax Incidence is the division

More information

Gov t Intervention: Price Floors & Price Ceilings / Taxes & Subsidies

Gov t Intervention: Price Floors & Price Ceilings / Taxes & Subsidies Gov t Intervention: Price Floors & Price Ceilings / Taxes & Subsidies Price Floor: Regulated price, cannot charge below this price. A price floor will be binding if it is set above the true equilibrium

More information

C H A P T E R 4: The Price System, Demand and Supply, and Elas ticity. The Price System: Rationing and Allocating Resources

C H A P T E R 4: The Price System, Demand and Supply, and Elas ticity. The Price System: Rationing and Allocating Resources C H A P T E R 4 The Price System, Demand and Supply, and Elasticity Prepared by: Fernando Quijano and Yvonn Quijano Karl Case, Ray Fair The Price System: Rationing and Allocating Resources The market system,

More information

Taxes and Subsidies PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD

Taxes and Subsidies PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD Taxes and Subsidies PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD Introduction We have already established that taxes are one of the reasons that supply decreases. Subsidies, which could be called

More information

Economics 165 Winter 2002 Problem Set #2

Economics 165 Winter 2002 Problem Set #2 Economics 165 Winter 2002 Problem Set #2 Problem 1: Consider the monopolistic competition model. Say we are looking at sailboat producers. Each producer has fixed costs of 10 million and marginal costs

More information

Problem Set #5 (Due in Class on June 2, 2011)

Problem Set #5 (Due in Class on June 2, 2011) Name: Problem Set #5 (Due in Class on June 2, 2011) Date: 1. The table below represents a demand and supply schedule for a small-country producer of iron ore. It sells output in its home market and on

More information

Graph 1: Market equilibrium

Graph 1: Market equilibrium ISSN 1314-74, Volume 9, 015 CONSUMER AND PRODUCER SURPLUS CHANGES AFTER TAXATION Fran Galetic Faculty of Economics and Business Zagreb, University of Zagreb, J.F. Kennedy square 6, 10000 Zagreb, Croatia

More information

a) Find the equilibrium price and quantity when the economy is closed.

a) Find the equilibrium price and quantity when the economy is closed. Economics 102 Fall 2007 Answers to Homework 2 Problem 1: In Schulzland, a small closed economy, the supply and demand for bushels of peanuts are given by D: P = 200 5Q and S: P = 40 + 3Q. The world price

More information

SUPPLY AND DEMAND : HOW MARKETS WORK

SUPPLY AND DEMAND : HOW MARKETS WORK SUPPLY AND DEMAND : HOW MARKETS WORK Chapter 4 : The Market Forces of and and demand are the two words that economists use most often. and demand are the forces that make market economies work. Modern

More information

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of $0 per unit and sets a price to maximize

More information

Government Intervention. Section 1.3

Government Intervention. Section 1.3 Government Intervention Section 1.3 Indirect taxes Learning Objectives Specific (fixed amount) taxes and ad valorem (percentage) taxes and their impact on markets Explain why governments impose indirect

More information

Chapter 27: Taxation. 27.1: Introduction. 27.2: The Two Prices with a Tax. 27.2: The Pre-Tax Position

Chapter 27: Taxation. 27.1: Introduction. 27.2: The Two Prices with a Tax. 27.2: The Pre-Tax Position Chapter 27: Taxation 27.1: Introduction We consider the effect of taxation on some good on the market for that good. We ask the questions: who pays the tax? what effect does it have on the equilibrium

More information

as a function of E D and E S can be looked as follows:

as a function of E D and E S can be looked as follows: TOPIC IV: MARKETS IN ACTION - Applications of S&D and E D &E S A. Using E D and E S to increase our understanding of the impact of a change in S or D. B. Price ceilings and price floors C. Trade quotas

More information

Sample Exam Questions/Chapter 7

Sample Exam Questions/Chapter 7 Sample Exam Questions/Chapter 7 1. The burden of a tax that is imposed on a good is said to fall completely on the consumers if the: A) price paid by consumers for the good declines by the amount of the

More information

Chapter 5 Applications of Supply and Demand

Chapter 5 Applications of Supply and Demand 1. Elasticity of Demand (E d ) Chapter 5 Applications of Supply and Demand Measures the responsiveness of Q d to a change in price. How much does Q d change (%) when P changes (%)? We can use a formula

More information

Chapter 4. Elasticity

Chapter 4. Elasticity Chapter 4 Elasticity -comparative static exercises in the supply and demand model give us the direction of changes in equilibrium prices and quantities -sometimes we want to know more we want to know about

More information

Chapter 6 Supply, Demand, and Government Policies

Chapter 6 Supply, Demand, and Government Policies Chapter 6 Supply, Demand, and Government Policies Review Questions Using supply-demand diagrams, show the difference between a non-binding price ceiling and a binding price ceiling in the wheat market.

More information

Math 1526 Consumer and Producer Surplus

Math 1526 Consumer and Producer Surplus Math 156 Consumer and Producer Surplus Scenario: In the grocery store, I find that two-liter sodas are on sale for 89. This is good news for me, because I was prepared to pay $1.9 for them. The store manager

More information

MFP SET. Lecture 3 Surplus: Consumer & producer Elasticity & its applications MFP SET 2000 1

MFP SET. Lecture 3 Surplus: Consumer & producer Elasticity & its applications MFP SET 2000 1 MFP SET Lecture 3 Surplus: Consumer & producer Elasticity & its applications MFP SET 1 Consumer surplus! Willingness to pay: the maximum amount that a consumer will pay for a good! Consumer surplus: the

More information

Ch. 6 Lecture Notes I. Price Elasticity of Demand 4. CONSIDER THIS A Bit of a Stretch

Ch. 6 Lecture Notes I. Price Elasticity of Demand 4. CONSIDER THIS A Bit of a Stretch Ch. 6 Lecture Notes I. Price Elasticity of Demand A. Law of demand tells us that consumers will respond to a price decrease by buying more of a product (other things remaining constant), but it does not

More information

Chapter 8 Application: The Costs of Taxation

Chapter 8 Application: The Costs of Taxation Chapter 8 Application: The Costs of Taxation Review Questions What three factors must be taken into account in order to fully understand the effect of taxes on economic well-being? ANSWER: In order to

More information

MICROECONOMICS II PROBLEM SET III: MONOPOLY

MICROECONOMICS II PROBLEM SET III: MONOPOLY MICROECONOMICS II PROBLEM SET III: MONOPOLY EXERCISE 1 Firstly, we analyze the equilibrium under the monopoly. The monopolist chooses the quantity that maximizes its profits; in particular, chooses the

More information

Economics 352: Intermediate Microeconomics

Economics 352: Intermediate Microeconomics Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter Twelve: The Partial Equilibrium Competitive Model and Applied Competitive Analysis This chapter will investigate perfect competition

More information

Economic Efficiency. Chapter 6 CHAPTER SUMMARY

Economic Efficiency. Chapter 6 CHAPTER SUMMARY Chapter 6 Economic Efficiency CHAPTER SUMMARY The central idea in this chapter is Adam Smith s invisible hand. Free-market competition will ensure that the allocation of resources is economically efficient.

More information

Micro Self-Test - Ch. 8 Price Ceilings and Floors

Micro Self-Test - Ch. 8 Price Ceilings and Floors Micro Self-Test - Ch. 8 Price Ceilings and Floors 1. A price ceiling is a: A. legally established minimum price that can be charged for a good. B. legally established maximum price that can be charged

More information

Final Exam 15 December 2006

Final Exam 15 December 2006 Eco 301 Name Final Exam 15 December 2006 120 points. Please write all answers in ink. You may use pencil and a straight edge to draw graphs. Allocate your time efficiently. Part 1 (10 points each) 1. As

More information

MICROECONOMIC PRINCIPLES SPRING 2001 MIDTERM ONE -- Answers. February 16, 2001. Table One Labor Hours Needed to Make 1 Pounds Produced in 20 Hours

MICROECONOMIC PRINCIPLES SPRING 2001 MIDTERM ONE -- Answers. February 16, 2001. Table One Labor Hours Needed to Make 1 Pounds Produced in 20 Hours MICROECONOMIC PRINCIPLES SPRING 1 MIDTERM ONE -- Answers February 1, 1 Multiple Choice. ( points each) Circle the correct response and write one or two sentences to explain your choice. Use graphs as appropriate.

More information

AP Microeconomics Chapter 5 Outline

AP Microeconomics Chapter 5 Outline I. Learning Objectives In this chapter students should learn: A. How to differentiate demand side market failures and supply side market failures. B. The origin of consumer surplus and producer surplus,

More information

ECON 101 MIDTERM 1 REVIEW SESSION (WINTER 2015) BY BENJI HUANG

ECON 101 MIDTERM 1 REVIEW SESSION (WINTER 2015) BY BENJI HUANG ECON 101 MIDTERM 1 REVIEW SESSION (WINTER 2015) BY BENJI HUANG TABLE OF CONTENT I. CHAPTER 1: WHAT IS ECONOMICS II. CHAPTER 2: THE ECONOMIC PROBLEM III. CHAPTER 3: DEMAND AND SUPPLY IV. CHAPTER 4: ELASTICITY

More information

Ch 6- Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question.

Ch 6- Name: Class: Date: Multiple Choice Identify the choice that best completes the statement or answers the question. Class: Date: Ch 6- Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The phrase "decreasing marginal benefit" means that a. the more you consume of the product,

More information

Price Theory Lecture 2: Supply & Demand

Price Theory Lecture 2: Supply & Demand Price Theory Lecture 2: Supply & emand I. The Basic Notion of Supply & emand Supply-and-demand is a model for understanding the determination of the price of quantity of a good sold on the market. The

More information

Econ 202 Exam 2 Practice Problems

Econ 202 Exam 2 Practice Problems Econ 202 Exam 2 Practice Problems Principles of Microeconomics Dr. Phillip Miller Multiple Choice Identify the choice that best completes the statement or answers the question. Chapter 6 1. If a binding

More information

Chapter 3. The Concept of Elasticity and Consumer and Producer Surplus. Chapter Objectives. Chapter Outline

Chapter 3. The Concept of Elasticity and Consumer and Producer Surplus. Chapter Objectives. Chapter Outline Chapter 3 The Concept of Elasticity and Consumer and roducer Surplus Chapter Objectives After reading this chapter you should be able to Understand that elasticity, the responsiveness of quantity to changes

More information

Monopoly WHY MONOPOLIES ARISE

Monopoly WHY MONOPOLIES ARISE In this chapter, look for the answers to these questions: Why do monopolies arise? Why is MR < P for a monopolist? How do monopolies choose their P and Q? How do monopolies affect society s well-being?

More information

Economics 201 Fall 2010 Introduction to Economic Analysis Problem Set #6 Due: Wednesday, November 3

Economics 201 Fall 2010 Introduction to Economic Analysis Problem Set #6 Due: Wednesday, November 3 Economics 201 Fall 2010 Introduction to Economic Analysis Jeffrey Parker Problem Set #6 Due: Wednesday, November 3 1. Cournot Duopoly. Bartels and Jaymes are two individuals who one day discover a stream

More information

Econ 201 Final Exam. Douglas, Fall 2007 Version A Special Codes 00000. PLEDGE: I have neither given nor received unauthorized help on this exam.

Econ 201 Final Exam. Douglas, Fall 2007 Version A Special Codes 00000. PLEDGE: I have neither given nor received unauthorized help on this exam. , Fall 2007 Version A Special Codes 00000 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 201 Final Exam 1. For a profit-maximizing monopolist, a. MR

More information

Chapter 9 The Analysis of Competitive Markets

Chapter 9 The Analysis of Competitive Markets Chapter 9 The Analysis of Competitive Markets Review Questions 1. What is meant by deadweight loss? Why does a price ceiling usually result in a deadweight loss? Deadweight loss refers to the benefits

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that

More information

The Economics Department, UMR Presents: Supply and Demand: Price and Quantity Determination in Competitive Markets

The Economics Department, UMR Presents: Supply and Demand: Price and Quantity Determination in Competitive Markets The Economics Department, UMR Presents: Supply and Demand: Price and Quantity Determination in Competitive Markets Starring Demand Supply Equilibrium and Disequilibrium Featuring The Law of Demand D D

More information

Up until now we have studied cases where the market outcome is an efficient outcome. In the case studied in this chapter externalities, that is not

Up until now we have studied cases where the market outcome is an efficient outcome. In the case studied in this chapter externalities, that is not Up until now we have studied cases where the market outcome is an efficient outcome. In the case studied in this chapter externalities, that is not true. The market outcome need not be efficient. Externalities

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 11 Monopoly practice Davidson spring2007 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly industry is characterized by 1) A)

More information

LABOR UNIONS. Appendix. Key Concepts

LABOR UNIONS. Appendix. Key Concepts Appendix LABOR UNION Key Concepts Market Power in the Labor Market A labor union is an organized group of workers that aims to increase wages and influence other job conditions. Craft union a group of

More information

ECF1100 Microeconomics

ECF1100 Microeconomics ECF1100 Microeconomics Semester 2, 2015 Notes Textbook: Gans, King, Byford and Mankiw, Principles of Microeconomics 6th Edition, Cengage Learning, Copyright 2015 (ISBN 9780170248525). Contents Week 1 Introduction

More information

Econ 100B: Macroeconomic Analysis Fall Problem Set #3 ANSWERS (Due September 15-16, 2008)

Econ 100B: Macroeconomic Analysis Fall Problem Set #3 ANSWERS (Due September 15-16, 2008) Econ 100B: Macroeconomic Analysis Fall 2008 Problem Set #3 ANSWERS (Due September 15-16, 2008) A. On one side of a single sheet of paper: 1. Clearly and accurately draw and label a diagram of the Production

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) It is efficient to produce an additional shirt if A) the marginal benefit of producing the shirt

More information

Principle of Microeconomics Econ 202-506 chapter 6

Principle of Microeconomics Econ 202-506 chapter 6 Principle of Microeconomics Econ 202-506 chapter 6 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The buyers pay the entire sales tax levied on

More information

Unit 7. Firm behaviour and market structure: monopoly

Unit 7. Firm behaviour and market structure: monopoly Unit 7. Firm behaviour and market structure: monopoly Learning objectives: to identify and examine the sources of monopoly power; to understand the relationship between a monopolist s demand curve and

More information

Government Intervention in the Market. Price Controls. Price Ceilings. Government Intervention in the Market

Government Intervention in the Market. Price Controls. Price Ceilings. Government Intervention in the Market Government Intervention in the Market Price Controls Buyers look to government for ways to hold prices down. Sellers look to government for ways to hold prices up. Government Intervention in the Market

More information

Econ 325: Environmental and Natural Resource Economics Fall 2007 Exam 1: SOLUTIONS

Econ 325: Environmental and Natural Resource Economics Fall 2007 Exam 1: SOLUTIONS Econ 325: Environmental and Natural Resource Economics Fall 2007 Exam 1: SOLUTIONS Instructions: Answer 1 question from each of the three sections. I will grade only 3 solutions, so if you answer more

More information

Midterm Exam #1 - Answers

Midterm Exam #1 - Answers Page 1 of 9 Midterm Exam #1 Answers Instructions: Answer all questions directly on these sheets. Points for each part of each question are indicated, and there are 1 points total. Budget your time. 1.

More information

PAGE 1. Econ 2113 - Test 2 Fall 2003 Dr. Rupp. Multiple Choice. 1. The price elasticity of demand measures

PAGE 1. Econ 2113 - Test 2 Fall 2003 Dr. Rupp. Multiple Choice. 1. The price elasticity of demand measures PAGE 1 Econ 2113 - Test 2 Fall 2003 Dr. Rupp Multiple Choice 1. The price elasticity of demand measures a. how responsive buyers are to a change in income. b. how responsive sellers are to a change in

More information

Module 2 Lecture 5 Topics

Module 2 Lecture 5 Topics Module 2 Lecture 5 Topics 2.13 Recap of Relevant Concepts 2.13.1 Social Welfare 2.13.2 Demand Curves 2.14 Elasticity of Demand 2.14.1 Perfectly Inelastic 2.14.2 Perfectly Elastic 2.15 Production & Cost

More information

PART 3 Market failure THE LIMITATIONS OF MARKETS. Sources of Market Failure. Private and Social Costs 29/02/2016. 1 of 38

PART 3 Market failure THE LIMITATIONS OF MARKETS. Sources of Market Failure. Private and Social Costs 29/02/2016. 1 of 38 PART 3 Market failure THE LIMITATIONS OF MARKETS ISBN: 978-1-4080-6981-3 1 of 38 Sources of Market Failure Imperfect knowledge of and between buyers & sellers Can be distorted by advertising and poor technical

More information

Unit 9: Utility, Externalities, and Factor Markets Lesson 4: Externalities

Unit 9: Utility, Externalities, and Factor Markets Lesson 4: Externalities Unit 9: Utility, Externalities, and Factor Markets Lesson 4: Externalities Objectives: - Define externality - Draw negative and positive externality graphs. - Explain the remedies for positive and negative

More information

PROBLEM SET #6: PRODUCTION COSTS, PERFECT COMPETITION, MONOPOLY, PRICE DISCRIMINATION

PROBLEM SET #6: PRODUCTION COSTS, PERFECT COMPETITION, MONOPOLY, PRICE DISCRIMINATION Professor Gregory Clark ECON 1A, Fall 2000 PROBLEM SET #6: PRODUCTION COSTS, PERFECT COMPETITION, MONOPOLY, PRICE DISCRIMINATION Notes: If the total cost function of a firm has the form TC = a + bq + cq

More information

International Trade Restrictions

International Trade Restrictions International Trade Restrictions Governments restrict international trade to protect domestic producers from competition. Governments use four sets of tools: Tariffs Import quotas Other import barriers

More information

Monopoly. Chapter 13. Monopoly and How It Arises. Single-price Monopoly. Monopoly and Competition Compared. Price Discrimination

Monopoly. Chapter 13. Monopoly and How It Arises. Single-price Monopoly. Monopoly and Competition Compared. Price Discrimination CHAPTER CHECKLIST Monopoly Chapter 13 1. Explain how monopoly arises and distinguish between single-price monopoly and price-discriminating monopoly. 2. Explain how a single-price monopoly determines its

More information

Quantity of trips supplied (millions)

Quantity of trips supplied (millions) Taxes chapter: 7 1. The United tates imposes an excise tax on the sale of domestic airline tickets. Let s assume that in 2010 the total excise tax was $6.10 per airline ticket (consisting of the $3.60

More information

Quantity Tax Incidence Subsidy Welfare Effects Case Study. Equilibrium Chapter 16

Quantity Tax Incidence Subsidy Welfare Effects Case Study. Equilibrium Chapter 16 Equilibrium Chapter 16 Competitive Equilibrium: Motivating Questions Firms are price-takers in competitive markets, but how is the market price (and quantity) determined? competitive equilibrium What happens

More information

ECON Chapter 4 review quiz

ECON Chapter 4 review quiz 1) The price elasticity of demand measures: ECON 1900-02 Chapter 4 review quiz a) the percentage change in quantity demanded as a result of a 1 percent change in supply b) the change in quantity demanded

More information

N. Gregory Mankiw Principles of Economics. Chapter 8. APPLICATION: THE COSTS OF TAXATION

N. Gregory Mankiw Principles of Economics. Chapter 8. APPLICATION: THE COSTS OF TAXATION N. Gregory Mankiw Principles of Economics Chapter 8. APPLICATION: THE COSTS OF TAXATION Solutions to Problems and Applications 1. a. Figure 3 illustrates the market for pizza. The equilibrium price is

More information

Price Ceilings The maximum legal price that can be charged Examples: Gasoline prices in the 1970s, Housing in New York City

Price Ceilings The maximum legal price that can be charged Examples: Gasoline prices in the 1970s, Housing in New York City ECON4 (Fall 00) 5. 9. 00 (Tutorial ) Chapter Market Forces: Demand and Supply Price Ceilings The maximum legal price that can be charged Examples: Gasoline prices in the 970s, Housing in New York City

More information

The Circular Flow of Income and Expenditure

The Circular Flow of Income and Expenditure The Circular Flow of Income and Expenditure Imports HOUSEHOLDS Savings Taxation Govt Exp OTHER ECONOMIES GOVERNMENT FINANCIAL INSTITUTIONS Factor Incomes Taxation Govt Exp Consumer Exp Exports FIRMS Capital

More information

Table of Contents MICRO ECONOMICS

Table of Contents MICRO ECONOMICS economicsentrance.weebly.com Basic Exercises Micro Economics AKG 09 Table of Contents MICRO ECONOMICS Budget Constraint... 4 Practice problems... 4 Answers... 4 Supply and Demand... 7 Practice Problems...

More information

Student Name: Date: Teacher Name: Heather Creamer. Score:

Student Name: Date: Teacher Name: Heather Creamer. Score: Economics EOC Quiz Answer Key Microeconomic Concepts - (SSEMI1) Flow Of Goods, (SSEMI2) Law Of Demand, (SSEMI3) Economic Behavior, (SSEMI4) Organization And Role Of Business Student Name: Teacher Name:

More information

Introduction to Agricultural Economics

Introduction to Agricultural Economics Introduction to Agricultural Economics Economics examines: how scarce resources are allocated. how firms maximize profits. how market competition affects firms and consumers. the limitations of markets.

More information

AP Microeconomics Chapter 12 Outline

AP Microeconomics Chapter 12 Outline I. Learning Objectives In this chapter students will learn: A. The significance of resource pricing. B. How the marginal revenue productivity of a resource relates to a firm s demand for that resource.

More information

Micro Externalities WCC P E Q Q

Micro Externalities WCC P E Q Q Micro Externalities WCC If it ain t broke, don t fix it consider our standard supply and demand diagram below note the size of the shaded economic surplus generated if we allow the market to reach its

More information

A. a change in demand. B. a change in quantity demanded. C. a change in quantity supplied. D. unit elasticity. E. a change in average variable cost.

A. a change in demand. B. a change in quantity demanded. C. a change in quantity supplied. D. unit elasticity. E. a change in average variable cost. 1. The supply of gasoline changes, causing the price of gasoline to change. The resulting movement from one point to another along the demand curve for gasoline is called A. a change in demand. B. a change

More information

Monopoly: Linear pricing. Econ 171 1

Monopoly: Linear pricing. Econ 171 1 Monopoly: Linear pricing Econ 171 1 The only firm in the market Marginal Revenue market demand is the firm s demand output decisions affect market clearing price $/unit P 1 P 2 L G Demand Q 1 Q 2 Quantity

More information

c. Given your answer in part (b), what do you anticipate will happen in this market in the long-run?

c. Given your answer in part (b), what do you anticipate will happen in this market in the long-run? Perfect Competition Questions Question 1 Suppose there is a perfectly competitive industry where all the firms are identical with identical cost curves. Furthermore, suppose that a representative firm

More information

Essential Graphs for Microeconomics

Essential Graphs for Microeconomics Essential Graphs for Microeconomics Basic Economic Concepts roduction ossibilities Curve Good X A F B C W Concepts: oints on the curve-efficient oints inside the curve-inefficient oints outside the curve-unattainable

More information

ECN 221 Chapter 5 practice problems This is not due for a grade

ECN 221 Chapter 5 practice problems This is not due for a grade ECN 221 Chapter 5 practice problems This is not due for a grade 1. Assume the price of pizza is $2.00 and the price of Beer is $1.00 and that at your current levels of consumption, the Marginal Utility

More information

Where are we? To do today: finish the derivation of the demand curve using indifference curves. Go on then to chapter Production and Cost

Where are we? To do today: finish the derivation of the demand curve using indifference curves. Go on then to chapter Production and Cost Where are we? To do today: finish the derivation of the demand curve using indifference curves Go on then to chapter Production and Cost Utility and indifference curves The point is to find where on the

More information

CHAPTER 4 APPLICATIONS OF SUPPLY AND DEMAND

CHAPTER 4 APPLICATIONS OF SUPPLY AND DEMAND CHAPTER 4 APPLICATIONS OF SUPPLY AND DEMAND I. CHAPTER OVERVIEW There is a common expression among people who think about economic issues: It s all a matter of supply and demand. This expression is, for

More information

Notes on indifference curve analysis of the choice between leisure and labor, and the deadweight loss of taxation. Jon Bakija

Notes on indifference curve analysis of the choice between leisure and labor, and the deadweight loss of taxation. Jon Bakija Notes on indifference curve analysis of the choice between leisure and labor, and the deadweight loss of taxation Jon Bakija This example shows how to use a budget constraint and indifference curve diagram

More information

Web Supplement to Chapter 2

Web Supplement to Chapter 2 Web upplement to Chapter 2 UPPLY AN EMAN: TAXE 21 Taxes upply and demand analysis is a very useful tool for analyzing the effects of various taxes In this Web supplement, we consider a constant tax per

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Survey of Microeconomics, Quiz #3 Fall 2006 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In the absence of a rent ceiling, the long run

More information

14 : Elasticity of Supply

14 : Elasticity of Supply 14 : Elasticity of Supply 1 Recap from Session Budget line and Consumer equilibrium Law of Equi Marginal utility Price, income and substitution effect Consumer Surplus Session Outline Elasticity of Supply

More information

Chapter 3 Market Demand, Supply, and Elasticity

Chapter 3 Market Demand, Supply, and Elasticity Chapter 3 Market Demand, Supply, and Elasticity After reading chapter 3, MARKET DEMAND, SUPPLY, AND ELASTICITY, you should be able to: Discuss the Law of Demand and draw a Demand Curve. Distinguish between

More information

ECON 202: Principles of Microeconomics. Chapter 1 Economics: Foundations and Models

ECON 202: Principles of Microeconomics. Chapter 1 Economics: Foundations and Models ECON 202: Principles of Microeconomics Chapter 1 Economics: Foundations and Models Economics: Foundations and Models 1. Introduction. 2. Three key economic ideas. 3. The economic problem that every society

More information

Summary Chapter 12 Monopoly

Summary Chapter 12 Monopoly Summary Chapter 12 Monopoly Defining Monopoly - A monopoly is a market structure in which a single seller of a product with no close substitutes serves the entire market - One practical measure for deciding

More information

Externality Essentials P E Q E

Externality Essentials P E Q E Micro Externality Essentials If it ain t broke, don t fix it consider our standard supply and demand diagram below note the size of the shaded economic surplus generated if we allow the market to O reach

More information

The Basics of Supply and Demand

The Basics of Supply and Demand 1 Demand and Supply Curves 1 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen September 7, 2007 Lecture 2 The Basics of Supply and Demand BUYERS = DEMAND MARKET EQUILIBRIUM SELLERS = SUPPLY

More information

The Revenue of a Competitive In perfect competition, average revenue equals the price of the good. Total revenue Average Revenue = = The Revenue of a

The Revenue of a Competitive In perfect competition, average revenue equals the price of the good. Total revenue Average Revenue = = The Revenue of a In this chapter, look for the answers to these questions: What is a perfectly competitive market? What is marginal revenue? How is it related to total and average revenue? How does a competitive firm determine

More information

Learning Objectives. Essential Concepts

Learning Objectives. Essential Concepts Learning Objectives After reading Chapter 16 and working the problems for Chapter 16 in the textbook and in this Workbook, you should be able to: Essential Concepts Define the concept of social economic

More information

Demand, Supply and Elasticity

Demand, Supply and Elasticity Demand, Supply and Elasticity CHAPTER 2 OUTLINE 2.1 Demand and Supply Definitions, Determinants and Disturbances 2.2 The Market Mechanism 2.3 Changes in Market Equilibrium 2.4 Elasticities of Supply and

More information

Supply and Demand. A market is a group of buyers and sellers of a particular good or service.

Supply and Demand. A market is a group of buyers and sellers of a particular good or service. Supply and Demand A market is a group of buyers and sellers of a particular good or service. The definition of the good is a matter of judgement: Should different locations entail different goods (and

More information

Demand, Supply, and Market Equilibrium

Demand, Supply, and Market Equilibrium Chapter Summary 4 Demand, Supply, and Market Equilibrium In this chapter, we ve seen how demand and supply determine prices. We also learned how to predict the effects of changes in demand or supply on

More information

Marginal cost. Average cost. Marginal revenue 10 20 40

Marginal cost. Average cost. Marginal revenue 10 20 40 Economics 101 Fall 2011 Homework #6 Due: 12/13/2010 in lecture Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework

More information

CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC.

CEVAPLAR. Solution: a. Given the competitive nature of the industry, Conigan should equate P to MC. 1 I S L 8 0 5 U Y G U L A M A L I İ K T İ S A T _ U Y G U L A M A ( 4 ) _ 9 K a s ı m 2 0 1 2 CEVAPLAR 1. Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market

More information

Chapter 15: Externalities

Chapter 15: Externalities Chapter 15: Externalities Econ 102: Introduction to Microeconomics 1 1.1 Goals of this class Goals of this class Learn about market failure. Learn how economic decisions can negatively affect others in

More information

QE1: Economics Notes 1

QE1: Economics Notes 1 QE1: Economics Notes 1 Box 1: The Household and Consumer Welfare The final basket of goods that is chosen are determined by three factors: a. Income b. Price c. Preferences Substitution Effect: change

More information

Chapter 3 Key for homework questions

Chapter 3 Key for homework questions Chapter 3 Key for homework questions 3. (Key Question) What effect will each of the following have on the demand for small automobiles such as the Mini Cooper and Smart car? a. Small automobiles become

More information