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microeconomics
Questions and Answers of
Microeconomics
If when price rises by 4 percent,quantity supplied rises by 8 percent,what is the price elasticity of supply?
In this chapter, we learn that most new cars aren’t sold at their list price but are sold at a discount and that this allows dealerships to charge more to customers with inelastic demand. At the
In the 1960s, coffee came in 1-pound cans. Today, most coffee comes in 11-ounce cans.a. Can you think of an explanation why?b. Can you think of other products besides coffee whose standard size has
If price elasticity of demand is greater than 1, what would we call demand:elastic or inelastic?
A firm has just increased its price by 5 percent over last year’s price, and it found that quantity sold remained the same.a. What is its price elasticity of demand?b. How would you calculate it?c.
Early economists made a distinction between needs and wants. Needs were economists’ concern; wants were of far less importance.a. Is such a distinction useful?b. Would making such a distinction
Why would an economist be more hesitant about making an elasticity estimate of the effect of an increase in price of 1 percent than an increase in price of 50 percent?
What is the approximate elasticity between points A and B on the graph below? Price 432- 1 A B 2 4 6 8 10 12 14 16 Quantity
In the chapter, you saw that an increase in Vermont’s minimum wage stimulated a small quantity response.a. What does this tell you about the nature of the labor market in Vermont? (Hint: Think
When tolls on the Dulles Airport Greenway were reduced from $1.75 to $1.00, traffic increased from 10,000 to 26,000 trips a day. Assuming all changes in quantity were due to the change in price, what
A major cereal producer decides to lower price from$3.60 to $3 per 15-ounce box.a. If quantity demanded increases by 18 percent, what is the price elasticity of demand?b. If, instead of lowering its
Your study partner, Nicole, has just stated that a straight-line demand curve is inelastic. How do you respond?
One football season Domino’s Pizza, a corporate sponsor of the Washington Redskins (a football team), offered to reduce the price of its $8 medium-size pizza by $1 for every touchdown scored by the
Economists have estimated the demand elasticity for motor fuel to be between 0.4 and 0.85.a. If the price rises 10 percent and the initial quantity sold is 10 million gallons, what is the range of
If elasticities are constantly changing as the time period gets longer, how do managers use a measure of elasticity of demand to determine the price they charge? If they don’t use elasticities, how
What are four important factors affecting the number of substitutes a good has?
Which has greater elasticity: a supply curve that goes through the origin with slope of 1 or a supply curve that goes through the origin with slope of 4?
Price elasticity is not just a technical economic concept. It also reflects the distribution of economic power—the bargaining power and economic opportunities of buyers and sellers.a. When
Demand for “prestige” college education is generally considered to be highly inelastic. What does this suggest about tuition increases at prestige schools in the future?Why don’t colleges raise
In the long run, would you expect demand to be more or less elastic?
Calculate the elasticity of the designated ranges of supply and demand curves on the following graph.
In 2004, Congress allocated over $20 billion to fight illegal drugs. About 60 percent of the funds was directed at reducing the supply of drugs through domestic law enforcement and interdiction. Some
If demand is inelastic and a firm raises price, what happens to total revenue?
Which of the pairs of goods would you expect to have a greater price elasticity of demand? a. Cars, transportation.b. Housing, leisure travel.c. Rubber during World War II, rubber during the entire
In the discussion of elasticity and raising and lowering prices, the text states that if you have an elastic demand, you should hesitate to raise your price, and that lowering price can possibly
If a good’s consumption increases with an increase in income, what type of good would you call it?
Colleges have increasingly used price sensitivity to formulate financial aid. The more eager the student, the less aid he or she can expect to get. Use elasticity to explain this phenomenon. Is this
If there were only two goods in the world, can you say whether they would be complements or substitutes?Explain your answer.
Label each of the following goods as a luxury, necessity, or inferior good. Income elasticity is given for each.a. Dental services: 1.6b. Beer: 0.8c. Baloney: −0.15
Economists have estimated the following transportation elasticities. For each pair, explain possible reasons why the elasticities differ.a. Elasticity of demand for buses is 0.23 during peak hours
Kean University Professor Henry Saffer and Bentley University Professor Dave Dhaval estimated that if the alcohol industry increased the prices of alcoholic beverages by 100 percent underage drinking
A firm faces an elastic demand for its product. It has come to an economist to advise it on whether to lower its price. The answer she gives is: Maybe.Why is this the right answer?
Once a book has been written, would an author facing an inelastic demand curve for the book prefer to raise or lower the book’s price? Why?
Demonstrate graphically the likely effect of an increase in the price of gas on the equilibrium quantity and price of hybrid cars.
Because of the negative incentive effect that taxes have on goods with elastic supply, in the late 1980s Margaret Thatcher (then prime minister of Great Britain) changed the property tax to a poll
Many of the buildings in Paris have Mansard roofs, such as those shown in the photograph on page 147.a. What property tax structure would bring this about?b. Could you imagine a change in the
Demonstrate the welfare loss of a tax when the supply is highly elastic and the demand is highly inelastic.
How is elasticity related to the revenue from a sales tax?
Do Pierre, a software engineer earning $200,000 a year, and Sally, a single mother whose welfare benefits are about to expire, get equal weight in the measure of consumer surplus? (Institutionalist)
Can you suggest a tax system that led to this building style, which was common in old Eastern European cities? Courtesy of David Colander
If a person has a highly elastic demand, will he likely bear a large or small percentage of the burden of a tax?
Minneapolis Federal Reserve Bank economist Edward Prescott estimates the elasticity of the U.S. labor supply to be 3. Given this elasticity, what would be the impact of funding the Social Security
How much of a $100 tax would a consumer pay if elasticity of demand is 0.2 and elasticity of supply is 1.8?
The Pure Food and Drug Act of 1906 is known as“Dr. Wiley’s Law.” It is generally regarded by non-economic historians as representing the triumph of consumer interests over producer interests.a.
The elasticity of the supply of labor in part determines who bears the burden of Social Security taxes. Those taxes are typically levied in matching 6.2 percent shares on workers’ wages and wages
When the price of ketchup rises by 18 percent, the demand for hot dogs falls by 2 percent.a. Calculate the cross-price elasticity of demand.b. Are the goods complements or substitutes?c. In the
Would you expect a shift in supply to have a greater effect on equilibrium quantity in the short run or in the long run? Explain your answer.
Why isn’t the combination of consumer and producer surplus maximized if there is either excess demand or supply?
The quotation from Calvin Coolidge at the beginning of the chapter equates taxation to robbery.a. Is that a reasonable position to take?b. What alternatives to taxation could a country consider to
If price moves from disequilibrium to equilibrium, what happens to the combination of producer and consumer surplus in the market?
Why does nearly every purchase you make provide you with consumer surplus?
The chapter frames the issue of the effects of taxation in terms of its effects on producer and consumer surplus.a. What does that framework leave out of the analysis?b. How might one frame the
Use the graph below that shows the effect of a$4 per-unit tax on suppliers to answer the following questions:a. What are equilibrium price and quantity before the tax? After the tax?b. What is
Given this elasticity, what would be the impact of funding the Social Security program with tax increases on the number of hours worked and on the amount of taxes collected to fund Social Security?
God sees all individuals as equal, and that what one does to the least of God’s children, one does to all. How does that approach to thinking about issues fit with the economic analysis that
The president of Lebanon Valley College proposed the following tuition program: provide a 50 percent tuition reduction for those graduating in the top 10 percent of their high school class, 33
Demonstrate the welfare loss of: (LO7-2)a. A restriction on output when supply is perfectly elastic.b. A tax t placed on suppliers.c. A subsidy s given to suppliers.d. A restriction on output when
If Social Security taxes were paid only by employees, what would likely happen to workers’ pretax pay?
In 2004, the University of California education system drastically cut enrollment due to significant state budget cuts and asked 7,600 applicants to defer enrollment for two years after completing
Demonstrate the effect of an effective price ceiling on producer and consumer surplus when both supply and demand are highly inelastic.
Would a firm’s research and development expenditures be classified as rent seeking?
If the federal government wanted to tax a good and suppliers were strong lobbyists, but consumers were not, would government prefer supply or demand to be more inelastic? Why?
How can an increase in productivity harm suppliers?
What types of goods would you recommend that the government tax if it wants the tax to result in no welfare loss? Name a few examples.
If supply is perfectly inelastic, will price controls cause a large shortage?
Why do price controls tend to create ongoing shortages or surpluses in the long run?
If the demand for a good is perfectly elastic and the supply is elastic, who will bear the larger share of the burden of a tax on the good where the tax is paid by consumers?
What percentage of a tax will the demander pay if price elasticity of supply is 0.4 and price elasticity of demand is 0.6? What percentage will the supplier pay?
Which good would an economist normally recommend taxing if government wanted to minimize welfare loss and maximize revenue: a good with an elastic or inelastic supply? Why?
Should tenants who rent apartments worry that increases in property taxes will increase their rent? Does your answer change when considering the long run?
Calculate the percentage of the tax borne by the demander and supplier in each of the following cases:a. ED = 0.3, ES = 1.2b. ED = 3, ES = 2c. ED = 0.5, ES = 1d. ED = 0.5, ES = 0.5e. Summarize your
Demonstrate how a price floor is like a tax on consumers and a subsidy to suppliers. Label the following: tax on consumers, transfer of surplus to suppliers, and welfare loss.a. Who gets the revenue
Use the graph below to answer the following questions:a. What are equilibrium price and quantity?b. What is producer surplus when the market is in equilibrium?c. What is consumer surplus when the
In which case would the shortage resulting from a price ceiling be greater: when supply is inelastic or elastic?Explain your answer.
Suppose government imposed a minimum wage above equilibrium wage.a. Assuming nothing else changes, what do you expect to happen to the resulting shortage of jobs as time progresses?b. What do you
A political leader comes to you and wonders from whom she will get the most complaints if she institutes a price ceiling when demand is inelastic and supply is elastic.a. How do you respond?b.
Define rent seeking. Do firms have a greater incentive to engage in rent-seeking behavior when demand is elastic or when it is inelastic?
What is the general rule of political economy? Give an example from the real world.
State three reasons for a potentially beneficial role of government intervention.
What is the adverse selection problem?
Automobile insurance companies charge lower rates to married individuals than they do to unmarried individuals.What economic reason is there for such a practice?Is it fair?
An advanced degree is required to teach at most colleges.In what sense is this a form of restricting entry through licensure?
Who would benefit and who would lose if an informational alternative to licensing doctors were introduced?
What is the effect of the moral hazard problem on insurance premiums? Explain your answer.
The total cost of government regulations in the U.S. manufacturing sector was estimated by the National Association of Manufacturers to be about $2 trillion in 2012, or$15,400 per family.a. Do the
When Ben wears his red shirt, it bothers Sally, who hates the color red. Since Ben’s wearing of a red shirt imposes a cost on Sally, it involves an externality. Would it therefore be correct to
True or false? Burning fossil fuels contributes to climate change. Thus, it makes sense for the government to place a tax on the burning of fossil fuels. Why?
If the opportunity cost of oil for food were the same for both the United States and Saudi Arabia, what should I.T. do?
In the 10th century B.C., King Solomon brought the Israelites into great economic wealth through specialization and trade. It was difficult when faced with the practices and beliefs of their trading
In what circumstances would a small country not get the larger percentage of the gains from trade?
What are four reasons for the difference between laypeople’s and economists’ views of trade?
Why has globalization caused employment and wages to decline in the manufacturing sector but not in the education, government, and health care sectors?
What are two likely adjustments that will reduce the trade deficit between China and the United States?
Show graphically the effect on the price of euros of an increase in the demand for dollars by Europeans.
If one dollar can be exchanged for more euros, has the dollar appreciated or depreciated?
If the world supply of goods is at the domestic price level, what will be the level of net imports? Explain your answer.
How can the discovery of a highly valuable resource lead to the appreciation of a currency and loss of comparative advantage in other goods?
How has the nature of U.S. imports from China changed in recent years?
Will a debtor nation necessarily be running a trade deficit?
How are tariffs like taxes?Demonstrate with a supply and demand curve.
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