ECON 040 Lecture Notes - Lecture 7: Deadweight Loss, Price Ceiling, Price Floor

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skywildebeest596

5 Aug 2020

School

College of The Sequoias

Department

Economics (ECON)

Course

ECON 040

Professor

Kasun

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Document Summary

The price ceiling must be lower than the market equilibrium price to have any effect. Also, there is a loss in surplus when a price ceiling is imposed. Less importantly, a price ceiling creates excess demand, thus consumers with the highest reservation prices (i. e. rich people) are able to purchase the good, whilst the poorest people are still unable to afford the good. Therefore, if the government wanted to make a good more affordable to lower-income consumers, a lump sum payment would be more ideal, as tinkering with the market reduces surplus and makes the good more affordable to the rich. The price floor represents a minimum allowable price imposed by the government: they are generally imposed when the government believes the price is unfairly low (protects producers that can be exploited). When a price floor is imposed, the price floor > market equilibrium price for it to have any effect.

Related Questions

Under a binding price ceiling, what does the change in consumer surplus represent?
A) The gain in surplus for those buyers who can still purchase the product at the lower price.
B) The loss in surplus for those buyers who previously purchased some units of the good at the higher price, but these units are no longer produced at the lower price.
C) The loss in surplus for those buyers who would like the purchase the excess demand created by the price ceiling policy.
D) Both A and B are correct.
E) Both A and C are correct.

When the market price is held above the competitive level, the deadweight loss is composed of:

A) producer surplus losses associated with units that used to be traded on the market but are no longer exchanged.

B) consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
C) producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
D) There is no deadweight loss if the government uses a price floor policy to increase the price.

Compared to a tariff, an import quota, which restricts imports to the same amount as the tariff, will leave the country as a whole
A) worse off than a comparable tariff.
B) not as bad off as a comparable tariff.

C) about the same as a comparable tariff.

D) Any of the above can be true.

What is the welfare impact of a subsidy policy?
A) Producer surplus increases, consumer surplus declines, and total welfare declines.
B) Producer and consumer surplus increase, and these gains are larger than the government cost.

C) Producer and consumer surplus increase, and these gains are smaller than the government cost.

D) Producer surplus increases, consumer surplus declines, and total welfare increases due to the subsidy program.

Why is there a deadweight loss associated with subsidy payments?
A) There is no deadweight loss from a subsidy.
B) Quantity supplied is less than the equilibrium amount, so consumers and producers lose surplus value on those units that are no longer produced.
C) Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them.
D) The subsidy payment does not distort quantities in the market, but the government cost exceeds consumer willingness to pay for the quantity demanded.

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home / study / business / economics / questions and answers / Question 1 Which Of The Following Is The Best Example ... Question: Question 1 Which of the following is the best exam... Bookmark Question 1 Which of the following is the best example of a positive externality? A car company lays off 10,000 employees in order to cut costs. An individual drives a large SUV, which increases the amount of greenhouse gases in the atmosphere. An individual smokes in a restaurant, which bothers other patrons. A child is vaccinated against a disease, which reduces the probability that other children will catch the disease. 4 points Question 2 As a result of a negative externality, the market equilibrium quantity is too ______ compared to the socially optimal quantity. As a result of a positive externality, the market equilibrium quantity is too ______ compared to the socially optimal quantity. high; high. low; low. high; low. low; high. 4 points Question 3 Based on the diagram below, the deadweight loss area associated with the market equilibrium equals: Week06_graph1.jpg $10 $50 $80 $1,000 4 points Question 4 A firm's accounting profit is given by total revenue: less implicit costs. less explicit costs. less economic profit. less implicit and explicit costs. 4 points Question 5 Suppose an activity has a private cost equal to $30 and a private benefit equal to $30. The associated social cost equals $35 and the social benefit equals $30. Which of the following statements is true about this activity? There is a negative externality associated with this activity but not a positive externality. There is a positive externality associated with this activity but not a negative externality. There is both a positive and a negative externality associated with this activity. There is neither a positive nor a negative externality associated with this activity. 4 points Question 6 The Coase Theorem implies that: the efficient level of an externality is generally zero. private individuals living in market economies should not be concerned with externalities. government intervention is not always needed to arrive at the efficient level of an externality. government laws are unnecessary. 4 points Question 7 An industry in which a small number of large firms sell products that are either close or perfect substitutes is: perfectly competitive. monopolistically competitive. an oligopoly. a monopoly. 4 points Question 8 When a negative externality is present in a market: a tax can increase the level of economic surplus. the social benefits are greater than the private benefits. there is generally too little of the good produced by private markets. the government should ensure that there are zero external costs associated in all markets. 4 points Question 9 In the presence of a positive externality, the government can arrive at the socially optimal output level by: paying producers a subsidy equal to the amount of social benefits associated with the activity. charging producers a tax equal to the amount of social costs associated with the activity. paying producers a subsidy equal to the amount of external benefits associated with the activity. charging producers a tax equal to the amount of external costs associated with the activity. 4 points Question 10 The tragedy of the commons is that: too few individuals have access to high quality healthcare. common people overconsume public goods. the quality of life for lower income people is generally lower than that of higher income people. a resource with no price tends to be exploited until its marginal benefit falls to zero. 4 points Question 11 One potential remedy to the tragedy of the commons is to: never allow a single individual to consume more than one percent of the common resource. criminalize the usage of common resources. allow individuals to use a common resource as long as they receive some benefit from doing so. place a common resource under private ownership. 4 points Question 12 As a result of a positional externality: contestants have a tendency to invest in a series of mutually offsetting investments in performance enhancement. there is generally an underinvestment in performance enhancement. the market price of performance enhancement materials is too high. the quality of performance in competitive situations is lower than the socially optimal level. 4 points Question 13 Which of the following statements is true regarding health insurance? Economics shows that all health related procedures should be free to individuals because the health of an individual is priceless. Total economic surplus would be larger if individuals faced an incentive to only use services when the benefit exceeds their costs. Health maintenance organizations provide an incentive for doctors to prescribe expensive nonessential services. First dollar insurance coverage has likely had very little to do with rising healthcare expenditures since World War II. 4 points Question 14 A strategy that yields a higher payoff no matter what the other players in the game choose is known as a: prisoner's strategy. dominated strategy. dominant strategy. Nash strategy.

1).

A consumer spends more time searching for a good when her reservation price is:

increased.

reduced.

fixed.

None of the statements is correct.

2).

In the game shown below, firms 1 and 2 must independently decide whether to charge high or low prices.

Which of the following are Nash equilibrium payoffs in the one-shot game?

(0, 0)

(5, -5)

(-5, 5)

(10, 10)

3).

A risk-neutral individual would:

prefer $5 with certainty to a risky prospect with the expected value of $5.

prefer a risky prospect with an expected value of $5 to a certain amount of $5.

be indifferent between a risky prospect with an expect value of $5 to a certain amount of $5.

prefer a risky prospect with the expected value of $0.50 to $5 with certainty.

4).

Snowpeak Ski Resort offers a price for a lift ticket that is barely over its marginal cost, but the high equipment rental fee keeps generating big profits. Which pricing strategy is the management using?

Price discrimination

Two-part pricing

Commodity bundling

Cross-subsidization

5).

The short run is defined as the time frame:

in which there are no fixed factors of production.

in which there are fixed factors of production.

less than one year.

less than three years.

6).

Fixed costs exist only in:

the long run.

capital-intensive markets.

the short run.

labor-intensive markets.

7).

Top of Form

Non-fed ground beef is an inferior good. In economic booms, grocery managers should:

increase their orders of non-fed ground beef.

reduce their orders of non-fed ground beef.

not change their orders of non-fed ground beef.

neither increase, reduce, nor maintain their current orders for non-fed ground beef.

Bottom of Form

8).

Which of the following pricing strategies is NOT used in markets with special cost and demand structures?

Peak-load pricing

Cross-subsidization

Transfer pricing

Low-price guarantees

9).

A perfectly competitive firm faces a:

perfectly elastic demand function.

perfectly inelastic demand function.

demand function with unitary elasticity.

None of the answers is correct.

10).

The special demand structure that induces a firm to use a cross-subsidization strategy is:

perfect substitution among products.

imperfect substitution among products.

independent demand for products.

interdependent demand for products.

11).

Which of the following factors reduces the need for government involvement in the marketplace?

The presence of externalities

The incentive to rent-seek

The need for public goods

Incomplete information

12).

Which of the following statements is true?

A mineral rights auction is not the same as a common-value auction.

An auctioneer is always indifferent between different kinds of auctions.

The Dutch and first-price, sealed-bid auctions are strategically equivalent.

An English auction always yields lower expected revenues than a second-price, sealed-bid auction.

13).

Which of the following is true concerning negative externalities?

Firms tend to produce more than the efficient level of output.

Society gains because firms do not pay the external costs of production.

Perfect competition is better than monopoly from the viewpoint of society even in the presence of negative externalities.

With negative externalities, a monopoly will always produce an output level less than is socially efficient.

14).

Which of the following is true under monopoly?

P > ATC

P > MC

P = MR

P = ATC

15).

Differentiated goods are NOT a feature of a:

perfectly competitive market.

monopolistically competitive market.

monopolistic market.

perfectly competitive market and monopolistic market.

16).

Producer surplus is measured as the area

below the demand curve and above the market price.

above the demand curve and below the market price.

above the supply curve and below the market price.

below the supply curve and above the market price.

17).

Jaynet spends $25,000 per year on painting supplies and storage space. She recently received two job offers from a famous marketing firm â one offer was for $105,000 per year, and the other was for $85,000. However, she turned both jobs down to continue a painting career. If Jaynet sells 30 paintings per year at a price of $9,000 each:

a. What are her accounting profits?

$

b. What are her economic profits?

$

18).

You are the manager of a monopoly that sells a product to two groups of consumers in different parts of the country. Group 1âs elasticity of demand is -2, while group 2âs is -4. Your marginal cost of producing the product is $40.

a. Determine your optimal markups and prices under third-degree price discrimination.

Instruction: Round your answers to two decimal places.

Markup for group 1:
Price for group 1: $

Markup for group 2:
Price for group 2: $

b. Which of the following are necessary conditions for third-degree price discrimination to enhance profits.

Instructions: You may select more than one answer. Click the box with a check mark for the correct answers and click twice to empty the box for the wrong answers. You must click to select or deselect each option in order to receive full credit.

	At least one group has elasticity of demand less than one in absolute value.
	There are two different groups with different (and identifiable) elasticities of demand.
	We are able to prevent resale between the groups.
	At least one group has elasticity of demand greater than 1 in absolute value.

19).

You are the manager of a firm that receives revenues of $60,000 per year from product X and $80,000 per year from product Y. The own price elasticity of demand for product X is -1.5, and the cross-price elasticity of demand between productY and X is -1.4.

How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent?

Instructions: Round your answer to the nearest dollar. Include a minus (-) sign if applicable.

$

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ECON 040 Lecture Notes - Lecture 7: Deadweight Loss, Price Ceiling, Price Floor

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