ECON 200 Lecture Notes - Lecture 3: Economic Surplus, Demand Curve, Reservation Price

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erinmole972

13 Feb 2016

School

University of Maryland

Department

Economics

Course

ECON 200

Professor

Robert Schwab

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Document Summary

What happens to total revenue if price rises: The price goes up-called price efect (so total revenue would rise) Quantity efect: people will buy less of good due to higher price (so total revenue would decrease) Price efect leads to higher total revenue. Quantity efect leads to lower total revenue. Therefore without additional info, the net efect of a price increase on total revenue is ambiguous. If demand is elastic then when price rises, total revenue will fall. If price goes up and quantity goes down only a little (demand isn"t sensitive to changes in price) then total revenue will go up. Welfare economics: the study of how the allocation of resources afects economic well-being. Economists have a great deal of conidence in markets. Willingness to pay: the maximum price that a buyer would be willing to pay for a good or service. Reservation price is another term for willingness to pay.

Related Questions

A competitive firmâs short-run demand for labor will rise when the price of its product rises.

	True
	False

As the wage rate rises, the marginal revenue product of labor increases.

	True
	False

A competitive firmâs demand for labor always slopes down in the short-run, but may slope upwards or downwards in the long run.

	True
	False

When labor an capital are complements in production, a higher wage will cause a firm to use more capital in the long run.

	True
	False

If labor is a regressive factor, then a firmâs long-run demand for labor may or may not be downward sloping.

	True
	False

The short-run demand curve for labor for a firm in any type of market for its output coincides with

	the upward-sloping portion of the marginal revenue product curve.
	the downward-sloping portion of the marginal revenue product curve.

	the downward-sloping portion of the marginal product curve.
	the marginal labor cost curve.

An increase in the price of labor will, in the short run, cause a competitive firmâs

	marginal cost to increase, the quantity it sells to decrease, and therefore reduce the quantity of labor demanded.
	price of its output to increase, leaving the quantity of labor demanded unchanged.

	marginal revenue product of labor to decrease, and therefore reduce demand for labor.
	marginal revenue product of labor to increase, and therefore increase demand for labor.

Which of the following would cause the firmâs short-run demand curve for labor to shift to the right?

	A decrease in the wage rate.
	An increase in the price of the firmâs product.

	An increase in the rental rate paid to capital.
	A decrease in the amount of complementary capital available.

If increased capital usage reduces the firmâs short-run demand for labor, then

	labor is a regressive factor.
	labor and capital are complements in production.

	labor and capital are substitutes in production.
	labor is a Giffen factor.

When is the law of demand violated for labor? That is, with regards to the law of labor demand, when does an increase in the wage not lead to a reduction in the quantity of labor demanded?

	Never.
	When the substitution and scale effects are in opposition, with the scale effect being the larger.

	When labor is a regressive factor.
	When labor earns zero economic rent.

If the wage rate rises, then the firmâs long-run marginal costs change, which in turn affects the firmâs output level and its employment of labor. This phenomenon is known as

	the substitution effect.
	the scale effect.

	the regressive-factor effect.
	the factor-price effect.

When will the scale effect of a wage increase cause a reduction in the quantity of labor demanded?

	Always.
	When labor is not a regressive factor.

	When labor and capital are substitutes in production.
	When labor and capital are complements in production.

Consider the usual case where a higher wage rate increases a firmsâ marginal costs. In this case, the industryâs demand curve for labor

	is more wage inelastic than the individual firmsâ demand curves would indicate.
	coincides with the horizontal sum of individual firmsâ demand curves.

	contains only substitution effects but no scale effects.
	is horizontal at the going wage rate.

To maximize profits, a monopolist will hire the quantity of labor at which marginal revenue product of labor

	is downward sloping and equal to the market wage rate.
	is downward sloping and equal to marginal labor cost.

	minus marginal labor cost is maximized.
	is maximized.

A firmâs revenue minus its factor payments equals

	zero.
	the profits or losses earned by the firm.

	the quasi-rents earned by the factors of production.
	the firmâs total revenue.

As the amount of labor used in production increases, total product

	increases at low levels of labor and decreases at higher levels of labor.
	increases at high levels of labor and decreases at low levels of labor.

	always increases.
	always decreases.

A profit-maximizing price taker will produce at a level where

	the wage equals the marginal product of labor.
	the marginal revenue product of labor equals the price of their output.

	the wage rate equals the price of their output.
	the marginal revenue product of labor equals the wage rate.

If the wage rate is $10 per hour and one worker can produce 2 units of output per hour, then the marginal cost of production is

	$5.
	$10.

	$20.
	The answer cannot be determined from the information given.

A firmâs long-run demand for labor is more wage-elastic than its short-run demand for labor.

	True
	False

A monopsonistâs short-run demand curve for labor coincides with its marginal revenue product of labor curve.

	True
	False

Workers will receive higher wages when an employer faces an upward-sloping supply curve for labor.

	True
	False

The profit an owner receives is equivalent to the rent received for her entrepreneurial services.

	True
	False

When high levels of labor are employed, total production tends to increase at a decreasing rate.

	True
	False

The substitution effect on labor always decreases the quantity of labor demanded when the wage rate increases.

	True
	False

A firmâs marginal revenue product of labor equals the marginal product of labor multiplied by the per-unit cost of labor.

	True
	False

Tastes and preferences are relevant to individual choices for consumption but not relevant to choices for supplying labor.

	True
	False

A higher wage will always cause a worker to increase the quantity of labor supplied.

	True
	False

The substitution and income effects of a wage increase both cause consumption to rise.

	True
	False

A workerâs labor supply may either rise or fall when nonlabor income increases, depending on whether the substitution effect or the income effect dominates.

	True
	False

When an increase in marginal productivity increases workersâ nonlabor income, the effect on the quantity of labor supplied is ambiguous/uncertain.

	True
	False

A technological improvement that is permanent is more likely to raise employment than one that is temporary.

	True
	False

Other factors being constant, firms that provide on-the-job training to workers will tend to pay higher wages.

	True
	False

If there is discrimination, employers engage in it a cost.

	True
	False

Human capital tends to increase over the course of a personâs life.

	True
	False

In the indifference curve budget line model of labor supply,

	labor is measured along the horizontal axis and leisure is measured along the vertical axis.
	labor is measured along the horizontal axis and consumption is measured along the vertical axis.

	consumption is measured along the horizontal axis and labor is measured along the vertical axis.
	consumption is measured along the horizontal axis and leisure is measured along the vertical axis.

In the indifference curve budget line model of labor supply, the slope of the indifference curve is used to measure

	the wage rate.
	laborâs marginal product.

	the workerâs nonlabor income.
	the marginal value of leisure.

If a worker has chosen a quantity of labor where the marginal value of leisure exceeds the wage rate, she would be better off by

	choosing less leisure.
	providing fewer hours of labor.

	providing more hours of labor.
	staying at this combination of labor and consumption.

When there is an increase in the wage rate there will be

	both a substitution effect and an income effect.
	only a substitution effect.

	only a substitution effect.
	either a substitution effect or an income effect.

When the wage rate rises, the substitution effect leads a worker to

	increase consumption while the income effect leads to a decrease in consumption.
	decrease consumption while the income effect leads to an increase in consumption.

	increase consumption, as does the income effect.
	substitution sleep for other leisure.

Consider the indifference curve budget line model of labor supply, and assume consumption and leisure are both normal goods. A higher wage rate would result in

	more consumption and less leisure.
	a reduction in the workerâs marginal value of leisure.

	reduced consumption if the income effect is larger than the substitution effect.
	increased labor only if the substitution effect outweighs the income effect.

When the wage rate rises, a worker chooses to replace some leisure hours with work hours, even if he would remain equally well off. This phenomenon is known as

	compensating differential.
	the income effect.

	the substitution effect.
	intertemporal substitution.

Which of the following will shift a workerâs labor supply curve to the left?

	Higher nonlabor income.
	A lower wage rate, assuming the substitution effect dominates the income effect.

	New machinery that substitutes for labor and lowers its marginal product.
	A decrease in the marginal value of leisure.

Which of the following would cause a rightward shift in the labor demand curve?

	Manna from heaven.
	A rise in the wage rate.

	A rise in workersâ marginal productivity.
	A decline in workersâ nonlabor incomes.

When some jobs are inherently more risky or unpleasant than other jobs, different workers will be paid different wages because of

	differences in human capital.
	differing access to capital.

	compensating differentials
	discrimination.

Discrimination is difficult to measure empirically because

	it is hard to measure and control for differences in marginal productivity.
	data on racial and gender differences is rarely available.

	discrimination is practiced by very few employers.
	economists find no significant wage differentials due to gender or race.

Intertemporal substitution dictates that

	people will work less in periods of high productivity.
	people will spend more in periods of high productivity.

	people will work more in periods of high productivity.
	people will spend less in periods of high productivity.

A decrease in the wage rate causes the budget line to

	become flatter.
	become steeper.

	shift upward.
	shift downward.

An increase in the marginal productivity of labor will tend to

	shift the labor supply curve rightward if the change is temporary.
	result in an increase in employment if the change is temporary.

	result in an increase in employment if the change is permanent.
	all of the above.

A downward shift in a workerâs budget line is a result of

	an increase in the wage rate.
	a decrease in the wage rate.

	an increase in nonlabor income.
	a decrease in nonlabor income

One deficiency of the labor-leisure indifference curve analysis is that because indifference curves are always tangent to the workerâs budget line, the model cannot explain why some people choose not to work.

	True
	False

pinkcheetah77

A1. The demand in Japan for new automobiles is elastic and sensitive to market prices. Given that, describe the effect of each of the following on the quantity demanded or the demand for new autos in Japan. Indicate whether the effect of each is an upward or downward movement along a given demand curve or instead involves an outward or inward shift in the demand curve for new autos. Explain your answers.

a. A decrease in the average price of new Japanese automobiles.
b. A fall in Japanese interest rates.
c. A rise in the price of public transportation in Japan.
d. A rise in the price of food in the United States.

A2.Suppose the demand for beer is characterized by the following point elasticities:

own price elasticity = -2.5

cross-price elasticity with soda = +3

income elasticity = +2

Based on the given elasticities, answer the following. Explain your answers.

a. If a firm in the industry wishes to increase total sales revenue (ignoring cost considerations), will it raise or lower its selling price? Why?

b. What happens to the demand for beer if the price of soda falls by 2%? Explain your answer.

c. What happens to the demand for beer if consumer income rises by 5%? Be specific.

d. Is beer a normal or inferior good? Explain.

I've completed this but I want to check my answers. Thanks

1) List and briefly explain three economic variables that shift the Demand Curve.

2) Define opportunity cost. How is opportunity cost used to determine comparative advantage?

3) In the market for calculators we observe that the price has fallen and more calculators are being sold. What might have happened to cause this change?

4) The price of gasoline rises. What would we expect to see happen in the market for cars with high gas mileage (like the Prius)?

5) What is the effect of a price floor (a price set above equilibrium) in the sugar market. Why does the government impose price floors?

6) Define the price elasticity of demand. Why is this concept important in economics?

7) Define the income elasticity of demand. Why is this concept important in economics?

8) List and briefly explain three economic variables that shift the Supply Curve.

9) A firm lowers of price of its product by 10% and consumers buy 5% more of the product. What is the price elasticity of demand for the product?

10) If the price elasticity of demand for a product is elastic, explain what will happen to total revenue when the price is decreased.

11) What is the difference between a change in quantity supplied and a shift in supply?

12) Write out the equation for the arc price elasticity of demand using symbols. Then write out the equation using the following numbers: the price increases from $8 to $10 and the quantity demanded falls from 3 units to 2 units. (Do not calculate the equation.)
Three Questions (no choice)

Long Answer Questions (20 points each)

Be certain to label all graphs. Write all explanations in complete sentences.

1) Draw a supply and demand graph for the market for oranges.

Illustrate and explain what happens with when a freeze destroys part of the crop.

2) Draw an increasing cost Production Possibilities Curve (PPC) for the U.S. with computers on the horizontal axis and textiles on the vertical axis.
a) What is the definition of a PPC

b) Choose a point on the PPC. What does this point represent?

c) Illustrate the opportunity cost of producing more computers.

d) Explain a point inside the PPC.

e) Explain a point outside the PPC.

f) Technological change reduces the cost of producing computers and textiles, illustrate and explain what happens in the graph.

g) Choose a new point that represents production and consumption after technological change.

h) Where does the U.S. produce and consume relative to before technological change.

i) Illustrate and explain the opportunity cost of producing more computers after technological change.

3) Define the price elasticity of demand. What does elastic, inelastic and unitary price elasticity of demand mean? For each of the three values of the price elasticity of demand explain what happens to quantity demanded and total revenue when the price of the product is increased? What about when the price of the product is decreased?

4) Using a supply and demand graph in the market for bread, illustrate and explain the effect of a price ceiling (Price set below equilibrium price).

Why would the government impose such a price ceiling?

How is the available bread distributed to consumers when there is a price ceilin

ECON 200 Lecture Notes - Lecture 3: Economic Surplus, Demand Curve, Reservation Price

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