ECO 1104 Chapter Notes - Chapter 8: Deadweight Loss, Economic Surplus, Laffer Curve

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7 Dec 2016

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Tax places a wedge between buyers and sellers: causes the size of the market to shrink. Government tax revenue = size of the tax x quantity sold. Represented by rectangle between the supply and demand curves. Deadweight loss: the fall in total surplus that results when a tax distorts market outcome. Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade. (triangle between the government revenue, supply, and demands curves. Large tax: small tax revenue because it reduces the size of the market too much. Laffer curve: when taxes get too high, it decreases tax revenue because it discourages people from producing. Total economic welfare= consumer surplus + producer surplus + government revenue. The larger the deadweight loss, the less economic welfare. Compared to a market with no taxes and no deadweight loss. Area of a triangle = base x height.

Related Questions

Suppose that a market is described by the following supply and demand equations:

QS= 2P

QD = 300P

a. Solve for the equilibrium price and the equilibrium quantity.

b. Suppose that a tax of T is placed on buyers so the new demand equation is QD = 300 (PT). Solve for the new equilibrium. What happens to the price received by sellers, the price paid by buyers, and the quantity sold?

c. Tax revenue is T×Q. Use your answer to part (b) to solve for tax revenue as a function of T.
d. The deadweight loss of a tax is the area of the triangle between the supply and demand curves. Recalling that the area of a triangle is , solve for deadweight loss as a function of T.

(Hint: Looking sideways, the base of the deadweight loss triangle is T, and the height is the difference between the quantity sold with the tax and the quantity sold without the tax.)

yellowmule81

_____ 1. Suppose you make silver jewelry. If the price of silver falls, we would expect you to:

a. be willing and able to produce less jewelry than before at each possible price.

b. be willing and able to produce more jewelry than before at each possible price.

c. face greater demand for your jewelry.

d. face a weaker demand for your jewelry.

_____ 2. If suppliers expect the price of their product to fall in the future, then they will:

a. increase supply (supply curve shifts out) now.

b. decrease supply (supply curve shifts in) now.

c. increase supply in the future, but not now.

d. decrease supply in the future, but not now.

_____ 3. Consider the market for portable air conditioners, initially in equilibrium. When a heatwave strikes, the equilibrium price:

a. increases and equilibrium quantity decreases.

b. decreases, and the equilibrium quantity increases.

c. and quantity both increase.

d. and quantity both decrease.

_____ 4. Buyers can buy all they want to buy and sellers can sell all they want to sell at:

a. prices at and above the equilibrium price.

b. prices at and below the equilibrium price.

c. prices above and below the equilibrium price, but not at the equilibrium price.

d. the equilibrium price, but not at prices above or below the equilibrium price.

_____ 5. The law of supply and demand states that:

a. demand and supply curves shift out as time goes by.

b. the price of a goodwill rise in response to excess demand for that good.

c. when the supply curve for good shifts, the demand curve for that good shifts in response.

d. the equilibrium price of goodwill be rising more often than it will be falling.

_____ 6. If Doritos and Cheetos are substitutes, a rise in the price of Cheetos will cause:

a. the equilibrium quantity of Doritos to fall and the price of Doritos to rise.

b. the equilibrium quantity and price of Doritos to rise.

c. the equilibrium quantity and price of Doritos to fall.

d. the equilibrium quantity of Doritos to rise and the price of Doritos to fall.

_____ 7. New production technology is perfected that allows auto manufacturers to build an automobile using half the labor hours formerly needed. As a result:

a. the equilibrium quantity of automobiles increases and the price decreases.

b. the equilibrium quantity and price of automobiles increase.

c. the equilibrium quantity and price of automobiles decreases.

d. there is likely no change in the number of automobiles produced.

_____ 8. The U.S. government announces that it will raise the interest rate on college student loans beginning in January of next year. The immediate market impact is:

a. the demand curve for student loans shifts out.

b. the supply curve for student loans shifts out.

c. we anticipate that more student loans will be completed next year than this year.

d. all of the above are correct.

_____ 9. What curve shift produces a fall in price and increase in quantity exchanged?

a. An inward shift in the demand curve.

b. An inward shift in the supply curve.

c. An outward shift in the supply curve.

d. An outward shift in the demand curve.

_____ 10. We note that fewer motorcycles were sold this year than last and that the price is also lower. What event could have caused this outcome?

a. A technological change that improved the fuel efficiency of motorcycles.

b. A rise in the wages paid to motorcycle manufacturing workers.

c. A motorcycle craze due to the popularity of Sons of Anarchy.

d. Increasing concerns about health impacts from breathing motorcycle exhaust.

_____ 11. The price that results in quantity supplied equaling quantity demanded is the optimal (best) price because it:

a. maximizes the combined welfare of buyers and sellers.

b. maximizes the cost of the seller.

c. minimizes the expenditure of buyers.

d. all of the above are correct.

_____ 12. Consumer surplus is the:

a. quantity of good consumers get without paying anything.

b. amount a consumer pays minus the amount the consumer is willing to pay.

c. amount a consumer is willing to pay minus the amount the consumer pays.

d. value of a good to a consumer.

_____ 13. In a market, the marginal buyer is the one:

a. whose willingness to pay is higher than all other buyers and potential buyers.

b. whose willingness to pay is lower than all other buyers and potential buyers.

c. who is willing to buy exactly one unit of the good.

d. who would be the first to leave the market if the price were any higher.

_____ 14. If a consumer is willing and able to pay $20 for a particular good and if she actually pays $16 for the good, then her consumer surplus is:

a. $4.

b. $16.

c. $20.

d. $36.

_____ 15. Suppose there is an early freeze in California that reduces the size of the orange crop. What happens to consumer surplus in the market for oranges?

a. Consumer surplus increases.

b. Consumer surplus decreases.

c. Consumer surplus is not affected by this change.

d. We would have to know whether the demand for oranges is elastic or inelastic.

_____ 16. Producer surplus is the area on a supply/demand graph:

a. under the supply curve.

b. between the supply and demand curves.

c. below the price line and above the supply curve.

d. under the demand curve and above the price line.

_____ 17. Economists typically measure economic efficiency using:

a. total producer and consumer surplus.

b. profits to firms.

c. the quantity supplied by sellers.

d. the price paid by buyers.

_____ 18. Which of the following statements is correct?

a. Efficiency and equality are both maximized when total surplus is maximized.

b. Efficiency deals with the size of the economic pie; equality with how fairly the pie is sliced.

c. Efficiency is more difficult to evaluate than equality.

d. Equality is judged on positive grounds; efficiency requires normative judgments.

_____ 19. The price elasticity of demand measures how much:

a. quantity demanded a response to changes in price.

b. quantity demanded a response to changes in income.

c. price responds to a change in demand.

d. Both a and c are correct

_____ 20. Goods with many close substitutes tend to have:

a. less elastic demands.

b. more elastic demands.

c. price elasticities of demand that are unit elastic.

d. income elasticities that are negative.

Short Answer Questions:

All of the following questions are based on the data shown here for coffee demand and supply at a fictional Columbus coffee shop called Go-bucks.

Price Quantity Quantity

per Cup Demanded Supplied

$1.60 1,700 1,220

$1.80 1,555 1,300

$2.00 1,400 1,400

$2.20 1,235 1,520

$2.40 1,060 1,660

$2.60 875 1,820

_____ 21. (6 points) Using the mid-point formula, calculate the price elasticity of demand as the price increases from $1.60 to $1.80.

_____ 22. (6 points) Repeat the calculation of the price elasticity of demand, this time for a price increase from $1.80 to $2.00.

_____ 23. (6 points) Repeat the calculation of the price elasticity of demand, this time for a price increase from $2.40 to $2.60.

24. (4 points) Over which price range is demand inelastic? Over which price range is demand elastic? Does this follow the trend noted in class?

_____________________________________________________________________________

_____ 25. (6 points) Turning to the supply side, calculate the price elasticity of supply as the price increases from $2.20 to $2.40.

26. (2 points) How would you describe the price elasticity of supply over this range?

_____________________________________________________________________________

graychimpanzee865

Question 1 If it was impossible to have a comparative advantage, there would be no gains from trade. True False 4 points

Question 2 If the price of Good X is $10 and price of Good Y is $15, the slope of the budget constraint is 1.5. True False 4 points

Question 3 If the demand and supply curves have equal slopes in absolute value, the burden of a commodity tax will be split equally regardless of on whom the tax is placed. True False 4 points

Question 4 Suppose that supply is fixed at 100 units and demand is Q = 500 P. A price ceiling of $100 creates a shortage of 400 units. True False 4 points

Question 5 Housing shortages caused by rent controls are larger in the long run because the supply of housing is more elastic in the long run. True False 4 points

Question 6 Firms should exit the industry if average costs are greater than marginal costs. True False 4 points

Question 7 If a 3.67 percent increase in price causes a 1.97 percent decrease in quantity demanded, then total revenue must fall following an increase in price. True False 4 points

Question 8 Which of the following choices best illustrates the concept of Adam Smith's invisible hand ? A Vietnamese farmer grows rice; an exporter ships it to the United States, and a grocer in New York sells it to a customer. A fishery's stock of fish becomes depleted due to overfishing as boats from around the world converge. A government regulates a firm to clean up the pollutants it has released as part of its production process. An apartment building is built, which provides much needed housing, on the site of the only playground for children in that town. 4 points

Question 9 Figure: Labor Supply and Welfare Refer to the figure. The budget constraint is: ABC. BD. ABDC. ABD. 4 points Question 10 The price of coffee has increased, yet evidence suggests the demand for coffee has been stable. A possible explanation is that: there has been no change in the supply of coffee. there has been increased use of subsidies in coffee production. wages of workers in coffee production might have decreased. wages of workers in coffee production might have increased. 4 points Question 11 Which of the following statements is TRUE regarding profit maximization in competitive markets? I. When all firms pursue profits, none of them achieve profits. II. When all firms pursue profits, only the most innovative will achieve profits. III. Production is divided in such a way that total costs of production are minimized. I only II only I and III only II and III only 4 points Question 12 Suppose France can produce four phones or three computers with one unit of labor, and Sweden can produce one phone or two computers with one unit of labor. If France can trade only with Sweden, then the theory of comparative advantage suggests that: France should specialize in producing phones and import computers from Sweden. France should specialize in producing computers and import phones from Sweden. France should produce both phones and computers, and import nothing from Sweden. France should import both phones and computers from Sweden. 4 points Question 13 Potato chips and popcorn are substitutes. A subsidy for potato chips will ______the demand for popcorn and the quantity of popcorn sold will ______. (Table: Barrels of Oil) Refer to the table. What is the total amount of producer surplus (per barrel of oil) earned by all four producers if the market price per barrel of oil is $51? Table: Barrels of Oil Minimum willingness to sell Country a single barrel of oil Country A $32.00 Country B 16.00 Country C 17.25 Country D 56.99 increase; increase increase; decrease decrease; decrease decrease; increase 4 points Question 14 In the market for Good X a necessity good without any good substitutes the workers and capital in the industry can easily find work producing other goods. The burden of the tax is likely to fall: more heavily on buyers, given that demand is more inelastic than supply. evenly between buyers and sellers. more heavily on sellers, given that supply is more inelastic than demand. more heavily on buyers, given that demand is more elastic than supply. 4 points Question 15 A U.S. manufacturer arranges to purchase parts from a German supplier for 500,000 euros in six months. The U.S. manufacturer is concerned that the dollar will depreciate against the euro, meaning the dollar cost of the 500,000 euros will rise. What should the U.S. manufacturer do? lobby the Fed to lower interest rates on six-month T-bills buy a futures contract that fixes the dollar cost of 500,000 euros in six months buy an exchange rate contract that pegs the interest rate to the discount rate on interbank loans sell a naked option to cover the output spread 4 points Question 16 Which of the following scenarios would cause a speculator to buy low and sell high ? Farmers expect to have a bumper harvest of corn next year. Imports of corn begin to flood the country. The government is expected to pass legislation making it mandatory for all vehicles to use corn-based fuels within one year. The government is expected to subsidize corn production for farmers. 4 points Question 17 In a market with a price ceiling which of the following is TRUE? Buyers and sellers experience unexploited gains from trade. Resources are allocated to their most efficient uses. The supply of goods is sold by the sellers with the lowest costs. The supply of goods is bought by the buyers with the highest willingness to pay. 4 points Question 18 Consider the following statements: I. Relative to a no-trade situation, if the United States exported wheat, the U.S. domestic wheat price would rise and domestic production of wheat would expand. II. Relative to a no-trade situation, international trade causes prices of all goods to rise. I is true; II is false. I is false; II is true. Both I and II are true. Both I and II are false. 4 points Question 19 As the price of a good fluctuates, a profit-maximizing firm will expand or contract production along its: average cost curve. average product curve. marginal cost curve. marginal product curve. 4 points Question 20 An increase in demand and a decrease in supply occur in a market. What happens to the equilibrium price and quantity? The equilibrium price decreases; the change in the equilibrium quantity is ambiguous. The equilibrium price decreases; the equilibrium quantity increases. The equilibrium price increases; the change in the equilibrium quantity is ambiguous. The equilibrium price increases; the equilibrium quantity decreases.

periwinklebear649

ECO 1104 Chapter Notes - Chapter 8: Deadweight Loss, Economic Surplus, Laffer Curve

ECO 1104 Full Course Notes

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