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what is elasticity?
a measure of a reponsiveness of quantity demanded or quantity supplied to a change in on of its determinants.
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A quantity demaded responds to a change in price is called what?
elasticity
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A demand that has quantity demanded responds only slightly to changes in price is what?
inelastic
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do close substitues have any effect on goods price increase?
no
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price of elasticity of demand formula is?
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suppose that a 10% increase in the price of an ice-cream cone causes the amount of ice-cream you buy to fall 20%. elasticity of demand is? is the 20% a increase or decrease effect?
=2 negitive 20% and a positve 10%
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how do economists classify demand curves?
according to their elasticity.
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When the elasticity is greater than 1 or less than 1 what happens?
- if greater the quantity moves proportionately more than the price.
- if less than 1 then its a inelasticityquantity moves the same amount than the price.
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if the elasticity is exactly 1, what happens?
the quantity moves the same amount proportionaltely as the price, and demand is said to have unit elasticity.
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The flatter a demand curve that passes through a given point what happens
the greater the price elasticity of demand will be.
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the steeper the demand curve that passes through a given point what happens?
smaller the price elastictiy of demand.
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what if the perfectly inelatic demand: elasticity equal zero what happens?
an increase in price but leaves the quandity demanded unchanged.
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Inelastic demand always looks like what letter?
I
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Total revenue is what?
the amount paid by buyers and reveived by sellers of a good, computed as the price of the good times the quantity sold.
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when the demand is elastic what happens when the price goes up?
Quantity demand falls more and causing a bigger decrease in total revenue.
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when demand is inelastic "price less than 1" what happens?
price and total revenue move in the same direction.
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when the demand is Elastic "price greater than 1" what happens?
price and total revenue move in opposite directions.
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if demand is unit elastic "price exactly at 1" what happens?
total revenue remains constant when the price changes.
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what to function multiplied create total revenue?
Price x Quantity
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in the rise over run what 2 ratios is it refering too?
Price over Quantity
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elastic in the short run is more or less than in the long run.
less
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A product that has the least elastic demand maybe considered what?
A true nessecity.
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what will cause a price increase?
increase in total revenue when demand is inelastic.
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when demand is inelastic. what happens to price and total revenue.
they move in the same direction.
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when demand is elastic, what happens to the price and total revenue.
they move in the opposite direction.
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what happens when demand is unit elastic what happens to the totoal revenue?
it reamins the same because the price change is propotionate to the quantity demanded.
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Complementary goods
quantity demanded for good is up what is demand for other good?
UP
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Complementary goods quantity demanded for good is down what is demand for other good?
down
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Substitute goods
quantity demanded for good is up what is the demand for the other good?
demand for good is down.
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Substitute goods quantity demanded for good is up what is the demand for the other good?
demand for good is up.
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Elasticity improves our understanding of supply and demand by adding
a quantitative element to our analysis
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Demand is said to be elastic if
buyers respond substantially to changes in the price of the good.
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If a person only occasionally buys a cup of coffee, his demand for coffee is probably
elastic
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If the price elasticity of demand for a good is 1.65, then a 3 percent decrease in price results in a
- 4.95 percent increase in the quantity demanded
- 1.65*3
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Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 1.5. Which of the following events is consistent with a 3.5 percent increase in the price of the good?
The quantity of the good demanded decreases from 25,294 to 24,000.
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Assume the section of the demand curve labeled A corresponds to prices between $6 and $12. Then, when the price increases from $8 to $10,
the percent decrease in the quantity demanded exceeds the percent increase in the price.
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When quantity moves proportionately the same amount as price, demand is
unit elastic and the price elasticity of demand is 1.
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The maximum value of total revenue corresponds to a price of
look at the midway unit elastic in the middle.
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If the price elasticity of demand for aluminum foil is 1.45, then a 2.4% decrease in the price of aluminum foil will increase the quantity demanded of aluminum foil by
- 3.48% and aluminum foil sellers' total revenue will increase as a result.
- 1.45=%Q/2.4 is 3.489%
- Elastic Price down and total revenue up.
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If the price elasticity of supply is 1.5 and a price increase led to a 1.8% increase in quantity supplied, then the price increase amounted to
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The supply of a good will be more elastic, the
longer the time period being considered.
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If an increase in the price of a good results in an increase in total revenue for the firm, then the supply of the good must be
Nothing can be said about price elasticity of supply from the information given.
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An advance in farm technology that results in an increased market supply is
bad for farmers because total revenue will fall, but good for consumers because prices for food will fall.
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Price ceilings and price floors that are binding
cause surpluses and shortages to persist since price cannot adjust to the market equilibrium price.
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. In New York City, rent-control laws have resulted in
- substantial benefits to people who are relatively wealthy and few, if any, benefits to the poor.
- the passage of other laws that make it almost impossible for landlords to evict tenants.
- a very slow rate of growth of the housing supply.
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Which of the following is the most correct statement about price controls?
Price controls often hurt those they are designed to help.
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. Suppose the same S and D curves apply, and a tax of the same amount per unit as shown here is imposed. Now, however, the buyers of the good, rather than the sellers, are required to pay the tax to the government. Now,
a downward shift of the demand curve replaces the upward shift of the supply curve.
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. If a tax is imposed on a market with elastic demand and inelastic supply,
sellers will bear most of the burden of the tax.
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Suppose the demand for picture frames is elastic and the supply of picture frames is inelastic. A tax of $1 per frame levied on buyers of picture frames will increase the equilibrium price paid by buyers of picture frames by
a positive amount but less than $0.50.
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Suppose sellers of liquor are required to send $1.00 to the government for every bottle of liquor they sell. Further, suppose this tax causes the price paid by buyers of liquor to rise by $0.80 per bottle. Which of the following statements is correct?
Eighty percent of the burden of the tax falls on buyers.
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Willingness to pay
measures the value that a buyer places on a good.
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Marjorie is willing to pay $68 for a pair of shoes for a formal dance. She finds a pair at her favorite outlet shoe store for $48. Marjorie's consumer surplus is
$20.
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. Suppose Katie, Kendra, and Kristen each purchase a particular type of cell phone at a price of $80. Katie’s willingness to pay was $100, Kendras’s willingness to pay was $95, and Kristen's willingness to pay was $80. Which of the following statements is correct?
For the three individuals together, consumer surplus amounts to $35.
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Suppose the market demand curve for a good passes through the point (quantity demanded = 100, price = $25). If there are five buyers in the market, then
the marginal buyer's willingness to pay for the 100th unit of the good is $25.
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When the demand for a good increases and the supply of the good remains unchanged, consumer surplus
may increase, decrease, or remain unchanged.
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Sally sharpens knives in her spare time for extra income. Buyers of her service are willing to pay $2.50 per knife for as many knives as Sally is willing to sharpen. On a particular day, she is willing to sharpen the first knife for $1.75, the second knife for $2.25, the third knife for $2.75, and the fourth knife for $3.25. Assume Sally is rational in deciding how many knives to sharpen. Her producer surplus is
$1.00.
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The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium price of chocolate
decreases, and producer surplus decreases.
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Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price for widgets to $6, producer surplus
might increase or decrease
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Suppose that the equilibrium price in the market for widgets is $5. If a law reduced the maximum legal price for widgets to $4,
any possible increase in consumer surplus would be smaller than the loss of producer surplus
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Cornflakes and milk are complementary goods. A decrease in the price of corn will
increase consumer surplus in the market for cornflakes and increase producer surplus in the market for milk.
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To fully understand how taxes affect economic well-being, we must
compare the reduced welfare of buyers and sellers to the amount of revenue the government raises.
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When a good is taxed,
both buyers and sellers of the good are made worse off.
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When a tax is imposed on a good,
the equilibrium quantity of the good always decreases.
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Buyers of a product will bear the larger part of the tax burden, and sellers will bear a smaller part of the tax burden, when
the supply of the product is more elastic than the demand for the product.
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It does not matter whether a tax is levied on the buyers or the sellers of a good because
buyers and sellers will share the burden of the tax.
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The benefit that government receives from a tax is measured by
tax revenue
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Suppose a tax of $4 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 2,000 units to 1,700 units. The tax decreases consumer surplus by $3,000 and it decreases producer surplus by $4,400. The deadweight loss of the tax is
$600.
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Deadweight loss is the
decline in total surplus that results from a tax.
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A tax of $10 per unit is imposed on a certain good. The supply curve and the demand curve are straight lines. The tax reduces the equilibrium quantity in the market by 200 units. The deadweight loss from the tax is
$,1000
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Suppose that policymakers are considering placing a tax on either of two markets. In Market A, the tax will have a significant effect on the price consumers pay, but it will not affect equilibrium quantity very much. In Market B, the same tax will have only a small effect on the price consumers pay, but it will have a large effect on the equilibrium quantity. Other factors are held constant. In which market will the tax have a larger deadweight loss?
Market B
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The Laffer curve relates
the tax rate to tax revenue raised by the tax.
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The equilibrium price before the tax is imposed is
P2
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The price that buyers effectively pay after the tax is imposed is
P3.
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The price that sellers effectively receive after the tax is imposed is
P1.
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The per unit burden of the tax on buyers is
P3 - P2.
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The per-unit burden of the tax on sellers is
P2 - P1.
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The amount of the tax on each unit of the good is
P3 - P1.
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The amount of tax revenue received by the government is equal to the area
P3 A C P1.
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The amount of deadweight loss associated with the tax is equal to
A B C.
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Which of the following equations is valid for the loss in consumer surplus caused by the tax?
Loss of consumer surplus = (1/2)(P3 - P2)(Q1 + Q2).
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Which of the following equations is valid for the loss in producer surplus caused by the tax?
Loss of producer surplus = (1/2)(P2 - P1)(Q1 + Q2).
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Which of the following equations is valid for the tax revenue that the tax provides to the government?
Tax revenue = (P3 - P1)Q1
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Which of the following equations is valid for the deadweight loss of the tax?
Deadweight loss = (1/2)(P3 - P1)(Q2 - Q1)
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Ryan would be willing to pay as much as $100 per week to have his house cleaned. Tammy's opportunity cost of cleaning Ryan’s house is $70 per week.
If Ryan pays Tammy $80 to clean his house, Ryan’s consumer surplus is
$20
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Ryan would be willing to pay as much as $100 per week to have his
house cleaned. Tammy's opportunity cost of cleaning Ryan’s house is $70 per
week.
If Tammy cleans Ryan's house for $80, Tammy’s producer surplus is
$10.
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Ryan would be willing to pay as much as $100 per week to have his
house cleaned. Tammy's opportunity cost of cleaning Ryan’s house is $70 per
week.
Assume Ryan is required to pay a tax of $40 when he hires someone to clean his house for a week. Which of the following is correct?
Ryan will now clean his own house.
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Ryan would be willing to pay as much as $100 per week to have his
house cleaned. Tammy's opportunity cost of cleaning Ryan’s house is $70 per
week.
Assume Ryan is required to pay a tax of $15 when he hires someone to clean his house. Which of the following is true?
- Ryan will continue to hire Tammy to clean his house but his consumer surplus will decline.
- Tammy will continue to clean Ryan's house but her producer surplus will decline.
- Total economic welfare (consumer surplus plus producer surplus plus tax revenue) will decrease.
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If Francis experiences a decrease in his income, we would expect that, as a result, Francis’s demand for
- normal goods will decrease
- inferior goods will increase
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A leftward shift of a supply curve is called
a decrease in supply
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A decrease in supply shifts the curve and
decreases in quantity supplied.
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when elasticity is greater than 0 or less than zero what is it?
- greater than zero is normal good
- less than zero is a inferior good
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