ECON 2000 Test 2 – Louisiana State University | ECON2000 Test 2 – Louisiana State University

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ECON 2000 Test 2 – Louisiana State University Assignment 6 1. MIT economist Jerry Hausman has estimated the price elasticity of demand for Post Raisin Bran cereal to be -2.5 and the price el... asticity of demand for all types of breakfast cereals to be -0.9. a. The price elasticity of demand is elastic, and the price elasticity of demand for all types of breakfast cereals is inelastic. b. What might the price elasticity of demand for Post Raisin Bran cereal be more elastic than the price elasticity of demand for all types of breakfast cereals? i. Post Raisin Bran cereal has more substitutes available. 2. Compare the price elasticity of demand for water with the price elasticity of demand for wine. The price elasticity of demand for water is likely a. Relatively more inelastic because water is a necessity. 3. If the demand for orange juice is elastic, will an increase in the price of orange juice increase or decrease the revenue received by orange juice sellers? a. If the price of orange juice increases, revenue will decrease 4. The price of organic apples rises and apple growers find that their revenue decreases. Is the demand for organic apples elastic or inelastic? a. The demand for organic apples is elastic. 5. Manager 1:”The only way we can increase the revenue we receive from selling our graphing calculators is by cutting the price.” Manager 2: “Cutting the price of a product never increases the amound of revenue you receive. If we want to increase revenue, we have to increase price.” Do you agree with the reasoning of Manager 2? a. I disagree. Cutting the price will increase revenue if the demand is price elastic. 6. Suppose you check out the prices of two products on Amazon.com: Conventional cathode ray tube (CRT) televisions and LCD flat panel televisions. a. For which type of televisions would you expect manufacturers to be offering similar televisions at about the same prices? i. Cathode ray tube (CRT) b. For which type of televisions would you expect manufacturers to be offering similar televisions at differing prices? i. LCD flat panel c. The reason we would expect to see these pricing strategies is because pricing strategies depend on i. Elasticities not well known at the beginning of the product life cycle. 7. Suppose the demand for Northface pullovers is illustrated in the figure to the right. - - - - - - - - - - - - - - - - 4. The competitive equilibrium rent in the city of Lowell is currently $1,000 per month. The government decides to enact rent control and to establish a price ceiling for apartments of $750 per month. Briefly explain whether rent control is likely to make each of the following people better or worse off. a. Someone currently renting an apartment in Lowell i. Will be better off if they keep their apartment because rent is lower due to the price ceiling ii. Will be worse off if they lose their apartment. b. Someone who will be moving to Lowell next year and who intends to rent an apartment. i. Will be better off if they are able to find an apartment to rent because rent is lower due to the price ceiling ii. Will be worse off if they are unable to find an apartment to rent c. A landlord who intends to abide by the rent control law i. Will be worse off because he will be receiving less rent. d. A landlord who intends to ignore the law and illegally charge the highest rent possible for his apartments i. Will be better off if he does not get caught because that amount will be above the equilibrium. ii. Will be worse off if he gets caught. 5. A black market is a. A market in which buying and selling take place at prices that violate government price regulations. 6. “Rent controls, government farm programs, and other price ceilings and price floors are bad.” This is an example of a a. Normative statement. The statement is concerned with what should be. 7. When the government imposes price floors or ceilings, a. Some people win, some people lose, and there is a loss of economic efficiency. 8. Tax incidence indicates a. The actual division of the burden of a tax b. Do the people who are legally required to pay a tax always bear the burden of the tax? Briefly explain. i. No. Whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government. 9. If the price consumers pay and the price sellers receive are not affected by whether consumers or sellers collect a tax on a good or service, why does the government usually require sellers and not consumers to collect a tax? a. It would be difficult for buyers to keep track of their purchases and the amount of tax they owe the government on these purchases. True. 10. Consider the market for gasoline in the figure. Suppose the market is perfectly competitive and initially in equilibrium. Now suppose the government imposes a gasoline tax of $0.75 to be paid for by producers. The effect of this tax is illustrated in the figure. a. Who bears the burden of the tax? i. Consumers pay $0.50 of the $0.75 tax and producers pay $0.25 of the tax. 11. Use the graph of the market for cigarettes to answer the following. a. According to the graph, how much is the government tax on cigarettes? i. $1.50 per pack b. What price do producers receive after paying the tax? i. $4.50 per pack c. How much tax revenue does the government collect? i. $27.00 billion dollars per year 12. Consider the market for gasoline illustrated in the figure. Suppose the market is perfectly competitive and initially in equilibrium. Suppose the government imposes a gas tax of $1.00 to be paid for by producers. Show how the tax affects the market for gas. a. How much government revenue does the gasoline tax generate? $40.00 b. The gasoline tax is: i. Efficient in that the tax revenue is greater than the excess burden. - - - - - - - - - - - - -- - - - - - -- - 1. Consider the production of hotdogs. Given the average total cost of producing hot dogs illustrated in the graph to the right, which of the following is true of the marginal cost of producing hotdogs? a. The marginal cost of producing up to 500 hotdogs is less than the average total cost, but the marginal cost of producing more than 500 hotdogs is greater than the average total cost. b. The marginal cost of production is exactly equal to the average total cost at 500 hotdogs. 2. The marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum because a. When the marginal cost of the last unit produced is below the average, it pulls the average down, and when the marginal cost is above the average, it pulls the average up. 3. Marginal cost (MC) can be expressed mathematically as a. MC = ∆TC / ∆Q , where TC is total cost and Q is output b. For example, if the total cost of producing three units of output is $2,663 and the total cost of producing four units of output is $3,021, then the marginal cost of the fourth unit is $388 4. As the level of output increases, what happens to the value of average fixed cost? a. Average fixed cost decreases. 5. The figure to the right illustrates the short-run cost curves for a company that produces cell phones. a. The ATC curve is C3, the AVC curve is C2, the AFC curve is C1, and the MC curve is C4. 6. Suppose the total cost of producing 10,000 tennis balls is $50,000 and the fixed cost is $10,000. a. Variable cost? $40,000 b. When output is 10,000, what is the average variable cost? $4.00 c. When output is 10,000, what is the average fixed cost? $1.00 d. Assuming that the cost curves have the usual shape, the dollar difference between average total costs and average variable costs decreases as output increases. Ch 6 Quiz 1. What do economists use the concept of elasticity for? a. To measure how one economic variable responds to changes in another economic variable. 2. How is the responsiveness of the quantity demanded to a change in price measured? a. By dividing the percentage change in the quantity demanded of a product by the percentage change in the product’s price. 3. Which of the following is true if demand is inelastic? a. The percentage change in quantity demanded will be less than the percentage change in price. b. The price elasticity of demand will be less than 1 in absolute value. c. There are few substitutes for the good in question. 4. Which of the following does the midpoint formula use as a benchmark to measures changes in price and quantity? a. The averages of the initial and final quantity and the initial and final price. 5. If demand is perfectly elastic, then what is the impact of an increase in price? a. A decrease in quantity demanded to zero. 6. Which of the following statements about total revenue is correct? a. Total revenue is the total amount of funds a firm receives from selling a good or service. b. Total revenue is calculated by multiplying price per unit by the number of units sold. c. Total revenue is affected by changes in price depending on price elasticity of demand. 7. Refer to the figure below. In which of the graphs does a price decrease lead to an increase in total revenue? a. In the graph on the right 8. When demand is price-elastic, what is the relationship between price and total revenue? a. They move inversely 9. Refer to the figure below. What happens to price elasticity (in absolute value) as we move down the demand curve? a. It falls 10. If an increase in the price of a complement leads to a decrease in the quantity demanded, the cross-price elasticity of demand is negative. 11. If the quantity demanded of a good is very responsive to changes in income (or has an income elasticity coefficient greater than one), the good is considered _____________. - [Show More]

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