Question 1

When price elasticity is less than -1, consumer spending increases as price falls.

Accepted Answer

When the price elasticity of demand is less than -1 (i.e., elastic), a decrease in price will result in a proportionally larger increase in quantity demanded. Therefore, consumer spending will increase as price falls.

Question 2

Price ceilings have to be set above the undistorted market equilibrium price in order to have any impact.

Accepted Answer

Price ceilings are government-imposed limits on how high the price of a good or service can be charged. If the ceiling is set above the undistorted market equilibrium price, it will have no impact because the market price will remain unchanged. However, if the ceiling is set below the equilibrium price, it can result in shortages, rationing, and other market distortions.

Question 3

Deadweight loss from the imposition of a price floor increases as consumer demand becomes more price elastic.

Accepted Answer

If demand is more price elastic, consumers are more likely to stop buying the product when the price goes up due to the price floor. This results in a larger gap between the quantity supplied and the quantity demanded, leading to a bigger deadweight loss.

Question 4

When tastes over current and future consumption are homothetic, the interest rate elasticity of savings supply is positive.

Accepted Answer

When tastes over current and future consumption are homothetic, the intertemporal substitution effect cancels out the income effect, leading to an interest rate elasticity of savings supply of zero, not positive.

Question 5

When own-price elasticity lies between 0 and -1, consumer spending decreases when price increases.

Accepted Answer

When own-price elasticity lies between 0 and -1, the demand is inelastic, meaning consumers are relatively unresponsive to price changes, and consumer spending on the good tends to increase or remain unchanged when the price increases.

Question 6

The equilibrium increase in marginal costs for firms resulting from the imposition of a price floor will be larger the more inelastic the price elasticity of demand is.

Accepted Answer

A price floor typically leads to a surplus of goods, and the impact on marginal costs is not directly related to the price elasticity of demand but rather to the firm's production and cost conditions. The elasticity of demand affects the quantity sold and the potential surplus created, not the marginal cost directly.

Question 7

When leisure is an inferior good, the wage elasticity of labor supply is always positive.

Accepted Answer

When leisure is an inferior good, an increase in wages will lead to a decrease in the demand for leisure. This means that people will work more hours in order to earn more money, which will result in a positive wage elasticity of labor supply.

Question 8

The price elasticity of output supply is greater in the long run than in the short run.

Accepted Answer

In the long run, producers have more time to adjust their production processes and inputs to changes in prices, making it easier for them to increase or decrease their output supply. In the short run, however, producers may be constrained by fixed inputs or limited capacity, making it more difficult to adjust their output supply in response to price changes. Therefore, the price elasticity of output supply tends to be greater in the long run than in the short run.

Question 9

In a perfectly competitive market with identical firms, all surplus will be consumer surplus in long run equilibrium.

Accepted Answer

In perfect competition, firms sell their goods at a price equal to the marginal cost of production. This results in the maximum possible consumer surplus in the market, as consumers are able to purchase goods at a price lower than what they are willing to pay. In the long run equilibrium, all firms earn zero economic profits, and any surplus beyond the costs of production is captured by consumers as additional surplus. Therefore, all surplus is consumer surplus in the long run equilibrium in a perfectly competitive market with identical firms.

Question 10

The greater the price elasticity of market demand, the less will be the reduction in market output from a price floor.

Accepted Answer

If market demand is highly price elastic, a price floor will lead to a relatively smaller reduction in market output. This is because as the price increases due to the price floor, consumers will likely reduce their quantity demanded by a greater percentage, making it more difficult for producers to reduce their output as much. Conversely, if market demand is less price elastic, a price floor will lead to a larger reduction in market output as producers will be able to reduce their output more without experiencing a significant decline in price.

Question 11

To have an effect on the market price, price ceilings must be set above the equilibrium price.

Accepted Answer

The answer of To have an effect on the market...

Question 12

Unless goods are Giffen goods, own-price elasticities of demand are always negative.

Accepted Answer

The answer of Unless goods are Giffen goods, own-price elasticities...

Question 13

The wage elasticity of labor demand is always negative.

Accepted Answer

The answer of The wage elasticity of labor demand is...

Question 14

The concept of &#34;non-price rationing&#34; means that, in general, we can deal with scarcity just as well without prices as with prices.

Accepted Answer

The answer of The concept of &#34;non-price rationing&#34; means that,...

Question 15

If a consumer's demand curve as constant own-price elasticity of -2, the consumer's spending will fall as price increases.

Accepted Answer

The answer of If a consumer's demand curve as constant...

Question 16

The reduction in the market output resulting from the imposition of a price floor depends on both the price elasticity of demand and the price elasticity of supply.

Accepted Answer

The answer of The reduction in the market output resulting...

Question 17

An equilibrium in the presence of price floors can be restored by increased consumer effort to obtain scarce goods.

Accepted Answer

The answer of An equilibrium in the presence of price...

Question 18

Demand curves with constant slopes must have different own-price elasticities as one moves along the demand curve.

Accepted Answer

The answer of Demand curves with constant slopes must have...

Question 19

Suppose a consumer has the following rule of thumb: Regardless of how gasoline prices fluctuate, she will always buy $20 of gasoline per week and then adjust her driving patterns accordingly.We can then conclude the following:

A)Her own-price elasticity of demand is equal to -1.
B)Her income-elasticity of demand is 0.
C)Her own-price elasticity is 0.
D)Her income elasticity of demand is -1.
E)Both (a) and (b).
F)Both (a) and (d).
G)Both (c) and (d)
H)None of the above.

Accepted Answer

The answer of Suppose a consumer has the following rule...

Question 20

When leisure is a normal good, the wage elasticity of labor supply is always positive.

Accepted Answer

The answer of When leisure is a normal good, the...

Question 21

Suppose that you know a good is a normal good for a consumer.Which of the following can you then conclude to be true:&#10;A)The own-price elasticity of demand is less than -1.&#10;B)The income elasticity of demand is greater than 0.&#10;C)The own-price elasticity of demand is greater than -1.&#10;D)The income elasticity of demand is less than 0.&#10;E)Both (a) and (b).&#10;F)Both (a) and (d).&#10;G)Both (b) and (c).&#10;H)None of the above.&#10;

Accepted Answer

The answer of Suppose that you know a good is...

Question 22

When tastes are quasilinear in leisure, which of the following is true:&#10;A)The wage elasticity of labor supply is zero.&#10;B)The wage elasticity of labor supply is positive.&#10;C)The wage elasticity of labor supply is negative.&#10;D)The wage elasticity of demand is negative.&#10;E)Both (a) and (d).&#10;F)Both (b) and (d).&#10;G)Both (c) and (d).&#10;

Accepted Answer

The answer of When tastes are quasilinear in leisure, which...

Question 23

Suppose a price ceiling is imposed below the undistorted market equilibrium price.Which of the following is true?&#10;A)The increase in the real price paid by consumers is larger the more price inelastic consumer demand is.&#10;B)The increase in the real price paid by consumers is larger the more price inelastic the supply curve is.&#10;C)The size of the reduction in market output depends only on the price elasticity of supply and not the price elasticity of demand.&#10;D)Both (a) and (b).&#10;E)Both (a) and (c).&#10;F)Both (b) and (c).&#10;G)All of the above.&#10;H)None of the above.&#10;

Accepted Answer

The answer of Suppose a price ceiling is imposed below...

Question 24

Suppose a consumer only consumes goods x and y, and suppose that x is a normal good while y is an inferior good.Which of the following is might be true?&#10;A)The cross-price elasticity of demand for x is positive.&#10;B)The cross-price elasticity of demand for x is negative.&#10;C)The own-price elasticity of demand for y is positive.&#10;D)The own-price elasticity of demand for y is negative.&#10;E)Both (a) and (c).&#10;F)Both (b) and (d).&#10;G)All of the above.&#10;H)None of the above.&#10;

Accepted Answer

The answer of Suppose a consumer only consumes goods x...

Question 25

Suppose that the market demand curve is

and the market supply curve is

.
a.Calculate the equilibrium price and output level.
b.Suppose a price floor of 16 is imposed in this market.What is the new equilibrium quantity transacted in the market?
c.How does the price that firms receive -- net any additional marginal effort costs they incur -- compare to the price consumers pay?
d.What is the total cost of the additional effort firms have to exert in equilibrium?

Accepted Answer

The answer of Suppose that the market demand curve is...

Question 26

Suppose the demand function for a consumer is given by

a.What is the own-price elasticity of demand for x?
b What is the cross-price elasticity of demand for x?
c.What happens to spending on x as the price of x increases?
d.What is the income elasticity of demand for x? What does this tell you about what kind of good x must be?

Accepted Answer

The answer of Suppose the demand function for a consumer...

Question 27

Suppose that the market demand curve is

and the market supply curve is

.
a.Calculate the equilibrium price and output level.
b.Suppose a price ceiling of 6 is imposed.What is the new equilibrium quantity transacted in the market?
c.How does the price consumers pay (including any marginal effort costs) compare to the price firms receive?
d.What is the total cost of the additional effort exerted by consumers?

Accepted Answer

The answer of Suppose that the market demand curve is...

Question 28

Suppose a consumer's demand function is

.
a.What's the general equation for the own-price elasticity of demand for this consumer?
b.What's the price elasticity of demand when p=25?
c.Suppose instead that the demand function is

.How does the equation for own-price elasticity change?
d.Continue with the demand equation in (c).Suppose p=25.What's the cross-price elasticity for x?
e.Continuing with part (d), what's the cross-price elasticity when the price of y is equal to 50?

Accepted Answer

The answer of Suppose a consumer's demand function is ...

Deck 18: Elasticities, Price-Distorting Policies, and Non-Price Rationing