Economic Principles: Elasticity, Surplus, and Taxation

Understanding Price Elasticity of Demand

1. What does the price elasticity of demand measure?

• e. a consumer’s sensitivity to a price change

Reference: Determinants of the Price Elasticity of Demand

2. Ice Skates Demand Elasticity Analysis

From the accompanying table, we would expect that, for recreational skaters, the price elasticity of demand for ice skates between $10 and $20 to be ________ than that of hockey players because ________.

• d. more elastic; recreational skaters can substitute other activities

3. Consumer Demand Elasticity: Coca-Cola Example

Selena is a devoted Coca-Cola consumer, whereas Antonio can drink either Coca-Cola or Pepsi products. Selena’s demand for Coca-Cola will be relatively more ________, while Antonio’s demand will be relatively more ________.

• d. inelastic; elastic

4. Demand Responsiveness to Price Change

Assume that a family spends 35 percent of its income on housing, 20 percent on travel-related expenses, 10 percent on utilities, 25 percent on health care, and 5 percent on pet food and grooming. Demand for which category will be most responsive to a change in price?

• d. travel-related expenses

5. Measuring Price Elasticity of Demand

Price elasticity of demand is measured as the:

• e. percentage change in quantity demanded divided by the percentage change in price.

Reference: Computing the Price Elasticity of Demand

6. Vertical Demand Curve and Elasticity

When the demand curve is vertical:

• d. the price elasticity of demand is equal to zero.

7. Perfectly Elastic Supply Curve Characteristics

A perfectly elastic supply curve:

• b. is horizontal.

Understanding Consumer and Producer Surplus

8. Defining Consumer Surplus

Consumer surplus is the difference between:

• d. the willingness to pay for a good and the amount that is paid to get it.

9. Willingness to Pay and Consumer Surplus

The difference between the willingness to pay for a good and the amount that is paid to get it is known as:

• e. consumer surplus.

10. Calculating Total Consumer Surplus (Priscilla & Patty)

Priscilla is willing to pay $65 for a new pair of shoes. Patty is willing to pay $50 for the same shoes. The shoes have a price of $45. What is the total consumer surplus for Priscilla and Patty?

• d. $25

Calculation: ($65 – $45) + ($50 – $45) = $20 + $5 = $25

11. Calculating Total Consumer Surplus (Jung & Eddie)

Jung is willing to pay $85 for a new jacket that sells for $70. Eddie is willing to pay $65 for that same jacket. What is the total consumer surplus for Jung and Eddie?

• b. $15

Calculation: ($85 – $70) = $15. (Eddie’s willingness to pay is less than the price, so Eddie would not purchase the jacket, contributing $0 to consumer surplus.)

12. Identifying Consumer Surplus in a Figure

In the figure, which region represents the consumer surplus?

• b. area B

13. Identifying Producer Surplus in a Figure

In the figure, which area represents the producer surplus?

• c. area C

14. Identifying Social Welfare in a Figure

In the figure, which combination of areas represents the social welfare?

• d. A + B

Taxes, Deadweight Loss, and Market Efficiency

15. Tax Equity and Elasticity

Questions about the equity of a tax are concerned mostly with:

• e. elasticity.

16. Price Difference After Tax Imposition

The difference between the price consumers pay and the price sellers receive after a tax is imposed is equal to the:

• b. dollar amount of the tax.

17. Specific Good or Service Tax Type

A tax that is applied to one specific good or service is a(n) ________ tax.

• d. excise

18. Factors Affecting Consumer Price Increase from Taxes

Taxes will almost always cause consumer prices to increase. How much they increase depends on:

• b. the amount of the tax.

19. Lost Surplus After Tax Imposition

When a tax is imposed on some good, the lost consumer surplus and producer surplus both typically end up as:

• e. tax revenue and deadweight loss.

20. Total Lost Social Welfare from Taxes

For any type of tax the government imposes:

• b. tax revenue plus deadweight loss equals total lost social welfare.

21. Minimizing Deadweight Loss from Taxes

If the government wants to raise taxes while generating the least amount of deadweight loss, it should raise taxes on a good with a:

• a. very elastic demand.

22. Long-Run Elasticity and Deadweight Loss

In the long run, both supply and demand tend to become more elastic. This suggests that, in the long run, the:

• d. deadweight loss from a tax will be greater than it is in the short run.

23. Market Efficiency at Supply and Demand Intersection

The price-quantity combination found where the supply and demand curves intersect is a unique combination that is efficient because:

• b. total surplus is maximized.

24. Externalities: Third-Party Market Effects

The costs or benefits of a market activity that affect a third party are called:

• a. externalities.

25. Basis of Personal Decisions for Consumers and Firms

The personal decisions of consumers and firms are based on ________ cost(s).

• b. social

26. External Costs in Market Activity

The costs of a market activity paid for by an individual NOT engaged in the market activity are ________ costs.

• a. external