E2_sample_Econ 102_sol

E2_sample_Econ 102_sol - Economics 102: Principles of...

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Unformatted text preview: Economics 102: Principles of Microeconomics Sample Exam 2 Solutions 1. A. The figure below shows the effect of a tax on gun buyers. The tax reduces the demand for guns from D1 to D2. The result is a rise in the price buyers pay for guns from P1 to P2, and a decline in the quantity of guns from Q1 to Q2. B. The figure below shows the effect of a tax on gun sellers. The tax reduces the supply of guns from S1 to S2. The result is a rise in the price buyers pay for guns from P1 to P2, and a decline in the quantity of guns from Q1 to Q2. 1 Economics 102: Principles of Microeconomics C. The figure below shows the effect of a binding price floor on guns. The increase in price from P1 to Pf leads to a decline in the quantity of guns from Q1 to Q2. There is excess supply in the market for guns, because the quantity supplied (Q3) exceeds the quantity demanded (Q2) at the price Pf. D. The figure below shows the effect of a tax on ammunition on the gun market. The tax on ammunition reduces the demand for guns from D1 to D2, because ammunition and guns are complements. The result is a decline in the price of guns from P1 to P2, and a decline in the quantity of guns from Q1 to Q2. 2 Economics 102: Principles of Microeconomics 2. A rise in the demand for French bread leads to an increase in producer surplus in the market for French bread, as shown below. The shift of the demand curve leads to an increased price, which increases producer surplus from area A to area A + B + C. Figure 7 The increased quantity of French bread being sold increases the demand for flour, as shown below. As a result, the price of flour rises, increasing producer surplus from area D to D + E + F. Note that an event that affects producer surplus in one market leads to effects on producer surplus in related markets. 3 Economics 102: Principles of Microeconomics 3. We covered a similar example during class. A. It doesn't make a difference whether they tax the producers or the consumers since the end result is the same. If they tax the consumers, the demand curve will shift by the amount of the tax. If they tax the producers, the supply curve will shift by the amount of the tax. Make sure you can show that you can show this graphically. B. The tax would be more effective for a relatively elastic demand curve than for a relatively inelastic demand curve. This is because people are more responsive to price changes under an elastic demand curve than an inelastic demand curve. Again, be able to show this graphically: draw two graphs with the same supply curve (same slope) but different demand curves (elastic/inelastic). C. Gasoline consumers are hurt by the tax because the price per gallon increased and the quantity decreased. 4. When supply is more elastic than demand the incidence (burden) of the tax falls more heavily on consumers than producers. This is because consumers are less responsive to price changes relative to producers, so the consumers bear a greater tax burden. When demand is more elastic than supply the incidence of the tax falls more heavily on producers than on consumers. This is because producers are more inelastic relative to consumers, so the producers bear the greater tax burden. Be able to justify your answer with graphs. 5. A. Consumer Surplus (CS) = (WillingnesstoPay Price) Remember, willingness to pay is the maximum amount that a buyer will pay for a good and consumer surplus measures the benefit buyers receive from participating in a market. It makes sense that we should look at the difference between willingness to pay and the price paid in a market in order to measure consumer surplus. Graphically, CS is the area below the demand curve and above price. B. Producer Surplus (PS) = (Price Cost) The cost of production (or just "cost") is the value of everything a seller must give up to produce a good, this is the minimum amount the seller is willing to receive for a good since he/she at least wants to cover the costs. Producer surplus measures the benefit sellers receive from participating in a market and is the amount a seller is paid (price) minus the cost of production. 4 Economics 102: Principles of Microeconomics 6. Furniture market: 7. Price Control questions a. For this example, a $300 price ceiling would cause a shortage of 4,000 bicycles. A price ceiling is binding if it is set at any price below equilibrium price. Since the equilibrium price in this market is $500, this would be a binding price ceiling. b. For this example, a $700 price floor would cause a surplus of 4,000 bicycles. A price floor is binding if it is set at any price above equilibrium price. Since the equilibrium price in this market is $500, this would be a binding price floor. c. More than one reason may exist for policymakers to impose a price ceiling or price floor in a market. Often this is done in an attempt to increase equality; a price ceiling may be imposed if policymakers perceive the equilibrium price to be unfair to buyers, and a price floor may be imposed if policymakers perceive the equilibrium price to be unfair to sellers. It is also very common for market participants (typically producers) to hire individuals to lobby on their behalf so that they can increase their surplus. 5 Economics 102: Principles of Microeconomics 8. 9. The tax revenue is larger when demand and supply are inelastic. This is because market participants are less responsive to price changes so the amount exchanged (Q) does not decrease by as much as it would if both curves were elastic. Again, be able to show this graphically. 6 ...
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