econ 2030 exam 2

econ 2030 exam 2 - Ch 8: 1, 3, 7-13, 16, 20 Ch 12: 1-3,...

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Ch 8: 1, 3, 7-13, 16, 20 Ch 12: 1-3, 7-10, 12, 15 A. Incidence of Taxation (Who pays a tax?) 1. Motivation a. Why is tax delineated in the way that it is? b. Example: A 5 cent excise tax is passed on gasoline. At surrounding gas stations, price only goes up 3 cents. Why? 2. Tools a. Elasticity i. how sensitive are buyers to price changes (price elasticity of demand) ii. how sensitive are sellers to price changes (price elasticity of supply) b. Economic Surplus i. economic surplus = consumer surplus + producer surplus ii. Consumer surplus a. net benefit that accrues to buyers b. difference between the price a consumer is willing and able to pay for a good (reservation price) and the actual price i. Consumer surplus = reservation price buyer - actual price iii. Producer surplus a. net benefit that accrues to sellers b . difference between the price a seller receives and the price they are willing to receive for the good i. producer surplus = actual price – reservation price of seller iv. Government revenue v. Deadweight Loss vi. Examples a. Suppose supply of a good increases due to an increase in productivity. Everything else held constant, this will cause what change in producer surplus? Consumer surplus? Economic Surplus? i. increase in supply lowers the equilibrium price ii. equilibrium quantity transacted increases iii. with an increase in both, consumer surplus increases iv. with a decrease in price and an increase in quantity transacted, the effect on producer surplus is ambiguous v. the economic surplus is going to rise due to the higher quantity transacted a. whatever surplus the producer loses goes to the consumer b. therefore, the net area will be unequivocally increased 3. Examples a. Who bears the burden of a tax? Side of the burden that is more inelastic. b. How is economic surplus affected? 9/29/10
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A. Theory of the Firm: The Basics 1. Assumption Businesses make decisions on what prices to sell products toward achieving the goal of maximum profitization 2. Profit : total revenue – total cost a. Definitions i. Total Revenue (TR) a. total amount of money taken from selling goods/services b. number of goods sold x price of good ii. Marginal Revenue (MR) a. the change in total revenue from selling one additional unit b. change in total revenue divided by change in quantity sold iii. Total Cost (TC) a. Explicit (accouting) i. out-of-pocket, obvious costs; also called “dollars out” ii. rent, employee wages, supplies, etc. b. Implicit (lost opportunity) i. more subtle costs which resemble opportunity costs; “dollars not in” ii. inability to earn next best income, etc. iv. Marginal Cost (MC) a. the change in total cost by producing one more unit b. Accounting = TR minus explicit cost i. always greater than economic profit c. Economic = TR minus explicit cost minus implicit cost i. always less than accounting profit d. Maximizing Rule: MR = MC i. to maximize profits, the good should be produced until marginal revenue equals marginal cost
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econ 2030 exam 2 - Ch 8: 1, 3, 7-13, 16, 20 Ch 12: 1-3,...

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