EC238 Lecture Notes - Lecture 7: Demand Curve, Fixed Cost, Invisible Hand

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28 Oct 2020

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An allocation of resources is said to satisfy the static efficiency criterion if the economic surplus derived from those resources is maximized by that allocation. Is the value that consumers receive from an allocation minus what is costs them to obtain it. Measured as the area under demand curve minus the consumer"s cost. Difference between the amount that a seller receives minus that what the seller would be willing to accept for the good. Given price p*, the seller maximizes his or her own producer surplus by choosing to sell. The producer surplus is designated by area b, the area under the price line that lies over the marginal curve, bounded from the left by the vertical axis and the right by the quantity of the good. The manner in which producers and consumers use environmental resources depends on the property rights governing these resources.

Related Questions

Michael spends all of his income on coffee and donuts. A coffee costs $2.50 and a donut costs $2.00. At his current consumption level, the marginal utility for coffee is 30 utils, and the marginal utility for a donut is 60 utils. Which statement best describes what Michael needs to do to maximize his utility?

Question 1 options:

1)	buy less of both coffee and donuts.

2)	buy less coffee and more donuts.

3)	buy more coffee and less donuts.

4)	spend the same amount on coffee as he does on donuts.

Question 2

What is it called when the marginal utility derived from the last dollar spent on each good is the same across all goods and the last dollar spent uses all of the available budget for the purchase of those goods?

Question 2 options:

1)	the optimal consumption bundle.

2)	the optimal production bundle.

3)	diminishing marginal utility.

4)	optimal point.

Question 3 (1 point)

What does the economic theory of marginal utility infer?

Question 3 options:

1)	consumers naturally know which consumption choices will maximize their utility.

2)	consumers who watch market trends are better at maximizing their utility than are those who do not watch those trends.

3)	one cannot maximize utility without taking an economics class that explains utility theory.

4)	one cannot maximize utility without doing the math of calculating the ratios of marginal utility divided by price.

Question 4

Kate is addicted to chocolate and does not care how much it costs. In fact, she spends more than $20 a week on chocolate. What can be concluded about elasticity in her buying decisions?

Question 4 options:

1)	Her income elasticity of demand for chocolate is equal to one.

2)	Her income elasticity of demand for chocolate is equal to zero.

3)	Her price elasticity of demand for chocolate is equal to one.

4)	Her price elasticity of demand for chocolate is equal to zero.

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Question 5 (1 point)

Why does the demand for a good become relatively more elastic?

Question 5 options:

1)	substitutes for the good become more available.

2)	substitutes for the good become less available.

3)	the good becomes more of a necessity.

4)	the time allowed for adjustment is shortened.

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Question 6 (1 point)

Assume the price of chicken per pound is $3.49 and that Americans purchase 10 million pounds per chicken every month. If the price of chicken increases to $5.49 per pound, identify what will occur to consumer surplus?

Question 6 options:

1)	consumer surplus increases.

2)	consumer surplus decreases.

3)	consumer surplus creates incentive to save.

4)	consumer surplus creates incentive to spend.

Question 7 (1 point)

What is another name for the difference between the price that consumers are willing to pay for a good and a lower price that they may actually have to pay?

Question 7 options:

profit.

revenue.

3)	consumer utility.

4)	consumer surplus.

Question 8

Adam, Brian, Robert, and Sam all want to attend a football game. The admission price is $48. Adam is willing to pay $59 for the ticket. Brian is willing to pay $39. Robert is willing to pay $45, and Sam is willing to pay $55. Based on this information, who will go to the game?

Question 8 options:

1)	Adam, Brian, Robert, and Sam.

2)	Brian and Robert.

3)	Adam and Sam.

4)	Brian, Robert, and Sam.

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Question 9 (1 point)

Lily is willing to pay $10 for one bracelet and $5 for a second. Patty is willing to pay $12 for one bracelet and $2 for a second. If the price is currently $8 per bracelet, identify what is the total consumer surplus after Lily and Patty make their purchases?

Question 9 options:

Question 10 (1 point)

Manfred is willing to shovel one driveway for $25, a second for $30, and a third for $35. Assume that the market rate for shoveling driveways is $32. How many driveways will Manfred shovel, what will be his total revenue, and what will be his producer surplus?

Question 10 options:

1)	Manfred will shovel two driveways for a total revenue of $64 and his producer surplus will be $9.

2)	Manfred will shovel three driveways for a total revenue of $75 and his producer surplus will be $12.

3)	Manfred will shovel three driveways for a total revenue of $96 and his producer surplus will be $5.

4)	Manfred will shovel four driveways for a total revenue of $125 and his producer surplus will be $18.

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Question 11 (1 point)

What would the difference between the price that producers receive and the lower price at which they are willing to sell the good be called?

Question 11 options:

1)	producer shortage.

2)	producer surplus.

3)	consumer shortage.

4)	consumer surplus.

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Question 12 (1 point)

What will happen when there is an increase in the price of eBook downloads?

Question 12 options:

1)	It reduces the marginal utility derived from each dollar spent on eBooks.

2)	It reduces the marginal utility derived from each hardcopy book purchased.

3)	There will not be a substitution effect.

4)	There will not be a change in the number of eBooks in the set of consumption possibilities.

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Question 13 (1 point)

When is price elasticity of demand utilized to measure how an individual changes the quantity they demand?

Question 13 options:

1)	when supply changes.

2)	when product quality changes.

3)	when marketing changes.

4)	when price changes.

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Question 14 (1 point)

Assume Mary consumes only tea and pastries. A cup of tea costs 5 euros and a pastry costs 8 euros. Her weekly income is 450 euros. Mary always drinks 2 cups of tea for every pastry she consumes. What is Maryâs optimal weekly consumption bundle?

Question 14 options:

1)	25 cups of tea and 50 pastries.

2)	50 cups of tea and 25 pastries.

3)	58 cups of tea and 20 pastries.

4)	60 cups of tea and 30 pastries.

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Question 15 (1 point)

When is producer surplus a positive value?

Question 15 options:

1)	the price the producer is willing to charge equals the market price.

2)	there is no tax applied to the good.

3)	the price the producer is willing to charge is less than the market price.

4)	the price the producer is willing to charge is greater than the market price.

_____ 1. Suppose you make silver jewelry. If the price of silver falls, we would expect you to:

a. be willing and able to produce less jewelry than before at each possible price.

b. be willing and able to produce more jewelry than before at each possible price.

c. face greater demand for your jewelry.

d. face a weaker demand for your jewelry.

_____ 2. If suppliers expect the price of their product to fall in the future, then they will:

a. increase supply (supply curve shifts out) now.

b. decrease supply (supply curve shifts in) now.

c. increase supply in the future, but not now.

d. decrease supply in the future, but not now.

_____ 3. Consider the market for portable air conditioners, initially in equilibrium. When a heatwave strikes, the equilibrium price:

a. increases and equilibrium quantity decreases.

b. decreases, and the equilibrium quantity increases.

c. and quantity both increase.

d. and quantity both decrease.

_____ 4. Buyers can buy all they want to buy and sellers can sell all they want to sell at:

a. prices at and above the equilibrium price.

b. prices at and below the equilibrium price.

c. prices above and below the equilibrium price, but not at the equilibrium price.

d. the equilibrium price, but not at prices above or below the equilibrium price.

_____ 5. The law of supply and demand states that:

a. demand and supply curves shift out as time goes by.

b. the price of a goodwill rise in response to excess demand for that good.

c. when the supply curve for good shifts, the demand curve for that good shifts in response.

d. the equilibrium price of goodwill be rising more often than it will be falling.

_____ 6. If Doritos and Cheetos are substitutes, a rise in the price of Cheetos will cause:

a. the equilibrium quantity of Doritos to fall and the price of Doritos to rise.

b. the equilibrium quantity and price of Doritos to rise.

c. the equilibrium quantity and price of Doritos to fall.

d. the equilibrium quantity of Doritos to rise and the price of Doritos to fall.

_____ 7. New production technology is perfected that allows auto manufacturers to build an automobile using half the labor hours formerly needed. As a result:

a. the equilibrium quantity of automobiles increases and the price decreases.

b. the equilibrium quantity and price of automobiles increase.

c. the equilibrium quantity and price of automobiles decreases.

d. there is likely no change in the number of automobiles produced.

_____ 8. The U.S. government announces that it will raise the interest rate on college student loans beginning in January of next year. The immediate market impact is:

a. the demand curve for student loans shifts out.

b. the supply curve for student loans shifts out.

c. we anticipate that more student loans will be completed next year than this year.

d. all of the above are correct.

_____ 9. What curve shift produces a fall in price and increase in quantity exchanged?

a. An inward shift in the demand curve.

b. An inward shift in the supply curve.

c. An outward shift in the supply curve.

d. An outward shift in the demand curve.

_____ 10. We note that fewer motorcycles were sold this year than last and that the price is also lower. What event could have caused this outcome?

a. A technological change that improved the fuel efficiency of motorcycles.

b. A rise in the wages paid to motorcycle manufacturing workers.

c. A motorcycle craze due to the popularity of Sons of Anarchy.

d. Increasing concerns about health impacts from breathing motorcycle exhaust.

_____ 11. The price that results in quantity supplied equaling quantity demanded is the optimal (best) price because it:

a. maximizes the combined welfare of buyers and sellers.

b. maximizes the cost of the seller.

c. minimizes the expenditure of buyers.

d. all of the above are correct.

_____ 12. Consumer surplus is the:

a. quantity of good consumers get without paying anything.

b. amount a consumer pays minus the amount the consumer is willing to pay.

c. amount a consumer is willing to pay minus the amount the consumer pays.

d. value of a good to a consumer.

_____ 13. In a market, the marginal buyer is the one:

a. whose willingness to pay is higher than all other buyers and potential buyers.

b. whose willingness to pay is lower than all other buyers and potential buyers.

c. who is willing to buy exactly one unit of the good.

d. who would be the first to leave the market if the price were any higher.

_____ 14. If a consumer is willing and able to pay $20 for a particular good and if she actually pays $16 for the good, then her consumer surplus is:

a. $4.

b. $16.

c. $20.

d. $36.

_____ 15. Suppose there is an early freeze in California that reduces the size of the orange crop. What happens to consumer surplus in the market for oranges?

a. Consumer surplus increases.

b. Consumer surplus decreases.

c. Consumer surplus is not affected by this change.

d. We would have to know whether the demand for oranges is elastic or inelastic.

_____ 16. Producer surplus is the area on a supply/demand graph:

a. under the supply curve.

b. between the supply and demand curves.

c. below the price line and above the supply curve.

d. under the demand curve and above the price line.

_____ 17. Economists typically measure economic efficiency using:

a. total producer and consumer surplus.

b. profits to firms.

c. the quantity supplied by sellers.

d. the price paid by buyers.

_____ 18. Which of the following statements is correct?

a. Efficiency and equality are both maximized when total surplus is maximized.

b. Efficiency deals with the size of the economic pie; equality with how fairly the pie is sliced.

c. Efficiency is more difficult to evaluate than equality.

d. Equality is judged on positive grounds; efficiency requires normative judgments.

_____ 19. The price elasticity of demand measures how much:

a. quantity demanded a response to changes in price.

b. quantity demanded a response to changes in income.

c. price responds to a change in demand.

d. Both a and c are correct

_____ 20. Goods with many close substitutes tend to have:

a. less elastic demands.

b. more elastic demands.

c. price elasticities of demand that are unit elastic.

d. income elasticities that are negative.

Short Answer Questions:

All of the following questions are based on the data shown here for coffee demand and supply at a fictional Columbus coffee shop called Go-bucks.

Price Quantity Quantity

per Cup Demanded Supplied

$1.60 1,700 1,220

$1.80 1,555 1,300

$2.00 1,400 1,400

$2.20 1,235 1,520

$2.40 1,060 1,660

$2.60 875 1,820

_____ 21. (6 points) Using the mid-point formula, calculate the price elasticity of demand as the price increases from $1.60 to $1.80.

_____ 22. (6 points) Repeat the calculation of the price elasticity of demand, this time for a price increase from $1.80 to $2.00.

_____ 23. (6 points) Repeat the calculation of the price elasticity of demand, this time for a price increase from $2.40 to $2.60.

24. (4 points) Over which price range is demand inelastic? Over which price range is demand elastic? Does this follow the trend noted in class?

_____________________________________________________________________________

_____ 25. (6 points) Turning to the supply side, calculate the price elasticity of supply as the price increases from $2.20 to $2.40.

26. (2 points) How would you describe the price elasticity of supply over this range?

_____________________________________________________________________________

graychimpanzee865

1. Other things remaining the same, a left shift in the supply curve will lead to:

A. a decrease in the equilibrium price and the equilibrium quantity.

B. an increase in the equilibrium price and the equilibrium quantity.

C. an increase in the equilibrium price and a decrease in the equilibrium quantity.

D. a decrease in the equilibrium price and an increase in the equilibrium quantity.

2. Two goods are said to be complements when a fall in the price of one good:

A. leads to a fall in the price of the other good.

B. leads to a left shift in the demand for the other good.

C. leads to a right shift in the demand for the other good.

D. doesn't affect the demand for the other good.

3. In a competitive free market:

A. all exchanges take place involuntarily.

B. there is no provision for the protection of property rights.

C. there is only one seller and many buyers.

D. the government does not impose price controls.

4. Which of the following correctly explains the role of economic agents in a free market?

A. Economic agents allocate goods to those buyers who value the goods the most.

B. Economic agents allocate goods to those buyers who need the goods the most.

C. Economic agents set production quotas for sellers in the market.

D. Economic agents set prices according to the production cost of each good.

5. Which of the following was an effect of the price ceiling placed on gasoline in the U.S. in the 1970s?

A. Gas stations ran out of gas as the quantity of gas demanded exceeded the quantity supplied.

B. Car owners started buying luxury cars that were less fuel-efficient as the price of gas was very low.

C. Those who valued gas the most were able to buy gas under the price ceiling.

D. The inventory of unsold gas increased and gas stations incurred losses.

6. Willingness to accept is:

A. the highest price that a producer is willing to receive to sell an extra unit of a good.

B. always higher than the marginal cost of production.

C. always lower than the marginal cost of production.

D. the lowest price that a producer is willing to receive to sell an extra unit of a good.

7. Assume that the economy is in a recession and consumers are expecting a fall in their income levels. This will cause a(n):

A. right shift in the market demand for all goods.

B. left shift in the market demand for all goods.

C. increase in the total quantity demanded of all goods.

D. decrease in the total quantity demanded of all goods.

8. Which of the following factors is expected to cause the demand curve for coffee to shift to the right?

A. A higher personal tax on the income of all consumers

B. An increase in the supply of coffee due to better weather

C. A higher tax on the sale of tea, a substitute for coffee

D. A fall in the manufacturing cost of coffee

9. If the demand and supply curves for a commodity shift to the right and the shift in demand is greater than the shift in supply, then in comparison to the initial equilibrium, the new equilibrium will be characterized by:

A. the same price and quantity.

B. a lower price and quantity.

C. a higher price and a lower quantity.

D. a higher price and quantity.

10. Which of the following statements correctly describes a perfectly competitive market?

A. Haggling and bargaining are commonly observed in a perfectly competitive market.

B. Buyers in a perfectly competitive market pay different prices according to their individual demand.

C. In a perfectly competitive market, individual sellers and buyers can influence the market price.

D.All participants in a perfectly competitive market are price-takers.

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EC238 Lecture Notes - Lecture 7: Demand Curve, Fixed Cost, Invisible Hand

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