Chapter 5

Question 1

Welfare Economics

Answer 1

The branch of economics that studies how the allocation of resources affects economic well-being.

Question 2

Willingness to pay

Answer 2

The maximum price a consumer is willing to pay for a good or a service.

Question 3

Consumer Surplus

Answer 3

The difference between the willingness to pay for a good and the price that is paid to get it.

Question 4

Willingness to Sell

Answer 4

The minimum price a seller will accept to sell a good or service.

Question 5

Producer Surplus

Answer 5

The difference between the price that the seller receives at the price at which a seller is willing to sell a good or service.

Question 6

How do producers determine their willingness to sell?

Answer 6

1) The direct cost of producing the good 2) Indirect costs or opportunity costs.

Question 7

Social Welfare

Answer 7

The sum of all consumer surplus and producer surplus. Measures the well being of all participants in a market, absent of any government intervention.

Question 8

Efficient Outcome

Answer 8

When an allocation of resources reaches maximum total surplus

Question 9

Equity

Answer 9

Refers to the fairness of the distribution of benefits among members of society.

Question 10

Excise tax

Answer 10

Tax levied on a particular good or service.

Question 11

Incidence

Answer 11

Refers to the burden of taxation on the party who pays the tax through higher prices, regardless of whom the tax is actually levied on.

Question 12

Why do politicians refer to tax the seller rather than the buyer?

Answer 12

A tax on the buyer is highly visible and much more likely to cause buyers to get angry or change their behavior.

Question 13

T/F The tax on a good is split between the buyer and seller due to shifts in the demand or supply fuction.

Answer 13

True.

Question 14

Dead weight loss

Answer 14

The decrease in economic activity caused by market distortions.

Question 15

Why is it a smart idea for governments to tax inelastic goods?

Answer 15

Because the demand is inelastic, it is unlikely that a tax on cigarettes would cause consumers to buy less This avoids a dead weight loss scenario because there is no loss in quantity demanded. Tax burden is placed solely on the consumer.

Question 16

What happens as demand becomes more elastic

Answer 16

More and more of the tax burden is placed on the seller of a good rather than the consumer.

Question 17

How does DWL change as demand becomes more elastic

Answer 17

The DWL grows as tax revenue shrinks. Consumer surplus disappears.

Question 18

How do you determine the effect of elasticity of supply on tax revenue and dwl?

Answer 18

The steeper the supply curve, the more the tax is levied on the consumer and the smaller the DWL.

Question 19

What happens to DWL as taxes increase

Answer 19

The size of the tax revenue decreases as the DWL increases. Quantity demanded decreases sharply as taxes rise.

Question 20

9. Suppose, in the relevant range, the supply elasticity for fidget spinners is +4.5 while the demand elasticity is -3.5. If Athens city council imposes a $2 tax on fidget spinner customers we should expect ___
   A. Firms to pay the entire tax.
   B. Consumers to pay the entire tax.
   C. Firms to pay a smaller portion of the tax than consumers.
   D. Consumers to pay a smaller portion of the tax than firms.

Answer 20

C) Firms to pay a smaller portion of the tax than consumers. Because the proportion of taxes rise the more inelastic the supply or demand relative to one another.

Question 21

10. A tax is imposed on the electric scooters market at its current price. Which market will have the largest deadweight loss as a result of the tax?
    A. Demand elasticity = -2; Supply elasticity = +3
    B. Demand elasticity = -2; Supply elasticity = +0.5
    C. Demand elasticity = -0.4; Supply elasticity = +3
    D. Demand elasticity = -0.4; Supply elasticity = +0.5

Answer 21

A) Because the more elastic the supply and demand the more the resulting dead weight loss.