Microecon chapter 5

Question 1

Consumer surplus

Answer 1

Difference between consumer willingness to pay and what they actually pay

Question 2

Producer surplus

Answer 2

Difference between producer willingness to supply and the price received

Question 3

Consumer surplus on graph

Answer 3

Area above equilibrium and below the demand curve

Question 4

Producer surplus on graph

Answer 4

Area above the supply curve and below the equilibrium

Question 5

Total economic surplus on graph

Answer 5

Area above the supply curve and below the demand curve

Question 6

Market failures (4)

Answer 6

• Price floor (min. price payable)
• Minimum wages
• Divots (max. quantity allowed)
• Taxes

Question 7

Price floor

Answer 7

Minimum price

Question 8

What does binding price floors lead to?

Answer 8

Excess supply

Question 9

Binding minimum wages consequences (2)

Answer 9

• Reduction of employment levels
• Increases quantity supplied of labour services

Question 10

Why are owners of firms are made worse off?

Answer 10

They are required to pay a higher wage before the imposition of minimum wage

Question 11

Why do worker gain/lose

Answer 11

Some keep their jobs -> higher wage rate
Wage increase -> some lose their jobs

Question 12

Price ceiling

Answer 12

Maximum price

Question 13

What does price ceiling leads to?

Answer 13

Excess demand

Question 14

Excess supply on graph

Answer 14

Above equilibrium

Question 15

Excess demand on graph

Answer 15

Below equilibrium

Question 16

What happens if the Xs supply is below the equilibrium or the Xs demand is above the equilibrium?

Answer 16

There is no change in the economy

Question 17

Consequence of price ceiling

Answer 17

Hidden market (violate legal price control)

Question 18

Goal of price ceiling (3)

Answer 18

• Restrict production
• Keep specific prices down
• Satisfy notion of equity in consumption of a product that is temporarily in short supply

Question 19

Effects of rent control

Answer 19

• Quantity demanded exceeds quantity supplied
• Alternative allocation schemes
• Hidden market will appear

Question 20

Existing tenant in rent control

Answer 20

Principal gainer from rent control

Question 21

Landlords in rent control

Answer 21

Lose ( Do not receive expected returns)

Question 22

Potential future tenant in rent control

Answer 22

Lose/suffer (Rental housing they require will not exist in the future)

Question 23

Government solutions to housing shortage (2)

Answer 23

• Subsidize housing
• Produce public housing

Question 24

Deadweight loss on graph

Answer 24

Area above supply curve and below demand curve between Q1 and Q0

Question 25

Deadweight loss

Answer 25

Reduction in economic surplus caused by price floor/ceiling

Question 26

Output quotas

Answer 26

Restriction of quantity produced

Question 27

Biding output quotas consequence (2)

Answer 27

• Reduction in output and overall economic surplus
• Market price rises

Question 28

Quota problems (3)

Answer 28

• Overproduction
• Costly barrier to entry
• Quota has market value

Question 29

Why do government intervene if the outcome is inefficient

Answer 29

Helps a specific group of people

Question 30

Policy makers do…

Answer 30

normative judgements

Question 31

Economist do…

Answer 31

Positive analysis