Deck 18: Elasticities, Price-Distorting Policies, and Non-Price Rationing

Question 1

Price ceilings have to be set above the undistorted market equilibrium price in order to have any impact.

Answer 1

False
They have to be set below market price to have an impact.

Question 2

The concept of "non-price rationing" means that,in general,we can deal with scarcity just as well without prices as with prices.

Answer 2

False
The concept is that,in the absence of market prices rationing scarce resources,some other form of rationing will have to emerge since something has to determine who gets what.But alternative rationing mechanisms are generally less efficient than the price mechanism.

Question 3

Deadweight loss from the imposition of a price floor increases as consumer demand becomes more price elastic.

Answer 3

True
This is because greater consumer responsiveness results in a greater reduction in the quantity demanded.

Question 4

In a perfectly competitive market with identical firms,all surplus will be consumer surplus in long run equilibrium.

Question 5

The reduction in the market output resulting from the imposition of a price floor depends on both the price elasticity of demand and the price elasticity of supply.

Question 6

The equilibrium increase in marginal costs for firms resulting from the imposition of a price floor will be larger the more inelastic the price elasticity of demand is.

Question 7

The greater the price elasticity of market demand,the less will be the reduction in market output from a price floor.

Question 8

When own-price elasticity lies between 0 and -1,consumer spending decreases when price increases.

Question 9

When price elasticity is less than -1,consumer spending increases as price falls.

Question 10

When leisure is a normal good,the wage elasticity of labor supply is always positive.

Question 11

If a consumer's demand curve as constant own-price elasticity of -2,the consumer's spending will fall as price increases.

Question 12

When leisure is an inferior good,the wage elasticity of labor supply is always positive.

Question 13

Suppose that the market demand curve is and the market supply curve is .
a.Calculate the equilibrium price and output level.
b.Suppose a price floor of 16 is imposed in this market.What is the new equilibrium quantity transacted in the market?
c.How does the price that firms receive -- net any additional marginal effort costs they incur -- compare to the price consumers pay?
d.What is the total cost of the additional effort firms have to exert in equilibrium?

Question 14

Suppose the demand function for a consumer is given by
a.What is the own-price elasticity of demand for x?
b What is the cross-price elasticity of demand for x?
c.What happens to spending on x as the price of x increases?
d.What is the income elasticity of demand for x? What does this tell you about what kind of good x must be?

Question 15

Demand curves with constant slopes must have different own-price elasticities as one moves along the demand curve.

Question 16

When tastes over current and future consumption are homothetic,the interest rate elasticity of savings supply is positive.

Question 17

The wage elasticity of labor demand is always negative.

Question 18

Suppose a consumer's demand function is .
a.What's the general equation for the own-price elasticity of demand for this consumer?
b.What's the price elasticity of demand when p=25?
c.Suppose instead that the demand function is
.How does the equation for own-price elasticity change?
d.Continue with the demand equation in (c).Suppose p=25.What's the cross-price elasticity for x?
e.Continuing with part (d),what's the cross-price elasticity when the price of y is equal to 50?

Question 19

The price elasticity of output supply is greater in the long run than in the short run.

Question 20

Unless goods are Giffen goods,own-price elasticities of demand are always negative.

Question 21

Suppose that the market demand curve is and the market supply curve is .
a.Calculate the equilibrium price and output level.
b.Suppose a price ceiling of 6 is imposed.What is the new equilibrium quantity transacted in the market?
c.How does the price consumers pay (including any marginal effort costs)compare to the price firms receive?
d.What is the total cost of the additional effort exerted by consumers?