Market Failure is said to occur whenever:
  • Private markets do not allocate resources in the most economically desirable way.
  • A change in price will have no effect on the quantity supplied.
  • Can be represented by a line parallel to the vertical axis.
  • Consumers are largely unresponsive to a per unit price change.
A public good:
  • Is available to all and cannot be denied to anyone.
  • Can be represented by a line parallel to the vertical axis.
  • The supply of old baseball cards is price inelastic.
  • Increase the amount demanded by more than 10%.
The price elasticity of demand coefficient measures:
  • Marginal benefit equals marginal cost.
  • Positive, indicating substitute goods.
  • Buyer responsiveness to price changes.
  • Non-rivalry and non-excludability.
Suppose that a 10% increase in the price of normal good Y causes a 20% in the quantity demanded of normal good X. The coefficient of demand is:
  • Positive, indicating substitute goods.
  • Positive and therefore X is a normal good.
  • Positive and therefore these are goods are substitute.
  • Increase the amount demanded by more than 10%.
Supply curves tend to be:
  • More elastic in the long run because there is time for firms to enter or leave the industry.
  • Is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price.
  • Elastic in high-price ranges and inelastic in low-price ranges.
  • The maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.
A positive externality or spillover benefit occurs when:
  • The benefits associated with a product exceed those accruing to people who consume it.
  • The benefit surpluses shared between consumers and producers will be maximized.
  • There is no effective way to keep people from using a good once it comes into being.
  • The combined amounts of consumer surplus and producer surplus are maximized.
Consumer surplus:
  • More elastic in the long run because there is time for firms to enter or leave the industry.
  • Is available to all and cannot be denied to anyone.
  • Is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price.
  • Is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price.
Suppose the price of a product rises and the total revenue of sellers increases, what can be concluded?
  • The combined amounts of consumer surplus and producer surplus are maximized.
  • The elasticity coefficient is less than one.
  • No conclusion can be reached with respect to the elasticity of supply.
  • A change in price will have no effect on the quantity supplied.
Producer surplus:
  • Is available to all and cannot be denied to anyone.
  • Is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price.
  • More elastic in the long run because there is time for firms to enter or leave the industry.
  • Is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price.
At the output level defining allocative efficiency:
  • The benefits associated with a product exceed those accruing to people who consume it.
  • There is no effective way to keep people from using a good once it comes into being.
  • The combined amounts of consumer surplus and producer surplus are maximized.
  • The maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.
Graphically, if the supply and demand curves are linear, consumer surplus is measure as the triangle:
  • Positive and therefore these are goods are substitute.
  • Under the demand curve and above the actual price.
  • Increase the amount demanded by more than 10%.
  • The elasticity coefficient is less than one.
Assume that a 6% increase in income in the economy produces a 3% increase in the quantity demanded of good X. The coefficient of income elasticity of demand is:
  • Positive, indicating substitute goods.
  • Positive and therefore X is a normal good.
  • Positive and therefore these are goods are substitute.
  • Plasma screen and LCD TVs (+4.2).
People enjoy outdoor holiday lighting displays and would be willing to pay to see these displays but can't be made to pay. Because those who put up lights are unable to charge others to view them, so they don't put up as many lights as people would like. This is an example of a:
  • Demand-side market failure.
  • The price of some other product.
  • Lard is an inferior good.
  • Under the demand curve and above the actual price.
A firm can sell as much as it wants at a constant price. Demand is thus:
  • The price elasticity of demand is 2.25.
  • Perfectly elastic.
  • The supply of old baseball cards is price inelastic.
  • Tea to be positive, but negative for cream.
The price of old baseball cards rises rapidly with increases in demand because:
  • The supply of old baseball cards is price inelastic.
  • The elasticity coefficient is less than one.
  • The price elasticity of demand is 2.25.
  • Consumers are largely unresponsive to a per unit price change.
We would expect the cross elasticity of demand between Pepsi and Coke to be:
  • Positive and therefore these are goods are substitute.
  • Positive, indicating substitute goods.
  • Buyer responsiveness to price changes.
  • Positive and therefore X is a normal good.
Total revenue falls as the price of a good is raised, if the demand for the good is:
  • Elastic
  • Lard is an inferior good.
  • Increase the amount demanded by more than 10%.
  • The elasticity coefficient is less than one.
The 2 main characteristics of a public good are:
  • Non-rivalry and non-excludability.
  • Buyer responsiveness to price changes.
  • Consumers are largely unresponsive to a per unit price change.
  • Marginal benefit equals marginal cost.
If the income elasticity of demand for lard is -3.00, this means that:
  • Greater than one.
  • Elastic in high-price ranges and inelastic in low-price ranges.
  • Lard is an inferior good.
  • Marginal benefit equals marginal cost.
Allocative efficiency occurs only at that output where:
  • There is no effective way to keep people from using a good once it comes into being.
  • The supply of old baseball cards is price inelastic.
  • The combined amounts of consumer surplus and producer surplus are maximized.
  • Elastic in high-price ranges and inelastic in low-price ranges.
If the demand curve reflects consumers' full willingness to pay, and the supply curve reflects all costs of production, then which of the following is true?
  • The benefits associated with a product exceed those accruing to people who consume it.
  • The maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output.
  • The benefit surpluses shared between consumers and producers will be maximized.
  • Increase the amount demanded by more than 10%.
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