If the demand curve is downward sloping, then when the supply curve shifts down, the competitive equilibrium price falls

and the equilibrium quantity rises.

Tru

e

Fal

se

0%0%

1. True

2. False

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Pct getting this right.

The picture

Competitive equilibrium theory predicts that the number of transactions and the amount of profits for

buyers and for sellers would be the same if a sales tax of \$20 per unit were collected from buyers as they would

be if a sales tax of \$20 per unit were collected from sellers.

1. True

2. False

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Sales tax

After tax Buyers’ profits

After tax Sellers profits in Blue

Now Buyers pay tax.

We can expect there to be excess demand in a market where a legal price ceiling is set lower than the competitive

equilibrium price.

1. True

2. False

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Price ceiling

Excess Demand in Pink.

A profit-maximizing firm will always want to hire an additional worker if the value of the average product of labor is greater than the

wage.

1. True

2. False

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Remember the marginal principle?

An example. Wage is $4

# workers Value of

output

Value of

Average product

Profit

1 $30 $30 $26

2 $35 $17.50 $27

3 $36 $12 $24

If the demand curve for labor is elastic, a minimum wage that is set higher than the equilibrium wage

will decrease total labor income.

1. True

2. False All 51%

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82%

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25%

Why is that?

• Minimum wage increases wage rate.

• New quantity price combination is on labor demand curve.

• If demand is elastic, quantity will fall by bigger percent than price rises.

• So total expenditure on labor will fall.

In the short run, a profit-maximizing firm will supply nothing if the price is

below its average total cost.

1. True

2. False All 75%

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98%

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34%

Why is that?

• We have talked and talked and talked about this one.

• Check out the discussion in the textbook pp 235-237 and the lecture notes for Feb 15, 17, and 22.

If the demand curve is a downward sloping straight line, then the demand

will be more elastic at higher prices than at lower prices.

1. True

2. FalseAll 28%

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50%

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14%

How so?

• Price elasticity is percent change in quantity divided by percent change in price.

• Slope of demand curve is change in quantity divided by change in price.

• Slope is constant.• Elasticity is (P/Q) x Slope.• As price rises, what happens to P/Q on demand

curve? • It rises. And demand becomes more elastic.

Slope is constant along straight line demand Curve.

P

Q

Elasticity is (P/Q) x Slope

Boomtown I

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99%

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89%

Boomtown II

All 52%

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36%

Los Locos

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26%

$30

1000

SummerDemand

$40

WinterDemand

Los Locos picture

A firm can hire any number of workers between 1 and 6. The value of a firms's output is \$14 if it hires one worker, \$21 if it hires 2 workers, \$28 if it hires 3 workers, \$34 if it hires 4 workers, \$39 if it hires 5 workers, and \$43 if it hires 6 workers. The highest wage at which this firm would be willing to hire 5 workers is:

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28%

What does the marginal value product rule tell us?

Marginal value product of fifth worker is $5.

What is highest wage at which you would hire him?

Short run behavior of firm

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25%

Why is that?

• Check out the discussion in the textbook pp 235-237 and the lecture notes for Feb 15, 17, and 22.

Long run behavior of firm

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19%

Why is that?

• Again, check out the discussion in the textbook pp 235-237 and the lecture notes for Feb 15, 17, and 22.

Increased penalties for drug selling will reduce total amount

spent on drugs (if demand is price elastic but not if inelastic)

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89%

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20%

Why is that?

• Increased penalties on sellers shifts supply curve up, doesn’t change demand curve.

• This raises price paid by demanders.

• If demand is elastic, a price increase reduces total expenditures. If demand is inelastic, it increases total expenditures.

In his blog article, Gary Becker argues that (it would be a good

idea to legalize drugs and replace current sanctions by sales taxes.)

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Horizontal supply at $20. 1000 demanders with BV $50, 1000 with BV

$30, 1000 with BV $15. Sales tax of $15 is imposed. What are tax revenue and excess burden?

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$50

$30

$15$20

RevenueExcess Burden

After tax Sales 1000 units. Tax revenue $15x1000.

Before Tax, Profits of Consumers=1000x30+1000x5=35000Profits of suppliers=0.

After tax: Profits of consumersFall to 1000x15.

$35Excess Burden 1000x$10=$10000

$1000 $2000 $3000

Price elasticity of demand for marijuana is –1/8. Govt seizes

and destroys half of the marijuana crop. Effect on equilibrium consumption?

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12%

Why is this?

• Confiscating half the crop doubles cost.• Horizontal supply curve shifts up.• 100% increase in price.• Price elasticity of demand is –1/8.• Percent change in quantity divided by percent

change in price is –1/8.• Percent change in quantity= -1/8x100% • That’s -12.5%

Demand curve is P=60-Q. Supply curve is P=Q/2. What is

equilibrium price and quantity?Solve 60-Q=Q/2 for Q. Then find P.

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