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KU / Economics / ECON 142 / Demand curve represents the benefit people see in this good.

Demand curve represents the benefit people see in this good.

Demand curve represents the benefit people see in this good.

Description

School: Kansas
Department: Economics
Course: Microeconomics
Professor: Brian staihr
Term: Fall 2016
Tags: Econ, 142, elasticity, obamacare, publicgoods, imposingtaxes, and externalities
Cost: 50
Name: ECON 142 Study Guide for Test 2
Description: This 12 page study guide includes notes from every lecture pertaining to test 2, as well as 20 questions from past exams w/ answer key!
Uploaded: 09/29/2016
13 Pages 6 Views 14 Unlocks
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ECON 142 Study Guide for Test #2


Demand curve represents the benefit people see in this good.



Chapters 5, 6, and 7

NOTES FROM ALL LECTURES PERTAINING TO TEST 2

Chapter 5

Equilibrium is also known as optimal and efficient.

Demand curve represents the benefit people see in this good. Supply curve represents costs associated with the good.

Market Failure: situation where the market, left on its own, fails to  produce optimal level of output. This justifies government  intervention.

PUBLIC GOODS

A specific thing that is provided by the government, because the  market gets it wrong.

A public good is both:  

1. non-rival consumption - multiple people can consume the  good. Unlike food, or many other items. (movie in a theater) 1 2. non-exclusion - you might pay for something and not get  it, and you might not pay for something and still get it. (fishing in the ocean)

Excludable


What is market failure?



Non-Excludable

Rival

Private Goods

(Starbucks Drinks)

Common Resources (Fish in Ocean)

Non-Rival

Quasi-Public Goods (Cable TV and Toll

Road)

Public Goods

(Mosquito Spraying)

Externalities (spill-over effect)

A cost or a benefit caused by a transaction that isn’t part of the

transaction.  

(A cost that affects someone that isn’t directly involved with the  consumption of a good.)

positive externality: something you benefit from

Negative externality: something that costs you something We also discuss several other topics like disadvantages of narrowcasting

Social Costs = private costs + external costs. social cost is the amount  shifted between private and external.

Social Benefit = private benefits + external benefits.

Supply curve represents private costs and demand curve represents private benefits!!! 

INCORPORATE THE EXTERNALITY: SHIFT THE CURVE 


Income elasticity of demand.



Chapter 6

Price Elasticity: RESPONSIVENESS

The bigger change in demand when price changes, the more elastic  demand is.

If the price changes, and you buy the same amount you were  going to buy anyway, you didn’t respond. Don't forget about the age old question of a journal of the plague year themes

Your demand is not responsive or elastic.

If price changes and you buy a little more or little less than  what you were going to, then you were somewhat responsive  and elastic.

If the price changes and you buy a lot more or a lot less, then  you have a very responsive and very elastic demand.

We care because we can determine if we’ll make more money selling  more units at lower price or lesser units at higher price. It’ll also  determine how much margin/profit we’ll make on a product. Don't forget about the age old question of budgeted production needs are determined by

THINGS THAT MAKE A PRODUCT ELASTIC

 1. number of substitutes (lot of substitutes=elastic)

 2. luxury or necessity (luxury tends to be elastic)

 3. how broadly the market is defined (broadly=elastic) for example,  a flight to new york is broad. a flight to boston on a friday at  five is narrow. Don't forget about the age old question of ast 104 syracuse
We also discuss several other topics like lawrence reitzer

4. size of good in consumer’s budget (large part of budget=elastic) 5. The amount of time one has to adjust to the price change 

If demand is elastic and price is lowered, make more If demand elastic and price is raised, lose money If demand is inelastic and price is lowered, make less If demand is inelastic and price is raised, make more

Percent Change in Quantity Demanded

--------------------------------------------- = Price in Elasticity

Percent Change in Price

We can calculate elasticity if we know these 4 things:

1. original price

2. new price

3. original quantity demanded

4. new quantity demanded

change in quantity demanded

 -------------------------

average quantity demanded We also discuss several other topics like university of houston kinesiology

 —————————————————

change in price

 —————

 average price

If we get a number lower than 1, demand is inelastic.  

Over 1 = elastic.

REMEMBER: Elasticity is not slope. Elasticity can change on the same  demand curve, while slope can’t.

Cross Price Elasticity

∙ Two different goods.

∙ How does the quantity demanded of X change when the price of  Y changes?

∙ If two goods are subs, cross price elasticity is positive. if they are  complements, elasticity is negative.

As more time passes, supply becomes more ELASTIC

Income Elasticity of Demand 

Necessity? Income elasticity is positive but small

Luxury? Income elasticity is positive and large

Inferior Good? Income elasticity is negative!

Combining Elasticity with imposing a tax

Elasticity of Supply

 ——————————

 E of Supply + E of Demand

This is the percentage of any tax that will fall on the BUYER.

When Supply is on top, it falls on buyer.

When demand is on top, it falls on the seller.

The more elastic the supply is, the more of the tax falls on the  buyer.

The more elastic demand is, the more of the tax falls on seller.

CHAPTER 7

55% of people get health care from where they work

36% get through government:

Medicaid=poor people medicare=elderly

15% buy through the market

10% just go without it

KNOW THESE STATISTICS!

THE 10%

emergency rooms are required to treat acute cases

not required to treat chronic cases.

USA - Third Party Payer System - principal agent problems Canada - Single Payer System

UK - Socialized Medicine (doctor is gov employee)

ObamaCare is NOT socialized medicine.

Principal-agent problems: One party acting on behalf of another  party… but there is asymmetric or incomplete info.

Agent pursues his/her own interests instead of the interests of the  principal who hired him/her. This is the PROBLEM.

Asymmetric Information 

When one party to a transaction has less info than the other party.

Examples: buying a used car

enrolling in an econ class.

hiring a baby sitter

taking a cruise

THE PUNCHLINE  

markets function badly or not at all when info is incomplete markets function better when info is more complete

A role for government? Require more complete information

Adverse Selection:  

Hidden info. When one party takes advantage of another party’s lack of info.

Result: bad customers or bad products are more likely to be selected.

Sometimes seller has more info and can take advantage (taxi drivers) Sometimes buyer has more info and can take advantage (all types of  insurance)

Risk Pooling:  

A way of reducing adverse selection in insurance. (States require all  drivers to have insurance, not just reckless drivers.)

This ensures that the insured population represents the overall  population.

Example: 

∙ Insurance company chooses to insure 100 people.

∙ $100 a month, for a total of $36,000 total revenue

∙ Insurance company expects 5 of these people to need surgery ∙ Surgery costs 7000 each

∙ company spends 35,000, covers costs and makes a little  money. BUT THIS IS IF THEY GUESS RIGHT

∙ If more need surgery, they are screwed.

∙ So company increases costs to make sure they don’t get  screwed, and all 100 people have to pay more. that is risk  pooling.

Moral Hazard:  

Hidden action/behavior. Actions you take after entering a transaction  that take advantage of the other party’s lack of info.

When people change their behavior after they get insured. Rising cost of health care.

In 2013, it was 17.3% of GDP.

In 2019 it’s expected to be 19.6% of GDP.

The 3 reasons costs are rising:

“Cost disease” - service industries do not see productivity gains like  manufacturing see. Low productivity in service industries causes  higher costs…

The population is aging. Healthcare on old people is 6x greater than  young people.

Distorted Economic Incentives The things we’ve just covered.  (Adverse selection, moral hazard).

OBAMACARE IS NOT:

5. Socialized medicine

6. Single-payer system

IT IS:

a set of adjustments to our current system.

5 adjustments of OBAMACARE:

1. Individual mandate: you now have to have insurance, or pay a fine.  (risk pooling)

2. Pre-Existing Conditions - Stops insurance companies from denying  coverage to people because of pre-existing conditions

3. Employer Mandate: Requires all firms with more than 200 employees to offer insurance. Firms w/50-200 employees can offer insurance or  pay a fee, small companies with less than 50 people are unaffected.

4. More people qualify for Medicaid: insurance given by government  to poorer people. incomes>200,000=tax increase.

5. Young people can stay on parents insurance until 26 years old. 20 QUESTIONS FROM PAST EXAMS

1. You are the Pricing Manager for a product that is a small part of a  consumer's budget and has relatively few substitutes. Your recommendation  to your boss would be...  

a. Lower the price of this good if you want to increase revenues because  the demand is most likely elastic

b. Lower the price of this good if you want to increase revenues because  the demand is most likely inelastic  

c. Increase the price of this good if you want to increase revenues  because the demand is most likely elastic  

d. Increase the price of this good if you want to increase revenues  because the demand is most likely inelastic

2. Which of the following accurately characterizes a quasi-public good such as the Kansas Turnpike (which is a toll road):  

a. It is rival in consumption and non-excludable  

b. It is non-rival in consumption and non-excludable  

c. It is non-rival in consumption and excludable  

d. It is rival in consumption and excludable  

3. The demand curve for your product is P = 220 – 2Q. Which of the following  comes closest to the price elasticity of the demand for this product (in  absolute value) as the price increases from $60 to $68?

a. .83

b. .71

c. .56

d. .42

4. What is the term, discussed in lecture, where the market- left to operate on its own –fails to produce the efficient or optimal level of output?  

______________________________________________

5. Which of the following is most likely correct?  

a. The price elasticity of demand for a nonstop flight to NYC is larger (in  absolute value) than the price elasticity of demand for a flight to NYC  in general  

b. The price elasticity of demand for a trip to Hawaii is larger (in absolute  value) than the price elasticity of demand for toothpaste

c. The price elasticity of demand for gasoline is smaller (in absolute  value) than the price elasticity of demand for pizza  

d. Actually all of the above are most likely correct  

Use this to answer the next three questions:  

P

Q

P

Q

56

120

62

100

60

128

52

140

6. What is the elasticity of supply for this good?

_____________________________

7. Based on elasticity of demand, which is most likely correct about this  good?  

a. It is most likely a small part of consumer's budget  

b. It is most likely a luxury  

c. It is most likely a good that has few or no substitutes  

d. Both a) and c) but not b)

8. Assume, as we did in lecture, that a $10 tax is placed on the seller of this  good. What portion of that $10 tax will fall on the buyer of this good?

a. Approximately 33%

b. Approximately 67%

c. Approximately 54%

d. Approximately 24%

9. If two goods are complements and they are both normal goods what do we know?

a. Their cross price elasticity is negative and their income elasticities are  both positive  

b. Their cross price elasticity is negative and their income elasticities are  both negative  

c. Their cross price elasticity is positive and their income elasticities are  both positive  

d. Their cross price elasticity is positive and their income elasticities are  both negative

10. Which of the following accurately characterizes a private good (such as a  Starbuck's latte)?

a. It is rival in consumption and excludable  

b. It is non-rival in consumption and non-excludable  

c. It is non-rival in consumption and excludable  

d. It is rival in consumption and non-excludable  

Use this graph to answer the next 5 questions:

11. and 12. Assume you are at the intersection of curves A and B. the  equilibrium quantity in this market is ________ and the  equilibrium quantity is ___________.

13. Consumer surplus in this market comes closest to

a. 8220.5

b. 9112.5

c. 9843.5

d. 8456.5

14. and 15. Now assume it is discovered that this good exhibits a negative  externality. "Incorporate" this externality as we did in sample questions and in class. After incorporating this externality the new quantity in the market will  be  

____________________

And the new consumer surplus in the market will be  

_____________________.  

16. You have already calculated the elasticity of demand for two products:  Product X has a price elasticity of .74 (in absolute value)

Product Y has a price elasticity of 1.25 (in absolute value)

The current quantity demanded of Product X is 230 and the current  price of Product X is $40  

The current quantity demanded of Product Y is also 230 and the  current price of Product Y is $30

Choose the product whose price you would decrease in order to increase  revenues, and reduce that price by 10%. Which of the following comes  closest to the new quantity that will be demanded of that product after the  price decreases?  

a. 268

b. 294

c. 243

d. 259

17. Which of the following comes closest to the new revenues you will earn  from that product following the price decrease and corresponding change in  quantity demanded?  

a. 6993

b. 6420

c. 7940

d. 7270

18. Which of the following is correct based on the discussion of the Affordable Care Act (also known as "Obamacare") in the text and in lecture?

a. Under the Affordable Care Act an employer with 300 employees is  required to offer health insurance to his employees

b. Under the Affordable Care Act an employer with 300 employees is  required to either offer health insurance to his employees or pay a fee

c. Under the Affordable Care Act and employer with 18 employees is  required to offer health insurance to his employees

d. Under the Affordable Care Act an employer with 18 employees is  required to either offer health insurance to his employees or pay a fee  

19. In our discussion and in the text, healthcare in the United States could  best be described as _____while health care in Japan could best be described  as______.  

a. A third party payer system; a single payer system  

b. A single payer system; universal health insurance

c. Socialized medicine; universal health insurance

d. None of the above  

Use the following graph to answer the next questions about externalities.

20. Assume we have a product and this product exhibits a negative  externality. Which of the following is correct?

a. Incorporating this negative externality takes the form of shifting Curve  X to Curve Y

b. Incorporating this negative externality takes form of shifting from  Curve B to Curve A  

c. Incorporating this negative externality takes for of shifting from Curve  Y to Curve X

d. Incorporating this negative externality takes for of shifting from Curve  A to Curve B  

ANSWERS:

1. d

2. c

3. d

4. market failure

5. d

6. .94

7. b

8. a

9. a

10. a

11. quantity = 135

12. price = 340

13. b

14. 120

15. 7200

16. d

17. a

18. a

19. d

20. a

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