ECO 2030. Principles of Economics-Price Theory
Exam #2 Study Guide
The exam is worth 100 points. There are 60+ questions.
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Practice test (graph questions only) Note: the answers will appear
once you take the test
Chapter 4
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Key words: factors that change demand and supply (shift the curve),
changes in market equilibrium due to changes in demand and supply
- Problems and applications:
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Page 85 problem #1 (a, b), #3 (a, b, c, d)
Chapter 5
- Key words:
price elasticity of demand, determinants
of elasticity, elastic, inelastic, elasticity and total revenue, cross price
elasticity of demand, income elasticity
- Problems and applications:
Page 110 #1 (a, b, c), Page 111 problem #8 (a, b)
Chapter 6
- Key words: price ceiling, price floor, tax incidence
- Problems and applications: Page 132 #1, #2 (a, b), 133 #6
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Also: who gains and who loses from (a) ceilings and (b) floors, (c) what
does your answers to (a) and (b) demand on?
Chapter 7
- Key words: market efficiency, willingness to pay, consumer surplus,
producer surplus, marginal cost, total surplus
- Problems and applications: Page 156: #10 (a, b, d[ignore the "fair"
questions])
Chapter 8
- Key words: burden of a tax, effects of a tax on
market price and quantity, deadweight loss, deadweight loss and demand
elasticity, taxation and welfare (i.e., changes in
consumer and producer surplus)
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Problems and applications: Page 173: #1 (a, b)
Chapter 13
- Key Concepts: diminishing marginal product, marginal costs, profit
maximization
Chapter 18
- Key Concepts: marginal product of labor, derived demand, value of the
marginal product of labor, profit maximization, labor demand, labor supply, labor-leisure choice
- Problems and Applications: Page 411: #3 (a, b)
Answer Key
Page 85
#1 a. supply decreases, b. demand decreases
#3 a. demand increases, b. supply decreases, c. supply increases, d. demand
increases
Page 110, 111
#1
- Mystery novels have more elastic demand than required textbooks, because
mystery novels have close substitutes, while required textbooks have no
close substitutes.
- Beethoven recordings have more elastic demand than classical music
recordings in general. Beethoven recordings are a narrower market than
classical music recordings, so it is easy to find close substitutes for
them.
- Subway rides during the next five years have more elastic demand than
subway rides during the next six months. Goods have a more elastic demand
over longer time horizons.
#8.
- With a price elasticity of demand of 0.4, reducing the quantity demanded
of cigarettes by 20 percent requires a 50 percent increase in price, since
20/50 = 0.4. The price should increase by $1 (50% of the current $2 price) to $3.
- The policy will have a larger effect five years from now than it does
one year from now. The elasticity is larger in the long run, since it may
take some time for people to reduce their cigarette usage. The habit of
smoking is hard to break in the short run.
Page 132, 133
#1 fewer (make sure you understand
the illustrative diagram)
#2 a. surplus, b. yes, if the demand for cheese is elastic
#6 less than $500 (make sure you understand the illustrative diagram)
Page 156
#10 a. demand and supply, price and quantity ... supply falls, b. the price
floor leads to a shortage, c. yes, it eliminates the deadweight loss
Also: (a) sellers lose from price ceilings, buyers?, (b) buyers lose from
price floors, sellers?, (c) the question marks depends on elasticity
Page 173
#1 a. no deadweight loss, b. price rises, quantity falls, consumer surplus
falls, producer surplus falls, tax revenue > 0, deadweight loss > 0
Page 411
#2 a. demand increases, b. supply increases