EXAM 2 REVIEW QUESTIONS

1. You should be able to define and calculate the price elasticity of demand.
2. You should be able explain the difference between elastic, unitary, and inelastic demand.
3. You should be able explain the relationship between elasticity, price change, and total revenue.
4. List the determinants of price elasticity of demand. Explain how each affects elasticity.
5. You should be able define price elasticity of supply and show how it is calculated. What determines the price elasticity of supply?
6. You should be able to show how price elasticity can be used to make predictions of the price change following a shift in the demand or supply curve.
7. Define income elasticity. Interpret the elasticity coefficient. What does the sign tell you? What is a normal good? An inferior good?
8. What type of goods have an income-elastic demand?
9. Show how a sales or excise tax affects the market for a good. Will all of the tax be paid by sellers? by consumers? What determines the extent to which each group pays? Show graphically.
10. If the price elasticity of demand for pizza is .4, by how much will the number of pizzas demanded fall if the pizzeria increases its prices by 20%. What will happen to total revenue?.
11. What is an efficient market? What is an inefficient one? Under what conditions are markets efficient? Explain how a competitive market in those conditions achieves efficiency. What did Adam Smith mean by the "invisible hand"?
12. What is a price ceiling? Why does the government impose them? What effect will they have?
13. If the market cannot allocate the commodity to users, how is this accomplished. Discuss the various methods used, how they work, and their effect on the distribution of goods and services and on efficiency. Why might these alternatives be better (worse) than the market?
14. What are price floors or price supports? Why are they imposed. Give some examples. Who benefits and who loses as a result of price supports?
15. Explain and show graphically the effect of quantity controls. Do the same for import restrictions. Explain how benefits and who loses from these. Explain how they affect efficiency. Why do they persist?
16. What are public goods? What characteristics make a public good different from a private good. What dilemma do public goods present to a market economy? How can the government solve the problem? Why is it difficult for the government to do so efficiently?
17. What are spillovers or externalities? Give some examples of external benefits and of external or spillover costs.
18. Explain and show graphically why the presence of external costs in a competitive market results in inefficiency. Do firms produce too much or too little? Explain and show graphically what the ideal would be.
19. What is the optimal (efficient) level of pollution abatement (reduction). Should we always seek to eliminate all pollution? Should we always seek to reduce pollution by the maximum amount technologically feasible? Explain.
20. Many times, governments deal with spillover costs such as pollution through regulations. Explain how this command- and-control system works and analyze its effects on the economy. What are the advantages and disadvantages of regulation?.
21. Describe the effects of a pollution tax. How much should the tax be? How will it lead to a reduction in pollution? What are the advantages and disadvantages of pollution taxes over control?
22. Explain how a system of marketable pollution permits would work. How many should the government issue? To whom? When will a firm sell a permit? When will a firm want to buy? What determines the price? What effect will these marketable permits have on the economy? On pollution? What are the advantages and disadvantages of a permit system over taxes and controls?
23. How might two individuals or small groups of individuals resolve the externality problem through individual transactions? Why doesn't this always work?
24. Explain and show graphically why the presence of external benefits in a competitive market results in inefficiency. Do firms produce too much or too little? Explain and show graphically what the ideal would be.
25. What government policies would lead to more efficient results in markets in which there are spillover benefits? Explain how these policies would work. Explain and show graphically the effect on the economy?