Transcript If the demand curve is downward sloping, then when the

If the demand curve is downward sloping,
then when the supply curve shifts down,
the competitive equilibrium price falls
and the equilibrium quantity rises.
Pct getting this right.
1. True
2. False
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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
Now Buyers pay tax.
After tax Sellers profits in Blue
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 Value of Profit
output
Average
product
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
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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
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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. False
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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
Elasticity is
(P/Q) x Slope
Q
Boomtown I
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Boomtown II
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Los Locos
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Los Locos picture
Summer
Demand
$40
$30
Winter
Demand
1000
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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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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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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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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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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After tax Sales 1000 units.
Tax revenue $15x1000.
Before Tax, Profits of
Consumers=1000x30+1000x5=35000
Profits of suppliers=0.
$50
After tax: Profits of consumers
Fall to 1000x15.
$35
$30
Revenue
Excess Burden
Excess Burden
1000x$10=$10000
$20
$15
$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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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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