If the demand curve is downward sloping then

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 All 91% Top 1/5 of class 97% Bottom 1/5 79% of class

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 All 69% Top 1/5 of class 82% Bottom 1/5 28% of class

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 All 85% Top 1/5 of class 99% Bottom 1/5 69% of class

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 All 76% Top 1/5 of class 97% Bottom 1/5 45% of class

Remember the marginal principle? An example. Wage is $4 # workers Value of Profit output Average product 1 $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% Top 1/5 of class 82% Bottom 1/5 25% of class

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% Top 1/5 of class 98% Bottom 1/5 34% of class

Why is that? • We have 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 All 28% Top 1/5 of class 50% Bottom 1/5 14% of class

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.

P Slope is constant along straight line demand Curve. Elasticity is (P/Q) x Slope Q

Boomtown I All 95% Top 1/5 of class 99% Bottom 1/5 89% of class

Boomtown II All 52% Top 1/5 of class 78% Bottom 1/5 36% of class

Los Locos All 39% Top 1/5 of class 64% Bottom 1/5 26% of class

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: All 60% Top 1/5 of class 92% Bottom 1/5 28% of class

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 All 68% Top 1/5 of class 98% Bottom 1/5 25% of class

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 All 65% Top 1/5 of class 98% Bottom 1/5 19% of class

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) All 58% Top 1/5 of 89% class Bottom 1/5 20% of class

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. ) All 76% Top 1/5 of 96% class Bottom 1/5 53% of class

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? All 55% Top 1/5 of 85% class Bottom 1/5 24% of class

After tax Sales 1000 units. Tax revenue $15 x 1000. Before Tax, Profits of Consumers=1000 x 30+1000 x 5=35000 Profits of suppliers=0. $50 After tax: Profits of consumers Fall to 1000 x 15. $35 $30 Revenue Excess Burden 1000 x$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? All 25% Top 1/5 of 46% class Bottom 1/5 12% of class

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= -1/8 x 100% • 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. All 92% Top 1/5 of 97% class Bottom 1/5 74% of class