ECON 2106 Exam 1 Study GuideTopics by ChapterI. Chapter 4: Elasticitya. Key Concepts (You need to be able to define these)i. Elasticity-a measure of the responsiveness of buyers and sellers to changes in price or income. Eq= %change in quantity/%change in priceii. price elasticity of demand (PEoD)- a measure of the responsiveness of quantity demanded to a change in priceiii. Key concept: immediate run- a period of time when there is no time for consumers to adjust their behavioriv. Key concept: short run- the period of time when consumers can partially adjust their behavior with regards to their short-term wants and needsv. Key concept: long run- the period of time when consumers can fully adjust their behavior with regards to both their short-term and long-term wants and needs.vi. Key Concept: Total Revenues- the amount that consumers pay and sellers receive for goods and services. (TR=price × quantity sold)vii. Key Concept: Income Elasticity of Demand- measures how much a change in income affects spending. Ei=%chnage in quantity/%chnage in incomeviii. cross-price elasticity of demand- measures the responsiveness of the quantity demanded of one good to a change in the price of a related good.b. Review the ECON REWIND review question (see the first few slides of Lecture 5)c. Sample Questionsi. If a business finds that demand for its good is very price elastic, it knows thata. price is very important. b. price is unimportant.c. price is unrelated.d. the effect of price is less important than the impact of the quantity consumers buy.e. the quantity consumers buy is unimportant.ii. If the income elasticity of demand is -3, the good will be a(n) ________ good.a. complement d. inferior b. substitute e. luxuryc. necessityiii. The following are examples of elastically-demanded goods EXCEPT:a. cheeseburgersb. fruity cocktailsc. comic booksd. insulin e. streaming services (like Netflix)A. B. C. D. E. f. .iv. Which of these graphs represents perfectly price inelastic demand for a good?a. Graph A d. Graph Db. Graph B e. Graph Ec. Graph Cv. Suppose the price elasticity of demand for magic mirrors is -0.1. Suppose next that the manufacturer of magic mirrors raises prices by 40%. If she sells 100 magic mirrors a month, how many can she expect to sell next month? (Hint: find the percent change in quantity demanded and apply it to existing sales).a. 99 b. 98 -0.1=%change in q/%40c. 97 change in Q=-4d. 96 e. 95II. Chapter 5: Market Outcomes and Tax Incidencea. Key Conceptsi. Welfare economics- the study of how the allocation of resources affects economic well-being.ii. consumer surplus- the difference between the willingness to pay (WTP) for a good and the price actually paid.iii. Producer Surplus- the difference between willingness-to-sell (WTS) and actual price paid.iv. Total Surplus- the sum of consumer and producer surplusv. tax incidence- the actual burden of taxation.vi. deadweight loss- the decrease in economic activity caused by market distortionsb. Review the ECON REWIND from the beginning of lecture 3c. Sample QuestionsFor the following questions, consider the following chartNumber of Hot Dogs Willingness to Sell (per hot dog)1 $2 2 $4 3 $6 4 $8 5 $10 i. Kendra has a hot dog cart, and her willingness to sell hot dogs is given above. Suppose the market price for hot dogs is $6. How many will Kendra sell?a. 4 b. 2c. 1d. 3ii. Consider your answer from above. Calculate Kendra’s producer surplus.a. $6 b. $12 PS(1)=$6-$2=4c. $4 PS(2)=$6-4=2d. $2 PS(3)=6-6=0iii. True or false: The Consumer Surplus of one of Kendra’s customers is $3. This is enough information to calculate total surplus.a. True b. FalseConsider the following graph for the next two questionsSuppose that this year, the GA department of agriculture advised Congress to institute a $1 tax (on consumers) to restrain the quantity of milk consumed in the country. Prior to the institution of the tax, the equilibrium price and quantity was $4 per gallon at 1,000 gallons a month. As you know from chapter 3, a tax on milk shifts the demand curve for milk to the left and now 750 gallons is the new equilibrium quantity.iv. Suppose the new equilibrium price (net of tax—that means “without tax”) is $3.50. What is the price with tax?a. $4b. $4.25c. $4.50 =$3.50+$1.00 d. $5 v. How much tax revenue is collected from this tax on milk?a. $750 b. $725 =$750*$1c. $1000d. $1750vi. Chapter 6: The Market at Work: Supply and Demanda. Key Conceptsi. Price Controls- Actions meant to set or manipulate prices through government intervention in markets.ii. Price Ceilings- legally established maximum priceiii. Price Floors- legally established minimum priceiv. black market- illegal markets that emerge when price controls are in place.v. minimum wage- the lowest (legal) hourly wage that firms may pay employeesb. Review ECON REWIND (from beginning of Lecture 5)c. Sample Questionsi. All of the following are examples of price controls except:a. The state of Maryland institutes a $15 minimum wageb. In Scotland, if the price of a bottle of Scotch whiskey falls below a certain price, the government buys Scotch whiskey until the price goes back up.c. New York passes rent controls legislation on 150 new apartments.d. Atlanta gives needy families $400 a month to help pay for rent. ii. Bruce Springsteen, a famous rock star, is also famous for loving his working-class fans. Because of this, he refuses to sell tickets to his rock and roll shows for more than $100, and it’s not uncommon to find a ticket to his show online for asmuch as 5 or 6 times that amount. Which of the following is true:a. He has a non-binding price floor on his tickets, and this creates a surplus.b. He has a binding price ceiling on his tickets, and this creates a shortage. c. He has a non-binding price ceiling on his tickets, and this creates a surplus.d. He has a binding price floor on his tickets, and this creates a shortage.iii. True or false, binding price ceilings always create surpluses.a. True binding price floors always create a surplusb. Falseiv. San Francisco is in the midst of a major housing shortage right now, which is driving rent through the roof! Many activists are saying that the city desperatelyneeds to rent control its apartments. Will rent control make the problem worse,better, or will it leave the problem unchanged.a. Betterb. Worse c.