Problem solving: The market for milk tea is characterized by a downward-sloping demand curve and an upward-sloping supply curve. Draw the competitive market equilibrium and then label the price, quantity, consumer surply, and producer surplus. This will be called PANEL A. Using your illustration, answer the following questions.

1. There is a deadweight loss in the graph I illustrated.

a. Yes

b. No

2.Suppose that a 10-peso tax was imposed on each milk tea sold. Re-draw the graph to show the effect of tax and label this as PANEL B. What happened to the price paid by buyers, and then what happened to consumer surplus?

a. Price paid by buyers increased, consumer surplus increased

b. Price paid by buyers decreased, consumer surplus decreased

c. Price paid by buyers increased, consumer surplus decreased

d. Price paid by buyers did not move, consumer surplus increased

3.Based on PANEL B, we can say that taxes affect the allocation of resources. We call this inefficiency in the gains of trade as:

a. Unallocative efficiency

b. Sunk cost

c. Trade losses

d. Deadweight loss

Multiple Choice

1. Demand is defined as the willingness and ability of the consumer to purchase. Supply is defined as the willingness and ability of the producer to produce.

A. Both statements are true

B. Both statements are false

C. Statement 1 is true, Statement 2 is false

D. Statement 1 is false, Statement 2 is true

2. In a purely competitive market, price is determined by the sellers. In a purely competitive market, all are price takers.

A. Both statements are true

B. Both statements are false

C. Statement 1 is true, Statement 2 is false

D. Statement 1 is false, Statement 2 is true

3.Goods with a demand elasticity equals to 1 have a unit elastic demand. The supply elasticity of goods become more inelastic in the long run than in the short run.

A. Both statements are true

B. Both statements are false

C. Statement 1 is true, Statement 2 is false

D. Statement 1 is false, Statement 2 is true

4.Perfectly inelastic supply or demand has an elasticity equals 0. Perfectly inelastic supply or demand is illustrated as a straight vertical line.

A. Both statements are true

B. Both statements are false

C. Statement 1 is true, Statement 2 is false

D. Statement 1 is false, Statement 2 is true

5.Perfectly elastic supply or demand has an elasticity equals one. Perfectly elastic supply or demand is illustrated as a straight horizontal line.

A. Both statements are true

B. Both statements are false

C. Statement 1 is true, Statement 2 is false

D. Statement 1 is false, Statement 2 is true

6.Describe the cross price elasticity of demand for substitute goods

A. CED is an absolute value

B. CED is negative

C. CED is zero or near-zero

D. CED is positive

7. A good which has a negative income elasticity coefficient is called:

A. Normal good

B. Inferior good

C. Superior good

D. Abnormal good

8.When the good has an inelastic demand, the best way to secure high revenues is to:

A. Charge high prices

B. Increase quantity sold

C. Use better technology

D. Do nothing

9.Total revenue is obtained through:

A. Price times demand

B. Price times quantity minus costs

C. Price times supply

D. Prices times quantity

10.The list contains the determinants of price elasticity of demand, except for:

A. Price

B. Availability of alternatives

C. Availability of supply

D. Time horizon