Page 566 - Krugmans Economics for AP Text Book_Neat

discouraged by the tax. The greater the elasticity of de- tional utility than the previous unit. As a result, the
mand or supply, or both, the larger the deadweight loss marginal utility curve slopes downward.
from a tax. If either demand or supply is perfectly in- 25. A budget constraint limits a consumer’s spending to
elastic, there is no deadweight loss from a tax. no more than his or her income. It defines the con-
22. A lump-sum tax is a tax of a fixed amount paid by all sumer’s consumption possibilities, the set of all af-
taxpayers. Because a lump-sum tax does not depend on fordable consumption bundles. A consumer who
the behavior of taxpayers, it does not discourage mutu- spends all of his or her income will choose a consump-
ally beneficial transactions and therefore causes no tion bundle on the budget line. An individual chooses
deadweight loss. the consumption bundle that maximizes total utility,
23. Consumers maximize a measure of satisfaction the optimal consumption bundle.
called utility. We measure utility in hypothetical 26. We use marginal analysis to find the optimal con-
units called utils. sumption bundle by analyzing how to allocate the
24. A good’s or service’s marginal utility is the additional marginal dollar. According to the optimal consump-
utility generated by consuming one more unit of the tion rule, with the optimal consumption bundle, the
good or service. We usually assume that the principle marginal utility per dollar spent on each good and
of diminishing marginal utility holds: consumption service—the marginal utility of a good divided by its
of another unit of a good or service yields less addi- price—is the same.

Key Terms

Substitution effect, p. 458 Perfectly inelastic supply, p. 478 Tax incidence, p. 502
Income effect, p. 459 Perfectly elastic supply, p. 479 Deadweight loss, p. 506
Price elasticity of demand, p. 460 Willingness to pay, p. 483 Administrative costs, p. 508
Midpoint method, p. 462 Individual consumer surplus, p. 485 Lump-sum tax, p. 508
Perfectly inelastic demand, p. 466 Total consumer surplus, p. 485 Utility, p. 511
Perfectly elastic demand, p. 467 Consumer surplus, p. 485 Util, p. 512
Elastic demand, p. 467 Cost, p. 489 Marginal utility, p. 513
Inelastic demand, p. 467 Individual producer surplus, p. 490 Marginal utility curve, p. 513
Unit-elastic demand, p. 467 Total producer surplus, p. 490 Principle of diminishing marginal utility, p. 513
Total revenue, p. 468 Producer surplus, p. 490 Budget constraint, p. 514
Cross-price elasticity of demand, p. 475 Total surplus, p. 495 Consumption possibilities, p. 514
Income elasticity of demand, p. 476 Progressive tax, p. 499 Budget line, p. 514
Income-elastic demand, p. 476 Regressive tax, p. 499 Optimal consumption bundle, p. 515
Income-inelastic demand, p. 476 Proportional tax, p. 499 Marginal utility per dollar, p. 518
Price elasticity of supply, p. 477 Excise tax, p. 499 Optimal consumption rule, p. 520

Problems

1. Nile.com, the online bookseller, wants to increase its total rev- a. Using the midpoint method, calculate the price elasticities
enue. One strategy is to offer a 10% discount on every book it of demand for group A and group B.
sells. Nile.com knows that its customers can be divided into b.Explain how the discount will affect total revenue from
two distinct groups according to their likely responses to the each group.
discount. The accompanying table shows how the two groups
respond to the discount. c. Suppose Nile.com knows which group each customer be-
longs to when he or she logs on and can choose whether or
not to offer the 10% discount. If Nile.com wants to increase
Group A Group B its total revenue, should discounts be offered to group A or
(sales per week) (sales per week) to group B, to neither group, or to both groups?
Volume of sales before 1.55 million 1.50 million 2. Do you think the price elasticity of demand for Ford sport-
the 10% discount utility vehicles (SUVs) will increase, decrease, or remain the
Volume of sales after 1.65 million 1.70 million same when each of the following events occurs? Explain your
the 10% discount answer.

524 section 9 Behind the Demand Curve: Consumer Choice