# Principle of Microeconomics Econ chapter 6

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1 Principle of Microeconomics Econ chapter 6 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The buyers pay the entire sales tax levied on a good when demand is perfectly or supply is perfectly. A) inelastic; elastic B) elastic; inelastic C) inelastic; inelastic D) elastic; elastic 1) 2) Using the above figure, CBL is the cost of breaking the law. What is the equilibrium price and quantity if beer is legal? A) \$5 per quart and 300 quarts of beer B) \$1 per quart and 300 quarts of beer C) \$3 per quart and 100 quarts of beer D) \$3 per quart and 500 quarts of beer 2) 1

2 3) In the above figure, if the minimum wage is set at \$8 per hour, the level of unemployment is hours per week is A) 30 million B) 0 C) 40 million D) 20 million 3) Wage rate (dollars per hour) Labor supplied (millions of workers) Labor demanded (millions of workers ) In the table above, the market is in equilibrium. Then a minimum wage is set at \$7 per hour. The number of unemployed workers will be A) 4 million. B) 2 million. C) 6 million. D) 0. 4) 2

3 5) The figure above shows the demand for and supply of rental housing in Smallton. If a rent ceiling is set at \$400, there is A) a surplus of 3,000 units of rental housing. B) a shortage of 2,000 units of rental housing. C) a shortage of 4,000 units of rental housing. D) neither a shortage nor a surplus of rental housing. 5) 6) A sales tax imposed on sellers shifts the supply curve leftward for the taxed good because the 6) A) tax is actually shifted entirely onto the buyer who can afford only a smaller supply. B) tax shifts the demand curve leftward. C) tax is paid by the seller to the government and is, therefore, like a cost of production. D) higher price causes entry into the market. 3

4 7) In the above figure, the equilibrium price of a paperback book is \$6 per book and the equilibrium quantity is 3 million books. The National Literature Board convinces the government to impose a price ceiling of \$3 per book. At this price, the quantity of books supplied to the market will be A) less than 3 million a month and will exceed the quantity demanded. B) 3 million a month and will equal the quantity demanded. C) more than 3 million a month and will exceed the quantity demanded. D) less than 3 million a month and will be less than the quantity demanded. 7) 8) In general, a fine on smoking cigarettes shifts the curve of cigarettes. 8) A) demand; rightward B) supply; leftward C) demand; leftward D) supply; rightward Price elasticity of supply Price elasticity of demand Hamburgers French fries Pizza Ice cream ) You are in the business of producing and selling hamburgers, french fries, pizza, and ice cream. The mayor plans to impose a tax on one of these products. Based on the elasticities in the above table, as a profit-minded business person who seeks to avoid taxes whenever possible, which good would you least like to have taxed? A) pizza B) hamburgers C) French fries D) ice cream 9) 4

5 10) In the figure above, originally the apartment rental market is in short-run and long-run equilibrium with a rent of \$600 per month. Then the government imposes a rent ceiling of \$500 per month. The deadweight loss is borne by A) the consumers only. B) the producers only. C) all consumers and some producers. D) all producers and some consumers. 11) The tax on insulin in the Philippines is anywhere between 10 and 20 percent. If you are rich and living in the Philippines, this is not a problem, but if you are poor, then insulin becomes something that you cannot afford. Why do buyers care so much about a tax on insulin, a vital daily medicine for those with diabetes? A) Because the tax incidence is equal between the buyers and sellers B) Because more insulin can be provided to those in need C) Because buyers pay virtually the entire tax on insulin because the demand is almost perfectly inelastic D) Because sellers increase their profit when there is a tax 10) 11) 12) An effective minimum wage is a price 12) A) ceiling that results in a surplus of low-skilled labor. B) floor that results in a surplus of low-skilled labor. C) ceiling that results in a shortage of low-skilled labor. D) floor that results in a shortage of low-skilled labor. 13) Which of the following leads to the suppliers paying all of a tax? 13) A) The supply is perfectly elastic. B) The demand is unit elastic. C) The supply is perfectly inelastic. D) The demand is perfectly inelastic. 5

6 14) A price floor is a price 14) A) that creates a surplus of the good if it is set above the equilibrium price. B) above which a seller cannot legally sell. C) below which a seller cannot legally sell. D) Both answers A and C are correct. 15) On Green Island, the demand for pencils is perfectly elastic and the supply of pencils is perfectly inelastic. If a sales tax on pencils is introduced,. A) the tax is split evenly between the buyers and sellers B) the sellers pay the entire tax C) no one pays the tax D) the buyers pay the entire tax 15) 16) A minimum wage set above the equilibrium wage rate for low-skilled workers. 16) A) increases the number of good paying jobs available to young people B) creates more employment opportunities for low-skilled workers C) creates more prosperity among younger people D) creates unemployment among low-skilled workers 17) The government sets a price floor for corn which is effective. As a result,. 17) A) a shortage of corn will be created. B) a deadweight loss will be created. C) the corn market will be efficient. D) None of the above answers is correct. 18) Suppose the local government places a sales tax on hotel rooms and that the demand for these rooms is elastic while the supply is perfectly inelastic. The tax incidence is such that the tax will be paid by A) the taxpayers. B) only the consumers. C) only the producers. D) equally by the consumers and the producers. 18) 19) A binding minimum wage creates 19) A) efficiency because it increases most workers' wages. B) inefficiency, in part because it causes too much job search. C) efficiency because few workers lose their jobs. D) inefficiency, in part because it decreases productive unemployment. 20) A minimum wage. 20) A) changes the demand for labor. B) is a price floor in the labor market C) is an effective way of increasing employment D) is a price ceiling in the labor market 6

7 21) The figure above shows the market for low-skilled labor in Midland city. The government sets a minimum wage at \$6 per hour. With the minimum wage law enacted, the potential loss from job search in Midland city is A) \$40 million. B) zero. C) \$60 million. D) \$120 million. 21) 7

8 22) In the figure above, originally the apartment rental market is in short-run and long-run equilibrium with a rent of \$600 per month. Then the government imposes a rent ceiling of \$500 per month. Now suppose that demand increases. The increase in demand results in the quantity supplied A) staying the same. B) increasing. C) decreasing. D) increasing, staying the same, or decreasing depending on how much demand increases. 22) 8

9 23) A hurricane sweeps through New Orleans and destroys a substantial portion of available housing. The pre-hurricane housing market for New Orleans is illustrated in the above figure. In the absence of rent controls, the short-run market response will be to move to a new equilibrium in the above figure at a price-quantity combination such as A) \$800 and 200,000 units. B) \$600 and 100,000 units. C) \$800 and 400,000 units. D) \$600 and 500,000 units. 24) More than 80 percent of the home heating oil used in the United States goes to the Northeast. In Vermont, the vast majority of people there use oil to stay warm when it s cold outside. Richard Izor heats his home with oil and inquires, I d like to see them come in and put a ceiling on the oil price now before it gets any bigger. Why they haven t done this is more than I can understand. Which of the following is NOT likely to occur if such a price ceiling was imposed? A) There would be an increase in inefficiency in the heating oil market B) There would be a surplus of heating oil C) A black market for heating oil may be created D) A heating oil shortage may occur 23) 24) 9

10 25) The above figure shows the market for blouses. The government decides to impose the sales tax shown in the figure on sellers. How much consumer surplus is lost? A) \$25,000 B) \$20,000 C) \$40,000 D) \$10,000 26) The government of Healthyland imposes a tax on sellers of salt. The tax is \$0.10 per pound. With no tax, the price of salt is \$0.40 per pound. The demand for salt is perfectly inelastic and the elasticity of supply is 1.5. How is the salt tax burden shared between buyers and sellers in Healthyland? A) Most of the tax is paid by buyers. B) Most of the tax is paid by sellers. C) Buyers pay the whole tax. D) Sellers pay the whole tax. 25) 26) 10

11 27) In the figure above, if a minimum wage of \$6 per hour has been imposed and the labor demand curve then shifts from D0 to D1 the wage rate and the amount of employment. A) does not change; decreases B) falls; increases C) falls; decreases D) does not change; increases 27) 28) A minimum wage set above the equilibrium wage will 28) A) create a lower wage rate for skilled workers than for unskilled workers. B) have no effect because the equilibrium level of employment is not affected by a minimum wage above the equilibrium wage. C) create a shortage of labor. D) create a surplus of labor. 29) A tax is imposed on the sellers of a product. The consumers will pay the full amount of the tax if demand is A) elastic. B) perfectly elastic. C) inelastic. D) perfectly inelastic. 29) 11

12 30) In the above figure, CBL is the cost of breaking the law. If it is illegal to buy and sell, then the price per unit will be A) \$200. B) \$500. C) \$300. D) \$ ) 12

13 31) To help pay for the cost of sport related injuries, the government imposes a tax on sellers of all sports equipment. Using the above figure, the area that equals the lost consumer surplus from this tax on sports equipment is A) P2P3ec. B) bcd. C) ced. D) P1P2cd. 31) 13

14 32) The figure above shows the demand for and supply of rental housing in Smallton. If a rent ceiling is set at \$800, what is the rent? A) \$600 B) \$400 C) \$800 D) None of the above answers is correct. 32) 33) In the above figure, a price floor of \$4 33) A) leads to a shortage. B) leads to a surplus. C) shifts the demand curve leftward. D) has no effect. 14

15 34) Which of the following is a result of an effective rent ceiling? I. equity in the housing market II. efficient allocation of resources III. a shortage of housing units. A) I and III B) III only C) I and II D) II only 34) 35) A rent ceiling that is effective results in. 35) A) a surplus of housing B) no change in the quantity of housing supplied but a decrease in the quantity of housing demanded C) a shortage of housing D) helping the poor 36) The above figure shows the apartment rental market in Bigtown. If the Bigtown Housing Authority imposes a rent ceiling above \$750 per month, the ceiling will A) help all renters. B) help all landlords. C) help some renters and hurt other renters. D) have no effect at all on the Bigtown rental market. 37) If penalties are imposed only on the buyers of illegal drugs, the equilibrium price of illegal drugs will and the equilibrium quantity will. A) fall; increase B) rise; increase C) rise; decrease D) fall; decrease 36) 37) 15

16 38) If penalties are imposed on the sellers of illegal goods or services, then the equilibrium price and the equilibrium quantity. A) rises; decreases B) rises; increases C) falls; increases D) falls; decreases 38) 39) To help pay for the cost of sport related injuries, the government imposes a tax on sellers of all sports equipment. The sports equipment consumers' share of this tax would be greater than that shown in the above figure A) only if the supply was more elastic. B) only if the demand was more inelastic. C) if either the demand was more inelastic or the supply more elastic. D) only if the demand was more elastic. 39) 40) Which of the following is a potential impact of an effective price ceiling? 40) A) deterioration in the quality of the price-controlled good B) use of non-price factors such as discrimination to allocate the price-controlled good to consumers C) a shortage D) All of the above are potential impacts of an effective price ceiling. 16

17 Product Price elasticity of demand Chewing gum 0.61 Candy bar 1.75 Soda 1.50 Newspaper ) You are in the business of retailing chewing gum, candy bars, sodas and newspapers. It has just come to your attention that the governor plans to impose a tax on one of these commodities. As a profit-minded business person who seeks to avoid taxes whenever possible, based on the price elasticity of demand in the above table, which commodity would you least like to have taxed? A) sodas B) candy bars C) newspapers D) chewing gum 41) 42) In the above figure, a black market emerges with a 42) A) price floor of \$4. B) price ceiling of \$4. C) price floor of \$2. D) a rationed quantity ) If buyers of illegal goods are punished but sellers are not, then the price and the equilibrium quantity. A) falls; decreases B) rises; decreases C) falls; increases D) rises; increases 43) 17

18 44) The figure above shows the housing market in the city of Appleville. A rent ceiling of \$650 per month is imposed. With the rent ceiling, the quantity of housing rented in Appleville is A) 200 units below the efficient level. B) efficient. C) 300 units below the efficient level. D) 100 units above the efficient level. 45) The figure above shows the housing market in the city of Appleville. A rent ceiling of \$650 per month is imposed. With the rent ceiling, what is the maximum black market rent in Appleville? A) \$800 per month B) \$750 per month C) \$700 per month D) \$650 per month 44) 45) 46) A rent ceiling creates a shortage. As a result, which of the following occurs? 46) A) a gain of both consumer and producer surplus B) only a loss of consumer surplus for tenants C) a loss of both consumer and producer surplus D) only a loss of producer surplus for landlords 47) The Volumetric Ethanol Excise Tax Credit (VEETC) is a tax credit for registered ethanol-gasoline blenders. Qualified blenders receive \$0.51 for each gallon of pure ethanol they blend into gasoline. That translates to \$0.42 for each gallon of E85. VEETC is an example of a. A) price ceiling B) subsidy C) price floor D) quota 47) 18

19 48) If the minimum wage is set above the equilibrium wage, a supply and demand diagram of the low-skilled labor market will show unemployment as A) the area of a rectangle. B) the area of a triangle. C) a vertical distance. D) a horizontal distance. 48) 19

20 Answer Key Testname: CHAPTER 6 1) A ID: mic9pa ) D ID: mic9pa ) D ID: mic9pa ) B ID: mic9pa ) B ID: mic9pa ) C ID: mic9pa ) D ID: mic9pa ) C ID: mic9pa ) B ID: mic9pa ) D ID: mic9pa ) C ID: mic9pa ) B ID: mic9pa ) C ID: mic9pa ) D ID: mic9pa ) B ID: mic9pa ) D ID: mic9pa ) B ID: mic9pa ) C ID: mic9pa ) B ID: mic9pa ) B ID: mic9pa ) D ID: mic9pa ) A ID: mic9pa ) A ID: mic9pa

21 Answer Key Testname: CHAPTER 6 24) B ID: mic9pa ) A ID: mic9pa ) C ID: mic9pa ) A ID: mic9pa ) D ID: mic9pa ) D ID: mic9pa ) C ID: mic9pa ) D ID: mic9pa ) A ID: mic9pa ) B ID: mic9pa ) B ID: mic9pa ) C ID: mic9pa ) D ID: mic9pa ) D ID: mic9pa ) A ID: mic9pa ) C ID: mic9pa ) D ID: mic9pa ) B ID: mic9pa ) A ID: mic9pa ) A ID: mic9pa ) A ID: mic9pa ) A ID: mic9pa ) C ID: mic9pa

22 Answer Key Testname: CHAPTER 6 47) B ID: mic9pa ) D ID: mic9pa

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