Chapters 6, 7 & 8 Review Questions

Chapters 6, 7 & 8 Review Questions Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. A price ceiling will be binding only if it is set a. equal to equilibrium price. b. above equilibrium price. c. below equilibrium price. d. none of the above; a price ceiling is never binding. 2. When, in a particular market, the law of demand and the law of supply both apply, the imposition of a binding price ceiling in that market causes quantity demanded to be a. greater than quantity supplied. b. less than quantity supplied. c. equal to quantity supplied. d. Any of the above is possible. Figure 6-1 3. Refer to Figure 6-1. In which panel(s) of the figure would there be a shortage of the good at the ceiling price? a. panel (a) but not panel (b) b. panel (b) but not panel (a) c. panel (a) and panel (b) d. neither panel (a) nor panel (b) 4. Refer to Figure 6-1. The situation in panel (a) may be described as one in which a. the price ceiling is not binding. b. the price ceiling really functions as a price floor. c. a surplus of the good will be observed. d. All of the above are correct. Figure 6-2

5. Refer to Figure 6-2. If the government imposes a price ceiling of $8 in this market, the result would be a a. surplus of 10. b. surplus of 20. c. shortage of 10. d. shortage of 20. 6. A binding price floor in a market is set a. above equilibrium price and causes a shortage. b. above equilibrium price and causes a surplus. c. below equilibrium price and causes a surplus. d. below equilibrium price and causes a shortage. Figure 6-3 7. Refer to Figure 6-3. In panel (b), with the price floor in effect, there will be a. a shortage of wheat. b. equilibrium in the market. c. a surplus of wheat. d. an excess demand for wheat. 8. When policymakers set prices by legal decree, they a. are usually following the advice of mainstream economists. b. are usually improving the organization of economic activity. c. are obscuring the signals that normally guide the allocation of society s resources.

d. are demonstrating a willingness to sacrifice equity for the sake of a gain in efficiency. Figure 6-5 9. Refer to Figure 6-5. When a certain price control is imposed in this market, the resulting quantity of the good that is actually bought and sold is such that buyers are willing and able to pay a maximum of P 1 dollars per unit for that quantity and sellers are willing and able to accept a minimum of P 2 dollars per unit for that quantity. If P 1 - P 2 = $3.00, then the price control in question is a. a price ceiling of $2.00. b. a price ceiling of $5.00. c. a price floor of $5.00. d. either a price ceiling of $2.00 or a price floor of $5.00. Figure 6-6 10. Refer to Figure 6-6. When the price ceiling applies in this market and the supply curve for gasoline shifts from S 1 to S 2, the resulting quantity of gasoline that is bought and sold is a. less than Q 3. b. Q 3

c. between Q 1 and Q 3. d. at least Q 1. 11. Refer to Figure 6-6. Which of the following statements best relates the figure to the events of the 1970s? a. Buyers of gasoline paid a price of P 1 before 1973; they paid a price of P 2 after OPEC increased the price of crude oil in 1973, and there was a shortage of gasoline at that price. b. Buyers of gasoline paid a price of P 1 before 1973; they paid a price of P 3 after OPEC increased the price of crude oil in 1973, and there was a shortage of gasoline at that price. c. Buyers of gasoline paid a price of P 2 before 1973; they paid a price of P 3 after OPEC increased the price of crude oil in 1973, with no shortage of gasoline at that price. d. The price ceiling was binding before 1973; the price ceiling was no longer binding after OPEC increased the price of crude oil in 1973. 12. In the housing market, rent control causes a. quantity supplied to fall and quantity demanded to fall. b. quantity supplied to fall and quantity demanded to rise. c. quantity supplied to rise and quantity demanded to fall. d. quantity supplied to rise and quantity demanded to rise. 13. The goal of a rent-control policy is to a. facilitate controlled economic experiments in urban areas. b. help landlords by assuring them a low vacancy rate for their apartments. c. help the poor by assuring them an adequate supply of apartments. d. help the poor by making housing more affordable. 14. Which of the following is not a result of government-imposed rent control? a. fewer new apartments offered for rent b. less maintenance provided by landlords c. bribery d. higher quality housing 15. In the United States, rent-control policies were first adopted during a. the Civil War. b. the Great Depression. c. World War II. d. the 1960s. 16. A binding minimum wage a. alters both the quantity demanded and quantity supplied of labor. b. affects only the quantity of labor demanded; it does not affect the quantity of labor supplied. c. has no effect on the quantity of labor demanded or the quantity of labor supplied. d. causes only temporary unemployment, since the market will adjust and eliminate any temporary surplus of workers. 17. At a minimum wage that exceeds the equilibrium wage, a. the quantity demanded of labor will exceed the quantity supplied. b. the quantity supplied of labor will exceed the quantity demanded. c. the minimum wage will not be binding. d. the market for skilled workers is affected, but the market for unskilled workers remains unaffected. 18. Which of the following is not a function of prices in a market system? a. Prices have the crucial job of balancing supply and demand. b. Prices send signals to buyers and sellers to help them make rational economic decisions. c. Prices coordinate economic activity. d. Prices ensure an equitable distribution of goods and services among consumers.

19. An alternative to rent-control laws that would not reduce the quantity of housing supplied is a. the payment by government of a fraction of a poor family s rent. b. higher taxes on rental income earned by landlords. c. a policy that prevents landlords from evicting tenants. d. a policy that allows government to confiscate residential property for the purpose of commercial development. Figure 6-8 20. Refer to Figure 6-8. The effective price that buyers pay after the tax is imposed is a. $8. b. $6. c. $5. d. $3. Figure 6-9 21. Refer to Figure 6-9. The amount of the tax per unit is a. $10.

b. $6. c. $4. d. $2. 22. A tax on the buyers of coffee will a. increase the effective price of coffee paid by buyers, increase the price of coffee received by sellers, and increase the equilibrium quantity of coffee. b. decrease the effective price of coffee paid by buyers, increase the price of coffee received by sellers, and decrease the equilibrium quantity of coffee. c. increase the effective price of coffee paid by buyers, decrease the price of coffee received by sellers, and decrease the equilibrium quantity of coffee. d. increase the effective price of coffee paid by buyers, decrease the price of coffee received by sellers, and increase the equilibrium quantity of coffee. 23. Which is the most correct statement about the burden of a tax imposed on buyers of sugar? a. Buyers bear the entire burden of the tax. b. Sellers bear the entire burden of the tax. c. Buyers and sellers share the burden of the tax. d. The government bears the entire burden of the tax. Figure 6-10 24. Refer to Figure 6-10. Sellers effectively pay how much of the tax per unit? a. $1.00. b. $1.50. c. $2.50. d. $3.00. Figure 6-11. On the graph below, the shift of the supply curve from S 1 to S 2 represents the imposition of a tax on a good. On the axes, Q represents the quantity of the good and P represents the price.

25. Consider Figure 6-11. The amount of the tax per unit is a. $1.50. b. $2.00. c. $2.50. d. $3.00. 26. Consider Figure 6-11. From the appearance of the graph, it is apparent that, for every unit of the good that is sold, a. sellers are required to send one dollar to the government and buyers are required to send two dollars to the government. b. sellers are required to send two dollars to the government and buyers are required to send one dollar to the government. c. sellers are required to send three dollars to the government and buyers are required to send nothing to the government. d. sellers are required to send nothing to the government and buyers are required to send two dollars to the government. 27. Consider Figure 6-11. Which of the following statements correctly characterizes the burden of the tax? a. One-fourth of the burden falls on buyers and three-fourths of the burden falls on sellers. b. One-third of the burden falls on buyers and two-thirds of the burden falls on sellers. c. One-half of the burden falls on buyers and one-half of the burden falls on sellers. d. Two-thirds of the burden falls on buyers and one-third of the burden falls on sellers. 28. Consider Figure 6-11. Suppose the demand curve is not the one drawn on the graph; instead, the demand curve is a vertical line passing through the point (Q = 10, P = 5). Using the two supply curves that are drawn, which of the following statements would describe the effects of the tax correctly? a. The price paid by buyers would be $9. b. The price received by sellers (after paying the tax) would be $6.50. c. The government would collect $27 from the tax. d. Buyers of the good would bear 100 percent of the burden of the tax. 29. When a payroll tax is enacted, a. the wage received by workers falls and the wage paid by firms rises. b. the wage received by workers falls and the wage paid by firms falls. c. the wage received by workers rises and the wage paid by firms falls. d. the wage received by workers rises and the wage paid by firms rises. 30. Most labor economists believe that the supply of labor is

a. less elastic than demand and, therefore, firms bear most of the burden of the payroll tax. b. less elastic than demand and, therefore, workers bear most of the burden of the payroll tax. c. more elastic than demand and, therefore, workers bear most of the burden of the payroll tax. d. more elastic than demand and, therefore, firms bear most of the burden of the payroll tax. Figure 6-12 31. Refer to Figure 6-12. In which market will the majority of the tax burden fall on the seller? a. market (a) b. market (b) c. market (c) d. All of the above are correct. 32. Refer to Figure 6-12. In which market will the tax burden be most equally divided between the buyer and the seller? a. market (a) b. market (b) c. market (c) d. All of the above are correct. Figure 6-13

33. Refer to Figure 6-13. The effective price that will be paid by buyers after the tax is a. P 0. b. P 1. c. P 2. d. impossible to determine. 34. Refer to Figure 6-13 The per-unit burden of the tax on sellers is a. P 2 minus P 0. b. P 2 minus P 1. c. P 1 minus P 0. d. Q 1 minus Q 0. Figure 6-14. 35. Refer to Figure 6-14. The effective price that buyers will pay after the tax is imposed is a. $24. b. $16. c. $10. d. $8.

36. Which of the following was not a result of the luxury tax imposed by Congress in 1990? a. The larger part of the tax burden fell on sellers. b. The larger part of the tax burden fell more on the middle class than on the rich. c. Even the wealthy demanded fewer luxury goods. d. The tax was never repealed or even modified. 37. The demand for salt is inelastic and the supply of salt is elastic. The demand for caviar is elastic and the supply of caviar is inelastic. Suppose that a tax of $1 per pound is levied on the sellers of salt and a tax of $1 per pound is levied on the buyers of caviar. We would expect that most of the burden of these taxes will fall on a. sellers of salt and the buyers of caviar. b. sellers of salt and the sellers of caviar. c. buyers of salt and the sellers of caviar. d. buyers of salt and the buyers of caviar. 38. Suppose the demand for macaroni is inelastic and the supply of macaroni is elastic, and the demand for cigarettes is inelastic and the supply of cigarettes is elastic. If a tax were levied on the sellers of both of these commodities, we would expect that the a. burden of both taxes would fall more heavily on the buyers than on the sellers. b. burden of the macaroni tax would fall more heavily on the sellers than on the buyers, and the burden of the cigarette tax would fall more heavily on the buyers than on the sellers. c. burden of the macaroni tax would fall more heavily on the buyers than on the sellers, and the burden of the cigarette tax would fall more heavily on the sellers than on the buyers. d. burden of both taxes would fall more heavily on the sellers than on the buyers. 39. One of the basic principles of economics is that markets are usually a good way to organize economic activity. This principle is explained by the study of a. factor markets. b. energy markets. c. welfare economics. d. labor economics. 40. A consumer's willingness to pay directly measures a. the extent to which advertising and other external forces have influenced the consumer s decisions regarding his or her purchases of goods and services. b. the cost of a good to the buyer. c. how much a buyer values a good. d. consumer surplus. 41. If a consumer is willing and able to pay $20 for a particular good and if he pays $16 for the good, then for that consumer, consumer surplus amounts to a. $4. b. $16. c. $20. d. $36. 42. Shannon buys a new CD player for her car for $135. She receives consumer surplus of $25 on her purchase if her willingness to pay is a. $25. b. $110. c. $135. d. $160.

43. Noah drinks Dr. Pepper. He can buy as many cans of Dr. Pepper as he wishes at a price of $0.50 per can. On a particular day, he is willing to pay $0.95 for the first can, $0.80 for the second can, $0.60 for the third can, and $0.40 for the fourth can. Assume Noah is rational in deciding how many cans to buy. His consumer surplus is a. $0.50. b. $0.85. c. $1.05. d. $1.20. Table 7-1 BUYER WILLINGNESS TO PAY MIKE $50.00 SANDY $30.00 JONATHAN $20.00 HALEY $10.00 44. Refer to Table 7-1. If the table represents the willingness to pay of four buyers and the price of the product is $15, then who would be willing to purchase the product? a. Mike b. Mike and Sandy c. Mike, Sandy, and Jonathan d. Mike, Sandy, Jonathan, and Haley 45. Consumer surplus is the a. amount of a good consumers get without paying anything for it. b. amount a consumer pays minus the amount the consumer is willing to pay. c. amount a consumer is willing to pay minus the amount the consumer actually pays. d. value of a good to a consumer. 46. Suppose there is an early freeze in California that reduces the size of the lemon crop. What happens to consumer surplus in the market for lemons? a. It increases. b. It decreases. c. It is not affected by this change in market forces. d. We would have to know whether the demand for lemons is elastic or inelastic to make this determination. This table refers to five possible buyers' willingness to pay for a case of Vanilla Coke. Table 7-2 BUYER WILLINGNESS TO PAY DAVID $8.50 LAURA $7.00 MEGAN $5.50 MALLORY $4.00 AUDREY $3.50 47. Refer to Table 7-2. If the market price is $3.80, a. David s consumer surplus is $4.70 and total consumer surplus for the five individuals is $9.50. b. Megan s consumer surplus is $1.70 and total consumer surplus for the five individuals is

$9.80. c. David, Laura, and Megan will be the only buyers of Vanilla Coke. d. the demand curve for Vanilla Coke, taking the five individuals into account, is horizontal. Table 7-3 For each of three potential buyers of oranges, the table displays the willingness to pay for the first three oranges of the day. Assume Alex, Barb, and Carlos are the only three buyers of oranges, and only three oranges can be supplied per day. First Orange Second Orange Third Orange Alex $2.00 $1.50 $0.75 Barb $1.50 $1.00 $0.80 Carlos $0.75 $0.25 $0 48. Refer to Table 7-3. If the market price of an orange increases from $0.60 to $1.05, total consumer surplus a. increases by $2.90. b. decreases by $2.25. c. decreases by $2.70. d. decreases by $3.85. 49. Refer to Table 7-3. Who experiences the largest gain in consumer surplus when the price of an orange decreases from $1.05 to $0.75? a. Alex b. Barb c. Carlos d. Alex and Barb experience the same gain in consumer surplus, and Carlos s gain is zero. Figure 7-1 50. Refer to Figure 7-1. When the price rises from P 1 to P 2, consumer surplus a. increases by an amount equal to A. b. decreases by an amount equal to B + C. c. increases by an amount equal to B + C. d. decreases by an amount equal to C. 51. Which of the following statements is not correct?

a. A seller would be eager to sell her product at a price higher than her cost. b. A seller would refuse to sell her product at a price lower than her cost. c. A seller would be indifferent about selling her product at a price equal to her cost. d. Since sellers cannot set the price for their product, they must be willing to sell their product at any price. 52. Producer surplus is the a. area under the supply curve to the left of the amount sold. b. amount a seller is paid minus the cost of production. c. area between the supply and demand curves, above the equilibrium price. d. cost to sellers of participating in a market. The following table represents the costs of five possible sellers. Table 7-4 SELLER COST DALE $1,500 JILL $1,200 DENISE $1,000 CATHERINE $750 JACKSON $500 53. Refer to Table 7-4. Who is a marginal seller when the price is $1,200? a. only Jill b. Jill and Dale c. only Denise, Catherine, and Jackson d. Denise, Catherine, Jackson, and Jill 54. Donald produces nails at a cost of $200 per ton. If he sells the nails for $350 per ton, his producer surplus per ton is a. $150. b. $200. c. $350. d. $550. Market Supply and Demand for Pepperoni Pizza Table 7-5 PRICE QUANTITY DEMANDED QUANTITY SUPPLIED $12.00 0 12 $10.00 4 10 $ 8.00 8 8 $ 6.00 12 6 $ 4.00 16 4 $ 2.00 20 2 55. Refer to Table 7-5. At a price of $4.00, total surplus is a. more than it would be at the equilibrium price. b. less than it would be at the equilibrium price. c. the same as it would be at the equilibrium price.

d. There is insufficient information to make this determination. 56. Refer to Table 7-5. As the table suggests, the demand curve is a straight line and so is the supply curve. Taking this into account, when there is equilibrium, consumer surplus is a. $4. b. $8. c. $12. d. $16. 57. Refer to Table 7-5. As the table suggests, the demand curve is a straight line and so is the supply curve. Take this into account and suppose the price is $8, with only 4 pizzas being bought and sold. Total surplus amounts to a. $20. b. $30. c. $36. d. $40. 58. Efficiency in a market is achieved when a. a social planner intervenes and sets the quantity of output after evaluating buyers' willingness to pay and sellers' costs. b. the sum of producer surplus and consumer surplus is maximized. c. all firms are producing the good at the same low cost per unit. d. no buyer is willing to pay more than the equilibrium price for any unit of the good. 59. In a market, total surplus is a. equal to producer surplus plus consumer surplus. b. equal to the total cost to sellers minus the total value to buyers. c. equal to consumers' willingness to pay plus producers cost. d. greater than the sum of consumer surplus plus producer surplus. Figure 7-8 60. Refer to Figure 7-8. Buyers who value this good more than price are represented by which line segment? a. AC. b. CE. c. BC. d. CD. 61. Refer to Figure 7-8. Sellers whose costs are greater than price are represented by segment

a. AC. b. CE. c. BC. d. CD. 62. Total surplus in a market is equal to a. Consumer surplus + Producer surplus. b. Value to buyers - Amount paid by buyers. c. Amount received by sellers - Costs of sellers. d. Producer surplus - Consumer surplus. Figure 7-9 63. Refer to Figure 7-9. At the equilibrium price, consumer surplus is a. $480. b. $640. c. $1,120. d. $1,280. 64. Refer to Figure 7-9. Assume demand increases and as a result, equilibrium price increases to $22 and equilibrium quantity increases to 110. The increase in producer surplus to producers already in the market would be equal to a. $90. b. $210. c. $360. d. $480. Figure 7-10

65. Refer to Figure 7-10. At the market-clearing equilibrium, total producer surplus is represented by the area a. F. b. F + G. c. D + E + F. d. D + E + F + G + H. Figure 7-11. On the graph below, Q represents the quantity of the good and P represents the good's price. 66. Refer to Figure 7-11. At the equilibrium, producer surplus is measured by the area a. ACG. b. AFG. c. DBG. d. CFG. 67. Moving production from a high-cost producer to a low-cost producer will a. lower total surplus. b. raise total surplus.

c. lower producer surplus. d. raise producer surplus but lower consumer surplus. 68. Inefficiency exists in an economy when a good is a. not being consumed by buyers who value it most highly. b. not distributed fairly among buyers. c. not produced because buyers do not value it very highly. d. being produced with less than all available resources. 69. If the government allowed a free market for transplant organs (such as kidneys) to exist, a. the shortage of organs would be eliminated and there would be no surplus of organs. b. the shortage of organs would be eliminated, but a surplus of organs would develop. c. the shortage of organs would persist. d. the overall well-being of society would remain unchanged. 70. The "invisible hand" is a. used to describe the welfare system in the United States. b. a concept developed by Adam Smith to describe the virtues of free markets. c. a concept used by J.M. Keynes to describe the role of government in guiding the allocation of resources in the economy. d. a term used by some economists to characterize the role of government in an economy-- inevitable but invisible. 71. Laissez-faire is a French expression which literally means a. to make do. b. to get involved. c. whatever works. d. allow them to do. 72. The French expression used by free-market advocates, which literally translates as "allow them to do," is a. laissez-faire. b. je ne sais pas. c. si'l vous plait. d. tête-à-tête. 73. If a market is allowed to move freely to its equilibrium price and quantity, then an increase in supply will a. increase consumer surplus. b. reduce consumer surplus. c. not affect consumer surplus. d. increase or decrease consumer surplus or leave consumer surplus unchanged. 74. Cornflakes and milk are complementary goods. A decrease in the price of corn will a. increase consumer surplus in the market for cornflakes and decrease producer surplus in the market for milk. b. increase consumer surplus in the market for cornflakes and increase producer surplus in the market for milk. c. decrease consumer surplus in the market for cornflakes and increase producer surplus in the market for milk. d. decrease consumer surplus in the market for cornflakes and decrease producer surplus in the market for milk. 75. Inefficiency can be caused in a market by the presence of a. market power. b. externalities. c. imperfectly competitive markets. d. All of the above are correct. 76. Anger over British taxes played a significant role in bringing about

a. the election of John Adams as the second American president. b. the American Revolution. c. the War of 1812. d. the no new taxes clause in the U.S. Constitution. 77. When a good is taxed, a. both buyers and sellers of the good are made worse off. b. only buyers are made worse off, because they ultimately bear the burden of the tax. c. only sellers are made worse off, because the government holds them responsible for sending in the tax payments. d. neither buyers nor sellers are made worse off, since tax revenue is used to provide goods and services that would otherwise not be provided in a market economy. 78. One result of a tax, irrespective of whether the tax is placed on the buyers or the sellers, is that the a. size of the market is unchanged. b. price the seller effectively receives is higher. c. supply curve for the good shifts upward by the amount of the tax. d. tax reduces the welfare of both buyers and sellers. 79. When a tax is placed on the buyers of a product, a result is that a. buyers effectively pay less than before and sellers effectively receive less than before. b. buyers effectively pay less than before and sellers effectively receive more than before. c. buyers effectively pay more than before and sellers effectively receive less than before. d. buyers effectively pay more than before and sellers effectively receive more than before. 80. Suppose a tax is levied on the buyers of a good; a. then the supply curve shifts upward by the amount of the tax. b. then the quantity supplied decreases for all conceivable prices of the good. c. this means that the buyers of the good will send tax payments to the government. d. this means that the buyers of the good will pay a higher effective price for the good, not that they will send tax payments to the government. 81. Suppose a tax of $3 per unit is imposed on a good. The supply curve and the demand curve are straight lines. The tax decreases consumer surplus by $3,900 and it decreases producer surplus by $3,000. The tax generates tax revenue of $6,000. From this information it follows that the tax decreased the equilibrium quantity of the good a. from 2,000 to 1,500. b. from 2,400 to 2,000. c. from 2,600 to 2,000. d. from 3,000 to 2,400. 82. For a good that is taxed, the area on the relevant supply-and-demand graph that represents government s tax revenue is a. smaller than the area that represents the loss of consumer surplus and producer surplus caused by the tax. b. bounded by the supply curve, the demand curve, the effective price paid by buyers, and the effective price received by sellers. c. a right triangle. d. a triangle, but not necessarily a right triangle. 83. The loss in total surplus resulting from a tax is called a. a deficit. b. economic loss. c. deadweight loss. d. inefficiency.

84. Suppose the equilibrium quantity in the market for widgets is 200 per month when there is no tax. Then a tax of $5 per widget is imposed. As a result, the government is able to raise $750 per month in tax revenue. We can conclude that the equilibrium quantity of widgets has fallen by a. 25 per month. b. 50 per month. c. 75 per month. d. 100 per month. Figure 8-2 85. Refer to Figure 8-2. The per-unit burden of the tax on sellers is a. P 3 - P 1. b. P 3 - P 2. c. P 2 - P 1. d. Q 2 - Q 1. Figure 8-4 86. Refer to Figure 8-4. The price that buyers effectively pay after the tax is imposed is a. P 1. b. P 2. c. P 3.

d. impossible to determine from the figure. 87. Refer to Figure 8-4. The price that sellers effectively receive after the tax is imposed is a. P 1. b. P 2. c. P 3. d. impossible to determine from the figure. 88. Refer to Figure 8-4. After the tax is levied, consumer surplus is represented by area a. A. b. A + B + C. c. D + E + F. d. F. 89. Refer to Figure 8-4. After the tax is levied, producer surplus is represented by area a. A. b. A + B + C. c. D + E + F. d. F. 90. Refer to Figure 8-4. The tax causes a reduction in producer surplus that is represented by area a. A. b. B + C. c. D + E. d. F. Figure 8-5 91. Refer to Figure 8-5. Without a tax, total surplus in this market is a. $3,000. b. $4,800. c. $6,000. d. $7,200. 92. Refer to Figure 8-5. The tax results in a deadweight loss that amounts to

a. $600. b. $900. c. $1,500. d. $1,800. 93. Suppose a tax of $1 per unit is imposed on a good. The more elastic the supply of the good, other things equal, a. the smaller is the response of quantity supplied to the tax. b. the larger is the tax burden on sellers relative to the tax burden on buyers. c. the larger is the deadweight loss of the tax. d. All of the above are correct. 94. Assume the price of gasoline is $2.00 per gallon and the equilibrium quantity of gasoline is 10 million gallons per day with no tax on gasoline. Starting from this initial situation, which of the following scenarios would result in the largest deadweight loss? a. The price elasticity of demand for gasoline is 0.1; the price elasticity of supply for gasoline is 0.6; and the gasoline tax amounts to $0.20 per gallon. b. The price elasticity of demand for gasoline is 0.1; the price elasticity of supply for gasoline is 0.4; and the gasoline tax amounts to $0.20 per gallon. c. The price elasticity of demand for gasoline is 0.2; the price elasticity of supply for gasoline is 0.6; and the gasoline tax amounts to $0.30 per gallon. d. There is insufficient information to make this determination. 95. Concerning the labor market and taxes on labor, economists disagree about a. the size of the tax on labor. b. the size of the deadweight loss of the tax on labor. c. whether or not a tax on labor places a wedge between the wage that firms pay and the wage that workers receive. d. All of the above are correct. 96. The Social Security tax is a tax on a. capital. b. labor. c. consumption expenditures. d. earnings during retirement. 97. The higher a country's tax rates, the more likely that country will be a. at the top of the Laffer curve. b. on the positively sloped part of the Laffer curve. c. on the negatively sloped part of the Laffer curve. d. experiencing small deadweight losses. 98. As the tax on a good increases from $1 per unit to $2 per unit to $3 per unit and so on, a. the tax revenue increases at first, but it eventually peaks and then decreases. b. the deadweight loss increases at first, but it eventually peaks and then decreases. c. the tax revenue always increases and the deadweight loss always increases. d. the tax revenue always decreases and the deadweight loss always increases. Short Answer 99. Using a supply-demand diagram, show a labor market with a binding minimum wage. Now, use the diagram to show those who are helped by the minimum wage, and those who are hurt by the minimum wage. 100. a. Using the graph shown, analyze the effect a $300 price ceiling would have on the

market for ten-speed bicycles. Would this be a binding price ceiling? b. Using the graph shown, analyze the effect a $700 price floor would have on this market. Would this be a binding price floor? c. Why would policymakers choose to impose a price ceiling or price floor? 101. Using the graph shown, answer the following questions. a. What was the equilibrium price in this market before the tax? b. What is the amount of the tax? c. How much of the tax will the buyers pay? d. How much of the tax will the sellers pay? e. How much will the buyer pay for the product after the tax is imposed? f. How much will the seller receive after the tax is imposed? g. As a result of the tax, what has happened to the level of market activity? 102. Using the graph shown, answer the following questions. a. What was the equilibrium price in this market before the tax? b. What is the amount of the tax? c. How much of the tax will the buyers pay?

d. How much of the tax will the sellers pay? e. How much will the buyer pay for the product after the tax is imposed? f. How much will the seller receive after the tax is imposed? g. As a result of the tax, what has happened to the level of market activity? 103. Using the graph shown, answer the following questions. a. What was the equilibrium price and quantity in this market before the tax? b. What is the amount of the tax? c. How much of the tax will the buyers pay? d. How much of the tax will the sellers pay? e. How much will the buyer pay for the product after the tax is imposed? f. How much will the seller receive after the tax is imposed? g. As a result of the tax, what has happened to the level of market activity? 104. How does elasticity affect the burden of a tax? Justify your answer using supply and demand diagrams. 105. Answer each of the following questions about demand and consumer surplus. a. What is consumer surplus, and how is it measured? b. What is the relationship between the demand curve and the willingness to pay?

c. Other things equal, what happens to consumer surplus if the price of a good falls? Why? Illustrate using a demand curve. d. In what way does the demand curve represent the benefit consumers receive from participating in a market? In addition to the demand curve, what else must be considered to determine consumer surplus? 106. Tammy loves donuts. The table shown reflects the value Tammy places on each donut she eats: VALUE OF FIRST DONUT $0.60 VALUE OF SECOND DONUT $0.50 VALUE OF THIRD DONUT $0.40 VALUE OF FOURTH DONUT $0.30 VALUE OF FIFTH DONUT $0.20 VALUE OF SIXTH DONUT $0.10 a. Use this information to construct Tammy's demand curve for donuts. b. If the price of donuts is $0.20, how many donuts will Tammy buy? c. Show Tammy's consumer surplus on your graph. How much consumer surplus would she have at a price of $0.20? d. If the price of donuts rose to $0.40, how many donuts would she purchase now? What would happen to Tammy's consumer surplus? Show this change on your graph. 107. Answer each of the following questions about supply and producer surplus. a. What is producer surplus, and how is it measured? b. What is the relationship between the cost to sellers and the supply curve? c. Other things equal, what happens to producer surplus when the price of a good rises? Illustrate your answer on a supply curve. 108. Given the following equations two equations: 1) Total Surplus = Consumer Surplus + Producer Surplus 2) Total Surplus = Value to Buyers - Cost to Sellers Show how equation (1) can be used to derive equation (2). 109. Answer the following questions based on the graph that represents J.R.'s demand for ribs per week of ribs at Judy's rib shack. a. At the equilibrium price, how many ribs would J.R. be willing to purchase? b. How much is J.R. willing to pay for 20 ribs? c. What is the magnitude of J.R.'s consumer surplus be at the equilibrium price? d. At the equilibrium price, how many ribs would Judy be willing to sell? e. How high must the price of ribs be for Judy to supply 20 ribs to the market? f. At the equilibrium price, what is the magnitude of total surplus in the market? g. If the price of ribs rose to $10, what would happen to J.R.'s consumer surplus? h. If the price of ribs fell to $5, what would happen to Judy's producer surplus? i. Explain why the graph that is shown verifies the fact that the market equilibrium (quantity) maximizes the sum of producer and consumer surplus.

110. Using the graph shown, determine the value of each of the following: a. equilibrium price before the tax b. consumer surplus before the tax c. producer surplus before the tax d. total surplus before the tax e. consumer surplus after the tax f. producer surplus after the tax g. total tax revenue to the government h. total surplus (consumer surplus + producer surplus + tax revenue) after the tax i. deadweight loss

111. John has been in the habit of mowing Willa's lawn each week for $20. John's opportunity cost is $15, and Willa would be willing to pay $25 to have her lawn mowed. What is the maximum tax the government can impose on lawn mowing without discouraging John and Willa from continuing their mutually beneficial arrangement? 112. Use the following graph shown to fill in the table that follows. Consumer surplus Producer surplus Tax revenue Total surplus WITHOUT TAX WITH TAX CHANGE

113. Using demand and supply diagrams, show the difference in deadweight loss between (a) a market with inelastic demand and supply and (b) a market with elastic demand and supply. 114. Illustrate on three demand-and-supply graphs how the size of a tax (small, medium and large) can alter total revenue and deadweight loss.

Chapters 6, 7 & 8 Review Questions Answer Section MULTIPLE CHOICE 1. ANS: C DIF: 2 REF: 6-1 TOP: Price ceilings 2. ANS: A DIF: 2 REF: 6-1 TOP: Price ceilings, Shortages 3. ANS: B DIF: 2 REF: 6-1 TOP: Price ceilings, Shortages 4. ANS: A DIF: 2 REF: 6-1 TOP: Price ceilings 5. ANS: D DIF: 2 REF: 6-1 TOP: Price ceilings, Shortages 6. ANS: B DIF: 2 REF: 6-1 TOP: Price floors, Surpluses 7. ANS: C DIF: 2 REF: 6-1 TOP: Price floors, Surpluses 8. ANS: C DIF: 2 REF: 6-1 TOP: Price ceilings, Price floors 9. ANS: D DIF: 3 REF: 6-1 TOP: Price ceilings, Price floors MSC: Analytical 10. ANS: A DIF: 2 REF: 6-1 TOP: Price ceilings 11. ANS: A DIF: 2 REF: 6-1 TOP: OPEC, Price ceilings 12. ANS: B DIF: 2 REF: 6-1 TOP: Rent control, Quantity demanded, Quantity supplied 13. ANS: D DIF: 1 REF: 6-1 TOP: Rent control 14. ANS: D DIF: 2 REF: 6-1 TOP: Rent control 15. ANS: C DIF: 2 REF: 6-1 TOP: Rent control MSC: Definitional 16. ANS: A DIF: 2 REF: 6-1 TOP: Minimum wage, Quantity demanded, Quantity supplied 17. ANS: B DIF: 2 REF: 6-1 TOP: Minimum wage, Surpluses 18. ANS: D DIF: 2 REF: 6-1 TOP: Prices, Market economy 19. ANS: A DIF: 2 REF: 6-1 TOP: Rent control, Quantity supplied 20. ANS: A DIF: 2 REF: 6-2 TOP: Tax, Equilibrium price 21. ANS: A DIF: 2 REF: 6-2 TOP: Tax 22. ANS: C DIF: 3 REF: 6-2

TOP: Tax, Equilibrium price, Equilibrium quantity MSC: Analytical 23. ANS: C DIF: 2 REF: 6-2 TOP: Tax incidence 24. ANS: B DIF: 2 REF: 6-2 TOP: Tax incidence 25. ANS: D DIF: 2 REF: 6-2 TOP: Tax 26. ANS: C DIF: 2 REF: 6-2 TOP: Tax 27. ANS: D DIF: 2 REF: 6-2 TOP: Tax burden 28. ANS: D DIF: 3 REF: 6-3 TOP: Tax burden MSC: Analytical 29. ANS: A DIF: 2 REF: 6-2 TOP: Payroll taxes, Wages 30. ANS: B DIF: 2 REF: 6-2 TOP: Labor supply, Payroll tax 31. ANS: A DIF: 2 REF: 6-2 TOP: Tax burden 32. ANS: C DIF: 2 REF: 6-2 TOP: Tax burden 33. ANS: C DIF: 2 REF: 6-2 TOP: Tax, Equilibrium price 34. ANS: C DIF: 2 REF: 6-2 TOP: Tax burden 35. ANS: A DIF: 2 REF: 6-2 TOP: Tax, Equilibrium price 36. ANS: D DIF: 2 REF: 6-2 TOP: Luxury tax 37. ANS: C DIF: 3 REF: 6-2 TOP: Elasticity, Tax incidence 38. ANS: A DIF: 3 REF: 6-2 TOP: Elasticity, Tax incidence 39. ANS: C DIF: 1 REF: 7-0 TOP: Welfare economics 40. ANS: C DIF: 2 REF: 7-1 TOP: Price, Value 41. ANS: A DIF: 1 REF: 7-1 TOP: Consumer surplus 42. ANS: D DIF: 1 REF: 7-1 TOP: Consumer surplus 43. ANS: B DIF: 2 REF: 7-1 TOP: Consumer surplus 44. ANS: C DIF: 2 REF: 7-1 TOP: Price, Value 45. ANS: C DIF: 1 REF: 7-1 TOP: Consumer surplus MSC: Definitional 46. ANS: B DIF: 2 REF: 7-1 TOP: Consumer surplus, Shifts of curves

47. ANS: B DIF: 2 REF: 7-1 TOP: Consumer surplus 48. ANS: B DIF: 3 REF: 7-1 TOP: Consumer surplus 49. ANS: D DIF: 3 REF: 7-1 TOP: Consumer surplus 50. ANS: B DIF: 2 REF: 7-1 TOP: Consumer surplus 51. ANS: D DIF: 2 REF: 7-2 TOP: Sellers 52. ANS: B DIF: 2 REF: 7-2 TOP: Producer surplus MSC: Definitional 53. ANS: A DIF: 2 REF: 7-2 TOP: Marginal sellers 54. ANS: A DIF: 1 REF: 7-2 TOP: Producer surplus 55. ANS: B DIF: 2 REF: 7-3 TOP: Total surplus 56. ANS: D DIF: 3 REF: 7-3 TOP: Consumer surplus 57. ANS: C DIF: 3 REF: 7-3 TOP: Total surplus 58. ANS: B DIF: 2 REF: 7-3 TOP: Efficiency 59. ANS: A DIF: 1 REF: 7-3 TOP: Total surplus MSC: Definitional 60. ANS: A DIF: 1 REF: 7-3 TOP: Price, Value 61. ANS: D DIF: 1 REF: 7-3 TOP: Sellers, Price 62. ANS: A DIF: 1 REF: 7-3 TOP: Total surplus MSC: Definitional 63. ANS: A DIF: 3 REF: 7-3 TOP: Consumer surplus 64. ANS: D DIF: 3 REF: 7-3 TOP: Producer surplus 65. ANS: C DIF: 2 REF: 7-3 TOP: Producer surplus 66. ANS: D DIF: 1 REF: 7-3 TOP: Producer surplus 67. ANS: B DIF: 2 REF: 7-3 TOP: Total surplus 68. ANS: A DIF: 2 REF: 7-3 TOP: Inefficiency 69. ANS: A DIF: 2 REF: 7-3 TOP: Price ceilings, Inefficiency 70. ANS: B DIF: 2 REF: 7-3 TOP: Invisible hand

71. ANS: D DIF: 1 REF: 7-3 TOP: Laissez-faire policy MSC: Definitional 72. ANS: A DIF: 1 REF: 7-3 TOP: Laissez-faire policy MSC: Definitional 73. ANS: A DIF: 2 REF: 7-3 TOP: Consumer surplus 74. ANS: B DIF: 3 REF: 7-3 TOP: Consumer surplus, Producer surplus 75. ANS: D DIF: 2 REF: 7-4 TOP: Market failures 76. ANS: B DIF: 1 REF: 8-0 TOP: Taxes MSC: Definitional 77. ANS: A DIF: 2 REF: 8-1 TOP: Taxes, Economic welfare 78. ANS: D DIF: 2 REF: 8-1 TOP: Tax, Economic welfare 79. ANS: C DIF: 2 REF: 8-1 TOP: Tax, Equilibrium price 80. ANS: C DIF: 2 REF: 8-1 TOP: Tax, Buyers MSC: Definitional 81. ANS: C DIF: 3 REF: 8-1 TOP: Consumer surplus, Producer surplus, Deadweight losses MSC: Analytical 82. ANS: A DIF: 3 REF: 8-1 TOP: Tax, Government 83. ANS: C DIF: 1 REF: 8-1 TOP: Deadweight losses MSC: Definitional 84. ANS: B DIF: 3 REF: 8-1 TOP: Tax, Quantity demanded 85. ANS: C DIF: 3 REF: 8-1 TOP: Tax burden 86. ANS: C DIF: 2 REF: 8-1 TOP: Tax, Equilibrium price 87. ANS: B DIF: 2 REF: 8-1 TOP: Tax, Equilibrium price 88. ANS: A DIF: 2 REF: 8-1 TOP: Tax, Consumer surplus 89. ANS: D DIF: 2 REF: 8-1 TOP: Tax, Producer surplus 90. ANS: C DIF: 2 REF: 8-1 TOP: Tax, Producer surplus 91. ANS: C DIF: 2 REF: 8-1 TOP: Total surplus 92. ANS: C DIF: 3 REF: 8-1 TOP: Deadweight losses 93. ANS: C DIF: 3 REF: 8-2 TOP: Price elasticity of supply, Deadweight losses 94. ANS: C DIF: 3 REF: 8-2 TOP: Deadweight losses

95. ANS: B DIF: 2 REF: 8-2 TOP: Economists, Taxes 96. ANS: B DIF: 1 REF: 8-2 TOP: Tax, Social Security 97. ANS: C DIF: 2 REF: 8-3 TOP: Laffer curve 98. ANS: A DIF: 2 REF: 8-3 TOP: Deadweight losses SHORT ANSWER 99. ANS: Those helped by the minimum wage are the workers who are still employed, but now receive the higher wage. In the diagram, those would be measured by the quantity of labor demanded at the minimum wage. Those who are hurt by the minimum wage are those who are now unemployed. These workers are measured as the difference between the quantity of labor supplied and the quantity demanded at the minimum wage. The perceptive student might note that the unemployed group can be divided into those who lose their jobs as a result of the minimum wage (the competitive equilibrium quantity of labor minus the quantity demanded at the minimum wage), and those who enter the market as a result of the higher wage, but cannot find employment (quantity of labor supplied at the minimum wage minus the competitive equilibrium quantity). The buyers of the labor (employers) are also worse off because they have to pay a higher wage for labor and, hence, hire a smaller quantity. DIF: 2 REF: 6-1 TOP: Minimum wage 100. ANS: a. For this example, a $300 price ceiling would cause a shortage of 4,000 bicycles. A

price ceiling is binding if it is set at any price below equilibrium price. Since the equilibrium price in the market is $500, this would be a binding price ceiling. b. For this example, a $700 price floor would cause a surplus of 4,000 bicycles. A price floor is binding if it is set at any price above equilibrium price. Since the equilibrium price in the market is $500, this would be a binding price floor. c. More than one reason may exist for policymakers to impose a price ceiling or price floor in a market. Often this is done in an attempt to increase equity. DIF: 2 REF: 6-1 TOP: Price ceilings, Price Floors 101. ANS: a. $10 b. $3 c. $1 d. $2 e. $11 f. $8 g. As a result of the tax, the level of market activity has fallen, from 100 units being bought and sold to only 90 units being bought and sold. DIF: 2 REF: 6-2 TOP: Tax, Tax incidence 102. ANS: a. $10.00 b. $5.00 c. $2.50 d. $2.50 e. $12.50 f. $7.50 g. As a result of the tax, the level of market activity has fallen, from 100 units being bought and sold to only 80 units being bought and sold. DIF: 2 REF: 6-2 TOP: Tax, Tax incidence 103. ANS: a. Equilibrium price is $8 and equilibrium is 8,000 units. b. The tax is $3.00. c. Buyers will pay $1.00. d. Sellers will pay $2.00. e. $9.00 f. $6.00 g. Instead of 8,000 units being bought and sold, only 6,000 will be bought and sold. DIF: 2 REF: 6-2 TOP: Tax, Tax incidence 104. ANS:

DIF: 3 REF: 6-2 TOP: Tax incidence, Elasticity MSC: Analytical 105. ANS: a. Consumer surplus measures the benefit to buyers of participating in a market. It is measured as the amount a buyer is willing to pay for a good minus the amount a buyer actually pays for it. For an individual purchase, consumer surplus is the difference between the willingness to pay, as shown on the demand curve, and the market price. For the market, total consumer surplus is the area under the demand curve and above the price, from the origin to the quantity purchased. b. Because the demand curve shows the maximum amount buyers are willing to pay for a given market quantity, the price given by the demand curve represents the willingness to pay of the marginal buyer. c. When the price of a good falls, consumer surplus increases for two reasons. First, those buyers who were already buying the good receive an increase in consumer surplus because they are paying less (area B). Second, some new buyers enter the market because the price of the good is now lower than their willingness to pay (area C); hence, there is additional consumer surplus generated from their purchases. The graph should show that as price falls from P 2 to P 1, consumer surplus increases from area A to area A + B + C. d. Since the demand curve represents the maximum price the marginal buyer is willing to

pay for a good, it must also represent the maximum benefit the buyer expects to receive from consuming the good. Consumer surplus must take into account the amount the buyer actually pays for the good, with consumer surplus measured as the difference between what the buyer is willing to pay and what he/she actually paid. Consumer surplus, then, measures the benefit the buyer didn't have to "pay for." DIF: 2 REF: 7-1 TOP: Demand, Consumer surplus 106. ANS: a. b. At a price of $0.20, Tammy would buy 5 donuts. c. The figure below shows Tammy's consumer surplus. At a price of $0.20, Tammy's consumer surplus would be $1.00.

d. If the price of donuts rose to $0.40, Tammy's consumer surplus would fall to $0.30 and she would purchase only 3 donuts. DIF: 2 REF: 7-1 TOP: Demand, Consumer surplus 107. ANS: a. Producer surplus measures the benefit to sellers of participating in a market. It is measured as the amount a seller is paid minus the cost of production. For an individual sale, producer surplus is measured as the difference between the market price and the cost of production, as shown on the supply curve. For the market, total producer surplus is measured as the area above the supply curve and below the market price, between the origin and the quantity sold. b. Because the supply curve shows the minimum amount sellers are willing to accept for a given quantity, the supply curve represents the cost of the marginal seller. c. When the price of a good rises, producer surplus increases for two reasons. First, those sellers who were already selling the good have an increase in producer surplus because the price they receive is higher (area A). Second, new sellers will enter the market because the price of the good is now higher than their willingness to sell (area B); hence,

there is additional producer surplus generated from their sales. The graph should show that as price rises from P 1 to P 2, producer surplus increases from area C to area A + B + C. DIF: 2 REF: 7-2 TOP: Supply, Producer surplus 108. ANS: Start with the equation: Total Surplus = Consumer Surplus + Producer Surplus. Then, since Consumer Surplus = Value to buyers - Amount paid by buyers, and since Producer Surplus = Amount received by sellers - Costs of sellers, then Total Surplus can be written as: Value to buyers - Amount paid by buyers + Amount received by sellers - Costs of sellers. Since the Amount paid by buyers equals the Amount received by sellers, the middle two terms cancel out and the result is: Total Surplus = Value to buyers - Costs of sellers. DIF: 2 REF: 7-3 TOP: Total surplus 109. ANS: a. 40 b. $10.00 c. $80.00. d. 40 e. $5 f. $200 g. It would fall from $80 to only $20. h. It would fall from $120 to only $30. i. At quantities less than the equilibrium quantity, the value to buyers exceeds the cost to sellers. Increasing the quantity in this region raises total surplus until equilibrium quantity is reached. At quantities greater than the equilibrium quantity, the cost to sellers exceeds the value to buyers and total surplus falls. DIF: 3 REF: 7-3 TOP: Consumer surplus, Producer surplus, Total surplus 110. ANS:

a. $10 b. $3600 c. $2400 d. $6000 e. $900 f. $600 g. $3000 h. $4500 i. $1500 DIF: 3 REF: 8-1 TOP: Tax, Economic welfare 111. ANS: If the tax is less than $10, there will exist a price at which both John and Willa will still benefit from the lawn-mowing arrangement. If the tax is $10, a price can be set which will leave John and Willa neither better off nor worse off from the lawn-mowing arrangement. If the tax is greater than $10, all possible prices will leave at least one of the parties worse off from the lawn-mowing arrangement. DIF: 2 REF: 8-1 TOP: Tax, Gains from trade 112. ANS: WITHOUT TAX WITH TAX CHANGE Consumer surplus A + B + C A (B + C) Producer surplus D + E + F F (D + E) Tax revenue None B + D (B + D) Total surplus A + B + C + D + E + F A + B + D + F (C + E) DIF: 2 REF: 8-1 TOP: Tax, Economic welfare 113. ANS: DIF: 2 REF: 8-2 TOP: Deadweight losses, Elasticity 114. ANS:

DIF: 2 REF: 8-3 TOP: Tax, Deadweight losses, Government