5: Market Efficiency and Market Distortions: Practice Quiz

Refer to the figure below. Instructions: Enter your answers as a whole number. a. What is the quantity demanded at $150 per game console? Quantity demanded: __ game consoles b. What is the quantity supplied at $150 per game console? Quantity supplied: __ game consoles c. What is the consumer surplus generated at a price of $150 per game console? Instructions: Use the tool provided "CS" to illustrate this area on the graph. Consumer surplus: $ ____ d. What is the producer surplus generated at a price of $150 per game console? Instructions: Use the tool provided "PS" to illustrate this area on the graph. Producer surplus: $ ___ e. What is total economic surplus at a price of $150 per game console? Economic surplus: $ ____ f. What is the economic surplus generated if the market were in equilibrium? Instructions: Use the tool provided "ESeq" to illustrate this area on the graph. Economic surplus in equilibrium: $ _____

Figure: CS (0, 100), (0, 550), (60, 250) PS (0, 100), (0, 150, (20, 150) ESeq (0, 150), (0, 550), (20, 450), (20, 150) Part a: Quantity demanded: 80 game consoles Part b: Quantity supplied: 20 game consoles Part c: Consumer surplus: $ 7000 Part d: Producer surplus: $ 500 Part e: Economic surplus: $ 7500 Part f: Economic surplus in equilibrium: $ 13500 Explanation a, b. A $150 price does not create an equilibrium. Quantity demanded is 80 game consoles and quantity supplied is 20 game consoles. Note that what is not supplied cannot be traded even if the quantity demanded is bigger than the quantity supplied. Therefore, the quantity traded is 20 game consoles. c. Consumer surplus is the area above the price ($150), but below the demand curve ($450), left from the quantity traded (20) and right of the vertical axis. Here the area consists of a rectangle (20 × ($450 - $150) = 6,000 ) with a triangle on top (1/2 × 20 × ($550 − $450) = 1,000). Therefore, consumer surplus adds up to $7,000. d. Producer surplus is the area below the price ($150) to the supply curve ($100), left from the quantity traded and right of the vertical axis. Here the area is a triangle: 1/2 × 20 × ($150 − $100) = $500. e. Economic surplus is the sum of consumer and producer surplus: $7,000 + $500 = $7,500. f. Economic surplus is the sum of consumer surplus and producer surplus. In equilibrium, the price would be $250 and the equilibrium quantity would be 60. Consumer surplus is: 1/2 × 60 × ($550 − $250) = $9,000. Producer surplus is: 1/2 × 60 × ($250 − $100) = $4,500. Thus, economic surplus would be $13,500.

Refer to the figure. The graph represents the weekly demand and supply for the game console market. Instructions: Enter your answers as a whole number. a. What is the equilibrium price and quantity? Price: $ ___ Quantity: __ game consoles b. Show the area of consumer surplus on the graph, and then determine how much consumer surplus is generated in the market each week. Instructions: Use the tool provided "CS" to illustrate this area on the graph. Consumer surplus: $ ____

Figure: CS (0, 250), (0, 550), (60, 250) Part a: Price: $ 250 Quantity: 60 game consoles Part b: Consumer surplus: $ 9000 Explanation a. The supply and demand curves intersect at a price of $250 and a quantity of 60 game consoles. b. Consumer surplus is the area below the demand curve and above the equilibrium price, from zero to the equilibrium quantity. Here the area is a triangle with a height of 300 (= 550 - 250) and a base of 60. Thus, consumer surplus is 1/2 × 60 × $300 = $9,000.

Refer to the figure. The graph represents the market for artichokes (in pounds per week) at a Midwest farmers' market. Suppose the equilibrium price of artichokes is $3 per pound and the equilibrium quantity is 100 pounds of artichokes per week. Using the graph, show the area representing consumer surplus in this market, and then determine how much consumer surplus will be generated by the market each week. Instructions: Use the tool provided "CS" to illustrate this area on the graph. Consumer surplus: $ ___

Figure: CS (0,3, (0,9), (100,3) Consumer surplus: $ 300 Explanation Consumer surplus is the area below the demand curve and above the equilibrium price, from zero to the equilibrium quantity. Here the area is a triangle with a height of 6 (= 9 - 3) and a base of 100. Thus, consumer surplus is 1/2 × 100 × 6 = $300.

Refer to the figure. Use the graph to show the area representing the deadweight loss, and then determine the deadweight loss created as a result of setting the price at $150. Instructions: Use the tool provided "DL" to illustrate this area on the graph. Deadweight loss: $ ____

Figure: DL (20, 150), (20, 450), (60, 250) Deadweight loss: $ 6000 Explanation For a price of $150, the traded quantity is 20 game consoles. Thus, the economic surplus for a price of $150 is the area left of the traded quantity (20), right of the vertical axis, above the supply curve and below the demand curve. In contrast, in an equilibrium, the economic surplus is the area left of the equilibrium quantity (60), right of the vertical axis, above the supply curve and below the demand curve. The deadweight loss created by a price of $150 is the difference between the economic surplus for an equilibrium and the economic surplus for a price of $150, Thus, the deadweight loss is equal to the area of the triangle between a quantity of 20 and 60 game consoles between the demand and supply curves. Therefore, deadweight loss can be calculated as 1/2 × (60 − 20) × ($450 - $150) = $6,000.

Refer to the figure. Suppose the local farmers' market sets a minimum price of $6 per pound that farmers can charge for artichokes. The supply and demand for artichokes is described in the graph above. Using the graph, show the resulting deadweight loss from the new minimum price, and then determine the amount of the deadweight loss as a result of the pricing policy. Instructions: Use the tool provided "DL" to illustrate this area on the graph. Deadweight loss: $ ___

Figure: DL (50, 2), (50, 6), (100, 3) Deadweight loss: $ 100 Explanation For a price of $6, the quantity traded is 50 pounds of artichokes. Thus, the economic surplus for a price of $6 is the area left of the quantity traded (50), right of the vertical axis, above the supply curve and below the demand curve. In contrast, in equilibrium, the economic surplus is the area left of the equilibrium quantity (100), right of the vertical axis, above the supply curve and below the demand curve. The deadweight loss created by a price of $6 is the difference between the economic surplus for an equilibrium and the economic surplus for a price of $6. Thus, the deadweight loss equals the area of the triangle between a quantity of 50 and 100 pounds of artichokes that is between the demand and supply curves. Consequently, the deadweight loss can be calculated as: 1/2 × (100 - 50) × ($6 - $2) = $100.

Refer to the figure. The graph represents the market for artichokes (in pounds per week) at a Midwest farmers' market. Suppose the equilibrium price of artichokes is $3 per pound and the equilibrium quantity is 100 pounds of artichokes per week. Using the graph determine how much economic surplus is generated in the market each week. Economic surplus: $ ___

Figure: ES (0, 1), (0, 9), (100, 3) Economic surplus: $ 400 Explanation Economic surplus is the sum of consumer surplus and producer surplus. Consumer surplus is: 1/2 × 100 × $6 = $300 Producer surplus is: 1/2 × 100 × $2 = $100 Thus, economic surplus is $300 + $100 = $400. You can also calculate economic surplus by figuring out the area of a triangle, which is 1/2 × base × height. In the case of the economic surplus here, the height is 8 (= 9 − 1) and the base is 100. The area of the triangle is 1/2 × 100 × $8 = $400.

Refer to the figure. The graph represents the market for artichokes (in pounds per week) at a Midwest farmers' market. Suppose the equilibrium price of artichokes is $3 per pound and the equilibrium quantity is 100 pounds of artichokes per week. Using the graph, show the area representing producer surplus in this market, and then determine how much producer surplus will be generated by the market each week. Instructions: Use the tool provided "PS" to illustrate this area on the graph. Producer surplus: $ ___

Figure: PS (0, 1), (0, 3), (100, 3) Producer surplus: $ 100 Explanation Producer surplus is the area below the price, above the supply curve, from zero to the equilibrium quantity. Here the area is a triangle with a height of 2 (= 3 - 1) and a base of 100. Thus, producer surplus is 1/2 × 100 × 2 = $100.

Refer to the figure. The graph represents the weekly demand and supply for the game console market. Instructions: Enter your answers as a whole number. a. What is the equilibrium price and quantity? Price: $ ___ Quantity: __ game consoles b. Show the area of producer surplus on the graph, and then determine how much producer surplus is generated in the market each week. Instructions: Use the tool provided "PS" to illustrate this area on the graph. Producer surplus: $ ____

Figure: PS (0, 100), (0, 250), (60, 250) Part a: Price: $ 250 Quantity: 60 game consoles Part b: Producer surplus: $ 4500 Explanation a. The supply and demand curves intersect at a price of $250 and a quantity of 60 game consoles. b. Producer surplus is the area below the price, above the supply curve, from zero to the equilibrium quantity. Here the area is a triangle with a height of 150 (= 250 - 100) and a base of 60. Thus, producer surplus is 1/2 × 60 × $150 = $4,500.

The table below presents the annual market for sofas in Akron, Ohio. Suppose the state government imposes a $100 excise tax on every sofa sold to be paid by customers at the point of sale. Market for Sofas Price (dollars) | Quantity of Sofas Demanded | Quantity of Sofas Supplied | Quantity of Sofas Demanded with Excise Tax $1,240 | 150 | 300 | 100 1,180 | 180 | 280 | 130 1,120 | 210 | 260 | 160 1,060 | 240 | 240 | 190 1,000 | 270 | 220 | 220 940 | 300 | 200 | 250 880 | 330 | 180 | 280 820 | 360 | 160 | 310 760 | 390 | 140 | 340 700 | 420 | 120 | 370 Instructions: Enter your answers as a whole number. a. Before the excise tax is imposed, what are the equilibrium price and quantity of sofas in Akron? P = $ ____ Q = ___ sofas b. Including the excise tax, what is the new equilibrium price consumers pay for sofas after the tax is imposed? $ ____ c. After the excise tax is imposed, what is the new equilibrium quantity of sofas? ___ sofas d. What is the total amount of revenue collected by the government from the excise tax on sofas? $ _____

Part a: P = $ 1,060 Q = 240 sofas Part b: $ 1,100 Part c: 220 sofas Part d: 22,000 Explanation a. The equilibrium occurs where the quantity demanded and quantity supplied are the same. This occurs where the demand curve and supply curve intersect. In this case, the equilibrium price is $1,060 per sofa and the equilibrium quantity is 240 sofas. b. The price paid by consumers after the tax is added is the amount consumers pay to producers plus the amount of the tax. The amount paid to producers is the price where the new demand curve and supply curve intersect, which occurs at a price of $1,000 per sofa. Consumers pay $1,000 but then pay an additional $100 in tax. Therefore, the price paid by consumers after the tax is added is $1,000 + $100 = $1,100 per sofa. c. To find the new equilibrium quantity with the tax, it occurs where the new demand curve with the tax and the supply curve intersect. In this case, the new equilibrium quantity is 220 sofas. d. The amount of tax revenue collected is equal to the quantity sold in the market multiplied by the amount of the tax. In this case, the market quantity sold is the new equilibrium quantity with the tax, which is 220 sofas times the tax of $100 per sofa: 220 sofas × $100 = $22,000 in tax revenue.

The U.S. Department of Agriculture guarantees dairy producers that they will receive at least $1.00 per pound for butter they supply to the market. Below is the current monthly demand and supply schedules for wholesale butter (in millions of pounds per month). Market for Wholesale Butter Price (dollars per pound) | Quantity of Butter Demanded (millions of pounds) | Quantity of Butter Supplied (millions of pounds) $0.80 | 116 | 76 0.90 | 114 | 84 1.00 | 112 | 92 1.10 | 110 | 100 1.20 | 108 | 108 1.30 | 106 | 116 1.40 | 104 | 124 1.50 | 102 | 132 1.60 | 100 | 140 1.70 | 98 | 148 1.80 | 96 | 158 Instructions: Round your answer for price to two decimal places. Enter your answers for quantity as a whole number. a. What are the equilibrium price and quantity in the wholesale butter market? P = $ ___ Q = ___ million pounds b. What is the monthly surplus created in the wholesale butter market due to the price support (price floor) program? multiple choice ◉ 11 million pounds ◉ 22 million pounds ◉ zero ◉ 79 million pounds Suppose that a decrease in the cost of feeding cows shifts the supply schedule to the right by 30 million pounds at every price. c. Fill in the new supply schedule given the change in the cost of feeding cows. Market for Wholesale Butter Price (dollars per pound) | Quantity of Butter Demanded (millions of pounds) | Initial Quantity of Butter Supplied (millions of pounds) | New Quantity of Butter Supplied (millions of pounds) $0.80 | 116 | 76 | ? 0.90 | 114 | 84 | ? 1.00 | 112 | 92 | ? 1.10 | 110 | 100 | ? 1.20 | 108 | 108 | ? 1.30 | 106 | 116 | ? 1.40 | 104 | 124 | ? 1.50 | 102 | 132 | ? 1.60 | 100 | 140 | ? 1.70 | 98 | 148 | ? 1.80 | 96 | 158 | ? d. Given the new supply of butter, what is the monthly surplus of butter created by the price support program? __ million pounds

Part a: P = $ 1.20 Q = 108 million pounds Part b: zero Part c: Table Answer Market for Wholesale Butter Price (dollars per pound) | Quantity of Butter Demanded (millions of pounds) | Initial Quantity of Butter Supplied (millions of pounds) | New Quantity of Butter Supplied (millions of pounds) $0.80 | 116 | 76 | 106 0.90 | 114 | 84 | 114 1.00 | 112 | 92 | 122 1.10 | 110 | 100 | 130 1.20 | 108 | 108 | 138 1.30 | 106 | 116 | 146 1.40 | 104 | 124 | 154 1.50 | 102 | 132 | 162 1.60 | 100 | 140 | 170 1.70 | 98 | 148 | 178 1.80 | 96 | 158 | 188 Part d: 10 million pounds Explanation a. The equilibrium occurs where the quantity demanded and the quantity supplied are the same. This occurs where the demand curve and supply curve intersect. In this case, the equilibrium price is $1.20 and the equilibrium quantity is 108 million pounds. b. There is no surplus. The market price is above the price floor; therefore, the market is in equilibrium and the price floor is nonbinding. c. When the cost of feeding cows decreases, the supply of butter will increase by 30 million pounds at every price. To show this in the table, take the initial quantity supplied at each price and add 30 to it to get the new quantity supplied. For example, at a price of $0.80, the initial quantity supplied is 76 and adding 30 to 76 gives the new quantity supplied of 106. Enter this amount in the table in the "New" column at the price of $0.80. Do this for each of the prices, so at $0.90 add 30 to 84, which gets a new quantity of 114. Continue this process for each price. d. After the change in supply, the new equilibrium would occur at a price below the price floor of $1.00 per pound. Therefore, the market will move to the price floor of $1.00 per pound. At a price of $1.00 per pound, the quantity supplied with the "New" supply curve is 122 million pounds and the quantity demanded is 112 million pounds. Therefore, 122 million pounds - 112 million pounds gives a surplus of 10 million pounds.

The market for packs of AA batteries during a typical week in Tulsa, Oklahoma, is described in the table below. Market for AA Batteries in a Typical Week Price (dollars) |Quantity of Batteries Demanded (packs) | Quantity of Batteries Supplied (packs) $20 | 0 | 150 18 | 10 | 130 16 | 20 | 110 14 | 30 | 90 12 | 40 | 70 10 | 50 | 50 8 | 60 | 30 6 | 70 | 10 Instructions: Enter your answers as a whole number. a. During a typical week in Tulsa, Oklahoma, what are the equilibrium price and quantity in the market for AA batteries? P = $ __ Q = __ packs In weeks when tornadoes threaten Tulsa, Oklahoma, the demand for packs of AA batteries increases as shown in the table below. Market for AA Batteries with Tornado Threat Price (dollars) | New Quantity of Batteries Demanded (packs) | New Quantity of Batteries Supplied (packs) $24 | 0 | 180 22 | 10 | 160 20 | 20 | 140 18 | 30 | 120 16 | 40 | 100 14 | 50 | 80 12 | 60 | 60 10 | 70 | 40 8 | 80 | 20 6 | 90 | 0 b. What are the equilibrium price and quantity of AA batteries in a week with a tornado threat? P = $ __ Q = __ packs Suppose that city leaders want to prevent the price of AA batteries from rising when tornadoes threaten Tulsa, Oklahoma. They impose a price ceiling of $10 for packages of AA batteries. c. This price ceiling of $10 per pack ____ ___ ______ the AA battery market during a typical week. d. What are quantity demanded and quantity supplied with the price ceiling in effect during the weeks when tornadoes threaten Tulsa? Qd = __ packs Qs = __ packs e. As a result of the price ceiling multiple choice ◉ quantity supplied exceeds quantity demanded by 30 packs of AA batteries in a week when tornadoes threaten Tulsa, Oklahoma. ◉ quantity supplied equals quantity demanded for packs of AA batteries in a week when tornadoes threaten Tulsa, Oklahoma. ◉ quantity demanded exceeds quantity supplied by 30 packs of AA batteries in a week when tornadoes threaten Tulsa, Oklahoma. ◉ quantity supplied exceeds quantity demanded by 40 packs of AA batteries in a week when tornadoes threaten Tulsa, Oklahoma.

Part a: P = $ 10 Q = 50 packs Part b: P = $ 12 Q = 60 packs Part c: will not impact Part d: Qd = 70 packs Qs = 40 packs Part e: quantity demanded exceeds quantity supplied by 30 packs of AA batteries in a week when tornadoes threaten Tulsa, Oklahoma. Explanation a. The equilibrium occurs where the quantity demanded and quantity supplied are the same. Graphically, this occurs where the demand curve and supply curve intersect. In this case, the equilibrium price is $10 and the equilibrium quantity is 50 packs of AA batteries. b. With no price ceiling, the new equilibrium occurs where the new quantity demanded and the new quantity supplied are the same. This occurs where the new demand curve and new supply curve intersect. In this case, the equilibrium price is $12 and the equilibrium quantity is 70 packs of batteries. c. Even if there is a price ceiling of $10, there will be no impact in the market during a typical week. Because the equilibrium price is $10 and the price ceiling is $10, the market is still allowed to go to equilibrium. d. With the price ceiling in place, the market will not be able to go to the new equilibrium. The highest the price can go is the "price ceiling" equal to $10. Therefore, with the price ceiling, the market price will be $10. At this price, going to the new demand curve, the quantity demanded will be 70 packs of AA batteries. However, at this price moving to the new supply curve, we find a quantity supplied of only 40 packs of AA batteries. e. When the price ceiling is in place during weeks when tornadoes threaten, the quantity demanded is 70 packs but the quantity supplied is only 40 packs. Therefore, the quantity demanded exceeds the quantity supplied and there is a shortage in the market of 30 packs of AA batteries.

The table below presents the average monthly demand and supply of 4' × 8' sheets of plywood from a typical home building supply store. In any month when coastal states such as Florida are threatened by hurricanes, the typical monthly demand for plywood increases by 400 sheets at every price. Imagine Florida passes a "price gouging" law that prevents home building supply stores from raising the price of plywood when hurricanes threaten. Market for Plywood Price (dollars) | Initial Quantity of Plywood Demanded (sheets) | Initial Quantity of Plywood Supplied (sheets) | New Quantity of Plywood Demanded (sheets) $106,600 | 3,800 | 7,000 116,400 | 4,000 | 6,800 126,200 | 4,200 | 6,600 136,000 | 4,400 | 6,400 145,800 | 4,600 | 6,200 155,600 | 4,800 | 6,000 165,400 | 5,000 | 5,800 175,200 | 5,200 | 5,600 185,000 | 5,400 | 5,400 194,800 | 5,600 | 5,200 204,600 | 5,800 | 5,000 214,400 | 6,000 | 4,800 Instructions: Enter your answers as a whole number. a. When there are no hurricanes threatening Florida, and without the "price gouging" law in place, what are the equilibrium price and quantity in the plywood market? P = $ __ Q = ____ sheets b. When hurricanes threaten Florida, and without the "price gouging" law in place, what are the equilibrium price and quantity in the plywood market? P = $ __ Q = ____ sheets c. When hurricanes threaten Florida, and with the "price gouging" law in place, what are the market price of plywood, the quantity demanded of plywood, and the quantity supplied of plywood? P = $ __ Qd = ____ sheets Qs = ____ sheets d. If the "price gouging" law goes into effect, the result of the law during hurricane season will be to create a multiple choice ◉ shortage of 600 sheets of plywood. ◉ shortage of 400 sheets of plywood. ◉ surplus of 400 sheets of plywood. ◉ surplus of 600 sheets of plywood.

Part a: P = $ 17 Q = 5,200 sheets Part b: P = $ 18 Q = 5,400 sheets Part c: P = $ 17 Qd = 5,600 sheets Qs = 5,200 sheets Part d: shortage of 400 sheets of plywood. Explanation a. The initial equilibrium occurs where the initial quantity demanded and the quantity supplied are the same. This occurs where the initial demand curve and supply curve intersect. In this case, the equilibrium price is $17 and the equilibrium quantity is 5,200 sheets of plywood. b. With no "price gouging" law, the new equilibrium occurs where the new quantity demanded and quantity supplied are the same. Graphically, this occurs where the new demand curve and supply curve intersect. In this case, the equilibrium price is $18 and the equilibrium quantity is 5,400 sheets of plywood. c. With the "price gouging" law in place, the market will not be able to go to the new equilibrium. The highest the price can go is the price ceiling equal to the original price. Therefore, with the "price gouging" law in place, the market price will be $17. At this price, going to the new demand curve, the quantity demanded will be 5,600 sheets of plywood. However, at this price moving to the supply curve, we find a quantity supplied of only 5,200 sheets of plywood. d. Because of the "price gouging" law acting as a price ceiling, the quantity demanded remains high at 5,600 sheets of plywood but producers do not have an incentive to increase quantity, and the quantity supplied remains at 5,200 sheets of plywood. Therefore, the quantity demanded exceeds the quantity supplied, resulting in a shortage of 400 sheets of plywood.

Assume the government imposes a $0.75 excise tax on the sale of every 2 liter bottle of soda. The tax is to be paid by the producers of soda. The figure below shows the annual market for 2 liter bottles of soda before and after the tax is imposed. Instructions: Round your answers for price to 2 decimal places. Enter your answers for quantity as a whole number. a. Before the tax is imposed, the equilibrium price is $ ___ per bottle and the equilibrium quantity is _ billion bottles. b. After the excise tax is imposed, consumers pay a price of $ ___ per bottle. c. After the excise tax is imposed, the price (or amount) producers keep after the tax is paid is $ ___ per bottle. d. After the tax is imposed, the equilibrium quantity is _ billion bottles. e. The government is able to collect $ ___ billion of tax revenue from the tax.

Part a: blank1: 1.50 blank2: 4 Part b: 2.00 Part c: 1.25 Part d: 3 Part e: 2.25 Explanation a. The equilibrium occurs where the quantity demanded and quantity supplied are the same. Graphically, this occurs where the demand curve and supply curve intersect. In this case, the equilibrium price is $1.50 per bottle and the equilibrium quantity is 4 billion bottles. b. The price paid by consumers is the same as the new equilibrium price that occurs where the demand curve and the new supply curve intersect. In this case, the price paid by consumers is $2.00 per bottle. c. The price (or amount) producers get to keep is the price paid by consumers after the tax is subtracted. Because the tax is $0.75 per bottle and the price paid by consumers is $2.00, the price producers get to keep is $2.00 - $0.75 = $1.25 per bottle. d. To find the new equilibrium quantity with the tax, it occurs where the demand curve and the new supply curve intersect. In this case, the new equilibrium quantity is 3 billion bottles. e. The amount of tax revenue collected is equal to the quantity sold in the market multiplied by the amount of the tax. In this case, the market quantity sold is the new equilibrium quantity with the tax, which is 3 billion bottles times the tax of $0.75 per bottle: 3 billion bottles × $0.75 = $2.25 billion in tax revenue.

Assume the government taxes packs of cigarettes both to discourage cigarette smoking and to raise tax revenue. The average excise tax on a pack of cigarettes is $2.50 per pack. The table below presents the annual demand and supply schedules, in billions of packs, both before and after the tax on packs of cigarettes. Market for Cigarettes Price (dollars per pack) | Quantity of Cigarettes Demanded (billions of packs) | Quantity of cigarettes supplied (billions of packs) | Quantity of Cigarettes Supplied with Tax (billions of packs) $10.00 | 5.0 | 65.0 | 40.0 9.75 | 7.5 | 62.5 | 37.5 9.50 | 10.0 | 60.0 | 35.0 9.25 | 12.5 | 57.5 | 32.5 9.00 | 15.0 | 55.0 | 30.0 8.75 | 17.5 | 52.5 | 27.5 8.50 | 20.0 | 50.0 | 25.0 8.25 | 22.5 | 47.5 | 22.5 8.00 | 25.0 | 45.0 | 20.0 7.75 | 27.5 | 42.5 | 17.5 7.50 | 30.0 | 40.0 | 15.0 7.25 | 32.5 | 37.5 | 12.5 7.00 | 35.0 | 35.0 | 10.0 6.75 | 37.5 | 32.5 | — 6.50 | 40.0 | 30.0 | — 6.25 | 42.5 | 27.5 | — 6.00 | 45.0 | 25.0 | — 5.75 | 47.5 | 22.5 | — 5.50 | 50.0 | 20.0 | — 5.25 | 52.5 | 17.5 | — 5.00 | 55.0 | 15.0 | — 4.75 | 57.5 | 12.5 | — 4.50 | 60.0 | 10.0 | — a. What are the equilibrium quantity and price per pack of cigarettes if there is no excise tax on cigarettes? multiple choice ◉ 22.5 billion packs; $7.00 per pack ◉ 35 billion packs; $7.00 per pack ◉ 22.5 billion packs; $8.00 per pack ◉ 35 billion packs; $8.00 per pack b. What are the equilibrium quantity and price per pack of cigarettes if there is a $2.50 excise tax per pack on cigarettes? multiple choice ◉ 35 billion packs; $8.25 per pack ◉ 35 billion packs; $7.00 per pack ◉ 22.5 billion packs; $8.25 per pack ◉ 22.5 billion packs; $7.00 per pack c. How much tax revenue does the $2.50 per pack excise tax on cigarettes generate each year? multiple choice ◉ $56.25 billion ◉ $75.00 billion ◉ $87.50 billion ◉ None - no cigarettes will be purchased d. By how many packs of cigarettes does quantity demanded decrease due to the excise tax on cigarettes? multiple choice ◉ 22.5 billion packs per year ◉ 25 billion packs per year ◉ 12.5 billion packs per year ◉ 35 billion packs per year e. By how much did the price paid by consumers change due to the tax on cigarettes? multiple choice ◉ $0.50 per pack ◉ $1.25 per pack ◉ $7.00 per pack ◉ $2.50 per pack

Part a: 35 billion packs; $7.00 per pack Part b: 22.5 billion packs; $8.25 per pack Part c: $56.25 billion Part d: 12.5 billion packs per year Part e: $1.25 per pack Explanation a. The equilibrium occurs where the quantity demanded and quantity supplied are the same. Graphically, this occurs where the demand curve and supply curve intersect. In this case, the equilibrium price is $7.00 per pack and the equilibrium quantity is 35 billion packs. b. To find the new equilibrium quantity with the tax, it occurs where the new supply curve with the tax and the demand curve intersect. In this case, the equilibrium price is $8.25 per pack and the equilibrium quantity is 22.5 billion packs. c. The amount of tax revenue collected is equal to the quantity sold in the market multiplied by the amount of the tax. In this case, the market quantity sold is the new equilibrium quantity with the tax, which is 22.5 billion packs times the tax of $2.50 per pack: 22.5 billion packs × $2.50 = $56.25 billion in tax revenue. d. The original equilibrium quantity demanded was 35 billion packs and the new equilibrium quantity demanded with the tax is 22.5 billion packs. Because of the tax, the quantity demanded fell from 35 billion packs to 22.5 packs, so the quantity demanded fell by 12.5 billion packs. e. The original price paid by consumers in equilibrium was $7.00 per pack but with the tax the equilibrium price price paid by consumers is $8.25 per pack. Therefore, the price paid by consumers increased by $1.25 per pack.

The marginal benefit of an additional beach towel is $8. The marginal cost of producing an additional beach towel is $12. If producers are not minimizing the average costs of production, then we can conclude multiple choice ◉ beach towel production is allocatively efficient but not productively efficient. ◉ beach towel production is neither allocatively nor productively efficient. ◉ beach towel production is both allocatively and productively efficient. ◉ beach towel production is not allocatively efficient but is productively efficient.

beach towel production is neither allocatively nor productively efficient. Explanation Production is productively efficient if producers are minimizing the average costs of production. Production is allocatively efficient if marginal benefit equals marginal cost. In this case, neither condition is met, so beach towel production is neither allocatively nor productively efficient.

A binding price ceiling on apartments (effective rent control) will multiple choice ◉ increase the quantity supplied of rental housing. ◉ decrease the quantity demanded of rental housing. ◉ cause the quantity supplied to exceed the quantity demanded by renters. ◉ cause the quantity demanded to exceed the quantity supplied of rental housing.

cause the quantity demanded to exceed the quantity supplied of rental housing. Explanation When a binding price ceiling is imposed, the market price will be forced to be lower than equilibrium. This means the quantity demanded will be greater than the quantity supplied, and this will create a shortage.

The additional benefit of producing one more roast beef sandwich at a local deli is $2. The additional cost of producing one more roast beef sandwich is $3. To improve allocative efficiency multiple choice ◉ producers should produce one more roast beef sandwich because MB > MC. ◉ producers should produce one more roast beef sandwich because MC > MB. ◉ producers should not produce one more roast beef sandwich because MB > MC. ◉ producers should not produce one more roast beef sandwich because MC > MB.

producers should not produce one more roast beef sandwich because MC > MB. Explanation When the marginal cost is less than the marginal benefit, producers should produce more. When the marginal cost exceeds the marginal benefit, producers should not produce more. Allocative efficiency occurs when the marginal cost equals the marginal benefit. In this case, producers should not produce one more roast beef sandwich because MC > MB.