Econ 206 Exam 2

Jane pays Chuck $50 to mow her lawn every week. When the government levies a mowing tax of $10 on Chuck, he raises his price to $60. Jane continues to hire him at the higher price. What is the change in producer surplus, change in consumer surplus, and deadweight loss?

$0, -$10, $0 (In this case, the entire tax is passed to Jane, the consumer. Therefore, there is no change in producer surplus because the price received by Chuck remains the same, but there is a decrease of $10 in consumer surplus because Jane now pays $10 more than before. Since the overall surplus remains the same and no mutually beneficial transactions were lost, deadweight loss is zero in the presence of this tax.)

The mayor now doubles the tax to $20. The price rises to $116, and the number of rooms rented falls to 800. This higher tax raises$______in government revenue, and causes a deadweight loss of$_____ in this market.

$16000 (Govt tax rev = $20/room x 800 qty) $2000 (DWL = Area of DWL Triangle 1/2 x base x height 1/2 x $20/room x 200 qty)

Hotel rooms in Smalltown go for $100, and 1,000 rooms are rented on a typical day. To raise revenue, the mayor decides to charge hotels a tax of $10 per rented room. After the tax is imposed, the going rate for hotel rooms rises to $108, and the number of rooms rented falls to 900. This tax raises$______in government revenue, and causes a deadweight loss of$_____ in this market.

$9000 (Govt tax revenue= tax x qty 10/room x 900/qty = 9000) & $500 (Deadweight loss = Area of DWL Triangle 1/2 x base x height 1/2 x $10/room x 100 qty = 500

Charlie loves watching Teletubbies on his local public TV station, but he never sends any money to support the station during its fundraising drives. 1. What name do economists have for people like Charlie? 2. How can the government solve the problem caused by people like Charlie? 3. How could the private market solve this problem? 4. How does the existence of cable TV alter the situation? 1. free rider 2. By taxing everyone for its use 3. Have people watch commercials during the show. 4. Cable television makes the good excludable and no longer a public good.

1. free rider 2. By taxing everyone for its use 3. Have people watch commercials during the show. 4. Cable television makes the good excludable and no longer a public good.

A bakery operating in competitive markets sells its output for $20 per cake and hires labor at $10 per hour. To maximize profits, it should hire labor until the marginal product of labor is A) 1/2 cake per hour. B) 2 cakes per hour. C) 10 cakes per hour. D) 15 cakes per hour.

A) 1/2 cake per hour.

Which categories of goods are excludable? A) private goods and club goods B) private goods and common resources C) public goods and club goods D) public goods and common resources

A) Private goods and club goods

When a nation opens itself to trade in a good and becomes an importer, A) producer surplus decreases, but consumer surplus and total surplus both increase. B) producer surplus decreases, consumer surplus increases, and so the impact on total surplus is ambiguous. C) producer surplus and total surplus increase, but consumer surplus decreases. D) producer surplus, consumer surplus, and total surplus all increase.

A) producer surplus decreases, but consumer surplus and total surplus both increase.

If a nation that does not allow international trade in steel has a domestic price of steel lower than the world price, then A) the nation has a comparative advantage in producing steel and would become a steel exporter if it opened up trade. B) the nation has a comparative advantage in producing steel and would become a steel importer if it opened up trade. C) the nation does not have a comparative advantage in producing steel and would become a steel exporter if it opened up trade. D) the nation does not have a comparative advantage in producing steel and would become a steel importer if it opened up trade.

A) the nation has a comparative advantage in producing steel and would become a steel exporter if it opened up trade.

After economics class one day, your friend suggests that taxing food would be a good way to raise revenue because the demand for food is quite inelastic. Which of the following statements are true? A. Taxing food won't generate any tax revenue because consumers will just start growing their own food on farms. B. Taxing food is less inefficient than taxing other things because there won't be too much deadweight loss. C. Taxing food will generate a large amount of deadweight loss because people aren't very price sensitive in this market. D. Taxing food is a bad way to raise revenue from an equity standpoint because poorer people spend a higher proportion of their income

B & D are true (The demand for food is inelastic, so a tax on food is a good way to raise revenue because it does not lead to much of a deadweight loss since consumers are not very price sensitive; thus taxing food is less inefficient than taxing other things. But it is not a good way to raise revenue from an equity point of view because poorer people spend a higher proportion of their income on food. The tax would hit them harder than it would hit wealthier people.)

A technological advance that increases the marginal product of labor shifts the labor ________ curve to the ________. A) demand, left B) demand, right C) supply, left D) supply, right

B) Demand, right

Which categories of goods are rival in consumption? A. private goods and club goods B. private goods and common resources C. public goods and club goods D. public goods and common resources

B) Private goods and common resources

Which of the following is an example of a public good? A. residential housing B. national defense C. restaurant meals D.fish in the ocean

B) national defense

If a nation that imports a good imposes a tariff, it will increase A) the domestic quantity demanded. B) the domestic quantity supplied. C) the quantity imported from abroad. D) all of the above.

B) the domestic quantity supplied.

If firms are competitive and profit maximizing, the demand curve for labor is determined by A) the opportunity cost of workers' time. B) the value of the marginal product of labor. C) offsetting income and substitution effects. D) the value of the marginal product of capital.

B) the value of the marginal product of labor.

Public goods are A. efficiently provided by market forces. B. underprovided in the absence of government. C. overused in the absence of government. D. a type of natural monopoly.

B. underprovided in the absence of government.

A tax that has no deadweight loss cannot raise any revenue for the government. TRUE OR FALSE? A tax that raises no revenue for the government cannot have any deadweight loss. TRUE OR FALSE?

BOTH STATEMENTS ARE FALSE (The statement A tax that has no deadweight loss cannot raise any revenue for the government is incorrect. An example is the case of a tax when either supply or demand is perfectly inelastic. The tax has no effect on quantity or on deadweight loss, but it does raise revenue. The statement A tax that raises no revenue for the government cannot have any deadweight loss is also incorrect. An example is the case of a 100% tax imposed on sellers. With a 100% tax on their sales of the good, sellers will not supply any of the good, so the tax will raise no revenue. Yet the tax has a large deadweight loss because it reduces the quantity sold to zero.)

If the market for rubber bands has very elastic supply and very inelastic demand, the burden of a tax on rubber bands will fall more heavily on

Buyers (With very elastic supply and very inelastic demand, the burden of the tax on rubber bands will be borne largely by buyers. As you can see on the first graph, a tax of $2 per rubber band causes consumer surplus to decline considerably, but producer surplus does not fall by that much)

Approximately what percentage of U.S. national income is paid to workers, as opposed to owners of capital and land? A) 30% B) 50% C) 70% D) 90%

C) 70%

When the nation of Ectenia opens itself to world trade in coffee beans, the domestic price of coffee beans falls. Which of the following describes the situation? A) Domestic production of coffee rises, and Ectenia becomes a coffee importer. B) Domestic production of coffee rises, and Ectenia becomes a coffee exporter. C) Domestic production of coffee falls, and Ectenia becomes a coffee importer. D) Domestic production of coffee falls, and Ectenia becomes a coffee exporter.

C) Domestic production of coffee falls, and Ectenia becomes a coffee importer.

Which of the following trade policies would benefit producers, hurt consumers, and increase the amount of trade? A) the increase of a tariff in an importing country B) the reduction of a tariff in an importing country C) starting to allow trade when the world price is greater than the domestic price D) starting to allow trade when the world price is less than the domestic price

C) starting to allow trade when the world price is greater than the domestic price

Common resources are A. efficiently provided by market forces. B. underprovided in the absence of government. C. overused in the absence of government. D. a type of natural monopoly

C. overused in the absence of government.

Private security patrol with idle officers

Club Good

Congested City Streets

Common Resource

Snow plowing of public streets provided by the city

Common Resource

Which of the following is an example of a common resource? A. residential housing B. national defense C. restaurant meals D. fish in the ocean

D) Fish in the ocean

The main difference between imposing a tariff and handing out licenses under an import quota is that a tariff increases A) consumer surplus. B) producer surplus. C) international trade. D) government revenue.

D) Government revenue

A storm destroys several factories, thereby reducing the stock of capital. What effect does this event have on factor markets? A) Wages and the rental price of capital both rise. B) Wages and the rental price of capital both fall. C) Wages rise, and the rental price of capital falls. D) Wages fall, and the rental price of capital rises.

D) Wages fall, and the rental price of capital rises.

Around 1973, the U.S. economy experienced a significant ________ in productivity growth, coupled with a(n) ________ in the growth of real wages. A) acceleration, acceleration B) acceleration, slowdown C) slowdown, acceleration D) slowdown, slowdown

D) slowdown, slowdown

Suppose that the president proposes a new law aimed at reducing healthcare costs: All Americans are required to eat one apple daily.

Demand for apples =increase Equilibrium price of apples= increase Marginal product of apple pickers = no change Value of the marginal product of apple pickers=increase Demand for apple pickers =increase Wage of apple pickers=increase

As a result of the tax, the price received by producers ____ and ______

Falls & Total receipts for producers fall (Unless supply is perfectly elastic or demand is perfectly inelastic, the price received by producers falls because of the tax. Total receipts for producers fall because producers lose revenue since both the price they receive and the quantity sold declines.

True or False: Consumer surplus rises if total consumer spending falls.

False (Whether total consumer spending falls or rises, consumer surplus declines because of the increase in price and reduction in quantity)

Total spending by consumers equals the price consumers pay multiplied by the quantity purchased.

Graphically it is represented by the rectangular area below the equilibrium price and to the left of the equilibrium quantit

Total revenue for producers equals the price producers receive multiplied by the quantity sold.

In this case, total spending by consumers equals total revenue for producers because there is no tax

The deadweight loss from a tax on heating oil is likely to be______ in the fifth year after it is imposed rather than the first year.

Larger (The deadweight loss from a tax on heating oil is likely to be greater in the fifth year after it is imposed rather than the first year. In the first year, the elasticity of demand is fairly low, as people who own oil furnaces are not likely to get rid of them right away. But over time they may switch to other energy sources, and people buying new furnaces for their homes will more likely choose gas or electric, so a tax will have a greater impact on quantity. Thus, the deadweight loss of the tax will become larger over time.)

When the tax is doubled, the tax revenue rises by ______ double, and the deadweight loss rises by ______ double.

Less than More than (When the tax is doubled, tax revenue rises from $9,000 to $16,000, which is less than double. However, deadweight loss rises from $500 to $2,000, which is more than double.)

Both public goods and common resources involve externalities. The externalities associated with public goods are generally______ . Because of this, the free-market quantity of public goods is generally _______than the efficient quantity. The externalities associated with common resources are generally_______ . Because of this, the free-market quantity of common resources is generally _______ than the efficient quantity.

Positive Less Negative Greater

Education in a congested classroom

Private Good

Rural Roads

Public Good

As a result of the tax, the price paid by consumers ______ and total consumer spending falls as long as demand is _____

Rises & Elastic (The price paid by consumers rises, unless demand is perfectly elastic or supply is perfectly inelastic. Whether total spending by consumers rises or falls depends on the price elasticity of demand. If demand is elastic, the percentage decline in quantity exceeds the percentage increase in price, so total spending declines. If demand is inelastic, the percentage decline in quantity is less than the percentage increase in price, so total spending rises.)

If the market for rubber bands has very inelastic supply and very elastic demand, the burden of a tax on rubber bands will fall more heavily on

Sellers (With very inelastic supply and very elastic demand, the burden of the tax on rubber bands will be borne largely by sellers. As you can see on the second graph, a tax of $2 per rubber band causes consumer surplus to barely fall, but producer surplus declines considerably)

The tax revenue collected from a tax on heating oil is likely to be ______ in the fifth year after it is imposed rather than the first year.

Smaller (The tax revenue is likely to be higher in the first year after it is imposed than in the fifth year. In the first year, demand is more inelastic, so the quantity does not decline as much and tax revenue is relatively high. As time passes and more people substitute away from oil, the quantity sold declines, as does tax revenue.)

Daniel Patrick Moynihan, the late senator from New York, once introduced a bill that would levy a 10,000 percent tax on certain hollow-tipped bullets. How would you expect this to affect the amount of tax revenue raised?

This tax likely won't raise much revenue because the high tax rate will probably cause the equilibrium quantity to be near zero.

Even if the tax would raise no revenue, why might Senator Moynihan have proposed it?

To discourage the use of hollow-tipped bullets

The Laffer curve illustrates that, in some circumstances, the government can reduce a tax on a good and increase the

government's tax revenue. (The Laffer curve shows the relationship between the tax on a good and the amount of government tax revenue received. In some instances, as the size of a tax increases, tax revenue grows. But as the size of the tax increases further, tax revenue falls because the higher tax drastically reduces the size of the market.)

Peanut butter has an upward-sloping supply curve and a downward-sloping demand curve. If a 10 cent per pound tax is increased to 15 cents, the government's tax revenue

increases by less than 50 percent and may even decline. (The government's tax revenue is the size of the tax times the amount of the good sold. Graphically, tax revenue equals the area of the rectangle formed by the tax wedge between the supply and demand curves. Recall that the area of a rectangle is width times length; in this case the width is the amount of the tax and the length is the quantity sold. When a tax increases from 10 cents to 15 cents per pound, this means the width of the rectangle increases by 50 percent. However, because demand is downward sloping and supply is upward sloping, the length of this rectangle also decreases. Therefore, the overall area of the rectangle increases by less than 50 percent and may even decline if the decrease in length more than offsets the increase in width)

Eggs have a supply curve that is linear and upward-sloping and a demand curve that is linear and downward-sloping. If a 2 cent per egg tax is increased to 3 cents, the deadweight loss of the tax

increases by more than 50 percent. (If demand is downward sloping and supply is upward sloping, the deadweight loss of a tax rises even more rapidly than the size of the tax. This occurs because the deadweight loss is the area of a triangle, and the area of a triangle depends on the square of its size. If you double the size of a tax, for instance, the base and height of the triangle double, so the deadweight loss rises by a factor of 4. In this case, if the size of a tax increases by 50 percent, the deadweight loss of the tax increases by more than 50 percent.)

When the supply is relatively elastic , the deadweight loss of a tax is

large

When the supply is relatively inelastic , the deadweight loss of a tax is

small

If a policymaker wants to raise revenue by taxing goods while minimizing the deadweight losses, he should look for goods with ________ elasticities of demand and ________ elasticities of supply.

small, small (A tax has a deadweight loss because it induces buyers and sellers to change their behavior. The tax raises the price paid by buyers, so they consume less. At the same time, the tax lowers the price received by sellers, so they produce less. Because of these changes in behavior, the equilibrium quantity in the market shrinks below the optimal quantity. The more responsive buyers and sellers are to changes in the price, the more the equilibrium quantity shrinks. Hence, the greater the elasticities of supply and demand, the greater the deadweight loss of a tax)

A tax on a good has a deadweight loss if

the reduction in consumer and producer surplus is greater than the tax revenue.