ECON EXAM 2 PRACTICE PROBLEMS (5-8)

The graph below shows the market for cigarettes. After the government imposes a $4 tax on suppliers, how much is the deadweight loss?

$10

The following graph shows a tax imposed on sellers of cell phones. What is the value of the deadweight loss associated with this tax?

$5

The graph below shows the market for soda. What is the deadweight loss for consumers?

$5

(start of 6)Suppose for a given good that the demand curve is perfectly inelastic, and the equilibrium price in the market is $A. If the government imposes a tax of $k on the suppliers, what is the new price?

$A+$k

If the price of haircuts increased from $18 to $24 and the quantity decreased from 35 to 28 units, what is the price elasticity of demand?

0.78

The graph below illustrates the consequence of the $9 tax on the supplier of salt. According to the graph, what percentage of the tax is paid by buyers?

100%

If marijuana went from being illegal to being legal, the demand for marijuana would

increase.

If marijuana went from being illegal to being legal, the supply of marijuana would

increase.

Tax burden generally falls on the group that is more...

inelastic.

The average total cost curve

is U-shaped.

The total cost curve

is increasing for all levels of output greater than or equal to 0.

The ____ the portion of your income spent on a good, the ____ is your demand for the good.

larger; more price elastic.

The passage of a law prohibiting the purchase of a drug is likely to be most effective at reducing the use of this drug when

the demand for the drug is elastic.

It is generally true that the more substitutes a good has, ....

the more elastic the demand curve of that good.

If the elasticity of supply is 2, this means that if ____

the price rises by one percent, the quantity supplied will rise by two percent.

The deadweight loss of a tax represents...

the producer and consumer surplus that is lost because of the tax.

According to the following graphs, if a tax is imposed which one of them would yield more revenue for the government (assuming that the supply curves are the same)?

Graph 1

Which of the following was NOT an effect of alcohol prohibition in the US?

Large increase in imported wine consumption.

The marginal cost (MC) curve

crosses ATC at the minimum of ATC.

The marginal cost curve

crosses average variable cost (AVC) at the minimum of AVC.

The graph below shows the market for cigarettes. After the government imposes a $1 tax on suppliers, how much is the deadweight loss?

$0

The following graph shows a tax imposed on sellers of cell phones. How much is the tax?

$2

For good X, the supply curve is the typical upward-sloping straight line, and the demand curve is the typical downward-sloping straight line. A tax of $15 per unit is imposed on good X. The tax reduces the equilibrium quantity in the market by 300 units. The deadweight loss from the tax is

$2250.

The following graph shows a tax imposed on sellers of cell phones. How much revenue is generated for the government by the tax?

$30

The graph below illustrates what would happen if the government prohibits the use of tobacco. Calculate the INCREASE (i.e. the change) in total expenditure on tobacco.

$34

The graph below shows what would happen to the market for soda if the government introduces a $4 tax on suppliers. Calculate the the amount reduced in the consumer surplus.

$35

The graph below illustrates the market for salt. If the government imposes $9 tax on the suppliers how much tax revenue will be raised?

$450

Suppose when Eric earns a salary of $20,000, he buys 20 fast food meals per year. When Eric gets a raise and earns a salary of $30,000, he buys 10 fast food meals per year. Calculate the income elasticity of demand, and decide whether Eric considers fast food meals a normal or inferior good.

-1.67; Eric considers fast food an inferior good.

Which of the following are determinants of price elasticity?

A. The availability of substitutes. B. The price of the good relative to income. C. Whether the good is a necessity or luxury. *D. All of the above are determinants of price elasticity.

Suppose we know that the price elasticity of demand of good X is equal to -1.2. Then, if its price will increase by 5%, we can predict with certainty that

A. quantity demanded of that good will increase. B. the revenue of the firm producing that good will increase by 6%. C. the revenue of the firm producing that good will decrease by 6%. * D. the quantity demanded of that good will decrease by 6%.

Comparative advantage is the...

Ability to produce a good at a lower opportunity cost than someone else

Suppose that the rest of the world lifts barriers to exports of cars. The Demand for cars made in your country shifts to the right (World Demand). Based on the figure below, which letter(s) represent the Net Gain to your economy of exporting cars?

C

Suppose the figure below represents the market for cars after a country signs a trade deal and lifts barriers to imports of cars for which the world price (P2) is lower than the domestic price (P1). Which letter(s) represent the gain of Consumer Surplus due to the cheaper imports?

C+D+E

When determining what goods to trade...

Comparative advantage is the key component.

Making goods with inelastic demand illegal tends to have which of the following effects? A. Increases total expenditure on the good B. Increases the price of the good C. Transfers money to criminals D. All of the above

D

Which of the following is an example of a good with inelastic supply? A. Marijuana B. Luxury boats C. Alcohol D. Land

D

The table below shows costs associated with the production of shoes, where TFC is Total Fixed Cost and TC is Total Cost. According to the table, what would be the value of TVC (Total Variable Cost) if the firm decides to produce 5 units of shoes?

D. 40

Making drugs illegal has a similar economic effect to ________

D. Taxing drugs

The deadweight loss of a tax represents...

D. The producer and consumer surplus that is lost because of the tax.

Suppose Countries C and D use only labor as an input and produce only tables and tents. In C, a worker in a week could produce 4 tables or 2 tents. In D, a worker in a week could produce 6 tables. Initially the countries do not trade, and then trade opens up. Under which circumstances will country C export tables?

If a worker in country D could produce more than 3 tents a week.

When demand for a good is inelastic, prohibition of that good will...

Increase total expenditure of the prohibited good.

With inelastic demand, prohibition

Increases total expenditures on the banned product

What can be said about the relationship between elasticity and deadweight loss?

More elasticity leads to more deadweight loss.

Which of the following was NOT a result of higher prices for alcohol during prohibition?

Quantity consumed dramatically decreased

Suppose McDonalds sells 500 burgers at the price of $3 per burger. If it increases its price to $7, the sales drop to 300. Calculate the new revenue and determine price elasticity of demand.

Revenue = $2100; demand is inelastic

If the price elasticity of a certain good is elastic, what would happen to the revenue earned from that good if its price decreases slightly?

Revenue will increase.

Which of the following methods can we use to find the average variable cost curve (for any given quantity produced)?

Subtract average fixed cost from average total cost.

If you want to generate the most government revenue, with the least deadweight loss, you should

Tax goods with inelastic demand

Suppose that when a firm produces between 5 units and 10 units of a good, its marginal cost curve is increasing. What can be said about the firm's average total cost curve between 5 and 10 units?

The average total cost curve can be either increasing or decreasing based on this information.

The following graph shows a tax imposed on sellers of cell phones. Is the tax burden greater for buyers or for sellers?

The burden is equally split between buyers and sellers: buyers pay $1 and sellers pay $1.

(start of 8) Marginal cost is...

The change in total cost from one more unit of production.

The marginal product of labor is...

The change in total output when an additional worker is hired.

The passage of a law prohibiting the use of a drug leads to an increase in expenditure on that drug when

The demand for the drug is perfectly inelastic.

If demand is price elastic, then

a fall in price will raise total revenue.

(start of 7) A potential unintended consequence of prohibition is

an increase in expenditure on the good.

By using more labor to produce more output, a firm can always reduce its

average fixed cost.

A tax either on consumers or on producers

creates a dead weight loss for society as a whole.

Suppose you are a government official tasked with placing a tax on a good to raise funds for public education. Which of the following would you most likely tax if you wished to maximize tax revenue? A. Private jets B. Fresh produce C. Cigarettes D. Train tickets

c

Which of the following is an example of a good with inelastic demand? A. Ramen noodles B. Luxury boats C. Salt D. Land

c

To compute elasticity...

calculate the percentage change in quantity divided by the percentage change in price.

A 10% increase in the price of movie ticket in Westridge 8 leads to a 15% decrease in the number of tickets sold, indicating the demand for movie ticket in Westridge 8 is

elastic.

If a 5% rise in price results in an 8% change in demand, the product is

elastic.

If chicken and pork are substitutes and the price of chicken increases,

demand for pork will increase.

Which of the following would most likely represent the market equilibrium price and quantity for marijuana if it went from being illegal to being legal?

lower price, higher quantity

(start of 5)A good with relatively elastic demand is more likely to be a _____, or a good with _____ substitutes.

luxury; many

The average variable cost curve

never crosses the average total cost curve.

A firm's marginal cost is the increase in its total cost divided by the increase in its

output.