Econ Exam #2

Assume that the United States imposes a quota on Italian shoes. Relative to the equilibrium world price that would exist in the absence of quotas, the equilibrium price of shoes in the United States will most likely ________, and the equilibrium price of shoes in Italy will most likely ________.

increase; decrease

Assume that the United States imposes a quota on Scottish wool suits. Relative to the equilibrium price that would exist in the absence of quotas, the equilibrium price of suits in the United States will most likely ________ and the equilibrium price of suits in Scotland will most likely ________.

increase; decrease

Demand for vegetables at a small farmers' market is steady, but the supply of vegetables has decreased because of a drought. This is good news for farmers if demand is:

inelastic and the price effect outweighs the output effect.

If you want to reduce the inefficiency costs of taxation, you should devise taxes to fall on goods for which the supply is ________ and the demand is ________.

inelastic; inelastic

If the executives of the U.S. silicon-chip industry lobby Congress for protection from imports on the grounds that theirs is a new industry that needs time to develop technological efficiency, they are using the:

infant industry argument.

The job creation argument for protection against free trade:

is that keeping out foreign imports allows the goods and services to be produced by domestic workers.

A tax system achieves efficiency when:

it minimizes the costs to the economy of tax collection.

An urbanized country has 100 million workers living on 100 square miles of land. A country that is principally rural has 1 million workers living on 10 square miles of land. From this information we know that the urbanized country is ________ relative to the rural country.

labor-abundant

The cross-price elasticity of demand of complementary goods is:

less than zero

If a country has the comparative advantage in producing cloth, we would predict that in the market for cloth, the autarky price would be ________ the world price and the country would choose to________ cloth.

less than; export

A regressive tax is one that takes a:

lower percentage of income as income rises.

Lower wages in China reflect ________ labor productivity in China than in the United States. This means that if the United States moved high-tech industries to China, the overall cost of production would be ________ in China than in the United States.

lower; higher

A tax that takes a ________ percentage of income as income ________ is a ________ tax.

lower; rises; regressive

If the executives of the U.S. silicon-chip industry lobby Congress for protection from imports on the grounds that the military should have an unrestricted domestic supply of silicon chips, they are using:

the national security argument.

If the government wants to minimize the deadweight loss from taxes, it should impose taxes on goods for which:

the price elasticity of demand is low.

If labor is abundant in South Africa but capital is scarce, when South Africa opens to trade:

the price of labor will rise and the price of capital will fall.

If demand is elastic, then:

the quantity effect dominates the price effect, and a decrease in the price causes total revenue to rise.

Countries that trade based on the Heckscher-Ohlin model will find that:

their import goods tend to utilize their relatively scarce factors of production most intensively.

In the short run, the price elasticity of supply for foods low in carbohydrates is lower than it will be in the long run because:

in the short run, food producers do not have as much time to respond to changes in demand.

If demand and supply are both very elastic, a decrease in the rate of an excise tax will likely

increase government revenue.

Other things being equal, the price elasticity of demand for a product will be lower:

if there are few or no substitutes available.

Production possibility frontiers:

illustrate the production choices available to an economy.

If the government follows an income tax system in which personal income up to and including $25,000 is not taxed, income of $25,001 to $50,000 is taxed at 10%, and income over $50,000 is taxed at 25%, a family earning income equal to $60,000 will pay a marginal tax rate of ________ and an average tax rate of ________.

25%; 8.3%

Gas prices recently increased by 25%. In response, purchases of gasoline decreased by 5%. Based on this data, the price elasticity of demand for gas is:

.2

The price of gasoline rises 5% and the quantity of gasoline purchased falls 1%. The price elasticity of demand is equal to ________ and demand is described as ________.

0.2; inelastic

If the price of chocolate-covered peanuts decreases from $1.10 to $0.90 and the quantity demanded increases from 180 bags to 220 bags, then the price elasticity of demand (using the midpoint method) is:

1

Suppose at a price of $10 the quantity demanded is 100. When the price falls to $8, the quantity demanded increases to 130. The price elasticity of demand (using the midpoint formula) between the prices of $10 and $8 is approximately:

1.17

In a single year, the Netherlands can raise 100 tons of beef or produce 1,000 boxes of tulips. In the same growing season, Belgium can raise 50 tons of beef or produce 750 boxes of tulips. In autarky, the price of one ton of beef in the Netherlands is:

10 boxes of tulips.

If personal income up to and including $25,000 is not taxed, income of $25,001 to $50,000 is taxed at 10%, and income over $50,000 is taxed at 20%, then a family earning an income of $75,000 will pay an average tax rate of:

10%

Suppose you manage a convenience mart and are in charge of ordering products but do not set the price. The home office provides the prices. In your area, the income elasticity of demand for peanut butter is -0.5. Due to local factory closings, you expect local incomes to decrease by 20% on average in the next month. As a result, you should stock:

10% more peanut butter on the shelves.

If personal income up to and including $30,000 is not taxed, income of $30,001 to $60,000 is taxed at 10%, and income over $60,000 is taxed at 25%, then a family earning an income of $100,000 will pay an average tax rate of:

13%

A group of dairy farmers is trying to raise milk prices by 10%. If the price elasticity of demand for milk is 0.75 and the price elasticity of supply for milk is 0, then by how much should farmers reduce their milk production to obtain the 10% increase?

7.5%

If your purchases of shoes increase from 9 pairs per year to 11 pairs per year when your income increases from $19,000 to $21,000 a year, other things equal, for you, shoes are considered:

A normal good

Suppose a nation has freely imported sugar at the world price PW for many years. However, a new government administration decides to levy a tariff on imported sugar, and the price rises to Pt. Most economists report that this has created inefficiency. How?

A tariff, like an excise tax, increases the price above the level that was achieved with free competition, and economists usually cite two sources of inefficiency. First, this artificially higher price prevents some mutually beneficial trades. Some consumers who were willing to purchase sugar at prices slightly higher than PW, are now unwilling to do so at Pt, even though PW represents the true cost of producing sugar in the world economy. This creates deadweight loss from unfulfilled transactions. A second source of inefficiency arises because the tariff price Pt "protects" some producers who could not profitably produce sugar at the lower PW. In other words, some economic resources that are inefficiently used in the sugar industry would with competition be used in some better alternative industry.

Which of the following is an example of a tariff?

A tax of 5% of the value of each Yamaha motorcycle imported from Japan.

Which of the following best describes a regressive tax?

A tax whose rate rises less than in proportion to income.

If the world price of good X is lower than the domestic (autarky) price of that good, will a nation be an exporter or importer of good X? How will the domestic market price adjust? Explain.

Because the world price of good X is a relative bargain, importers will find it profitable to purchase good X at the world price and sell it at the higher domestic price. Greater supply of good X in the domestic market will eventually drop the domestic price to the world price and importing will stop.

We note that the price of pretzels increases and the demand for tortilla chips decreases, so we can assume that these two goods are:

Complementary goods

Assume an economy moves from autarky to free international trade. Which of the following statements is true about the export sector?

Consumer surplus falls, producer surplus rises, and the economy as a whole gains.

If the government wants to limit sales of a particular good, it may do so by imposing a quota. However, the same reduction in sales may be achieved by an appropriately chosen excise tax. True or false?

True

The income elasticity of demand for eggs has been estimated to be 0.57. If income grows by 5% in a period, how will that affect demand for eggs in that period, all other things unchanged?

Demand will increase by about 2.9%.

The price elasticity of demand for gasoline in the short run has been estimated to be 0.1. If a war in the Middle East causes the price of oil (from which gasoline is made) to increase, how will that affect total expenditures on gasoline in the short run, all other things equal?

Demand will not change much, but total expenditures will rise.

The price elasticity of demand is measured by:

Dividing the percentage change in the quantity demanded by the percentage change in the price.

In autarky, a country's production and consumption points must be identical. True or false?

True

If Indonesia has lower wage rates than India, trade between these two nations will make India worse off. True or false?

False

Import tariffs benefit domestic producers more than they hurt domestic consumers. True or false?

False

In the United States, poor people and the middle class pay the largest share of income taxes. True or false?

False

International trade based on comparative advantage allows a country to produce outside its production possibility frontier. True or false?

False

While the United States generally follows a policy of free trade, this is so particularly for agriculture and textiles, in which all restrictions on international trade have been removed. True or false?

False

A perfectly elastic supply curve is:

Horizontal

The mayor advocates raising the entrance fee at the city's pools to increase revenue for the city. The mayor is right only if the price effect dominates the quantity effect. True or false?

True

Which is not a source of comparative advantage?

In general, France has absolute advantage in production of all goods and services when compared to Italy.

For a good to be considered a normal good, the_____ must be ________.

Income elasticity of demand; greater than 0

The price elasticity of demand along a demand curve with a constant slope:

Increases in absolute value as the price rises.

Kayla and Jada are roommates in New York City. Both Kayla and Jada recently received raises. Kayla now buys more CDs than before, but Jada buys fewer. Kayla behaves as if CDs are ________ goods, and Jada's income elasticity of demand for CDs is ________.

Normal, Negative

If the price elasticity of demand between two points on a demand curve is 0.75, then the demand between those two points is:

Price-inelastic.

If the government removed the excise tax on gasoline, which of the following would not occur?

Producer surplus would decrease.

Which of the following taxes best illustrates the benefits principle of tax fairness?

Roads and highways are built and maintained through revenue from a tax on gasoline.

Suppose the price of real estate increases by 37.11% in Oakland next year. If the quantity of new homes supplied does not change, this means that the price elasticity of ________ will be perfectly ________ in Oakland next year.

Supply, inelastic

(Table: Production Possibilities for the United States and Canada) Based on the production possibilities for the United States and Canada, which of the following is true?

The United States has an absolute advantage in producing cars.

(Table: The Production Possibilities for Tractors and Crude Oil) Based on the production possibilities for the United States and Mexico, which of the following is true?

The United States has an absolute advantage in producing tractors.

Which statement is not true about the World Trade Organization (WTO)?

The WTO is a direct enforcer of trade agreements.

Which of the following is an example of an excise tax?

a tax of $0.41 per gallon of gas

Exports increase producer surplus but decrease consumer surplus and decrease total surplus. True or false?

True

Explain how an excise tax levied on suppliers affects the supply curve.

The supply curve shifts upward by the amount of the tax at all quantities.

When a worker earns income, she and her employer pay equal portions of FICA (the Federal Insurance Contributions Act). Which of the following statements is true?

The worker bears almost all of the burden (incidence) of the tax

The price elasticity of demand for ground beef has been estimated to be 1.0. If mad cow disease strikes the United States and a large percentage of the cattle are removed from the market, how will that affect total expenditures on hamburger, all other things equal?

Total expenditures will remain unchanged.

The price elasticity of demand for gasoline in the long run has been estimated to be 1.5. If an extended war in the Middle East caused the price of oil (from which gasoline is made) to increase and remain high for a decade, how would that affect total expenditures on gasoline in the long run, all other things equal?

Total expenditures would fall.

Suppose the price elasticity of demand for oranges is 1.8. If a fall frost destroys one-third of the nation's orange crop, how will that affect total revenue from oranges, all other things unchanged?

Total revenue will fall

The price elasticity of demand for lettuce has been estimated to be 2.58. If an insect infestation destroys 10% of the nation's lettuce crop, how will that affect total revenue from lettuce, all other things unchanged?

Total revenue will fall

A tax system causes a loss in efficiency because taxes distort incentives. True or false?

True

If the price elasticity of demand equals 0, then this means the demand curve is:

Vertical

Suppose the income elasticity for cross-country bus trips is equal to -2 and the income elasticity for cross-country plane trips is equal to +2. Does this make sense? Explain your answer.

Yes, it makes sense. With a negative income elasticity, bus trips appear to be inferior goods. Plane trips appear to be normal goods. When a person receives more income, it makes sense that demand for cross-country plane trips will shift to the right and demand for cross-country bus trips will shift to the left.

A politician says that a tax on good X will not increase the price of good X paid by consumers. Is there any way that this can be an accurate statement?

Yes. If the demand curve is perfectly elastic, then a tax on suppliers shifts the supply curve upward, but the new equilibrium price to the consumer is unchanged. This is also accurate if supply is perfectly inelastic.

A university bookstore decreased the price of a sweatshirt from $20 to $18 and discovered that sweatshirt sales increased from 100 per week to 120 per week. Use the midpoint formula to compute the price elasticity of demand for sweatshirts.

[(120 - 100/110] ÷ [(18 - 20)/19] = 1.72

If total revenue goes up when the price falls, demand is said to:

be price-elastic.

Assume that a tariff is imposed on Chinese imports into the United States. This tariff is likely to:

benefit U.S. producers and penalize Chinese producers.

Paying a fee every time you use the municipal golf course is an example of the:

benefits principle

A linear demand curve:

can have both elastic and inelastic price elasticities of demand.

(Figure: The Production Possibility Frontiers for Jackson and Tahoe) Look at the figure The Production Possibility Frontiers for Jackson and Tahoe. Tahoe has an absolute advantage in producing

cattle only

An economy moves from autarky to free international trade. In the import sector ________:

consumer surplus rises, producer surplus falls, and the economy as a whole gains.

The pair of items that is most likely to have a negative cross-price elasticity of demand is:

hot dogs and mustard

If I told you that the income elasticity for hybrid cars was positive, you would know that:

hybrid cars are a normal good

If demand and supply are both very inelastic, a decrease in the rate of an excise tax will likely

decrease government revenue.

Since the United States imports a large quantity of textiles from Asia, the overall wages of U.S. textile workers has ________, while the price of textiles in the United States has ________.

decreased; decreased

If a tax system is well designed, it must be true that:

efficiency can be improved only by making the system less fair.

The cross-price elasticity of electricity with respect to the price of natural gas has been estimated as being equal to 0.2. This implies that:

electricity and natural gas are substitutes.

Taxes paid on the purchase of specific items such as gasoline, cigarettes, or alcoholic beverages are called:

exercise taxes

If the ________ differ(s) between two countries, this suggests the possibility for mutually advantageous trade.

factor endowments

(Figure: A Tariff on Oranges in South Africa) Look at the figure A Tariff on Oranges in South Africa. When the government imposes a tariff on imported oranges, the price of oranges in South Africa rises from PW to PT and domestic consumer surplus ________ to ________.

falls; F + L

Since labor is relatively scarce in Canada, free trade should cause the wages paid to Canadian labor to rise. True or false

false

In the case of U.S. import protection, quota rents for the most important import licenses are earned by:

foreign governments.

Taxation according to the benefits-received principle is best illustrated by:

gasoline tax

A shirt manufacturer sold 10 dozen shirts per day when the price was $4 per shirt but sold 15 dozen shirts per day when the price was $3 per shirt. The price elasticity of demand (using the midpoint method) is:

greater than 1 but less than 3

Import protections are often imposed because:

groups representing import-competing industries are more cohesive than consumers.

The pair of items that is most likely to have a negative cross-price elasticity of demand is:

hamburgers and ketchup

If a tax system is designed to minimize the sum of its deadweight loss and its administrative cost, then:

maximizing efficiency is its principal goal.

The poorest 20% of families in the United States pay a ________ share of their total income in taxes.

negative

The belief that importing goods from low-wage countries will hurt the standard of living of workers in the importing country is known as the:

pauper labor fallacy.

The price elasticity of demand for skiing lessons in New Hampshire is over 1.00. This means that the demand is ________ in New Hampshire.

price elastic

The burden of a tax that is imposed on a good is said to fall completely on the consumers if the:

price paid by consumers for the good increases by the amount of the tax.

When the percentage change in quantity demanded is larger than the percentage change in price, demand is said to be:

price-elastic

If the price elasticity of supply is less than 1, then supply is:

price-inelastic

If a country has the comparative advantage in producing wooden furniture, then with free trade:

producer surplus in the market for wooden furniture will increase.

If the government imposes a $5 excise tax on leather shoes and the price of leather shoes does not change:

producers are paying all of the tax.

Which of the following taxes is not a major source of tax revenue for the federal government?

property tax

Income tax rates are such that Mr. R. Hood earns $35,000 per year and pays $7,000 in taxes, while Mr. G. Gisbourne earns $1 million per year and pays $200,000 in taxes. This tax is:

proportional

Restrictions on free international trade designed to protect domestic industries from competitive market forces that originate beyond the borders of the country are:

protectionist policies.

In the importing country, the most likely effect of a tariff on a good is to:

raise the price and decrease the quantity demanded.

The incidence of a tax:

refers to how much of the tax is actually paid by consumers and producers.

The World Trade Organization (WTO):

resolves disputes between member nations arising from alleged violations of previous agreements dealing with international trade.

In a single year, Argentina can raise 100 tons of beef or produce 1,000 boxes of tulips. In the same growing season, Venezuela can raise 50 tons of beef or produce 750 boxes of tulips. When the two countries begin trading beef for tulips, we would expect the total surplus from beef consumption and production to:

rise in Argentina.

If a nation exports a good when the economy is opened to trade, the domestic price of the good will ________ and domestic consumption will ________.

rise, fall

(Figure: A Tariff on Oranges in South Africa) Look at the figure A Tariff on Oranges in South Africa. When the government imposes a tariff on imported oranges, the price of oranges in South Africa rises from PW to PT and domestic producer surplus ________ to ________.

rises; G + H

The evidence suggests that taken collectively, taxes in the U.S. economy are:

somewhat progressive

If your purchases of shoes increase from 9 pairs per year to 11 pairs per year when the price of shirts increases from $8 to $12, for you, shoes and shirts are considered:

substitue goods

An example of a tariff is a:

tax of 10% of the value of each Honda automobile imported from Japan.

Bangladesh exports shirts, the making of which is labor-intensive, to the United States. The likely source of Bangladesh's comparative advantage in shirts is:

that in comparison with the United States, Bangladesh is a labor-abundant country.

China, which is labor-abundant, has a comparative advantage in clothing production, which is labor-intensive. Which of the following models explains this pattern of comparative advantage?

the Heckscher-Ohlin model

A lump-sum tax, such as the fee for a driver's license, does not take into consideration:

the ability-to-pay principle.

Suppose the price elasticity of demand for blueberries is 1.5. If climate change destroys one-fourth of the nation's blueberry crop (and thus reduces supply), how will that affect total revenue, all other things unchanged?

total revenue will fall

Policies that limit imports, usually with the goal of protecting domestic producers in import-competing industries from foreign competition, are known as:

trade protection.

Which of the following taxes is not used in the United States?

value added tax (VAT)