7

12. If the minimum that the Smith family would be willing to sell their house for is $185,000, but they in fact sell it for $210,000, they will receive: A. producer surplus in the amount of $210,000. B. producer surplus in the amount of $25,000. C. consumer surplus in the amount of $210,000. D. consumer surplus in the amount of $25,000.

Producer surplus is the difference between what the seller will accept and the actual price he or she receives: $210,000 - $185,000 = $25,000.

2. The total cost of taxation to consumers and producers generally exceeds the amount of tax revenue collected by government.

TRUE The total cost also includes the deadweight loss.

11. The more inelastic the demand for agricultural output, the stronger the incentive for farmers to engage in rent-seeking activities.

The more inelastic the demand, the greater the loss of revenue resulting from an increase in supply. The incentive for rent seeking is to avoid this loss of revenue. TRUE

81. Suppose people freely choose to spend 40 percent of their income on health care, but then the government decides to tax 40 of a person's income to provide the same level of coverage as before. What can be said about deadweight loss in each case? A. Taxing income results in deadweight loss, and purchasing health care on one's own doesn't result in deadweight loss. B. Taxing income results in less deadweight loss because government knows better what health care coverage is good for society. C. There is no difference because the goods are purchased in the market in either case. D. There is no difference because the total spending remains the same and the health care purchased remains the same.

a Taxation results in deadweight loss because it reduces the incentive to work. The important relationship is between effort and income. When people spend their own money, they are choosing how to spend it. Government cannot know ahead of time what the individual will buy.

83. If the supply curve is perfectly inelastic, the burden of a tax on suppliers is borne: A. entirely by the suppliers. B. entirely by the consumers. C. mostly by the suppliers and partly by the consumers if the demand curve is inelastic. D. partly by the suppliers and mostly by the consumers if the demand curve is elastic.

a When the supply curve is perfectly inelastic, the entire burden of the tax falls on the suppliers.

42. There would be no deadweight loss if: A. demand was perfectly inelastic. B. demand was perfectly elastic. C. taxes collected were used for societal good. D. demand was to shift by the amount of the tax.

a Deadweight loss is caused by changes in behavior. If demand is perfectly inelastic, quantity demanded doesn't change and there is no deadweight loss.

43. A per-unit tax on coffee paid by the seller causes the: A. supply of coffee curve to shift upward by the amount of the per-unit tax. B. supply of coffee curve to shift downward by the amount of the per-unit tax. C. demand for coffee curve to shift upward by the amount of the per-unit tax. D. demand for coffee curve to shift downward by the amount of the per-unit tax.

a Sellers will attempt to raise prices as a result of the tax, and so the supply curve shifts upward. The demand curve would shift if the tax were paid by the consumer.

106. Given the same supply elasticity, the burden of a 10 percent tax on suppliers would be greatest on consumers within what price range? A. $2 and $4 B. $4 and $6 C. $6 and $8 D. $8 and $10

a Elasticity rises as price rises along a straight-line demand curve. Thus, the lowest range is the most likely candidate. Doing the calculations, we find that elasticity between $2 and $4 is [(26 - 22)/24]/[(4 - 2)/3] = (4/24)/(2/3) = (1/6)/(2/3) = 3/12 = .25 and is lower than in all the other ranges.

166. Which of the following statements is true? A. Supply and demand tend to be much more elastic in the long run than in the short run. B. Supply and demand tend to be much more inelastic in the long run than in the short run. C. Supply is elastic in the short run, whereas demand is elastic only in the long run. D. Supply is inelastic in the short run, whereas demand is inelastic only in the long run.

a In the long run, consumers and producers are better able to adjust to a price change, and so the quantity response tends to be larger.

153. Rent-seeking activities: A. require resources, and the net result is to reduce total welfare to society. B. require resources, but the net result is to increase total welfare to society. C. do not require resources. D. have no effect on society's welfare.

a Lobbying the government requires resources. Since the net result is a transfer of surplus from one group to another, these activities are unproductive in the sense that they do not improve social surplus and therefore reduce total welfare to the society.

172. Consumers have the greatest incentive to lobby for price controls in the short run when supply is: A. inelastic and demand increases. B. inelastic and demand decreases. C. elastic and demand increases. D. elastic and demand decreases.

a Price will rise the most when supply is inelastic and demand increases. Consumers have the greatest incentive to keep prices down in this case.

95. If elasticity of demand is 1.8, elasticity of supply is .7, and a 20 percent excise tax is levied on the good: A. the tax burden on suppliers will be greater. B. the tax burden on consumers will be greater. C. the tax burden will be the same for both. D. one cannot say who will bear the greater burden without knowing the tax.

a The more inelastic the supply or demand, the greater the burden of the tax placed on that party.

164. The more inelastic demand is, the: A. more sellers have to gain by restricting supply to raise price and total revenue. B. less sellers have to gain by restricting supply to raise price and total revenue. C. more sellers have to gain by raising supply to lower price and raise total revenue. D. smaller will be the effect on total revenue of a change in price.

a When demand is inelastic, reducing supply results in a higher equilibrium price and an increase in total revenue. The more inelastic demand is, the greater is the benefit of doing so.

167. When supply and demand are both elastic, a price floor will cause a: A. larger surplus than when supply and demand are inelastic. B. smaller surplus than when supply and demand are inelastic. C. larger shortage than when supply and demand are inelastic. D. smaller shortage than when supply and demand are inelastic.

a When supply and demand are elastic, a given increase in price caused by a price floor results in a larger change in quantity demanded and quantity supplied.

86. If the demand curve is perfectly elastic, the burden of a tax on suppliers is borne: A. entirely by the suppliers. B. entirely by the consumers. C. mostly by the suppliers and partly by the consumers if the supply curve is inelastic. D. partly by the suppliers and mostly by the consumers if the supply curve is elastic.

a When the demand curve is perfectly elastic, the entire burden of the tax falls on the suppliers.

85. If demand is perfectly inelastic, the burden of a tax on suppliers is borne: A. entirely by the suppliers. B. entirely by the consumers. C. mostly by the suppliers and partly by the consumers if the demand curve is inelastic. D. partly by the suppliers and mostly by the consumers if the demand curve is elastic.

b When the demand curve is perfectly inelastic, suppliers can shift the entire burden of a tax onto the consumers.

84. If the supply curve is perfectly elastic, the burden of a tax on suppliers is borne: A. entirely by the suppliers. B. entirely by the consumers. C. mostly by the suppliers and partly by the consumers if the demand curve is inelastic. D. partly by the suppliers and mostly by the consumers if the demand curve is elastic.

b When the supply curve is perfectly elastic, price rises by the amount of the tax and the entire burden of the tax falls on the consumers.

28. If price is increased by law from a market equilibrium value of $5 to a higher value of $6: A. both producer surplus and consumer surplus will increase. B. consumer surplus will decrease and there will be some lost surplus. C. producer surplus will decrease and there will be some lost surplus. D. there will be lost surplus, as both producer surplus and consumer surplus decrease.

b Consumer surplus falls as a result of the higher price. The lost surplus is the result of fewer units bought and sold.

155. When demand is highly inelastic and supply shifts to the right, price: A. falls, quantity sold increases, and total revenue increases. B. falls, quantity sold increases, and total revenue decreases. C. increases, quantity sold decreases, and total revenue increases. D. increases, quantity sold decreases, and total revenue decreases.

b Because demand is highly inelastic, the decrease in price is proportionately larger than the increase in quantity, and so total revenue falls.

174. A general rule of political economy in a democracy is that when small groups are helped by a government action and large groups are hurt by that action by an equal and offsetting amount, policies tend to reflect: A. the large group's interest. B. the small group's interest. C. neither group's interest over the other. D. the interest of a free market.

b Because each person in the smaller group benefits more, each person in that smaller group has an incentive to lobby harder.

154. As a result of advances in productivity, farmers can produce more at a lower cost. The effect of these changes has been to: A. increase the demand for farm output. B. reduce total revenue for farmers as a group. C. increase total revenue for farmers as a group. D. increase profits for farmers as a group.

b Because the demand for food is highly inelastic, the rightward shift of supply has resulted in lower total revenue.

143. The price of gasoline is generally higher in Hawaii than in the continental United States. Therefore, the Hawaiian legislature passed a law forbidding gas stations from charging a price higher than the average price of gas on the West Coast of the United States. This is an example of: A. a price floor. B. a price ceiling. C. a quota. D. a tax.

b Limiting how high a price can be charged is a price ceiling.

117. The more elastic the supply and the demand curves are, the: A. smaller the shortage a price ceiling will create. B. greater the shortage a price ceiling will create. C. smaller the surplus a price ceiling will create. D. greater the surplus a price ceiling will create.

b Price ceilings create shortages, and more elastic supply and demand curves will worsen the problem because quantity demanded and quantity supplied will be much more influenced by small price changes.

152. Government is lobbied to institute price controls because: A. they tend to increase total producer surplus and consumer surplus. B. people care more about their own surplus than they do about total surplus. C. people care more about total surplus than they do about their own surplus. D. they reduce producer surplus, but they raise consumer surplus more than enough to compensate.

b Price controls reduce total producer surplus and consumer surplus.

175. When the United States imposed a tariff on imported shrimp, a Vietnamese official said: "If the tariffs are imposed, that will mean fewer shrimp for the U.S. market and higher prices for consumers. So the U.S. government position hurts its own people. That's irrational." The imposition of tariffs by the United States in this case illustrates: A. that the U.S. government, like all governments, is sometimes irrational. B. what the text calls the general rule of political economy, which states that often small interest groups lobby better than large groups. C. that U.S. consumers are either irrational or altruistic because they are willing to pay higher prices to help the U.S. shrimp industry. D. the good/bad paradox that what is good economics is always bad politics and vice versa.

b Small interest groups often beat diffuse large groups even when the total benefit to the small group is a small fraction of the cost to the large group. See the text for the definition of the general rule of political economy.

97. Suppose the equilibrium price of CDs is $10 a CD. At that price, quantity of CDs demanded and supplied is 100,000. If a $6 tax per CD paid by suppliers increases the equilibrium price to $14 per CD and reduces the equilibrium quantity sold to 90,000: A. suppliers pay a greater portion of the tax because they are more price elastic. B. consumers pay a greater portion of the tax because they are less price elastic. C. suppliers pay a greater portion of the tax because the tax is levied on them. D. suppliers pay a greater portion of the tax because they are less price elastic.

b Suppliers receive a price (net of the tax) of $8 while consumers pay $14. Thus, elasticity of demand is approximately .3 and elasticity of supply is approximately .5. The party who is more price inelastic bears the larger burden of the tax.

100. Given the same price elasticity of supply, sellers would be able to pass along the smallest portion of a 10 percent tax on which item? A. Beef with a price elasticity of demand of .62 B. Pork with a price elasticity of demand of .73 C. Chicken with a price elasticity of demand of .32 D. Fish with a price elasticity of demand of .12

b The more elastic the demand, the smaller the burden of the tax placed on consumers.

94. If elasticity of demand is .2, elasticity of supply is .5, and a 10 percent excise tax is levied on the good: A. the tax burden on suppliers will be greater. B. the tax burden on consumers will be greater. C. the tax burden will be the same for both. D. one cannot say who will bear the greater burden without knowing the tax.

b The more inelastic the supply or demand, the greater the burden of the tax placed on that party.

168. A price floor will create the largest surplus when: A. both supply and demand are inelastic. B. both supply and demand are elastic. C. supply is elastic and demand is inelastic. D. supply is inelastic and demand is elastic.

b When supply and demand are elastic, a given increase in price caused by a price floor results in a larger change in quantity demanded and quantity supplied.

54. A per-unit tax will result in a deadweight loss unless the tax causes no change in: A. the price consumers pay. B. the price producers receive after paying it. C. equilibrium quantity sold. D. either equilibrium price or equilibrium quantity.

c It is the fact that most taxes cause quantity bought and sold to fall that results in deadweight loss. As explained in the text, the loss of welfare represents a loss for those consumers and producers who would have traded without the tax but do not with the tax.

82. In 1997, the federal government reinstated a 10 percent excise tax on airline tickets. The industry tried to pass on the full 10 percent ticket tax to consumers but was able to boost fares by only 4 percent. From this you can conclude that the: A. demand for airline tickets is perfectly inelastic. B. supply of airline tickets is perfectly inelastic. C. demand elasticity for airline tickets is greater than zero in absolute value. D. supply elasticity of airline tickets is less than infinity.

c The airline industry could have passed along the entire 10 percent if demand were inelastic (zero). Since they could not, we know demand elasticity is greater than zero.

40. From the point of view of consumer surplus and producer surplus, what problem was created when Thailand subsidized the cost of energy to consumers to help alleviate the burden of higher energy costs? A. It hurt the poor and benefited the rich. B. It led to less fuel being used than the amount that maximizes consumer surplus. C. It encouraged the consumption of too much fuel at the expense of other goods. D. It has no effect; consumers gained consumer surplus, but taxpayers lost the same amount because they had to finance the subsidy.

c A subsidy is the opposite of a tax. A tax leads to a deadweight loss because too little of the good or services is consumed. A subsidy leads to a deadweight loss because too much of the good or service is consumed.

15. Total consumer surplus is measured as the area: A. between the demand curve and the supply curve. B. above the demand curve. C. between the vertical axis, the demand curve, and a horizontal line through the market price. D. between the demand curve and the horizontal axis.

c Given quantity demanded, consumer surplus is the distance between the demand curve and the price consumers must pay.

29. If price is lowered by law from the market equilibrium value of $5 to a lower value of $4: A. both producer surplus and consumer surplus will increase. B. consumer surplus will decrease and there will be some lost total surplus. C. producer surplus will decrease and there will be some lost total surplus. D. there will be lost surplus, as both producer surplus and consumer surplus decrease.

c Producer surplus falls as a result of the lower price. The lost surplus is the result of fewer units bought and sold.

41. Cigarette taxes cause deadweight loss because: A. they are regressive. B. they are progressive. C. they change people's behavior. D. they yield no revenue.

c The deadweight loss of a tax is caused by the changes in behavior it causes.

13. The distance between the demand curve and the price the consumer has to pay for a product (given quantity demanded) is referred to as: A. market surplus. B. market shortage. C. consumer surplus. D. producer surplus.

c The demand curve shows how much an individual would be willing to pay. If the consumer pays less than that, it represents a net gain. Economists call this gain consumer surplus.

171. The problems created by price controls become greatest as time goes by when: A. supply becomes more inelastic and demand becomes more elastic. B. demand becomes more elastic and supply becomes more inelastic. C. demand and supply become more elastic. D. demand and supply become more inelastic.

c Because in the long run demand and supply become more elastic, price ceilings will create greater shortages and price floors will create greater surpluses as time progresses.

144. The price of gasoline is generally higher in Hawaii than in the continental United States. Therefore, the Hawaiian legislature passed a law forbidding gas stations from charging a price higher than the average price of gas on the West Coast of the United States. As time progresses, one would expect the resulting: A. surplus of gas in Hawaii to rise. B. surplus of gas in Hawaii to fall. C. shortage of gas in Hawaii to rise. D. shortage of gas in Hawaii to fall.

c By limiting how high a price can be charged, the legislature is reducing the incentive to invest in supplying gasoline. The long-run elasticity of supply of gas is larger than the short-run elasticity, and the shortage will rise.

96. If elasticity of demand is .7, elasticity of supply is .7, and a 5 percent excise tax is levied on the good: A. the tax burden on suppliers will be greater. B. the tax burden on consumers will be greater. C. the tax burden will be the same for both. D. one cannot say who will bear the greater burden without knowing the tax.

c Elasticity is the same for both.

119. Assuming a binding price floor, the more inelastic the supply and the demand curves are, the: A. smaller the shortage a price floor will create. B. greater the shortage a price floor will create. C. smaller the surplus a price floor will create. D. greater the surplus a price floor will create.

c Price floors create surpluses, and more inelastic supply and demand curves will create less of a problem because quantity demanded and quantity supplied will not be affected as much by the price change.

109. Suppose that 75 percent of a cigarette tax is borne by consumers. If the supply elasticity is 1, the demand elasticity is equal to: A. 1. B. 1/2. C. 1/3. D. 1/4.

c Set the consumer's share of the tax burden, ES/(ED + ES) equal to 3/4, substitute ES = 1, and solve for ED.

98. Suppose the equilibrium price of textbooks is $40 a textbook. At that price, the quantity of textbooks demanded and supplied is 20,000. If a $5 tax per textbook paid by consumers increases the price paid by consumers to $42 a textbook and reduces the equilibrium quantity sold to 18,000, elasticity of: A. demand is 1.4 and elasticity of supply is 2.16. Consumers pay a larger portion of the tax. B. demand is 0.7 and elasticity of supply is 46. Consumers pay a smaller portion of the tax. C. supply is 1.4 and elasticity of demand is 2.16. Suppliers pay a larger portion of the tax. D. supply is 0.7 and elasticity of demand is 46. Suppliers pay a smaller portion of the tax.

c Suppliers receive a price (net of the tax) of $37, and consumers pay $42. Thus, elasticity of demand is 2.16 and elasticity of supply is 1.35. The party who is more price inelastic bears the larger burden of the tax.

108. When elasticities of supply and demand are both equal to 1, the burden of a tax will be: A. entirely on buyers. B. entirely on sellers. C. half on buyers and half on sellers. D. mostly on buyers.

c The consumer's share of the tax burden is ES/(ED + ES), and the seller's share is ED/(ED + ES).

151. Taxes: A. cause market shortages. B. cause the equilibrium quantity to increase. C. create a wedge between the price consumers pay and the price suppliers receive. D. cause the price consumers pay to equal the price suppliers receive.

c This is related to the difference between price ceilings and taxes. Neither causes quantity to rise (both cause quantity to fall); only price ceilings cause market shortages because with a price ceiling, the price consumers pay equals the price suppliers receive.

53. When government imposes a per-unit tax on a product, the net price producers actually receive for the product (after all taxes) typically: A. increases by the amount of the per-unit tax. B. increases by less than the amount of the per-unit tax. C. decreases by the amount of the per-unit tax. D. decreases by less than the amount of the per-unit tax.

d As long as demand is downward-sloping and supply is upward-sloping, the price producers keep after paying the tax decreases by less than the amount of the per-unit tax. As long as demand is not perfectly inelastic, consumers will bear part of the per unit tax.

14. The distance between the supply curve and the price the producer receives for a product for a given quantity supplied is referred to as: A. market surplus. B. market shortage. C. consumer surplus. D. producer surplus.

d The supply curve shows how much a producer would be willing to accept. If the producer receives more than that, it represents a net gain. Economists call this gain producer surplus.

118. Assuming a binding price floor, the more elastic the supply and demand curves are, the: A. smaller the shortage a price floor will create. B. greater the shortage a price floor will create. C. smaller the surplus a price floor will create. D. greater the surplus a price floor will create.

d Price floors create surpluses, and more elastic supply and demand curves will worsen the problem because quantity demanded and quantity supplied will be much more influenced by small price changes.

173. "When small groups are helped by a government action and large groups are hurt by that same action, the small group tends to lobby far more effectively than the large group; thus, policies tend to reflect the small group's interest, not the interest of the large group." This statement is: A. evidence of the futility of lobbying. B. the law of effective lobbying. C. the large/small rule. D. the general rule of political economy.

d See the definition of a general rule of political economy.

107. An excise tax is imposed on smartphones. If the elasticity of demand is 2 and the elasticity of supply is 1, we can predict that: A. consumers will bear the full tax burden. B. sellers will bear the full tax burden. C. consumers will bear 2/3 of the tax burden. D. sellers will bear 2/3 of the tax burden.

d The consumers' share of the tax burden is ES/(ES + ED), and the sellers' share is ED/(ES + ED).

99. Given the same price elasticity of supply, sellers would be able to pass along the largest portion of a 10 percent tax on which item? A. Beef with a price elasticity of demand of .62 B. Pork with a price elasticity of demand of .73 C. Chicken with a price elasticity of demand of .32 D. Fish with a price elasticity of demand of .12

d The more inelastic the demand, the greater the burden of the tax placed on consumers.

101. Those with more inelastic demands will bear a larger burden of a tax because they: A. have more buying power. B. have more income. C. will switch to other products with a tax. D. have fewer substitutes for that good.

d Those with inelastic demands have fewer substitutes. Thus, they will accept more of the burden of a tax.

165. When supply is inelastic, consumers face: A. insignificant price increases when demand increases. B. insignificant price decreases when demand increases. C. significant price decreases when demand increases. D. significant price increases when demand increases.

d When supply is inelastic and demand shifts to the right, the equilibrium price will increase significantly.

1. When the market is in equilibrium, total surplus is maximized. True False

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