Eco231 Exam 2

Producing a soccer ball costs Jake $5. He sells it to Darby for $35. Darby values the soccer ball at $50. For this transaction, the total surplus in the market is $40. True False

False

Price is the rationing mechanism in a free, competitive market. True False

True

Producer surplus is the amount a seller is paid minus the cost of production. True False

True

If there is no tax placed on the product in this market, producer surplus is the area a. A + B + E. b. D. c. C + F. d. A + B + C + D. e. C + D + F.

e. C + D + F.

If a tax is placed on the product in this market, deadweight loss is the area a. A + B + C + D. b. B + C + E + F. c. A + D. d. B + C. e. E + F.

e. E + F.

If buyers are rational and there is no market failure, a. free market solutions are efficient. b. free market solutions generate equality. c. free market solutions maximize total surplus. d. all of the above are true. e. a and c are correct.

e. a and c are correct.

Taxes on labor income tend to encourage a. workers to work fewer hours. b. second earners to stay home. c. the elderly to retire early. d. the unscrupulous to enter the underground economy. e. all of the above.

e. all of the above.

If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then a. producer surplus is maximized. b. total surplus is maximized. c. consumer surplus is maximized. d. the value placed on the last unit of production by buyers exceeds the cost of production. e. the cost of production on the last unit produced exceeds the value placed on it by buyers.

e. the cost of production on the last unit produced exceeds the value placed on it by buyers.

Suppose that the price of a new bicycle is $300. Sue values a new bicycle at $400. It costs $200 for the seller to produce the new bicycle. What is the value of total surplus if Sue buys a new bike? a. $100 b. $500 c. $200 d. $400 e. $300

$200

A binding price ceiling causes quantity demanded to be less than quantity supplied. True False

False

A binding price floor causes quantity supplied to be less than quantity demanded. True False

False

A tax on insulin is likely to cause a very large deadweight loss to society. True False

False

Binding price ceilings benefit all consumers because they allow consumers to buy all the goods they demand at a lower price. True False

False

Consumer surplus can be measured as the area between the demand curve and the supply curve. True False

False

Joel has a 1966 Mustang, which he sells to Susie, an avid car collector. Susie is pleased since she paid $8,000 for the car but would have been willing to pay $11,000 for the car. Susie's consumer surplus is $2,000. True False

False

The greater the elasticity of demand, the smaller the deadweight loss of a tax. True False

False

Welfare economics is the study of the U.S. federal welfare system. True False

False

When a good is taxed, the tax revenue collected by the government equals the decrease in the welfare of buyers and sellers caused by the tax. True False

False

A price ceiling set below the equilibrium price causes a shortage in the market. True False

True

Efficiency is related to the size of the economic pie, whereas equality is related to how the pie gets sliced and distributed. True False

True

Even though participants in the economy are motivated by self-interest, the "invisible hand" of the marketplace guides this self-interest into promoting general economic well-being. True False

True

For any given quantity, the price on a demand curve represents the marginal buyer's willingness to pay. True False

True

Taxes affect market participants by increasing the price paid by the buyer and decreasing the price received by the seller. True False

True

The Laffer curve is the curve showing how tax revenue varies as the size of the tax varies. True False

True

Suppose that at a price of $30 per month, there are 30,000 subscribers to cable television in Small Town. If Small Town Cablevision raises its price to $40 per month, the number of subscribers will fall to 20,000. At which of the following prices does Small Town Cablevision earn the greatest total revenue? a. $30 per month b. $0 per month c. either $30 or $40 per month because the price elasticity of demand is 1.0 d. $40 per month

a. $30 per month

Suppose that at a price of $30 per month, there are 30,000 subscribers to cable television in Small Town. If Small Town Cablevision raises its price to $40 per month, the number of subscribers will fall to 20,000. Using the midpoint method for calculating the elasticity, what is the price elasticity of demand for cable television in Small Town? a. 1.4 b. 2.0 c. 1.0 d. 0.75 e. 0.66

a. 1.4

Which of the following statements is true if the government places a price ceiling on gasoline at $4.00 per gallon and the equilibrium price is $3.00 per gallon? a. A significant increase in the demand for gasoline could cause the price ceiling to become a binding constraint. b. There will be a surplus of gasoline. c. There will be a shortage of gasoline. d. A significant increase in the supply of gasoline could cause the price ceiling to become a binding constraint.

a. A significant increase in the demand for gasoline could cause the price ceiling to become a binding constraint.

If a tax is placed on the product in this market, tax revenue paid by the sellers is the area a. C. b. B + C + E + F. c. C + F. d. B. e. A.

a. C.

Which of the following statements about a binding price ceiling is true? a. The shortage created by the price ceiling is greater in the long run than in the short run. b. The surplus created by the price ceiling is greater in the short run than in the long run. c. The surplus created by the price ceiling is greater in the long run than in the short run. d. The shortage created by the price ceiling is greater in the short run than in the long run.

a. The shortage created by the price ceiling is greater in the long run than in the short run.

Producer surplus is the area a. above the supply curve and below the price. b. below the supply curve and above the price. c. below the demand curve and above the price. d. below the demand curve and above the supply curve. e. above the demand curve and below the price.

a. above the supply curve and below the price.

The surplus caused by a binding price floor will be greatest if a. both supply and demand are elastic. b. both supply and demand are inelastic. c. supply is inelastic and demand is elastic. d. demand is inelastic and supply is elastic.

a. both supply and demand are elastic.

A tax on gasoline is likely to a. cause a greater deadweight loss in the long run when compared to the short run. b. cause a greater deadweight loss in the short run when compared to the long run. c. generate a deadweight loss that is unaffected by the time period over which it is measured. d. None of the above is correct.

a. cause a greater deadweight loss in the long run when compared to the short run.

If the cross-price elasticity between two goods is negative, the two goods are likely to be a. complements. b. necessities. c. substitutes. d. luxuries.

a. complements.

The reduction of a tax a. could increase tax revenue if the tax had been extremely high. b. will have no impact on tax revenue. c. causes a market to become less efficient. d. will always reduce tax revenue regardless of the prior size of the tax.

a. could increase tax revenue if the tax had been extremely high.

Within the supply-and-demand model, a tax collected from the sellers of a good shifts the a. demand curve upward by the size of the tax per unit. b. supply curve upward by the size of the tax per unit. c. supply curve downward by the size of the tax per unit. d. demand curve downward by the size of the tax per unit.

a. demand curve upward by the size of the tax per unit.

The burden of a tax falls more heavily on the buyers in a market when a. demand is inelastic and supply is elastic. b. demand is elastic and supply is inelastic. c. both supply and demand are elastic. d. both supply and demand are inelastic.

a. demand is inelastic and supply is elastic.

If demand is linear (a straight line), then price elasticity of demand is a. elastic in the upper portion and inelastic in the lower portion. b. inelastic throughout. c. inelastic in the upper portion and elastic in the lower portion. d. elastic throughout. e. constant along the demand curve.

a. elastic in the upper portion and inelastic in the lower portion.

An increase in the price of a good along a stationary supply curve a. increases producer surplus. b. decreases producer surplus. c. improves market equity. d. does all of the above.

a. increases producer surplus.

If a small percentage increase in the price of a good greatly reduces the quantity demanded for that good, the demand for that good is a. price elastic. b. unit price elastic. c. income inelastic. d. income elastic. e. price inelastic.

a. price elastic.

In general, a flatter demand curve is more likely to be a. price elastic. b. price inelastic. c. unit price elastic. d. none of the above.

a. price elastic.

Medical care clearly enhances people's lives. Therefore, we should consume medical care until a. the benefit buyers place on medical care is equal to the cost of producing it. b. we must cut back on the consumption of other goods. c. buyers receive no benefit from another unit of medical care. d. everyone has as much as they would like.

a. the benefit buyers place on medical care is equal to the cost of producing it.

If a supply curve for a good is price elastic, then a. the quantity supplied is sensitive to changes in the price of that good. b. the quantity supplied is insensitive to changes in the price of that good. c. the quantity demanded is sensitive to changes in the price of that good. d. the quantity demanded is insensitive to changes in the price of that good. e. none of the above.

a. the quantity supplied is sensitive to changes in the price of that good.

Joe has ten baseball gloves and Sue has none. A baseball glove costs $50 to produce. If Joe values an additional baseball glove at $100 and Sue values a baseball glove at $40, then to maximize a. equality, Joe should receive the glove. b. consumer surplus, both should receive a glove. c. efficiency, Joe should receive the glove. d. efficiency, Sue should receive the glove.

c. efficiency, Joe should receive the glove.

For which of the following products would the burden of a tax likely fall more heavily on the sellers? a. food b. clothing c. entertainment d. housing

c. entertainment

If a fisherman must sell all of his daily catch before it spoils for whatever price he is offered, once the fish are caught, the fisherman's price elasticity of supply for fresh fish is a. zero. b. infinite. c. unable to be determined from this information. d. one.

a. zero.

One advantage market economies have over centrally-planned economies is that market economies provide an equal distribution of goods and services to households. are more efficient. establish a significant role for government in the allocation of resources. solve the problem of scarcity.

are more efficient.

If a buyer's willingness to pay for a new Honda is $30,000 and she is able to actually buy it for $28,000, her consumer surplus is a. $28,000. b. $2,000. c. $58,000. d. $0. e. $30,000.

b. $2,000.

If consumers always spend 15 percent of their income on food, then the income elasticity of demand for food is a. 0.15. b. 1.00. c. 1.15. d. 1.50. e. none of the above.

b. 1.00.

If a tax is placed on the product in this market, consumer surplus is the area a. D. b. A. c. A + B + C + D. d. A + B + E. e. A + B.

b. A.

If a tax is placed on the product in this market, producer surplus is the area a. A. b. D. c. A + B + E. d. A + B + C + D. e. C + D + F.

b. D.

Which of the following statements about the burden of a tax is correct? a. The tax burden falls most heavily on the side of the market (buyers or sellers) that is most willing to leave the market when price movements are unfavorable to them. b. The distribution of the burden of a tax is determined by the relative elasticities of supply and demand and is not determined by legislation. c. The tax burden generated from a tax placed on a good consumers perceive to be a necessity will fall most heavily on the sellers of the good. d. The burden of a tax lands on the side of the market (buyers or sellers) from which it is collected.

b. The distribution of the burden of a tax is determined by the relative elasticities of supply and demand and is not determined by legislation.

Which of the following would cause a demand curve for a good to be price inelastic? a. The good is inferior. b. The good is a necessity. c. The good is a luxury. d. There are a great number of substitutes for the good.

b. The good is a necessity.

Total surplus is the area a. below the supply curve and above the price. b. below the demand curve and above the supply curve. c. above the supply curve and below the price. d. above the demand curve and below the price. e. below the demand curve and above the price.

b. below the demand curve and above the supply curve.

Deadweight loss is greatest when a. both supply and demand are relatively inelastic. b. both supply and demand are relatively elastic. c. supply is elastic and demand is perfectly inelastic. d. demand is elastic and supply is perfectly inelastic.

b. both supply and demand are relatively elastic.

When a tax on a good starts small and is gradually increased, tax revenue will a. rise. b. fall. c. first rise and then fall. d. first fall and then rise. e. do none of the above.

c. first rise and then fall.

Studies show that a 10 percent increase in the minimum wage a. increases teenage employment by about 1 to 3 percent. b. decreases teenage employment by about 1 to 3 percent. c. increases teenage employment by about 10 to 15 percent. d. decreases teenage employment by about 10 to 15 percent.

b. decreases teenage employment by about 1 to 3 percent.

The burden of a tax falls more heavily on the sellers in a market when a. demand is inelastic and supply is elastic. b. demand is elastic and supply is inelastic. c. both supply and demand are elastic. d. both supply and demand are inelastic.

b. demand is elastic and supply is inelastic.

If a tax on a good is doubled, the deadweight loss from the tax a. doubles. b. increases by a factor of four. c. could rise or fall. d. stays the same.

b. increases by a factor of four.

If supply is price inelastic, the value of the price elasticity of supply must be a. zero. b. less than 1. c. greater than 1. d. infinite. e. none of the above.

b. less than 1.

Adam Smith's "invisible hand" concept suggests that a competitive market outcome a. minimizes total surplus. b. maximizes total surplus. c. generates equality among the members of society. d. does both b and c.

b. maximizes total surplus.

If there is excess capacity in a production facility, it is likely that the firm's supply curve is a. price inelastic. b. price elastic. c. unit price elastic. d. none of the above.

b. price elastic.

In general, a steeper supply curve is more likely to be a. price elastic. b. price inelastic. c. unit price elastic. d. none of the above.

b. price inelastic.

Technological improvements in agriculture that shift the supply of agricultural commodities to the right tend to a. increase total revenue to farmers as a whole because the demand for food is elastic. b. reduce total revenue to farmers as a whole because the demand for food is inelastic. c. reduce total revenue to farmers as a whole because the demand for food is elastic. d. increase total revenue to farmers as a whole because the demand for food is inelastic.

b. reduce total revenue to farmers as a whole because the demand for food is inelastic.

A price floor a. is not a binding constraint if it is set above the equilibrium price. b. sets a legal minimum on the price at which a good can be sold. c. sets a legal maximum on the price at which a good can be sold. d. always determines the price at which a good must be sold.

b. sets a legal minimum on the price at which a good can be sold.

The demand for which of the following is likely to be the most price inelastic? a. airline tickets b. bus tickets c. taxi rides d. transportation

d. transportation

If a tax is placed on the product in this market, tax revenue paid by the buyers is the area a. B + C. b. C. c. B. d. A. e. B + C + E + F.

c. B.

The graph that shows the relationship between the size of a tax and the tax revenue collected by the government is known as a a. deadweight curve. b. tax revenue curve. c. Laffer curve. d. Reagan curve. e. None of the above is correct.

c. Laffer curve.

Which of the following is true with regard to the burden of the tax in Exhibit? a. The sellers pay a larger portion of the tax because supply is more elastic than demand. b. The buyers pay a larger portion of the tax because demand is more inelastic than supply. c. The sellers pay a larger portion of the tax because supply is more inelastic than demand. d. The buyers pay a larger portion of the tax because demand is more elastic than supply.

c. The sellers pay a larger portion of the tax because supply is more inelastic than demand.

Suppose there are three identical vases available to be purchased. Buyer 1 is willing to pay $30 for one, buyer 2 is willing to pay $25 for one, and buyer 3 is willing to pay $20 for one. If the price is $25, how many vases will be sold and what is the value of consumer surplus in this market? a. One vase will be sold, and consumer surplus is $30. b. Three vases will be sold, and consumer surplus is $80. c. Two vases will be sold, and consumer surplus is $5. d. One vase will be sold, and consumer surplus is $5. e. Three vases will be sold, and consumer surplus is $0.

c. Two vases will be sold, and consumer surplus is $5.

A binding price ceiling creates a. a surplus. b. a shortage or a surplus depending on whether the price ceiling is set above or below the equilibrium price. c. a shortage. d. an equilibrium

c. a shortage.

Which of the following would likely cause the greatest deadweight loss? a. a tax on cigarettes b. a tax on salt c. a tax on cruise line tickets d. a tax on gasoline

c. a tax on cruise line tickets

If a producer has market power (can influence the price of the product in the market) then free market solutions a. generate equality. b. are efficient. c. are inefficient. d. maximize consumer surplus.

c. are inefficient.

When a tax distorts incentives to buyers and sellers so that fewer goods are produced and sold, the tax has a. increased efficiency. b. generated no tax revenue. c. caused a deadweight loss. d. reduced the price buyers pay.

c. caused a deadweight loss.

Within the supply-and-demand model, a tax collected from the buyers of a good shifts the a. supply curve upward by the size of the tax per unit. b. supply curve downward by the size of the tax per unit. c. demand curve downward by the size of the tax per unit. d. demand curve upward by the size of the tax per unit.

c. demand curve downward by the size of the tax per unit.

A decrease in supply (shift to the left) will increase total revenue in that market if a. supply is price inelastic. b. supply is price elastic. c. demand is price inelastic. d. demand is price elastic.

c. demand is price inelastic.

Suppose the supply of diamonds is relatively inelastic. A tax on diamonds would generate a a. large deadweight loss and the burden of the tax would fall on the seller of diamonds. b. large deadweight loss and the burden of the tax would fall on the buyer of diamonds. c. small deadweight loss and the burden of the tax would fall on the seller of diamonds. d. small deadweight loss and the burden of the tax would fall on the buyer of diamonds.

c. small deadweight loss and the burden of the tax would fall on the seller of diamonds.

A buyer's willingness to pay is a. that buyer's consumer surplus. b. that buyer's producer surplus. c. that buyer's maximum amount he is willing to pay for a good. d. that buyer's minimum amount he is willing to pay for a good. e. none of the above.

c. that buyer's maximum amount he is willing to pay for a good.

Which of the following is an example of a price floor? a. rent controls b. restricting gasoline prices to $2.00 per gallon when the equilibrium price is $3.00 per gallon c. the minimum wage d. All of the above are price floors.

c. the minimum wage

The price elasticity of demand is defined as a. the percentage change in price of a good divided by the percentage change in the quantity demanded of that good. b. the percentage change in income divided by the percentage change in the quantity demanded. c. the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good. d. the percentage change in the quantity demanded divided by the percentage change in income. e. none of the above.

c. the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good.

Which side of the market is more likely to lobby government for a price floor? a. Neither buyers nor sellers desire a price floor. b. Both buyers and sellers desire a price floor. c. the sellers d. the buyers

c. the sellers

When a tax is collected from the buyers in a market, a. the buyers bear the burden of the tax. b. the sellers bear the burden of the tax. c. the tax burden on the buyers and sellers is the same as an equivalent tax collected from the sellers. d. the tax burden falls most heavily on the buyers.

c. the tax burden on the buyers and sellers is the same as an equivalent tax collected from the sellers.

If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then a. consumer surplus is maximized. b. total surplus is maximized. c. the value placed on the last unit of production by buyers exceeds the cost of production. d. producer surplus is maximized. e. the cost of production on the last unit produced exceeds the value placed on it by buyers.

c. the value placed on the last unit of production by buyers exceeds the cost of production.

If an increase in the price of a good has no impact on the total revenue in that market, demand must be a. price inelastic. b. price elastic. c. unit price elastic. d. all of the above.

c. unit price elastic.

If there is no tax placed on the product in this market, total surplus is the area a. A + B + C + D. b. E + F. c. A + D + E + F. d. A + B + C + D + E + F. e. B + C + E + F.

d. A + B + C + D + E + F.

If a tax is placed on the product in this market, total surplus is the area a. B + C + E + F. b. A + B + C + D + E + F. c. A + D. d. A + B + C + D. e. E + F.

d. A + B + C + D.

If there is no tax placed on the product in this market, consumer surplus is the area a. D + C + B. b. A. c. A + B + C. d. A + B + E. e. C + D + F.

d. A + B + E.

Suppose the equilibrium price for apartments is $800 per month and the government imposes rent controls of $500. Which of the following is unlikely to occur as a result of the rent controls? a. Landlords may be offered bribes to rent apartments. b. There may be long lines of buyers waiting for apartments. c. Landlords may discriminate among apartment renters. d. The quality of apartments will improve. e. There will be a shortage of housing.

d. The quality of apartments will improve.

If a market is efficient, then a. the market allocates output to the buyers who value it the most. b. the market allocates buyers to the sellers who can produce the good at least cost. c. the quantity produced in the market maximizes the sum of consumer and producer surplus. d. all of the above are true. e. none of the above is true.

d. all of the above are true.

In general, if a benevolent social planner wanted to maximize the total benefits received by buyers and sellers in a market, the planner should a. choose a price below the market equilibrium price. b. choose a price above the market equilibrium price. c. choose any price the planner wants because the losses to the sellers (buyers) from any change in price are exactly offset by the gains to the buyers (sellers). d. allow the market to seek equilibrium on its own.

d. allow the market to seek equilibrium on its own.

Check My Work Which of the following takes place when a tax is placed on a good? a. a decrease in the price buyers pay, an increase in the price sellers receive, and a decrease in the quantity sold b. a decrease in the price buyers pay, an increase in the price sellers receive, and an increase in the quantity sold c. an increase in the price buyers pay, a decrease in the price sellers receive, and an increase in the quantity sold d. an increase in the price buyers pay, a decrease in the price sellers receive, and a decrease in the quantity sold

d. an increase in the price buyers pay, a decrease in the price sellers receive, and a decrease in the quantity sold

If the income elasticity of demand for a good is negative, it must be a. an elastic good. b. a luxury good. c. a normal good. d. an inferior good.

d. an inferior good.

If a market generates a side effect or externality, then free market solutions a. are efficient. b. generate equality. c. maximize producer surplus. d. are inefficient.

d. are inefficient.

Consumer surplus is the area a. above the supply curve and below the price. b. below the demand curve and above the supply curve. c. below the supply curve and above the price. d. below the demand curve and above the price. e. above the demand curve and below the price.

d. below the demand curve and above the price.

For a price ceiling to be a binding constraint on the market, the government must set it a. at any price because all price ceilings are binding constraints. b. precisely at the equilibrium price. c. above the equilibrium price. d. below the equilibrium price.

d. below the equilibrium price.

An increase in the price of a good along a stationary demand curve a. improves the material welfare of the buyers. b. improves market efficiency. c. increases consumer surplus. d. decreases consumer surplus.

d. decreases consumer surplus.

If consumers think that there are very few substitutes for a good, then a. supply would tend to be price elastic. b. supply would tend to be price inelastic. c. demand would tend to be price elastic. d. demand would tend to be price inelastic. e. none of the above is true.

d. demand would tend to be price inelastic.

A tax placed on a good that is a necessity for consumers will likely generate a tax burden that a. falls entirely on sellers. b. is evenly distributed between buyers and sellers. c. falls more heavily on sellers. d. falls more heavily on buyers.

d. falls more heavily on buyers.

A tax of $1.00 per gallon on gasoline a. increases the price the buyers pay by $1.00 per gallon. b. decreases the price the sellers receive by $1.00 per gallon. c. increases the price the buyers pay by precisely $0.50 and reduces the price received by sellers by precisely $0.50. d. places a tax wedge of $1.00 between the price the buyers pay and the price the sellers receive.

d. places a tax wedge of $1.00 between the price the buyers pay and the price the sellers receive.

The seller's cost of production is a. the seller's consumer surplus. b. the seller's producer surplus. c. the maximum amount the seller is willing to accept for a good. d. the minimum amount the seller is willing to accept for a good. e. none of the above.

d. the minimum amount the seller is willing to accept for a good.

According to Adam Smith, the success of decentralized market economies is primarily due to individuals' pursuit of self-interest. the basic benevolence of society. society's legal system. partnerships that are forged between business and government.

individuals' pursuit of self-interest.