Microeconomics - Chapter 4 Economic Efficiency, Government Price Setting, and Taxes

Can economic analysis provide a final answer to the question of whether the government should intervene in markets by imposing price ceilings and price​ floors? Why or why​ not? A. Economic analysis cannot provide such an answer because it seeks to address positive questions such as​ "what is." B.Economic analysis can provide such an answer because it seeks to address both positive and normative questions such as​ "what is" and​ "what ought to​ be." C.Economic analysis can provide such an answer because it seeks to address positive questions such as​ "what is." D.Economic analysis cannot provide such an answer because it seeks to address normative questions such as​ "what ought to​ be." E.Economic analysis can provide such an answer because it seeks to address normative questions such as​ "what ought to​ be."

A. Economic analysis cannot provide such an answer because it seeks to address positive questions such as​ "what is."

Does it matter whether buyers or sellers are legally responsible for paying a​ tax? A. No, the market price to consumers and net proceeds to sellers are the same independent of who pays the tax. B. Yes, the tax is more efficient if consumers pay the tax. C. Yes, the tax is more equitable if sellers pay the tax.

A. No, the market price to consumers and net proceeds to sellers are the same independent of who pays the tax.

Producing where marginal revenue is ____ marginal cost results in production that is too low to maximize overall surplus. A. above B. below

A. above

The equilibrium price with the tax equals the​ net-of-tax price plus the​ per-unit tax, and is____ the original equilibrium price. A. higher than B. equal C. less than

A. higher than

According to​ economists, an efficient tax is one that A. imposes a small excess burden relative to the tax revenue it raises. B. splits the tax burden equally between consumers and producers. C. is relatively easy to collect relative to the revenue it generates. D. maximizes tax revenue for government.

A. imposes a small excess burden relative to the tax revenue it raises.

Black markets may arise A. in reaction to binding price ceilings. B. in reaction to​ non-binding price floors. C. in reaction to insufficient consumer surplus. D. in reaction to excessive producer surplus. E. both a and b.

A. in reaction to binding price ceilings.

How does producer surplus change as the equilibrium price of a good rises or​ falls? As the price of a good​ rises, producer surplus _____ and as the price of a good​ falls, producer surplus _____. A. increase, decrease B. decrease, increase

A. increase, decrease

Whether rent​ controls, government farm​ programs, and other price ceilings and price floors are desirable or undesirable is a ____, —a matter of judgment and not strictly an economic question. An analysis of the economic results of these programs​ is, on the other​ hand, ____ analysis. A. normative, positive B. positive, normative

A. normative, positive

When the government taxes a good or​ service, it affects the market equilibrium for that good or​ service, and economic efficiency falls. Suppose buyers are responsible for collecting the tax and sending the tax receipts to the government. Then the price buyers would be willing to pay would fall by the amount of the tax and the demand curve would shift down by the amount of the​ tax, because buyers would require a price that is lower by the amount of the tax to purchase the same quantity of the product. This causes a ____ at the original equilibrium​ price, which _____ the​ net-of-tax price and reduces equilibrium output. A. surplus, decrease B. shortage, decrease C. surplus, increase D. shortage, increase

A. surplus, decrease

Consumer surplus is used as a measure of a​ consumer's net benefit from purchasing a good or service. Explain why consumer surplus is a measure of net benefit. Consumer surplus gives us the benefit to consumers A. that remains after subtracting the price. B. that remains after subtracting producer surplus. C. that remains after subtracting the marginal cost of production. D. that remains after subtracting any shortages. E. that remains after subtracting deadweight loss.

A. that remains after subtracting the price.

Producer surplus is A. the difference between the lowest price a firm would be willing to accept and the price it actually receives. Your answer is correct. B. the difference between the lowest price a firm would be willing to accept and marginal cost. C. the difference between the highest price a consumer is willing to pay and the lowest price a firm would be willing to accept. D. the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. E. the market price multiplied by the number of units sold by a firm.

A. the difference between the lowest price a firm would be willing to accept and the price it actually receives.

Briefly explain whether you agree with the following​ statement: ​"A lower price in a market always increases economic efficiency in that​ market." A. I​ disagree, because shortages will​ result, thereby encouraging firms to be shoddy in how they operate and in what they produce. B. I​ disagree, because economic efficiency declines if price falls below the market equilibrium. C. I​ agree, because the resulting increase in consumer surplus will more than offset the decline in producer surplus. D. I​ agree, because falling prices for their products will inspire firms to operate as efficiently as possible.

B. I​ disagree, because economic efficiency declines if price falls below the market equilibrium.

The higher price will often cause producers to increase the quantity supplied and result in a ___ of the good. Government may respond by purchasing the excess ____ , paying producers not to produce or subsidizing production. Each of these options is expensive. A. Surplus, demand B. Surplus, supply C. Shortage, demand D. Shortage, supply

B. Surplus, supply

Briefly explain whether you agree or disagree with the following​ statement: ​"If there is a shortage of a​ good, it must be​ scarce, but there is not a shortage of every scarce​ good." A. The statement is correct because there is a shortage of some goods that are not scarce. B. The statement is correct because every good​ (except undesirable​ things) is scarce. C. The statement is incorrect because there is no shortage of scarce goods. D. The statement is incorrect because every good​ (except undesirable​ things) is scarce. E. The statement is incorrect because there is a shortage of every scarce good.

B. The statement is correct because every good​ (except undesirable​ things) is scarce.

Briefly explain whether you agree with the following​ statement: ​"If consumer surplus in a market​ increases, producer surplus must​ decrease." A. The statement is incorrect. Consumer surplus​ (and producer​ surplus) could increase if the government intervenes in a market by imposing taxes. B. The statement is incorrect. Consumer surplus​ (and producer​ surplus) could increase by decreasing deadweight loss. C. The statement is incorrect. Consumer surplus​ (and producer​ surplus) could increase by decreasing economic surplus. D. The statement is incorrect. Consumer surplus​ (and producer​ surplus) could increase by decreasing economic efficiency. E. The statement is correct.

B. The statement is incorrect. Consumer surplus​ (and producer​ surplus) could increase by decreasing deadweight loss.

A student​ argues: "Economic surplus is greatest at the level of output where the difference between marginal benefit and marginal cost is​ largest." This statement is false because A. the level of output where the difference between marginal benefit and marginal cost is largest will also have the highest producer and consumer surplus. B. the level of output where the difference between marginal benefit and marginal cost is largest will be below the output level needed to have the maximum economic surplus. C. the level of output where the difference between marginal benefit and marginal cost is largest will be above the output level needed to have the maximum economic surplus. D. the marginal benefit and marginal cost relationship has no relevance to economic surplus.

B. the level of output where the difference between marginal benefit and marginal cost is largest will be below the output level needed to have the maximum economic surplus.

Many agricultural products are subject to price floors. A price floor aids sellers by requiring that a price be above the competitive equilibrium price. A. This reduces the quantity supplied and producer surplus. B. This reduces the quantity supplied and consumer surplus. C. This reduces the quantity demanded and consumer surplus. D. This reduces the quantity demanded and producer surplus.

C. This reduces the quantity demanded and consumer surplus.

A number of cities impose rent​ control, which puts a ceiling on the rent that landlords can charge for an apartment. A price ceiling aids buyers by requiring that a price be below the competitive equilibrium price. A. This reduces the quantity demanded and consumer surplus. B. This reduces the quantity demanded and producer surplus. C. This reduces the quantity supplied and producer surplus. D. This reduces the quantity supplied and consumer surplus.

C. This reduces the quantity supplied and producer surplus.

The competitive equilibrium is economically efficient because every unit of a good has been produced where the marginal benefit to buyers is greater than or equal to the marginal cost to producers. Output below or above the competitive equilibrium level would not be efficient​ because, if​ below, more units could be produced for which the additional benefit to consumers would be A. greater than the additional cost of production​ and, if​ above, the additional benefit to consumers of those units would be greater than the additional cost of production. B. less than the additional cost of production​ and, if​ above, the additional benefit to consumers of those units would be greater than the additional cost of production. C. greater than the additional cost of production​ and, if​ above, the additional benefit to consumers of those units would be less than the additional cost of production. D. less than the additional cost of production​ and, if​ above, the additional benefit to consumers of those units would be less than the additional cost of production.

C. greater than the additional cost of production​ and, if​ above, the additional benefit to consumers of those units would be less than the additional cost of production

Do producers tend to favor price floors or price​ ceilings? ​ Why? Producers favor A. price ceilings​ because, when​ binding, price ceilings increase price above the equilibrium and may increase producer surplus. B. price floors​ because, when​ binding, price floors decrease price below the equilibrium and increase producer surplus. C. price floors​ because, when​ binding, price floors increase price above the equilibrium and may increase producer surplus. D. price floors​ because, when​ non-binding, price floors increase price above the equilibrium and may increase producer surplus. E. price floors​ because, when​ binding, price floors increase price above the equilibrium and decrease deadweight loss

C. price floors​ because, when​ binding, price floors increase price above the equilibrium and may increase producer surplus.

Marginal cost is A. the additional benefit from consuming one more unit. B. the cost of producing output. C. the additional cost of producing one more unit. D. the difference between the lowest price a firm would be willing to accept and the price it actually receives. E. a legally determined minimum price that sellers may charge.

C. the additional cost of producing one more unit.

Deadweight loss is A. the reduction in consumer expenditure resulting from market failure. B. the reduction in sales revenue resulting from market distortions. C. the reduction in economic surplus resulting from a market not being in competitive equilibrium. D. a measure of market equity.

C. the reduction in economic surplus resulting from a market not being in competitive equilibrium.

Economic efficiency A. is a market outcome in which the sum of consumer surplus and producer surplus is at a maximum. B. is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production. C. is a market outcome in which every individual is better off than they would be at any other market outcome. D. both a and b. E. all of the above.

D. both a and b.

Why do some consumers tend to favor price controls while others tend to oppose​ them? A. Price ceilings generate shortages.​ Consequently, consumers surplus​ increases, but producer surplus decreases. B. Price ceilings generate surpluses.​ Consequently, consumers who obtain the product at a lower price​ win, but consumers who obtain the product at a higher price lose. C. Price floors generate shortages.​ Consequently, the consumers who obtain the product at a lower price​ win, but other consumers will lose because they would like to purchase the product but are unable to because of a shortage. D.Price ceilings generate shortages.​ Consequently, the consumers who obtain the product at a lower price​ win, but other consumers will lose because they would like to purchase the product but are unable to because of a shortage. E.None of the above.

D.Price ceilings generate shortages.​ Consequently, the consumers who obtain the product at a lower price​ win, but other consumers will lose because they would like to purchase the product but are unable to because of a shortage.

Marginal benefit is A.a legally determined maximum price that sellers may charge. B.the additional cost of producing one more unit. C.the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. D.the additional benefit from consuming one more unit.

D.the additional benefit from consuming one more unit.

Why is the supply curve referred to as a marginal cost​ curve? A. It shows the difference between the lowest price a firm would be willing to accept and the marginal cost of production. B. It shows the difference between the highest price a consumer is willing to pay and the lowest price a firm would be willing to accept. C. It shows the price producers actually receive in the market. D. It shows the willingness of consumers to purchase a product at different prices. E. It shows the willingness of firms to supply a product at different prices.

E. It shows the willingness of firms to supply a product at different prices.

Do the people who are legally required to pay a tax always bear the burden of the​ tax? Briefly explain. A. No. Consumers always bear the burden of the tax. B. No. Producers always bear the burden of the tax. C. No. Those who are legally required to send a tax payment to the government never bear the burden of the tax. D. Yes. Those who are legally required to send a tax payment to the government bear the burden of the tax. E. No. Whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government

E. No. Whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government

Economists define economic efficiency in this way A. to help policymakers understand the negative consequences of price floors. B. to help policymakers understand the negative consequences of taxes. C. to help policymakers understand the negative consequences of price ceilings. D. to illustrate the benefits of a competitive market equilibrium. E. all of the above.

E. all of the above.

Tax incidence indicates A. the burden of a tax on consumers. B. the burden of a tax on producers. C. who is not legally required to send a tax payment to the government. D. who is legally required to send a tax payment to the government. E. the actual division of the burden of a tax.

E. the actual division of the burden of a tax.

Consumer surplus is A. the difference between the lowest price a firm would be willing to accept and the price it actually receives. B. the highest price a consumer is willing to pay to consume a good or service. C. the difference between the highest price a consumer is willing to pay and marginal benefit. D. the difference between the highest price a consumer is willing to pay and the lowest price a firm would be willing to accept. E. the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.

E. the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.

Why is the demand curve referred to as a marginal benefit​ curve? A.It shows the difference between the highest price a consumer is willing to pay and the lowest price a firm would be willing to accept. B.It shows the price consumers actually pay to consume a product. C.It shows the difference between the highest price a consumer is willing to pay and the marginal benefit of consumption. D.It shows the willingness of firms to supply a product at different prices. E.It shows the willingness of consumers to purchase a product at different prices.

E.It shows the willingness of consumers to purchase a product at different prices.

____ the sum of consumer surplus and producer​ surplus, or the total net benefit to society is at a maximum when a competitive​ market, with many buyers and sellers and no government​ restrictions, is in equilibrium.

Economic surplus

The _____ of the competitive market equilibrium can be thought about in terms of consumer surplus and producer surplus.

economic efficiency

The higher equilibrium price with the tax will ___ consumer surplus. A. reduce C. increase Producer surplus will also fall because producers receive the​ net-of-tax price, which is lower than the original equilibrium price. Part of the fall in economic surplus will be offset by the tax revenue government​ collects, which equals the tax rate multiplied by the​ new, lower equilibrium output quantity. The rest of the reduction in consumer and producer surplus is equal to the deadweight —or ____ of the tax. A. efficiency gain B. excess burden

reduce, excess burden