ECO 1305 - Exam Two (w/ Examples)

If the price of the good is $12, then consumer surplus is

$16

Suppose a tax of $5 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 200 units to 100 units. The tax decreases consumer surplus by $450 and decreases producer surplus by $300. The deadweight loss from the tax is

$250.

Ronnie operates a lawn-care service. On each day, the cost of mowing the first lawn is $10, the cost of mowing the second lawn is $12, and the cost of mowing the third lawn is $15. His producer surplus on the first three lawns of the day is $53. If Ronnie charges all customers the same price for lawn mowing, that price is

$30

Refer to the Figure. Which of the following movements would illustrate the effect in the market for swimming lessons of an increase in the incomes of parents with school-aged children? (note: swimming lessons are more attractive now as a result of the income increase)

Demand 1 to Demand 2

Scenario 8-1 Erin would be willing to pay as much as $100 per week to have her house cleaned. Ernesto's opportunity cost of cleaning Erin's house is $70 per week. Refer to Scenario 8-1. Assume Erin is required to pay a tax of $40 if she hires Ernesto to clean her house for a week. Which of the following is correct?

Erin will now clean her own house.

If the government imposes a $3 tax in a market, the buyers and sellers will share an equal burden of the tax.

False

T/F: All else equal, a decrease in demand will cause an increase in producer surplus

False

T/F: If the government imposes a binding price floor in a market, then the consumer surplus in that market will increase.

False

T/F: Suppose you buy an iPod for $100. If your consumer surplus is $30, your willingness to pay is $70.

False

When a tax is imposed on a good, the resulting decrease in consumer surplus is always larger than the resulting decrease in producer surplus.

False

Suppose the government has imposed a price floor on the market for soybeans. Which of the following events could transform the price floor from one that is not binding into one that is binding?

Farmers use improved, draught-resistant seeds, which lowers the cost of growing soybeans.

Suppose a tax of $5 per unit is imposed on this market. Which of the following is correct?

Sellers will bear more of the burden of the tax than buyers will.

Refer to the Figure. Which of the following movements would illustrate the effect in the market for chocolate chip cookies of a decrease in the price of flour?

Supply 1 to Supply 2

Which of the following quantities decrease in response to a tax on a good?

The equilibrium quantity in the market for the good, producer surplus, and the well-being of buyers of the good

T/F: Suppose you sell a kayak for $600, but you were willing to sell it for $450. The buyer was willing to pay $650. The total surplus is $200.

True

Taxes create deadweight losses.

True

A price floor is

a legal minimum on the price at which a good can be sold. often imposed when sellers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price floor. a source of inefficiency in a market.

Under rent control, bribery is a mechanism to

bring the total price of an apartment (including the bribe) closer to the equilibrium price.

Suppose an increase in the price of rubber coincides with an advance in the technology of tire production. As a result of these two events, the demand for tires

decreases, and the supply of tires increases. is unaffected, and the supply of tires decreases. is unaffected, and the supply of tires increases. Correct Answer None of the other answers is necessarily correct

A minimum wage that is set below a market's equilibrium wage will result in an excess

emand for labor, that is, unemployment. demand for labor, that is, a shortage of workers. supply of labor, that is, unemployment. NONE ARE CORRECT

A tax levied on the sellers of a good shifts the

supply curve upward by the size of the tax.

With trade, producer surplus is

$1,000.

The increase in total surplus resulting from trade is

$1,280, since consumer surplus increases by $3,520 and producer surplus falls by $2,240.

The loss of producer surplus associated with some sellers dropping out of the market as a result of the tax is

$1.

The size of the tariff on roses is

$1.

Total surplus without the tax is

$10, and total surplus with the tax is $7.50.

The amount of deadweight loss caused by the tariff equals

$100.

The amount of the tax per unit is...

$14.

If the supply curve is S, the demand curve is D, and the equilibrium price is $100, what is the producer surplus?

$2,500

The amount of revenue collected by the government from the tariff is

$200.

The price that buyers pay after the tax is imposed is...

$24.

If the supply curve is S and the demand curve shifts from D to D', what is the increase in producer surplus to existing producers?

$2500

If the price of the good is $6, then consumer surplus is

$36

The amount of tax revenue received by the government is

$5.

If the supply curve is S and the demand curve shifts from D to D', what is the increase in producer surplus due to new producers entering the market?

$625

The per-unit burden of the tax on buyers is

$8.

A government-imposed price of $6 in this market could be an example of a (i) binding price ceiling. (ii) non-binding price ceiling. (iii) binding price floor. (iv) non-binding price floor.

(i) and (iv) only

Suppose that Firms A and B each produce high-resolution computer monitors, but Firm A can do so at a lower cost. Cassie and David each want to purchase a high-resolution computer monitor, but David is willing to pay more than Cassie. If Firm A produces a monitor that Cassie buys but David does not, then the market outcome illustrates which of the following principles? (i) Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay. (ii) Free markets allocate the demand for goods to the sellers who can produce them at the least cost.

(ii) only

With trade, total surplus in the Guatemalan coffee market amounts to

1,870.

Consumer surplus in this market after trade is

A + B + D.

The tax causes consumer surplus to decrease by the area

B + C.

What happens to consumer surplus in the iPod market if iPods are normal goods and buyers of iPods experience an increase in income?

Consumer surplus may increase, decrease, or remain unchanged

Refer to the Figure. Which of the following movements would illustrate the effect in the market for golf balls of an increase in green fees (a complement to golf balls)?

Demand 2 to Demand 1

A tax on buyers shifts the demand curve to the right.

False

A tax on sellers increases supply.

False

Without free trade, the domestic price of a good must be equal to the world price of a good.

False

Which graph correctly illustrates the relationship between the size of a tax and the size of the deadweight loss associated with the tax?

Graph (a)

One economist has argued that rent control is "the best way to destroy a city, other than bombing." Why would an economist say this?

He fears that rent control will eliminate the incentive to maintain buildings, leading to a deterioration of the city.

Suppose the government imposes a tax of P'-P'''. Total surplus before the tax is measured by the area

I + J + K + L + M + Y.

Suppose the government imposes a tax of P'-P'''. Total surplus after the tax is measured by the area

J + K + L + M.

Joe has a maximum WTP of 15 dollars for lumber per month and Jill has a maximum WTP of 20 dollars for lumber per month. Pat is the only seller of lumber and has a min WTA of 5 dollars for a first unit of lumber per month and 12 dollars for a second unit of lumber per month. Typically the price of lumber in their community is 13 dollars per unit of lumber. Suppose the government imposes a price ceiling of 10 dollars. Which of the following is possible:

Joe arrives first in line this month and buys lumber. Joe's CS increases by 3 dollars this month compared to a typical month. Jill experiences a decrease in CS of 7 dollars this month compared to a typical month. Pat experiences a drop in PS of 4 dollars compared to what Pat typically gets.

If the supply curve is S and the demand curve shifts from D to D', what is the change in producer surplus?

Producer surplus increases by $3,125

Which of the following statements regarding a Laffer curve is the most plausible?

Reducing a high tax rate is more likely to increase tax revenue than is reducing a low tax rate.

Scenario 8-2 Roland mows Karla's lawn for $25. Roland's opportunity cost of mowing Karla's lawn is $20, and Karla's willingness to pay Roland to mow her lawn is $28. Refer to Scenario 8-2. Assume Roland is required to pay a tax of $3 each time he mows a lawn. Which of the following results is most likely?

Roland and Karla still can engage in a mutually-agreeable trade.

Suppose Yolanda needs a dog sitter so that she can travel to her sister's wedding. Yolanda values dog sitting for the weekend at $200. Rebecca is willing to dog sit for Yolanda so long as she receives at least $175. Yolanda and Rebecca agree on a price of $185. Suppose the government imposes a tax of $30 on dog sitting. What is the deadweight loss of the tax?

The lost benefit to Yolanda and Rebecca because after the tax, Rebecca will not dog sit for Yolanda

What generally happens to the total surplus in a market when the government imposes a tax?

Total surplus decreases.

Because taxes distort incentives, they cause markets to allocate resources inefficiently.

True

T/F: Consumer surplus can be measured as the area between the demand curve and the equilibrium price.

True

Long lines

are an inefficient rationing mechanism because they waste buyers' time, and discrimination according to seller bias is an inefficient rationing mechanism because the good does not necessarily go to the buyer who values it most highly.

A shortage results when a

binding price ceiling is imposed on a market.

Suppose the government imposes a tax of P' - P'''. The area measured by J represents

consumer surplus after the tax.

When a country that imports a particular good imposes an import quota on that good,

consumer surplus decreases and total surplus decreases in the market for that good.

Suppose the government imposes a tax of P' - P'''. The area measured by I + Y represents the

deadweight loss due to the tax.

The decrease in total surplus that results from a market distortion, such as a tax, is called a

deadweight loss.

If the government removes a binding price floor from a market, then the price received by sellers will

decrease, and the quantity sold in the market will increase.

When trade in coffee is allowed, consumer surplus in Guatemala

decreases by the area B + D.

The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium price of chocolate

decreases, and producer surplus decreases.

The price ceiling causes quantity

demanded to exceed quantity supplied by 85 units

With trade, Guatemala will

export 22 units of coffee.

The world price of a pound of almonds is $4.50. Before Uruguay allowed trade in almonds, the price of a pound of almonds there was $3.00. Once Uruguay began allowing trade in almonds with other countries, Uruguay began

exporting almonds and the price per pound in Uruguay increased to $4.50.

When a tariff is imposed in the market, domestic producers

gain $150 of producer surplus.

The nation of Wheatland forbids international trade. In Wheatland, you can buy 1 pound of corn for 3 pounds of fish. In other countries, you can buy 1 pound of corn for 2 pounds of fish. These facts indicate that

if Wheatland were to allow trade, it would import corn.

When the supply of a good increases and the demand for the good remains unchanged, consumer surplus

increases

When trade in coffee is allowed, producer surplus in Guatemala

increases by the area B + D + G.

Motor oil and gasoline are complements. If the price of motor oil decreases, consumer surplus in the gasoline market

may increase, decrease, or remain unchanged

When a tax is placed on the sellers of a product, generally, buyers pay

more, and sellers receive less than they did before the tax.

If a tax is levied on the sellers of a product, then the demand curve will

not shift.

Assume, for Vietnam, that the domestic price of textiles without international trade is higher than the world price of textiles. This suggests that, in the production of textiles,

other countries have a comparative advantage over Vietnam and Vietnam will import textiles.

Suppose the government imposes a tax of P'-P'''. The area measured by L + M + Y represents

producer surplus before the tax.

Zelzar has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs. Which groups in Zelzar are better off as a result of the new free-trade policy?

producers of steel and consumers of incense

When the nation of Worldova allows trade and becomes an exporter of silk,

residents of Worldova who produce silk become better off; residents of Worldova who buy silk become worse off; and the economic well-being of Worldova rises.

Which of the following would be the most likely result of a binding price ceiling imposed on the market for rental cars?

slow replacement of old rental cars with newer ones

A tax on an imported good is called a

tariff.

Suppose the government imposes a tax of P'-P'''. The area measured by K + L represents

tax revenue.

The government's benefit from a tax can be measured by

tax revenue.

An alternative to rent-control laws that would not reduce the quantity of housing supplied is

the payment by government of a fraction of a poor family's rent.