Econ 202M - Midterm Exam

Assuming that desktop computers are normal goods, which of the following will NOT increase demand for desktop computers?

a very large computer company going out of business

In each of the following cases involving taxes, explain: (i) whether the incidence of the tax falls more heavily on consumers or producers, (ii) why government revenue raised from the tax is not a good indicator of the true cost of the tax, and (iii) how deadweight loss arises as a result of the tax. a. The government imposes an excise tax on the sale of all college textbooks. Before the tax was imposed, 1 million textbooks were sold every year at a price of $50. After the tax is imposed, 600,000 books are sold yearly; students pay $55 per book, $30 of which publishers receive. b. The government imposes an excise tax on the sale of all airline tickets. Before the tax was imposed, 3 million airline tickets were sold every year at a price of $500. After the tax is imposed, 1.5 million tickets are sold yearly; travelers pay $550 per ticket, $450 of which the airlines receive. c. The government imposes an excise tax on the sale of all toothbrushes. Before the tax, 2 million toothbrushes were sold every year at a price of $1.50. After the tax is imposed, 800,000 toothbrushes are sold every year; consumers pay $2 per toothbrush, $1.25 of which producers receive.

a. After the imposition of the tax, consumers pay $5 more per book than before; publishers receive $20 less per book than before. Producers (publishers) bear more of the tax. The tax is $55 − $30 = $25 per book, and 600,000 books are bought and sold. So government revenue is $15 million. This, however, is a poor estimate of the cost of the tax, since it does not take into account the fact that, in addition to the higher price, there are now 400,000 potential consumers who would have bought the books without the tax but no longer will buy them. Deadweight loss arises because consumers and producers lose surplus that is not captured as government revenue. That loss in surplus is accounted for by the 400,000 potential consumers and publishers who would have made transactions without the tax but do not once the tax is levied. b. After the imposition of the tax, travelers pay $50 more per ticket than before; airlines receive $50 less than before. The tax is split evenly between consumers and producers. The tax is $550 − $450 = $100 per ticket, and 1.5 million tickets are bought and sold. So government revenue is $150 million. This, however, is a poor estimate of the cost of the tax, since it does not take into account the fact that, in addition to 1.5 million travelers paying higher prices, there are now 1.5 million potential consumers who would have bought tickets without the tax but no longer buy tickets. Deadweight loss arises because consumers and producers lose surplus that is not captured as government revenue. That loss in surplus is represented by the 1.5 million tickets that would have been transacted at the pre-tax price but are not transacted once the tax is levied. c. After the imposition of the tax, consumers pay $0.50 more per toothbrush than before; producers receive $0.25 less than before. The incidence of the tax falls mainly on consumers. The tax is $2.00 − $1.25 = $0.75 per toothbrush, and 800,000 toothbrushes are bought and sold. So government revenue is $600,000. This, however, is a poor estimate of the cost of the tax, since it does not take into account the fact that, in addition to 800,000 toothbrushes now being more expensive, there are 1.2 million toothbrushes that would have been transacted without the tax but are no longer transacted. Inefficiency arises because consumers and producers lose surplus that is not captured as government revenue. That loss in surplus is represented by the 1.2 million toothbrushes that would have been transacted at the pre-tax price but are not transacted once the tax is levied.

1. Do you think the price elasticity of demand for Ford sport-utility vehicles (SUVs) will increase, decrease, or remain the same when each of the following events occurs? Explain your answer. a. Other car manufacturers, such as General Motors, decide to make and sell SUVs. b. SUVs produced in foreign countries are banned from the American market. c. Due to ad campaigns, Americans believe that SUVs are much safer than ordinary passenger cars. d. The time period over which you measure the elasticity lengthens. During

a. The price elasticity of demand for Ford SUVs will increase because more substitutes are available. b. The price elasticity of demand for Ford SUVs will decrease because fewer substitutes are available. c. The price elasticity of demand for Ford SUVs will decrease because other cars are viewed as less of a substitute. d. The price elasticity of demand for Ford SUVs will increase over time because more substitutes (such as four-wheel-drive cargo vans) become available.

Assess the following four tax policies in terms of the benefits principle versus the ability-to-pay principle. a. A tax on gasoline that finances maintenance of state roads b. An 8% tax on imported goods valued in excess of $800 per household brought in on passenger flights c. Airline-flight landing fees that pay for air traffic control d. A reduction in the amount of income tax paid based on the number of dependent children in the household

a. This tax is based on the benefits principle, since the people who use the state's roads will be the ones paying the gasoline tax. b. This tax is based on the ability-to-pay principle, since the people paying the tax will presumably be individuals who buy expensive items abroad and then import them on passenger flights. c. This tax is based on the benefits principle, since the airlines pay the landing fee and are also the beneficiary of air traffic control services. d. This reduction is based on the ability-to-pay principle. People who have more dependent children in their household will have higher expenses and so are less able to pay a given amount of income taxes, other things equal.

The demand curve for running shoes has shifted to the right. What could have caused it?

an increase in the income of buyers of running shoes

If the government imposes a limit on sales of a good or service by licensing the right to sell a given quantity of the good, the difference between the demand and supply price is:

the quota rent. or the quota rent plus the market price of the license if the license is tradable. "Depends on the version of the test check the available answers."

If a market is in disequilibrium:

there are opportunities for people to make themselves better off.

Scarcity in economics means that:

we do not have sufficient resources to produce all of the goods and services we want.

A price floor or a price ceiling is an example of:

a price control.

French fries and hamburgers are complements in consumption. Suppose the cost of the ingredients used to make hamburgers rises, so that the price of a hamburger rises. Then the equilibrium relative price of french fries _____ and the equilibrium quantity _____.

falls; decreases

Table: Production Good Z and Good X in Urbanville Reference: Ref 2-28 (Table: Production of Good Z and Good X in Urbanville) Look at the table Production of Good Z and Good X in Urbanville. If this table shows the production possibility frontier and if Urbanville is producing 5 of Z and 50 of X, this combination is:

feasible but inefficient.

An economy is said to have a comparative advantage if it:

has the lowest cost of producing a particular good.

In most cases, economic efficiency is achieved through:

incentives built into a market economy.

Figure: Shifts in Demand and Supply III Reference: Ref 3-12 (Figure: Shifts in Demand and Supply III) Look at the figure Shifts in Demand and Supply III. The figure shows how supply and demand might shift in response to specific events. Suppose the technology for producing snowboards improves. Which panel BEST describes how this will affect the market for winter parkas, a complement in consumption of snowboards?

panel A

Figure: Shifts in Demand and Supply II Reference: Ref 3-11 (Figure: Shifts in Demand and Supply II) Look at the figure Shifts in Demand and Supply II. The graph shows how supply and demand might shift in response to specific events. Suppose a drought destroys one-third of the nation's peanut crop. Which panel BEST describes how this will affect the market for peanuts?

panel C

Refer to the figure below. Consumer surplus is

30

Refer to the figure below. Consumer surplus is:

30

Table: The Market for Taxi Rides Reference: Ref 4-24 (Table: The Market for Taxi Rides) Look at the table The Market for Taxi Rides. If a government quota limit at 6 million rides is imposed, the quota rent accruing to the owner of a taxi medallion will be _____ per ride, but there will be a total missed opportunity (inefficiency) to consumers and producers of _____ million rides.

$4; 4

1. Do you aware of the federal and state excise tax on gasoline? 2. What the gasoline tax revenue is used to pay for ?

1) Consumers pay both a federal gas tax (18.4 cents per gallon since 1997—see the website http://www.gaspricewatch.com/web_gas_taxes.phpLinks to an external site. for data) and a state gas tax (which varies by state—see the websites listed to look up your state). 2) The gasoline tax revenue is used to pay for road maintenance and construction.

Table: Production Possibilities Schedule I Reference: Ref 2-10 (Table: Production Possibilities Schedule I) Look at the table Production Possibilities Schedule I. If the economy produces 24 units of capital goods per period, it also can produce at most _____ units of consumer goods per period.

2

Scenario: Countries A and B Two countries, A and B, produce two goods, wheat (W) and steel (S). Each has a linear production possibility frontier in both goods. If country A spends all of its available resources to produce wheat, it can produce 500 tons of wheat and no steel. If it uses all of its resources to produce steel, it can produce 250 tons of steel and no wheat. If country B spends all of its available resources producing wheat, it can produce 400 tons of wheat, and if it spends all of its resources on the production of steel, it can produce 400 tons of steel. Reference: Ref 2-29 (Scenario: Countries A and B) Look at the scenario Countries A and B. If each country devotes half of its resources to the production of wheat and half to the production of steel, then their combined total production of wheat will be _____ tons and their combined total production of steel will be _____ tons.

450; 325

Which of the following represents consumer surplus?

A

Figure: Supply of Coconuts Reference: Ref 3-1 (Figure: Supply of Coconuts) Look at the figure Supply of Coconuts. An improvement in the technology used to harvest coconuts (e.g., a faster, less expensive coconut picker) would be represented in the figure as a movement from:

A to C.

How much of the FICA tax is levied on each group in the economy?

Half is paid by workers and half by employers.

After a great holiday season when it opened its doors for business regularly at 6 A.M., a local retail store decides to continue to open at 6 A.M., even though many customers plan on arriving later to do their shopping. Such a plan by the retail store is:

Inefficient, since most customers will revert to their normal shopping behavior after the holidays are over.

Which of the following is NOT one of the four principles for understanding individual choice?

Overall spending sometimes gets out of line with the economy's productive capacity.

Figure: The Market for Tortillas Reference: Ref 4-17 (Figure: The Market for Tortillas) Look at the figure The Market for Tortillas. With a nonbinding price floor, the price could be equal to _____, consumers would demand _____, and producers would supply _____.

P2; Q2; Q2

Florida schools offered cash bonuses to students who scored high on the state's standardized exams. The cash bonuses are an example of this economic principle:

People usually take advantage of opportunities to make themselves better off.

All states impose excise taxes on gasoline. According to data from the Federal Highway Administration, the state of California imposes an excise tax of $0.40 per gallon of gasoline. In 2015, gasoline sales in California totaled 14.6 billion gallons. What was California's tax revenue from the gasoline excise tax? If California doubled the excise tax, would tax revenue double? Why or why not?

Tax revenue is $0.40 per gallon × 14.6 billion gallons = $5.84 billion. Doubling the excise tax would reduce the amount of gasoline bought and sold, and tax revenue would less than double. The exception would be a case in which either demand or supply is perfectly inelastic; only in that special case would the quantity transacted not change as a result of the imposition of the excise tax, and tax revenue would—in this special case only—double as a result of a doubling in the excise tax rate.

Suppose the supply curve for soap bubbles has a slope of +1 and intersects the vertical axis at a price of $2 per bottle. Interpret the meaning of both the y-intercept and the slope.

The y-intercept at $2 tells us that there will be zero bottles supplied at prices of $2 and below. In other words, the price must rise above $2 for any bottles to be supplied. The slope of +1 tells us that if the price rises $1, one more bottle of soap bubbles will be supplied.

The fact that individuals in a market economy act so as to make themselves better off is a major reason a market equilibrium is usually efficient.

True

A recent news story reported that the Organization of Petroleum Exporting Countries is expected to decrease the supply of oil next summer. Summer is traditionally a time of increased demand for oil because of vacation travel. What would be the combined effect of these two events on the summer market for gasoline?

an increase in the price and an unpredictable change in the quantity

If the price of mozzarella cheese (an ingredient in pizza) declines, there will be:

an increase in the supply of pizza.

In the following figure, which area represents producer surplus

c

In the following figure, which area represents producer surplus?

c

Figure: Guns and Butter Reference: Ref 2-2 (Figure: Guns and Butter) Look at the figure Guns and Butter. The combination of guns and butter at point H:

cannot be attained, given the level of technology and the factors of production available.

In the market for canned pinto beans, _____ will increase if income increases and if pinto beans are a(n) _____ good.

demand; normal

Figure: Guns and Butter Reference: Ref 2-2 (Figure: Guns and Butter) Look at the figure Guns and Butter. On this figure, points A, B, E, and F:

indicate combinations of guns and butter that society can produce using all of its factors efficiently.

Figure: Production Possibility Frontier Reference: Ref 2-11 (Figure: Production Possibility Frontier) Look at the figure Production Possibilities Frontier. Which of the following is NOT an efficient rate of production per period?

no cars and 18 computers

An economy is efficient if it is:

not possible to produce more of one good without producing less of another good.

Table: Production Possibilities Schedule II Reference: Ref 2-3 (Table: Production Possibilities Schedule II) Look at the table Production Possibilities Schedule II. The production of 14 units of consumer goods and 1 unit of capital goods per period would result in:

some unused or inefficiently used resources.

Figure: The Market for Butter Reference: Ref 4-13 (Figure: The Market for Butter) Look at the figure The Market for Butter. If a government price floor at $1.30 is imposed on this market, an inefficiency will result in the form of a _____ of _____ million pounds of butter.

surplus; 6.0