Econ Midterm

Refer to Figure 8-2. Consumer surplus without the tax is

$6, and consumer surplus with the tax is $1.50.

Refer to Figure 9-1. In the absence of trade, total surplus in the Guatemalan coffee market amounts to

1,650.

Which of the following goods is rival and excludable?

A congested toll road

Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without government intervention in the vaccination market, which of the following statements is correct?

At the current output level, the marginal social benefit exceeds the marginal private benefit.

Which of the following is not an advantage of corrective taxes?

They subsidize the production of goods with positive externalities.

Refer to Figure 8-5. Graph (a) and Graph (b) each illustrate a $4 tax placed on a market. In comparison to Graph (a), Graph (b) illustrates which of the following statements?

When demand is relatively inelastic, the deadweight loss of a tax is smaller than when demand is relatively elastic.

A city street is

a common resource when it is congested, but it is a public good when it is not congested.

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

deadweight loss.

If the production of computer chips yields greater technology spillovers than the production of potato chips, the government should

encourage the production of computer chips with subsidies.

If the size of a tax increases, tax revenue

may increase, decrease, or remain the same.

The size of a tax and the deadweight loss that results from the tax are

positively related.

Markets fail to allocate resources efficiently when

property rights are not well established.

If a sawmill creates too much noise for local residents,

the government can raise economic well-being through noise-control regulations.

It is commonly argued that national defense is a public good. Nevertheless, the weapons used by the U.S. military are produced by private firms. We can conclude that

weapons are rival in consumption and excludable, but national defense is not rival in consumption and not excludable.

Refer to Figure 9-2. Total surplus with trade exceeds total surplus without trade by

$1,280.

Refer to Scenario 10-1. From the given information, it is apparent that

the production of gasoline involves a negative externality, so the market will produce a larger quantity of gasoline than is socially desirable.

Producers have little incentive to produce a public good because

there is a free-rider problem.

Refer to Figure 9-2. The increase in total surplus resulting from trade is

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

Refer to Figure 8-2. The loss of producer surplus associated with some sellers dropping out of the market as a result of the tax is

$1.

Refer to Figure 8-2. The loss of consumer surplus associated with some buyers dropping out of the market as a result of the tax is

$1.50.

Refer to Figure 8-2. Total surplus without the tax is

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

Refer to Figure 6-10. The amount of the tax per unit is

$14.

Refer to Figure 9-2. Without trade, producer surplus amounts to

$3,240.

Refer to Figure 8-2. The loss of consumer surplus for those buyers of the good who continue to buy it after the tax is imposed is

$3.

Refer to Figure 8-2. The loss of producer surplus as a result of the tax is

$3.

Refer to Figure 8-2. The per-unit burden of the tax on buyers is

$3.

Refer to Scenario 10-1. Suppose the equilibrium quantity of gasoline is 1,150 gallons; that is, QMARKET = 1,150. Then the equilibrium price of a gallon could be

$3.30.

Refer to Figure 8-2. Producer surplus without the tax is

$4, and producer surplus with the tax is $1.

Refer to Figure 8-2. The loss of consumer surplus as a result of the tax is

$4.50.

Refer to Figure 8-2. The amount of tax revenue received by the government is

$5.

Refer to Figure 8-2. The amount of the tax on each unit of the good is

$5.

Refer to Scenario 10-1. Let QMARKET represent the equilibrium quantity of gasoline, and let QOPTIMUM represent the socially optimal quantity of gasoline. Which of the following inequalities is correct?

1,000 < QOPTIMUM < QMARKET

The Occupational Safety and Health Administration (OSHA) has determined that the probability of a worker dying from exposure to a hazardous chemical used in the production of fertilizer is 0.008. The cost of imposing a regulation that would ban the chemical is $32 million. If the value of a human life is equal to $10 million, how many people must the policy affect in order for the benefits to exceed the costs?

401

Miguel, Maria, and Marcos all would like a place to sit while waiting at their children's bus stop. The neighborhood association is considering installing several park benches at the bus stop. Miguel values the benches at $20, Maria at $30, and Marcos at $40. The park benches and labor for installation cost $100. If Miguel, Maria, and Marcos are the only residents who value the benches, what should the neighborhood association do?

Do not install the park benches because the costs outweigh the benefits.

Pay-per-view broadcasts are

club goods

Goods that are rival in consumption but not excludable would be considered

common resources.

Before considering any public project, the government should

conduct a cost-benefit analysis and compare the total cost and total benefits of the project.

Refer to Figure 9-2. If this country allows free trade in tricycles,

consumers will gain and producers will lose.

Refer to Figure 9-1. When trade in coffee is allowed, consumer surplus in Guatemala

decreases by the area B + D.

Refer to Scenario 10-1. The production of the 1,000th gallon of gasoline entails an

external cost of $0.45.

If the labor supply curve is very elastic, a tax on labor

has a large deadweight loss.

Refer to Figure 8-2. The imposition of the tax causes the price paid by buyers to

increase by $3.

When a country is on the downward-sloping side of the Laffer curves, a cut in the tax rate will

increase tax revenue and decrease the deadweight loss.

On hot summer days, electricity-generating capacity is sometimes stretched to the limit. At these times, electric companies may ask people to voluntarily cut back on their use of electricity. An economist would suggest that

it would be more efficient if the electric company raised its rates for electricity at peak times.

Refer to Figure 10-1. This graph represents the tobacco industry. The industry creates

negative externalities.

Refer to Figure 8-1. Suppose the government imposes a tax of P'-P'''. The area measured by L + M + Y represents

producer surplus before the tax.

The goal of requiring licenses for hunting and fishing is to

reduce the use of a common resource.

Refer to Scenario 10-1. Suppose the dollar amount of the externality, per gallon of gasoline, is constant, regardless of how much gasoline is produced. Then the externality could be internalized if producers of gasoline were

required to pay a tax of $0.45 per gallon of gasoline sold.

Producer surplus is

the amount a seller is paid minus the cost of production.

Refer to Figure 9-2. With trade, producer surplus is

$1,000.

Refer to Figure 9-2. With trade, the price of tricycles in this country is

$11, with 200 tricycles produced in this country and another 320 tricycles imported.

Refer to Figure 7-5. 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?

$2,500

Refer to Figure 8-2. The loss of producer surplus for those sellers of the good who continue to sell it after the tax is imposed is

$2.

Refer to Figure 8-2. The per-unit burden of the tax on sellers is

$2.

Refer to Figure 10-1. This graph represents the tobacco industry. Without any government intervention, the equilibrium price and quantity are

$2.07 and 38 units, respectively.

Refer to Figure 8-2. The amount of deadweight loss as a result of the tax is

$2.50.

Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are

$2.80 and 24 units, respectively.

Refer to Figure 9-2. Without trade, consumer surplus amounts to

$3,240.

Refer to Figure 9-2. Without trade, total surplus amounts to

$6,480.

Refer to Figure 9-2. With trade, consumer surplus is

$6,760.

Refer to Figure 7-2. If the government imposes a price floor of $110 in this market, then consumer surplus will decrease by

$600.

Refer to Figure 9-2. With trade, total surplus is

$7,760.

Refer to Figure 10-3. What is the equilibrium price in this market?

$8

Refer to Figure 7-2. At the equilibrium price, consumer surplus is

$800.

Refer to Figure 9-1. In the absence of trade, the equilibrium price of coffee in Guatemala is

$90.

Refer to Figure 9-1. With trade, total surplus in the Guatemalan coffee market amounts to

1,870.

Refer to Figure 10-3. What is the socially optimal quantity of output in this market?

10 units

Kristi and Rebecca sell lemonade on the corner for $0.50 per cup. It costs them $0.10 to make each cup. On a certain day, their producer surplus is $20. How many cups did Kristi and Rebecca sell?

50

Refer to Figure 9-1. In the absence of trade, total surplus in Guatemala is represented by the area

A + B + C + D + F.

Which of the following is not a characteristic of pollution permits?

Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial allocation.

Which of the following statements is not correct?

Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix the price of pollution.

In which of the following cases is the Coase theorem most likely to solve the externality?

Ed is allergic to his roommate's cat.

Refer to Figure 8-8. 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)

Refer to Figure 9-1. From the figure it is apparent that

Guatemala has a comparative advantage in producing coffee, relative to the rest of the world.

Refer to Figure 9-1. From the figure it is apparent that

Guatemala will export coffee if trade is allowed.

Refer to Figure 9-1. Relative to the no-trade situation, trade with the rest of the world results in

Guatemalan consumers paying a higher price for coffee.

Refer to Figure 9-1. When trade is allowed,

Guatemalan producers of coffee become better off and Guatemalan consumers of coffee become worse off.

Refer to Figure 8-1. Suppose the government imposes a tax of P'-P'''. Total surplus after the tax is measured by the area

J + K + L + M.

Refer to Scenario 10-1. Let Q represent the number of gallons of gasoline and let P represent the price of a gallon of gasoline. Which of the following statements is correct?

One point on the supply curve is (Q = 1,000, P = $3.10).

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.

Refer to Table 7-5. You are selling extra tickets to the Midwest Regional Sweet 16 game in the men's NCAA basketball tournament. The table shows the willingness to pay of the four potential buyers in the market for a ticket to the game. Which of the following graphs represents the market demand curve?

See study guide starts at 500, ends at 4

Refer to Figure 6-12. 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.

Which of the following events would increase producer surplus?

Sellers' costs stay the same and the price of the good increases.

Refer to Figure 8-5. Which of the following combinations will maximize the deadweight loss from a tax?

Supply2 and Demand2

Suppose that coal producers create a negative externality equal to $5 per ton of coal. What is the relationship between the equilibrium quantity of coal and the socially optimal quantity of coal?

The equilibrium quantity is greater than the socially optimal quantity.

Which of the following is an example of a positive externality?

The mayor of a small town plants flowers in the city park.

Suppose that candy producers create a positive externality equal to $1 per pound of candy. Further suppose that the government offers a $1-per-pound subsidy to the producers. What is the relationship between the equilibrium quantity and the socially optimal quantity of candy?

They are equal.

Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the government imposes a $5 per-unit tax on the producers. What is the relationship between the after-tax equilibrium quantity and the socially optimal quantity of electricity to be produced?

They are equal.

Zaria and Hannah are roommates. Zaria assigns a $30 value to smoking cigarettes. Hannah values smoke-free air at $15. Which of the following scenarios is a successful example of the Coase theorem?

Zaria pays Hannah $16 so that Zaria can smoke.

Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example of

a transaction cost.

The Tragedy of the Commons will be evident when a growing number of sheep grazing on the town commons leads to a destruction of the grazing resource. To correct for this problem, the town could

auction off a limited number of sheep-grazing permits.

Suppose a tax is imposed on the sellers of fast-food French fries. The burden of the tax will

be shared by the buyers and sellers of fast-food French fries but not necessarily equally.

Market failure associated with the free-rider problem is a result of

benefits that accrue to those who don't pay.

Brad owns 5 acres of land. Brad sells the land to a real estate developer who builds a subdivision with 10 houses. The land is an example of a good that is

both rival in consumption and excludable.

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by J represents

consumer surplus after the tax.

Refer to Figure 8-1. Suppose the government imposes a tax of P'' - P. The area measured by J + K + I represents

consumer surplus before the tax.

A toll on a congested road is in essence

corrective tax

If the government decides to build a new highway, the first step would be to conduct a study to determine the value of the project. The study is called a

cost-benefit analysis.

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by I + Y represents the

deadweight loss due to the tax.

Refer to Figure 8-2. The imposition of the tax causes the price received by sellers to

decrease by $2.

Refer to Figure 8-2. The imposition of the tax causes the quantity sold to

decrease by 1 unit.

A tax on the sellers of coffee will increase the price of coffee paid by buyers,

decrease the effective price of coffee received by sellers, and decrease the equilibrium quantity of coffee.

Refer to Figure 7-6. When the price falls from P2 to P1, producer surplus

decreases by an amount equal to A+B.

When a tax is imposed on a good, the

equilibrium quantity of the good always decreases.

Refer to Figure 9-1. With trade, Guatemala will

export 22 units of coffee.

Refer to Figure 6-1. A binding price ceiling is shown in

graph (b) only.

Refer to Figure 9-2. With trade, this country

imports 320 tricycles.

If the cost of producing sofas decreases causing the price of sofas to decrease, consumer surplus in the sofa market will

increase.

Refer to Figure 9-1. When trade in coffee is allowed, producer surplus in Guatemala

increases by the area B + D + G.

When Monique drives to work every morning, she drives on a congested highway. What Monique does not realize is that when she enters the highway each morning she increases the travel time of all other drivers on the highway. In this case, the external cost of Monique's highway trip

increases the social cost above the private cost.

When an externality is present, the market equilibrium is

inefficient, and the equilibrium does not maximize the total benefit to society as a whole.

The deadweight loss from a tax per unit of good will be smallest in a market with

inelastic supply and inelastic demand.

Refer to Figure 10-3. If the government wanted to tax or subsidize this good to achieve the socially optimal level of output, it would

introduce a subsidy of $4 per unit.

Pollution is a

negative externality that can be viewed as a common-resource problem.

If a road is congested, then use of that road by an additional person would lead to a

negative externality.

Because public goods are

not excludable, people have an incentive to be free riders.

Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The area measured by M represents

producer surplus after the tax.

A benevolent social planner would prefer that the output of good x be increased from its current level if, at the current level of output of good x,

social cost = private cost = private value < social value.

When negative externalities are present in a market

social costs will be greater than private costs.

Refer to Figure 8-1. Suppose the government imposes a tax of P'-P'''. The area measured by K + L represents

tax revenue.

According to the Coase theorem, private parties can solve the problem of externalities if

the cost of bargaining is small.

A drought in California destroys many red grapes causing the prices of both red grapes and red wine to rise. As a result, the consumer surplus in the market for red grapes

decreases, and the consumer surplus in the market for red wine decreases.

Suppose that a tax is placed on books. If the buyers pay the majority of the tax, then we know that the

demand is more inelastic than the supply.

A $1.50 tax levied on the buyers of pomegranate juice will shift the demand curve

downward by exactly $1.50.

Refer to Table 7-2. Who experiences the largest loss of consumer surplus when the price of the good increases from $20 to $22?

All three buyers experience the same loss of consumer surplus.

Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. How much will buyers pay per unit after the tax is imposed?

Between $5 and $7

Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. What will be the new equilibrium quantity in this market?

Between 60 units and 100 units

Refer to Table 7-7. If the market price is $1,000, the producer surplus in the market is

$300.

Refer to Figure 6-13. What is the amount of the tax per unit?

$4

Refer to Figure 7-5. If the supply curve is S', the demand curve is D, and the equilibrium price is $150, what is the producer surplus?

$625

Refer to Figure 6-7. Which of the following statements is not correct?

A government-imposed price of $10 would be a binding price ceiling if market demand is either Demand A or Demand B.

A price ceiling is

A legal maximum on the price at which a good can be sold

Which of the following is not correct?

A minimum wage would be binding for workers with high skills and much experience.

Refer to Figure 7-1. When the price is P1, consumer surplus is

A+B+C.

Refer to Figure 6-15. In which market will the majority of the tax burden fall on buyers?

The market shown in graph (b)

Suppose that in a particular market, the supply curve is highly elastic and the demand curve is highly inelastic. If a tax is imposed in this market, then the

buyers will bear a greater burden of the tax than the sellers.

Refer to Figure 7-1. When the price rises from P1 to P2, consumer surplus

decreases by an amount equal to B+C.

Refer to Figure 6-2. The price ceiling causes quantity

demanded to exceed quantity supplied by 90 units.

Moving production from a high-cost producer to a low-cost producer will

raise total surplus.

Refer to Figure 6-13. Suppose buyers, rather than sellers, were required to pay this tax (in the same amount per unit as shown in the graph). Relative to the tax on sellers, the tax on buyers would result in

the same amount of tax revenue for the government.

Producer surplus directly measures

the well-being of sellers

Refer to Figure 6-8. In 1973, OPEC restricted supply and U.S. government regulations limited the price oil companies could charge for gasoline. Which of the following statements best relates the figure to the events that occurred in the United States in the 1970s?

Buyers of gasoline paid a price of P1 before 1973; they paid a price of P2 after OPEC increased the price of crude oil in 1973, and there was a shortage of gasoline at that price.

If a tax shifts the demand curve downward, we can infer that the tax was levied on

buyers of the good.

If the government levies a $1,000 tax per boat on sellers of boats, then the price paid by buyers of boats would

increase by less than $1,000.

Refer to Figure 6-8. When the price ceiling is enforced in this market, and the supply curve for gasoline shifts from S1 to S2, the resulting quantity of gasoline that is bought and sold is

less than Q3.

The burden of a luxury tax usually falls

more on the middle class than on the rich.

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

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

As a result of a decrease in price,

new buyers enter the market, increasing consumer surplus.

Refer to Figure 6-7. If the government imposes a price ceiling at $6, it would be

nonbinding if market demand is Demand A and binding if market demand is Demand B.

If a nonbinding price floor is imposed on a market, then the

quantity sold in the market will stay the same.

A tax on a good

raises the price that buyers pay and lowers the price that sellers receive.

Cost is a measure of the

seller's willingness to sell.

A supply curve can be used to measure producer surplus because it reflects

sellers' costs.

Refer to Figure 6-4. In graph (b), there will be

surplus

Consider the market for gasoline. Buyers

would lobby for a price ceiling, whereas sellers would lobby for a price floor.

Refer to Table 7-7. If the price is $1,l50, who would be willing to supply the product?

Carlos, Dianne, and Evaline

All else equal, what happens to consumer surplus if the price of a good increases?

Consumer surplus decreases

Suppose there is an early freeze in California that reduces the size of the lemon crop. As the price of lemons rises, what happens to consumer surplus in the market for lemons?

Consumer surplus decreases

Refer to Figure 6-11. Suppose a tax of $2 per unit is imposed on this market. Which of the following is correct?

One-half of the burden of the tax will fall on buyers, and one-half of the burden of the tax will fall on sellers.

Refer to Figure 7-5. If the demand curve is D and the supply curve shifts from S' to S, what is the change in producer surplus?

Producer surplus increases by $1,875.

Refer to Figure 7-5. 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 is true when the price of a good or service rises?

Some buyers exit the market.

Refer to Figure 6-5. Which of the following statements is not correct?

When the price is $6, there is a surplus of 8 units

A price floor is

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

Suppose the government wants to encourage Americans to exercise more, so it imposes a binding price ceiling on the market for in-home treadmills. As a result,

a shortage of treadmills will develop.

Refer to Figure 6-9. In this market, a minimum wage of $7.00 is

binding and creates unemployment.

Refer to Figure 6-5. A government-imposed price of $12 in this market is an example of a

binding price floor that creates a surplus.

Henry is willing to pay 45 cents, and Janine is willing to pay 55 cents, for 1 pound of bananas. When the price of bananas falls from 50 cents a pound to 40 cents a pound,

both Janine and Henry experience an increase in consumer surplus.

When a good is taxed,

both buyers and sellers of the good are made worse off.

Under rent control, bribery is a potential mechanism to

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

Billie Jo values a stainless steel dishwasher for her new house at $500, but she succeeds in buying one for $425. Billie Jo's willingness to pay for the dishwasher is

$500.

Refer to Figure 7-5. 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

Refer to Figure 6-10. The per-unit burden of the tax on buyers is

$8.

Refer to Figure 6-14. The buyers will bear the highest share of the tax burden compared to sellers if the demand is

D2, and the supply is S2.

Dallas buys strawberries, and he would be willing to pay more than he now pays. Suppose that Dallas has a change in his tastes such that he values strawberries more than before. If the market price is the same as before, then

Dallas's consumer surplus would increase.

Refer to Table 7-3. If you have a ticket that you sell to the group in an auction, what will be the selling price?

Slightly more than $50

Refer to Table 7-10. You want to hire a professional photographer to take pictures of your family. The table shows the costs of the four potential sellers in the local photography market. Which of the following graphs represents the market supply curve?

Starts @ 400 ends @ 1000

Refer to Figure 6-8. When the price ceiling is enforced in this market and the supply curve for gasoline shifts from S1 to S2,

a shortage will occur at the new market price of P2.

When a tax is placed on the buyers of lemonade, the

burden of the tax will be shared by the buyers and the sellers, but the division of the burden is not always equal.

Refer to Figure 6-2. The price ceiling

makes it necessary for sellers to ration the good using a mechanism other than price.

Refer to Figure 6-13. How is the burden of the tax shared between buyers and sellers? Buyers bear

three-fourths of the burden, and sellers bear one-fourth of the burden.

Refer to Table 7-7. Suppose each of the five sellers can supply at most one unit of the good. The market quantity supplied is exactly 2 if the price is

$1,050.

Refer to Table 7-3. If you have two (essentially) identical tickets that you sell to the group in an auction, assuming that each person can only buy one ticket, which of the following is closest to the selling price for each ticket?

$26

Refer to Table 7-8. If the sellers bid against each other for the right to sell the good to a consumer, then the good will sell for

$100 or slightly less.

Refer to Figure 7-5. If the supply curve is S, the demand curve is D, and the equilibrium price is $100, what is the producer surplus?

$2,500

Refer to Figure 6-10. The price that buyers pay after the tax is imposed is

$24.

Refer to Table 6-1. Following the imposition of a price floor $2 above the equilibrium price, irate buyers convince Congress to repeal the price floor and to impose a price ceiling $1 below the former price floor. The resulting market price is

$3.

Refer to Table 7-2. If there is only one unit of the good and if the buyers bid against each other for the right to purchase it, then the good will sell for

$35 or slightly more.

Refer to Table 7-9. The equilibrium market price for 10 piano lessons is $400. What is the total producer surplus in the market?

$400

Bob purchases a book for $6, and his consumer surplus is $2. How much is Bob willing to pay for the book?

$8

Refer to Figure 6-13. Acme, Inc. is a seller of the good. Acme sells a unit of the good to a buyer and then pays the tax on that unit to the government. After paying the tax, Acme receives how much?

$8.00

Refer to Table 6-1. How many units of the good are purchased after the imposition of the price floor?

5

Refer to Figure 6-9. In this market, a minimum wage of $7.00 creates a labor

surplus of 4,000 worker hours.

Refer to Figure 7-6. Suppose producer surplus is larger than C but smaller than A+B+C. The price of the good must be

between P1 and P2.

Refer to Figure 6-3. A government-imposed price of $24 in this market is an example of a

binding price floor that creates a surplus.

Dawn's bridal boutique is having a sale on evening dresses. The increase in consumer surplus comes from the benefit of the lower prices to

both existing customers who now get lower prices on the gowns they were already planning to purchase and new customers who enter the market because of the lower prices.

Refer to Figure 6-14. Suppose D1 represents the demand curve for paperback novels, D2 represents the demand curve for gasoline, and S1 is representative of the supply curve for paperback novels as well as the supply curve for gasoline. After the imposition of the $2 tax on paperback novels and on gasoline, the

buyers of gasoline bear a higher burden of the $2 tax than buyers of paperback novels.

If a consumer places a value of $15 on a particular good and if the price of the good is $17, then the

consumer does not purchase the good.

Refer to Figure 7-1. Area C represents the

consumer surplus to new consumers who enter the market when the price falls from P2 to P1.

Justin builds fences for a living. Justin's out-of-pocket expenses (for wood, paint, etc.) plus the value that he places on his own time amount to his

cost of building fences.

Refer to Figure 6-14. Suppose D1 represents the demand curve for gasoline in both the short run and long run, S1represents the supply curve for gasoline in the short run, and S2 represents the supply curve for gasoline in the long run. After the imposition of the $2 tax, the price paid by buyers will be

higher in the long run than in the short run.

If the government removes a binding price ceiling from a market, then the price paid by buyers will

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

In the housing market, supply and demand are

more elastic in the long run than in the short run, and so rent control leads to a larger shortage of apartments in the long run than in the short run.

Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling, the

quantity demanded of physicals increases, and the quantity supplied of physicals decreases.

Suppose the equilibrium price of a tube of toothpaste is $2, and the government imposes a price floor of $3 per tube. As a result of the price floor, the

quantity demanded of toothpaste decreases and the quantity of toothpaste that firms want to supply increases.

When a tax is levied on a good, the buyers and sellers of the good share the burden,

regardless of how the tax is levied.

Refer to Figure 7-6. Area A represents

the increase in producer surplus to those producers already in the market when the price increases from P1to P2.