Econ Quiz 2
A price ceiling creates
A shortage, INTENDED to help buyers.
A price floor creates
A surplus, INTENDED to help sellers.
If the government's purpose in implementing a tax was to raise tax revenue (as opposed to decreasing the quantity consumed) and minimize deadweight loss, then it should tax which of the following goods?
Alcohol (Inelastic items have smaller DWL).
Trade between countries
Allows each country to consume at a point outside its production possibilities frontier.
The amount of tax revenue earned by a tax is measured by the areas
B+D.
Suppose there was a $2 per six-pack tax on the beer market, and that demand was relatively inelastic and supply was relatively elastic. How would the burden of tax be divided between buyers and sellers?
Buyers would bear a greater burden of the tax.
The amount of deadweight loss of a tax is measured by the area(s)
C+E.
Deadweight lost on a graph with a tariff is
D + F.
On a graph, taxes change
Equilibrium by increasing price and decreasing quantity.
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.
Types of taxes
Income tax/progressive (bracket), property tax, utility tax, excise tax (specific goods like marijuana, alcohol, cigarettes), sales tax.
Suppose Jim and Tom can both produce baseball bats. If Jim's opportunity cost of producing baseball bats is lower than Tom's opportunity cost of producing baseball bats, then
Jim has a comparative advantage in the production of baseball bats.
Price ceilings is
Max price set below equilibrium price, causes shortage, causes black market to form, INTENDED to help buyers, quantity demanded - quantity supplied.
If Oklahoma's opportunity cost of producing corn is lower than Iowa's opportunity cost of producing corn, then
Oklahoma has a comparative advantage in the production of corn.
Which of the following is correct?
Price controls often hurt those they are designed to help.
Which of the following is NOT a function of prices in a market system?
Prices ensure an equal distribution of goods and services among consumers.
Four key economic ideas the production possibilities frontier (PPF) illustrates
Scarcity, opportunity cost, economic growth, efficiency
Suppose sellers of liquor are required to send $1.00 to the government for every bottle of liquor they sell. Further, suppose this tax causes the price paid by buyers of liquor to rise by $0.80 per bottle. Which of the following statements is correct?
The effective price received by sellers is $0.20 per bottle less than it was before the tax.
Suppose sellers of liquor are required to send $1.00 to the government for every bottle of liquor they sell. Further, suppose this tax causes the price paid by buyers of liquor to rise by $0.80 per bottle. Which of the following statements is correct?
The price elasticity of demand is relatively more inelastic than the price elasticity of supply.
Suppose the government imposes a 20-cent tax on the sellers of iced tea. Which of the following is NOT correct?
The tax would raise the equilibrium price by 20 cents.
What happens to the total surplus in a market when the government imposes a tax?
Total surplus decreases.
Rent control laws dictate
a maximum rent that landlords may charge tenants.
Which of the following observations would be consistent with the imposition of a binding price ceiling on a market? After the price ceiling becomes effective,
a smaller quantity of the good is bought and sold.
Trade can make everybody better off because it
allows people to specialize according to comparative advantage.
A price ceiling is binding when it is set
below the equilibrium price, causing a shortage.
Shawna bakes bread and knits sweaters. Ben also bakes bread and knits sweaters, but Shawna is better at producing both goods. In this case, trade could
benefit both Ben and Shawna.
Assume that England and Spain can switch between producing cheese and producing bread at a constant rate according to the table below. Number of Units Produced in 40 Hours Cheese Bread England 40 10 Spain 10 5 According to the table, England has an absolute advantage in the production of
both goods and Spain has an absolute advantage in the production of neither good.
When a tax is placed on sellers of tea,
both sellers and buyers of tea are made worse off.
If a price ceiling is a binding constraint on a market, then
buyers cannot buy all they want to buy at the price ceiling.
Price controls
can generate inefficiencies of their own.
Assume that England and Spain can switch between producing cheese and producing bread at a constant rate according to the table below. Number of Units Produced in 40 Hours Cheese Bread England 40 10 Spain 10 5 According to the table, England has a comparative advantage in the production of
cheese and Spain has a comparative advantage in the production of bread.
Trade among nations is ultimately based on
comparative advantage.
When a tax is imposed on sellers in a market,
consumer surplus decreases, producer surplus decreases, government tax revenue increases and deadweight loss increases.
A tax on the sellers of coffee
decreases the size of the coffee market.
Tax incidence
depends on the elasticities of supply and demand.
If the world price of textiles is higher than Vietnam's domestic price of textiles (before trade), then Vietnam should
export textiles.
An important factor in the decline of the US textile industry over the past 100 years or so is
foreign competitors that can produce quality textile goods at low cost.
Which of the following would be the least likely result of a binding price ceiling imposed on the market for rental cars?
free gasoline given to people as an incentive to rent a car.
For two individuals who engage in the same two productive activities, it is impossible for one of the two individuals to
have a comparative advantage in both activities.
If the government levies a $1000 tax per boat on sellers of boats, then the price paid by buyers of boats would
increase by less than $1000.
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.
Over time, housing shortages caused by rent control
increase, because the demand for and supply of housing are more elastic in the long run.
A tax placed on the sellers of yachts
increases sellers' costs, reduces profits, and shifts the supply curve left.
Economic growth
is the goal; we want to push the production possibilities frontier out.
A person can benefit from specialization and trade by obtaining a good at a price that is
lower than his or her opportunity cost of the good.
A minimum wage that is set above a market's equilibrium wage will result in
more quantity of labor supplied, or in other words, more laborers willing to work.
Assume, for Singapore, that the domestic price of soybeans without international trade is higher than the world price of soybeans. This suggests that, in the production of soybeans,
other countries have a comparative advantage over Singapore and Singapore will import soybeans.
When a binding price floor is imposed in a market,
price no longer serves as a rationing mechanism.
A tax imposed on the sellers of a good will raise the
price paid by buyers and lower the equilibrium quantity.
Suppose a country that imports a particular good imposes a tariff on that good. Compared to trade with no tariff, after the tariff is imposed,
producer surplus increases and total surplus decreases in the market for that good.
Suppose New Zealand goes from being an isolated country to being an exporter of wool. As a result,
producer surplus increases.
A certain cowboy spends 10 hours per day mending fences and herding cattle. For the cowboy, a graph that shows his various possible mixes of output (fences mended per day and cattle herded per day) is called his
production possibilities frontier.
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.
If a non-binding price floor is imposed on a market, then the
quantity sold in the market will stay the same.
If a tax is imposed on a market with elastic demand and inelastic supply, then
sellers will bear most of the burden of the tax.
When a binding price ceiling is imposed on a market to benefit buyers,
some buyers will not be able to buy any amount of the good.
When a binding price floor is imposed on a market to benefit sellers,
some sellers benefit, and some sellers are harmed.
When government imposes a price ceiling or a price floor on a market,
someone may become better off and someone may become worse off.
A tariff is a
tax on an imported good.
According to the Laffer Curve, as the tax on a good increase from $1 per unit to $2 per unit to $3 per unit and so on, the
tax revenue increases at first, but it eventually peaks and then decreases.
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.
When a country allows trade and becomes an importer of coal,
the gains of the domestic consumers of coal exceed the losses of the domestic producers of coal.
Other than OPEC, the shortage of gasoline in the US in the 1970's could also be blamed on
the government's policy of maintaining a price ceiling on gasoline.
An example of a price floor is
the minimum wage.
When a tax is placed on the sellers of cell phones,
the size of the cell phone market decreases, but the price paid by buyers increases.
Tax revenue
the tax times quantity.
Trade is great because
there are more options, higher quantity, cheaper prices, allows societies to produce outside production possibilities frontier.
If a price ceiling is not binding, then
there will be no effect on the market price or quantity sold.
Price controls are usually enacted
when policymakers believe that the market price of a good or service is unfair to buyers or sellers.
Taxes on labor (i.e. wages) encourage all of the following EXCEPT
workers to work more.
