quiz 14

The price elasticity of demand is -1.5. The price elasticity of supply is 1.5. The fraction of a specific tax that is borne by producers is

0.5

Consider a good whose own price elasticity of demand is -0.5 and price elasticity of supply is

0.75

Consider a good whose own price elasticity of demand is -1.5 and price elasticity of supply is 0.5. The fraction of a specific tax that is borne by producersis

1

Consider a good whose own price elasticity of demand is 0 and price elasticity of supply is 1. The fraction of a specific tax that will be passed through to consumers is

1

Which of the following is unlikely to occur as a result of a price support program?

A reduction to producer surplus.

A country's government would like to raise the price of one its most important agricultural crops, coffee beans. Which of the following government programs will result in higher prices for coffee beans? A) in import quota on coffee beans B) an acreage limitation program which provides coffee bean farmers financial incentives to leave some of their acreage idle. C) An import tariff on coffee beans

ALL OF THE ABOVE

Import tariffs generally result in A) higher domestic prices B) less consumer surplus C) more producer surplus for domestic producers D) a deadweight loss E) all of the above

ALL OF THE ABOVE

The US government currently imposes a .54 per gallon tariff on all ethanol imported into the country. If this tariff were removed, then: A) the domestic ethanol price falls B) foreign producer surplus declines. C) domestic consumer surplus increases. D) domestic producer surplus decreases E) ALL OF THE ABOVE

ALL OF THE ABOVE

Which of the following conditions must hold in the equilibrium of a competitive market where the government puts a specific tax on consumers? A) the quantity sold and the price paid by the buyer must lie on the demand curve. B) the quantity sold and the seller's price must lie on the supply curve. C) the quantity demanded must equal the quantity supplied D) the difference between the price the buyer pays and the price the seller receives must equal the specific tax E) all of the above

ALL OF THE ABOVE

Which of the following policies could lead to a deadweight loss? A) price ceilings B) price floors C) policies prohibiting human cloning

ALL OF THE ABOVE

Consider the following statements when answering this question I. Overall, the sick will always gain from a price ceiling on prescription drugs. II. The reduction of supply caused by the imposition of a price ceiling is greater the more inelastic the market supply curve.

BOTH ARE FALSE

Consider the following statements when answering this question I. It is impossible to shift taxes from producers to consumers without hurting the latter. II. Only polluters pay (through production taxes) for the environmental damage they cause

BOTH ARE FALSE.

Use the following statements to answer this question: I. For downward sloping demand and upward sloping supply curves, the government expenditure used to pay for a subsidy program exceeds the sums of the changes in producer and consumer surplus. II. To model the price quantity impacts of a subsidy, we can shift the demand curve upward by the amount of the per-unit subsidy payment.

BOTH ARE TRUE

In 1970s the federal government imposed price controls on natural gas. Which of the following statement is true?

Consumers gained from the price controls, because consumer surplus was larger than it would have been under free market equilibrium.

Where Es is the elasticity of supply and Ed is the own price elasticity of demand, the fraction of the tax passed on to the consumers in the form of higher prices is

Es/(Es-Ed)

Consider the following statements when answering this question I. Employees are always hurt by minimum wage laws. II. Workers always benefit from minimum wage laws.

I. TRUE II. FALSE

Consider the following statements when answering this question I. Waiting lists for kidney transplants have been caused by a 1984 congressional law forbidding humans to sell their kidneys. II. Randomly choosing citizens to serve on juries is an efficient mechanism for selecting jurors.

I. TRUE II. FALSE

Consider the following statements when answering this question I. When a competitive industry's supply curve is perfectly elastic, then the sole beneficiaries of a reduction in input prices are consumers. II. Even in competitive markets firms have no incentives to control costs, as they can always pass on cost increases to customers.

I. TRUE II. FALSE

Use the following statements to answer this question I. When the market price is held above the competitive price level, the loss in consumer surplus is fully captured by producers. II. When the market price is held above competitive level, there is no deadweight loss because producer gains exactly equal consumer losses.

I. TRUE II. FALSE

One way to remove the excess labor supply problem from a minimum wage policy is to have the government hire all unemployed workers at the minimum wage. What is the key drawback of this version of a minimum wage policy?

The deadweight loss may increase substantially AND the cost to the government may be very large.

Under a binding price ceiling, what does the change in consumer surplus represent?

The gain in surplus for those buyers who can still purchase the product at the lower price. The loss in surplus for those buyers who previously purchases some units of the good at the higher price, but these units are no longer produced at the lower price.

Under a binding price ceiling, what does the change in producer surplus represent?

The loss in surplus associated with those units that used to be produced at the higher price but are no longer produced at the lower price.

The Clinton administration has recommended an increase in the tax on yachts to help pay for government programs. Which of the following is true?

The sales of yachts will decrease

Eliminating price supports for all US agricultural producers will hurt the farmers who cultivate products that have

a low own price elasticity of demand and a low price elasticity of market supply.

A situation in which the unregulated competitive market outcome is inefficient because prices fail to provide proper signals to buyers & sellers is known as:

a market failure

In 1994, the state of California suffered a devastating earthquake. To help pay for the damages, the state raised its sales tax by one cent per dollar of expenditure on most consumer goods. This state sales tax is an example of what economists call:

an ad valorem tax

When the federal government installs a price support program that requires the government to purchase all of a good not bought in the private economy at the support price, changes in producer surplus

are positive, but more than offset by the cost to consumers and the government.

Producer surplus is measured as the

area above the supply curve up to the market price

When the federal government installs a price support program that requires the government to purchase all of a good not bought in the private economy at the support price, the impact on the total welfare is the

change in consumer surplus + the change in the producer surplus - the cost to the government

In an unregulated, competitive market consumer surplus exists because some

consumers are willing to pay more than the equilibrium price.

A small decrease in a production quota will have a large impact on the support price if:

demand is inelastic

Price ceilings can result in a net loss in consumer surplus when the ____ curve is ____

demand; very inelastic

A minimum wage policy induces an:

excess supply of labor

When government intervenes in a competitive market by imposing an effective price ceiling, we would expect the quantity supplied to _____ and the quantity demanded to ______

fall;rise

The formula Es(Es-Ed) is used to calculate the

fraction of a specific tax that is pass through to consumers

What is the difference between a price support and a price floor?

government buys the excess supply to maintain a price support, but not for a price floor.

The benefit of a subsidy accrues mostly to consumers

if Ed/Es is small

Governments may successfully intervene in competitive markets in order to achieve economic efficiency

in cases of both positive and negative externalities

The burden of a tax per unit of output will fall heavily on consumers when demand is relatively ____ and supply is relatively ____

inelastic;elastic

Having seen the quantity of drugs supplied by pharmaceutical companies in a competitive market, a government decides to force companies to sell exactly the same quantity of drugs at prevailing market prices. The government then forbids additional drug sales and allows doctors to prescribe drugs at no cost to patients in need. This government scheme is

likely to be inefficient as doctors are unlikely to prescribe drugs to the consumers who are willing to pay the most for the drugs.

For national security reasons a government decides that all of its base metal industry should not be located in the same geographical region as it is presently. The government decides to allocate production quotas to firms in different parts of the country, but does not restrict in any way the transactions between consumers and base metal producers. This scheme is

likely to be inefficient as some of the industry's output is not produced by the firms with the lowest cost.

Price ceilings

may decrease consumer surplus is demand is sufficiently inelastic

When the government imposes a specific tax per unit on a product, changes in consumer surplus are ____ and changes in producer surplus are ____

negative;negative

Deadweight loss refers to

net losses in total surplus

When the market price is held above the competitive level, the deadweight loss is composed of:

producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.

An effective price ceiling causes a loss of

producer surplus for certain and possibly consumer surplus as well.

Which of the following is NOT true about price floors?

producers will often respond to a price floor by cutting production to the point at which price equals marginal cost.

As illustrated in the textbook, the government can further increase the support price of a commodity by purchasing excess supplies and using a:

production quota

As noted in the text, the major Japanese auto manufacturers agreed to "voluntary" import restrictions that reduced the number of cars they could ship to the US market in the 1980s. One of the key outcomes from this policy is that the Japanese manufacturers were able to:

raise their prices of autos in the US market and capture higher profit margins on the imported cars

A price support may be pictured by

shifting the demand curve to the right by the amount of the government purchase.

The deadweight loss of a specific tax will be a small share of the tax revenue collected if:

supply & demand are both inelastic

Consumer surplus measures

the benefit that consumers receive from a good or services beyond what they pay.

A few years ago, the city of Seattle, Washington considered imposing a specific tax on all espresso-based coffee drinks sold in the city. The extra tax revenue generated would have been used to fund after-school programs for low-income children. The coffee house owners (firms) agreed that this would e a good program to fund, but they argued the tax would sharply reduce their sales volume and they would pay most of the tax burden. This claim is true if:

the demand for espresso-based coffee is more elastic than supply.

The consumer's gain from the imposition of a price ceiling is higher when

the own price elasticity of market demand is low and the price elasticity of market supply is low.

Government intervention can increase total welfare when

there are costs of benefits that are external to the market consumers do not have perfect information about product quality.

Although rice is a staple of the Japanese diet, the Japanese government has long restricted the importation of rice into Japan. The result of this import quota is

to decrease the consumer surplus of Japanese rice consumers.

Producer surplus for the whole market can be though of as

total profit plus factor rents earned by lower cost firms

Compared to a tariff, an import quota, which restricts imports to the same amount as the tariff, will leave the country as a whole

worse off than a comparable tariff