ECO2030 Chapter 7/8 Sample Questions

Adam Smith's "invisible hand" concept suggests that a competitive market outcome a. maximizes total surplus.b.generates equality among the members of society.c.minimizes total surplus.d.both maximizes total surplus and generates equality among the members of society.

a

An increase in the price of a good along a stationary supply curve a. increases producer surplus.b.does all of the things described in these answers.c.decreases producer surplus.d.improves market equity.

a

Consumer surplus is the area a.below the demand curve and above the price. b.above the supply curve and below the price. c.above the demand curve and below the price. d.below the supply curve and above the price. e.below the demand curve and above the supply curve.

a

When a tax distorts incentives to buyers and sellers so that fewer goods are produced and sold than otherwise, the tax has a. caused a deadweight loss.b.decreased equity.c.generated no tax revenue.d.increased efficiency.

a

A tax on petrol is likely to a. generate a deadweight loss that is unaffected by the time period over which it is measured.b.cause a greater deadweight loss in the long run when compared to the short run.c.none of these answersd.cause a greater deadweight loss in the short run when compared to the long run.

b

An increase in the price of a good along a stationary demand curve a. improves the material welfare of the buyers.b.decreases consumer surplus.c.improves market efficiency.d.increases consumer surplus.

b

If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then a. total surplus is maximized.b.the value placed on the last unit of production by buyers exceeds the cost of production.c.producer surplus is maximized.d.the cost of production on the last unit produced exceeds the value placed on it by buyers.e.consumer surplus is maximized.

b

If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then a. the value placed on the last unit of production by buyers exceeds the cost of production.b.the cost of production on the last unit produced exceeds the value placed on it by buyers.c.consumer surplus is maximized.d.total surplus is maximized.e.producer surplus is maximized.

b

If a market is efficient, then a. the market allocates buyers to the sellers who can produce the good at least cost.b.all of these answers.c.none of these answers.d.the quantity produced in the market maximizes the sum of consumer and producer surplus.e.the market allocates output to the buyers that value it the most.

b

In general, if a benevolent social planner wanted to maximize the total benefits received by buyers and sellers in a market, the planner should a. choose a price below the market equilibrium price.b.allow the market to seek equilibrium on its own.c.choose any price the planner wants because the losses to the sellers (buyers) from any change in price are exactly offset by the gains to the buyers (sellers).d.choose a price above the market equilibrium price.

b

Joe has ten pairs of football boots and Sue has none. A pair of football boots costs €50 to produce. If Joe values an additional pair of boots at €100 and Sue values a pair of boots at €40, then to maximize a. efficiency Sue should receive the glove.b.efficiency Joe should receive the glove.c.equity, Joe should receive the glove.d.consumer surplus both should receive a glove.

b

Medical care clearly enhances people's lives. Therefore, we should consume medical care until a. everyone has as much as they would like.b.the benefit buyers place on medical care is equal to the cost of producing it.c.buyers receive no benefit from another unit of medical care.d.we must cut back on the consumption of other goods.

b

The seller's cost of production is a. none of these answers.b.the minimum amount the seller is willing to accept for a good.c.the seller's producer surplus.d.the maximum amount the seller is willing to accept for a good.e.the seller's consumer surplus.

b

If a buyer's willingness to pay for a new Honda is €20,000 and she is able to actually buy it for €18,000, her consumer surplus is a. €18,000.b.€20,000.c.€2,000.d.€0.e.€38,000.

c

If a market generates a side effect or externality, then free market solutions a. maximize producer surplus.b.are efficient.c.are inefficient.d.are equitable.

c

If a tax on a good is doubled, the deadweight loss from the tax a. doubles.b.stays the same.c.increases by a factor of four.d.could rise or fall.

c

Suppose that the price of a new bicycle is €300. Natalie values a new bicycle at €400. It costs €200 for the seller to produce the new bicycle. What is the value of total surplus if Natalie buys a new bike? a. €500b.€300c.€200d.€400e.€100

c

The reduction of a tax a. will have no impact on tax revenue.b.will always reduce tax revenue regardless of the prior size of the tax.c.could increase tax revenue if the tax had been extremely high.d.causes a market to become less efficient.

c

Total surplus is the area a. above the supply curve and below the price.b.below the demand curve and above the price.c.below the demand curve and above the supply curve.d.below the supply curve and above the price.e.above the demand curve and below the price.

c

When a tax on a good starts small and is gradually increased, tax revenue a. will fall.b.will rise.c.will first rise and then fall.d.will first fall and then rise.e.none of these answers

c

Which of the following is true with regard to a tax on labour income? Taxes on labour income tend to encourage a. the unscrupulous to enter the underground economy.b.the elderly to retire early.c.all of the things described in these answers.d.second earners to stay home.e.workers to work fewer hours.

c

A buyer's willingness to pay is that buyer's a. minimum amount they are willing to pay for a good.b.producer surplus.c.consumer surplus.d.maximum amount they are willing to pay for a good.e.none of these answers.

d

Deadweight loss is greatest when a. supply is elastic and demand is perfectly inelastic.b.demand is elastic and supply is perfectly inelastic.c.both supply and demand are relatively inelastic.d.both supply and demand are relatively elastic.

d

If a producer has market power (can influence the price of the product in the market) then free market solutions a. are equitable.b.are efficient.c.maximize consumer surplus.d.are inefficient.

d

Since the supply of undeveloped land is relatively inelastic, a tax on undeveloped land would generate a. a small deadweight loss and the burden of the tax would fall on the renter.b.a large deadweight loss and the burden of the tax would fall on the landlord.c.a large deadweight loss and the burden of the tax would fall on the renter.d.a small deadweight loss and the burden of the tax would fall on the landlord.

d

The graph that shows the relationship between the size of a tax and the tax revenue collected by the government is known as a a. none of these answersb.Reagan curve.c.Keynesian curve.d.Laffer curve.e.Henry George curve.

d

Which of the following would likely cause the greatest deadweight loss? a. a tax on saltb.a tax on cigarettesc.a tax on petrold.a tax on cruise line tickets

d

If buyers are rational and there is no market failure, a. free market solutions are efficient.b.free market solutions maximize total surplus.c.all of these answers.d.free market solutions are equitable.e.free market solutions are efficient and free market solutions maximize total surplus.

e

Producer surplus is the area a. below the supply curve and above the price.b.below the demand curve and above the supply curve.c.below the demand curve and above the price.d.above the demand curve and below the price.e.above the supply curve and below the price.

e

Suppose there are three identical vases available to be purchased. Buyer 1 is willing to pay €30 for one, buyer 2 is willing to pay €25 for one, and buyer 3 is willing to pay €20 for one. If the price is €25, how many vases will be sold and what is the value of consumer surplus in this market?

e

A larger tax always generates more tax revenue.

false

A tax collected from buyers generates a smaller deadweight loss than a tax collected from sellers.

false

A tax on cigarettes would likely generate a larger deadweight loss than a tax on luxury boats.

false

A tax will generate a greater deadweight loss if supply and demand are inelastic.

false

Consumer surplus is the buyer's willingness to pay minus the seller's cost.

false

Deadweight loss is the reduction in consumer surplus that results from a tax.

false

Free markets are efficient because they allocate output to buyers who have a willingness to pay that is below the price.

false

If John values having his hair cut at €20 and Mary's cost of providing the hair cut is €10, any tax on hair cuts larger than €10 will eliminate the gains from trade and cause a €20 loss of total surplus.

false

If your willingness to pay for a hamburger is €3.00 and the price is €2.00, your consumer surplus is €5.00.

false

Producer surplus is a measure of the unsold inventories of suppliers in a market.

false

Producing more of a product always adds to total surplus.

false

Total surplus is the seller's cost minus the buyer's willingness to pay.

false

When a tax is placed on a good, the revenue the government collects is exactly equal to the loss of consumer and producer surplus from the tax.

false

Equilibrium in a competitive market maximizes total surplus.

tre

A deadweight loss results when a tax causes market participants to fail to produce and consume units on which the benefits to the buyers exceeded the costs to the sellers.

true

A larger tax always generates a larger deadweight loss.

true

A tax causes a deadweight loss because it eliminates some of the potential gains from trade.

true

Consumer surplus is a good measure of buyers' benefits if buyers are rational.

true

Cost to the seller includes the opportunity cost of the seller's time.

true

Externalities are side effects, such as pollution, that are not taken into account by the buyers and sellers in a market.

true

If a tax is doubled, the deadweight loss from the tax more than doubles.

true

If a tax is placed on a good and it reduces the quantity sold, there must be a deadweight loss from the tax.

true

If a tax is placed on a good in a market where supply is perfectly inelastic, there is no deadweight loss and the sellers bear the entire burden of the tax.

true

If an income tax rate is high enough, a reduction in the tax rate could increase tax revenue.

true

If the demand curve in a market is stationary, consumer surplus decreases when the price in that market increases.

true

In general, a tax raises the price the buyers pay, lowers the price the sellers receive, and reduces the quantity sold.

true

Producer surplus is the area above the supply curve and below the price.

true

The height of the supply curve is the marginal seller's cost.

true

The major advantage of allowing free markets to allocate resources is that the outcome of the allocation is efficient.

true

The two main types of market failure are market power and externalities.

true