ECON 101 Exam 2 Policies

(Figure: The Market for Hamburgers) Look at the figure The Market for Hamburgers. If the market is originally in equilibrium and the government imposes an excise tax of $0.80 per unit of the good sold, consumer surplus will be reduced by: A) $175. B) $240. C) $105. D) $90

A) $175.

(Figure: The Shrimp Market) Look at the figure The Shrimp Market. If the government wants to limit shrimp sales to 500 pounds, it can impose a _____ excise tax on sellers, and the total tax revenue generated will be _____. A) $5; $2,500 B) $7.50; $7,500 C) $10; $2,500 D) The answer cannot be determined from the information provided.

A) $5; $2,500

Rapidly increasing health costs have been a major political concern since at least 1992. Suppose the government sets the maximum price for a normal doctor visit at $20 to control rising health costs but the current market price is $40. What will happen? A) More people will try to visit the doctor, but there will be fewer doctors willing to see patients at that price. B) The same number of people will try to visit the doctor, and the same number of doctors are willing to see patients at that price. C) More people will be able to see the doctor, since the price is lower. D) Fewer people will try to see the doctor, and fewer doctors are willing to see patients at that price.

A) More people will try to visit the doctor, but there will be fewer doctors willing to see patients at that price.

(Figure: Supply and Demand in Agriculture) Look at the figure Supply and Demand in Agriculture. If a price floor at P4 is set to help improve farm incomes and the government wants to assure farmers that their output will be purchased, the government must purchase an amount of output equal to: A) Q3 - Q0. B) Q3 - Q1. C) Q2 - Q1. D) Q1 - Q3.

A) Q3 - Q0.

If demand is downward-sloping and supply is upward-sloping, which of the following statements about the effects of an excise tax is INCORRECT? A) The lower the elasticity of supply relative to the elasticity of demand, the lower the burden of the tax borne by suppliers. B) An excise tax causes a deadweight loss because consumer and producer surpluses are reduced by more than the revenue the government collects. C) An excise tax drives a wedge between the price paid by consumers and the price received by producers. D) An excise tax is inefficient because it distorts incentives at the margin for both consumers and producers.

A) The lower the elasticity of supply relative to the elasticity of demand, the lower the burden of the tax borne by suppliers.

Suppose the price elasticity of demand for yachts equals 4.04, while the price elasticity of supply for yachts equals 0.22. If Congress reinstates a luxury tax on yachts, who will pay more of the tax? A) Yacht builders will pay more. B) Yacht buyers will pay more. C) Yacht builders and buyers will pay equally. D) It's impossible to tell without additional information.

A) Yacht builders will pay more.

(Figure: The Market for Hybrid Cars) Look at the figure The Market for Hybrid Cars. What area represents consumer surplus if there is a binding price floor at P1? A) a B) a + b C) a + b + c D) a + b + d

A) a

Which of the following is an excise tax? A) a tax of $0.41 per gallon of gas B) a tax of 12.4% of your wages C) a tax on the value of your property D) a one-time local per capita tax of $50

A) a tax of $0.41 per gallon of gas

If the demand curve is downward-sloping and supply is perfectly elastic, then the burden of an excise tax is: A) borne entirely by consumers. B) borne entirely by producers. C) shared by consumers and producers, with the burden falling mainly on consumers. D) shared by consumers and producers, with the burden falling mainly on producers.

A) borne entirely by consumers.

If the main purpose of a tax is to decrease the amount of a harmful activity, such as underage drinking, the government should impose it on harmful activities whose supply is _____ and demand is _____. A) elastic; elastic B) inelastic; inelastic C) elastic; inelastic D) inelastic; elastic

A) elastic; elastic

(Figure: Supply and Demand in Agriculture) Look at the figure Supply and Demand in Agriculture. The government could help increase farmers' income by setting a price _____ at _____, causing a _____ of _____. A) floor; P4; surplus; Q3 - Q0 B) floor; P2; surplus; Q2 - Q0 C) ceiling; P4; surplus; Q2 - Q1 D) floor; P1; shortage; Q3 - Q0

A) floor; P4; surplus; Q3 - Q0

West African cotton farmers are very upset about the subsidies the U.S. government pays to American cotton farmers. One reason for this could be that subsidized cotton from the United States: A) leads to cotton surpluses in the United States and lower prices for West African farmers on world markets. B) raises the world price of cotton. C) has led to a global shortage of cotton. D) has led to an increase in the demand for West African cotton.

A) leads to cotton surpluses in the United States and lower prices for West African farmers on world markets.

To be binding, a price ceiling must be set at a price: A) lower than the equilibrium price. B) higher than the equilibrium price. C) the same as the equilibrium price. D) Any price ceiling is binding.

A) lower than the equilibrium price.

Suppose the government decides to fight obesity in America by imposing an excise tax based on the saturated fat content of food. The most likely effect of this tax would be to: A) lower the profits of ice cream suppliers. B) decrease revenue for the government. C) decrease black market activity. D) raise the profits of ice cream suppliers.

A) lower the profits of ice cream suppliers.

The most likely reason that the government implements a _____ is because it feels the price is too high for _____. A) price ceiling; consumers B) price floor; consumers C) price ceiling; producers D) price floor; producers

A) price ceiling; consumers

If an excise tax is imposed on automobiles and collected from consumers: A) the demand curve will shift downward by the amount of the tax. B) the supply curve will shift upward by the amount of the tax. C) the equilibrium quantity supplied will increase relative to the pretax level. D) the equilibrium quantity demanded will increase relative to the pretax level.

A) the demand curve will shift downward by the amount of the tax.

(Figure: The Market for Yachts) Look at the figure The Market for Yachts. If the government imposes a $60,000 tax on yachts (collected from the producers), consumers will pay _____ of the tax and producers will pay _____. A) $30,000; $30,000 B) $40,000; $20,000 C) $20,000; $40,000 D) $10,000; $50,000

B) $40,000; $20,000

If an excise tax is imposed on wine and collected from the consumers, the _____ curve will shift _____ by the amount of the tax. A) demand; upward B) demand; downward C) supply; upward D) supply; downward

B) demand; downward

Taxes on the purchase of specific items such as gasoline, cigarettes, or alcoholic beverages are called: A) personal income taxes. B) excise taxes. C) property taxes. D) sales taxes.

B) excise taxes.

Hugo Chávez was the president of Venezuela. Venezuela is a major producer of oil products, which remain the keystone of Venezuela's economy. Suppose President Chávez wanted to increase his popularity with the citizens of Venezuela and enacted a government policy to reduce the price of gasoline sold at state-owned gas stations to 50% of the previous price. Assuming a downward-sloping demand curve for gasoline, in theory, this policy would result in the quantity of gasoline demanded to be _____ the quantity of gasoline supplied. A) equal to B) greater than C) less than D) greater than or equal to

B) greater than

One of the ways rent control is inefficient is that it leads to: A) higher-quality apartments. B) high opportunity costs associated with wasted time searching for apartments. C) markets that maximize total surplus. D) the construction of more apartments.

B) high opportunity costs associated with wasted time searching for apartments.

. If the government imposes binding rent control: A) rent will be set above the equilibrium price. B) it may result in some landlords leaving the business because they cannot cover costs. C) it will lead to rental units being higher in quality because landlords are guaranteed a high price. D) it will cause a surplus of housing.

B) it may result in some landlords leaving the business because they cannot cover costs.

Given any downward-sloping demand curve for a good, the more price-elastic the supply curve, the _____ equilibrium output will fall and the _____ will be the deadweight loss when the government imposes an excise tax. A) more; smaller B) more; larger C) less; smaller D) less; larger

B) more; larger

The burden of a tax on a good is said to fall completely on the consumers if the: A) price paid by consumers for the good declines by the amount of the tax. B) price paid by consumers for the good increases by the amount of the tax. C) price paid by consumers does not change. D) wages received by workers who produce the good increase by the amount of the tax

B) price paid by consumers for the good increases by the amount of the tax.

When the government removes a binding price floor: A) quantity demanded will decrease and quantity supplied will increase. B) quantity demanded will increase and quantity supplied will decrease. C) excess demand will develop. D) excess supply will develop.

B) quantity demanded will increase and quantity supplied will decrease.

The United States and the European Union impose price floors on many agricultural products. These price floors lead to unwanted surpluses. To deal with a surplus: A) the U.S. government typically pays farmers to produce as much as possible. B) the U.S. government in some cases has destroyed the surplus production. C) the European Union pays farm exporters to sell products for a profit overseas. D) the U.S. government holds auctions to sell the surplus to the highest bidder.

B) the U.S. government in some cases has destroyed the surplus production.

If the government wants to minimize the deadweight loss from taxes, it should tax goods for which: A) the price elasticity of demand is high. B) the price elasticity of demand is low. C) the price elasticity of supply is high. D) the demand is high.

B) the price elasticity of demand is low.

A price floor is likely to cause deadweight loss because: A) buyers incur additional search costs looking for the scarce good. B) the quantity of the good is less than the equilibrium quantity. C) a black market emerges and the good sells at prices above the price floor. D) some buyers who want to buy at the controlled price are unable to find a seller willing to sell at that price.

B) the quantity of the good is less than the equilibrium quantity.

When a tenant in a rent-controlled apartment sublets the apartment to another renter at a rent higher than the price ceiling: A) it is inefficient. B) the transaction takes place on a black market. C) there is an increase in quantity demanded. D) there is a decrease in quantity demanded.

B) the transaction takes place on a black market.

(Figure: The Gasoline Market) Look at the figure The Gasoline Market. The pretax equilibrium price is $3, and the equilibrium quantity before tax is 20,000 gallons. An excise tax has been levied on each gallon of gasoline supplied by producers. Based on the graph, the incidence of the tax on suppliers is: A) $1.50. B) $1. C) $0.75. D) $15,000.

C) $0.75.

(Figure: The Market for Hamburgers) Look at the figure The Market for Hamburgers. If the market is originally in equilibrium and the government imposes an excise tax of $0.80 per hamburger, producer surplus will be reduced by: A) $175. B) $240. C) $105. D) $90.

C) $105.

(Figure: The Shrimp Market) Look at the figure The Shrimp Market. If the government wants to limit shrimp sales to 250 pounds, it can impose a _____ excise tax on sellers, and the total tax revenue generated will be _____. A) $5; $2,500 B) $7.50; $7,500 C) $10; $2,500 D) The answer cannot be determined from the information provided.

C) $10; $2,500

(Figure: The Gasoline Market) Look at the figure The Gasoline Market. The pretax equilibrium price is $3, and the equilibrium quantity before tax is 20,000 gallons. An excise tax has been levied on each gallon of gasoline supplied by producers, shifting the supply curve upward. The total tax revenue collected by the government is equal to: A) $1.50. B) $15,000. C) $26,250. D) $30,000.

C) $26,250.

If the government removed the excise tax on gasoline, assuming that neither demand nor supply is perfectly inelastic, which of the following would NOT occur? A) an increase in consumer surplus B) an increase in producer surplus C) a decrease in producer surplus D) an increase in total surplus

C) a decrease in producer surplus

A student organization is formed on your college campus to protest against the high rent for apartments near campus. This organization is planning a meeting with the dean and president of the college. Which of the following best describes the policy the student organization will fight for? A) a laissez faire policy B) a price floor C) a price ceiling D) a quantity control

C) a price ceiling

(Figure: The Market for Hybrid Cars) Look at the figure The Market for Hybrid Cars. What area represents deadweight loss if there is a binding price floor at P1? A) a + b + c B) b + c + d + e C) c + e D) c

C) c + e

Suppose the government of the oil-rich country Saudi Arabia sets gasoline prices at $0.25 per gallon when the market price is $1.50. The Saudi government's actions will: A) improve efficiency, since the low prices will force producers to find cheaper production methods. B) result in gasoline surpluses even in an oil-rich country. C) cause gasoline shortages even in an oil-rich country. D) improve equality between rich and poor, since the poor can now afford gasoline.

C) cause gasoline shortages even in an oil-rich country.

Suppose the government sets a price floor below the current price of a good. This price floor will: A) result in an excess supply of the good. B) result in an excess demand for the good. C) have no effect on the price of the good. D) increase the quantity supplied of the good.

C) have no effect on the price of the good.

An agricultural market price support policy establishes a binding price floor, which: A) decreases the price paid by consumers. B) does not change the price paid by consumers. C) increases the price received by farmers. D) decreases the price received by farmers.

C) increases the price received by farmers.

State governments levy excise taxes on alcohol because: A) they want to subsidize alcohol production. B) they want to encourage individuals to produce their own alcohol. C) it discourages drinking alcohol while raising revenue for the government. D) it is politically popular with religious groups.

C) it discourages drinking alcohol while raising revenue for the government.

Price ceilings will impose costs on society because they: A) will eliminate long waiting lines. B) may result in black market prices, which are lower than the market-determined price would be. C) lead to a smaller quantity offered on the market. D) help businesses instead of consumers.

C) lead to a smaller quantity offered on the market.

Given any upward-sloping supply curve for a good, the more inelastic the demand curve, the _____ equilibrium output will fall and the _____ will be the deadweight loss when the government imposes an excise tax. A) more; smaller B) more; larger C) less; smaller D) less; larger

C) less; smaller

The incidence of a tax: A) is a measure of the revenue the government receives from it. B) refers to who writes the check to the government. C) refers to how much of the tax is actually paid by consumers and producers. D) is a measure of the deadweight loss from the tax.

C) refers to how much of the tax is actually paid by consumers and producers.

Assume the same upward supply curve for each of the following goods. Considering demand only, a tax on _____ would result in the largest deadweight loss. A) gasoline B) medicine C) restaurant meals D) tobacco

C) restaurant meals

An analysis of the effect of excise taxes on markets allows us to conclude that: A) when the price elasticity of supply is equal to zero, an excise tax falls entirely on the consumers. B) when the price elasticity of demand is lower than the price elasticity of supply, an excise tax falls mainly on the producers. C) whether the tax is levied on consumers or producers, the quantity sold will be the same. D) when the price elasticity of demand is higher than the price elasticity of supply, an excise tax falls mainly on the consumers.

C) whether the tax is levied on consumers or producers, the quantity sold will be the same.

(Figure: The Market for Yachts) Look at the figure The Market for Yachts. If the government imposes a $60,000 tax on yachts (collected from the producers), the price of yachts will rise to _____ and the government will collect _____. A) $100,000; $120 million B) $120,000; $90 million C) $140,000; $90 million D) $160,000; $120 million

D) $160,000; $120 million

(Figure: The Gasoline Market) Look at the figure The Gasoline Market. The pretax equilibrium price is $3, and the equilibrium quantity before tax is 20,000 gallons. An excise tax has been levied on each gallon of gasoline, shifting the supply curve upward. The deadweight loss from this tax is equal to: A) $1.50. B) $5,000. C) $15,000. D) $4,375.

D) $4,375.

The number of seats in a football stadium is fixed at 70,000. The city decides to impose a tax of $10 per ticket. In response, the team management raises the ticket price from $30 to $40 and still sells all 70,000 tickets. The tax caused a change in the consumer surplus of _____, a change in the producer surplus of _____, and a deadweight loss of _____. A) -$10; $0; $10 B) -$700,000; $0; $700,000 C) -$10; $0; $0 D) -$700,000; $0; $0

D) -$700,000; $0; $0

Governments continue to impose price controls. Which of the following is NOT a valid reason for this? A) Some people do benefit from such price controls. B) People fear that prices will change dramatically if the price controls are removed. C) It is politically expedient to enact regulations that benefit influential voting groups. D) Price controls are always effective.

D) Price controls are always effective.

Rent controls in New York City cause all of the following EXCEPT: A) inefficiently low-quality apartments. B) wasted resources resulting from the opportunity cost of time associated with trying to find an apartment. C) black markets. D) an increase in the quantity supplied of rent-controlled apartments.

D) an increase in the quantity supplied of rent-controlled apartments.

When the government imposes an excise tax in a market with a downward-sloping demand curve and an upward-sloping supply curve: A) consumer surplus falls. B) producer surplus falls. C) a deadweight loss occurs. D) consumer surplus falls, producer surplus falls, and a deadweight loss occurs.

D) consumer surplus falls, producer surplus falls, and a deadweight loss occurs.

(Figure: The Market for Yachts) Look at the figure The Market for Yachts. If the government imposes a $60,000 tax on yachts and collects it from the consumers, the _____ curve will shift _____ by _____. A) supply; upward; $30,000 B) supply; upward; $60,000 C) demand; downward; $30,000 D) demand; downward; $60,000

D) demand; downward; $60,000

(Figure: The Shrimp Market) Look at the figure The Shrimp Market. If the government wants to limit shrimp sales to 500 pounds, it can impose a price: A) floor of $15. B) floor of $10. C) ceiling of $10. D) floor of $15 or ceiling of $10.

D) floor of $15 or ceiling of $10.

(Figure: The Market for Yachts) Look at the figure The Market for Yachts. A price _____ of _____ will bring the about the same price and output in the market for yachts as would an excise tax of $60,000. A) ceiling; $80,000 B) ceiling; $100,000 C) floor; $100,000 D) floor; $160,000

D) floor; $160,000

The governor wants to levy a $1 excise tax on some good—he doesn't care which—but he does want to minimize the deadweight loss. The deadweight loss will be least when the demand curve is _____ and the supply curve is _____. A) elastic; elastic B) elastic; inelastic C) inelastic; elastic D) inelastic; inelastic

D) inelastic; inelastic

To minimize deadweight loss, markets where demand is relatively _____ and supply is relatively _____ should be taxed. A) elastic; inelastic B) elastic; elastic C) inelastic; elastic D) inelastic; inelastic

D) inelastic; inelastic

The most likely reason that the government would implement a _____ is because it feels that the price is too low for _____. A) price ceiling; consumers B) price floor; consumers C) price ceiling; producers D) price floor; producers

D) price floor; producers

The deadweight loss from an excise tax comes about because: A) the number of transactions in the market is smaller than the no-tax equilibrium. B) some mutually beneficial transactions do not take place. C) a quota rent exists. D) the number of transactions in the market is reduced and some mutually beneficial transactions do not take place.

D) the number of transactions in the market is reduced and some mutually beneficial transactions do not take place.

When the minimum wage increases: A) unemployment among skilled workers decreases. B) fewer workers are willing to work off the books. C) employment of unskilled workers increases. D) unemployment among unskilled workers increases.

D) unemployment among unskilled workers increases.