Econ 101 Exam 2

(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.

(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

Each month Jessica buys exactly 15 Big Macs regardless of the price. Jessica's price elasticity of demand for Big Macs is:

A) 0.

The price of gasoline rises 5% and the quantity of gasoline purchased falls 1%. The price elasticity of demand is equal to _____, and demand is described as _____.

A) 0.2; inelastic

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.

(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.

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.

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.

(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

If the estimated price elasticity of demand for foreign travel is 4:

A) a 20% decrease in the price of foreign travel will increase quantity demanded by 80%.

A newspaper typically consumes a smaller fraction of a consumer's budget than a home entertainment system. Therefore, you would expect the demand for:

A) a home entertainment system to be more price-elastic.

Which of the following is an excise tax?

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.

Use of the midpoint method to calculate the price elasticity of demand eliminates the problem of computing:

A) different elasticities, depending on whether price decreases or increases.

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

A rancher in Oklahoma decides to raise the price of her beef by 19% over the prevailing market price. If the demand for beef is perfectly elastic, this rancher's quantity demanded will:

A) fall to 0.

. (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

If demand _____ and the University of Michigan increases the price of football tickets, revenues will increase.

A) is price-inelastic

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.

To be binding, a price ceiling must be set at a price:

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.

When demand is _____, a rise in price leads to a(n) _____ in total revenue.

A) perfectly inelastic; decrease B) perfectly elastic; increase C) inelastic; increase D) elastic; decrease

The ratio of the percentage change in quantity demanded to the percentage change in price is the _____ elasticity of demand.

A) price

The most likely reason that the government implements a _____ is because it feels the price is too high for _____.

A) price ceiling; consumers

The price elasticity of demand for skiing lessons in New Hampshire is over 1. This means that the demand is _____ in New Hampshire.

A) price elastic

The university president believes that increasing student tuition by 5% will increase revenues. If the president is correct that revenues will increase, then the tuition increase will _____ the number of students enrolling by _____.

A) reduce; less than 5%

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.

The university hopes to raise more revenue by increasing parking fees. This plan will work only if:

A) the price effect is larger than the quantity effect.

(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 _____.

B) $40,000; $20,000

The price elasticity of supply for a good is 3 if a _____ in price leads to a 3% decrease in the quantity supplied.

B) 1% decrease

(Figure: Demand Curves) Look at the figure Demand Curves. Gala apples have many close but not perfect substitutes and are not very expensive. Which graph best represents the demand schedule for Gala apples?

B) B

If a good has a price-inelastic demand, then which of the following is NOT likely to be characteristic of this good?

B) It has many substitutes.

Which of the following is NOT true regarding a price-elastic demand curve?

B) The absolute value of the price elasticity is a fraction less than 1.

If an excise tax is imposed on wine and collected from the consumers, the _____ curve will shift _____ by the amount of the tax.

B) demand; downward

Taxes on the purchase of specific items such as gasoline, cigarettes, or alcoholic beverages are called:

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.

B) greater than

The long-run price elasticity of supply of crude oil is _____ the short-run price elasticity of supply of crude oil.

B) greater than

One of the ways rent control is inefficient is that it leads to:

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

After a price decrease, the quantity effect tends to:

B) increase total revenue.

If the government imposes binding rent control:

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

We predict the long-run price elasticity of demand for gasoline to be _____ the short-run price elasticity of demand for it.

B) larger than

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.

B) more; larger

If the price of emergency visits to the doctor rose, we would expect:

B) only a slight decline in the number of emergency visits to the doctor.

Suppose the price elasticity of demand for cheeseburgers equals 0.37. This means the overall demand for cheeseburgers is:

B) price inelastic.

The burden of a tax on a good is said to fall completely on the consumers if the:

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

When the government removes a binding price floor:

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:

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:

B) the price elasticity of demand is low.

A price floor is likely to cause deadweight loss because:

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:

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:

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:

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 _____.

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:

C) $26,250.

Gas prices recently increased by 25%. In response, purchases of gasoline decreased by 5%. According to this finding, the price elasticity of demand for gas is:

C) 0.2.

A restaurant manager has estimated that the price elasticity of demand for meals is 2. If the restaurant increases menu prices by 5%, she can expect the number of meals sold to decrease by _____ and total revenue to _____.

C) 10%; fall

A hotel has a capacity of 100 rooms in the short run. Which of the following statements best describes the short-run elasticity of supply for rooms at this hotel?

C) The elasticity of supply is zero in the short run because the short-run supply curve is vertical.

The price elasticity of demand for fresh tomatoes has been estimated to be 2.22. If a new insecticide and fertilizer treatment yields a 20% increase in the nation's fresh tomato crop, how will that affect total revenue from fresh tomatoes, all other things unchanged?

C) Total revenue will rise.

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?

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?

C) a price ceiling

If total revenue goes up when the price falls, demand is said to:

C) be price-elastic.

(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?

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:

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

The price elasticity of demand can be found by:

C) comparing the percentage change in quantity demanded to the percentage change in price

Suppose the government sets a price floor below the current price of a good. This price floor will:

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

A major state university in the South recently raised tuition by 12%. An economics professor at this university asked his students, "How many of you will transfer to another university because of the increase in tuition?" One student in about 300 said that he or she would transfer. Based on this information, the price elasticity of demand for education at this university is:

C) highly inelastic.

An agricultural market price support policy establishes a binding price floor, which:

C) increases the price received by farmers

State governments levy excise taxes on alcohol because:

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

Price ceilings will impose costs on society because they:

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.

C) less; smaller

Suppose the price elasticity of demand for fishing lures equals 1.5 in South Carolina and 0.63 in Alabama. To increase revenue, fishing lure manufacturers should:

C) lower prices in South Carolina and raise prices in Alabama

The supply curve for a good will be more elastic if:

C) production inputs are readily available at a relatively low cost.

The incidence of a 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.

C) restaurant meals

An analysis of the effect of excise taxes on markets allows us to conclude that:

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 _____.

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:

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 _____.

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

The only producer of chocolate bunnies in the world, Choco's Bunny Company, recently expanded its production capacity from 1,000 to 2,000 bunnies per day. If the price elasticity of demand for bunnies is 3.33, by how much will the company have to reduce its price to sell the additional 1,000 bunnies (by the midpoint method)?

D) 20%

Egg producers know that the elasticity of demand for eggs is 0.1. If they want to increase sales by 5%, they will have to lower price by:

D) 50%.

(Figure: Demand Curves) Look at the figure Demand Curves. Which graph shows a perfectly elastic demand curve?

D) D

Governments continue to impose price controls. Which of the following is NOT a valid reason for this?

D) Price controls are always effective.

The demand for textbooks is price-inelastic. Which of the following would explain this?

D) Textbooks are a necessity.

Which of the following goods is likely to have the largest price elasticity of demand?

D) a green Cannondale mountain bike

Rent controls in New York City cause all of the following EXCEPT:

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:

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 _____.

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:

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.

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 _____.

D) inelastic; inelastic

To minimize deadweight loss, markets where demand is relatively _____ and supply is relatively _____ should be taxed.

D) inelastic; inelastic

Which of the following is most likely to have a vertical supply curve?

D) paintings by Van Gogh

The most likely reason that the government would implement a _____ is because it feels that the price is too low for _____.

D) price floor; producers

If demand is elastic, the _____ effect dominates the _____ effect, and a(n) _____ in price will cause total revenue to rise.

D) quantity; price; decrease

The deadweight loss from an excise tax comes about because:

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

When the price goes down, the quantity demanded goes up. The price elasticity of demand measures:

D) the responsiveness of the quantity change to the price change.

Which of the following is NOT a factor in determining the price elasticity of demand?

D) the slope of the supply curve

When the minimum wage increases:

D) unemployment among unskilled workers increases.

Total revenue will decrease if the price goes _____ and demand is _____.

D) up; price-elastic

A perfectly price-inelastic demand curve is:

D) vertical.