Unit 5 Exam - Welfare Economics

In a closed economy, total economic value consists of both the consumer's surplus and the producer's surplus. True False

True In a closed economy, the sum of both the consumer surplus and the producer surplus represents the total economic value in the marketplace.

Examine the graph below. Total consumer surplus is a. $600. b. $1200. c. $2400. d. $1400.

a. $600.

Examine the graph below. Total producer surplus is a. $600. b. $1200. c. $2400. d. $800.

a. $600.

As a result of increased international trading, the a. change in consumer surplus is minimal. b. change in the consumer surplus can be identified graphically as the area difference between the world price and the domestic equilibrium price. c. total economic value will consist exclusively of the consumer surplus. d. amount of domestic production would likely increase.

b. change in the consumer surplus can be identified graphically as the area difference between the world price and the domestic equilibrium price. The change in consumer surplus as a result of increased international trading will graphically equate to the area between the world price and the domestic equilibrium price.

When an import tariff is imposed, the increase in producer surplus can be measured by a. multiplying the value of the import tariff by the total volume of imports. b. multiplying the value of the tariff by the total volume of domestic production. c. subtracting the government's share of total economic value from the remaining consumer surplus. d. multiplying the equilibrium price by the equilibrium quantity.

b. multiplying the value of the tariff by the total volume of domestic production. Multiplying the value of the tariff by the total volume of domestic production is a way to measure the change in producer surplus that results from the import tariff.

If the world price is greater than the domestic price, the a. amount consumed by domestic consumers will increase dramatically. b. volume of imports will rise sharply. c. domestic producers will export some of the product. d. value of the consumer surplus will still exceed that of the producer surplus.

c. domestic producers will export some of the product. Because domestic producers are the low cost producers, exporting opportunities will exist for domestic producers.

If coffee is a normal good and a consumer receives additional income, a. the demand curve for coffee will shift inward and total social benefit will decrease. b. the demand curve for coffee will shift outward, but no additional social benefits will be produced. c. the demand curve for coffee will shift outward and additional social benefits will be produced. d. the demand curve will not change.

c. the demand curve for coffee will shift outward and additional social benefits will be produced. As the demand curve shifts outward, the area underneath the demand curve, which represents total social benefits, will increase.

If a price ceiling is greater than the buyer's reservation price, a. the consumer would drop out of the market. b. the producer would drop out of the market. c. there would be no effect on the market. d. trading would be blocked.

c. there would be no effect on the market. A price above the buyer's reservation price is also above the seller's reservation price. It is, therefore, irrelevant to the transaction, and the buyer and seller are free to negotiate a trade.

Examine the graph below. If Q * = 40, QT = 30, PS = $30, P * = $40, and PD = $50, how much economic value is lost to blocked trades? a. Cannot be determined from the information given b. $600 c. $300 d. $100

d. $100

A tax wedge a. separates what the buyer pays from what the seller gets. b. is the value that the government usually gets. c. makes a difference between what the buyer has to pay and the price the seller gets to keep. d. all of the above.

d. all of the above.

Study the graph below. Assume that PS = $30, PD = $50, and QT = 30. Tax revenue a. cannot be determined from the information given. b. equals $1200. c. equals $300. d. equals $600.

d. equals $600.

If a consumer buys a good at a specific price, his reservation price for that good is a. less than the price of that good. b. less than or equal to the price of that good. c. greater than the price of that good. d. greater than or equal to the price of that good.

d. greater than or equal to the price of that good.

Expending resources in non-productive ways to gain advantage in a market is a. deadweight loss. b. subsidizing. c. price control. d. rent-seeking behavior.

d. rent-seeking behavior.

Examine the graph below. Producer surplus is a. the entire area between the supply and demand curves. b. the area under the supply curve. c. the area under the demand curve and above the price. d. the area below the price and above the supply curve.

d. the area below the price and above the supply curve.

Suppose that there is a buyer willing to pay $4.00 for lunch and a seller willing to sell it for $1.00. The potential economic value from this trade is $3.00. Assume now that the government imposes a tax of $1.00 on the lunch. After the tax, the the buyer agrees to pay $3.50. The consumer surplus is now $.50, and the producer surplus is now $1.50. True False

True The consumer surplus is found by subtracting the price the consumer pays from what the consumer would have paid: $4.00 − $3.50 = $.50. The producer surplus is found by subtracting the price the producer would have accepted from what the producer gets: $2.50 − $1.00 = 1.50. The difference between what the consumer pays and what the producer recieves is the tax revenue: $3.50 − $2.50 = $1.00.

Examine the graph below. Assume that the country places a tariff on the good represented in this market. Lost consumer surplus after imposition of the tariff is represented by area(s) a. 1, 2, 3, and 4. b. 4. c. 2 and 4. d. 1 and 3.

a. 1, 2, 3, and 4.

Given the following formulae for demand and supply curves, calculate producer surplus. Demand: P = $100 − QD Supply: P = $2 + QS a. $9604.00 b. $1200.50 c. $1300.50 d. $1250.00

b. $1200.50

What effect will an increase in the costs of inputs have on the total costs to society of producing a good or service? a. The total costs to society of producing the good or service will decrease. b. The total costs to society of producing the good or service will increase. c. The total costs to society of producing the good or service will not change. d. Higher input costs means producers will stop production of the good or service.

b. The total costs to society of producing the good or service will increase. The total costs to society will increase because the area under the supply curve will increase.

All the following are examples of non-price competition except a. hiring people to stand in line. b. paying the market price. c. trying to get Congress to pass a law favoring your group. d. bribing public officials to get what you want.

b. paying the market price. Standing in line, bribing officials, and lobbying Congress are all forms of non-price competition. They all represent wasted resources that could be used in productive activities.

An excise tax may reduce the consumer surplus because a. the producer surplus will increase. b. the price the consumer must pay increases. c. the reservation price will decrease by the amount of the excise tax. d. the government typically targets consumers.

b. the price the consumer must pay increases. The excise tax increases the amount the consumers must pay. Consumer surplus decreases by definition. The area under the demand curve and above the price is the consumer surplus. Usually, this will reduce the area, but the exact reduction depends on the elasticities of the demand and supply curve.

The total government revenue derived from an excise tax is calculated as a. the product of the equilibrium price times the equilibrium quantity. b. the product of the excise tax times the quantity of the good actually traded. c. the product of the excise tax times the pre-tax equilibrium quantity. d. the amount of lost economic value.

b. the product of the excise tax times the quantity of the good actually traded. The product of the excise tax times the quantity of the good actually traded equals the total tax revenue. Total revenue always equals price times quantity, or TR = Px ⋅ Qx.

Examine the graph below. When the price is $40, the total economic value of the output purchased is a. $1600. b. $800. c. $1200. d. $600.

c. $1200.

How does positive economics differ from normative economics? a. Positive economics judges economic outcomes and normative economics objectively describes the world. b. Both approaches are objective. c. Positive economics describes the world objectively while normative economics assesses outcomes. d. Both approaches assess economic outcomes.

c. Positive economics describes the world objectively while normative economics assesses outcomes. Positive economics is objective and normative economics assesses outcomes.

Excise taxes destroy economic value and create deadweight loss by a. giving tax revenue to unproductive members of society. b. funding government programs that are less efficient than private spending. c. blocking buyers and sellers from realizing some of the gains from trade. d. reducing taxpayers' incomes.

c. blocking buyers and sellers from realizing some of the gains from trade. Deadweight loss is the lost value that is cannot be created when a tax imposes a wedge between the buyers and sellers to the extent that a trade does not take place. It is the total of lost consumer and producer surplus. Deadweight loss is not related to government spending or taxpayers' income.

When the world price is less than the domestic equilibrium price, the a. domestic producers will cease production. b. domestic consumers will purchase only the lower priced imported good or service. c. total amount of trading in the market will occur at the world price. d. domestic producer surplus will be eliminated.

c. total amount of trading in the market will occur at the world price. The lower world price will force some higher cost producers to leave the marketplace; all producers that remain will trade their good at the world price.

When a price control forces competitors to engage in non-price competition, the winner is the one who a. can wait long enough. b. buys out of the black market. c. can play by the rules. d. can expend the most resources.

d. can expend the most resources. The winner in the non-price competition for the scarce resource will be the person or group that can expend the most resources in rent-seeking activities. Some competitors drop out after the cost of the non-price competition rises. Eventually, after enough resources are expended, there will be only one winner.

Increases in international trading of a good will a. cause producer surplus to rise when compared to the consumer surplus. b. result in a decrease in total economic value. c. increase the amount of deadweight loss incurred by society. d. cause producer surplus to decrease and consumer surplus to increase.

d. cause producer surplus to decrease and consumer surplus to increase. As consumers benefit from the lower world price, producer surplus will start to shrink. Because total economic value consists of producer surplus plus consumer surplus, consumer surplus will grow as producer surplus shrinks.

In general, as the tax wedge increases, a. the reduction in the consumer surplus is greater than the reduction in the producer surplus. b. the reduction in both the consumer surplus and producer surplus is equally divided. c. the reduction in the producer surplus is greater than the reduction in the consumer surplus. d. the precise impact on consumer and producer surplus is difficult to say.

d. the precise impact on consumer and producer surplus is difficult to say. This is a correct statement. You cannot determine the exact reduction in consumer and producer surplus without knowing the elasticities of the demand and supply curves. The relative losses between producer and consumer would be a matter of negotiation between the two over price.

Assume a buyer is willing to pay $10.00 for a toy, and a seller is willing to sell a toy for $8.00. An excise tax of $2.50 on toys means that a. the buyer and seller must split the tax for the trade to occur. b. the buyer's reservation price will become greater to cover the tax. c. the seller loses $0.50 on the trade. d. the trade will not occur.

d. the trade will not occur.