EC 110 Test #2 Review

Suppose the government has imposed a price floor on the market for soybeans. Which of the following events could transform the price floor from one that is not binding into one that is binding? a. Farmers use improved, draught-resistant seeds, which lowers the cost of growing soybeans. b. The number of farmers selling soybeans decreases. c. Consumers' income increases, and soybeans are a normal good. d. The number of consumers buying soybeans increases.

A; Farmers use improved, draught-resistant seeds, which lowers the cost of growing soybeans.

Which of the following statements is correct regarding a tax on a good and the resulting deadweight loss? a. The greater are the price elasticities of supply and demand, the greater is the deadweight loss. b. The greater is the price elasticity of supply and the smaller is the price elasticity of demand, the greater is the deadweight loss. c. The smaller are the decreases in quantity demanded and quantity supplied, the greater the deadweight loss. d. The smaller is the wedge between the effective price to sellers and the effective price to buyers, the greater is the deadweight loss.

A; The greater are the price elasticities of supply and demand, the greater is the deadweight loss.

The price elasticities of supply and demand affect a. both the size of the deadweight loss from a tax and the tax incidence. b. the size of the deadweight loss from a tax but not the tax incidence. c. the tax incidence but not the size of the deadweight loss from a tax. d. neither the size of the deadweight loss from a tax nor the tax incidence.

A; both the size of the deadweight loss from a tax and the tax incidence.

​The price elasticity of demand for a good measures how willing ​a.​consumers are to move away from the good as price rises. ​b.​firms are to produce more of a good as price rises. ​c.​consumers are to buy more of a good as price rises. ​d.​firms are to produce more of a good as price falls.

A; consumers are to move away from the good as price rises.

Refer to Figure 8-2. The imposition of the tax causes the price received by sellers to a. decrease by $2. b. increase by $3. c. decrease by $4. d. increase by $5.

A; decrease by $2.

Refer to Figure 8-19. If the economy is at point A on the curve, then a small increase in the tax rate will a. increase the deadweight loss of the tax and increase tax revenue. b. increase the deadweight loss of the tax and decrease tax revenue. c. decrease the deadweight loss of the tax and increase tax revenue. d. decrease the deadweight loss of the tax and decrease tax revenue.

A; increase the deadweight loss of the tax and increase tax revenue.

Refer to Figure 6-25. In which market will the majority of the tax burden fall on sellers? a. market (a) b. market (b) c. market (c) d. All of the above are correct.

A; market (a).

Willingness to pay a. measures the value that a buyer places on a good. b. is the amount a seller actually receives for a good minus the minimum amount the seller is willing to accept. c. is the maximum amount a buyer is willing to pay minus the minimum amount a seller is willing to accept. d. is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

A; measures the value that a buyer places on a good.

As a result of a decrease in price, a. new buyers enter the market, increasing consumer surplus. b. new buyers enter the market, decreasing consumer surplus. c. existing buyers exit the market, increasing consumer surplus. d. existing buyers exit the market, decreasing consumer surplus.

A; new buyers enter the market, increasing consumer surplus.

Refer to Figure 7-15. At the equilibrium price, consumer surplus is a. $150. b. $200. c. $250. d. $350.

A; $150.

Refer to Figure 8-2. The amount of deadweight loss as a result of the tax is a. $2.50. b. $5. c. $7.50. d. $10.

A; $2.50.

Consumer surplus is equal to the a. Value to buyers - Amount paid by buyers. b. Amount paid by buyers - Costs of sellers. c. Value to buyers - Costs of sellers. d. Value to buyers - Willingness to pay of buyers.

A; Value to buyers - Amount paid by buyers.

Refer to Figure 7-15. If the government imposes a price floor of $60 in this market, then total surplus will be a. $110.50. b. $125.00. c. $187.50. d. $225.25..

C; $187.50.

Refer to Figure 7-15. At the equilibrium price, total surplus is a. $150. b. $200. c. $250. d. $300.

C; $250.

Refer to Figure 7-15. If the government imposes a price ceiling of $60 in this market, then total surplus will be a. $187.50. b. $212.50. c. $250.00. d. $266.67.

C; $250.00.

Producer surplus is a. measured using the demand curve for a good. b. always a negative number for sellers in a competitive market. c. the amount a seller is paid minus the cost of production. d. the opportunity cost of production minus the cost of producing goods that go unsold.

C; the amount a seller is paid minus the cost of production.

If the government allowed a free market for transplant organs such as kidneys to exist, the a. shortage of organs would be eliminated, and there would be no surplus of organs. b. shortage of organs would be eliminated, but a surplus of organs would develop. c. shortage of organs would persist. d. overall well-being of society would remain unchanged.

A; shortage of organs would be eliminated, and there would be no surplus of organs.

Income elasticity of demand measures how a. the quantity demanded changes as consumer income changes. b. consumer purchasing power is affected by a change in the price of a good. c. the price of a good is affected when there is a change in consumer income. d. many units of a good a consumer can buy given a certain income level.

A; the quantity demanded changes as consumer income changes.

Refer to Figure 7-15. At the equilibrium price, producer surplus is a. $80. b. $100. c. $120. d. $135.

B; $100.

​A perfectly elastic demand implies that a. buyers will not respond to any change in price. b. any rise in price above that represented by the demand curve will result in a quantity demanded of zero. c. quantity demanded and price change by the same percent as we move along the demand curve. d. price will rise by an infinite amount when there is a change in quantity demanded.

B; any rise in price above that represented by the demand curve will result in a quantity demanded of zero.

Policymakers use taxes a. to raise revenue for public purposes but not to influence market outcomes. b. both to raise revenue for public purposes and to influence market outcomes. c. when they realize that price controls alone are insufficient to correct market inequities. d. only in those markets in which the burden of the tax falls clearly on the sellers.

B; both to raise revenue for public purposes and to influence market outcomes.

Refer to Figure 8-2. The imposition of the tax causes the price paid by buyers to a. decrease by $2. b. increase by $3. c. decrease by $4. d. increase by $5.

B; increase by $3.

Refer to Figure 6-25. In which market will the majority of the tax burden fall on buyers? a. market (a) b. market (b) c. market (c) d. All of the above are correct.

B; market (b).

Refer to Figure 8-2. The loss of producer surplus as a result of the tax is a. $1. b. $2. c. $3. d. $4.

C; $3.

Refer to Figure 8-2. The loss of consumer surplus as a result of the tax is a. $1.50. b. $3. c. $4.50. d. $6.

C; $4.50.

Refer to Figure 8-2. The amount of tax revenue received by the government is a. $2.50. b. $4. c. $5. d. $9.

C; $5.

Refer to Figure 6-4. A government-imposed price of $6 in this market could be an example of a (i) binding price ceiling. (ii) non-binding price ceiling. (iii) binding price floor. (iv) non-binding price floor. a. (i) only b. (ii) only c. (i) and (iv) only d. (ii) and (iii) only

C; (i) and (iv) only.

Refer to Figure 8-19. The curve that is shown on the figure is called the a. deadweight-loss curve. b. tax-incidence curve. c. Laffer curve. d. Lorenz curve.

C; Laffer curve.

A price ceiling will be binding only if it is set a. equal to the equilibrium price. b. above the equilibrium price. c. below the equilibrium price. d. either above or below the equilibrium price.

C; below the equilibrium price.

The presence of a price control in a market for a good or service usually is an indication that a. an insufficient quantity of the good or service was being produced in that market to meet the public's need. b. the usual forces of supply and demand were not able to establish an equilibrium price in that market. c. policymakers believed that the price that prevailed in that market in the absence of price controls was unfair to buyers or sellers. d. policymakers correctly believed that price controls would generate no inequities of their own once imposed.

C; policymakers believed that the price that prevailed in that market in the absence of price controls was unfair to buyers or sellers.

Another way to think of the marginal seller is the seller who a. will accept the lowest price of any seller in the market. b. requires the highest price of any potential seller in the market. c. would leave the market first if the price were any lower. d. would leave the market last if the price falls.

C; would leave the market first if the price were any lower.

Refer to Figure 5-5. At a price of $30 per unit, sellers' total revenue equals a. $150. b. $200. c. $288. d. $450.

D; $450

Refer to Figure 5-5. Using the midpoint method, between prices of $48 and $54, price elasticity of demand is about a. 0.92. b. 3.89. c. 4.33. d. 5.67.

D; 5.67.

Inefficiency can be caused in a market by the presence of a. market power. b. externalities. c. imperfectly competitive markets. d. All of the above are correct.

D; All of the above are correct.

Taxes are costly to market participants because they a. transfer resources from market participants to the government. b. alter incentives. c. distort market outcomes. d. All of the above are correct.

D; All of the above are correct.

A demand curve reflects each of the following except the a. willingness to pay of all buyers in the market. b. value each buyer in the market places on the good. c. highest price buyers are willing to pay for each quantity. d. ability of buyers to obtain the quantity they desire.

D; ability of buyers to obtain the quantity they desire.

When a tax is imposed on a good, the a. supply curve for the good always shifts. b. demand curve for the good always shifts. c. amount of the good that buyers are willing to buy at each price always remains unchanged. d. equilibrium quantity of the good always decreases.

D; equilibrium quantity of the good always decreases.

For which of the following types of goods would the income elasticity of demand be positive and relatively large? a. all inferior goods b. all normal goods c. goods for which there are many complements d. luxuries

D; luxuries.

Which of the following was not a result of the luxury tax imposed by Congress in 1990? a. The larger part of the tax burden fell on sellers. b. A larger part of the tax burden fell on the middle class than on the rich. c. Even the wealthy demanded fewer luxury goods. d. The tax was never repealed or even modified.

D; the tax was never repealed or even modified.

In a market, the marginal buyer is the buyer a. whose willingness to pay is higher than that of all other buyers and potential buyers. b. whose willingness to pay is lower than that of all other buyers and potential buyers. c. who is willing to buy exactly one unit of the good. d. who would be the first to leave the market if the price were any higher.

D; who would be the first to leave the market if the price were any higher.