EC 210 Exam 2 Questions Part
12) If the government places a $500 tax on luxury cars, the price paid by consumers will rise by (A).
(A): less than $500 The burden of any tax is shared by both producers and consumers. The price paid by consumers rises, and the price received by producers falls, with the difference between the two equal to the amount of the tax. Therefore, if the government places a $500 tax on luxury cars, the price paid by consumers will rise by less than $500. The only exceptions would be if the supply curve were perfectly elastic or the demand curve were perfectly inelastic, in which case, consumers would bear the full burden of the tax, and the price paid by consumers would rise by exactly $500. (Note: The fact that luxury cars likely have elastic demand is irrelevant in this case. Even if a good has inelastic demand, the burden is still shared between consumers and producers unless they are in a perfectly elastic or perfectly inelastic situation.)
10A) Complete the first row of the following table by entering the price paid by consumers (PPC), the price received by producers (PPP), and the quantity of beer sold (QBS) in the absence of a tax on this market. TAX: A) 0 B) 2
A) PPC: 5 PPP: 5 QBS: 5 B) PPC: 6 PPP: 4 QBS: 4 Without a tax, the equilibrium price is $5 per case, and the equilibrium quantity is 5 cases. In this situation, the price paid by consumers is the same as the price received by producers.
14A) Indicate the effect this change in the minimum wage has on each of the following labor market components. 14B) Complete the following table by indicating whether the elasticity of demand, the elasticity of supply, both, or neither affect the magnitude of the change in employment and unemployment. 14C) If the demand for unskilled labor were inelastic, the proposed increase in the minimum wage would (C1) the total wage payments to unskilled workers. This is (C2) if the demand for unskilled labor is elastic.
A) Employment - Decrease, Unemployment - Increase B) Elasticity of Demand - Employment and Unemployment, Elasticity of Supply - Unemployment C1) increase C2) not true
16A) A market is described by the following supply-and-demand curves: QS = = 2P, QD = = 300−P
A) Equilibrium Price: 100 Equilibrium Quantity: 200 At equilibrium, the quantity supplied (QS) equals the quantity demanded (QD). Using the given equations, you can solve for the equilibrium price (Pe) as follows: QS = QD 2Pe = 300−Pe 3Pe = 300 Pe = 100 Substituting Pe=100 into either equation will give you an equilibrium quantity of 200.
5) Which of the following would increase quantity supplied, increase quantity demanded, and decrease the price that consumers pay?
The repeal of a tax levied on producers When a tax is levied on producers, it places a wedge between the price that buyers pay and the price that sellers receive. This wedge shifts the relative position of the supply and demand curves. In the new equilibrium, buyers and sellers share the burden of the tax. If this tax is repealed, the market returns to its competitive equilibrium, increasing quantity supplied (QSQS) and quantity demanded (QDQD) and decreasing the price consumers pay (PP)
6) When a good is taxed, the burden of the tax falls mainly on consumers if:
supply is elastic, and demand is inelastic. A tax burden falls more heavily on the side of the market that is less elastic because, in essence, the elasticity measures the willingness of buyers or sellers to leave the market when conditions become unfavorable. A small elasticity of demand means that buyers do not have good alternatives to consuming this particular good. A small elasticity of supply means that sellers do not have good alternatives to producing this particular good. When the good is taxed, the side of the market with fewer good alternatives is less willing to leave the market and must, therefore, bear more of the burden of the tax.
13) Congress and the President decide that the United States should reduce air pollution by reducing its use of gasoline. They impose a $0.50 tax on each gallon of gasoline sold. Who should they impose this tax on? If the demand for gasoline were more elastic, this tax would be (B) effective in reducing the quantity of gasoline consumed. (C) True or False: Consumers of gasoline are hurt by this tax. (D) Workers in the oil industry are (D) by this tax.
(A) - It doesn't matter (B) - more (C) - True (D) - hurt
8) The government has decided that the free-market price of cheese is too low. The following graph shows the market for cheese and two possible price controls at P1P1 and P2P2. If the government wants to impose a binding price floor in the cheese market, it should set a price control at (A) With the price floor, there is a (B) of cheese. (C): True or False: This is possible if demand is elastic. In response to cheese producers' complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, (D) benefit from this new policy and (E) lose.
(A) - P1P1 (B) - surplus (C) - True (D) - producers of cheese (E) - taxpayers
2) In a market with a binding price ceiling, an increase in the ceiling will (A) ________ the quantity supplied, (B) ________ the quantity demanded, and reduce the (C) ________.
(A) increase (B) decrease (C) shortage When the government imposes a legal maximum on the price of a good, this is known as a price ceiling. If the price ceiling that is being imposed is below the equilibrium price, the price ceiling is binding and causes a shortage in the market. An increase in the price ceiling will raise the market price. This will lead to an increase in the quantity supplied and a decrease in the quantity demanded, thereby reducing the shortage. See Section: How Price Ceilings Affect Market Outcomes.
15) At Fenway Park, home of the Boston Red Sox, seating is limited to 39,000. Hence, the number of tickets issued is fixed at that figure. The following graph shows the demand and supply for Red Sox tickets. Seeing a golden opportunity to raise revenue, the city of Boston levies a per ticket tax of $5 to be paid by the ticket buyer. Boston sports fans, a famously civic-minded lot, send in the $5 per ticket. In this case, the tax burden falls on (A) because (B).
(A) the team's owners (B) supply is perfectly inelastic
11) A senator wants to raise tax revenue and make workers better off. A staff member proposes raising the payroll tax paid by firms and using part of the extra revenue to reduce the payroll tax paid by workers. This (A) accomplish the senator's goals because the burden of a tax depends on (B).
(A): would not (B): the elasticity of supply and demand Increasing the payroll tax paid by firms and using part of the extra revenue to reduce the payroll tax paid by workers would not make workers better off, because the division of the burden of a tax depends on the elasticity of supply and demand and not on who must pay the tax. Because the tax wedge would be larger, it is likely that both firms and workers, who share the burden of any tax, would be worse off.
7) Suppose the demand for classical music concert tickets is downward sloping and the supply of classical music concert tickets is upward sloping. Lovers of classical music persuade Congress to impose a price ceiling of $40 per concert ticket.
Equilibrium Price: $30: Same $40: Same $50: Fewer When the government imposes a legal maximum on the price of a good, this is known as a price ceiling. If the price ceiling that is being imposed is below the equilibrium price, the price ceiling is binding and causes a shortage in the market. So, if the equilibrium price is $40 or below, a price ceiling of $40 is not binding and has no effect on the number of people attending musical concerts. However, if the equilibrium price in the absence of price controls is above $40 per ticket, then imposing a price ceiling of $40 will cause quantity demanded to exceed quantity supplied, causing a shortage of tickets and a decrease in the number of people who attend classical music concerts.
9) A recent study found that the demand and supply schedules for flying disks are as follows: Price (Dollars for Disks): 11, 10, 9, 8, 7, 6 Quantity Demanded (Dollars for Disks): 1, 2, 4, 6, 8, 10 Quantity Supplied (Dollars for Disks): 15, 12, 9, 6, 3, 1 Complete the row of the following table by indicating the equilibrium price and the equilibrium quantity of flying disks in the absence of any price controls. MP: Market Price, MQ: Market Quantity, B/NB: Binding/Not Binding
No Price Control: MP: 8, MQ: 6, B/NB: N/A Price Floor: MP: 10, MQ: 2, B/NB: Binding Price Ceiling: MP: 8, MQ: 6, B/NB: Not Binding
Chapter 6
Supply, Demand, and Government Policies
4) Which of the following would increase quantity supplied, decrease quantity demanded, and increase the price that consumers pay?
The imposition of a binding price floor When the government imposes a legal minimum on the price of a good, this is known as a price floor. If the price floor being imposed is above the equilibrium price, the price floor is binding and causes a surplus in the market. The end result is an increase in the quantity supplied, a decrease in the quantity demanded, and an increase in the price that consumers pay.
10B) Complete the second row of the following table by entering the price paid by consumers, the price received by producers, and the quantity of beer sold when beer drinkers pay a $2 tax on each case of beer. Given the previous results, which of the following statements are true? Check all that apply.
The price producers receive decreases as a result of the tax. The quantity of beer sold decreases as a result of the tax. The following statements represent what occurs as a result of the tax: •The quantity of beer sold decreases from 5 cases to 4 cases. •The price producers receive decreases from $5 per case to $4 per case. •The price consumers pay increases from $5 per case to $6 per case. •The difference between the price paid by consumers and the price received by producers increases from $0 to $2 per case.
3) A $1 per unit tax levied on consumers of a good is equivalent to:
a $1 per unit tax levied on producers of the good. Taxes levied on sellers and taxes levied on buyers are equivalent. In both cases, the tax places a wedge between the price that buyers pay and the price that sellers receive. The wedge between the buyers' price and the sellers' price is the same, regardless of whether the tax is levied on buyers or sellers. In either case, the wedge shifts the relative position of the supply and demand curves. In the new equilibrium, buyers and sellers share the burden of the tax. The only difference between a tax levied on sellers and a tax levied on buyers is who sends the money to the government.
1) When the government imposes a binding price floor, it causes:
a surplus of the good to develop. When the government imposes a legal minimum on the price of a good, this is known as a price floor. If the price floor being imposed is above the equilibrium price, the price floor is binding and causes a surplus in the market.
