ECON TEST 2

If Pw is $20, and Tariff T = $10, the domestic consumers must pay ______ for a shirt.

$30

Government uses taxes to:

- To raise revenue for public projects such as roads, schools, and national defense

If Pd < Pw

-Domestic country has comparative advantage -country exports the good

Tariff vs. Quota

-Import quotas have a similar impact, except profits to foreign producers rather than the US government with quotas - With tariffs, foreign producers with the lowest costs will import the most - With quotas, only foreign producers with permission may import, regardless of costs

Reasons for taxes

-Raise revenue for public purposes -Influence market outcomes

binding price floor

-Set above the equilibrium price. -Some sellers are unable to sell what they want

If Pd > Pw

-The "world" has comparative advantage -Under free trade, country imports the good

Efficiency in a market is achieved when

-The goods are consumed by the buyers who value them most highly -The goods are produced by the producers with the lowest costs -Raising or Lowering the quantity of a good would not increase total surplus

total surplus

-consumer surplus + producer surplus -total gains from trade in a market -(WTP-P) + (P-Cost to make)

A tax

-creates a wedge between the price buyers pay and the price sellers receive -raises the price buyers pay and lower the price sellers receive -reduces quantity bought and sold

Benefits of International Trade

-increased variety of goods -lower costs through economies of scale -competition from abroad may reduce market power of domestic firms increasing total welfare

Import quotas effects:

-raise prices -reduce quantity demanded -cause deadweight loss

More elastic supply and relatively inelastic demand:

-sellers bear a small burden of tax -buyers bear more of the burden

Relatively inelastic supply and more elastic demand

-sellers bear more of the tax burden -buyers bear a small burden

price ceiling

A legal maximum on the price at which a good can be sold

price floor

A legal minimum on the price at which a good can be sold

binding price ceiling

A maximum legal price that is set below the equilibrium price. Because the market equilibrium price is greater than the price ceiling, the ceiling restricts trade and is said to be binding.

Tariff

A tax on imported goods

Efficiency

An allocation of resources is efficient if it maximizes total surplus

National security arguement

An industry vital to national security should be protected from foreign competition, to prevent dependence on imports that could be disrupted during wartime.

A $2.00 tax levied on the sellers of birdhouses will shift the supply curve A. upward by less than $2.00. B. upward by exactly $2.00. C. downward by exactly $2.00. D. downward by less than $2.00.

B

When a good is taxed, the burden of the tax a. falls more heavily on the side of the market that is more elastic b. falls more heavily on the side of the market that is more inelastic c. falls more heavily on the side of the market that is closer to unit elastic d.is distributed independently of relative elasticities of supply and demand

B

Buyers of a good bear the larger share of the tax burden when the (i) supply is more elastic than the demand for the product. (ii) demand in more elastic than the supply for the product. (iii) tax is placed on the sellers of the product. (iv) tax is placed on the buyers of the product. A. (i) and (iii) only B. (i) and (iv) only C. (i) only D. (ii) only

C

If the government removes a $1 tax on sellers of gasoline and imposes the same $1 tax on buyers of gasoline, then the price paid by buyers will: a. increase, and the price received by sellers will increase b. increase, and the price received by sellers will not change c. not change, and the price received by sellers will increase d. not change, and the price received by sellers will not change

C

When a tax is placed on the buyers of lemonade, the A. burden of the tax will be always be equally divided between the buyers and the sellers. B. buyers bear the entire burden of the tax. C. burden of the tax will be shared by the buyers and the sellers, but the division of the burden is not always equal. D. sellers bear the entire burden of the tax.

C

Consumer surplus formula

CS = WTP - P

If the government wants to reduce smoking, it should impose a tax on A. whichever side of the market is less elastic. B. sellers of cigarettes. C. buyers of cigarettes. D. either buyers or sellers of cigarettes.

D

A tax on buyers shifters the _____________ curve _____________ by the amount of the tax.

Demand, down

infant industry argument response

Difficult for gov't to determine which industries will eventually be able to compete and whether benefits of establishing these industries exceed cost to consumers of restricting imports.

True or false: DWL is included in total surplus?

False

National Security argument response

Fine, if trade restrictions based on true security needs. But producers may exaggerate their own importance to national security to obtain protection from foreign competition.

tax revenue

Government income due to taxation. Illustrated with the box below CS, above PS, and left of the DWL.

price controls

Imposed when policymakers believe the market price of a good or service is unfair to buyers or sellers

infant industry argument

New industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations.

Producer Surplus formula

PS = P - Cost to make

small elasticity of supply

Sellers do not have good alternatives to producing this good

non-binding price floor

Set below the equilibrium price No effect on the market.

The biggest source of government revenue comes from

Tax on labor income

Consumer surplus on a Supply Demand curve.

The area above Price and below the demand curve

dead weight loss

The fall in total surplus that results from a market distortion such as a tax.

jobs argument response

Total unemployment does not rise as imports rise, because job losses from imports are offset by job gains in export industries....

True or false: Tax Revenue is included in total surplus?

True

The unfair-competition argument response

We should welcome imports of low-cost products subsidized by the other country's taxpayers. The gains to our consumers will exceed the losses to our producers.

non-binding price ceiling

When a price ceiling is above the equilibrium price. Has no effect on the price or quantity sold.

As the tax on a good increases from $1 per unit to $2 per unit to $3 per unit and so on, the a. tax revenue increases at first, but it eventually peaks and then decreases b. deadweight loss increases at first, but it eventually peaks and then decreases. c. tax revenue always increases, and the deadweight loss always increases. d. tax revenue always decreases, and the deadweight loss always increases.

a

When demand is inelastic, a tax reduces Q (a lot, a little) and DWL is (small, large)

a little, small

When supply is inelastic, a tax reduces Q (a lot, a little) and DWL is (small, large)

a little, small

When demand is elastic, a tax reduces Q (a lot, a little) and DWL is (small, large)

a lot, large

When supply is elastic, a tax reduces Q (a lot, a little) and DWL is (small, large)

a lot, large

import quota

a quantitative limit on imports of a good

If a country is exporting, with trade, CS is ______________________________________________, and PS is __________________________________.

area above Pw and below Demand curve, area below Pw and above the supply curve

If a country imports, with trade, CS is ______________________________________________, and PS is ______________________________.

area above the Pw and below Demand curve, area below Pw and above supply curve

More elastic demand curve has a (bigger, smaller) deadweight loss.

bigger

More elastic supply curve has a (bigger, smaller) deadweight loss.

bigger

The greater the elasticity of a curve, the ________________ the DWL of a tax.

bigger

Small elasticity of demand

buyers do not have good alternatives to consuming this good

If the labor supply curve is nearly vertical, a tax on labor a. has a large deadweight loss. b. raises a small amount of tax revenue. c. has little impact on the amount of work that workers are willing to do. d. results in a large tax burden on the firms that hire labor.

c

Suppose the technology for producing Toyota Corollas improves. As a result, the equilibrium price of Toyota Corollas will _________________ and consumer surplus will __________________.

decrease, increase.

A high tax drastically, (increases, decreases) the size of the market.

decreases

As taxes decrease, DWL:

decreases more rapidly than the decreasing size of the tax

free trade

domestic price = world price

When a country allows trade and becomes an importer of a good,

domestic producers become worse off, and domestic consumers become better off.

When demand is elastic, it is (easier, harder) for consumers to leave the market when the tax reduces Pb.

easier

When supply is elastic, it is (easier, harder) for firms to leave the market when the tax reduces Ps.

easier

Taxes levied on sellers and taxes levied on buyers are _____________.

equivalent. The amount buyers pay rises and the amount sellers receive falls.

Taxes

goverment can make buyers or sellers pay a specific amount on each unit

When demand is inelastic, it is (easier, harder) for consumers to leave the market when the tax reduces Pb.

harder

When supply is inelastic, it is (easier, harder) for firms to leave the market when the tax reduces Ps.

harder

As taxes increase, DWL:

increases more rapidly than the increasing size of the tax

As a tax increases, tax revenue:

increases then decreases.

In the long run, supply and demand of rental apartments are more elastic, so the shortage is (smaller, larger).

larger

The tax burden falls more heavily on the side of the market that is ___________________.

less elastic

Binding price ceiling rationing mechanisms

long lines, discrimination according to sellers' biases

Domestic price

opportunity cost of the good on the domestic market without trade

Large economies are

price makers and have effect on Pw

Small economies are

price takers and have no effect on Pw

unfair competition argument

producers argue their competitors in another country have an unfair advantage

tariffs on imports

raise domestic price above the world price by the amount of the tariff

Larger governments provide more services but:

require higher taxes creating a larger DWL

binding price floor rationing mechanisms

sellers appeal to personal biases of the buyers, transactions performed under the table (illegal workers).

Tax revenue is used to fund

services such as education, roads, police, etc.

A binding price ceiling creates

shortage

Laffer Curve

shows the relationship between the size of the tax and tax revenue

Less elastic demand curve has a (bigger, smaller) deadweight loss.

smaller

Less elastic supply curve has a (bigger, smaller) deadweight loss.

smaller

A tax on sellers shifts the ______________ curve ___________ by the amount of the tax.

supply, up

binding price floors cause

surplus (unemployment)

Consumer Surplus (CS)

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Producer Surplus

the amount a seller is paid for a good minus the seller's cost of providing it

Producer Surplus on a supply demand graph is

the area under the Price and above the supply curve

Without trade, equilibrium price and quantity are determined on

the domestic market

When a country allows trade and becomes an importer of coal,

the gains of the domestic consumers of coal exceed the losses of the domestic producers of coal.

The larger the DWL from taxation,

the greater the argument for smaller government

gains from trade

the improvement in outcomes that occurs when producers specialize and exchange goods and services

Willingness to Pay (WTP)

the maximum amount that a buyer will pay for a good

world price

the price of a good that prevails in the world market for that good

welfare economics

the study of how the allocation of resources affects economic well-being

total consumer surplus

the sum of the individual consumer surpluses of all the buyers of a good in a market

job argument

trade destroys jobs in industries that compete with imports

opportunity cost

whatever must be given up to obtain some item