Microeconomics Exam 2

Illegal markets

High profit margin because price goes up from the risk Lack of regulation

non-binding

when a price ceiling is above the equilibrium price

The legal incidence of a tax: a. is the burden of the tax in terms of loss of consumer or producer surplus. b. is which group that is legally obligated to provide the tax revenue to the government. c. is always placed on consumers. d. is always placed on producers.

b. is which group that is legally obligated to provide the tax revenue to the government.

The benefit that government receives from a tax is measured by a. deadweight loss. b. consumer surplus. c. tax incidence. d. tax revenue.

d. tax revenue.

Utilitarianism

idea that the goal of society should be to bring about the greatest happiness for the greatest number of people

marginal tax rate

the extra taxes paid on an additional dollar of income

Binding

If the price floor is above the equilibrium price.

Price elastic

The demand for a product is highly responsive to price changes.

price inelastic

The demand for a product is not very responsive to price changes.

Suppose you are told that the marginal tax rate is 90%. For an additional dollar earned, you get to keep a. 10 cents b. 90 cents c. nothing at all (0 cents). d. $1.10

a. 10 cents

The price elasticity of supply would be considered to be elastic if it were: a. 5 b. 0 c. 1/10 d. -5

a. 5

If a good is inferior, it would have a. a negative income elasticity of demand. b. a positive income elasticity of demand c. a positive cross price elasticity of demand d. a negative cross price elasticity of demand.

a. a negative income elasticity of demand.

The deadweight loss from a tax of $x per unit will be smallest in a market a. in which demand is inelastic and supply is inelastic. b. in which demand is inelastic and supply is elastic. c. in which demand is elastic and supply is inelastic. d. None of the above are correct; we need to know the value of x in order to determine the answer.

a. in which demand is inelastic and supply is inelastic.

A minimum wage increase will cause a larger decrease in employment if: a. the wage elasticity of labor demand is very large (price elastic). b. the wage elasticity of labor demand is very small (price inelastic). c. the minimum wage is very close to the equilibrium wage. d. the minimum wage is below the equilibrium wage.

a. the wage elasticity of labor demand is very large (price elastic).

Suppose the U.S. government decides to tax the sellers of soda. Before the tax 100 billion sodas are sold at $1 per soda. After the tax, sellers receive 90 cents per soda (after paying the tax) and buyers pay 1.20 per soda. The amount of the tax must have been: a. 30 cents per soda. b. 10 cents per soda. c. 20 cents per soda. d. $1 per soda.

b. 10 cents per soda.

Bob lists his gently used iPhone on Craigslist. His willingness to sell is $150. Which of the following is true, if his only offer comes from Teddy, who offers to pay $200 for the phone? a. Bob would not sell the phone. b. Bob would get $50 of producer surplus from selling the phone to Teddy. c. Bob would get $200 of produces surplus from selling the phone to Teddy. d. Bob would be better off, but Teddy would be worse off, if Bob sells the phone to Teddy.

b. Bob would get $50 of producer surplus from selling the phone to Teddy.

"All transactions in markets should be voluntary" is an approach to fairness most closely related to: a. a results based approach to equity. b. a rules based approach to equity. c. utilitarianism. d. Rawls' belief about equity.

b. a rules based approach to equity.

If the demand for leather decreases, producer surplus in the leather market a. increases. b. decreases. c. remains the same. d. may increase, decrease, or remain the same.

b. decreases

Tax incidence or the burden of tax refers to: a. who is legally obligated to pay the tax to the government. b. how consumers/producers are hurt by the tax, in terms of loss of surplus. c. how much deadweight-loss is created by the tax d. the dollar value of the tax revenues.

b. how consumers/producers are hurt by the tax, in terms of loss of surplus.

The minimum wage is an example of a(n): a. price ceiling. b. price floor. c. inferior good. d. tax.

b. price floor.

Suppose the government imposes a 30-cent tax on the sellers of soft drinks. Which of the following is not correct? The tax would a. shift the supply curve upward by 30 cents. b. raise the equilibrium price by 30 cents. c. reduce the equilibrium quantity. d. discourage market activity.

b. raise the equilibrium price by 30 cents.

Paternalism is: a. a response to monopoly/a lack of competition. b. reducing people's freedom for their own benefit. c. banning goods for efficiency reasons. d. banning goods because of externalities.

b. reducing people's freedom for their own benefit.

When it comes to the burden of taxes, it pays to be a. unresponsive. b. responsive. c. a seller. d. a buyer.

b. responsive.

Suppose a tax is placed on a good with a very price elastic demand (Say Mt. Dew). All else equal: a. the burden will fall more heavily on the buyers of Mt. Dew. b. the burden will fall more heavily on the sellers of Mt. Dew. c. the burden will fall exactly equally on the buyers/sellers of Mt. Dew. d. the burden will fall on the group with the legal incidence of the tax.

b. the burden will fall more heavily on the sellers of Mt. Dew.

Why do some workers lose their jobs when a minimum wage level is increased? a. the increase in labor costs decreases labor supply and cause the price of the good to exceed the value of the initial endowment. b. the increase in the wage rate decreases the quantity of labor demanded. c. the demand for labor is perfectly inelastic. d. the supply of labor decreases.

b. the increase in the wage rate decreases the quantity of labor demanded.

If the current allocation of resources in the market for wallpaper is efficient, then it must be the case that a. producer surplus equals consumer surplus in the market for wallpaper. b. the market for wallpaper is in equilibrium. c. there is a surplus of wallpaper. d. All of the above are correct.

b. the market for wallpaper is in equilibrium.

Total surplus measures the a. loss to buyers from paying higher prices plus the benefit to sellers from receiving lower prices. b. total happiness generated from transactions in a free market. c. fairness of the distribution of resources in society. d. value to the government of goods and services sold in society.

b. total happiness generated from transactions in a free market.

Which of the following did we discuss as a relatively efficient tax? a. a tax on luxury goods. b. a tax on windows. c. a tax on necessities. d. a very high marginal tax on income.

c. a tax on necessities.

If a tax is levied on the buyers of dog food (legal incidence on buyers), then: a. buyers will bear the entire burden of the tax. b. sellers will bear the entire burden of the tax. c. buyers and sellers will generally share the burden of the tax. d. the government will bear the entire burden of the tax.

c. buyers and sellers will generally share the burden of the tax.

Which of the following goods is most likely to create a negative externality? a. t-shirts b. flu shots c. cigarettes d. textbooks

c. cigarettes

The goal of a price ceiling is to: a. generate tax revenue. b. maximize the total surplus in the market. c. keep prices lower than the equilibrium price. d. keep prices higher than the equilibrium price.

c. keep prices lower than the equilibrium price.

Under rent control, landlords cease to be responsive to tenants' concerns about the quality of the housing because a. with rent control, the government guarantees landlords a minimum level of profit. b. they become resigned to the fact that many of their apartments are going to be vacant at any given time. c. with shortages and waiting lists, they have no incentive to maintain and improve their property. d. with rent control, it becomes the government's responsibility to maintain rental housing.

c. with shortages and waiting lists, they have no incentive to maintain and improve their property.

A price floor is: a. a legal minimum on the price at which a good can be sold. b. often imposed for reasons associated with someone's idea of fairness. c. a source of inefficiency in a market. d. All of the above are correct.

d. All of the above are correct.

There are several criticisms of the minimum wage. Which of the following is NOT one of those criticisms? The minimum wage a. often hurts those people who it is intended to help. b. results in a surplus of low-skilled labor (unemployment). c. creates an inefficiency. d. does not raise the wage of any employed person.

d. does not raise the wage of any employed person.

In choosing the form of a tax, there is often a tradeoff between a. allocative and productive efficiency. b. profits and revenues. c. profits and fairness. d. fairness and efficiency.

d. fairness and efficiency.

Which of the following does not generally create dead-weight loss? a. a binding price ceiling. b. a binding price floor. c. a tax. d. specialization.

d. specialization.

Negative externality

the harm, cost, or inconvenience suffered by a third party because of actions by others

tax incidence

the manner in which the burden of a tax is shared among participants in a market

Dead-weight loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium.

legal incidence

entity responsible for paying the tax