Chapter 6 2.doc

Microeconomics: Principles, Applications, & Tools, 7e (O'Sullivan) - Testbank 1 Chapter 6 Market Efficiency and Government Intervention 6.1 Consumer Surplus and Producer Surplus 1) A market equilibrium will generate the largest possible surplus when: A) there are no external benefits and external costs. B) there is perfect competition. C) perfect information is available. D) all of the above. Answer: D Diff: 1 Topic: Market Efficiency and Government Intervention Skill: Conceptual AACSB: Reflective Thinking 2) Buyers and sellers acting in their own best interest generate outcomes that are in society's best interest when all of the following are true EXCEPT: A) buyers and sellers are informed. B) markets are efficient. C) there are no external benefits. D) there are no external costs. Answer: B Diff: 2 Topic: Market Efficiency and Government Intervention Skill: Conceptual AACSB: Reflective Thinking 3) Buyers and sellers acting in their own best interest generate outcomes that are in society's best interest when: A) there are informed buyers and sellers. B) there is perfect competition. C) there are no external costs. D) all of the above Answer: D Diff: 2 Topic: Market Efficiency and Government Intervention Skill: Conceptual AACSB: Reflective Thinking

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4) If there are a large number of firms, each of which is so small it takes the market price as given, then the market is characterized by: A) informed buyers and sellers. B) perfect competition. C) no externalities. D) efficiency. Answer: B Diff: 1 Topic: Market Efficiency and Government Intervention Skill: Definition 5) Adam Smith taught that individual buyers and sellers who act in their own self interest frequently promote society's interest. What assumption is needed for society's interest to be promoted? A) Buyers and sellers can make informed decisions. B) Markets are perfectly competitive. C) There are no external benefits or costs. D) all of the above Answer: D Diff: 1 Topic: Market Efficiency and Government Intervention Skill: Fact 6) The difference between the maximum amount that a consumer is willing to pay for a product and the price that is paid for the product describes: A) consumer surplus. B) the cost of producing a unit of the product. C) marginal utility. D) producer surplus. Answer: A Diff: 1 Topic: The Demand Curve and Consumer Surplus Skill: Definition 7) If a consumer buys a good we know that her willingness to pay: A) is greater than its price. B) is less than its price. C) is equal to its price. D) is either greater than or equal to its price. Answer: D Diff: 1 Topic: The Demand Curve and Consumer Surplus Skill: Conceptual AACSB: Reflective Thinking

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8) Suppose the price of a liter of soda is $2. If Sara is willing to pay $3 for that liter of soda, her consumer surplus is: A) $0. B) $1. C) $2. D) $3. Answer: B Diff: 2 Topic: The Demand Curve and Consumer Surplus Skill: Analytical AACSB: Analytic Skills 9) Assume that the price of a DVD player is $50. If Joshua is willing to pay $50 for that DVD player, his consumer surplus is: A) $0. B) $1. C) $10. D) $50. Answer: A Diff: 2 Topic: The Demand Curve and Consumer Surplus Skill: Analytical AACSB: Analytic Skills 10) Suppose the price of a box of pop tarts is $3. If Michael is willing to pay $4 for that box of pop tarts, his consumer surplus is: A) $0. B) $1. C) $2. D) $3. Answer: B Diff: 2 Topic: The Demand Curve and Consumer Surplus Skill: Analytical AACSB: Analytic Skills 11) Suppose the price of a scientific calculator is $80. If Juan is willing to pay $100 for that scientific calculator, his consumer surplus is: A) $0. B) $10. C) $20. D) $30. Answer: C Diff: 1 Topic: The Demand Curve and Consumer Surplus Skill: Analytical AACSB: Analytic Skills 3 Copyright © 2012 Pearson Education, Inc.

12) Suppose that the price of a hamburger is $3. Victoria is willing to pay $5 for the first hamburger, David is willing to pay $4 for the second hamburger, Kelly is willing to pay $3 for the third hamburger, and Antony is willing to pay $2 for the fourth hamburger. In equilibrium, what is the total consumer surplus from the consumption of hamburger? A) $0 B) $2 C) $3 D) $9 Answer: C Diff: 2 Topic: The Demand Curve and Consumer Surplus Skill: Analytical AACSB: Analytic Skills 13) Suppose that the price of a donut is $1 each. Lorena is willing to pay $2 for the first donut, Ricky is willing to pay $1.80 for the second donut, Jennifer is willing to pay $1.50 for the third donut, and Betty is willing to pay $1.20 for the fourth donut. In equilibrium, what is the total consumer surplus from the consumption of donuts? A) $2.40 B) $2.50 C) $3.50 D) $3.60 Answer: B Diff: 2 Topic: The Demand Curve and Consumer Surplus Skill: Analytical AACSB: Analytic Skills 14) Suppose that the price of New York style slices of pizza is $4 each. Matthew is willing to pay $6 for the first slice, James is willing to pay $5 for the second slice, Jessica is willing to pay $4 for the third slice, and Tammy is willing to pay $3 for the fourth slice. Which consumer will NOT buy pizza slices? A) Matthew B) James C) Jessica D) Tammy Answer: D Diff: 2 Topic: The Demand Curve and Consumer Surplus Skill: Analytical AACSB: Analytic Skills

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15) In Figure 6.1, the price of the good is $20 and the shaded area represents: A) producer surplus. B) consumer surplus. C) market equilibrium. D) a price ceiling. Answer: B Diff: 1 Topic: The Demand Curve and Consumer Surplus, graphing Skill: Analytical AACSB: Analytic Skills 16) In Figure 6.1, the consumer surplus is equal to: A) $400. B) $300. C) $200. D) $100. Answer: D Diff: 2 Topic: The Demand Curve and Consumer Surplus, graphing Skill: Analytical AACSB: Analytic Skills

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17) If the good in Figure 6.1 were free: A) consumer surplus would equal $450 and consumer expenditure would be $0. B) consumer surplus and consumer expenditure would both be maximized. C) consumer surplus and consumer expenditure would both be zero. D) consumer surplus would be maximized but consumer expenditure would be impossible to calculate. Answer: A Diff: 3 Topic: The Demand Curve and Consumer Surplus, graphing Skill: Analytical AACSB: Analytic Skills 18) As price falls along a particular demand curve, consumer surplus: A) decreases rapidly. B) decreases by a very small amount. C) remains constant. D) increases. Answer: D Diff: 2 Topic: The Demand Curve and Consumer Surplus Skill: Conceptual AACSB: Reflective Thinking 19) As price falls along the elastic portion of a linear demand curve ________ decrease(s) while ________ increase(s). A) only price; quantity demanded, consumer surplus, and consumer expenditures B) consumer surplus and price; quantity demanded and consumer expenditures C) quantity demanded and price; consumer surplus and consumer expenditures D) consumer expenditures, quantity demanded, and price; consumer surplus Answer: A Diff: 3 Topic: The Demand Curve and Consumer Surplus Skill: Conceptual AACSB: Reflective Thinking 20) As price falls along the inelastic portion of a linear demand curve ________ decrease(s) while ________ increase(s). A) only price; quantity demanded, consumer surplus, and consumer expenditures B) consumer surplus and price; quantity demanded and consumer expenditures C) quantity demanded and price; consumer surplus and consumer expenditures D) consumer expenditures and price; quantity demanded and consumer surplus Answer: D Diff: 3 Topic: The Demand Curve and Consumer Surplus Skill: Conceptual AACSB: Reflective Thinking 6 Copyright © 2012 Pearson Education, Inc.

21) Suppose that the price of a laptop computer drops from $700 to $550. Quantity demanded for laptop computers will ________ and consumer surplus will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: A Diff: 2 Topic: The Demand Curve and Consumer Surplus Skill: Analytical AACSB: Analytic Skills 22) Suppose that the price of beer goes up due to a higher alcohol tax added. Quantity demanded for beer will ________ and consumer surplus will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: D Diff: 2 Topic: The Demand Curve and Consumer Surplus Skill: Conceptual AACSB: Reflective Thinking 23) Suppose that the supply of gasoline increases. Price will ________ and consumer surplus will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Diff: 3 Topic: The Demand Curve and Consumer Surplus Skill: Conceptual AACSB: Reflective Thinking 24) Suppose that the supply of gasoline decreases. Price will ________ and consumer surplus will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 3 Topic: The Demand Curve and Consumer Surplus Skill: Conceptual AACSB: Reflective Thinking 7 Copyright © 2012 Pearson Education, Inc.

25) Suppose that Anne buys three pairs of designer shoes at $200 a pair. If the price equals the amount Anne is willing to pay for the third pair, then: A) she earned no consumer surplus. B) she might have earned some consumer surplus on the first two pairs of shoes. C) she would have earned consumer surplus if she bought one more pair of shoes. D) she would have earned more consumer surplus if she bought one fewer pair of shoes. Answer: B Diff: 2 Topic: The Demand Curve and Consumer Surplus Skill: Analytical AACSB: Analytic Skills 26) Suppose that Tim is willing to pay $50 for a dozen of roses for Kim on Valentine's Day. If he actually pays $2.50 per rose for the 12 roses, his total consumer surplus is: A) $50. B) $30. C) $20. D) $12. Answer: C Diff: 2 Topic: The Demand Curve and Consumer Surplus Skill: Analytical AACSB: Analytic Skills 27) Producer surplus is: A) the difference between the highest market price consumers are willing to pay for a product and the minimum amount producers are willing to accept for that product. B) the difference between the market price consumers are willing to pay for a product and the actual price they pay. C) the price a producer receives for a product minus the marginal cost of production. D) the economic profit earned from the sale of a good, minus its marginal cost of production. Answer: C Diff: 1 Topic: The Supply Curve and Producer Surplus Skill: Definition 28) The difference between the price a producer receives for a product and the minimum amount a producer is willing to accept for that product is: A) the market demand for a product. B) consumer surplus. C) perfect competition surplus. D) producer surplus. Answer: D Diff: 1 Topic: The Supply Curve and Producer Surplus Skill: Definition 8 Copyright © 2012 Pearson Education, Inc.

29) Suppose the market price for bagels is $1.50 each. If Fresh Bagels Bakery's marginal cost of producing that bagel is $0.75, its producer surplus from that bagel is: A) $0. B) $0.25. C) $0.75. D) $1.25. Answer: C Diff: 2 Topic: The Supply Curve and Producer Surplus Skill: Analytical AACSB: Analytic Skills 30) Suppose the market price for a cup of coffee is $1.25. If Coffee Express' marginal cost of making that cup of coffee is $0.75, its producer surplus from that cup of coffee is: A) $0.50. B) $0.75. C) $1.25. D) $1.50. Answer: A Diff: 2 Topic: The Supply Curve and Producer Surplus Skill: Analytical AACSB: Analytic Skills 31) Suppose the price of a package of guitar strings is $5. If Mark's marginal cost of producing that package of guitar strings is $3, his producer surplus from that package of guitar strings is: A) $0. B) $1. C) $2. D) $3. Answer: C Diff: 2 Topic: The Supply Curve and Producer Surplus Skill: Analytical AACSB: Analytic Skills 32) Suppose the price of a package of guitar strings is $5. If Mark's marginal cost of producing that package of guitar strings is $5, his producer surplus from that package of guitar strings is: A) $0. B) $1. C) $2. D) $3. Answer: A Diff: 2 Topic: The Supply Curve and Producer Surplus Skill: Analytical AACSB: Analytic Skills 9 Copyright © 2012 Pearson Education, Inc.

33) Suppose that the price of a coffee mug is $2. Lee's marginal cost of producing coffee mugs $0.50 for the first mug, Tammy's marginal cost of producing coffee mugs is $1 for the second mug, Stan's marginal cost of producing coffee mugs is $1.50 for the third mug, Joy's marginal cost of producing coffee mugs is $2 for the fourth mug, and Jody's marginal cost of producing coffee mugs is $3 for the fifth mug. In equilibrium, what is the producer surplus from producing coffee mugs? A) $0 B) $2 C) $3 D) $6 Answer: C Diff: 2 Topic: The Supply Curve and Producer Surplus Skill: Analytical AACSB: Analytic Skills 34) Suppose that the price of a box of shotgun shells is $5. Morris' marginal cost of producing boxes of shotgun shells is $3.50 for the first box, Tommy's marginal cost of producing boxes of shotgun shells is $4 for the second box, Pat's marginal cost of producing boxes of shotgun shells is $5.50 for the third box, and Al's marginal cost of producing boxes of shotgun shells is $6 for the fourth box. In equilibrium, what is the producer surplus from producing boxes of shotgun shells? A) $1.50 B) $2.50 C) $3.50 D) $4.00 Answer: B Diff: 2 Topic: The Supply Curve and Producer Surplus Skill: Analytical AACSB: Analytic Skills 35) Suppose that the price of a bottle of soda is $2. Vonda's marginal cost of production is $1.25 for the first bottle, Galiela's marginal cost of production is $1.50 for the second bottle, Gretchen's marginal cost of production is $1.75 for the third bottle, and Matt's marginal cost of production is $2 for the fourth bottle. Which producer gets no producer surplus? A) Vonda B) Galiela C) Gretchen D) Matt Answer: D Diff: 2 Topic: The Supply Curve and Producer Surplus Skill: Analytical AACSB: Analytic Skills

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36) Suppose that the price of macaroni drops. Quantity supplied will ________ and producer surplus will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: D Diff: 2 Topic: The Supply Curve and Producer Surplus Skill: Conceptual AACSB: Reflective Thinking 37) Suppose that the price of macaroni rises. Quantity supplied will ________ and producer surplus will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: A Diff: 2 Topic: The Supply Curve and Producer Surplus Skill: Conceptual AACSB: Reflective Thinking 38) If the demand for tennis shoes increases and a firm's supply curve is upward sloping, then: A) producer surplus decreases. B) producer surplus does not change. C) producer surplus increases. D) producer surplus may either increase or decrease. Answer: C Diff: 3 Topic: The Supply Curve and Producer Surplus Skill: Conceptual AACSB: Reflective Thinking 39) If the demand for tennis shoes decreases and a firm's supply curve is upward sloping, then: A) producer surplus decreases. B) producer surplus does not change. C) producer surplus increases. D) producer surplus may either increase or decrease. Answer: A Diff: 3 Topic: The Supply Curve and Producer Surplus Skill: Conceptual AACSB: Reflective Thinking

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40) In Figure 6.2 the price is $20 and the shaded area represents: A) producer surplus. B) consumer surplus. C) market equilibrium. D) a price ceiling. Answer: A Diff: 1 Topic: The Supply Curve and Producer Surplus, graphing Skill: Analytical AACSB: Analytic Skills 41) In Figure 6.2, the producer surplus is: A) $400. B) $300. C) $200. D) $100. Answer: C Diff: 2 Topic: The Supply Curve and Producer Surplus, graphing Skill: Analytical AACSB: Analytic Skills

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42) If the good in Figure 6.2 were free: A) producer surplus would not change but consumer expenditure would be minimized. B) producer surplus and consumer expenditure would both be maximized. C) producer surplus and consumer expenditure would both be zero. D) producer surplus would be maximized but consumer expenditure would be minimized. Answer: C Diff: 2 Topic: The Supply Curve and Producer Surplus, graphing Skill: Analytical AACSB: Analytic Skills 43) As price falls along a particular supply curve, producer surplus: A) decreases. B) remains constant. C) increases rapidly. D) increases a very small bit. Answer: A Diff: 1 Topic: The Supply Curve and Producer Surplus Skill: Conceptual AACSB: Reflective Thinking 44) As price falls along a supply curve, ________ increase(s) while ________ decrease(s). A) nothing; quantity supplied, producer surplus, and revenues B) producer surplus and price; quantity supplied and revenues C) quantity supplied and price; producer surplus and revenues D) revenues, quantity supplied, and price; producer surplus Answer: A Diff: 3 Topic: The Supply Curve and Producer Surplus Skill: Conceptual AACSB: Reflective Thinking 45) In order for a market to reach equilibrium producers must have enough information to make informed decisions about purchasing the product. Answer: FALSE Diff: 1 Topic: Market Efficiency and Government Intervention Skill: Conceptual AACSB: Reflective Thinking 46) Consumer surplus increases as the price of a good decreases. Answer: TRUE Diff: 1 Topic: The Demand Curve and Consumer Surplus Skill: Conceptual AACSB: Reflective Thinking 13 Copyright © 2012 Pearson Education, Inc.

47) If the market price of a DVD is $15 and a consumer was willing to pay $20 for it, that consumers surplus on the DVD is $5. Answer: TRUE Diff: 2 Topic: The Demand Curve and Consumer Surplus Skill: Analytical AACSB: Analytic Skills 48) Consumer surplus is price less willingness to sell. Answer: FALSE Diff: 1 Topic: The Demand Curve and Consumer Surplus Skill: Definition 49) Producer surplus equals the market price less the producer's willingness to accept or marginal cost. Answer: TRUE Diff: 1 Topic: The Supply Curve and Producer Surplus Skill: Definition 50) Producer surplus increases as the price of a good decreases. Answer: FALSE Diff: 1 Topic: The Supply Curve and Producer Surplus Skill: Conceptual AACSB: Reflective Thinking 51) If the marginal cost of a candy bar is $.10 and the producer sells it for $1.00, then the producers surplus on that candy bar is $1.10. Answer: FALSE Diff: 2 Topic: The Supply Curve and Producer Surplus Skill: Analytical AACSB: Analytic Skills 52) People often complain about paying "outrageously high prices." Define an "outrageously high price" in terms of consumer surplus. Answer: Most of the time when you go to the store you pay much less for an item than you would be willing to pay. This means that you earn considerable consumer surplus. An "outrageously high price" is a price so close to the maximum that you are willing to pay for an item that you get no or almost no consumer surplus. Diff: 2 Topic: The Demand Curve and Consumer Surplus Skill: Conceptual AACSB: Reflective Thinking 14 Copyright © 2012 Pearson Education, Inc.

53) What is consumer surplus and how is it calculated? Answer: Consumer surplus is the difference between consumers' willingness to pay and price or what they must pay for a product. It is calculated by subtracting market price from willingness to pay or the areas between the demand curve and the market price. Diff: 2 Topic: The Demand Curve and Consumer Surplus Skill: Conceptual AACSB: Reflective Thinking 54) What is willingness to accept? Answer: the minimum price that a producer is willing to accept as payment for a product Diff: 2 Topic: The Supply Curve and Producer Surplus Skill: Definition 55) What is producer surplus? Answer: the difference between price and willingness to accept or the area between the market price and the supply curve Diff: 1 Topic: The Supply Curve and Producer Surplus Skill: Definition 6.2 Market Equilibrium and Efficiency 1) What is the total surplus of a market? A) the sum of consumer surplus and producer deficit B) the sum of consumer surplus and producer surplus C) the difference between the consumer surplus and producer surplus D) the difference between the highest price that a consumer is willing to pay and the lowest price that a producer is willing to sell Answer: B Diff: 1 Topic: Market Equilibrium and Efficiency Skill: Definition

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2) Refer to Figure 6.3. On this graph, the total surplus of the market is maximized when the price is at point: A) A. B) B. C) O. D) D. Answer: C Diff: 3 Topic: Market Equilibrium and Efficiency, graphing Skill: Analytical AACSB: Analytic Skills 3) Prices below the free market equilibrium are inefficient because: A) they prevent mutually beneficial transactions. B) no one can be made better off without hurting someone by participating in another transaction. C) all mutually beneficial transactions happen. D) more goods could be produced using society's resources. Answer: A Diff: 2 Topic: Total Surplus is Lower with a Price below the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking

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4) Prices below the free market equilibrium are inefficient because: A) producer surplus is lower than in equilibrium. B) consumer surplus is higher than in equilibrium. C) total surplus is lower than in equilibrium. D) total surplus is higher than in equilibrium. Answer: C Diff: 2 Topic: Total Surplus is Lower with a Price below the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking 5) Prices below the free market equilibrium are inefficient because the willingness to pay by someone to consume an additional unit ________ the marginal cost to someone for producing that unit. A) exceeds B) is less than C) equals D) None of the above; efficiency is defined in terms of natural resources, not market equilibrium. Answer: A Diff: 2 Topic: Total Surplus is Lower with a Price below the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking 6) Prices above the free market equilibrium are inefficient because the willingness to pay by someone to consume an additional unit ________ the marginal cost to someone for producing that unit. A) exceeds B) is less than C) equals D) None of the above; efficiency is defined in terms of natural resources, not market equilibrium. Answer: B Diff: 2 Topic: Total Surplus is Lower with a Price above the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking 7) Prices above the free market equilibrium are inefficient because: A) no one can be made better off without hurting someone by participating in another transaction. B) they prevent mutually beneficial transactions. C) all mutually beneficial transactions happen. D) more goods could be produced using society's resources. Answer: B Diff: 2 Topic: Total Surplus is Lower with a Price above the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking 17 Copyright © 2012 Pearson Education, Inc.

8) A price equal to the free market equilibrium price is efficient because the willingness to pay by someone to consume an additional unit ________ the marginal cost to someone for producing that unit. A) exceeds B) is less than C) equals D) None of the above; efficiency is defined in terms of natural resources, not market equilibrium. Answer: C Diff: 2 Topic: Efficiency and the Invisible Hand Skill: Conceptual AACSB: Reflective Thinking 9) Economists call the phenomenon that leads individual consumers and producers to the market equilibrium: A) the invisible foot. B) the invisible head. C) the invisible arm. D) the invisible hand. Answer: D Diff: 1 Topic: Efficiency and the Invisible Hand Skill: Definition 10) The famous economist who coined the metaphor "the invisible hand" is: A) Mickey Kantor. B) Alan Greenspan. C) Milton Friedman. D) Adam Smith. Answer: D Diff: 1 Topic: Efficiency and the Invisible Hand Skill: Fact

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Table 6.1 11) Refer to Table 6.1. When quantity = 5, this market is ________ because ________. A) inefficient; willingness to pay > marginal cost B) inefficient; willingness to pay < marginal cost C) efficient; willingness to pay = marginal cost D) producing too much consumer surplus; willingness to pay > marginal cost Answer: C Diff: 2 Topic: Market Equilibrium and Efficiency Skill: Analytical AACSB: Analytic Skills 12) Refer to Table 6.1. When quantity = 7, this market is ________ because ________. A) inefficient; willingness to pay > marginal cost B) inefficient; willingness to pay < marginal cost C) efficient; willingness to pay = marginal cost D) producing too much consumer surplus; willingness to pay > marginal cost Answer: B Diff: 2 Topic: Market Equilibrium and Efficiency Skill: Analytical AACSB: Analytic Skills 13) Refer to Table 6.1. When quantity = 3, this market is ________ because ________. A) inefficient; willingness to pay > marginal cost B) inefficient; willingness to pay < marginal cost C) efficient; willingness to pay = marginal cost D) producing too much consumer surplus; willingness to pay > marginal cost Answer: A Diff: 3 Topic: Market Equilibrium and Efficiency Skill: Analytical AACSB: Analytic Skills 19 Copyright © 2012 Pearson Education, Inc.

14) Refer to Figure 6.3. On this graph, area ABC is: A) consumer surplus. B) producer surplus. C) total surplus. D) total producer net benefit. Answer: A Diff: 2 Topic: Market Equilibrium and Efficiency, graphing Skill: Analytical AACSB: Analytic Skills 15) Refer to Figure 6.3. On this graph, area BCD is: A) producer surplus. B) total surplus. C) consumer net benefit. D) consumer surplus. Answer: A Diff: 2 Topic: Market Equilibrium and Efficiency, graphing Skill: Analytical AACSB: Analytic Skills

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16) Refer to Figure 6.3. On this graph, area ACD is: A) producer surplus. B) total surplus. C) consumer net benefit. D) consumer surplus. Answer: B Diff: 2 Topic: Market Equilibrium and Efficiency, graphing Skill: Analytical AACSB: Analytic Skills 17) Refer to Figure 6.3. On this graph, area BCEO represents: A) producer surplus. B) total surplus. C) firm profits. D) total revenues. Answer: D Diff: 2 Topic: Market Equilibrium and Efficiency, graphing Skill: Analytical AACSB: Analytic Skills 18) Refer to Figure 6.3. On this graph, area BCEO represents: A) producer surplus. B) total surplus. C) consumer expenditures. D) firm profits. Answer: C Diff: 2 Topic: Market Equilibrium and Efficiency, graphing Skill: Analytical AACSB: Analytic Skills 19) The maximum price reduces total surplus of the market because it prevents some mutually beneficial transactions. Answer: TRUE Diff: 2 Topic: Total Surplus is Lower with a Price below the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking 20) To be effective a price ceiling must be above equilibrium. Answer: FALSE Diff: 2 Topic: Total Surplus is Lower with a Price below the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking 21 Copyright © 2012 Pearson Education, Inc.

21) A price floor above the equilibrium price increases the total surplus of the market. Answer: FALSE Diff: 2 Topic: Total Surplus is Lower with a Price above the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking 22) Government intervention can be justified on efficiency grounds when at least one of the efficiency conditions are not being met. Answer: TRUE Diff: 2 Topic: Government Intervention in Efficient Markets Skill: Conceptual AACSB: Reflective Thinking 23) The market maximizes total surplus under what conditions? Answer: no external costs or benefits, perfect information and perfect competition Diff: 2 Topic: Market Equilibrium and Efficiency Skill: Conceptual AACSB: Reflective Thinking 24) What is a price ceiling and why must it be below equilibrium to be effective? Answer: A price ceiling is a maximum price. It is only effective below equilibrium because the market will remain at equilibrium if a maximum price is set above equilibrium. Diff: 2 Topic: Total Surplus is Lower with a Price below the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking

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25) Draw a picture to illustrate why total surplus is highest at the competitive equilibrium price and not at a price below equilibrium. Explain your diagram. Answer:

At a price below equilibrium producers are willing to produce less of the good than they would at equilibrium. This means that some mutually beneficial trades do not take place. Total surplus is decreased by the amount illustrated by the shaded triangle. Diff: 2 Topic: Total Surplus is Lower with a Price below the Equilibrium Price, graphing Skill: Analytical AACSB: Analytic Skills 26) What is a price floor and why must it be above equilibrium to be effective? Answer: A price floor is a minimum price. It is only effective above equilibrium because the market will remain at equilibrium if a minimum price is set below equilibrium. Diff: 2 Topic: Total Surplus is Lower with a Price above the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking 27) Explain how the "invisible hand" makes sure that markets reach equilibrium more quickly than they would if the government sets prices for goods. Answer: The "invisible hand" is always adjusting the market price for goods. Suppose that people's demand for heating oil goes up. Producers notice that they are running out of oil and immediately increase their activities and raise price to compensate them for the extra work. If the government set a price for heating oil, when demand rose the first thing the government would have to do is appoint a panel of experts to study the problem. The free market would have "fixed the problem" long before the panel of experts could be appointed. Diff: 2 Topic: Efficiency and the Invisible Hand Skill: Conceptual AACSB: Reflective Thinking

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6.3 Controlling PricesMaximum and Minimum Prices

1) Refer to Figure 6.4. Suppose that the current price is set at A and Q1 units of a good are traded. Which of the following statements is INCORRECT? A) The quantity supplied exceeds the quantity demanded. B) A buyer's willingness to pay is smaller than a seller's willingness to accept at Q1. C) The consumer surplus would increase should the price fall. D) Total surplus is not maximized. Answer: B Diff: 2 Topic: Controlling Prices--Maximum and Minimum Prices, graphing Skill: Analytical AACSB: Analytic Skills 2) Refer to Figure 6.4. Suppose that the current price is set at B and Q2 units of a good are traded. Which of the following statements is INCORRECT? A) The quantity demanded is equal to the quantity supplied. B) Total surplus is not maximized. C) A buyer's willingness to pay equals a seller's willingness to accept. D) The trade of a good at the current price is efficient. Answer: B Diff: 2 Topic: Controlling Prices--Maximum and Minimum Prices, graphing Skill: Analytical AACSB: Analytic Skills

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3) Refer to Figure 6.4. Suppose that the current price is set at B and Q2 units of a good are traded. Which of the following statements is INCORRECT? A) The current market transaction is efficient. B) Total surplus would decrease should the price fall. C) Total surplus would increase should the price rise. D) The quantity demanded equals the quantity supplied. Answer: C Diff: 2 Topic: Controlling Prices--Maximum and Minimum Prices, graphing Skill: Analytical AACSB: Analytic Skills 4) Refer to Figure 6.4. Suppose that the current price is set at C and Q1 units of a good are traded. Which of the following statements is INCORRECT? A) The quantity supplied is smaller than the quantity demanded. B) A buyer's willingness to pay is greater than a seller's willingness to accept. C) The producer surplus would increase should the price rise. D) Total surplus would increase should the price fall. Answer: D Diff: 2 Topic: Controlling Prices--Maximum and Minimum Prices, graphing Skill: Analytical AACSB: Analytic Skills 5) If the government intervenes in the market, while the market meets the efficiency conditions. Then the government: A) promotes more efficiency. B) causes inefficiency. C) reduces the consumer surplus only. D) reduces the producer surplus only. Answer: B Diff: 2 Topic: Controlling PricesMaximum and Minimum Prices Skill: Conceptual AACSB: Reflective Thinking 6) Suppose that the government sets a maximum price for milk at $5 a gallon and the equilibrium price of a gallon is $3. How much quantity traded will this maximum price lead to? A) the equilibrium quantity B) below the equilibrium quantity C) above the equilibrium quantity D) There is not sufficient information. Answer: A Diff: 2 Topic: Setting Maximum Prices Skill: Analytical AACSB: Analytic Skills 25 Copyright © 2012 Pearson Education, Inc.

7) Suppose that the maximum price for rent in New York City is set above the equilibrium price. Which of the following statements is incorrect? A) It reduces the quantity supplied. B) It increases the quantity demanded. C) Consumers want to buy more than producers want to sell. D) All of the above are incorrect. Answer: D Diff: 2 Topic: Setting Maximum Prices Skill: Conceptual AACSB: Reflective Thinking 8) If the government imposes a maximum price in a market that is below the equilibrium price: A) total surplus in the market increases. B) total surplus in the market decreases. C) total surplus in the market does not change. D) total surplus may increase or decrease, depending on whether costs are increasing or decreasing in production. Answer: B Diff: 2 Topic: Setting Maximum Prices Skill: Conceptual AACSB: Reflective Thinking 9) Which of the following are examples of goods and services that have been subject to maximum prices or may be subject to maximum prices in the near future? A) gasoline B) rental housing C) medical goods and services D) all of the above Answer: D Diff: 1 Topic: Setting Maximum Prices Skill: Fact 10) A maximum price set below the equilibrium price will: A) cause excess demand and increase total surplus. B) cause excess demand and decrease total surplus. C) cause excess supply and increase total surplus. D) cause excess supply and decrease total surplus. Answer: B Diff: 2 Topic: Setting Maximum Prices Skill: Conceptual AACSB: Reflective Thinking 26 Copyright © 2012 Pearson Education, Inc.

11) Rent control leads to quantity supplied being ________ quantity demanded. A) equal to B) greater than C) less than D) Either A or B is correct. Answer: C Diff: 2 Topic: Rent Control Skill: Conceptual AACSB: Reflective Thinking 12) If the government imposes a maximum price on rental apartments that is below the equilibrium price, we can expect to see all of the following EXCEPT: A) landlords doing less maintenance to their rental units. B) new apartment units being built. C) renters spending more time searching for apartments. D) some building owners converting their apartments to condominiums. Answer: B Diff: 2 Topic: Rent Control Skill: Conceptual AACSB: Reflective Thinking 13) Suppose that the government imposes a maximum price on rental apartments and the market price of apartments does not change. The most likely explanation is that: A) the law is impossible to enforce. B) apartment owners are withdrawing rental units from the market and forcing price up. C) market forces are pushing rental rates up to avoid a shortage of apartments. D) the maximum price set by the government was at or above the equilibrium price. Answer: D Diff: 2 Topic: Rent Control Skill: Conceptual AACSB: Reflective Thinking 14) All of the below are examples of negative effects of imposing rent control EXCEPT: A) persons who get a place to live pay lower rent. B) renters must pay non-refundable security deposits. C) producer surplus decreases. D) some people who would have rented apartments before rent control will not rent. Answer: A Diff: 2 Topic: Rent Control Skill: Conceptual AACSB: Reflective Thinking

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15) All of the below are examples of negative effects of imposing rent control EXCEPT: A) renters spend less time searching for apartments. B) persons who get a place to live pay higher rent. C) producer surplus decreases. D) some people who would have rented apartments before rent control will not rent. Answer: A Diff: 2 Topic: Rent Control Skill: Conceptual AACSB: Reflective Thinking 16) In the case of rent control, a maximum price will cause ________ and ________ the total surplus of the market. A) excess demand; reduce B) excess demand; increase C) excess supply; reduce D) excess supply; increase Answer: A Diff: 2 Topic: Rent Control Skill: Conceptual AACSB: Reflective Thinking 17) Which of the following statements about rent control is FALSE? A) Rent control is an effective way to help the poor. B) Many wealthy and famous people benefit from rent control. C) A person does not have to be poor to qualify for a rent-controlled apartment. D) All of the above are false statements. Answer: A Diff: 1 Topic: Rent Control Skill: Fact 18) Since rent control ________ the total surplus of the market, the policy generates a ________. A) decreases; producer surplus B) increases; producer surplus C) decreases; deadweight loss. D) increases; deadweight loss. Answer: C Diff: 2 Topic: Rent Control Skill: Conceptual AACSB: Reflective Thinking

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19) Since rent control outlaws transactions the would make both the consumer and supplier better off, then rent control: A) causes excess demand and increases total surplus. B) causes inefficiency. C) decreases total surplus. D) B and C are correct. Answer: D Diff: 2 Topic: Rent Control Skill: Conceptual AACSB: Reflective Thinking 20) If government sets a minimum price above the equilibrium price: A) some consumers gain at the expense of producers and the total surplus decreases. B) some consumers gain at the expense of producers and the total surplus increases. C) some producers gain at the expense of consumers and the total surplus decreases. D) some producers gain at the expense of consumers and the total surplus increases. Answer: C Diff: 2 Topic: Setting Minimum Prices Skill: Conceptual AACSB: Reflective Thinking 21) Suppose that the government sets a minimum price for soybeans at $5 a pound above the equilibrium price. This leads to a quantity traded: A) at the equilibrium quantity. B) below the equilibrium quantity. C) above the equilibrium quantity. D) There is not sufficient information. Answer: B Diff: 2 Topic: Setting Minimum Prices Skill: Analytical AACSB: Analytic Skills 22) Assume the government sets a minimum price for a particular good below the equilibrium price. How much quantity traded will this lead to? A) the equilibrium quantity B) below the equilibrium quantity C) above the equilibrium quantity D) There is not sufficient information. Answer: A Diff: 2 Topic: Setting Minimum Prices Skill: Conceptual AACSB: Reflective Thinking 29 Copyright © 2012 Pearson Education, Inc.

23) Refer to Figure 6.4. If consumers currently gain at the expense of producers, a maximum price must have been set at: A) A. B) B. C) C. D) There is not sufficient information. Answer: C Diff: 2 Topic: Setting Maximum Prices, graphing Skill: Analytical AACSB: Analytic Skills 24) Refer to Figure 6.4. If producers currently gain at the expense of consumers, a minimum price must have been set at: A) A. B) B. C) C. D) There is not sufficient information. Answer: A Diff: 2 Topic: Setting Minimum Prices, graphing Skill: Analytical AACSB: Analytic Skills

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25) Refer to Figure 6.4. If a market experiences excess demand and fails to maximize total surplus, a maximum price must have been set at: A) A. B) B. C) C. D) There is not sufficient information. Answer: C Diff: 2 Topic: Setting Maximum Prices, graphing Skill: Analytical AACSB: Analytic Skills 26) Refer to Figure 6.4. If a market experiences excess supply and fails to maximize total surplus, a minimum price must have been set at: A) A. B) B. C) C. D) There is not sufficient information. Answer: A Diff: 2 Topic: Setting Minimum Prices, graphing Skill: Analytical AACSB: Analytic Skills 27) Refer to Figure 6.4. If the current market transactions occur only over the output level where a buyer's willingness to pay is greater than a seller's willingness to accept, the government could have set: A) a maximum price at A. B) a minimum price at A. C) a minimum price at C. D) There is not sufficient information. Answer: B Diff: 2 Topic: Setting Minimum Prices, graphing Skill: Analytical AACSB: Analytic Skills

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28) Refer to Figure 6.4. If the current market transactions occur only over the output level where a buyer's willingness to pay is greater than a seller's willingness to accept, the government could have set: A) a maximum price at A B) a minimum price at C. C) a maximum price at C. D) There is not sufficient information. Answer: C Diff: 2 Topic: Setting Maximum Prices, graphing Skill: Analytical AACSB: Analytic Skills 29) A government policy that keeps the price of gasoline below its equilibrium level will increase consumer surplus. Answer: FALSE Diff: 2 Topic: Setting Maximum Prices Skill: Conceptual AACSB: Reflective Thinking 30) Rent control makes consumers who can find a place to rent worse off. Answer: FALSE Diff: 2 Topic: Rent Control Skill: Conceptual AACSB: Reflective Thinking 31) A government policy that keeps the price of guitar strings above its equilibrium level will increase total surplus. Answer: FALSE Diff: 2 Topic: Setting Minimum Prices Skill: Conceptual AACSB: Reflective Thinking 32) Deadweight loss is what the consumers lose when paying more for a good than what the equilibrium price for that good is. Answer: FALSE Diff: 2 Topic: Setting Minimum Prices Skill: Conceptual AACSB: Reflective Thinking

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33) A price floor above the equilibrium price causes excess quantity demand. Answer: FALSE Diff: 2 Topic: Setting Minimum Prices Skill: Conceptual AACSB: Reflective Thinking 34) A policy that establishes a maximum price decreases the quantity supplied or leaves it unchanged, while a policy that establishes a minimum price increases the quantity supplied or leaves it unchanged. Answer: TRUE Diff: 2 Topic: Controlling PricesMaximum and Minimum Prices Skill: Conceptual AACSB: Reflective Thinking 35) Will a price ceiling always result in a reduction in efficiency? Answer: Not always. A price ceiling only results in inefficiency if it is effectiveif it causes the market price to fall below the equilibrium price. If the price ceiling's maximum price is above the equilibrium price, the price ceiling is ineffective and does nothing to the market outcome. Diff: 2 Topic: Setting Maximum Prices Skill: Conceptual AACSB: Reflective Thinking 36) Politicians are often heard saying that tuition at state universities should be kept low "to make education equally accessible to all residents of the state, regardless of income." Assuming that state funding for the universities is held constant, what condition will prevail if tuition is held below equilibrium price? Will education really be "equally accessible" under these conditions? Answer: If tuition is held below equilibrium price there will be more people who want to attend state universities than the university system can successfully educate. This will mean that the universities will have to "ration" admission by raising admission standards so that some students who did not have the best high school grades won't get college educations. It will also mean that class sizes at the state universities will be larger, students will not be able to be admitted to some of the classes they want to take, etc. Diff: 2 Topic: Setting Maximum Prices Skill: Conceptual AACSB: Reflective Thinking

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37) Gasoline prices are rising because OPEC has cut the supply of oil they are willing to sell in the world oil market. You hear someone in a restaurant say that the government should put a ceiling on the price of gasoline to protect citizens from price gouging. Discuss the pros and cons of a price ceiling on gasoline. Answer: The pro is that the people who do get gasoline will pay lower prices for it. The con is that with price ceilings there will be long lines and "sold out" signs at the gas station. So while the price ceiling might save money on gasoline when you drive to Florida for spring break, the shortages might mean that you can't find the gasoline you need to get back to school afterwards. Diff: 2 Topic: Setting Maximum Prices Skill: Analytical AACSB: Analytic Skills 6.4 Controlling QuantitiesLicensing and Import Restrictions 1) Which of the following is a way of controlling the quantity of a particular product? A) rent control B) price floor C) business licenses D) Either A or B is correct. Answer: C Diff: 1 Topic: Controlling Quantities - Licensing and Import Restrictions Skill: Conceptual AACSB: Reflective Thinking 2) Why does the medallion policy cause inefficiency? A) It decreases the total surplus of the taxi market. B) It prevents riders and drivers from doing mutually beneficial transactions. C) It always decreases producer surplus only. D) A and B are correct. Answer: D Diff: 3 Topic: Taxi Medallions Skill: Conceptual AACSB: Reflective Thinking

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3) Refer to Figure 6.6, which shows a market for taxi medallions. Without any limit to the number of medallions (taxi licenses), the consumer surplus from consuming taxicab services is represented by: A) area ABF. B) area ACI. C) area DEH. D) area CEI. Answer: B Diff: 3 Topic: Taxi Medallions, graphing Skill: Analytical AACSB: Analytic Skills 4) Refer to Figure 6.6, which shows a market for taxi medallions. Without any limit to the number of medallions (taxi licenses), the producer surplus is represented by: A) area ABF. B) area ACI. C) area DEH. D) area CEI. Answer: D Diff: 3 Topic: Taxi Medallions, graphing Skill: Analytical AACSB: Analytic Skills

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5) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of taxi licenses is reduced from Q2 to Q1, the consumer surplus from consuming taxicab services is represented by: A) area ABF. B) area ACFG. C) area DEH. D) area BEFH. Answer: A Diff: 3 Topic: Taxi Medallions, graphing Skill: Analytical AACSB: Analytic Skills 6) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of medallions is reduced from Q2 to Q1, the producer surplus is represented by: A) area ABF. B) area ACFG. C) area DEH. D) area BEFH. Answer: D Diff: 3 Topic: Taxi Medallions, graphing Skill: Analytical AACSB: Analytic Skills 7) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of taxi licenses is reduced from Q2 to Q1, the consumer surplus: A) decreases by area FGI. B) decreases by (area BCFG + area FGI). C) decreases by area GHI. D) decreases by (area CDGH + area GHI). Answer: B Diff: 3 Topic: Taxi Medallions, graphing Skill: Analytical AACSB: Analytic Skills

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8) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of taxi licenses is reduced from Q2 to Q1, the producer surplus: A) increases by area BCFG. B) increases by (area BCFG - area GHI). C) decreases by area GHI. D) decreases by (area CDGH + area GHI). Answer: B Diff: 3 Topic: Taxi Medallions, graphing Skill: Analytical AACSB: Analytic Skills 9) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of taxi licenses is reduced from Q2 to Q1, the total surplus of the market is represented by: A) area ABF. B) area ABF + area BCFG. C) area ABF + area BCFG + area CDGH. D) area ABF + area BCFG + area CDGH + area DEH. Answer: D Diff: 3 Topic: Taxi Medallions, graphing Skill: Analytical AACSB: Analytic Skills 10) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of taxi licenses is reduced from Q2 to Q1, the decrease in total surplus of the market is represented by: A) area FGI. B) area GHI. C) area FHI. D) area BDFH - area FHI. Answer: C Diff: 3 Topic: Taxi Medallions, graphing Skill: Analytical AACSB: Analytic Skills 11) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of taxi licenses is reduced from Q2 to Q1: A) the gain in consumer surplus equals the loss in producer surplus. B) the gain in producer surplus equals the loss in consumer surplus. C) the gain in consumer surplus is greater than the loss in producer surplus. D) the gain in producer surplus is smaller than the loss in consumer surplus. Answer: D Diff: 3 Topic: Taxi Medallions, graphing Skill: Analytical AACSB: Analytic Skills 37 Copyright © 2012 Pearson Education, Inc.

12) In Figure 6.7 at equilibrium consumer surplus is area: A) A. B) A + B + C. C) E + F + G. D) G. Answer: B Diff: 3 Topic: Taxi Medallions, graphing Skill: Analytical AACSB: Analytic Skills 13) In Figure 6.7 at equilibrium, producer surplus is area: A) A. B) A + B + C. C) E + F + G. D) G. Answer: C Diff: 3 Topic: Taxi Medallions, graphing Skill: Analytical AACSB: Analytic Skills

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14) In Figure 6.7 with a quantity constraint of Q1, consumer surplus is area: A) A. B) A + B + C. C) E + F + G. D) G. Answer: A Diff: 3 Topic: Taxi Medallions, graphing Skill: Analytical AACSB: Analytic Skills 15) In Figure 6.7 with a quantity constraint of Q1, producer surplus is area: A) A. B) A + B + C. C) E + F + G. D) G. Answer: D Diff: 3 Topic: Taxi Medallions, graphing Skill: Analytical AACSB: Analytic Skills 16) In Figure 6.7 with a quantity constraint of Q1, the dead weight loss is area: A) A. B) H + I + J. C) C + F. D) G. Answer: C Diff: 3 Topic: Taxi Medallions, graphing Skill: Analytical AACSB: Analytic Skills 17) A quantity restriction leads to a quantity traded ________ the equilibrium quantity. A) at B) above C) below D) Either A or C is correct. Answer: D Diff: 2 Topic: Licensing and Market Efficiency Skill: Conceptual AACSB: Reflective Thinking

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18) A quantity restriction leads to a price ________ the equilibrium price. A) at B) above C) below D) Either A or B is correct. Answer: D Diff: 2 Topic: Licensing and Market Efficiency Skill: Conceptual AACSB: Reflective Thinking 19) If the government imposes a quantity restriction on how many shoes can be imported into a country, and the total quantity is below the market equilibrium quantity: A) total surplus in the market increases. B) total surplus in the market decreases. C) total surplus in the market does not change. D) total surplus may increase or decrease, depending on whether costs are increasing or decreasing in production. Answer: B Diff: 2 Topic: Licensing and Market Efficiency Skill: Conceptual AACSB: Reflective Thinking 20) An electrician licensing program in the state of North Carolina requires each electrician to obtain a license and renew it each year. Which of the following is a result of having the licensing program in NC? A) a decrease in total surplus B) excess demand for electrical service C) an increase in the quality of electrician D) All of the above are a result of the licensing program. Answer: D Diff: 3 Topic: Licensing and Market Efficiency Skill: Conceptual AACSB: Reflective Thinking 21) An import restriction ________ the market price and ________ the total surplus of the market. A) increases; decreases B) increases; increases C) decreases; increases D) decreases; decreases Answer: A Diff: 2 Topic: Import Restrictions Skill: Conceptual AACSB: Reflective Thinking 40 Copyright © 2012 Pearson Education, Inc.

22) Figure 6.5 illustrates the market for sugar. With free trade, the price of sugar would be at point: A) C. B) D. C) F. D) G. Answer: C Diff: 2 Topic: Import Restrictions, graphing Skill: Analytical AACSB: Analytic Skills 23) Figure 6.5 illustrates the market for sugar. If imports of sugar were banned, the price of sugar would be at point: A) C. B) D. C) F. D) G. Answer: A Diff: 2 Topic: Import Restrictions, graphing Skill: Analytical AACSB: Analytic Skills

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24) Figure 6.5 illustrates the market for sugar. With free trade, consumer surplus in the market would be shown as area: A) ABC. B) AEF. C) GEQ1. D) ABQ20. Answer: B Diff: 2 Topic: Import Restrictions, graphing Skill: Analytical AACSB: Analytic Skills 25) Figure 6.5 illustrates the market for sugar. If sugar imports were banned, consumer surplus in the market would be shown as area: A) ABC. B) AEF. C) GEQ1. D) ABQ20. Answer: A Diff: 2 Topic: Import Restrictions, graphing Skill: Analytical AACSB: Analytic Skills 26) Figure 6.5 illustrates the market for sugar. With free trade, producer surplus in the market would be shown as area: A) ABC. B) AEF. C) GEQ1. D) FEG. Answer: D Diff: 2 Topic: Import Restrictions, graphing Skill: Analytical AACSB: Analytic Skills 27) Figure 6.5 illustrates the market for sugar. If sugar imports were banned, producer surplus in the market would be shown as area: A) ABC. B) AEF. C) CBD. D) FEG. Answer: C Diff: 2 Topic: Import Restrictions, graphing Skill: Analytical AACSB: Analytic Skills 42 Copyright © 2012 Pearson Education, Inc.

28) Figure 6.5 illustrates the market for sugar. With free trade, total surplus in the market would be shown as area: A) ABC. B) AEF. C) AEG. D) FEG. Answer: C Diff: 2 Topic: Import Restrictions, graphing Skill: Analytical AACSB: Analytic Skills 29) Figure 6.5 illustrates the market for sugar. If sugar imports were banned, total surplus in the market would be shown as area: A) ABC. B) AEF. C) CBD. D) ABD. Answer: D Diff: 2 Topic: Import Restrictions, graphing Skill: Analytical AACSB: Analytic Skills 30) Figure 6.5 illustrates the market for sugar. If sugar imports were banned: A) domestic producers gain at the expense of domestic consumers. B) domestic consumers gain at the expense of domestic producers. C) domestic consumers gain at the expense of foreign producers. D) foreign producers gain at the expense of domestic consumers and producers. Answer: A Diff: 2 Topic: Import Restrictions, graphing Skill: Analytical AACSB: Analytic Skills 31) A ban on imports will ________ the price domestic consumers pay for the good, and ________ the amount of the good consumed by domestic consumers. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 2 Topic: Import Restrictions Skill: Analytical AACSB: Analytic Skills 43 Copyright © 2012 Pearson Education, Inc.

32) A ban on imports will ________ domestic producer surplus, and ________ domestic consumer surplus. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 2 Topic: Import Restrictions Skill: Analytical AACSB: Analytic Skills Recall the Application about the importation of used cars into Mexico to answer the following question(s). 33) Recall the Application. The ban on all imported used cars into Mexico other than those produced in 1998 will ________ Mexican consumer surplus and ________ Mexican producer surplus. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease Answer: B Diff: 2 Topic: Application 1, Used Cars to Mexico: 1998 Cars Only Skill: Analytical AACSB: Analytic Skills 34) Recall the Application. The ban on all imported used cars into Mexico other than those produced in 1998 will ________ U.S. producer surplus and ________ the equilibrium price of 1998 model used cars. A) decrease; increase B) increase; increase C) increase; decrease D) decrease; decrease Answer: A Diff: 2 Topic: Application 1, Used Cars to Mexico: 1998 Cars Only Skill: Analytical AACSB: Analytic Skills

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Recall the Application about the shortage of human organs for transplant operations to answer the following question(s). 35) Recall the Application. In a normal market, price will stabilize the market for human organs and will eliminate the shortage. Why do thousand of Americans die waiting for an organ transplant? A) There is no pricing mechanism to close the gap between quantity demanded and quantity supplied. B) People are interested in donating organs but the medicine is not fully advanced. C) People can only find human organs in the black market. D) none of the above Answer: A Diff: 2 Topic: Application 2, Supply and Demand for Human Organs Skill: Analytical AACSB: Analytic Skills 36) Recall the Application. The U.S. government sets the domestic price of human organs for transplanting at zero which leads to: A) a surplus in human organs available for transplanting. B) a shortage of human organs available for transplanting. C) market equilibrium in organs available for transplanting. D) no organs available for transplanting. Answer: B Diff: 2 Topic: Application 2, Supply and Demand for Human Organs Skill: Analytical AACSB: Analytic Skills 37) Recall the Application. In the U.S. there are fewer human organs available for transplants than people who need transplants, this problem could be reduced by: A) allowing people who need a transplant to purchase organs from donors. B) having the government buy organs from donors and then allocating them to hospitals for those who need transplants. C) having a public appeal to convince more people to donate organs for transplanting. D) all of the above Answer: D Diff: 2 Topic: Application 2, Supply and Demand for Human Organs Skill: Analytical AACSB: Analytic Skills

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Additional Application Prior to 2001 Canada annually exported billions of board feet of lumber to the United States tariff-free. The two countries had followed an agreement in which there would be no restrictions on the lumber from Canadian companies. In March 2001 the agreement ended and in 2002 the United States imposed tariffs and duties on imported Canadian lumber. What were the effects of these changes and who gained and who lost? The forestry workers of Canada were hurt. About 15,000 workers lost their jobs in British Columbia and many Canadian towns suffered from the loss of income from lumber sales and related industries. Exports to the United States fell from 14.7 billion board feet in 2000 to 20.9 million board feet in 2004. When the lumber prices rose in the United States, the costs of production for home building firms increased. The U.S. government has realized $3.5 billion from the tariffs and that is sitting in the Treasury awaiting resolution of legal disputes. Lumber companies in the United States have seen their prices rise with less competition. James Thayer, “Soft Wood, Hard Dispute,” The Weekly Standard, November 18, 2005. OnlineAdd 38) According to this application about the United States imposing tariffs on lumber from Canada. After the tariffs were placed on Canadian lumber imports, we could expect the consumer surplus in the United States to: A) increase. B) decrease. C) remain unaffected. D) none of these Answer: B Diff: 3 Topic: Additional Application Skill: Analytical AACSB: Analytic Skills 39) According to this application about the United States imposing tariffs on lumber from Canada. The effects of the U.S. tariffs will ________ the price of lumber in the United States and ________ the quantity of imports from Canada. A) increase, decrease B) decrease, decrease C) increase, increase D) decrease, decrease Answer: A Diff: 2 Topic: Additional Application Skill: Analytical AACSB: Analytic Skills 46 Copyright © 2012 Pearson Education, Inc.

40) According to this application about the United States imposing tariffs on lumber from Canada. If the cost of production for U.S. construction companies increased, then their ________ curve should shift ________. A) demand, left B) supply, right C) demand, right D) supply, left Answer: D Diff: 3 Topic: Additional Application Skill: Analytical AACSB: Analytic Skills 41) There are losers and winners from a taxi medallion policy. The losers are consumers and the winners are the people who receive a medallion. Answer: TRUE Diff: 2 Topic: Taxi Medallions Skill: Conceptual AACSB: Reflective Thinking 42) An import ban on shrimp increases the price of shrimp, decreases the quantity of shrimp, and therefore domestic producers will gain at the expense of domestic consumers. Answer: TRUE Diff: 2 Topic: Import Restrictions Skill: Conceptual AACSB: Reflective Thinking 43) A quantity restriction decreases the price of the product and the quantity produced. Answer: FALSE Diff: 2 Topic: Import Restrictions Skill: Conceptual AACSB: Reflective Thinking 44) With a quantity restriction , the total surplus of the market increases. On the contrary, with the licensing restriction, the total surplus decreases. Answer: FALSE Diff: 2 Topic: Import Restrictions Skill: Conceptual AACSB: Reflective Thinking

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45) A quantity restriction greater than the equilibrium quantity has no effect on a market. Answer: TRUE Diff: 2 Topic: Import Restrictions Skill: Conceptual AACSB: Reflective Thinking 46) An import ban on sugar decreases the price of sugar, decreases the quantity of sugar, and increases the output of the domestic sugar industry. Answer: FALSE Diff: 3 Topic: Import Restrictions Skill: Analytical AACSB: Analytic Skills 47) Suppose that televisions are produced both domestically and abroad. What would a ban on imported televisions do to the price of televisions, the quantity of televisions, and the output of the domestic television industry? Answer: A ban on imported televisions would lead to a leftward shift in the total supply, so price increases and quantity decreases. However, since supply is upward sloping, it is evident that domestic production will increase in the case of an import ban. Diff: 2 Topic: Import Restrictions Skill: Analytical AACSB: Analytic Skills

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48) Draw a graph to illustrate the effect on the market of an import restriction. Show how price and quantity in the market are affected. What happens to consumer and producer surplus? Answer:

As shown in the graph, total supply includes production by foreign and domestic suppliers, and the market is in equilibrium at P1 and Q1. When an import restriction is imposed, the supply decreases to only the production by domestic suppliers. As a result the price increases to P2 and the quantity decreases to Q2. Consumer surplus is decreased, and the ban eliminates the producer surplus of foreign suppliers. A producer surplus for domestic suppliers is generated, thus they gain at the expense of domestic consumers. Diff: 3 Topic: Import Restrictions, graphing Skill: Analytical AACSB: Analytic Skills

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49) Draw a graph showing the effect on the market of the imposition of a quantity restriction. Show the effect on consumer and producer surplus. Answer:

As shown in the graph, the market is originally in equilibrium at a price of P1 and a quantity of Q1. The imposition of the quantity restriction at Q2, which is less than Q1, also has the effect of causing the price to rise to P2. The triangle whose sides are the vertical line at Q2, the supply curve, and the demand curve represents the combined loss in consumer and producer surplus that results. Diff: 3 Topic: Import Restrictions, graphing Skill: Analytical AACSB: Analytic Skills

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6.5 Who Really Pays Taxes?

1) Refer to Figure 6.8. If your city imposes a tax of $100 per apartment, new monthly rent consumers pay is: A) $460. B) $500. C) $560. D) $600. Answer: C Diff: 2 Topic: Tax Shifting: Forward and Backward, graphing Skill: Analytical AACSB: Analytic Skills 2) Refer to Figure 6.8. If your city imposes a tax of $100 per apartment, new monthly rent landlords receive after the tax is: A) $460. B) $500. C) $560. D) $600. Answer: A Diff: 2 Topic: Tax Shifting: Forward and Backward, graphing Skill: Analytical AACSB: Analytic Skills

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3) Refer to Figure 6.8. If your city imposes a tax of $100 per apartment: A) consumers take the entire burden of the tax. B) landlords take the entire burden of the tax. C) consumers pay $60 and landlords pay $40 tax per apartment. D) consumers pay $40 and landlords pay $60 tax per apartment. Answer: C Diff: 2 Topic: Tax Shifting: Forward and Backward, graphing Skill: Analytical AACSB: Analytic Skills 4) Refer to Figure 6.8. If your city imposes a tax of $100 per apartment, the tax would incur the deadweight loss of: A) $48,000. B) $100,000. C) $520,000. D) $560,000. Answer: B Diff: 3 Topic: Tax Shifting: Forward and Backward, graphing Skill: Analytical AACSB: Analytic Skills 5) Refer to Figure 6.8. Suppose that your city imposes a tax of $100 per apartment and the supply curve is a vertical line at Q=10,000. Then: A) consumers pay the whole amount of the tax. B) landlords pay the whole amount of the tax. C) consumers and landlords split the tax. D) There is not sufficient information. Answer: B Diff: 3 Topic: Tax Shifting: Forward and Backward, graphing Skill: Analytical AACSB: Analytic Skills 6) Given the slope of a supply curve, if a demand curve becomes more price elastic: A) the share of a tax consumers take becomes smaller. B) the share of a tax consumers take becomes greater. C) consumers pay the entire amount of a tax. D) There is not sufficient information. Answer: A Diff: 3 Topic: Tax Shifting and the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking

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7) Ceteris paribus, if the demand for gasoline is relatively inelastic, and the government decides to place a tax on it, there should be a relatively ________ price hike to eliminate the excess ________ caused by the tax. A) large; supply B) large; demand C) small; supply D) small; demand Answer: B Diff: 2 Topic: Tax Shifting and the Price Elasticity of Demand Skill: Analytical AACSB: Analytic Skills 8) If demand is elastic, and the government decides to raise the tax on new cars. Then the price for cars will increase by a ________ amount and car buyers will bear a ________ share of the tax. A) large; large B) large; small C) small; large D) small; small Answer: D Diff: 2 Topic: Tax Shifting and the Price Elasticity of Demand Skill: Analytical AACSB: Analytic Skills 9) If demand is inelastic, and the government decides to raise the tax on water. Then the price for water will increase by a ________ amount and water consumers will bear a ________ share of the tax. A) large; large B) large; small C) small; large D) small; small Answer: A Diff: 2 Topic: Tax Shifting and the Price Elasticity of Demand Skill: Analytical AACSB: Analytic Skills

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10) Other things being equal, if the demand for a taxed good is relatively elastic, that is, the demand curve is relatively ________ consumers pay a ________ part of the tax. A) steep; large B) steep; small C) flat; large D) flat; small Answer: D Diff: 2 Topic: Tax Shifting and the Price Elasticity of Demand Skill: Analytical AACSB: Analytic Skills 11) Ceteris paribus, if the demand curve for milk is inelastic and the government decides to impose a tax on it. There is going to be a relatively ________ price hike to eliminate the excess ________ caused by the tax. A) large; supply B) large; demand C) small; supply D) small; demand Answer: B Diff: 2 Topic: Tax Shifting and the Price Elasticity of Demand Skill: Analytical AACSB: Analytic Skills

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12) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. The consumer surplus at the initial equilibrium is shown by: A) Triangle A. B) Triangle A + Rectangle B. C) Triangle A +Rectangle B + Triangle C. D) Triangle A + Rectangle B + Rectangle D. Answer: C Diff: 2 Topic: Tax Burden and Deadweight Loss, graphing Skill: Analytical AACSB: Analytic Skills 13) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. The consumer surplus at the new equilibrium with $2 tax is shown by: A) Triangle A. B) Triangle A + Rectangle B. C) Rectangle B + Triangle C. D) Triangle C + Rectangle E. Answer: A Diff: 2 Topic: Tax Burden and Deadweight Loss, graphing Skill: Analytical AACSB: Analytic Skills

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14) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. Suppose the government imposes a tax of $2 per pound of fish, and the tax is paid in legal terms by producers. Which of the following shows the extra money consumers must pay for the 100,000 pounds of fish they purchase? A) Triangle A B) Rectangle B C) Triangle A + Rectangle B D) Rectangle B + Triangle C Answer: B Diff: 2 Topic: Tax Burden and Deadweight Loss, graphing Skill: Analytical AACSB: Analytic Skills 15) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. Suppose the government imposes a tax of $2 per pound of fish, and the tax is paid in legal terms by producers. Which of the following shows the loss of consumer surplus on the fish that are NOT consumed because of the tax? A) Triangle C B) Rectangle B + Triangle C C) Triangle C + Rectangle E D) Rectangle B + Rectangle D Answer: A Diff: 2 Topic: Tax Burden and Deadweight Loss, graphing Skill: Analytical AACSB: Analytic Skills 16) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. Suppose the government imposes a tax of $2 per pound of fish, and the tax is paid in legal terms by producers. Which of the following shows the tax revenue raised by the government? A) Triangle A B) Rectangle B C) Rectangle B + Triangle C D) Rectangle B + Rectangle D Answer: B Diff: 2 Topic: Tax Burden and Deadweight Loss, graphing Skill: Analytical AACSB: Analytic Skills

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17) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. Suppose the government imposes a tax of $2 per pound of fish, and the tax is paid in legal terms by producers. Which of the following shows the difference between the total burden of the tax and the amount of revenue collected by the government? A) Triangle A B) Rectangle B C) Triangle C D) Rectangle E Answer: C Diff: 2 Topic: Tax Burden and Deadweight Loss, graphing Skill: Analytical AACSB: Analytic Skills 18) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. Suppose the government imposes a tax of $2 per pound of fish, and the tax is paid in legal terms by producers. Which of the following statements is correct? A) Producers bear the full cost of the tax. B) Consumers bear the full cost of the tax. C) Both producers and consumers equally share the tax. D) Consumers bear a relatively large share of the tax, compared to producers. Answer: B Diff: 2 Topic: Tax Burden and Deadweight Loss, graphing Skill: Conceptual AACSB: Reflective Thinking 19) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. Suppose the government imposes a tax of $2 per pound of fish, and the tax is paid in legal terms by producers. If the supply curve were positively sloped: A) producers would bear the full cost of the tax. B) consumers would bear the full cost of the tax. C) both producers and consumers share the tax. D) There is not sufficient information. Answer: C Diff: 2 Topic: Tax Burden and Deadweight Loss, graphing Skill: Conceptual AACSB: Reflective Thinking

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Recall the Application about the group of large restaurant owners in France requesting that the government lower the VAT on restaurant meals to answer the following question(s). 20) Recall the Application. What would happen if there is a VAT cut on restaurant meals? A) Competitiveness will be decreased in the restaurant industry. B) There will be a decrease in the sales of restaurant meals. C) Restaurant owners will cut the prices of restaurant meals. D) none of the above Answer: C Diff: 2 Topic: Application 3, Response to Lower Taxes in French Restaurants Skill: Conceptual AACSB: Analytic Skills 21) Recall the Application. If there is a tax cut on restaurant meals, there should be a decrease in cost that will be translated into ________ prices for consumers and ________ quantity of meals served. A) higher; higher. B) higher; lower C) lower; lower. D) lower; higher. Answer: D Diff: 2 Topic: Application 3, Response to Lower Taxes in French Restaurants Skill: Conceptual AACSB: Analytic Skills Recall the Application about the taxes on mobile phones in many African countries to answer the following question(s). 22) Recall the Application. A study of the mobile phone market suggests that f taxes are reduced on mobile phone service in developing nations, tax revenue would ________ in the short run and ________ in the long run. A) increase; increase even more B) decrease; increase C) increase; decrease D) decrease; decrease even more Answer: B Diff: 2 Topic: Application 4, Taxing Mobile Phones in Africa Skill: Conceptual AACSB: Reflective Thinking

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23) Recall the Application. The high tax rates on mobile phone service in many African nations ________ the use of mobile phones and ________ economic development. A) discourages; encourages B) discourages; impedes C) encourages; encourages D) encourages; impedes Answer: B Diff: 2 Topic: Application 4, Taxing Mobile Phones in Africa Skill: Conceptual AACSB: Reflective Thinking 24) Given the slope of a supply curve, consumers take a relatively smaller share of a tax if their demand becomes more price elastic. Answer: TRUE Diff: 3 Topic: Tax Shifting and the Price Elasticity of Demand Skill: Conceptual AACSB: Reflective Thinking 25) If the market for a good consists of a downward sloping demand curve and a vertical supply curve, sellers will have to pay the whole amount of a newly imposed tax. Answer: TRUE Diff: 3 Topic: Tax Burden and Deadweight Loss Skill: Conceptual AACSB: Reflective Thinking 26) The excess burden of a tax is the amount paid by consumers. Answer: FALSE Diff: 2 Topic: Tax Burden and Deadweight Loss Skill: Conceptual AACSB: Reflective Thinking 27) Consumers pay the part of a tax associated with a higher price for the product. Answer: TRUE Diff: 2 Topic: Tax Burden and Deadweight Loss Skill: Conceptual AACSB: Reflective Thinking

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28) If the market for a good consists of a downward sloping demand curve and a horizontal supply curve, consumers will pay the whole amount of a newly imposed tax. Answer: TRUE Diff: 2 Topic: Tax Burden and Deadweight Loss Skill: Conceptual AACSB: Reflective Thinking 29) When do consumers bear the larger share of a tax? Answer: when demand is inelastic Diff: 2 Topic: Tax Burden and Deadweight Loss Skill: Conceptual AACSB: Reflective Thinking 30) What is a deadweight loss or tax burden associated with a tax? Answer: the difference between the total burden of the tax and the amount of revenue the government receives Diff: 2 Topic: Tax Burden and Deadweight Loss Skill: Conceptual AACSB: Reflective Thinking

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