EC120 Lecture Notes - Lecture 5: Price Ceiling, Tax Incidence, Economic Surplus
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1. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?
| $0.60 | ||
| $0.40 | ||
| $0.75 | ||
| $0.67 |
2. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:
| a tax of $5 in Market X and a subsidy of $10 in Market Y. | ||
| subsidizing both markets. | ||
| taxing Market Y and subsidizing Market X. | ||
| taxing both markets. |
3.Economic theory suggests that a natural monopoly should be:
| eliminated whenever it arises. | ||
| regulated to take advantage of economies of scale. | ||
| left alone to operate with excess capacity. | ||
| taken over by the government. |
4.When the size of the production is the most efficient:
| total cost is at the minimum. | ||
| average cost is at the minimum. | ||
| marginal cost is at the minimum. | ||
| fixed cost is at the minimum. |
5.A firm should exit the industry if which of the following conditions apply?
| TR > TC | ||
| P < AC | ||
| Lifetime expected profit is positive. | ||
| Prices are low now but expected to rise. |
6.Figure: Costs
Reference: Ref 11-6
(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:
| $75. | ||
| $300. | ||
| $225. | ||
| $0, because P = MC at P = $20. |
7.When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.
| too low; too high | ||
| equal to the efficient price; too low | ||
| too high; too low | ||
| equal to the efficient price; too high |
8.Which of the following statements is TRUE?
I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.
II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances.
III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.
| I only | ||
| II and III only | ||
| I, II, and III | ||
| III only |
9.Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:
| various options. | ||
| more quantity. | ||
| more discount. | ||
| higher quality. |
10.Figure: Government Price Controls
Reference: Ref 8-3
(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:
| a shortage of 15 units. | ||
| a surplus of 15 units. | ||
| a supply of 20 units. | ||
| no effect on the market. |
11.In which of these instances does price function as a signal in the market?
| Suppliers invest more in exploration when the price of oil increases. | ||
| Consumers complain of price gouging as the price of oil skyrockets. | ||
| Government imposes price controls on the skyrocketing price of oil. | ||
| All of the answers are correct. |
12.Ethanol and sugar are both made from sugar cane, and ethanol can be used as substitute fuel for oil. Increasing oil prices cause the demand for ethanol to increase. This will cause the ______ sugar to ______ and its price to ______.
| demand for; decrease; decrease | ||
| supply of; increase; increase | ||
| supply of; decrease; increase | ||
| demand for; increase; increase |
13.Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?
| Cotton growers in California don't pay payroll taxes. | ||
| The water used to grow California cotton is highly subsidized by the government. | ||
| Cotton growers in California are mostly operated as nonprofit enterprises. | ||
| The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield. |
14.Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:
| the equilibrium price will fall to $7.50. | ||
| competition among buyers will increase the current price. | ||
| the current price will fall below $7.50 as sellers compete for market share. | ||
| There is not enough information provided to answer the question. |
15.Which of the following would increase the demand for beef?
| lower pork prices | ||
| higher consumer income | ||
| higher prices of feed grains used to feed beef cattle | ||
| an increase in the price of beef |
16.A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve.
True
False
17.Table: Production in the United States and Germany
| Labor units required to produce: |
| One Clock | One Sofa |
| United States | 2 | 5 | |
| Germany | 3 | 9 |
Reference: Ref 2-8
(Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one sofa in the United States is _________, and the opportunity cost of producing one sofa in Germany is _______.
| two clocks; three clocks | ||
| 10 clocks; 27 clocks | ||
| 0.4 clocks; 0.33 clocks | ||
| 2.5 clocks; three clocks |
18.Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.
| This trade makes Ella worse off by $200. | ||
| This trade makes Mark better off by $200. | ||
| Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800. | ||
| This trade creates value by moving the guitar and drum set to people who value them more. |
1. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?
| $0.60 | ||
| $0.40 | ||
| $0.75 | ||
| $0.67 |
2. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:
| a tax of $5 in Market X and a subsidy of $10 in Market Y. | ||
| subsidizing both markets. | ||
| taxing Market Y and subsidizing Market X. | ||
| taxing both markets. |
3.Economic theory suggests that a natural monopoly should be:
| eliminated whenever it arises. | ||
| regulated to take advantage of economies of scale. | ||
| left alone to operate with excess capacity. | ||
| taken over by the government. |
4.When the size of the production is the most efficient:
| total cost is at the minimum. | ||
| average cost is at the minimum. | ||
| marginal cost is at the minimum. | ||
| fixed cost is at the minimum. |
5.A firm should exit the industry if which of the following conditions apply?
| TR > TC | ||
| P < AC | ||
| Lifetime expected profit is positive. | ||
| Prices are low now but expected to rise. |
6.Figure: Costs
Reference: Ref 11-6
(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:
| $75. | ||
| $300. | ||
| $225. | ||
| $0, because P = MC at P = $20. |
7.When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.
| too low; too high | ||
| equal to the efficient price; too low | ||
| too high; too low | ||
| equal to the efficient price; too high |
8.Which of the following statements is TRUE?
I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.
II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances.
III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.
| I only | ||
| II and III only | ||
| I, II, and III | ||
| III only |
9.Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:
| various options. | ||
| more quantity. | ||
| more discount. | ||
| higher quality. |
10.Figure: Government Price Controls
Reference: Ref 8-3
(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:
| a shortage of 15 units. | ||
| a surplus of 15 units. | ||
| a supply of 20 units. | ||
| no effect on the market. |
11.In which of these instances does price function as a signal in the market?
| Suppliers invest more in exploration when the price of oil increases. | ||
| Consumers complain of price gouging as the price of oil skyrockets. | ||
| Government imposes price controls on the skyrocketing price of oil. | ||
| All of the answers are correct. |
12.Ethanol and sugar are both made from sugar cane, and ethanol can be used as substitute fuel for oil. Increasing oil prices cause the demand for ethanol to increase. This will cause the ______ sugar to ______ and its price to ______.
| demand for; decrease; decrease | ||
| supply of; increase; increase | ||
| supply of; decrease; increase | ||
| demand for; increase; increase |
13.Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?
| Cotton growers in California don't pay payroll taxes. | ||
| The water used to grow California cotton is highly subsidized by the government. | ||
| Cotton growers in California are mostly operated as nonprofit enterprises. | ||
| The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield. |
14.Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:
| the equilibrium price will fall to $7.50. | ||
| competition among buyers will increase the current price. | ||
| the current price will fall below $7.50 as sellers compete for market share. | ||
| There is not enough information provided to answer the question. |
15.Which of the following would increase the demand for beef?
| lower pork prices | ||
| higher consumer income | ||
| higher prices of feed grains used to feed beef cattle | ||
| an increase in the price of beef |
16.A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve.
True
False
17.Table: Production in the United States and Germany
| Labor units required to produce: |
| One Clock | One Sofa |
| United States | 2 | 5 | |
| Germany | 3 | 9 |
Reference: Ref 2-8
(Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one sofa in the United States is _________, and the opportunity cost of producing one sofa in Germany is _______.
| two clocks; three clocks | ||
| 10 clocks; 27 clocks | ||
| 0.4 clocks; 0.33 clocks | ||
| 2.5 clocks; three clocks |
18.Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.
| This trade makes Ella worse off by $200. | ||
| This trade makes Mark better off by $200. | ||
| Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800. | ||
| This trade creates value by moving the guitar and drum set to people who value them more. |
Considering the demand side of a market for a good, it is reasonable to expect that:
i. demand curves for a given good are identical between consumers
ii. demand curves for a given good differ between consumers
iii. an individual has identical demand curves for different goods
iv. an individual has different demand curves for different goods
| i |
| ii |
| iii |
| iv |
| i and iii |
| ii and iv |
Suppose the market demand curve for a good is represented by the linear equation Q = 60 - 0.75P. If the market price were to increase from P = $20 to P = $40, then holding all other factors constant:
| the quantity demanded would decrease by 10 units and total expenditures on the good would decrease by $400 |
| the quantity demanded would decrease by 15 units and total expenditures on the good would increase by $300 |
| the quantity demanded would decrease by 30 units and total expenditures on the good would increase by $1200 |
| the quantity demanded would increase by 20 units and total expenditures on the good would decrease by $800 |
| the quantity demanded would increase by 10 units and total expenditures on the good would increase by $100 |
| the quantity demanded would increase by 25 units and total expenditures on the good would increase by $1000 |
A perfectly competitive firms supply curve for a good identifies the:
i. minimum quantity supplied at each price, holding all other factors constant
ii. firms minimum willingness to accept for each incremental unit of the good (e.g., the first unit, second unit, etc.), holding all other factors constant
iii. maximum quantity supplied at each price, holding all other factors constant
iv. firms maximum willingness to accept for each incremental unit of the good (e.g., the first unit, second unit, etc.), holding all other factors constant
| i and ii |
| i and iv |
| ii and iii |
| iii and iv |
Considering the supply side of a market for a good, if a firms supply curve were vertical, then:
| the law of supply holds, and quantity supplied is completely insensitive to changes in price |
| the law of supply holds, and quantity supplied is highly sensitive to changes in price |
| the law of supply fails to hold, and quantity supplied is completely insensitive to changes in price |
| the law of supply fails to hold, and quantity supplied is highly sensitive to changes in price |
| none of the above |
The determinants of supply are:
i. factors other than price that will affect the quantity of a good or service a firm is willing and able to purchase
ii. factors that affect a producers maximum willingness-to-accept to produce various quantities of a good
iii. factors that affect a producers minimum willingness-to-accept to produce various quantities of a good
| i |
| ii |
| iii |
| i and ii |
| i and iii |
The market supply curve for a good is derived by:
i. horizontally summing the supply curves of the individual firms in the market
ii. vertically summing the supply curves of the individual firms in the market
iii. summing the quantity supplied by each firm at a given price and then repeating this over the range of prices
| i |
| ii |
| iii |
| i and ii |
| i and iii |
If the level of technology used in the production of a good improves, and assuming the quality of the good does not change, then:
i. more output may be obtained with a given amount of inputs compared to before the technological improvement
ii. a given amount of output may be obtained with fewer inputs compared to before the technological improvement
iii. the firm will increase its use of other inputs, such as the number of workers it employs
iv. market demand for the good will increase
| i |
| ii |
| iii |
| iv |
| i and ii |
| i, ii, and iii |
| i, ii, and iv |
| i, ii, iii, and iv |
Considering the market for gasoline, which of the following would result in an increase in market supply?
i. a decrease in the price of gasoline
ii. an improvement in oil extraction and refining technologies
iii. an increase in the wage rates paid to gasoline refinery workers
iv. a decrease in the price of crude oil, a key input used to produce gasoline
v. the imposition of a federal gasoline tax aimed a decreasing the emission of greenhouse gases
| i |
| ii |
| iii |
| iv |
| v |
| ii and iv |
| i, ii, and iv |
| i, ii, iii, and iv |
| i, ii, iii, iv and v |
Suppose a market has two identical sellers. If each sellers supply function is given by P = 20 + Q, then the market supply function is:
| P = 20 + 0.5Q |
| P = 20 + 2Q |
| P = 40 + Q |
| P = 40 + 2Q |
From the market framework discussed in class and the readings, it may be concluded that in order for a good to be exchanged between a seller and a buyer, it must be that:
| buyer maximum willingness-to-pay is greater than seller minimum willingness-to-accept |
| buyer maximum willingness-to-pay is greater than or equal to seller minimum willingness-to-accept |
| buyer minimum willingness-to-pay is greater than or equal to seller maximum willingness-to-accept |
| buyer minimum willingness-to-pay is greater than seller maximum willingness-to-accept |
If the market demand function is given by P = 80 - 0.3Q and the market supply is given by P = 20 + 0.1Q, then the equilibrium price and quantity are:
| P = $35 and Q = 150 |
| P = $65 and Q = 150 |
| P = $26 and Q = 60 |
| P = $28 and Q = 80 |
Of concern are the affects of sustained summer droughts on the domestic supply of wheat. Noting that wheat is a primary ingredient in the production of bread and that potatoes are a substitute for bread, if the supply of wheat declines then it is reasonable to expect:
| the price of wheat to fall, the supply of bread to increase, and the demand for potatoes to increase |
| the price of wheat to fall, the supply of bread to increase, and the demand for potatoes to decrease |
| the price of wheat to rise, the supply of bread to decrease, and the demand for potatoes to decrease |
| the price of wheat to rise, the supply of bread to decrease, and the demand for potatoes to increase |
| the price of wheat to rise, the supply of bread to increase, and the demand for potatoes to increase |
| the price of wheat to rise, the supply of bread to increase, and the demand for potatoes to decrease |
Suppose a perfectly competitive market is initially in equilibrium. If market demand and supply decrease simultaneously, then equilibrium:
| price will rise, but the equilibrium quantity may either rise, fall, or remain unchanged |
| quantity will rise, but the equilibrium price may either rise, fall, or remain unchanged |
| price will fall, but the equilibrium quantity may either rise, fall, or remain unchanged |
| quantity will fall, but the equilibrium price may either rise, fall, or remain unchanged |
Considering the demand side of a market for a good, the consumer surplus derived by an individual:
i. is the difference between the maximum amount the consumer is willing to pay on each unit and the minimum prices that producers are willing to accept
ii. is the difference between the minimum amount the consumer is willing to pay on each unit and the price he/she
actually pays
iii. is the difference between the maximum amount the consumer is willing to pay on each unit and the price he/she actually pays
iv. will decrease if price increases
| i |
| ii |
| iii |
| i and iv |
| ii and iv |
| iii and iv |
Suppose the market demand for a good is described by the equation P = 120 - 2Q. If a change in market supply results in price decreasing from P0 = $80 to P1 = $70, then the resulting change in consumer surplus is:
| $225 |
| $400 |
| $575 |
| $625 |
| $750 |
