Microeconomics 8th Edition Pindyck Test Bank

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Microeconomics 8th Edition Pindyck Test Bank

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Microeconomics, 8e (Pindyck/Rubinfeld)
Chapter 9 The Analysis of Competitive Markets

9.1 Evaluating the Gains and Losses from Government PoliciesConsumer and Producer Surplus

Figure 9.1

1) Refer to Figure 9.1. If the market is in equilibrium, the consumer surplus earned by the buyer of the 1st unit is ________.
A) $5.00
B) $15.00
C) $22.50
D) $40.00
Answer: D
Diff: 1
Section: 9.1

2) Refer to Figure 9.1. If the market is in equilibrium, the producer surplus earned by the seller of the 1st unit is ________.
A) $5.00
B) $10.00
C) $15.00
D) $20.00
E) $40.00
Answer: D
Diff: 1
Section: 9.1

3) Refer to Figure 9.1. If the market is in equilibrium, total consumer surplus is
A) $30.
B) $70.
C) $400.
D) $800.
E) $1200.
Answer: D
Diff: 2
Section: 9.1

4) Refer to Figure 9.1. If the market is in equilibrium, total producer surplus is
A) $30.
B) $70.
C) $400.
D) $800.
E) $1200.
Answer: C
Diff: 2
Section: 9.1

5) Refer to Figure 9.1. If the market is in equilibrium, total consumer and producer surplus is
A) $0.
B) $100.
C) $800.
D) $1200.
E) $2000.
Answer: D
Diff: 1
Section: 9.1

6) Refer to Figure 9.1. If the government establishes a price ceiling of $20, how many widgets will be sold?
A) 20
B) 30
C) 40
D) 50
E) 60
Answer: A
Diff: 1
Section: 9.1

7) Refer to Figure 9.1. Suppose the market is currently in equilibrium. If the government establishes a price ceiling of $20, consumer surplus will
A) fall by $200.
B) fall by $300.
C) remain the same.
D) rise by $200.
E) rise by $300.
Answer: C
Diff: 2
Section: 9.1

8) Refer to Figure 9.1. Suppose the market is currently in equilibrium. If the government establishes a price ceiling of $20, producer surplus will
A) fall by $200.
B) fall by $300.
C) remain the same.
D) rise by $200.
E) rise by $300.
Answer: B
Diff: 2
Section: 9.1

9) Refer to Figure 9.1. If the government establishes a price ceiling of $20, the resulting deadweight loss will be
A) $0.
B) $20.
C) $30.
D) $300.
E) $600.
Answer: D
Diff: 1
Section: 9.1

10) Refer to Figure 9.1. If the government establishes a price ceiling of $20, total consumer and producer surplus will be
A) $30.
B) $400.
C) $600.
D) $900.
E) $1200.
Answer: D
Diff: 1
Section: 9.1

11) Consumer surplus measures
A) the extra amount that a consumer must pay to obtain a marginal unit of a good or service.
B) the excess demand that consumers have when a price ceiling holds prices below their equilibrium.
C) the benefit that consumers receive from a good or service beyond what they pay.
D) gain or loss to consumers from price fixing.
Answer: C
Diff: 1
Section: 9.1

12) When government intervenes in a competitive market by imposing an effective price ceiling, we would expect the quantity supplied to ________ and the quantity demanded to ________.
A) fall; rise
B) fall; fall
C) rise; rise
D) rise; fall
Answer: A
Diff: 1
Section: 9.1

13) Producer surplus is measured as the
A) area under the demand curve above market price.
B) entire area under the supply curve.
C) area under the demand curve above the supply curve.
D) area above the supply curve up to the market price.
Answer: D
Diff: 1
Section: 9.1

14) In an unregulated, competitive market consumer surplus exists because some
A) sellers are willing to take a lower price than the equilibrium price.
B) consumers are willing to pay more than the equilibrium price.
C) sellers will only sell at prices above equilibrium price (or actual price).
D) consumers are willing to make purchases only if the price is below the actual price.
Answer: B
Diff: 1
Section: 9.1

15) In an unregulated, competitive market producer surplus exists because some
A) consumers are willing to pay more than the equilibrium price.
B) producers are willing to take more than the equilibrium price.
C) producers are willing to sell at less than the equilibrium price.
D) consumers are willing to purchase, but only at prices below equilibrium price.
Answer: C
Diff: 1
Section: 9.1

16) Deadweight loss refers to
A) losses in consumer surplus associated with excess government regulations.
B) situations where market prices fail to capture all of the costs and benefits of a policy.
C) net losses in total surplus.
D) losses due to the policies of labor unions.
Answer: C
Diff: 1
Section: 9.1

17) In 1970s the federal government imposed price controls on natural gas. Which of the following statements is true?
A) These price controls caused a chronic excess supply of natural gas.
B) Consumers gained from the price controls, because consumer surplus was larger than it would have been under free market equilibrium.
C) Producers gained from the price controls because producer surplus was larger than it would have been under free market equilibrium.
D) This episode of price controls was unusual, because it resulted in no deadweight loss to society.
Answer: B
Diff: 1
Section: 9.1

18) An effective price ceiling causes a loss of
A) producer surplus for certain and possibly consumer surplus as well.
B) consumer surplus only.
C) producer surplus only.
D) consumer surplus for certain and possibly producer surplus as well.
E) neither producer nor consumer surplus.
Answer: A
Diff: 2
Section: 9.1

19) Price ceilings can result in a net loss in consumer surplus when the ________ curve is ________.
A) demand; very elastic
B) demand; very inelastic
C) supply; very inelastic
D) none of the above; price ceilings always increase consumer surplus
Answer: B
Diff: 2
Section: 9.1

20) Producer surplus for the whole market can be thought of as
A) total profit.
B) variable operating profit plus factor rents.
C) total profit minus factor rents earned by lower cost firms.
D) total profit plus factor rents earned by lower cost firms.
Answer: D
Diff: 2
Section: 9.1

Figure 9.2

21) Refer to Figure 9.2. At price 0E and quantity Q*, consumer surplus is the area
A) 0FCQ*.
B) AFC.
C) EFC.
D) AEC.
E) none of the above
Answer: C
Diff: 1
Section: 9.1

22) Refer to Figure 9.2. At price 0E and quantity Q*, producer surplus is the area
A) 0ACQ*.
B) 0ECQ*.
C) 0FCQ*.
D) EFC.
E) none of the above
Answer: E
Diff: 2
Section: 9.1

23) Refer to Figure 9.2. At price 0E and quantity Q*, the deadweight loss is
A) 0ACQ*.
B) 0ECQ*.
C) 0FCQ*.
D) EFC.
E) none of the above
Answer: E
Diff: 2
Section: 9.1

24) Refer to Figure 9.2. At price 0H and quantity Q1, consumer surplus is the area
A) EDGF.
B) 0FGQ1.
C) HFGB.
D) EFC.
E) none of the above
Answer: C
Diff: 2
Section: 9.1

25) Refer to Figure 9.2. At price 0H and quantity Q1, producer surplus is the area
A) 0ABQ1.
B) 0EDQ1.
C) AHB.
D) 0FGQ1.
E) none of the above
Answer: C
Diff: 2
Section: 9.1

26) Refer to Figure 9.2. At price 0H and quantity Q1, the deadweight loss is
A) DGC.
B) BDC.
C) BGC.
D) 0FGQ1.
E) none of the above
Answer: C
Diff: 2
Section: 9.1

Figure 9.3

27) Refer to Figure 9.3. If the market is in equilibrium, the consumer surplus earned by the buyer of the 100th unit is
A) $0.50.
B) $0.75.
C) $1.50.
D) $2.00.
E) $2.75.
Answer: B
Diff: 1
Section: 9.1

28) Refer to Figure 9.3. If the market is in equilibrium, the producer surplus earned by the seller of the 100th unit is
A) $0.50.
B) $0.75.
C) $1.50.
D) $2.00.
E) $2.75.
Answer: C
Diff: 1
Section: 9.1

29) Refer to Figure 9.3. If the market is in equilibrium, total consumer surplus is
A) $1.
B) $3.
C) $200.
D) $400.
E) $600.
Answer: C
Diff: 2
Section: 9.1

30) Refer to Figure 9.3. If the market is in equilibrium, total producer surplus is
A) $2.
B) $3.
C) $200.
D) $400.
E) $600.
Answer: D
Diff: 2
Section: 9.1

31) Refer to Figure 9.3. If the market is in equilibrium, total consumer and producer surplus is
A) $0.
B) $4.
C) $5.
D) $600.
E) $800.
Answer: D
Diff: 1
Section: 9.1

32) Refer to Figure 9.3. If the government establishes a price ceiling of $1.00, how many pounds of berries will be sold?
A) 200
B) 300
C) 400
D) 600
E) 800
Answer: A
Diff: 1
Section: 9.1

33) Refer to Figure 9.3. If the government establishes a price ceiling of $1.00, consumer surplus will
A) fall by $50.
B) fall by $150.
C) remain the same.
D) rise by $50.
E) rise by $150.
Answer: E
Diff: 2
Section: 9.1

34) Refer to Figure 9.3. If the government establishes a price ceiling of $1.00, producer surplus will
A) fall by $150.
B) fall by $300.
C) remain the same.
D) rise by $150.
E) rise by $300.
Answer: B
Diff: 2
Section: 9.1

35) Refer to Figure 9.3. If the government establishes a price ceiling of $1.00, the resulting deadweight loss will be
A) $1.50.
B) $200.
C) $150.
D) $300.
E) $600.
Answer: C
Diff: 1
Section: 9.1

36) Refer to Figure 9.3. If the government establishes a price ceiling of $1.00, total consumer and producer surplus will be
A) $1.50.
B) $300.
C) $450.
D) $500.
E) $600.
Answer: C
Diff: 1
Section: 9.1

37) Price ceilings
A) cause quantity to be higher than in the market equilibrium.
B) always increase consumer surplus.
C) may decrease consumer surplus if demand is sufficiently elastic.
D) may decrease consumer surplus if demand is sufficiently inelastic.
E) always decrease consumer surplus.
Answer: D
Diff: 3
Section: 9.1

38) Consider the following statements when answering this question
I. When a competitive industrys supply curve is perfectly elastic, then the sole beneficiaries of a reduction in input prices are consumers.
II. Even in competitive markets firms have no incentives to control costs, as they can always pass on cost increases to consumers.
A) I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) I and II are false.
Answer: B
Diff: 3
Section: 9.1

39) Consider the following statements when answering this question
I. Employers are always hurt by minimum wage laws.
II. Workers always benefit from minimum wage laws.
A) I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) I and II are false.
Answer: B
Diff: 3
Section: 9.1

40) Consider the following statements when answering this question
I. Overall, the sick will always gain from a price ceiling on prescription drugs.
II. The reduction of supply caused by the imposition of a price ceiling is greater the more inelastic the market supply curve.
A) I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) I and II are false.
Answer: D
Diff: 3
Section: 9.1

41) The consumers gain from the imposition of a price ceiling is higher when
A) the own price elasticity of market demand is high and the price elasticity of market supply is high.
B) the own price elasticity of market demand is high and the price elasticity of market supply is low.
C) the own price elasticity of market demand is low and the price elasticity of market supply is high.
D) the own price elasticity of market demand is low and the price elasticity of market supply is low.
Answer: D
Diff: 3
Section: 9.1

42) Under a binding price ceiling, what does the change in consumer surplus represent?
A) The gain in surplus for those buyers who can still purchase the product at the lower price.
B) The loss in surplus for those buyers who previously purchased some units of the good at the higher price, but these units are no longer produced at the lower price.
C) The loss in surplus for those buyers who would like the purchase the excess demand created by the price ceiling policy.
D) Both A and B are correct.
E) Both A and C are correct.
Answer: D
Diff: 3
Section: 9.1

43) Under a binding price ceiling, what does the change in producer surplus represent?
A) The gain in surplus for those sellers who are still willing to supply the product at the lower price.
B) The loss in surplus associated with those units that used to be produced at the higher price but are no longer produced at the lower price.
C) The gain in surplus associated with the excess demand created by the price ceiling policy.
D) Both A and B are correct.
E) Both A and C are correct.
Answer: B
Diff: 3
Section: 9.1

44) Suppose a competitive market is in equilibrium at price P and quantity Q. If the demand curve becomes less elastic, but the same price-quantity equilibrium is maintained, what happens to consumer and producer surplus?
A) Both PS and CS increase
B) CS increases and PS decreases
C) CS increases and PS remains the same
D) Both CS and PS decrease
Answer: C
Diff: 2
Section: 9.1

45) The market demand curve for a popular teen magazine is given by Q = 80 10P where P is the magazine price in dollars per issue and Q is the weekly magazine circulation in units of 10,000. If the circulation is 400,000 per week at the current price, what is the consumer surplus for a teen reader with maximum willingness to pay of $3 per issue?
A) $2.00
B) $1.00
C) Zero
D) -$1.00
Answer: D
Diff: 2
Section: 9.1

46) The utilities commission in a city is currently examining pay telephone service in the city. The commission has been asked to evaluate a proposal by a city council member to place a $0.10 price ceiling on local pay phone service. The staff economist at the utilities commission estimates the demand and supply curves for pay telephone service as follows:
QD = 1600 2400P
QS = 200 + 3200P,
where P = price of a pay telephone call, and Q = number of pay telephone calls per month.

a. Determine the equilibrium price and quantity that will prevail without the price ceiling.
b. Analyze the quantity that will be available with the price ceiling (in the long-run).
c. The city council realizes that the telephone company could curtail pay phone service in response to the ceiling. To prevent this, the council plans to impose a requirement that the telephone company must maintain the current number of pay phones. In light of this additional restriction, what will be the likely impact of the price ceiling?
Answer:
a.
Set QD = QS.
1600 2400P = 200 + 3200P
1400 = 5600P
P = $0.25
Substitute into QD.
QD = 1600 2400(0.25)
QD = 1000

b.
QS = 200 + 3200(0.10)
QS = 520
QD = 1600 2400(0.10)
QD = 1360
There will be a shortage of 1360 520 or 840 calls.

c.
The telephone company would be expected to allow service to decline by not servicing broken phones, placing the required phones in very easily reserviced areas, and otherwise reducing the cost of complying with the requirement.
Diff: 2
Section: 9.1

47) In an unregulated, competitive market we could calculate consumer surplus if we knew the equations representing supply and demand. For this problem assume that supply and demand are as follows:
Supply P = 4 + 0.116Q
Demand P = 25 0.10Q,
where P represents unit price in dollars and Q represents number of units sold each year. Calculate the annual value of aggregate consumer surplus.
Answer: We must calculate the area above the equilibrium price and below the demand curve. The equilibrium price is:
4 + 0.116Q = 25 0.10Q
0.216Q = 21
Q = 97.22 units per year.

The area below the demand curve can be calculated after we know the height of demand at Q = 0 and Q = 97.22.
At Q = 0, P = 25.
At Q = 97.22, P = 25 0.10(97.22) = 15.28.
Since demand is linear, we can use the difference of 25 and 15.28 or 9.72 as the height of the space under demand.
Area = 1/2 b h = (1/2)(97.22)(9.72) = $472.49
Diff: 1
Section: 9.1

48) The elected officials in a west coast university town are concerned about the exploitative rents being charged to college students. The town council is contemplating the imposition of a $350 per month rent ceiling on apartments in the city. An economist at the university estimates the demand and supply curves as:
QD = 5600 8P QS = 500 + 4P,
where P = monthly rent, and Q = number of apartments available for rent. For purposes of this analysis, apartments can be treated as identical.

a. Calculate the equilibrium price and quantity that would prevail without the price ceiling. Calculate producer and consumer surplus at this equilibrium (sketch a diagram showing both).
b. What quantity will eventually be available if the rent ceiling is imposed? Calculate any gains or losses in consumer and/or producer surplus.
c. Does the proposed rent ceiling result in net welfare gains? Would you advise the town council to implement the policy?

Answer:
a.
To calculate equilibrium set QD = QS and solve for P.
5600 8P = 500 + 4P
5100 = 12P
P = 425
Substitute P into QD to solve for Q.
QD = 5600 8(425)
Q = 2200

QD = 5600 8P
P = 700 0.125QD

QS = 500 4P
P = 125 + 0.25Q

C.S. = area A
C.S. = 0.5(700 425) 2200
C.S. = 302,500
P.S. = area B
P.S. = 0.5(425 125) 2200
P.S. = 330,000
Sum of producer and consumer surplus is:
302,500 + 330,000 = 632,500

b.
Eventually the market will settle at the quantity supplied corresponding to $350 rent.
QS = 500 + 4(350)
QS = 1900

QD at P = 350
QD = 5600 8(350) = 2800
There will be a shortage of 900 apartments.

Gain = Consumer surplus is area A
Area A = (425 350) 1900 = 142,500

Area B = loss in consumer surplus
To find area B, first find consumer reservation price corresponding to an output of 1900.
P = 700 0.125(1900) = 462.50
Difference Q = 2200 1900 = 300
Area B = 0.5(462.50 425) (2200 1900)
Area B = 5625
Loss in consumer surplus is 5625.

Area C is loss in producer surplus not offset by gain in consumer surplus.
Area C = 0.5(425 350) (2200 1900)
Area C = 11,250

c.
Area A is a gain in consumer surplus, but it is offset by a loss in producer surplus. The net changes are thus B (lost C.S.) and C (lost P.S.). The policy thus results in a deadweight loss.The deadweight loss = lost C.S. + lost P.S. or 5625 + 11250 = 16,875.
Deadweight loss = 16,875

Diff: 2
Section: 9.1

49) In an unregulated competitive market, supply and demand have been estimated as follows:
Demand P = 25 0.10Q Supply P = 4 + 0.116Q,
where P represents unit price in dollars, and Q represents number of units sold per year.

a. Calculate annual aggregate consumer surplus.
b. Calculate annual aggregate producer surplus.
c. Define what producer surplus means.
Answer:
a.
First compute equilibrium price.
QS = QD
4 + 0.116Q = 25 0.10Q
0.216Q = 21
Q = 97.22 units per year
At Q = 97.22, P = 25 0.10(97.22) = 15.28.

Consumer surplus is the area of the triangle between the equilibrium price line 15.28 and the demand curve out to Q = 97.22
Height of triangle is 25 15.28 = 9.72
Area = (1/2)(b)(h) = (0.5)(97.22)(9.72) = $472.49
Consumer surplus = $472.49 per year.

b.
The producer surplus is the area of the triangle formed by the area bounded by the equilibrium price line and the supply curve.
Height of triangle is = 15.28 4 (S at Q = 0). = 11.28
Area of triangle = 1/2 b h = (0.5)(97.22)(11.28) = $548.21 per year.

c.
Producer surplus represents the value of payments per unit of time to sellers over and above the marginal cost of producing the units. For the individual unit, it is the difference between the equilibrium price and the marginal cost of producing the unit.
Diff: 2
Section: 9.1

50) In a competitive market, the following supply and demand equations are given:
Supply P = 5 + 0.36Q
Demand P = 100 0.04Q,
where P represents price per unit in dollars, and Q represents rate of sales in units per year.

a. Determine the equilibrium price and sales rate.
b. Determine the deadweight loss that would result if the government were to impose a price ceiling of 40 dollars per unit.
Answer:
a.
Equate supply and demand to get equilibrium values.
5 + 0.036Q = 100 0.04Q
0.076Q = 95
Q = 1,250 units per year

The equilibrium price is
P = 5 + 0.036(1250) = $50.00 per unit.

b.
With a price ceiling of $40, the deadweight loss is the triangle between supply and demand bounded by Q of 1250 and the new sales rate at P of 40.
Rearrange supply in terms of P.
P = 5 + 0.036Q or Q = -138.89 + 27.78P
At P = 40, Q = -138.89 + 27.78(40)
Q = 972.31 units per year.
The base of the triangle (rotated 90 degrees) is the vertical distance between the heights of supply and demand when Q = 972.31

Height of demand = P = 100 0.04(972.31) = 61.11
Height of supply = P = 5 + 0.036(972.31) = 40.00
Triangle base is the difference = 21.11

Height of triangle = Q Q = 1250 972.31 = 277.69
Deadweight loss = 1/2 b h = (1/2)(21.11)(277.69) = $2,931.

Diff: 2
Section: 9.1

51) The demand and supply functions for basic cable TV in the local market are given as:
QD= 200,000 4,000P and QS = 20,000 + 2,000P. Calculate the consumer and producer surplus in this market. If the government implements a price ceiling of $15 on the price of basic cable service, calculate the new levels of consumer and producer surplus. Are all consumers better off? Are producers better off?

Answer: First we must determine the market equilibrium quantity and price. To do this, we set quantity demanded equal to quantity supplied and solve for equilibrium price.
QD= 200,000 4,000P = QS = 20,000 + 2,000P ==> P = 30. At a price of $30, the quantity exchanged will be: 80,000. The choke price (lowest price such that no units are transacted) is $50.
The consumer surplus is CS = (50 30) 80,000 = 800,000.
Producer surplus is PS = 30(20,000) + (80,000 20,000)30 = 1,500,000.
If a price ceiling of $15 is implemented, producers will only bring 50,000 units to the market.

Consumer surplus is CS = 0.5(50,000)(50 37.5) + (50,000)(37.5 15)
= 312,500 + 1,125,000 = 1,437,500
Producer surplus becomes = 20,000(15) + (50,000 20,000)15 = 525,000.
In this example, consumer surplus has risen by 637,500. However, not all consumers are better off as the price ceiling brings about a shortage. That is, some consumers are willing to pay $15 for cable TV yet are unable to get it. Producer surplus shrinks by 65% due to the price ceiling. Producers are worse off.
Diff: 2
Section: 9.1

52) The demand and supply functions for oil on the world market are given as: QD = 25.64 0.06P and QS = 21.74 + 0.07P. Calculate consumer surplus. If the Clinton Administration puts a price ceiling of $20 per unit, calculate the resulting consumer surplus. Are consumers better off?

Answer: First we must determine the market equilibrium quantity and price. To do this, we set quantity demanded equal to quantity supplied and solve for equilibrium price.
QD = 25.64 0.06P = QS = 21.74 + 0.07P ==> P = 30. At a price of $30, the quantity exchanged will be: 23.84. The choke price (lowest price such that no units are transacted) is $427 . The consumer surplus is CS = (427 30) 23.84 = 4,736.21. If a price ceiling of $20 is implemented, producers will only bring 23.14 units to the market. Consumer surplus is

CS = 0.5(427.33 41.67)(23.14) + (41.67 20)(23.14) = 4,963.53. Producer surplus becomes
PS = 20(21.74) (23.14 21.74)20 = 448.80. In this example, consumer surplus has increased by 5%. In aggregate, consumers are better off. Also, some consumers are worse off as the price ceiling brings about a shortage. That is, there are consumers willing to pay $20 for a unit and do not get it.
Diff: 2
Section: 9.1

9.2 The Efficiency of a Competitive Market

1) Governments may successfully intervene in competitive markets in order to achieve economic efficiency
A) at no time; competitive markets are always efficient without government intervention.
B) to increase the incidence of positive externalities.
C) in cases of positive externalities only.
D) in cases of negative externalities only.
E) in cases of both positive and negative externalities.
Answer: E
Diff: 1
Section: 9.2

2) Government intervention can increase total welfare when
A) there are costs or benefits that are external to the market.
B) consumers do not have perfect information about product quality.
C) a high price makes the product unaffordable for most consumers.
D) all of the above
E) A and B only
Answer: E
Diff: 1
Section: 9.2

3) Which of the following policies could lead to a deadweight loss?
A) price ceilings.
B) price floors.
C) policies prohibiting human cloning.
D) all of the above
E) A and B only
Answer: D
Diff: 2
Section: 9.2

4) Having seen the quantity of drugs supplied by pharmaceutical companies in a competitive market, a government decides to force companies to sell exactly the same quantity of drugs at prevailing market prices. The government then forbids additional drug sales and allows doctors to prescribe the drugs at no cost to patients in need. This government scheme is
A) efficient as the quantity of drugs traded is the same as under a free market.
B) efficient as the price of drugs paid by the government is the same as under a free market.
C) efficient as consumer surplus is maximized.
D) likely to be inefficient as doctors are unlikely to prescribe drugs to the consumers who are willing to pay the most for the drugs.
E) likely to be inefficient as drug producers have a captive buyer.
Answer: D
Diff: 3
Section: 9.2

5) For national security reasons a government decides that all of its base metal industry should not be located in the same geographical region, as it presently is. The government decides to allocate production quotas to firms in different parts of the country, but does not restrict in any way the transactions between consumers and base metal producers. This scheme is
A) efficient as consumers still buy from whoever they like.
B) efficient as those consumers who value base metals the most can purchase them.
C) likely to be inefficient as some of the industrys output is not produced by the firms with the lowest cost.
D) likely to be inefficient as the scheme will require subsidies to work.
E) efficient as learning by doing effects will be strongest in the firms set up in new geographical regions.
Answer: C
Diff: 3
Section: 9.2

6) Consider the following statements when answering this question
I. Waiting lists for kidney transplants have been caused by a 1984 congressional law forbidding humans to sell their kidneys.
II. Randomly choosing citizens to serve on juries is an efficient mechanism for selecting jurors.
A) I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) I and II are false.
Answer: B
Diff: 2
Section: 9.2

7) When the market price is held above the competitive level, the deadweight loss is composed of:
A) producer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
B) consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
C) producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
D) There is no deadweight loss if the government uses a price floor policy to increase the price.
Answer: C
Diff: 2
Section: 9.2

8) A situation in which the unregulated competitive market outcome is inefficient because prices fail to provide proper signals to buyers and sellers is known as:
A) an imperfectly competitive market.
B) a market failure.
C) a deadweight loss.
D) a disequilibrium.
Answer: B
Diff: 1
Section: 9.2

9) Use the following statements to answer this question:
I. When the market price is held above the competitive price level, it is possible for the loss in consumer surplus to be fully captured by producers.
II. When the market price is held above the competitive level, there is no deadweight loss because producer gains exactly equal consumer losses.
A) I and II are true.
B) I is true and II is false.
C) II is true and I is false.
D) I and II are false.
Answer: B
Diff: 1
Section: 9.2

10) Suppose the market supply curve is upward sloping and market demand is perfectly inelastic. If the market price is held above the equilibrium level, which of the following statements about the resulting outcome is not true?
A) The decrease in consumer surplus is fully captured by the producers.
B) There will be an excess quantity supplied.
C) Quantity demanded will remain the same.
D) Quantity demanded will decline.
Answer: D
Diff: 2
Section: 9.2

11) The market supply curve for music downloads is Q = 135(P-1) where Q is millions of downloads and P is the price in dollars per track. If the current price is $1.20 per download, what is the change in producer surplus if the price increases by $0.20 per track?
A) $5.4 million
B) $8.1 million
C) $10.8 million
D) $27 million
Answer: B
Diff: 2
Section: 9.2

9.3 Minimum Prices

Figure 9.4

1) Suppose the market in Figure 9.4 is currently in equilibrium. If the government establishes a price floor of $50, how many widgets will be sold?
A) 20
B) 30
C) 40
D) 50
E) 60
Answer: A
Diff: 1
Section: 9.3

2) Suppose the market in Figure 9.4 is currently in equilibrium. If the government establishes a price floor of $40, consumer surplus will
A) fall by $50.
B) fall by $350.
C) remain the same.
D) rise by $50.
E) rise by $350.
Answer: B
Diff: 2
Section: 9.3

3) Refer to Figure 9.4. If the government establishes a price floor of $40 and government purchases the surplus over quantity demanded, producer surplus will
A) fall by $275.
B) fall by $500.
C) remain the same.
D) rise by $275.
E) rise by $500.
Answer: E
Diff: 2
Section: 9.3

4) Refer to Figure 9.4. If the government establishes a price floor of $40 and government purchases the surplus over quantity demanded, the resulting deadweight loss will be
A) $15.
B) 10 widgets.
C) $1,050.
D) $1,200.
E) $2,400.
Answer: C
Diff: 1
Section: 9.3

5) Refer to Figure 9.4. If the government establishes a price floor of $40 and purchases the surplus, total consumer and producer surplus will be
A) $15.
B) 30 widgets.
C) $1,050.
D) $1,200.
E) $1,350
Answer: E
Diff: 1
Section: 9.3

Figure 9.5

6) Refer to Figure 9.5. If the government establishes a price floor of $2.50, how many pounds of berries will be sold?
A) 200
B) 300
C) 400
D) 600
E) 800
Answer: A
Diff: 1
Section: 9.3

7) Refer to Figure 9.5. If the government establishes a price floor of $2.50, consumer surplus will
A) fall by $50.
B) fall by $150.
C) remain the same.
D) rise by $50.
E) rise by $150.
Answer: B
Diff: 2
Section: 9.3

8) Refer to Figure 9.5. If the government establishes a price floor of $2.50 and farmers grow only the amount of berries that will be sold, producer surplus will
A) fall by $50.
B) fall by $100.
C) remain the same.
D) rise by $50.
E) rise by $100.
Answer: C
Diff: 2
Section: 9.3

9) Refer to Figure 9.5. If the government establishes a price floor of $2.50 and farmers grow only the amount of berries that will be sold, the resulting deadweight loss will be
A) $1.50.
B) 200 pounds of berries.
C) $150.
D) $250.
E) $300.
Answer: C
Diff: 1
Section: 9.3

10) Refer to Figure 9.5. If the government establishes a price floor of $2.50 and farmers grow only the amount of berries that will be sold, total consumer and producer surplus will be
A) $1.50.
B) $300.
C) $450.
D) $500.
E) $600.
Answer: C
Diff: 1
Section: 9.3

11) Which of the following is NOT true about price floors?
A) Consumer surplus is always lower than it would be in the competitive equilibrium.
B) Producer surplus could be lower, higher, or the same as it would be in competitive equilibrium.
C) Producer surplus could be negative as the result of a price floor.
D) Producers will often respond to a price floor by cutting production to the point at which price equals marginal cost.
E) The total producer surplus depends on how producers respond to the price floor in determining their output level.
Answer: D
Diff: 2
Section: 9.3

12) Eliminating price supports for all US agricultural producers will hurt the farmers who cultivate products that have
A) a high own price elasticity of demand and a high price elasticity of market supply.
B) a high own price elasticity of demand and a low price elasticity of market supply.
C) a low own price elasticity of demand and a high price elasticity of market supply.
D) a low own price elasticity of demand and a low price elasticity of market supply.
Answer: D
Diff: 3
Section: 9.3

13) One way to remove the excess labor supply problem from a minimum wage policy is to have the government hire all unemployed workers at the minimum wage. What is the key drawback of this version of a minimum wage policy?
A) The deadweight loss may increase substantially.
B) The cost to the government may be very large.
C) Consumer surplus losses increase further.
D) A and B are correct.
E) B and C are correct..
Answer: D
Diff: 2
Section: 9.3

14) A minimum wage policy induces an:
A) excess demand for labor.
B) excess supply of labor.
C) efficient market outcome.
D) elastic labor supply response.
Answer: B
Diff: 1
Section: 9.3

15) The market supply function is P = 10 + Q and the market demand function is P = 70 2Q. What is the change in consumer surplus associated with a minimum floor price of $30?
A) Zero
B) -$100
C) -$30
D) -$55
Answer: A
Diff: 2
Section: 9.3

16) The market supply function is P = 10 + Q and the market demand function is P = 70 2Q. What is the change in consumer surplus associated with a minimum floor price of $40?
A) -$25
B) -$150
C) -$175
D) -$200
Answer: C
Diff: 2
Section: 9.3

17) The demand and supply functions for pizza in the local market are: QD = 20,000 833P and
QS = 5,000 + 417P. Calculate consumer and producer surplus in this market. If the minimum wage is increased by $2 per hour, the new market supply curve becomes: QS = 4,000 + 417P. Calculate the loss in consumer and producer surplus in the pizza market due to this change.

Answer: First we must determine the market equilibrium quantity and price. To do this, we set quantity demanded equal to quantity supplied and solve for equilibrium price.
QD = 20,000 833P = QS = 5,000 + 417P ==> P = 12. At a price of $12, the quantity exchanged will be: 10,004. The choke price (lowest price such that no units are transacted) is $24. The consumer surplus is CS = (24 12)10,004 = 60,024. Producer surplus is
PS = 12(5,000) + (10,004 5,000)12 = 90,024. If the new minimum wage shifts market supply, the new equilibrium price is QD = 20,000 833P = QS = 4,000 + 417P ==> P = 12.80. At a price of $12.80, the quantity exchanged will be: 9,337.6. The choke price (lowest price such that no units are transacted) is $24. The consumer surplus is = (24 12.80)9,337.6 = 52,290.56. Producer surplus is PS = 12.80(4,000) + (9,337.6 4,000)12.80 = 85,360.64. The change in societal welfare in the pizza market due to the new minimum wage is:
W = (CS + PS) (CS + PS) = 137,651.2 150,048 = -12,396.80. The loss in welfare in the local pizza market is 12,396.80 or 8.3%.
Diff: 2
Section: 9.3

18) The market demand and supply functions for pork are: QD = 2,000 500P and QS = 800 + 100P. To help pork producers, the U.S. Congress is considering legislation that would put a price floor at $2.25 per unit. If this price floor is implemented, how many units of pork will the government be forced to buy to keep the price at $2.25? How much will the government spend in total? How much does producer surplus increase?

Answer: First we must determine the market equilibrium quantity and price. To do this, we set quantity demanded equal to quantity supplied and solve for equilibrium price.
QD = 2,000 500P = QS = 800 + 100P ==> P = 2. At a price of $2, the quantity exchanged will be: 1,000. The choke price (lowest price such that no units are transacted) is $4. The consumer surplus is CS = (4 2)1,000 = 1,000. Producer surplus is PS = 2(800) + (1,000 800)2 = 1,800. If a price floor of $2.25 per unit is implemented, consumers will purchase 875 units. However, producers will bring 1,025 units to the market. The government will be forced to buy up the surplus 150 units at $2.25 per unit. Consumer surplus is: CS = (4 2.25)875 = 765.625. Producer surplus is
PS = 2.25(800) + (1,025 800)2.25 = 2,053.125. Government spending is $337.50. Producer surplus increases by $253.125 or 14.1%. Consumer surplus falls by over 23%.

Diff: 2
Section: 9.3

19) The market demand and supply functions for milk are: QD = 58 30.4P and QS = 16 + 3.2P. If a price floor of $1.75 is implemented, calculate the change in producer surplus. How many surplus units of milk are being produced? If the government purchases all the excess units at $1.75, calculate the milk expenditures by government? Does the increase in producer surplus due to the price floor exceed government spending on excess milk?
Answer: First we must determine the market equilibrium quantity and price. To do this, we set quantity demanded equal to quantity supplied and solve for equilibrium price.
QD = 58 30.4P = QS = 16 + 3.2P ==> P = 1.25. At a price of $1.25, the quantity exchanged will be: 20. The choke price (lowest price such that no units are transacted) is $1.91. The consumer surplus is
CS = (1.91 1.25)20 = 6.60. Producer surplus is PS = 1.25(16) + (20 16)1.25 = 22.50. If a price floor of $1.75 is implemented, producers will bring 21.6 units to the market. At this price, consumers will purchase 4.8 units. This leaves a surplus of 16.8 units being produced. Government would need to spend $29.4 to purchase the excess milk. Producer surplus with the price floor is: PS = 1.75(16) + (21.6 16)1.75 = 32.90. Producer surplus has increased by $10.4. The increase in producer surplus does not exceed government spending on milk. This increase in producer surplus is only 35% of the level of government spending on surplus milk.
Diff: 2
Section: 9.3

20) The market for semiskilled labor can be represented by the following supply and demand curves:
LD = 32000 4000W LS = 8000 + 6000W,
where L = millions of person hours per year, and
W = the wage in dollars per hour.

a. Calculate the equilibrium price and quantity that would exist under a free market. What impact does a minimum wage of $3.35 per hour have on the market?
b. The government is contemplating an increase in the minimum wage to $5.00 per hour. Calculate the impact of the new minimum wage on the quantity of labor supplied and demanded.
c. Calculate producer surplus (laborers surplus) before and after the proposed change. Comment on the net effect of the proposed change upon workers as a whole and on individual workers. How does this price floor differ from an agricultural support price?
d. Is the policy efficient from an economists viewpoint?

Answer:
a.
Equate LD to Ls:
32000 4000W = -8000 + 6000W
40000 = 10,000W
W = $4.00 per hour
LD = 32,000 4000(4)
LD = 16,000 million person hours
A minimum wage of $3.35 would not be binding, and therefore the market would attain its free market equilibrium.

b.
At the $5.00 proposed minimum:
LD = 32,000 4000(5)
LD = 12,000
LS = -8000 + 6000(5)
LS = 22,000
The new minimum wage would create unemployment of 10,000 person hours per year.

c.
Rewrite LS and LD with W on left-hand side:
LD = 32,000 4000W
W = 8 0.00025LD
LS = -8000 + 6000W
W = 1.33 + 0.000167LS

Producer surplus at $4.00 wage:
P. S. = 0.5(4 1.33) 16,000 = 21,360
Determine reservation wage at 12,000
W = 1.33 + 0.000167(12000)
W = 3.33
Producer surplus at $5.00 wage:
P. S. = 0.5 (3.33 1.33)12,000 + (5.00 3.33)12,000 = 32,040
Workers as a whole have been made better off as indicated by the increase in producer surplus. Individual workers who are displaced from labor force are worse off, however. This policy differs from agricultural supports in that government does not buy up the surplus. When government buys the surplus, every producer is better off from the policy.

d.
No, there is a loss in consumer surplus (employer surplus) that has not been calculated. When the loss in consumer surplus is accounted for, it is apparent that there is a deadweight loss from the minimum wage.

Diff: 2
Section: 9.3

21) Consider a competitive market with supply and demand curves expressed as:
Supply P = 5 + 0.036Q Demand P = 50 0.04Q,
where P represents unit price in dollars and Q represents sales rate in units per day.

a. Determine the equilibrium price and sales rate.
b. If this were the labor market for low skilled workers, what would be the loss in consumer surplus (purchaser surplus) when the minimum wage is set at $40 per day (an eight hour day)?
c. What is the loss or gain in producer surplus (seller surplus) in part b. above?

Answer:
a.
Equilibrium price (wage rate) and sales rate (employment rate) are computed as follows:
5 + 0.036Q = 50 0.04Q
0.076Q = 45
Q = 592.11 units per day
Wage rate = P = 50 .04(592.11) = $26.32 per day

b.
Consumer surplus lost would be the area bounded by the minimum wage $40, the market equilibrium wage $26.32, the employment rates, before and after wages, and zero employment. We have a trapezoid made up of a rectangle and a triangle. The rectangle is bounded by the two wages, zero sales, and sales rate at the minimum wage.

Height of rectangle = WM WE = 40 26.32 = 13.68
Base of rectangle = QM = ?
PM = 50 0.04QM
40 = 50 0.04QM
QM = 250
Area of rectangle = b h = (250)(13.68) = 3,420.
Area of triangle with base measured on the vertical.
Base length = PM PE = 13.68
Height = QE QM = 592.11 250 = 342.11
Area = (1/2)b h = (0.5)(13.68)(342.11) = 2,340
Thus, consumer surplus lost = 3420 + 2340 = $5760 per day.

c.
The producer surplus also has two parts. Producers gain the surplus in the rectangle lost by consumers in part b.

Area = 3,420. But, the loss in employment (sales) represents a loss in surplus. This loss is a triangle bounded by supply, equilibrium wage rate, and the two levels of employment (sales rates). The only thing left to compute is the height of the supply curve at
QM = 250.
Supply P = 5 + 0.036(250) = 14.
The area of the triangle of loss is (1/2)(b h).
Base = b = 342.11 (measured horizontally)
Height = h = 26.32 14 = 12.32
Area of triangle = (0.5)(342.11)(12.32) = 2,107.40
Net change in producer surplus = $3420 2107.40 = $1,312.60
Diff: 2
Section: 9.3

9.4 Price Supports and Production Quotas

1) Suppose the government raises the price of cheese above the market equilibrium level (P0) by imposing a high minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on the areas in the figure below, what is the change in consumer surplus after this policy is adopted?

A) Consumers lose area B.
B) Consumers lose area A+B.
C) Consumers lose area A but gain area B.
D) Consumers gain area A+B.
Answer: B
Diff: 2
Section: 9.4

2) Suppose the government raises the price of cheese above the market equilibrium level (P0) by imposing a high minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on the areas in the figure below, what is the change in producer surplus after this policy is adopted?

A) Producers lose area C but gain area A.
B) Producers lose area C but gain area A+B.
C) Producers gain A.
D) Producers gain area A+B+D.
Answer: D
Diff: 2
Section: 9.4

3) Suppose the government raises the price of cheese above the market equilibrium level (P0) by imposing a high minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on the areas in the figure below, what is the cost of this program to the government?

A) Government expenditures are area E+F+G.
B) Government expenditures are area B+C+D.
C) Government expenditures are area D.
D) Government expenditures are area B+C+D+E+F+G.
Answer: D
Diff: 3
Section: 9.4

4) Suppose the government raises the price of cheese above the market equilibrium level (P0) by imposing a high minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on the areas in the figure below, what is the deadweight loss of this program?

A) Deadweight loss is area E+F+G.
B) Deadweight loss is area B+C+E+F+G.
C) Deadweight loss is area D.
D) Deadweight loss is area B+C+D+E+F+G.
Answer: B
Diff: 3
Section: 9.4

5) What is the difference between a price support and a price floor?
A) A price support is below equilibrium; a price floor is above it.
B) A price support is above equilibrium; a price floor is below it.
C) Government buys the excess supply to maintain a price floor, but not a price support.
D) Government buys the excess supply to maintain a price support, but not for a price floor.
E) There is no difference between the two.
Answer: D
Diff: 1
Section: 9.4

6) A price support may be pictured by
A) shifting the demand curve to the right by the amount of the government purchase.
B) shifting the demand curve to the left by the amount of the government purchase.
C) shifting the supply curve to the right by the amount of the government purchase.
D) shifting the supply curve to the left by the amount of the government purchase.
E) drawing a horizontal line below equilibrium price at the supported price.
Answer: A
Diff: 1
Section: 9.4

7) Which of the following is unlikely to occur as a result of a price support program?
A) A reduction in consumer surplus
B) A reduction in producer surplus
C) An increase in quantity purchased
D) An economic cost to government
E) Improved economic efficiency
Answer: B
Diff: 1
Section: 9.4

8) A countrys government would like to raise the price of one its most important agricultural crops, coffee beans. Which of the following government programs will result in higher prices for coffee beans?
A) An import quota on coffee beans
B) An acreage limitation program which provides coffee bean farmers financial incentives to leave some of their acreage idle
C) An import tariff on coffee beans
D) all of the above
Answer: D
Diff: 1
Section: 9.4

9) When the federal government installs a price support program that requires the government to purchase all of a good not bought in the private economy at the support price, changes in producer surplus
A) are negative.
B) are positive, but more than offset by the cost to consumers and the government.
C) are positive, and not offset by the cost to consumers and the government.
D) and consumer surplus are both positive.
Answer: B
Diff: 2
Section: 9.4

10) When the federal government installs a price support program that requires the government to purchase all of a good not bought in the private economy at the support price, the impact on total welfare is the
A) change in consumer surplus.
B) change in consumer surplus + the change in producer surplus + the cost to government.
C) change in consumer surplus + the change in producer surplus the cost to government.
D) change in consumer surplus + the change in producer surplus.
Answer: C
Diff: 1
Section: 9.4

Figure 9.6

11) Refer to Figure 9.6. The government policy pictured is
A) a price ceiling of $20.
B) a price support of $20.
C) a price ceiling of $15.
D) a price support of $15.
E) A quota of 600.
Answer: B
Diff: 1
Section: 9.4

12) Refer to Figure 9.6. Before this policy was implemented, consumer surplus was
A) $20.
B) $4000.
C) $6000.
D) $8000.
E) $12000.
Answer: B
Diff: 2
Section: 9.4

13) Refer to Figure 9.6. Before this policy was implemented, producer surplus was
A) $10.
B) $2000.
C) $4000.
D) $6000.
E) $12000.
Answer: B
Diff: 2
Section: 9.4

14) Refer to Figure 9.6. As a result of this policy, quantity will
A) fall to 300.
B) rise to 400.
C) stay at 400.
D) fall to 400.
E) rise to 600.
Answer: E
Diff: 1
Section: 9.4

15) Refer to Figure 9.6. As a result of this policy, consumer surplus will
A) fall to $15.
B) fall to $2250.
C) rise to $2500.
D) fall to $5000.
E) rise to $5000.
Answer: B
Diff: 2
Section: 9.4

16) Refer to Figure 9.6. As a result of this policy, producer surplus will be
A) $2000.
B) $3375.
C) $4500.
D) $6000.
E) $12,000.
Answer: C
Diff: 2
Section: 9.4

17) Refer to Figure 9.6. The amount the government pays in the market to implement this policy is
A) $20.
B) $3000.
C) $4000.
D) $6000.
E) $12,000.
Answer: D
Diff: 2
Section: 9.4

18) Refer to Figure 9.6. Including the consumers expected tax burden, the total change in welfare from this policy is
A) -$6000.
B) -$5250.
C) -$4500.
D) $4500.
E) $5250.
Answer: B
Diff: 2
Section: 9.4

Figure 9.7

19) The policy shown in Figure 9.7 is a
A) price floor of $50.
B) price support of $50.
C) price ceiling of $30.
D) quota of 2000.
E) quota of 4000.
Answer: D
Diff: 1
Section: 9.4

20) Refer to Figure 9.7. Before the policy was implemented, consumer surplus was
A) $30.
B) $60.
C) $45,000.
D) $90,000.
E) $180,000.
Answer: C
Diff: 2
Section: 9.4

21) Refer to Figure 9.7. Before the policy was implemented, producer surplus was
A) $30.
B) $60.
C) $45,000.
D) $90,000.
E) $180,000.
Answer: C
Diff: 2
Section: 9.4

22) Refer to Figure 9.7. After the policy was implemented, the quantity traded became
A) 1000.
B) 2000.
C) 3000.
D) 4000.
E) between 2000 and 4000, but the amount depends upon producers reactions, which are uncertain.
Answer: B
Diff: 1
Section: 9.4

23) Refer to Figure 9.7. After the policy was implemented, price became
A) $10.
B) $30.
C) $50.
D) $70.
E) between $50 and $70, but the price is uncertain because quantity can be any amount between 2000 and 4000.
Answer: C
Diff: 1
Section: 9.4

24) Refer to Figure 9.7. After the policy, consumer surplus became
A) $0.
B) $10.
C) $20.
D) $20,000.
E) $40,000.
Answer: D
Diff: 2
Section: 9.4

25) Refer to Figure 9.7. Because of the policy, consumer surplus fell by
A) $10.
B) $20.
C) $12,500.
D) $25,000.
E) $45,000.
Answer: D
Diff: 1
Section: 9.4

26) Refer to Figure 9.7. Without counting any government payments received by firms, as a result of this policy the producer surplus earned on the units sold in the market
A) rose by $15,000.
B) rose by $20,000.
C) rose by $40,000.
D) fell by $5,000.
E) fell by $45,000.
Answer: A
Diff: 2
Section: 9.4

27) Refer to Figure 9.7. The amount the government will have to pay to producers to sustain this policy is at least
A) $0.
B) $10,000.
C) $15,000.
D) $20,000.
E) $100,000.
Answer: D
Diff: 2
Section: 9.4

28) Refer to Figure 9.7. Because of this policy, total producer surplus including funds received from the government will be at least
A) $10,000.
B) $40,000.
C) $80,000.
D) $100,000.
E) $160,000.
Answer: C
Diff: 2
Section: 9.4

29) As illustrated in the textbook, the government can further increase the support price of a commodity by purchasing excess supplies and using a:
A) production quota.
B) consumption tax.
C) excess profits tax.
D) minimum wage.
Answer: A
Diff: 1
Section: 9.4

30) A small decrease in a production quota will have a large impact on the support price if:
A) demand is completely elastic.
B) demand is highly (but not completely) elastic.
C) demand is inelastic.
D) The demand elasticity does not affect the price outcomes of a quota program.
Answer: C
Diff: 2
Section: 9.4

31) Under a production quota policy, the government can maintain a particular support price by reducing the quantity supplied. To maintain a particular support price, how must the quota amount change if the demand curve becomes more elastic?
A) Quota amount increases
B) Quota amount decreases
C) Quota amount does not change
D) Quota amount depends on the supply curve
Answer: B
Diff: 2
Section: 9.4

32) Suppose the government does not provide an incentive payment to producers under a production quota policy, and the amount that may be produced and sold by firms is limited by law in order to raise the market price to the support price. Do producers still gain surplus value under this version of the production quota policy?
A) Yes, they would always achieve a larger producer surplus under this version of the policy
B) Yes, as long as the surplus value gained from consumers exceeds the amount of producer surplus lost from production quantities that are no longer produced
C) No, they would always face a decrease in producer surplus without the government incentive payment
D) No, the change in producer surplus is always negative due to the gains achieved by consumers
Answer: B
Diff: 2
Section: 9.4

33) The supply and demand curves for corn are as follows:
QD = 3,750 725P
QS = 920 + 690P,
where Q = millions of bushels and P = price per bushel.

a. Calculate the equilibrium price and quantity that would prevail in the free market.
b. The government has imposed a $2.50 per bushel support price. How much corn will the government be forced to purchase?
c. Calculate the loss in consumer surplus that would occur under the support program.

Answer:
a.
set QD = QS
3,750 725P = 920 + 690P
2,830 = 1,415P
P = 2.00
QD = 3,750 725(2) = 2,300

b.
To solve for government quantity, QG, we realize that:
QG = QS QD
920 + 690P = 3750 725P + QG
QG = 1415P 2830
Quantity supplied at the support price of $2.50 is:
QS = 920 + 650(2.50)
QS = 2645
Quantity demanded at the support price of $2.50 is:
QD = 3750 725(2.50)
QD = 1937.50
Government quantity purchased is then 707.5 bushels.

c.
Solve supply and demand for P in terms of Q:
QD = 3750 725P
P = 5.17 0.0014Q
QS = 920 + 690P
P = -1.33 + 0.00145Q

QD at P = 2.50
QD = 3750 725(2.50)
QD = 1937.50
C.S. under free market: = 0.5(5.17 2.00) 2300
C.S. under free market = 3645.5

C.S. under support price: = 0.5(5.17 2.50) 1937.50
C.S. under price support = 2586.56

Price support results in a loss of $1058.94 in consumer surplus.

Diff: 2
Section: 9.4

9.5 Import Quotas and Tariffs

Figure 9.8

1) Refer to Figure 9.8. With no government interference, the country pictured will
A) import 500 tons of sugar.
B) import 300 tons of sugar.
C) import 200 tons of sugar.
D) import no sugar.
E) export sugar.
Answer: B
Diff: 1
Section: 9.5

2) Refer to Figure 9.8. In order to eliminate international trade in sugar altogether, this country would have to impose a tariff of
A) $25.
B) $50.
C) $75.
D) $150.
E) $175.
Answer: C
Diff: 2
Section: 9.5

3) Refer to Figure 9.8. In order to eliminate international trade in sugar altogether, this country would have to impose a quota of
A) 0 tons.
B) 200 tons.
C) 300 tons.
D) 350 tons.
E) 500 tons.
Answer: A
Diff: 2
Section: 9.5

4) Refer to Figure 9.8. A $50 tariff would result in domestic consumption of
A) 600, domestic production of 100, and imports of 500.
B) 500, domestic production of 200, and imports of 300.
C) 400, domestic production of 300, and imports of 100.
D) 300, domestic production of 400, and exports of 100.
E) 200, domestic production of 500, and exports of 300.
Answer: C
Diff: 2
Section: 9.5

5) Refer to Figure 9.8. If free trade in sugar is allowed, consumer surplus will be
A) $175.
B) $250.
C) $30,625.
D) $61,250.
E) $62,500.
Answer: E
Diff: 2
Section: 9.5

6) Refer to Figure 9.8. If free trade in sugar is replaced by a $50 tariff in sugar, consumer surplus will
A) fall by $50.
B) fall by $26,250.
C) fall by $22,500.
D) rise by $50.
E) rise by $17,500.
Answer: C
Diff: 2
Section: 9.5

7) Refer to Figure 9.8. Under free trade in sugar, domestic producer surplus will be
A) $100.
B) $175.
C) $10,000.
D) $25,000.
E) $30,625.
Answer: C
Diff: 2
Section: 9.5

8) Refer to Figure 9.8. If free trade in sugar is replaced by a $50 tariff on sugar, the effect on domestic producer surplus will be to
A) lower it by $50.
B) lower it by $12,500.
C) leave it unchanged.
D) raise it by $50.
E) raise it by $12,500.
Answer: E
Diff: 2
Section: 9.5

9) Refer to Figure 9.8. If free trade in sugar is replaced by a $50 tariff in sugar, government revenue from the tariff will be
A) $50.
B) $5000.
C) $15,000.
D) $17,500.
E) $25,000.
Answer: B
Diff: 2
Section: 9.5

10) Refer to Figure 9.8. In order to gain the equivalent imports as a $50 tariff, the government would have to impose a quota of
A) 100 tons of sugar.
B) 200 tons of sugar.
C) 300 tons of sugar.
D) 350 tons of sugar.
E) 500 tons of sugar.
Answer: A
Diff: 2
Section: 9.5

11) Import tariffs generally result in
A) higher domestic prices.
B) less consumer surplus.
C) more producer surplus for domestic producers.
D) a deadweight loss.
E) all of the above
Answer: E
Diff: 1
Section: 9.5

12) Compared to a tariff, an import quota, which restricts imports to the same amount as the tariff, will leave the country as a whole
A) worse off than a comparable tariff.
B) not as bad off as a comparable tariff.
C) about the same as a comparable tariff.
D) Any of the above can be true.
Answer: A
Diff: 2
Section: 9.5

13) Although rice is a staple of the Japanese diet, the Japanese government has long restricted the importation of rice into Japan. The result of this import quota is:
A) to decrease the price of rice to the Japanese people.
B) to decrease the consumer surplus of Japanese rice consumers.
C) to decrease the producer surplus of Japanese rice producers.
D) a welfare gain for the Japanese people.
E) to increase the consumption of rice by the Japanese people.
Answer: B
Diff: 2
Section: 9.5

Figure 9.9

14) Refer to Figure 9.9. At free trade, domestic consumer surplus would be
A) $20,000.
B) $27,500.
C) $40,000,000.
D) $45,000,000.
E) $75,625,000.
Answer: E
Diff: 2
Section: 9.5

15) Refer to Figure 9.9. At free trade, domestic producer surplus would be
A) $2,500.
B) $50,000.
C) $1,250,000.
D) $2,500,000.
E) $20,000,000.
Answer: C
Diff: 2
Section: 9.5

16) Refer to Figure 9.9. At free trade, domestic consumption is
A) 5500; domestic production is 1000; imports are 4500.
B) 5000; domestic production is 2000; imports are 3000.
C) 4000; domestic production is 4000; imports are 0.
D) 2000; domestic production is 5000; imports are 3000.
E) 1000; domestic production is 5500; imports are 4500.
Answer: A
Diff: 1
Section: 9.5

17) Refer to Figure 9.9. Now suppose an import quota of 3000 trucks is imposed. The quota will make total consumer surplus equal to
A) $25,000.
B) $13,125,000.
C) $40,000,000.
D) $62,500,000.
E) $75,625,000.
Answer: D
Diff: 2
Section: 9.5

18) Refer to Figure 9.9. Now suppose an import quota of 3000 trucks is imposed. The quota will make total domestic producer surplus equal to
A) $2,500.
B) $5,000.
C) $5,000,000.
D) $10,000,000.
E) $30,000,000.
Answer: C
Diff: 2
Section: 9.5

19) Refer to Figure 9.9. Now suppose an import quota of 3000 trucks is imposed. Government revenue from the quota will be
A) $0.
B) $2,500.
C) $7,500,000.
D) $12,500,000.
E) $13,125,000.
Answer: A
Diff: 1
Section: 9.5

20) Refer to Figure 9.9. Now suppose an import quota of 3000 trucks is imposed. The quota will decrease the revenue of foreign firms by
A) $0.
B) $2,500.
C) $7,500,000.
D) $11,250,000.
E) $13,125,000.
Answer: D
Diff: 2
Section: 9.5

21) Refer to Figure 9.9. Now suppose an import quota of 3000 trucks is imposed. An alternative to the quota that would have the same impact on the number of imports would be a tariff of
A) $2,500.
B) $5,000.
C) $15,000.
D) $20,000.
E) $13,125,000.
Answer: A
Diff: 2
Section: 9.5

22) Refer to Figure 9.9. Now suppose an import quota of 3000 trucks is imposed. If the government wanted to cut off all international trade without changing the quota, it could allow the quota amount of 3000 trucks in at no tariff and then charge a tariff on all imports above the quota amount. What tariff would accomplish the goal?
A) $0.
B) $5,000
C) $7,500
D) $10,000
E) $20,000
Answer: B
Diff: 2
Section: 9.5

23) The U.S. government currently imposes a $0.54 per gallon tariff on all ethanol imported into the c

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