Question 1

What are rent-seeking activities? Give an example.

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Question 2

Refer to the graph shown. In the long run supply will become:

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Question 3

Define consumer surplus and producer surplus.Explain why the equilibrium price and quantity maximizes the sum of producer plus consumer surplus (the total surplus).

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Question 4

How are price ceilings similar to taxes? How are they different?

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Question 5

What are the three costs of taxation? What is the deadweight loss of taxation? What causes deadweight loss?

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Question 6

"When small groups are helped by a government action and large groups are hurt by that same action, the small group tends to lobby far more effectively than the large group; thus, policies tend to reflect the small group's interest, not the interest of the large group." This statement is:

Accepted Answer

This statement reflects the general rule of political economy, which states that policies tend to reflect the interests of concentrated or well-organized groups, rather than diffuse or unorganized groups. This can lead to policies that benefit a small group, even if they disproportionately harm a larger group.

Question 7

When supply and demand are both elastic, a price floor will cause a:

Accepted Answer

When both supply and demand are elastic, a price floor (set above the equilibrium price) will cause a larger surplus because both consumers and producers are more responsive to price changes. Consumers will decrease their quantity demanded significantly, and producers will increase their quantity supplied significantly, leading to a larger surplus compared to a situation where supply and demand are inelastic.

Question 8

Define consumer surplus and producer surplus.

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Question 9

How are price ceilings similar to taxes on producers? How are price floors similar to taxes on consumers? How are both price ceilings and price floors different from taxes?

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Question 10

Consumers have the greatest incentive to lobby for price controls in the short run when supply is:

Accepted Answer

When supply is inelastic and demand increases, prices are likely to rise significantly because the quantity supplied cannot easily adjust to meet the higher demand. Consumers have a strong incentive to lobby for price controls in this scenario to prevent prices from rising too much.

Question 11

Explain why the person who physically pays the tax is not necessarily the person who bears the tax.Who is most likely to bear the greater proportion of the tax burden? How does this apply to Social Security taxes?

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Question 12

Demonstrate graphically and explain verbally the concept of consumer surplus.

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Question 13

A general rule of political economy in a democracy is that when small groups are helped by a government action and large groups are hurt by that action by an equal and offsetting amount, policies tend to reflect:

Accepted Answer

In a democracy, politicians and parties are incentivized to cater to their electoral base and interest groups. When a small group is helped by a government action, they are likely to be more active and vocal in pressuring politicians to maintain their benefits. On the other hand, large groups that are hurt by an equal and offsetting amount may not be as organized or vocal, resulting in policies that prioritize the interests of the small group.

Question 14

When the United States imposed a tariff on imported shrimp, a Vietnamese official said: "If the tariffs are imposed, that will mean fewer shrimp for the U.S. market and higher prices for consumers. So the U.S. government position hurts its own people. That's irrational." The imposition of tariffs by the United States in this case illustrates:

Accepted Answer

The imposing of tariffs in this case demonstrates the general rule of political economy, which states that small interest groups are typically more effective in lobbying than large groups. The U.S. government's decision to impose tariffs on imported shrimp is likely a result of pressure from the domestic shrimp industry, which is a relatively small interest group compared to the larger group of U.S. consumers who would be negatively affected by the higher prices. This decision serves as an illustration of how small interest groups are often able to influence government policy in their favor, even if it results in negative consequences for the larger group.

Question 15

There are far more consumers of agricultural commodities than there are producers;but agricultural producers have consistently been able to get Congress to vote them subsidies at taxpayer expense and supply restrictions at the consumer's expense.How can the success of the agricultural lobby be explained by "the general rule of political economy"?

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Question 16

A price floor will create the largest surplus when:

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Question 17

The problems created by price controls become greatest as time goes by when:

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Question 18

Refer to the graph shown. Which statement best characterizes the difference between the effect of a price ceiling in the short run and the long run?

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Question 19

Define rent-seeking activities and give an example.Use agricultural price supports to demonstrate that the value of rent seeking is linked to elasticity.

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Question 20

What is the deadweight loss of taxation? What causes deadweight loss?

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Quiz 7: Taxation and Government Intervention