Question 1

Which of the following is a true statement regarding the economic impact of a subsidy?
A) The distribution of the benefits from a subsidy will depend on whether the subsidy is legally granted to the buyer or seller.
B) When demand is relatively inelastic, the benefits of a subsidy will mainly accrue to sellers.
C) When supply is relatively elastic, the benefits of a subsidy will mainly accrue to buyers.
D) When demand is relatively elastic, the benefits of a subsidy will mainly accrue to buyers.

Accepted Answer

The answer of Which of the following is a true...

Question 2

Figure 4-25 
Refer to Figure 4-25. The tax causes a reduction in producer surplus that is represented by area
A) A.
B) B + C.
C) D + E.
D) F.

Accepted Answer

The answer of Figure 4-25 
Refer to Figure 4-25. The...

Question 3

Figure 4-25 Refer to Figure 4-25. The price that sellers receive after the tax is imposed is A) P ₁. B) P ₂. C) P ₃. D) impossible to determine from the figure.

Accepted Answer

The answer of Figure 4-25 
Refer to Figure 4-25. The...

Question 4

Because illegal drug markets operate outside the legal system,
A) the quality of these drugs has increased.
B) the sellers of illegal drugs earn less money.
C) there is less violence in these markets than if they were legal.
D) none of the above.

Accepted Answer

None of the given choices can be concluded from the statement that illegal drug markets operate outside the legal system.

Question 5

Figure 4-25 
Refer to Figure 4-25. Producer surplus before the tax was levied is represented by area
A) A.
B) A + B + C.
C) D + E + F.
D) F.

Accepted Answer

The answer of Figure 4-25 
Refer to Figure 4-25. Producer...

Question 6

Suppose there is an increase in the excise tax imposed on cigarettes, a good for which the demand is relatively inelastic. The short-run burden of the tax increase will be borne primarily by
A) consumers, because the increase in market price will be large relative to the increase in the excise tax.
B) firms, because the increase in market price will be large relative to the increase in the excise tax.
C) consumers, because the increase in market price will be small relative to the increase in the excise tax.
D) firms, because the increase in market price will be small relative to the increase in the excise tax.

Accepted Answer

When the demand for a good is relatively inelastic, the quantity demanded does not change significantly in response to a change in price. Therefore, when the excise tax on cigarettes increases, the market price will also increase by a large amount. Since the quantity demanded will not decrease significantly, consumers will end up paying most of the tax increase through higher prices. Thus, the short-run burden of the tax increase will be borne primarily by consumers.

Question 7

Currently, federal and state gasoline taxes (imposed statutorily on the sellers of gasoline) amount to about $.45 per gallon. Suppose the current price of gasoline is $1.20 per gallon, and that if the tax was not in place, the price would be only $.80.
A) The full incidence of the tax is falling on consumers.
B) The full incidence of the tax is falling on suppliers.
C) A $.05 burden is being borne by sellers and $.40 by consumers.
D) A $.05 burden is being borne by consumers and $.40 by sellers.

Accepted Answer

The price without tax is $0.80, and with tax, it is $1.20. The tax is $0.45, so consumers pay $0.40 more, and sellers receive $0.05 less.

Question 8

Figure 4-25 
Refer to Figure 4-25. After the tax is levied, consumer surplus is represented by area
A) A.
B) A + B + C.
C) D + E + F.
D) F.

Accepted Answer

The answer of Figure 4-25 
Refer to Figure 4-25. After...

Question 9

During the imposition of price controls in the 1970s, long gasoline lines were common. In the absence of price controls, markets would have eliminated such excess demand by
A) allowing the price to rise, so gas was rationed to those willing to pay the most for it.
B) increasing the gap between supply and demand.
C) allowing price to decline, so the poor could afford to buy more gas.
D) mandating a 50-mile-per-hour speed limit to reduce consumption.

Accepted Answer

Price controls create an artificial shortage of goods as they prevent the market from reaching an equilibrium price. In this case, the shortage of gasoline led to long lines because demand exceeded the supply available at the controlled price. In a free market, the price would have risen, which would have reduced demand to match the available supply. Those who were willing and able to pay the higher price would have gotten the gas they needed, while those who were not would have been priced out of the market. This would have eliminated the excess demand and the long lines.

Question 10

With a price ceiling above the equilibrium price,
A) quantity demanded would exceed quantity supplied.
B) quantity supplied would exceed quantity demanded.
C) the market would be in equilibrium.
D) the equilibrium price would be expected to fall over time.

Accepted Answer

A price ceiling above the equilibrium price is non-binding, meaning it does not affect the market. Therefore, the market remains in equilibrium.

Question 11

The deadweight loss resulting from levying a tax on an economic activity is
A) the tax revenue directed to the government as the result of the tax.
B) the loss of potential gains from trade from activities forgone because of the tax.
C) the increase in the price of an activity as the result of the tax levied on it.
D) the marginal benefits derived from the expansion in government activities made possible by the increase in tax revenues.

Accepted Answer

Deadweight loss is the loss of potential gains from trade arising from market inefficiencies caused by distortions such as taxes. It represents the reduction in welfare that is caused by the tax and can result in a decrease in economic activity. Therefore, option B is the correct answer.

Question 12

An income tax is regressive if
A) the tax liability of high-income recipients exceeds the tax liability of those with low incomes.
B) the tax liability of high-income recipients is less than the tax liability of those with low incomes.
C) high-income recipients pay a higher percentage of their incomes in taxes than those with low incomes.
D) high-income recipients pay a lower percentage of their incomes in taxes than those whose incomes are low.

Accepted Answer

A regressive tax system means that low-income earners pay a higher percentage of their income in taxes than high-income earners. Therefore, option D is the correct answer as it states that high-income recipients pay a lower percentage of their incomes in taxes than those whose incomes are low.

Question 13

Figure 4-25 
Refer to Figure 4-25. After the tax is levied, producer surplus is represented by area
A) A.
B) A + B + C.
C) D + E + F.
D) F.

Accepted Answer

The answer of Figure 4-25 
Refer to Figure 4-25. After...

Question 14

The average tax rate (ATR) is defined as
A) taxable income divided by tax liability.
B) change in tax liability divided by change in taxable income.
C) tax liability divided by taxable income.
D) change in taxable income divided by change in tax liability.

Accepted Answer

The average tax rate (ATR) is defined as tax liability divided by taxable income. This reflects the overall percentage of income paid in taxes.

Question 15

If an increase in the government-imposed minimum wage pushes the price (wage) of unskilled labor above market equilibrium, which of the following will most likely occur in the unskilled labor market?
A) an increase in demand for unskilled labor
B) a decrease in the supply of unskilled labor
C) a shortage of unskilled labor
D) a surplus of unskilled labor

Accepted Answer

When the government-imposed minimum wage increases, the price (wage) of unskilled labor goes above the market equilibrium. As a result, employers will reduce the quantity of unskilled labor demanded because they cannot afford to pay the higher wage. This will lead to a surplus of unskilled labor in the market because there will be more workers willing to work at the higher wage than there are available jobs at that wage. Thus, option D is the correct answer.

Question 16

Figure 4-25 
Refer to Figure 4-25. The tax causes a reduction in consumer surplus that is represented by area
A) A.
B) B + C.
C) D + E.
D) F.

Accepted Answer

The answer of Figure 4-25 
Refer to Figure 4-25. The...

Question 17

Figure 4-25 
Refer to Figure 4-25. Consumer surplus before the tax was levied is represented by area
A) A.
B) A + B + C.
C) D + E + F.
D) F.

Accepted Answer

Consumer surplus before the tax was levied is represented by the area under the demand curve (going up to the price) and above the original market price (horizontal line). This area is represented by A + B + C.

Question 18

An increase in the demand for a product will cause output to
A) increase and both the demand for and prices of the resources used to produce the product to increase.
B) increase and both the demand for and prices of the resources used to produce the product to decrease.
C) decrease; the demand for the resources used to produce the product will remain constant.
D) decrease; the price of resources used to produce the product will decrease.

Accepted Answer

An increase in demand for a product will result in an increase in output as the producer will look to capitalize on the increased demand. However, as output increases, the demand for the resources used to produce the product will also increase, causing an increase in prices for those resources. This is because producers need to buy more resources to produce the increased output required to satisfy the increased demand. Therefore, Choice A is the correct answer.

Question 19

Rent controls generally fix the price of rental housing below market equilibrium. Economic analysis suggests these controls
A) are effective in helping the poor find housing.
B) improve the quality of housing available to consumers.
C) create a surplus of rental housing.
D) reduce the future supply of rental housing.

Accepted Answer

Rent controls reduce the amount of profit landlords can make on rental units, which leads to a reduction in the supply of rental units in the long run. Landlords will be less likely to invest in or maintain rental properties, which can result in a decrease in the quality and quantity of rental housing available. Therefore, rent controls reduce the future supply of rental housing.

Question 20

Figure 4-25 
Refer to Figure 4-25. The benefit to the government is
A) measured by tax revenue and is represented by area A + B.
B) measured by tax revenue and is represented by area B + D.
C) measured by the net gain in total surplus and is represented by area B + D.
D) measured by the net gain in total surplus and is represented by area D + E.

Accepted Answer

The answer of Figure 4-25 
Refer to Figure 4-25. The...

Quiz 4: Supply and Demand: Applications and Extensions

Which of the following is a true statement regarding the economic impact of a subsidy?

Figure 4-25 Refer to Figure 4-25. The tax causes a reduction in producer surplus that is represented by area

Figure 4-25 Refer to Figure 4-25. The price that sellers receive after the tax is imposed is

Because illegal drug markets operate outside the legal system,

Figure 4-25 Refer to Figure 4-25. Producer surplus before the tax was levied is represented by area

Suppose there is an increase in the excise tax imposed on cigarettes, a good for which the demand is relatively inelastic. The short-run burden of the tax increase will be borne primarily by

Currently, federal and state gasoline taxes (imposed statutorily on the sellers of gasoline) amount to about $.45 per gallon. Suppose the current price of gasoline is $1.20 per gallon, and that if the tax was not in place, the price would be only $.80.

Figure 4-25 Refer to Figure 4-25. After the tax is levied, consumer surplus is represented by area

During the imposition of price controls in the 1970s, long gasoline lines were common. In the absence of price controls, markets would have eliminated such excess demand by

With a price ceiling above the equilibrium price,

The deadweight loss resulting from levying a tax on an economic activity is

An income tax is regressive if

Figure 4-25 Refer to Figure 4-25. After the tax is levied, producer surplus is represented by area

The average tax rate (ATR) is defined as

If an increase in the government-imposed minimum wage pushes the price (wage) of unskilled labor above market equilibrium, which of the following will most likely occur in the unskilled labor market?

Figure 4-25 Refer to Figure 4-25. The tax causes a reduction in consumer surplus that is represented by area

Figure 4-25 Refer to Figure 4-25. Consumer surplus before the tax was levied is represented by area

An increase in the demand for a product will cause output to

Rent controls generally fix the price of rental housing below market equilibrium. Economic analysis suggests these controls

Figure 4-25 Refer to Figure 4-25. The benefit to the government is