# Midterm 2 Sample Questions. Use the demand curve diagram below to answer the following THREE questions.

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1 ! Midterm 2 Sample uestions Use the demand curve diagram below to answer the following THREE questions What is the own-price elasticity of demand as price decreases from 6 per unit to 4 per unit? Use the mid-point formula in your calculation. a) 1/3. b) 5/3. c) 3/5. 2. At what price does own-price elasticity of demand equal zero? a) 0. b) 4. c) 6. d) There is no point on this demand curve where own-price elasticity of demand equals zero. 3. Use the point-slope formula to calculate own-price elasticity of demand when the price of the good equals 2. a) 1/3. b) 1/2. c) 1/4. e) Page! 1 of! 22

2 The following THREE questions refer to the diagram below. 4. Suppose per unit tax of 3 is introduced in this market. What is the CONSUMER price at the taxed equilibrium? a) 9. b) 8. c) 7. d) S Suppose per unit tax of 3 is introduced in this market. What is the EAWEIGHT LOSS at the taxed equilibrium? a) 18. b) 12. c) 6. d) Suppose per unit tax of 3 is introduced in this market. How much revenue doe the government raise, as a result of this tax? a) 3. b) 6. c) 12. d) 24. Page! 2 of! 22

3 7. If a demand curve is VERTICAL, then own-price elasticity of demand for this good is equal to: a) Infinity. b) Zero. c) One. 8. Which of the following correctly describes the effect of a tax imposed in a market? Assume upward sloping supply, downward sloping demand, and no externalities. a) Market surplus increases, government revenues increase, and social surplus decreases. b) Market surplus decreases, government revenues increase, and social surplus increases. c) Market surplus increases, government revenues increase, and social surplus increases. d) Market surplus decreases, government revenues increase, and social surplus decreases. 9. Which of the following correctly describes the effect of a price ceiling imposed in a market? Assume upward sloping supply, downward sloping demand, and no externalities. a) Market surplus increases and producer surplus decreases. b) Market surplus decreases and producer surplus increases. c) Market surplus decreases and producer surplus decreases. d) None of the above is correct. 10. All else equal, we would expect demand for a good to be price-elastic, if there are close substitutes available for that good. a) Less; more. b) More, no. c) More; few. d) Less; few. Page! 3 of! 22

4 Use the diagram below, which illustrates the market for a good whose production results in a negative externality, to answer the following THREE questions. 14 MSC MPC 4 2 MSB What does the deadweight loss equal, at the unregulated equilibrium? a) 50. b) 60. c) There is no deadweight loss at the unregulated equilibrium. d) There is insufficient information to calculate the deadweight loss. 12. If the optimal Pigovian tax is levied in this market, how much revenue does the government raise? a) 600. b) 500. c) 400. Page! 4 of! 22

5 13. (Remember to refer to the diagram above.) If the optimal Pigovian tax is levied in this market, by how do external costs decrease? a) 100. b) 200. c) 300. d) There is insufficient information to answer the question. 14. Which of the following statements about the introduction of a price floor is/are TRUE? I. The price floor will make all sellers better off. II. The price floor will make all buyers worse off. III. The price floor will create excess demand. a) I and II only. b) I and III only. c) II only. d) I, II, and III. 15. Which of the following statements about the introduction of a price ceiling is/are TRUE? I. The price ceiling will make all sellers worse off. II. The price ceiling will make all buyers better off. III. The price ceiling will create excess demand. a) I and II only. b) I and III only. c) II only. d) I, II, and III. 16. Which of the following correctly describes the effect of the socially optimal Pigovian tax imposed in a market characterized by a negative externality? a) Market surplus increases, government revenues increase, and social surplus decreases. b) Market surplus decreases, government revenues increase, and social surplus increases. c) Market surplus increases, government revenues increase, and social surplus increases. d) Market surplus decreases, government revenues increase, and social surplus decreases. Page! 5 of! 22

6 Consider the demand curve diagram below. P1 P2 9 q If price decreases from P1 to P2, which of the following statements about revenue is TRUE? a) Revenue will Increase. b) Revenue will decrease. c) Revenue will remain unchanged. d) There is insufficient information to determine what happens to revenue. 18. Which of the following correctly describes the effect of a price ceiling imposed in a market? Assume there exists a negative externality in this market, and that the price ceiling is chosen to correct the associated market failure. a) Market surplus increases and social surplus decreases. b) Market surplus decreases and social surplus increases. c) Market surplus and social surplus both increase. d) Market surplus and social surplus both decrease. 19. Suppose that a 5 increase in price results in a 10 percent decrease in quantity demanded. What does (the absolute value of) own price elasticity of demand equal? a) 0.5. b) 2. c) 5. d) 10. Page! 6 of! 22

7 20. Suppose you are told that the own-price elasticity of demand equals 5. Which of the following is a correct interpretation of this number? I. A 5% increase in price will result in a 1% decrease in quantity demanded. II. A 1% increase in price will result in a 5% decrease in quantity demanded. III. A 10% increase in price will result in a 50% decrease in quantity demanded. a) I only. b) I and III only. c) II only. d) II and III only. 21. If goods X and Y are COMPLEMENTS, then which of the following could be the value of the cross price elasticity of demand for good Y? a) -1. b) -2. c) Neither a) nor b). d) Both a) and b). 22. If Labatt s beer is an inferior good, then which of the following could be the value of income elasticity of demand? a) b) c) Both a) and b). d) Neither a) nor b). 23. Which of the following statements about tax incidence and relative elasticities is TRUE? a) If demand is inelastic and supply is upward sloping, then consumers bear more of the burden of a tax. b) If supply is perfectly inelastic and demand is inelastic, then producers bear none of the burden of the tax. c) If supply is horizontal and demand is elastic, then consumers bear all the burden of the tax. d) More than one of the above is true. Page! 7 of! 22

8 Use the diagram below to answer the following TWO questions, which illustrates the market for a good S 24. If a subsidy of 4 per unit is introduced in this market, what will be the new equilibrium quantity?. a) 8 units. b) 9 units. c) 10 units. 25. If a subsidy of 4 per unit is introduced in this market, the then the price that consumers pay will equal and the price that producers receive will be will be the new equilibrium quantity?. a) -1, 3. b) 0; 4. c) 1; 5. Page! 8 of! 22

9 Use the diagram below to answer the following TWO questions. Assume that this industry is perfectly competitive, and that there is a negative externality associated with output, such that the marginal external cost is equal to S 26. If a price floor of 6 is introduced in this market, which of the following correctly describes the effect on producer surplus? a) Producer surplus is unchanged by the introduction of the price floor. b) Producer surplus increases by 24, after the introduction of the price floor. c) Producer surplus decreases by 12, after the introduction of the price floor. d) None of the above statements correctly describes the effect of the introduction of the price floor on producer surplus. 27. If a price floor of 6 is introduced in this market, which of the following correctly describes the effect on social surplus? a) Social surplus is unchanged by the introduction of the price floor. b) Social surplus decreases by 8, after the introduction of the price floor. c) Social surplus increases by 8, after the introduction of the price floor. d) None of the above statements correctly describes the effect of the introduction of the price floor on social surplus. Page! 9 of! 22

10 28. If, at a given level of output, marginal social benefit is less than marginal social cost, then: a) Social surplus will increase if quantity increases, since social costs fall and social benefits rise. b) Social surplus will increase if quantity increases, since social benefits rise by more than social costs rise. c) Social surplus will increase if quantity decreases, since social benefits fall by less than social costs fall. d) Social surplus will increase if quantity decreases, since social benefits rise and social costs fall. 29. The diagram below illustrates the domestic supply and demand curves for a good S If the world price is 2, and a tariff of 2 is introduced, by how much will imports decrease as a result of the tariff? a) 15 units. b) 20 units. c) 25 units. Page! 10 of! 22

11 The following FOUR questions refer to the diagram below, which illustrates the market for a good whose production results in a negative externality. MSC a d MPC b e MSB! 30. If there is no regulation in place to correct the externality, which area represents SOCIAL SURPLUS? a) a. b) a - d. c) a + b. d) a + b + e If the optimal Pigovian tax is introduced in this market, which area represents the CHANGE in SOCIAL SURPLUS resulting from the tax? a) Social surplus increases by area e. b) Social surplus decreases by area e. c) Social surplus increases by area d. d) Social surplus decreases by area d. 32. If there is no regulation in place to correct the externality, then what area represents EXTERNAL COSTS? a) b. b) b + e. c) b + e + d. d) e + d. Page! 11 of! 22

12 33. (Remember to refer to the diagram above.) If there is no regulation in place to correct the externality, then what area represents MARKET SURPLUS? a) a. b) a - d. c) a + b. d) a + b + e. 34. Which of the following CANNOT reduce the equilibrium quantity sold in a market? a) A price ceiling. b) A price floor. c) A tax. d) All of the above can decrease equilibrium quantity sold. 35. Suppose that the introduction of government policy increases social surplus. Which of the following statements is/are TRUE? I. The policy must represent a Pareto Improvement. II. The policy must represent a Potential Pareto Improvement. III. The gains from the policy outweigh the losses from the policy. a) II and III only. b) I and II only. c) II only. d) None of the statements is true. 36. Suppose that a competitive market is in an unregulated equilibrium. You know that - at the equilibrium - own-price elasticity of demand equal 0.2 and own-price elasticity of supply equals 0.1. If a tax is introduced in this market, which of the following correctly describes the burden of this tax? a) Consumer price rises by more than producer price falls. b) Consumer price rises by less than producer price falls. c) Consumer price rises by the same amount as producer price falls. d) Without knowing the size of the tax, we cannot determine the relative burden of the tax. Page! 12 of! 22

13 Use the supply and demand diagram drawn below to answer the following TWO questions. S If a price floor of 40 is introduced in this market, what is the associated deadweight loss? a) B. b) B + C. c) B + C + E. d) There is no deadweight loss. 7 A B C E If a 15 per unit tax is levied in this market, what is the associated deadweight loss? a) B. b) B + C. c) B + C + E. d) There is no deadweight loss. 39. In which of the following cases will consumers bear the full burden of a tax? I. emand is downward sloping and supply is perfectly inelastic. II. emand is perfectly inelastic and supply is upward sloping. III. emand is downward sloping and supply is perfectly elastic. a) I only. b) I and II only. c) III only. d) II and III only. Page! 13 of! 22

14 ! Refer to the supply and demand curves illustrated below for the following THREE questions. Assume no externalities k j f g S If a price ceiling of 5 is introduced in this market, which area represent the decrease in MARKET SURPLUS? a) k + f. b) f + g. c) k + j. d) k + f + j + g. 41. If a price ceiling of 5 is introduced in this market, which area represent the EAWEIGHT LOSS? a) k + f. b) f + g. c) k + j. d) k + f + j + g. 42. If a price ceiling of 5 is introduced in this market, which area represent the change in CONSUMER SURPLUS? a) f + g. b) k - g. c) j - f. d) k + f + j + g. Page! 14 of! 22

15 ! Use the diagram below - which illustrates the domestic supply and demand curves for a good - to answer the following TWO questions. Assume the world price of the good is S If a tariff of 10 per unit is introduced in the market, then, at the new equilibrium: a) Consumers will pay a price of 20, quantity sold will be 60 units, of which 40 are imported. b) Consumers will pay a price of 30, quantity sold will be 40 units, of which 30 are produced domestically. c) Consumers will pay a price of 20, quantity sold will be 60 units, of which none are produced domestically. d) Consumers will pay a price of 30, quantity sold will be 40 units, of which none are imported. 44. If a tariff of 10 per unit is introduced in the market, then the government will raise in tariff revenue. a) 400. b) 300. c) 200. d) 100. Page! 15 of! 22

16 ! Use the supply and demand curve drawn below to answer the following TWO questions S 45. If a price floor is set at 9 per unit, what will be the new equilibrium quantity? a) 50 units. b) 40 units. c) 20 units. 46. Suppose a tax of 6 per unit is introduced in market illustrated above. Which of the following statements is/are TRUE? a) The deadweight loss from the tax will be larger than the deadweight loss from a price floor set at 9. b) The deadweight loss from the tax will be the same size as the deadweight loss from a price floor set at 9. c) The deadweight loss from the tax will be smaller than the deadweight loss from a price floor set at 9. d) There is insufficient information to compare the deadweight loss from the tax to the deadweight loss from a price floor set at 9. Page! 16 of! 22

17 ! The following question refers to the diagram below, which illustrates two firms marginal abatement cost curves for a pollutant P. Note that in the absence of any regulation each firm will emit 80 units of P. Use this diagram to answer the following FOUR questions MC A MC A P 47. If a 6 per unit pollution tax is levied on these two firms, how much ABATEMENT will each firm undertake? a) Firm 1 will abate 50 units and firm 2 will abate 20 units. b) Firm 1 will abate 30 units and from 2 will abate 60 units. c) Both firms will abate 20 units. 48. If a 6 per unit pollution tax is levied on these two firms, how much REVENUE will the government raise? a) 120. b) 300. c) 420. Page! 17 of! 22

18 49. If a cap and trade program is introduced that reduces aggregate emissions to 40 units, what will be the equilibrium price of permits? a) 10. b) 8. c) 6. d) We need to know the initial distribution of permits to calculate the equilibrium price of permits. 50. If each firm reduces emissions by 50%, what will AGGREGATE ABATEMENT COSTS equal? a) 160. b) 240. c) 320. d) None of the above 51. Which of the following statements about the deadweight loss of taxation is TRUE? (Assume no externalities.) I. The deadweight loss arises because the gain in government revenue is less than the decrease in market surplus. II. The larger the decrease in quantity from a given tax, the larger the deadweight loss. III. The deadweight loss will be zero if demand is perfectly inelastic. a) I and II only. b) I only. c) II and III only. d) I, II, and III. 52. Suppose that, if the price of a good increases from 10 to 12, total expenditure on the good decreases. Which of the following could be the (absolute) value for the own-price elasticity of demand, in the price range considered? a) 0.6. b) 1.4. c) Both a) and b). d) Neither a) or b). Page! 18 of! 22

19 Use the diagram below to answer the following THREE questions. S 8 5 w y x z 53. If a 3 per unit tax is introduced in this market. which area represent the EAWEIGHT LOSS? a) There is no deadweight loss surplus. b) Area x. c) Area x + y. d) Area w + y. 54. If a 3 per unit tax is introduced in this market. which area represent the GOVERNMENT REVENUE? a) There is no government revenue. b) Area x. c) Area x + y. d) Area w + y. 55. If a 3 per unit tax is introduced in this market. which area represent the decrease in CONSUMER SURPLUS? a) There is no decrease in consumer surplus. b) Area x. c) Area y. d) Area w + y. Page! 19 of! 22

20 56. Which of the following statements correctly describes the effect of the optimal Pigovian tax in a market characterized by a negative externality? I. Social surplus increases because the gain in government revenue and the reduction in external costs is greater than the decrease in market surplus. II. Social surplus increases because the decrease in social costs is greater than the decrease in social benefits. III. Social surplus increases because external costs are eliminated. a) I and II only. b) I only. c) II and III only. d) I, II, and III. 57. Which of the following statements correctly describes the effect of a per unit subsidy? Assume no externalities. I. Social surplus decreases because market surplus decreases by more than government spending decreases. II. Social surplus decreases because social costs increase by more than social benefits. III. Marginal social cost is greater than marginal social benefit at the new equilibrium. a) I and II only. b) I only. c) II and III only. d) I, II, and III. 58. Suppose that goods X and Y are SUBSTITUTES. Which of the following could be the value of cross-price elasticity of demand? a) 1.6. b) 4.3. c) Both a) and b). d) Neither a) or b). Page! 20 of! 22

21 59. Suppose that gasoline is NORMAL. Which of the following could be the value of income elasticity of demand? a) 0.6. b) 1.3. c) Both a) and b). d) Neither a) or b). 60. Suppose Netflix decreases its monthly subscription fee. If doing so results in an increase in revenues raised, which of the following could be the value of the own-price elasticity of demand for Netflix subscriptions? a) 0.9. b) 1.0. c) 1.1. d) All of the above. 61. Suppose that there are external benefits resulting from a particular market s activity (but no external costs). Which of the following is true? a) Market surplus equals social surplus. b) Market surplus is greater than social surplus. c) Market surplus is less than social surplus. 62. Suppose that there are external costs resulting from a particular market s activity (but no external benefits). Which of the following is true? a) Market surplus equals social surplus. b) Market surplus is greater than social surplus. c) Market surplus is less than social surplus. Page! 21 of! 22

22 The following TWO questions refer to the supply and demand curve diagram below S 63. If a price floor is set at 8, which of the following statements is true? a) uantity demanded will decrease by 30 units. b) Sellers would like to sell 80 units. c) uantity traded will equal 30 units. d) All of the above are true. 64. Calculate the deadweight loss associated with an 8 price floor. a) 50. b) 75. c) 100. Page! 22 of! 22