Econ 200, Summer 2011, Dr. Alan and Prof. Crossley. Problem Set 2. (Reference: Mankiw and Taylor, Chapters 6, 7, 8, 13)

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1 Multiple Choice Econ 200, Summer 2011, Dr. Alan and Prof. Crossley Problem Set 2 (Reference: Mankiw and Taylor, Chapters 6, 7, 8, 13) 1 Refer to the Figure below. Consider the impact of a tax on sellers, shown in this diagram of the market for whisky. In this case, the total tax revenue collected by the government is a. 3 b c. 13,500 d. 40,500 2 Taxes levied directly on consumers a. always hurt consumers rather than producers. b. always hurt producers rather than consumers. c. generate more revenue than taxes levied on producers. d. have the same effect as taxes directly levied on producers. 3 When the minimum wage is set above the equilibrium market wage, a. there will be an excess demand for labour at the minimum wage. b. it will have no effect on the quantity of labour employed. c. the unemployment rate will rise. d. the quality of the labour force will rise. 4 Suppose that the government introduces a price ceiling in the fish market, and that suppliers begin to accept under-the-table payments or bribes from buyers who are anxious to ensure they get the fish they want. The

2 a. excess supply of fish will be eliminated. b. purpose of that price ceiling would be defeated. c. price ceiling must have been too low. d. price of fish set by the price ceiling would rise. 5 A 5 per cent tax is levied on products A and B, both of which have the same price elasticity of demand. Unit sales of A are nearly the same after the tax, while unit sales of B fall dramatically. Which of the following can we conclude? a. Producers of A bear a greater share (relative to consumers) of their market's tax burden than the producers of B. b. Product B has a smaller price elasticity of supply than product A. c. Tax revenue is greater from product A. d. Tax revenue is greater from product B. 6 If you had been willing to pay 2.19 for the litre of milk purchased at the supermarket but were required to pay only 1.29, you have gained a. a refund of 0.90 from the cashier. b. a consumer surplus amounting to c. excess marginal benefit of d. producer surplus of Sellers' costs of producing various units of the good are shown by the a. height of the demand curve. b. width of the demand curve. c. width of the supply curve. d. height of the supply curve. 8 This diagram shows the market for salmon, in equilibrium at 20 per kilo. At this price consumer surplus is a b c d

3 9 One way of measuring the economic inefficiency in a specific situation is to calculate the a. difference between the price of the good in the inefficient situation and the price if the situation was efficient. b. change in revenue reported by firms. c. loss in consumer and producer surplus relative to an efficient solution. d. change in economic profits relative to an efficient solution. 10 Market failure in the form of externalities arises when a. all production costs are included in the prices of goods. b. not all costs and benefits are included in the prices of goods. c. the total surplus is maximized but some consumers cannot buy because prices are too high. d. the market fails to achieve equilibrium. 11 The market will be in equilibrium with a tax on sales of a good when a. the quantity demanded equals the quantity supplied and the price buyers pay exceeds the price sellers receive by the per-unit tax. b. the price received by the seller equals the price paid by the buyer and the quantity demanded is less than the quantity supplied by the amount of the tax. c. the tax is equal to the price paid by the buyer and quantity demanded is equal to the quantity supplied. d. there cannot be a market equilibrium with a tax on sales. 12 The deadweight loss from an economically inefficient situation is equal to a. consumer surplus minus producer surplus. b. consumer surplus plus producer surplus. c. the consumer and producer surplus that people could gain by eliminating that inefficiency. d. the increase in consumer surplus minus the increase in producer surplus that people could gain by eliminating that inefficiency.

4 13 If the supply curve is perfectly price elastic, a per-unit tax a. does not create a deadweight loss. b. does not reduce consumer surplus. c. does not reduce producer surplus. d. reduces consumer surplus but increases producer surplus. 14 Suppose demand for electricity is perfectly price inelastic. A tax on electricity will be a. split between producers and consumers in equal shares. b. paid only by producers. c. paid only by consumers. d. split between producers and consumers in unequal shares. 15 Deadweight loss a. means that there is a loss to some individuals without a corresponding gain to others. b. is not really a loss to society because what one individual loses another individual gains. c. can be eliminated by sales taxes. d. can occur even if output is at the efficient level. 16 Which of the following costs of publishing a book is a fixed cost? a. author royalties of 5% per book b. costs of paper and binding c. shipping and postage d. typesetting, and jacket design 17 Miller Technologies has average variable costs of 6 and average total costs of 10 when it produces 1,000 units of output. The firm's total fixed costs equal a. 2,000. b. 3,000. c. 4,000. d. 5, If marginal cost is greater than average total cost then a. profits are increasing. b. economies of scale are becoming greater. c. average total cost remains constant. d. average total cost is increasing. 19 Which of the following factors is most likely to shift a firm s total cost and marginal cost curves downward? a. a technological advance resulting in increased productivity b. higher property taxes charged by the municipal government c. increased wages to attract additional computer operators d. a reduction in subsidies from the state government

5 20 Some reasons that firms may experience diseconomies of scale include that a. the firm is too small to take advantage of specialization. b. large management structures may be bureaucratic and inefficient. c. if there are too many employees, the work place becomes crowded and people become less productive. d. average fixed costs begin to rise again. Short Answer 1. Refer to the diagram below. a) Calculate the equilibrium price and quantity prior to the introduction of a tax. b) Consider the impact of a 5 per unit tax in the market described in this diagram. Calculate the equilibrium price and quantity exchanged in the market after the tax is introduced. c) Calculate the dead weight loss attributable to the tax. d) Calculate government revenue from the tax. 2. Mankiw and Taylor, Chapter 7, problems 3, 4 and Mankiw and Taylor, Chapter 8, problem Mankiw and Taylor, Chapter 13, problem 10.