Homework_Nov#1

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

Figure 5-1

____ 1. Refer to Figure 5-1. Assume, for the good in question, two specific points on the demand curve are (Q =
1,000, P = $40) and (Q = 1,500, P = $30). Then which of the following scenarios is possible?
a. Both of these points lie on section C of the demand curve.
b. The vertical intercept of the demand curve is the point (Q = 0, P = $60).
c. The horizontal intercept of the demand curve is the point (Q = 1,800, P = $0).
d. Any of these scenarios is possible.
____ 2. Refer to Figure 5-1. Assume, for the good in question, two specific points on the demand curve are (Q =
2,000, P = $15) and (Q = 2,400, P = $12). Then which of the following scenarios is possible?
a. Both of these points lie on section C of the demand curve.
b. The vertical intercept of the demand curve is the point (Q = 0, P = $22).
c. The horizontal intercept of the demand curve is the point (Q = 5,000, P = $0).
d. Any of these scenarios is possible.
____ 3. The flatter the demand curve through a given point, the
a. greater the price elasticity of demand at that point.
b. smaller the price elasticity of demand at that point.
c. closer the price elasticity of demand will be to the slope of the curve.
d. greater the absolute value of the change in total revenue when there is a movement from
that point upward and to the left along the demand curve.

Figure 5-6
____ 4. Refer to Figure 5-6. Suppose this demand curve is a straight, downward-sloping line all the way from the
horizontal intercept to the vertical intercept. We choose two prices, P1 and P2, and the corresponding
quantities demanded, Q1 and Q2, for the purpose of calculating the price elasticity of demand. Also suppose P2
> P1. In which of the following cases could we possibly find that (i) demand is elastic and (ii) an increase in
price from P1 to P2 causes an increase in total revenue?
a. 0 < P1 < P2 < $10.
b. $10 < P1 < P2 < $15.
c. P1 > $15.
d. None of the above is correct.
____ 5. If the price elasticity of demand for tuna is 0.7, then a 1.5% increase in the price of tuna will decrease the
quantity demanded of tuna by
a. 1.05% and tuna sellers' total revenue will increase as a result.
b. 1.05% and tuna sellers' total revenue will decrease as a result.
c. 2.14% and tuna sellers' total revenue will increase as a result.
d. 2.14% and tuna sellers' total revenue will decrease as a result.
____ 6. Harry's Barber Shop increased its total monthly revenue from $1,500 to $1,800 when it raised the price of a
haircut from $5 to $9. The price elasticity of demand for Harry's Haircuts is
a. 0.567.
b. 0.700.
c. 1.429.
d. 2.200.
____ 7. Suppose a producer is able to separate customers into two groups, one having an inelastic demand and the
other having an elastic demand. If the producer's objective is to increase total revenue, she should
a. increase the price charged to customers with the elastic demand and decrease the price
charged to customers with the inelastic demand.
b. decrease the price charged to customers with the elastic demand and increase the price
charged to customers with the inelastic demand.
c. charge the same price to both groups of customers.
d. increase the price for both groups of customers.
____ 8. Suppose that 50 candy bars are demanded at a particular price. If the price of candy bars rises from that price
by 5 percent, the number of candy bars demanded falls to 48. Using the midpoint approach to calculate the
price elasticity of demand, it follows that the
a. demand for candy bars in this price range is elastic.
 b. price increase will decrease the total revenue of candy bar sellers.
c. price elasticity of demand for candy bars in this price range is about 1.22.
d. price elasticity of demand for candy bars in this price range is about 0.82.
____ 9. When her income increased from $10,000 to $20,000, Heather's consumption of macaroni decreased from 10
pounds to 5 pounds and her consumption of soy-burgers increased from 2 pounds to 4 pounds. We can
conclude that for Heather,
a. macaroni and soy-burgers are both normal goods with income elasticities equal to 1.
b. macaroni is an inferior good and soy-burgers are normal goods; both have income
elasticities of 1.
c. macaroni is an inferior good with an income elasticity of -1 and soy-burgers are normal
goods with an income elasticity of 1.
d. macaroni and soy-burgers are both inferior goods with income elasticities equal to -1.
____ 10. Which of the following statements is not valid when supply is perfectly elastic?
a. The elasticity of supply approaches infinity.
b. The supply curve is horizontal.
c. Very small changes in price lead to large changes in quantity supplied.
d. The time period under consideration is more likely a short period rather than a long period.

Table 5-2
Supply Curve A Supply Curve B Supply Curve C
Price $1.00 $2.00 $1.00 $3.00 $2.00 $5.00
Quantity
Supplied 500 600 600 900 400 700

____ 11. Refer to Table 5-2. Along which of the supply curves does quantity supplied move proportionately more than
the price?
a. along supply curve B only
b. along supply curves B and C
c. along all three supply curves
d. Quantity supplied moves proportionately more than the price along none of the three
supply curves.
____ 12. A tax on the buyers of coffee will
a. increase the effective price of coffee paid by buyers, increase the price of coffee received
by sellers, and increase the equilibrium quantity of coffee.
b. decrease the effective price of coffee paid by buyers, increase the price of coffee received
by sellers, and decrease the equilibrium quantity of coffee.
c. increase the effective price of coffee paid by buyers, decrease the price of coffee received
by sellers, and decrease the equilibrium quantity of coffee.
d. increase the effective price of coffee paid by buyers, decrease the price of coffee received
by sellers, and increase the equilibrium quantity of coffee.

Figure 6-10
____ 13. Refer to Figure 6-10. Suppose the same S and D curves apply, and a tax of the same amount per unit as
shown here is imposed. Now, however, the buyers of the good, rather than the sellers, are required to pay the
tax to the government. Now,
a. the burden on buyers will be larger than in the case illustrated in Figure 6-10.
b. the burden on sellers will be smaller than in the case illustrated in Figure 6-10.
c. a downward shift of the demand curve replaces the upward shift of the supply curve.
d. All of the above are correct.

Figure 6-11. On the graph below, the shift of the supply curve from S 1 to S2 represents the imposition of a tax
on a good. On the axes, Q represents the quantity of the good and P represents the price.

____ 14. Consider Figure 6-11. Which of these statements about the effects of the tax is correct?
a. The tax is paid by sellers; sellers bear one-half of the burden of the tax; government
collects $24 from the tax.
b. The tax is paid by sellers; sellers bear one-third of the burden of the tax; government
 collects $24 from the tax.
c. The tax is paid by sellers; sellers bear two-thirds of the burden of the tax; government
collects $30 from the tax.
d. The tax is paid by buyers; buyers bear two-thirds of the burden of the tax; government
collects $16 from the tax.
____ 15. Buyers of a good bear the larger share of the tax burden when a tax is placed on a product for which
a. the supply is more elastic than the demand.
b. the demand in more elastic than the supply.
c. the tax is placed on the sellers of the product.
d. the tax is placed on the buyers of the product.
____ 16. The demand for salt is inelastic and the supply of salt is elastic. The demand for caviar is elastic and the
supply of caviar is inelastic. Suppose that a tax of $1 per pound is levied on the sellers of salt and a tax of $1
per pound is levied on the buyers of caviar. We would expect that most of the burden of these taxes will fall
on
a. sellers of salt and the buyers of caviar.
b. sellers of salt and the sellers of caviar.
c. buyers of salt and the sellers of caviar.
d. buyers of salt and the buyers of caviar.
____ 17. Which of the following quantities decrease in response to a tax on a good?
a. the size of the market for the good, the effective price of the good paid by buyers, and
consumer surplus
b. the size of the market for the good, producer surplus, and the well-being of buyers of the
good
c. the effective price received by sellers of the good, the wedge between the effective price
paid by buyers and the effective price received by sellers, and consumer surplus
d. None of the above is necessarily correct unless we know whether the tax is levied on
buyers or on sellers.
____ 18. For a good that is taxed, the area on the relevant supply-and-demand graph that represents governments tax
revenue is
a. smaller than the area that represents the loss of consumer surplus and producer surplus
caused by the tax.
b. bounded by the supply curve, the demand curve, the effective price paid by buyers, and
the effective price received by sellers.
c. a right triangle.
d. a triangle, but not necessarily a right triangle.
____ 19. The supply curve and the demand curve for cigars are straight lines. Suppose the equilibrium quantity in the
market for cigars is 1,000 per month when there is no tax. Then a tax of $0.50 per cigar is imposed. The
effective price paid by buyers increases from $1.50 to $1.90 and the effective price received by sellers falls
from $1.50 to $1.40. The governments tax revenue amounts to $475 per month. Which of the following
statements is correct?
a. After the tax is imposed, the equilibrium quantity of cigars is 900 per month.
b. The demand for cigars is more elastic than the supply of cigars.
c. The deadweight loss of the tax is $12.50.
d. The tax causes a decrease in consumer surplus of $380.

Figure 8-2
____ 20. Refer to Figure 8-2. The per-unit burden of the tax on sellers is
a. P3 - P1.
b. P3 - P2.
c. P2 - P1.
d. Q2 - Q1.
____ 21. Refer to Figure 8-2. Which of the following equations is valid for the loss in consumer surplus caused by the
tax?
a. Loss of consumer surplus = (1/2)(P3 - P2)(Q1 - Q2).
b. Loss of consumer surplus = (1/2)(P3 - P2)(Q1 + Q2).
c. Loss of consumer surplus = (1/2)(P3 + P2)(Q1 - Q2).
d. Loss of consumer surplus = (1/2)(P3 + P2)(Q1 + Q2).

Figure 8-6

____ 22. Refer to Figure 8-6. The deadweight loss associated with this tax amounts to
a. $60, and this figure represents the amount by which tax revenue to the government
exceeds the combined loss of producer and consumer surpluses.
b. $60, and this figure represents the surplus that is lost because the tax discourages mutually
advantageous trades between buyers and sellers.
c. $40, and this figure represents the amount by which tax revenue to the government
 exceeds the combined loss of producer and consumer surpluses.
d. $40, and this figure represents the surplus that is lost because the tax discourages mutually
advantageous trades between buyers and sellers.

Figure 8-7 The graph below represents a $10 per unit tax on a good. On the graph, Q represents quantity and
P represents price.

____ 23. Refer to Figure 8-7. One effect of the tax is to

a. reduce consumer surplus from $60 to $24.
b. reduce producer surplus from $32 to $8.
c. create a deadweight loss of $24.
d. All of the above are correct.
____ 24. Assume the price of gasoline is $2.00 per gallon and the equilibrium quantity of gasoline is 10 million gallons
per day with no tax on gasoline. Starting from this initial situation, which of the following scenarios would
result in the largest deadweight loss?
a. The price elasticity of demand for gasoline is 0.1; the price elasticity of supply for
gasoline is 0.6; and the gasoline tax amounts to $0.20 per gallon.
b. The price elasticity of demand for gasoline is 0.1; the price elasticity of supply for
gasoline is 0.4; and the gasoline tax amounts to $0.20 per gallon.
c. The price elasticity of demand for gasoline is 0.2; the price elasticity of supply for
gasoline is 0.6; and the gasoline tax amounts to $0.30 per gallon.
d. There is insufficient information to make this determination.
____ 25. Which of the following would likely have the smallest deadweight loss relative to the tax revenue?
a. a head tax (that is, a tax everyone must pay regardless of what one does or buys)
b. an income tax
c. a tax on compact discs
d. a tax on caviar
____ 26. Which of the following ideas is the most plausible?
a. Reducing a high tax rate is less likely to increase tax revenue than is reducing a low tax
rate.
b. Reducing a high tax rate is more likely to increase tax revenue than is reducing a low tax
rate.
c. Reducing a high tax rate will have the same effect on tax revenue as reducing a low tax
 rate.
d. Reducing a tax rate can never increase tax revenue.

Figure 9-1

____ 27. Refer to Figure 9-1. As a result of trade, total surplus increases by
a. $80.
b. $97.50.
c. $162.50.
d. $495.50.

Figure 9-6. The figure applies to the nation of Wales and the good is cheese.

____ 28. Refer to Figure 9-6. Which of the following is a valid equation for Welsh producer surplus with trade?
a. Producer surplus with trade = (1/2)P0Q0.
b. Producer surplus with trade = (1/2)P1Q1.
c. Producer surplus with trade = (1/2)P1Q2.
 d. None of the above is correct.
____ 29. Aquilonia has decided to end its policy of not trading with the rest of the world. When it ends its trade
restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs.
We can conclude that Aquilonias new free-trade policy has
a. increased consumer surplus and producer surplus in the incense market.
b. increased consumer surplus in the steel market and left producer surplus in the rug market
unchanged.
c. decreased consumer surplus in both the steel and rug markets.
d. decreased consumer surplus in the steel market and increased total surplus in the incense
market.

Short Answer

30. How does elasticity affect the burden of a tax? Justify your answer using supply and demand diagrams.
31. Using the graph shown, determine the value of each of the following:
a. equilibrium price before the tax
b. consumer surplus before the tax
c. producer surplus before the tax
d. total surplus before the tax
e. consumer surplus after the tax
f. producer surplus after the tax
g. total tax revenue to the government
h. total surplus (consumer surplus + producer surplus + tax revenue) after the tax
i. deadweight loss

32. Suppose that instead of a supply-demand diagram, you are given the following information:

Qs = 100 + 3P
Qd = 400 - 2P
From this information compute equilibrium price and quantity. Now suppose that a tax is placed on buyers so
that
Qd = 400 - (2P + T).

If T = 15, solve for the new equilibrium price and quantity. (Note: P is the price received by sellers and P + T
is the price paid by buyers.) Compare these answers for equilibrium price and quantity with your first
answers. What does this show you?