Econ Multiple Choice Practice Problems Final PDF

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PRACTICE QUESTIONS FOR FINAL MULTIPLE CHOICES 1. a) b) c) d)

If the government decides to subsidize a good, it will typically do all of the following except: add to consumer surplus. add to producer surplus. have a positive impact on the government’s budget. create a deadweight loss.

2.

Suppose the government decides to create a price support (floor) on the price of corn, which of the following is a true statement? A binding price support/floor will tend to lower the price of corn for poorer people. If the government does not buy any wheat, there will tend to be an excess supply of wheat in the marketplace, if the price floor is binding. A non-binding price support/floor below the equilibrium price in the market will also lead to a rise in the price of corn. It is likely that the total surplus (consumer surplus plus producer surplus) will rise with a price support program.

a) b) c) d)

3. a) b) c) d)

It is always the case that the deadweight loss will be lower with a quota system than a tariff system. there will be a deadweight loss from imposing tariffs on imports, even though the government may have a need for the revenue from the tariffs. free trade will lead to a deadweight loss. the deadweight loss will be lower with a tariff system than a quota system.

4. If supply is relatively inelastic when compared with demand in a perfectly competitive market, a) consumers will share a larger burden of an excise tax than producers. b) consumers and producers will share the burden of an excise tax equally. c) producers will share a larger burden of an excise tax than consumers. d) the incidence of the tax cannot be determined without more information. 5. Suppose that a market is initially in equilibrium. The initial demand curve is P  90  Qd . The initial supply curve is P  2Qs . Suppose that the government imposes a $3 tax on this market. How much of this $3 is paid for by producers? a) $0. b) $1. c) $1.50. d) $2. 6. Which of the following statements regarding a price ceiling in a perfectly competitive market is incorrect? a) There will be no deadweight loss with the price ceiling. b) The will be excess demand resulting from the price ceiling. c) The market will under produce relative to the efficient level. d) Consumer surplus may either increase or decrease with a price ceiling.

7. The domestic market for calculators is perfectly competitive and is in equilibrium. Domestic demand is given by Qd = 100 – P and domestic supply is given by Qs = 4P. The world price for calculators is $10. How many units of calculators will be imported? a) 0 b) 10 c) 30 d) 50 8. Consider a perfectly competitive market with market supply and market demand. Suppose the government imposes an excise tax of $4 per unit on this market. What is total surplus (consumer surplus plus producer surplus) after the government imposes the tax? a)72 b)98 c)144 d)196 9. Consider a perfectly competitive market with inverse market supply P  5  3Qs and inverse market demand P  50  2Qd . Suppose the government subsidizes this market with a subsidy of $5 per unit. What is the increase in consumer surplus resulting from the subsidy? a) 17 b) 19 c) 21 d) 23 10. Suppose that the market for cigarettes is initially in equilibrium and is perfectly competitive. The demand curve can be expressed as P  60  Qd ; the supply curve can be expressed as P  0.5Qs . Quantity is expressed in millions of boxes per month. Now suppose that the federal government imposes a production quota on cigarettes of 30 million boxes per month. What are the new amount traded and the price in this market? a) Q = 40; P = 20 b) Q = 20; P = 40 c) Q = 30; P = 30 d) Q = 30; P = 15 11. The domestic market for calculators is perfectly competitive and is in equilibrium. Domestic demand is given by Qd = 100 – P and domestic supply is given by Qs = 4P. The world price for calculators is $10. Now, a tariff of $10 is imposed on all imports. How much revenue does this policy generate for the government? a) 0 b) 10 c) 30 d) 50 12. In order for a price floor to be effective, it must be set _____________ the equilibrium price, while a price ceiling must be set _____________ the equilibrium price in order to be effective. a. above; below b. above; above c. below; above d. below; below e. at; at

13. A tariff can accomplish all of the following goals except a. raising revenue b. lowering prices of imports c. allowing firms to stay in business when they otherwise would have shut down d. raising profits of protected firms e. raising employment in the protected industry 14. The Laffer Curve…… a. shows the positive relationship between tax rates and tax revenues b. shows the negative relationship between tax rates and tax revenues c. is used by supply-side economists to argue that it is possible to generate higher tax revenues by decreasing tax rates d. illustrates how a decrease in taxes, which are reflected in an increase of the disposable income of the workers, increases the incentives to work, thereby always increasing the tax revenues collected 15. How do quotas and tariffs impact the supply of goods available to consumers and domestic prices in general? a. They increase the supply of goods and increase prices. b. They decrease the supply of goods and increase prices. c. They increase the supply of goods and decrease prices. d. They decrease the supply of goods with no change in prices. PROBLEMS 1) The demand and supply conditions of market for beer are given by the following

equations: 𝟑

P=108 - 𝟐 Qd and P= Qs+18 a. Find the initial equilibrium price and quantity.

b. Calculate the consumer surplus and producer surplus for the equilibrium. c. Suppose that government impose a price floor at P=66 to control the consumption of beer. Is this policy effective? What are price and quantity consumed after this intervention of government? d. Going back to equilibrium in part a), suppose now that government restricts the production of the beer and set a quota of 20 in this market. What are price and quantity consumed after this intervention of government? e. Going back to equilibrium in part a), suppose now that the government imposes a tax of $10 per unit on producers and the producers adjust the supply function to include the tax when t =10. Illustrate with a diagram how the producer tax of 10 will affect the market demand and supply curves. Find the new equilibrium price and quantity after the tax. Show the initial and after tax equilibrium on your graph.

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f. Who gets the higher burden of the tax? Calculate the percentage tax share paid by consumers and producers. Also, calculate the deadweight loss associated with the tax policy. g. Going back to equilibrium in part a), suppose now that this market is open to international trade and international price of the beer is 36. Will this country export or import beer? What will be the quantity of export/imports? h. Given the international price level in part g), suppose that government introduces a tariff of 12 per traded quantity. Calculate the new trade level and tariff revenue. Who will benefit from this policy? 2. Suppose there is a small, closed economy that produces bananas. The domestic demand and domestic supply curves for bananas in this small, closed economy are given as: Domestic demand: P = 20 – (1/2)Q Domestic supply: P = 2 + (1/10)Q a. What is the equilibrium price and quantity of bananas in this small, closed economy? b. Suppose that the world price of bananas is $8 per unit of bananas and this economy opens to trade. Provide a numerical measure of this country’s imports or exports of bananas once the market is open to trade. c. If this closed economy opens its banana market to trade with the world price of bananas equal to $8 per unit of bananas, what will be the change in consumer surplus due to this decision? d. Suppose that the world price of bananas is $2.50 per unit of bananas. If this market opens to trade, what will be the level of imports or exports of bananas? e. Given the scenario in part (d), what will be the change in consumer surplus when this economy goes from being a closed economy with regard to the banana market to being an open economy with regard to the banana market? f. Suppose that the world price of bananas is $2.50 per unit of bananas and that this economy is open to trade. Suppose the government implements a tariff of $1.00 per unit of bananas. Calculate the tariff revenue from the implementation of this policy and the deadweight loss from the tariff. g. Suppose the government wishes to replace the tariff described in part (h) with a quota that results in the same consumer surplus as the consumer surplus with the tariff, the same producer surplus as the producer surplus with the tariff, and the same deadweight loss as the deadweight loss with the tariff. How many units of bananas should the quota equal for this result? Explain your answer.

Tekin K ANSWER KEY F FOR OR MULTIPLE CHOICES 1) C 2) B 3) B 4) C 5) B 6) A 7) D 8) C 9) B 10) C 11) A 12) A 13) B 14) C 15) B

ANSWER KEY F FOR OR PROBLEM PROBLEMS S

ANSWER KEY FOR Q1: a) b) c) d) e) f) g) h)

P* = 54 and Q* = 36 CS = 972, PS= = 648 price floor is binding. Qsold=28, P=66. quota is effective. Qsold=20, P=78 after tax: P** = 60 and Q** = 32 consumers pay 60 % of the tax. producers pay 40 %. DWL=20 import 30 units import 10 units. tariff revenue=120.

ANSWER KEY FOR Q2: a) b) c) d) e) f) g)

P* = 5 and Q* = 30 export 36 units CS1 =225, CS2=144, chage in CS=-81 import 30 units CS1 =225, CS2=306.25, chage in CS=81.25 import 18 units: tariff revenue=18; dwl=6. all effects will be the same. however, there is no revenue for the government if the quota licenses are not sold....