Practice Questions

Chapter 7-Part B: Government Policies

MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.

1) A situation is efficient if it is: 1)

A) possible to find a transaction that will make at least one person better off without
harming others.
B) possible to find a transaction that will make at least one person better off, even if
others are made worse off.
C) possible to find a transaction that will make everyone better off.
D) not possible to find a transaction that will make at least one person better off
without harming others.

2) If it is possible to make a change that will help some people without harming others, 2)
then the situation is:
A) fair. B) inefficient. C) unfair. D) efficient.

3) Ingrid has been waiting for the show "Mamma Mia!" to come to town. When it 3)
finally does come, tickets cost $60. Ingrid's reservation price is $75. But when Ingrid
tries to buy a ticket, they are sold out. Suppose Steven was able to purchase a ticket
at the box office for $60. Steven's reservation price for the ticket is $65. If Steven
attends "Mamma Mia!" and Ingrid does not, then this situation is:
A) inefficient because Steven and Ingrid could have made a mutually beneficial trade.
B) inefficient because Ingrid would have enjoyed the show too.
C) efficient because Steven arrived at the ticket counter before the show was sold out.
D) efficient because Steven paid less for the ticket than his reservation price.

4) Suppose your economics professor has an extra copy of textbook that he or she 4)
would like to give to a student in the class. Which of the following schemes is the
most likely to result in an efficient outcome?
A) Giving the textbook to the student who has the lowest midterm score.
B) Auctioning off the textbook to the highest bidder.
C) Letting students take turns using the textbook.
D) Randomly selecting one student to receive the textbook.

5) One reason why market-based exchanges make both consumers and producers better off is 5)
A) the court system upholds all legal transactions.
B) insurance protects them from the costs of bad decisions.
C) producers must share part of the profit with consumers.
D) that they would not freely agree to the transaction if they did not benefit from it
E) the government ensures that all parties benefit.

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Use the table for the question(s) below.

Consumer Willingness To Pay Price Consumer Surplus

A $130  $100  $30 
B $110  $100  $10 
C $100  $100  $0 
D $80  $100  ($20)

6) In the market depicted in the table above, in a free market Consumer D will 6)
A) be willing and able to pay a price of $120.
B) be forced to purchase an item she does not want.
C) refuse to buy the item.
D) be willing and able to pay a price of $100.
E) lose $20 of her income.

7) The benefit to producers from selling an additional unit is 7)
A) the difference between the price the firm receives and the marginal cost of that unit.
B) the marginal cost of that unit.
C) the price the firm receives.
D) the total revenue earned from sales.
E) impossible to determine because full information on prices and costs are never available.

Use the table for the question(s) below.

Unit Produced Marginal Cost Price Producer Surplus

1st $5 $10 $5
2nd $7 $10 $3
3rd $10 $10 $0
4th $15 $10 ($5)

8) In the market depicted in the table above, total producer surplus when the price is $10 is 8)
A) $3. B) -$5. C) $5. D) -$8. E) $8.

9) If the market supply curve does not capture all of the costs to society of producing an 9)
additional unit of good, then:
A) the allocation of resources will be efficient.
B) the market equilibrium will not be efficient.
C) the market will not be in equilibrium.
D) the market equilibrium will be socially optimal.

10) If the market demand curve does not capture all of the benefits to society of buying 10)
an additional unit of good, then:
A) the allocation of resources will be socially optimal.
B) the market equilibrium will not be efficient.
C) the market equilibrium will be socially optimal.
D) the market will not be in equilibrium.

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11) The figure below shows the supply and demand curves for jeans in Smallville. 11)

Suppose jeans initially sell for $60 per pair. If the price of jeans falls to $40 per pair,
then total economic surplus will increase by ________ per day.
A) $20 B) $40 C) $80 D) $160

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12) The figure below shows the supply and demand curves for jeans in Smallville. 12)

The equilibrium price will NOT lead to the largest possible total economic surplus if:
A) there are diminishing returns in the production of jeans.
B) jeans are purchased by consumers with reservation prices greater than $40.
C) the production of jeans generates air pollution.
D) the market for jeans is perfectly competitive.

13) A market equilibrium is only efficient if: 13)

A) allrelevant costs and benefits are reflected in the market supply and demand
curves.
B) the consumer surplus and the producer surplus associated with a given transaction
are equal.
C) consumer surplus and producer surplus are both zero.
D) output is distributed equitably among consumers.

14) Which of the following is NOT necessarily true in a market equilibrium? 14)
A) Price represents the cost of an extra unit of production.
B) All mutually beneficial trades have been made.
C) Price represents the value of an extra unit of consumption.
D) Both rich and poor have adequate access to the good.

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15) The sum of producer surplus and consumer surplus is: 15)
A) total economic profit. B) total surplus.
C) normal profit. D) the marginal benefit of a good.

16) Consumer surplus is the cumulative difference between: 16)

A) the amount consumers are willing to pay and the price they actually pay.
B) consumers' savings and consumers' expenditures.
C) the suggested retail price and the price consumers actually pay.
D) consumers' incomes and consumers' expenditures.

17) A price ceiling that is set below the equilibrium price will result in: 17)
A) higher total economic surplus. B) a surplus of the good.
C) higher producer surplus. D) a shortage of the good.

18) A price ceiling that is set above the equilibrium price will result in: 18)
A) an increase in consumer surplus.
B) no change in total economic surplus.
C) a loss in total economic surplus.
D) a market price that is above the equilibrium price.

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19) Refer to the figure below. 19)

When the market is unregulated, consumer surplus is represented by the area:

A) AGI B) AJE C) DBC D) ABC

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20) Refer to the figure below. 20)

When the market is unregulated, producer surplus is represented by the area:

A) ABC B) FHC C) DBC D) DGF

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21) Refer to the figure below. 21)

If a price ceiling were imposed at point G, then producer surplus would be represented
by the area ________.
A) 0GFQ2 B) DGF C) 0DFQ2 D) DBC

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22) Refer to the figure below. 22)

If a price ceiling were imposed at point G, the consumer surplus would be represented
by the area ________.
A) GAEF B) BAEH C) BJEH D) JAE

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23) Refer to the figure below. 23)

If a price ceiling were imposed at point G, the loss in total economic surplus would be
represented by the area ________.
A) GJEF B) DAC C) FEC D) JAE + DGF

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24) Supposea small island nation imports sugar for its population at the world price of 24)
$1,500 per ton. The domestic market for sugar is shown below.

With no subsidy, the equilibrium price of sugar is ________ per ton, and the
equilibrium quantity is ________ tons per day.
A) $1,000; 12 B) $1,000; 8 C) $1,500; 8 D) $1,500; 12

25) Supposea small island nation imports sugar for its population at the world price of 25)
$1,500 per ton. The domestic market for sugar is shown below.

With no subsidy, what is consumer surplus?

A) $8,000 per day B) $4,000 per day
C) $1,000 per day D) $9,000 per day

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26) Supposea small island nation imports sugar for its population at the world price of 26)
$1,500 per ton. The domestic market for sugar is shown below.

If the government provides a subsidy of $500 per ton, the equilibrium price of sugar
will be ________ per ton, and the equilibrium quantity will be ________ tons per day.
A) $1500; 8 B) $1500; 12 C) $1000; 12 D) $1000; 8

27) Supposea small island nation imports sugar for its population at the world price of 27)
$1,500 per ton. The domestic market for sugar is shown below.

If the government provides a subsidy of $500 per ton, then consumer surplus will be
________ per day.
A) $8,000 B) $9,000 C) $4,000 D) $1,000

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28) Supposea small island nation imports sugar for its population at the world price of 28)
$1,500 per ton. The domestic market for sugar is shown below.

If the government provides a subsidy of $500 per ton, then producer surplus will be
________ per day.
A) $0 B) $8,000 C) $4,000 D) $1,000

29) Supposea small island nation imports sugar for its population at the world price of 29)
$1,500 per ton. The domestic market for sugar is shown below.

If the government provides a subsidy of $500 per ton, then the cost of subsidy, which
must be borne by taxpayers, will be ________ per day.
A) $2,000 B) $500 C) $5,000 D) $6,000

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30) Supposea small island nation imports sugar for its population at the world price of 30)
$1,500 per ton. The domestic market for sugar is shown below.

If the government provides a subsidy of $500 per ton, then relative to before the
subsidy, total economic surplus will ________ by ________ per day.
A) increase; $1,000 B) decrease; $1,000
C) decrease; $6,500 D) increase; $6,500

31) A per-unit tax 31)

A) is the same as an income tax.
B) is imposed once on every person in the market.
C) adds a fixed-dollar amount to each unit of a good sold.
D) is imposed once per year.
E) is the same as a sales tax.

32) The deadweight loss that is due to a tax 32)

A) is the sum of the losses in consumer and producer surpluses.
B) does not impair the efficiency of the market.
C) helps restore allocative efficiency.
D) is the sum of the gains in consumer and producer surpluses.
E) is caused by an inefficient tax code.

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Use the figure for the question(s) below.

33) The deadweight loss is indicated by area 33)

A) A. B) B. C) C. D) D. E) A + D.

34) The tax collected is indicated by area 34)

A) A. B) B. C) C. D) D. E) D - A.

35) The sum of the consumer and producer surplus after the tax is imposed is indicated by areas 35)

A) B + C.
B) A + B + C.
C) D - A.
D) A - D.
E) A + B + C +D.

36) Another name for a legal maximum price is a(n) 36)

A) price floor.
B) illegal price.
C) efficiency price.
D) maxi-min price.
E) price ceiling.

37) A price floor is a(n) 37)

A) fiduciary price.
B) price so low that people donʹt notice it.
C) a minimum price imposed by the market.
D) a price so low that people ʺwalk all over itʺ in disdain.
E) a legal minimum price imposed by government.

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Use the figure for the question(s) below.

38) In the figure, a price floor of $5 would result in a loss of consumer surplus of 38)

A) A. B) B. C) C. D) D. E) E + F.

39) A quota is a 39)

A) tax on imports.
B) minimum quantity that can be bought and sold over a specific period of time.
C) maximum quantity that can be inventoried over a specific period of time.
D) maximum quantity that can be bought and sold over a specific period of time.
E) price quote made by buyers.

Use the figure for the question(s) below.

40) In the figure above, a quota placed on this market would 40)

A) reduce consumer surplus by area B + D and reduce producer surplus by area A + C.
B) reduce consumer surplus by area A + B and reduce producer surplus by area C + D.
C) increase consumer surplus by area A + C and reduce producer surplus by area B + D.
D) reduce consumer surplus by area A + C and reduce producer surplus by area B + D.
E) increase consumer surplus by area C + D and reduce producer surplus by area A + B.

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