Lecture 6: Supply, Demand and Government Policies

True / False Questions

1. When the market is in equilibrium, total surplus is maximized.

True False

2. The total cost of taxation to consumers and producers generally exceeds the amount of tax revenue
collected by the government.

True False

3. An excise tax on alcohol causes the supply of alcohol to decrease and the price of alcohol to
decrease.

True False

4. If a tax is legally required to be paid by sellers, sellers typically bear the full burden of the tax.

True False

5. If the demand for insulin is highly inelastic, the burden of a tax on insulin will be borne almost
entirely by sellers.

True False

6. If the government's goal is to alter people's behavior through taxation, taxing goods with relatively
elastic demand and supply would be most effective.

True False

7. A price ceiling is in essence an implicit tax on producers and an implicit subsidy to consumers.

True False

8. Unlike excise taxes, price ceilings create no deadweight loss.

True False

9. Price ceilings create shortages, but taxes do not.

True False

10. The military draft can be seen as an implicit tax on potential recruits and a subsidy to those who
demand defense services.

True False
11. The more inelastic the demand for agricultural output, the stronger the incentive for farmers to
engage in rent-seeking activities.

True False

Multiple Choice Questions

1. From the point of view of consumer surplus and producer surplus, what problem was created when
Thailand subsidized the cost of energy to consumers to help alleviate the burden of higher energy
costs?
A. It hurt the poor and benefited the rich.
B. It led to less fuel being used than the amount that maximizes consumer surplus.
C. It encouraged the consumption of too much fuel at the expense of other goods.
D. It has no effect; consumers gained consumer surplus, but taxpayers lost the same amount
because they had to finance the subsidy.

2. Cigarette taxes cause deadweight loss because:

A. they are regressive.
B. they are progressive.
C. they change people's behavior.
D. they yield no revenue.

3. There would be no deadweight loss if:

A. demand was perfectly inelastic.
B. demand was perfectly elastic.
C. taxes collected were used for societal good.
D. demand was to shift by the amount of the tax.

4. A per-unit tax on coffee paid by the seller causes the:

A. supply of coffee curve to shift upward by the amount of the per-unit tax.
B. supply of coffee curve to shift downward by the amount of the per-unit tax.
C. demand for coffee curve to shift upward by the amount of the per-unit tax.
D. demand for coffee curve to shift downward by the amount of the per-unit tax.

5. Graphically, deadweight loss is shown by the:

A. welfare loss rectangle.
B. welfare loss triangle.
C. tax revenue rectangle.
D. consumer surplus loss triangle.
6. Refer to the graph shown. Assume that the market is initially in equilibrium at a price of $6 and a
quantity of 40 units. If the government imposes a $2 per-unit tax on this product, the equilibrium
price will change to:

A. $4.
B. $5.
C. $7.
D. $8.

7. Refer to the graph above. Assume that the market is initially in equilibrium at a price of $6 and a
quantity of 40 units. If the government imposes a $2 per-unit tax on this product, equilibrium
quantity will change to:
A. 30.
B. 50.
C. 60.
D. 100.

8. Refer to the graph above. Assume that the market is initially in equilibrium at a price of $6 and a
quantity of 40 units. If the government imposes a $2 per-unit tax on this product, it will collect tax
revenue in the amount of:
A. $60.
B. $80.
C. $100.
D. $120.

9. Refer to the graph above. Assume that the market is initially in equilibrium at a price of $6 and a
quantity of 40 units. If the government imposes a $2 per-unit tax on this product, consumer surplus
will fall from:
A. 80 to 45.
B. 160 to 90.
C. 90 to 45.
D. 160 to 80.
10. When government imposes a per-unit tax on a product, the net price producers actually receive for
the product (after all taxes) typically:
A. increases by the amount of the per-unit tax.
B. increases by less than the amount of the per-unit tax.
C. decreases by the amount of the per-unit tax.
D. decreases by less than the amount of the per-unit tax.

11. Refer to the graph shown. Assume that the market is initially in equilibrium at a price of $10 and a
quantity of 500 units. If the government imposes a $4 per-unit tax on this product, the equilibrium
price will change to:

A. $4.
B. $8.
C. $12.
D. $14.

12. Refer to the graph above. Assume that the market is initially in equilibrium at a price of $10 and a
quantity of 500 units. If the government imposes a $4 per-unit tax on this product, equilibrium
quantity will change to:
A. 300.
B. 400.
C. 500.
D. 1,000.

13. Refer to the graph above. Assume that the market is initially in equilibrium at a price of $10 and a
quantity of 500 units. In equilibrium, consumer surplus is equal to:
A. 1,500.
B. 2,500.
C. 3,500.
D. 5,000.

14. Refer to the graph above. Assume that the market is initially in equilibrium at a price of $10 and a
quantity of 500 units. In equilibrium, producer surplus is equal to:
A. 1,500.
B. 2,500.
C. 3,500.
D. 5,000.
15. Refer to the graph above. Assume that the market is initially in equilibrium at a price of $10 and a
quantity of 500 units. If the government imposes a $4 per-unit tax on this product, it will collect tax
revenue in the amount of:
A. $0.
B. $1,200.
C. $1,600.
D. $2,000.

16. Refer to the graph shown. Assume that the market is initially in equilibrium at a price of $10 and a
quantity of 500 units. If the government imposes a $4 per-unit tax on this product, consumer surplus
will fall from:

A. 2,500 to 1,600.
B. 5,000 to 3,200.
C. 2,500 to 1,200.
D. 5,000 to 2,500.

17. Refer to the graph above. Assume that the market is initially in equilibrium at a price of $10 and a
quantity of 500 units. If the government imposes a $4 per-unit tax on this product, producer surplus
will fall from:
A. 2,500 to 1,600.
B. 5,000 to 3,200.
C. 3,200 to 1,600.
D. 5,000 to 2,500.

18. Refer to the graph above. Assume that the market is initially in equilibrium at a price of $10 and a
quantity of 500 units. If the government imposes a $4 per-unit tax on this product, the deadweight
loss from the tax will be:
A. 200.
B. 1,600.
C. 1,800.
D. 2,000.
19. Refer to the graph shown. With an effective price ceiling at $3, the quantity supplied:

A. falls from 70 to 40.

B. falls from 40 to 20.
C. increases from 40 to 70.
D. increases from 20 to 40.

20. Refer to the graph above. With an effective price ceiling at $3, total surplus is reduced by:
A. 20.
B. 30.
C. 50.
D. 100.

21. Refer to the graph above. An effective price ceiling at $3 imposes a deadweight loss of:
A. 20.
B. 30.
C. 50.
D. 100.

22. Refer to the graph above. An effective price ceiling at $3 causes consumer surplus to:
A. increase from 80 to 120.
B. fall from 110 to 80.
C. increase from 120 to 130.
D. fall from 130 to 120.

23. Refer to the graph above. An effective price ceiling at $3 causes producer surplus to:
A. increase from 30 to 120.
B. increase from 80 to 110.
C. fall from 120 to 30.
D. fall from 80 to 30.

24. If the supply curve is perfectly inelastic, the burden of a tax on suppliers is borne:
A. entirely by the suppliers.
B. entirely by the consumers.
C. mostly by the suppliers and partly by the consumers if the demand curve is inelastic.
D. partly by the suppliers and mostly by the consumers if the demand curve is elastic.
25. If the supply curve is perfectly elastic, the burden of a tax on suppliers is borne:
A. entirely by the suppliers.
B. entirely by the consumers.
C. mostly by the suppliers and partly by the consumers if the demand curve is inelastic.
D. partly by the suppliers and mostly by the consumers if the demand curve is elastic.

26. If demand is perfectly inelastic, the burden of a tax on suppliers is borne:

A. entirely by the suppliers.
B. entirely by the consumers.
C. mostly by the suppliers and partly by the consumers if the demand curve is inelastic.
D. partly by the suppliers and mostly by the consumers if the demand curve is elastic.

27. If the demand curve is perfectly elastic, the burden of a tax on suppliers is borne:
A. entirely by the suppliers.
B. entirely by the consumers.
C. mostly by the suppliers and partly by the consumers if the supply curve is inelastic.
D. partly by the suppliers and mostly by the consumers if the supply curve is elastic.

28. If elasticity of demand is .2, elasticity of supply is .5, and a 10 percent excise tax is levied on the
good:
A. the tax burden on suppliers will be greater.
B. the tax burden on consumers will be greater.
C. the tax burden will be the same for both.
D. one cannot say who will bear the greater burden without knowing the tax.

29. If elasticity of demand is 1.8, elasticity of supply is .7, and a 20 percent excise tax is levied on the
good:
A. the tax burden on suppliers will be greater.
B. the tax burden on consumers will be greater.
C. the tax burden will be the same for both.
D. one cannot say who will bear the greater burden without knowing the tax.

30. If elasticity of demand is .7, elasticity of supply is .7, and a 5 percent excise tax is levied on the good:
A. the tax burden on suppliers will be greater.
B. the tax burden on consumers will be greater.
C. the tax burden will be the same for both.
D. one cannot say who will bear the greater burden without knowing the tax.

31. Suppose the equilibrium price of CDs is $10 a CD. At that price, the quantity of CDs demanded and
supplied is 100,000. If a $6 tax per CD paid by suppliers increases the equilibrium price to $14 per CD
and reduces the equilibrium quantity sold to 90,000:
A. suppliers pay a greater portion of the tax because they are more price elastic.
B. consumers pay a greater portion of the tax because they are less price elastic.
C. suppliers pay a greater portion of the tax because the tax is levied on them.
D. suppliers pay a greater portion of the tax because they are less price elastic.
32. Refer to the graphs shown. The burden of the tax is borne entirely by consumers in graphs:

A. A and D.
B. B and C.
C. C and D.
D. B and D.

33. Refer to the graph above. The burden of the tax is borne entirely by sellers in graphs:
A. A and D.
B. B and C.
C. C and D.
D. B and D.

34. Refer to the graphs above. The most tax revenue collected by a given per-unit tax on producers is
shown by graphs:
A. A and D.
B. B and C.
C. C and D.
D. B and D.

35. Refer to the graphs above. Deadweight loss is the least with the imposition of a given per-unit tax on
producers in graphs:
A. A and D.
B. B and C.
C. C and D.
D. B and D.
36. Refer to the graphs shown. In which graph is there no producer surplus either with or without a per-
unit tax?

A. A
B. B
C. C
D. D

37. Refer to the graphs shown. In which graph is there no consumer surplus either with or without a per-
unit tax?

A. A
B. B
C. C
D. D

38. Suppose the equilibrium price of textbooks is $40 a textbook. At that price, the quantity of textbooks
demanded and supplied is 20,000. If a $5 tax per textbook paid by consumers increases the price
paid by consumers to $42 a textbook and reduces the equilibrium quantity sold to 18,000, elasticity
of:
A. demand is 1.4 and elasticity of supply is 2.16. Consumers pay a larger portion of the tax.
B. demand is 0.7 and elasticity of supply is 46. Consumers pay a smaller portion of the tax.
C. supply is 1.4 and elasticity of demand is 2.16. Suppliers pay a larger portion of the tax.
D. supply is 0.7 and elasticity of demand is 46. Suppliers pay a smaller portion of the tax.

39. Given the same price elasticity of supply, sellers would be able to pass along the largest portion of a
10 percent tax on which item?
A. Beef with a price elasticity of demand of .62
B. Pork with a price elasticity of demand of .73
C. Chicken with a price elasticity of demand of .32
D. Fish with a price elasticity of demand of .12
40. Given the same price elasticity of supply, sellers would be able to pass along the smallest portion of a
10 percent tax on which item?
A. Beef with a price elasticity of demand of .62
B. Pork with a price elasticity of demand of .73
C. Chicken with a price elasticity of demand of .32
D. Fish with a price elasticity of demand of .12

41. Those with more inelastic demands will bear a larger burden of a tax because they:
A. have more buying power.
B. have more income.
C. will switch to other products with a tax.
D. have fewer substitutes for that good.

42. Refer to the following graph.

A $4 tax is levied on suppliers (represented by S0 without the tax). From the graph and tax structure you
know that the:
A. elasticities of supply and demand are about the same.
B. elasticity of supply is less than the elasticity of demand.
C. elasticity of demand is less than the elasticity of supply.
D. elasticities cannot be calculated.

43. A local government is considering a 10 percent tax on items A, B, and C. They want to tax only those
goods for which the burden of the tax is lowest on suppliers. They know that the elasticity of supply
of all the suppliers in question is about equal and have observed that when the price of A, B, and C
rose 10 percent, total sales receipts for A and B rose 2 percent but declined 2 percent for C. From
this information, they should:
A. tax A and B but not C.
B. tax A, B, and C equally.
C. tax C but not A and B.
D. You need to know the volume of sales to determine the answer.
44. Refer to the graph shown. Given the same supply elasticity, the burden of a 10 percent tax would be
borne the most by the consumer in segment:

A. AB.
B. BC.
C. CD.
D. DE.

45. Refer to the graph above. If the elasticity of supply is 1, the burden of the tax will be shared equally
by consumers and suppliers at which point?
A. A
B. C
C. E
D. It depends on who pays the tax.

46. Given the same supply elasticity, the burden of a 10 percent tax on suppliers would be greatest on
consumers within what price range?
A. $2 and $4
B. $4 and $6
C. $6 and $8
D. $8 and $10

47. An excise tax is imposed on smartphones. If the elasticity of demand is 2 and the elasticity of supply
is 1, we can predict that:
A. consumers will bear the full tax burden.
B. sellers will bear the full tax burden.
C. consumers will bear 2/3 of the tax burden.
D. sellers will bear 2/3 of the tax burden.

48. When elasticities of supply and demand are both equal to 1, the burden of a tax will be:
A. entirely on buyers.
B. entirely on sellers.
C. half on buyers and half on sellers.
D. mostly on buyers.
49. Suppose that 75 percent of a cigarette tax is borne by consumers. If the supply elasticity is 1, the
demand elasticity is equal to:
A. 1.
B. 1/2.
C. 1/3.
D. 1/4.

50. The price of gasoline is generally higher in Hawaii than in the continental United States. Therefore,
the Hawaiian legislature passed a law forbidding gas stations from charging a price higher than the
average price of gas on the West Coast of the United States. This is an example of:
A. a price floor.
B. a price ceiling.
C. a quota.
D. a tax.

51. The price of gasoline is generally higher in Hawaii than in the continental United States. Therefore,
the Hawaiian legislature passed a law forbidding gas stations from charging a price higher than the
average price of gas on the West Coast of the United States. As time progresses, one would expect
the resulting:
A. surplus of gas in Hawaii to rise.
B. surplus of gas in Hawaii to fall.
C. shortage of gas in Hawaii to rise.
D. shortage of gas in Hawaii to fall.

52. Refer to the following graph.

With an effective price ceiling at $3, the effect is an implicit tax on:
A. suppliers equal to $60.
B. suppliers equal to $80.
C. consumers equal to $60.
D. consumers equal to $80.
53. Refer to the graph shown. With an effective price floor at $8, total surplus is reduced by:

A. 25.
B. 45.
C. 90.
D. 100.

54. Refer to the graph above. An effective price floor at $8 imposes a deadweight loss of:
A. 25.
B. 45.
C. 90.
D. 100.

55. Refer to the graph above. An effective price floor at $8 causes consumer surplus to:
A. increase from 10 to 62.50.
B. fall from 62.50 to 10.
C. increase from 120 to 130.
D. fall from 320 to 80.

56. Refer to the graph above. An effective price floor at $8 causes producer surplus to:
A. increase from 10 to 80.
B. fall from 62.5 to 10.
C. increase from 62.5 to 70.
D. fall from 70 to 62.5.

57. Refer to the graph above. With an effective price floor at $8, the effect is an implicit tax on:
A. suppliers equal to $50.
B. suppliers equal to $30.
C. consumers equal to $50.
D. consumers equal to $30.

58. Taxes:
A. cause market shortages.
B. cause the equilibrium quantity to increase.
C. create a wedge between the price consumers pay and the price suppliers receive.
D. cause the price consumers pay to equal the price suppliers receive.