MULTIPLE CHOICE

Identify the choice that best completes the statement or answers the question.

1. Minimum-wage laws dictate

a. the exact wage that firms must pay workers.
b. a maximum wage that firms may pay workers.
c. a minimum wage that firms may pay workers.
d. a minimum wage and a maximum wage that firms may pay workers.

2. Price controls are usually enacted

a. as a means of raising revenue for public purposes.
b. when policymakers believe that the market price of a good or service is unfair to buyers
or sellers.
c. when policymakers detect inefficiencies in a market.
d. All of the above are correct.

Inefficiencies like monopoly or externalities: anti-trust and other tools

3. Price controls
a. always produce a fair outcome.
b. always produce an efficient outcome.
c. can generate inequities of their own.
d. Both (a) and (b) are correct.

4. Policymakers use taxes

a. to raise revenue for public purposes, but not to influence market outcomes.
b. both to raise revenue for public purposes and to influence market outcomes.
c. when they realize that price controls alone are insufficient to correct market inequities.
d. only in those markets in which the burden of the tax falls clearly on the sellers.

5. If a nonbinding price ceiling is imposed on a market, then

a. the quantity sold in the market will decrease.
b. the quantity sold in the market will stay the same.
c. the price in the market will increase.
d. the price in the market will decrease.

6. If the government removes a binding price ceiling from a market, then the price paid by
buyers will
a. increase and the quantity sold in the market will increase.
b. increase and the quantity sold in the market will decrease.
c. decrease and the quantity sold in the market will increase.
d. decrease and the quantity sold in the market will decrease.
Table 6-2.
Price Quantity Quantity
Demanded Supplied
$0 250 0
$5 200 75
$10 150 150
$15 100 225
$20 50 300
$25 0 375

7. Refer to Table 6-2. Which of the following statements is correct?

a. A price ceiling set at $5 will be binding and will result in a shortage of 50 units.
b. A price ceiling set at $5 will be binding and will result in a shortage of 75 units.
c. A price ceiling set at $5 will be binding and will result in a shortage of 125 units.
d. A price ceiling set at $5 will not be binding.

8. Refer to Table 6-2. Which of the following statements is correct?

a. A price floor set at $5 will be binding and will result in a surplus of 50 units.
b. A price floor set at $5 will be binding and will result in a surplus of 75 units.
c. A price floor set at $5 will be binding and will result in a surplus of 125 units.
d. A price floor set at $5 will not be binding.
Figure 6-2
Panel (a) Panel (b)

price of wheat price of wheat

S
S

price floor

price floor

D
D
quantity
quantity

9. Refer to Figure 6-2. A binding price floor is shown in

a. both panel (a) and panel (b).
b. panel (a) but not panel (b).
c. panel (b) but not panel (a).
d. neither panel (a) nor panel (b).

10. Refer to Figure 6-2. In panel (b), there will be

a. a shortage of wheat.
b. equilibrium in the market.
c. a surplus of wheat.
d. lines of people waiting to buy wheat.
Figure 6-4
price
10
S
9

3
D
2

10 20 30 40 50 60 70 80 quantity

11. Refer to Figure 6-4. For a price ceiling to be binding in this market, it would have to be
set at
a. any price below $6.
b. a price between $3 and $6.
c. a price between $6 and $9.
d. any price above $6.

12. Refer to Figure 6-4. Suppose a price floor of $7 is imposed on this market. As a result,
a. buyers’ total expenditure on the good decreases by $20.
b. the supply curve shifts to the left so as to now pass through the point (quantity = 40, price
= $7).
c. the quantity of the good demanded decreases by 20 units.
d. the price of the good continues to serve as the rationing mechanism.

13. If a tax is levied on the sellers of a product, then the demand curve
a. will shift down.
b. will shift up.
c. will become flatter.
d. will not shift.
14. If a tax is levied on the sellers of a product, then the supply curve
a. will shift up.
b. will shift down.
c. will become flatter.
d. will not shift.

15. A $0.10 tax levied on the sellers of chocolate bars will cause the
a. supply curve for chocolate bars to shift down by $0.10.
b. supply curve for chocolate bars to shift up by $0.10.
c. demand curve for chocolate bars to shift down by $0.10.
d. demand curve for chocolate bars to shift up by $0.10.

16. When a tax is placed on the sellers of a product, the

a. size of the market decreases.
b. effective price received by sellers decreases and the price paid by buyers increases.
c. supply of the product decreases.
d. All of the above are correct.

17. The size of a tax and the deadweight loss that results from the tax are
a. positively related.
b. negatively related.
c. independent of each other.
d. equal to each other.
Figure 8-10. The vertical distance between points A and B represents the original tax.
Price
12

11
F
10 S
A
9

8
C
7

5 D
4
B
3 G
2

1
D
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Quantity

19. Refer to Figure 8-10. If the government changed the per-unit tax from $5.00 to $2.50,
then the price paid by buyers would be $7.50, the price received by sellers would be $5, and the
quantity sold in the market would be 1.5 units. Compared to the original tax rate, this lower tax
rate would
a. increase government revenue and increase the deadweight loss from the tax.
b. increase government revenue and decrease the deadweight loss from the tax.
c. decrease government revenue and increase the deadweight loss from the tax.
d. decrease government revenue and decrease the deadweight loss from the tax.

20. Refer to Figure 8-10. If the government changed the per-unit tax from $5.00 to $7.50,
then the price paid by buyers would be $10.50, the price received by sellers would be $3, and the
quantity sold in the market would be 0.5 units. Compared to the original tax rate, this higher tax
rate would
a. increase government revenue and increase the deadweight loss from the tax.
b. increase government revenue and decrease the deadweight loss from the tax.
c. decrease government revenue and increase the deadweight loss from the tax.
d. decrease government revenue and decrease the deadweight loss from the tax.

Short Answer

Problem 1:
Suppose the minimum wage is above the equilibrium wage in the market for unskilled labor.
Using a supply and-demand diagram of the market for unskilled labor, show the market wage,
the number of workers who are employed, and the number of workers who are unemployed.
Also show the total wage payments to unskilled workers.

Problem 2:
Hotel rooms in Smalltown go for $100, and 1,000 rooms are rented on a typical day.

a. To raise revenue, the mayor decides to charge hotels a tax of $10 per rented room. After the
tax is imposed, the going rate for hotel rooms rises to $108, and the number of rooms rented falls
to 900. Calculate the amount of revenue this tax raises for Smalltown and the deadweight loss of
the tax. (Hint: The area of a triangle is 1⁄2 3 base 3 height.)

b. The mayor now doubles the tax to $20. The price rises to $116, and the number of rooms
rented falls to 800. Calculate tax revenue and deadweight loss with this larger tax. Do they
double, more than double, or less than double? Explain.