Chapter 4: Economic Efficiency, Government Price Setting, and Taxes

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1. The difference between the ________ for a good and the ________ is called consumer surplus.
A. highest price a consumer is willing to pay; lowest price a consumer is willing to pay
B. lowest price a consumer is willing to pay; price the consumer actually pays
C. highest price a consumer is willing to pay; price the consumer actually pays
D. price the consumer actually pays; actual cost to the producer
Answer: C
Diff: 1

2. New York City has about two million apartments. Of this number
A. all are subject to rent control. B. about one-half are subject to rent control.
C. all are subject to price floors. D. about 10 percent are subject to rent control.
Answer: B
Diff: 1

3. Suppose there are two cities that have rent controlled apartments. In one city (Albany) all apartments are
subject to rent control; in the other city (Halftrack) one-half of the apartments are rent controlled. Which of
the following is most likely to be true?
A. It will be difficult to find a rent-controlled apartment in Albany or Halftrack; rents for the Halftrack
apartments not subject to controls will be higher than they would be without rent control.
B. It will be easier to find an affordable apartment in Albany since rents will be low across the board.
C. It will be easier to find an affordable apartment in Halftrack, either a rent-controlled apartment or
another apartment, at a reasonable price.
D. It will be impossible to rent an apartment in either city at any price.
Answer: A
Diff: 2

4. Juanita goes to the Hardware Emporium to buy a new circular saw. She is willing to pay $120 for a new saw,
but buys one on sale for $85. Juanita's consumer surplus from the purchase is
A. $35. B. $85. C. $120. D. $205.
Answer: A
Diff: 1

5. Brett buys a new cell phone for $100. He receives consumer surplus of $80 from the purchase. How much
does Brett value his cell phone?
A. $180 B. $100 C. $80 D. $20
Answer: A
Diff: 1

6. The maximum price that a buyer is willing to pay for a good measures his
A. consumer surplus. B. marginal benefit. C. willingness to pay. D. producer surplus.
Answer: C
Diff: 1
 7. A consumer is willing to purchase a product up to the point where
A. he spends all of his income.
B. the marginal benefit is equal to the price of the product.
C. the quantity demanded is equal to the quantity supplied.
D. he is indifferent between consuming and saving.
Answer: B
Diff: 1

8. The additional benefit to a consumer from consuming one more unit of a good or service
A. is equal to consumer surplus.
B. is equal to the opportunity cost of consuming the good or service.
C. is equal to marginal benefit.
D. is equal to economic surplus.
Answer: C
Diff: 1

9. Which of the following statements best describes the concept of consumer surplus?
A. "I paid $89 for a microwave oven last week. This week the same store is selling the same microwave
oven for $69."
B. "I sold my hard copy of Harry Potter and the Half-Blood Prince to a used book store for $10 even though I
was willing to sell it for $5."
C. "Target was having a sale on tube socks so I bought 5 pairs."
D. "I was going to pay $200 for new sunglasses that I had seen at the Oakley store but I ended up paying
only $140 for the same sunglasses."
Answer: D
Diff: 1

10. Each point on a demand curve shows

A. the willingness of consumers to purchase a product at different prices.
B. the consumer surplus received from purchasing a given quantity of a product.
C. the economic surplus received from purchasing a given quantity of a product.
D. the legally determined maximum price that sellers may charge for a given quantity of a product.
Answer: A
Diff: 2

Table 4-1

Consumer Willingness to Pay

Curly $50
Moe 30
Larry 15
11. Refer to Table 4-1. The table above lists the highest prices three consumers, Curly, Moe, and Larry, are willing
to pay for a bottle of champagne. If the price of one of the bottles is $24 dollars
A. Curly will buy two bottles, Moe will buy one bottle and Larry will buy no bottles.
B. Curly will receive $26 of consumer surplus from buying one bottle.
C. Curly and Moe receive a total of $80 of consumer surplus from buying one bottle each. Larry will buy
no bottles.
D. Larry will receive $15 of consumer surplus since he will buy no bottles.
Answer: B
 Diff: 2

12. Refer to Table 4-1. The table above lists the highest prices three consumers, Curly, Moe, and Larry, are willing
to pay for a bottle of champagne. If the price of the champagne falls from $24 to $14
A. consumer surplus increases from $32 to $53.
B. Curly will buy four bottles; Moe will buy two bottles, and Larry will buy one bottle.
C. consumer surplus will increase from $80 to $95.
D. Larry and Moe will receive more consumer surplus than Curly.
Answer: A
Diff: 2

13. The additional cost to a firm of producing one more unit of a good or service is the
A. minimum cost. B. total cost. C. opportunity cost. D. marginal cost.
Answer: D
Diff: 1

Table 4-2

Marginal Cost
Marko's Polos (dollars)
1st shirt $7
2nd shirt 10
3rd shirt 15
4th shirt 20
14. Refer to Table 4-2. The table above lists the marginal cost of polo shirts by Marko's, a firm that specializes in
producing men's clothing. If the market price of Marko's polo shirts is $18
A. Marko's will produce four shirts.
B. producer surplus from the first shirt is $18.
C. producer surplus will equal $22.
D. there will be a surplus; as a result, the price will fall to $7.
Answer: C
Diff: 3

15. Refer to Table 4-2. The table above lists the marginal cost of polo shirts by Marko's, a firm that specializes in
producing men's clothing. If the price of polo shirts increases from $15 to $20
A. consumers will buy no polo shirts.
B. the marginal cost of producing the third polo shirt will increase to $20.
C. producer surplus will rise from $13 to $28.
D. there will be a surplus of polo shirts.
Answer: C
Diff: 3

16. The area above the market supply curve and below the market price
A. is equal to the total amount of producer surplus in a market.
B. is equal to the marginal cost of the last unit produced.
C. is equal to the total amount of economic surplus in a market.
D. is equal to the total cost of production.
Answer: A
 Diff: 1

17. The area above the market supply curve and below the market price is equal to the
A. consumer surplus. B. producer surplus. C. marginal benefit. D. marginal cost.
Answer: B
Diff: 2

18. Consumer surplus in a market for a product would be equal to the area under the demand curve if
A. producer surplus was equal to zero.
B. marginal cost was equal to the market price.
C. the product was produced in a perfectly competitive market.
D. the market price was zero.
Answer: D
Diff: 2

19. Which of the following statements is not true?

A. Consumer surplus measures the difference between the highest price a consumer is willing to pay for a
product and the price she actually pays.
B. Marginal benefit is the additional benefit to a consumer from consuming one more unit of a product.
C. Consumer surplus measures the net benefit from participating in a market.
D. Producer surplus measures the total benefit received by producers from participating in a market.
Answer: D
Diff: 2

20. A supply curve shows

A. the quantities sold at different prices.
B. the marginal cost of producing one more unit of a good or service.
C. the marginal benefit from buying one more unit of a good or service.
D. the total cost of producing different quantities of a good or service.
Answer: B
Diff: 1

21. The willingness of consumers to buy a product at different prices is shown on a

A. demand curve. B. supply curve.
C. production possibilities frontier. D. marginal cost curve.
Answer: A
Diff: 1

Figure 4-1
Figure 4-1 shows Kendra's demand for ice-cream cones curve.

22. Refer to Figure 4-1. Kendra's marginal benefit from consuming the second ice cream cone is
A. $6.50 B. $6.00 C. $3.00 D. $2.25
Answer: C
Diff: 1

23. Refer to Figure 4-1. If the market price is $2.50, what is the consumer surplus on the second ice cream cone?
A. $0.50 B. $1.50 C. $3.00 D. $10.50
Answer: A
Diff: 1

24. Refer to Figure 4-1. If the market price is $2.50, what is Kendra's consumer surplus?
A. $9.00 B. $7.50 C. $1.50 D. $0
Answer: C
Diff: 2

25. Refer to Figure 4-1. What is the total amount that Kendra is willing to pay for 3 ice cream cones?
A. $2.50 B. $7.50 C. $9.00 D. $13.50
Answer: C
Diff: 2

26. Refer to Figure 4-1. If the market price is $2.50, what is the maximum number of ice cream cones that Kendra
will buy?
A. 1 B. 2 C. 3 D. 4
Answer: C
Diff: 1

27. Suppliers will be willing to supply a product in all of the following situations except
A. the price received is greater than the additional cost of producing the product.
B. the price received is at least equal to the additional cost of producing the product.
C. the price received is equal to the additional cost of producing the product.
D. the price received is less than the additional cost of producing the product.
Answer: D
Diff: 1

28. The difference between the lowest price a firm would have been willing to accept and the price it actually
receives from the sale of a product is called
A. producer surplus. B. profit. C. marginal revenue. D. price differential.
Answer: A
Diff: 1

Figure 4-2

29. Refer to Figure 4-2. What area represents producer surplus at a price of P1?
A. C B. A + C C. C + E D. A + C + E
Answer: A
Diff: 1

30. Refer to Figure 4-2. What area represents the decrease in producer surplus when the market price falls from
P2 to P1?
A. C + E B. A + C + E C. A + B D. B + D
Answer: C
Diff: 2

31. Two economists from Northwestern University estimated the benefit households received from subscribing
to broadband Internet service. They found that in 2006, 47 million consumers paid an average of $36 per
month to subscribe to a broadband Internet service, and estimated the value of total consumer surplus for
these subscribers was equal to $890.5 million. Based on these numbers, what was the average monthly
consumer surplus per subscriber for broadband Internet service?
A. $0.05 B. $0.77 C. $13.06 D. $18.95
Answer: D
Diff: 2

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
32. Producer surplus is the difference between the highest price someone is willing to pay and the price he
actually pays.
Answer: True False
Diff: 1

33. The total amount of producer surplus in a market is equal to the area above the market supply curve and
below the market price.
Answer: True False
Diff: 1
 34. The additional cost to a firm of producing one more unit of a good or service is equal to producer surplus.
Answer: True False
Diff: 1

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
35. What is consumer surplus? Why would policy makers be interested in consumer surplus?
Answer: Consumer surplus is the difference between what a consumer is willing to pay for a product and what
she actually pays for the product. Since consumer surplus measures the benefit that consumers receive
from a good as they themselves perceive it, it serves as a good measure of economic well-being. Thus, if
policy makers care about consumer preferences, they could use this measure to make normative
judgments about market outcomes.
Diff: 2

36. Assume the market price for tangerines is $18.00 per bushel. At the market price, tangerine growers are
willing to supply a quantity of 12,000 bushels per week. The quantity supplied drops to zero when the price
falls to $5.00 per bushel. Construct a graph showing this data, calculate the total producer surplus in the
market for tangerines, and show the total producer surplus on the graph.
Answer:

The total producer surplus is (1/2 × $13 × 12,000) = $78,000.

Diff: 2

37. The market price for coffee is $2.25 per cup. Austin is willing to pay $5.00 per cup, Colin is willing to pay $4.00
per cup, Lucy is willing to pay $3.00 per cup, and Ike is willing to pay $2.00 per cup. Construct a graph
showing the consumer surplus for each cup of coffee purchased. How many cups of coffee will be purchased?
What is the value of the consumer surplus each of the four consumers receives from their coffee purchases?
Answer:

3 cups of coffee will be purchased. Austin's consumer surplus is $2.75. Colin's consumer surplus is
$1.75. Lucy's consumer surplus is $0.50. Ike receives no consumer surplus since he will not be willing to
purchase a cup of coffee.
Diff: 2
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
38. In a competitive market equilibrium the ________ equals the ________ of the last unit sold.
A. total profit; marginal benefit B. total cost; marginal cost
C. profit; selling price D. marginal benefit; marginal cost
Answer: D
Diff: 1

39. When the marginal benefit equals the marginal cost of the last unit sold in a competitive market
A. the net benefit of consumers is equal to the net benefit of producers.
B. an economically efficient level of output is produced.
C. producer surplus is equal to consumer surplus.
D. total benefit is equal to total cost.
Answer: B
Diff: 1

Figure 4-3

Figure 4-3 shows the market for granola. The market is initially in equilibrium at a price of P 1 and a quantity of Q1. Now
suppose producers decide to cut output to Q2 in order to raise the price to P2.

40. Refer to Figure 4-3. What area represents consumer surplus at P2?
A. A B. A + B C. B + C D. A + B + D + F
Answer: A
Diff: 1

41. Refer to Figure 4-3. What area represents producer surplus at P2?
A. A + B + D B. B + D C. B + D + G D. B + C + D + E
Answer: B
Diff: 1

42. Refer to Figure 4-3. What area represents the deadweight loss at P2?
A. C + E + H B. G + H C. C + E D. B + C
Answer: C
Diff: 1

43. Refer to Figure 4-3. At the price P2 consumers are willing to buy the Q2 pounds of granola. Is this an
economi cally efficient quantity?
A. No, the marginal benefit of the last unit (Q2) exceeds the marginal cost of that last unit.
B. Yes, otherwise consumers would not buy Q2 units.
C. Yes, because the price P2 shows what consumers are willing to pay for the product.
D. No, the marginal cost of the last unit (Q2) exceeds the marginal benefit of the last unit.
Answer: A
Diff: 1

44. Deadweight loss refers to

A. the opportunity cost to firms from producing the equilibrium quantity in a competitive market.
B. the sum of consumer and producer surplus.
C. the loss of economic surplus when the marginal benefit equals the marginal cost of the last unit
produced.
D. the reduction in economic surplus resulting from not being in competitive equilibrium.
Answer: D
Diff: 1

45. The sum of consumer surplus and producer surplus is equal to

A. the deadweight loss. B. the economic surplus.
C. zero. D. total profit.
Answer: B
Diff: 1

46. Economic surplus is maximized in a competitive market when

A. demand is equal to supply.
B. the deadweight loss equals the sum of consumer surplus and producer surplus.
C. marginal benefit equals marginal cost.
D. producers sell the quantity that consumers are willing to buy.
Answer: C
Diff: 2

47. ________ is defined as a market outcome in which the marginal benefit to consumers of the last unit produced
is equal to the marginal cost of production, and in which the sum of consumer surplus and producer surplus
is at a maximum.
A. Economic efficiency B. Consumer efficiency
C. Producer efficiency D. Deadweight efficiency
Answer: A
Diff: 2

48. If, in a competitive market, marginal benefit is greater than marginal cost
A. the net benefit to consumers from participating in the market is greater than the net benefit to producers.
B. the government must force producers to lower price in order to achieve economic efficiency.
C. the quantity sold is greater than the equilibrium quantity.
D. the quantity sold is less than the equilibrium quantity.
Answer: D
Diff: 3
49. In a competitive market the ________ curve shows the marginal benefit received by consumers and the
________ curve shows the marginal cost to producers.
A. .demand; supply B. supply; demand
C. demand; market demand D. supply; market supply
Answer: A
Diff: 1

Figure 4-4

50. Refer to Figure 4-4. The figure above represents the market for iced tea. Assume that this is a competitive
market. At a price of $3
A. the marginal cost of iced tea is greater than the marginal benefit; therefore, output is inefficiently low.
B. producers should lower the price to $1 in order to sell the quantity demanded of 10,000.
C. the marginal benefit of iced tea is greater than the marginal cost; therefore, output is inefficiently low.
D. the marginal benefit of iced tea is greater than the marginal cost; therefore, output is inefficiently high.
Answer: C
Diff: 2

51. Refer to Figure 4-4. The figure above represents the market for iced tea. Assume that this is a competitive
market. If the price of iced tea is $1
A. the quantity supplied is less than the economically efficient quantity.
B. the quantity supplied is economically efficient but the quantity demanded is economically inefficient.
C. economic surplus is maximized.
D. not enough consumers want to buy iced tea.
Answer: A
Diff: 1

52. Refer to Figure 4-4. The figure above represents the market for iced tea. Assume that this is a competitive
market. If the price of iced tea is $3, what changes in the market would result in an economically efficient
output?
A. The price would decrease, the quantity supplied would increase, and the quantity demanded would
decrease.
B. The quantity supplied would decrease, the quantity demanded would increase and the equilibrium
price would decrease.
C. The price would decrease, the demand would increase and the supply would decrease.
D. The price would decrease, quantity demanded would increase and quantity supplied would decrease.
Answer: D
Diff: 1
 53. Refer to Figure 4-4. The figure above represents the market for iced tea. Assume that this is a competitive
market. If 20,000 units of iced tea are sold
A. the deadweight loss is equal to economic surplus.
B. producer surplus equals consumer surplus.
C. the marginal benefit of each of the 20,000 units of iced tea equals $3.
D. marginal benefit is equal to marginal cost.
Answer: D
Diff: 1

54. Refer to Figure 4-4. The figure above represents the market for iced tea. Assume that this is a competitive
market. Which of the following is true?
A. If the price of iced tea is $3 the output will be economically efficient but there will be a deadweight loss.
B. If the price of iced tea is $3 consumers will purchase more than the economically efficient output.
C. Both 10,000 and 30,000 are economically inefficient rates of output.
D. If the price of iced tea is $3 producers will sell 30,000 units of iced tea but this output will be
economically inefficient.
Answer: C
Diff: 1

55. In a competitive market when there is no deadweight loss,

A. consumer surplus is minimized.
B. producer surplus is minimized.
C. consumer surplus plus producer surplus is minimized.
D. consumer surplus plus producer surplus is maximized.
Answer: D
Diff: 1

56. Economic efficiency is achieved when there is a market outcome in which the marginal benefit to consumers
of the last unit produced is equal to its marginal cost of production and
A. economic surplus plus consumer surplus equals producer surplus.
B. consumer surplus plus producer surplus is maximized.
C. economic surplus is minimized.
D. the difference between consumer surplus and producer surplus is maximized.
Answer: B
Diff: 2

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
57. There will be no deadweight loss if the marginal benefit to consumers is equal to the marginal cost of
production and the sum of consumer surplus and producer surplus is maximized.
Answer: True False
Diff: 1

58. The difference between consumer surplus and producer surplus in a market is equal to the deadweight loss.
Answer: True False
Diff: 1
 59. Equilibrium in a competitive market results in the greatest amount of economic surplus from the production
of a good or service.
Answer: True False
Diff: 1

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
60. What is deadweight loss? When is deadweight loss equal to zero?
Answer: Deadweight loss is the reduction in economic surplus resulting from a market not being in competitive
equilibrium. Deadweight loss is equal to zero when the sum of consumer surplus and producer surplus
is maximized, which occurs when the market is in competitive equilibrium.
Diff: 1

61. The graph below represents the market for alfalfa. The market price is $7.00 per bushel. Identify the areas
representing consumer surplus, producer surplus, and economic surplus.

Answer: Consumer surplus is represented by area A.

Producer surplus is represented by area B.
Economic surplus is represented by area A + B.
Diff: 1

62. The graph below represents the market for alfalfa. The equilibrium price is $7.00 per bushel, but the market
price is $9.00 per bushel. Identify the areas representing consumer surplus, producer surplus, and
deadweight loss at the equilibrium price of $7.00 and at the market price of $9.00.

Answer: At the equilibrium price of $7.00:

Consumer surplus is represented by area A + B + C.
Producer surplus is represented by area D + E.
There is no deadweight loss.

At the market price of $9.00:

Consumer surplus is represented by area A.
Producer surplus is represented by area B + D.
Deadweight loss is represented by area C + E.
 Diff: 2

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
63. When ________ in a market, the total net benefit to society is maximized.
A. deadweight loss is maximized B. a competitive equilibrium is achieved
C. consumer surplus is minimized D. producer surplus is minimized
Answer: B
Diff: 1

Table 4-3

Quantity of
Hourly Wage Quantity of
Labor
(dollars) Labor Supplied
Demanded
$6.00 350,000 390,000
6.50 360,000 380,000
7.00 370,000 370,000
7.50 380,000 360,000
8.00 390,000 350,000
8.50 400,000 340,000

Table 4-3 shows the demand and supply schedules for the low-skilled labor market in the city of Westover.

64. Refer to Table 4-3. What is the equilibrium hourly wage (W*) and the equilibrium quantity of labor (Q*)?
A. W* = $7.00; Q* = 370,000 B. W* = $6.50; Q* = 380,000
C. W* = $6.50; Q* = 360,000 D. W* = $7.00; Q* = 740,000
Answer: A
Diff: 1

65. Refer to Table 4-3. If a minimum wage of $7.50 an hour is mandated, what is the quantity of labor demanded?
A. 380,000 B. 370,000 C. 360,000 D. 10,000
Answer: C
Diff: 1

66. Refer to Table 4-3. If a minimum wage of $7.50 an hour is mandated, what is the quantity of labor supplied?
A. 390,000 B. 380,000 C. 370,000 D. 340,000
Answer: B
Diff: 1

67. Refer to Table 4-3. If a minimum wage of $7.50 is mandated there will be a
A. shortage of 10,000 units of labor. B. surplus of 10,000 units of labor.
C. shortage of 20,000 units of labor. D. surplus of 20,000 units of labor.
Answer: D
Diff: 1

68. Refer to Table 4-3. Suppose that the quantity of labor demanded increases by 40,000 at each wage level. What
are the new free market equilibrium hourly wage and the new equilibrium quantity of labor?
 A. W = $8.00; Q = 390,000 B. W = $7.50; Q = 380,000
C. W = $6.50; Q = 380,000 D. W = $6.00; Q = 390,000
Answer: A
Diff: 2

69. Which of the following is a consequence of minimum wage laws?

A. Low skilled workers benefit because minimum wage increases the number of jobs providing low skilled
workers with training.
B. Employers will be reluctant to offer low-skill workers jobs with training.
C. Producers have an incentive to offer workers non-wage benefits such as health care benefits and
convenient working hours rather than a higher wage.
D. All workers benefit when the minimum wage is increased.
Answer: B
Diff: 1

70. The minimum wage is an example of

A. a subsidy for low-skilled workers. B. a price floor.
C. a price ceiling. D. a black market.
Answer: B
Diff: 1

71. To affect the market outcome, a price floor

A. must be set above the black market price. B. must be set above the legal price.
C. must be set above the price ceiling. D. must be set above the equilibrium price.
Answer: D
Diff: 1

72. Government intervention in agricultural markets in the U.S. began

A. during World War II to ensure that enough food was available for domestic consumption.
B. after World War I in order to assist farmers to adjust from a war-time economy to a peace-time economy.
C. during the Great Depression.
D. during the Korean War.
Answer: C
Diff: 1

73. A black market is a market where buying and selling take place
A. at prices that violate government price regulations.
B. in non-licensed shops and warehouses.
C. after regular office hours.
D. on foreign soil.
Answer: A
Diff: 1

Figure 4-5
Figure 4-5 shows the market for apartments in Bay City. Recently, the government imposed a rent ceiling at R0.

74. Refer to Figure 4-5. With rent control, the quantity supplied is Q1. Suppose apartment owners ignore the law
and rent this quantity for the highest rent they can get. What is the highest rent they can get?
A. R* B. R1 C. R0 D. more than R1
Answer: B
Diff: 2

75. Refer to Figure 4-5. What is the area that represents consumer surplus after the imposition of the ceiling?
A. A + B+ D B. A + B + C C. A + B + D + F D. A + B + D + F + G
Answer: A
Diff: 2

76. Refer to Figure 4-5. What is the area that represents the producer surplus after the imposition of the ceiling?
A. F + G B. F C. D + F + G D. A + B + D + F + G
Answer: B
Diff: 2

77. Refer to Figure 4-5. What is the area that represents the portion of producer surplus transferred to consumers
as a result of the rent ceiling?
A. D + E B. D + F C. D D. F
Answer: C
Diff: 3

78. Refer to Figure 4-5. What area represents the deadweight loss after the imposition of the ceiling?
A. G + H B. J + H C. C + E + J + H D. C + E
Answer: D
Diff: 2

79. Which term refers to a legally established maximum price that firms may charge?
A. a price ceiling B. a subsidy C. a price floor D. a tariff
Answer: A
Diff: 1

80. In order to be binding a price floor

A. must lie above the free market equilibrium price.
 B. must lie below the free market equilibrium price.
C. must coincide with the free market equilibrium price.
D. must be high enough for firms to earn a profit.
Answer: A
Diff: 2

81. ________ dictates the lowest wage that firms may pay for labor.
A. A maximum wage requirement B. A minimum wage law
C. The black market wage D. A price ceiling wage
Answer: B
Diff: 1

Figure 4-6

Figure 4-6 shows the demand and supply curves for the coffee market. The government believes that the equilibrium price
is too low and tries to help almond growers by setting a price floor at $7.00.

82. Refer to Figure 4-6. What is the value of consumer surplus after the imposition of the price floor?
A. $1,500 B. $2,700 C. 4,500 D. $5,700
Answer: A
Diff: 3

83. Refer to Figure 4-6. What is the value of producer surplus after the imposition of the price floor?
A. $3,000 B. $3,600 C. $4,200 D. $4,500
Answer: A
Diff: 3

84. Refer to Figure 4-6. What is the value of the portion of consumer surplus that has been transferred to producer
surplus as a result of the price floor?
A. $1,200 B. $1,500 C. $1,800 D. $3,000
Answer: A
Diff: 3

85. Refer to Figure 4-6. What is the value of the deadweight loss after the imposition of the price floor?
A. $600 B. $1,800 C. $2,700 D. $3,300
Answer: A
Diff: 3

86. Congress passed the Freedom to Farm Act in 1996. What was the purpose of this Act?
 A. to encourage more people to become farmers
B. to grant free land to farmers in order to produce crops that were particularly scarce
C. to phase out the use of price ceilings in agricultural markets
D. to phase out price floors and return to a free market in agriculture
Answer: D
Diff: 1

87. Because minimum wage is a price floor

A. it will be set below the market equilibrium price.
B. it will create a deadweight loss.
C. it will increase the number of jobs available in the labor market.
D. it will maximize consumer surplus.
Answer: B
Diff: 1

88. Increases in the minimum wage are intended to raise the incomes of low-income workers. Many economists
favor a different policy to achieve this goal, a policy that avoids the deadweight losses that result from the
minimum wage. What is this policy?
A. distribution of food stamps to low-income consumers
B. distribution of vouchers that can be used for rent or mortgage payments
C. the Alternative Minimum Tax
D. the earned income tax credit
Answer: D
Diff: 2

89. Which of the follow is a result of imposing a rent ceiling?

A. Some consumer surplus is converted to producer surplus.
B. There is an increase in the quantity of apartments supplied.
C. There is an increase in the quantity of apartments demanded.
D. The marginal benefit of the last apartment rented is less than the marginal cost of supplying it.
Answer: C
Diff: 2

90. Which of the following describes the difference between "scarcity" and "shortage"?
A. There is no difference; either word can be used to describe the situation that exists when there is less of a
good or service available than people want.
B. In the economic sense, almost everything is scarce. A shortage of a good or service occurs when the
quantity demanded is greater than the quantity supplied at the current market price.
C. There is a shortage of almost everything. Scarcity occurs only if the quantity demanded of a good or
service is greater than the quantity supplied at the current market price.
D. In the economic sense, almost everything is scarce. A shortage of a good or service occurs when the
quantity demanded is greater than the quantity supplied at the equilibrium price.
Answer: B
Diff: 2

91. In cities with rent controls, the actual rents paid can be ________ than the legal maximum. One explanation
for this is because there is a ________ of apartments, tenants are ________.
A. higher; shortage; often willing to pay rents higher than the law allows
 B. higher; surplus; often forced to pay rents higher than the law allows
C. lower; surplus; never willing to pay rents below the legal maximum
D. lower; shortage; rarely willing to pay rents lower than the law allows
Answer: A
Diff: 2

92. Some economists believe that giving Christmas gifts results in deadweight losses for gift recipients. Which of
the following helps to explain this belief?
A. Many people resent receiving cash for presents rather than gifts.
B. In many cases people would have chosen different gifts for themselves than the ones they received.
C. Many people who give gifts do so because they feel they have to, not because they want to.
D. Economists have found that deadweight losses occur when people receive the same gifts from different
people.
Answer: B
Diff: 2

93. Some economists believe that giving Christmas gifts results in deadweight losses for gift recipients. If the gift
recipient had received the equivalent value in cash instead of the gift,
A. the deadweight loss would have been greater.
B. the deadweight loss would have been zero.
C. the consumer surplus would have been less.
D. the deadweight loss and the consumer surplus would not change since the cash and gift have equal
dollar values.
Answer: B
Diff: 2

94. Which of the following is a result of government price controls?

A. Some people win and some people lose.
B. Price controls benefit poor consumers but harm producers and wealthy consumers.
C. Price controls increase economic efficiency.
D. The deadweight loss from price ceilings is greater than the deadweight loss from price floors.
Answer: A
Diff: 2

95. Economists ________ that price controls are desirable.

A. are in agreement B. are reluctant to state
C. never believe D. only recently agree
Answer: B
Diff: 2

Article Summary

The Department of Health (DOH) in the Philippines announced that the government will enact a price ceiling,
effective August 15, 2009, on six to seven drugs used to treat hypertension, infections, high cholesterol, cancer and
diabetes. Despite the DOH's recommendations on price reductions for these drugs they alleged were overpriced, drug
firms refused to lower their prices, prompting the price ceiling. In the Philippines, the President, upon the
recommendation of the Health Secretary, has the power to impose a price ceiling on essential medicines.
Philippine Health Secretary, Francisco Duque III, claims the drug companies "...have been selling drugs and medicines
in this country for a high price compared to other countries and they've had it so good for such a long time". According
to Duque, the government's objective is to improve public access to essential medicines, especially for poor patients.

Source: Johanna Camille Sisante, contributor, "Govt to set price ceiling on drugs," GMANews.TV, July 20, 2009.

96. Refer to the Article Summary. The price ceiling being implemented by the Phillipine government on the six to
seven drugs will
A. increase the price consumers will pay for these drugs.
B. decrease the quantity of these drugs the manufacturers will be willing to supply.
C. have to be set above the market equilibrium price to be effective.
D. encourage manufacturers to produce and sell more of these drugs to increase their profits.
Answer: B
Diff: 2

97. Refer to the Article Summary. The price ceiling being implemented by the Phillipine government on the six to
seven drugs will have all of the following effects on the market for these drugs except
A. an increase in consumer surplus. B. an increase in producer surplus.
C. an increase in deadweight loss. D. a more efficient equilibrium
Answer: D
Diff: 2

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
98. Government intervention in agriculture began in the Untied States in the 1930s.
Answer: True False
Diff: 1

99. There is a shortage of every good that is scarce.

Answer: True False
Diff: 1

100. All renters benefit from rent control and all landlords lose.
Answer: True False
Diff: 1

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
Figure 4-7

101. Refer to Figure 4-7 which shows the market for watermelons. Suppose the government imposes a price floor
of Pw. How will the price floor affect the quantity supplied, quantity demanded and quantity exchanged?
 Answer: The price floor will have no effect on the market outcome. An effective price floor must lie above the
free market equilibrium. Thus, in this case the market outcome will be determined by forces of demand
and supply.
Diff: 3

Table 4-4

Price Per Quantity Quantity

Bushel Demanded Supplied
(dollars) (bushels) (bushels)
$3 36,000 0
6 30,000 2,000
9 25,000 5,000
12 20,000 10,000
15 16,000 16,000
18 13,000 23,000
21 8,000 30,000
24 3,000 36,000

Table 4-4 above contains information about the wheat market. Answer the following questions based on this table.

102. Refer to Table 4-4. An agricultural price floor is a price that the government guarantees farmers will receive
for a particular crop. Suppose the federal government sets a price floor for wheat at $21 per bushel.
a. What is the amount of shortage or surplus in the wheat market as result of the price floor?
b. If the government agrees to purchase any surplus output at $21, how much will it cost the government?
c. If the government buys all of the farmers' output at the floor price, how many bushels of wheat will it
have to purchase and how much will it cost the government?
d. Suppose the government buys up all of the farmers' output at the floor price and then sells the output to
consumers at whatever price it can get. Under this scheme, what is the price at which the government will be
able to sell off all of the output it had purchased from farmers? What is the revenue received from the
government's sale?
e. In this problem we have considered two government schemes: (1) a price floor is established and the
government purchases any excess output and (2) the government buys all the farmers' output at the floor
price and resells at whatever price it can get. Which scheme will taxpayers prefer?
f. Consider again the two schemes. Which schem e will the farmers prefer?
g. Consider again the two schemes. Which scheme will wheat buyers prefer?
Answer: a. 22,000 surplus.
b. $21 × 22,000 = $462,000.
c. 30,000 bushels × $21 = $630,000.
d. $6 per bushel and government receives $6 × 30,000 = $180,000.
e. Taxpayers prefer scheme (1).
f. In terms of revenue, farmers are indifferent between the two schemes.
g. Wheat buyers prefer scheme (2).
Diff: 3

Figure 4-8
Figure 4-8 shows the market for taxi rides. The following question(s) are based on this figure.

103. Refer to Figure 4-8. To legally drive a taxicab in New York City, you must have a medallion issued by the city
government. Assume that only 13,200 medallions have been issued. Let's also assume this puts an absolute
limit on the number of taxi rides that can be supplied in New York City on any day, because no one breaks the
law by driving a taxi without a medallion. Assume as well that each taxi provides 6 trips per day. In that case,
the quantity supplied of taxi rides is 79,200 (or 6 rides per taxi × 13,200 taxis). This is shown in the diagram
with a vertical line at this quantity. Assume that there are no government controls on the prices that drivers
can charge for rides.
a. What would the equilibrium price and quantity be in this market if there were no medallion requirement?
b. If there were no medallion requirement, indicate the area that represents consumer surplus.
c. If there were no medallion requirement, indicate the area that represents producer surplus.
d. If there were no medallion requirement, indicate the area that represents economic surplus.
e. What are the price and quantity with the medallion requirement?
f. With a medallion requirement in place, what area represents consumer surplus?
g. With a medallion requirement in place, what area represents producer surplus?
h. With a medallion requirement in place, what area represents the deadweight loss?
i. Based on your answers to parts (c) and (g), are taxicab drivers better off with the medallion requirement
for taxicabs than without?
j. Are consumers better off with or without the medallion requirement for taxicabs?
Answer: a. P = $20, Q = 100,000 rides.
b. Consumer Surplus = A + B+ H.
c. Producer Surplus = C + D + J.
d. Economic Surplus = A + B + C + D + H + J.
e. P = $30, Q = 79,200.
f. Consumer surplus with medallion = A.
g. Producer surplus with medallion = B + C + D.
h. Deadweight loss = H + J.
i. Taxi drivers are better off with the requirement because producer surplus is greater by the area of B
- J.
j. Consumers are better off without the medallion requirement.
Diff: 3

104. Using a supply and demand graph, illustrate the market for rent-controlled apartments with the following
data:

Equilibrium rent without rent control: $1,500

Rent with rent control: $700
Quantity of apartments demanded with rent control: 50,000
Quantity of apartments supplied with rent control: 20,000

What is the value of the initial shortage of apartments with rent control?
Now leads to a reduction in the supply of apartments, and the new quantity supplied is now 15,000. Illustrate this
assume on your graph.
rent
control What is the value of the shortage of apartments following the decrease in supply?
Answer:

The initial shortage of apartments is (50,000 - 20,000) = 30,000.

The reduction in supply is shown by the shift from S1 to S2.
The shortage following the decrease in supply is (50,000 - 15,000) = 35,000.

Diff: 3

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
105. Tax incidence is the actual division of the
A. burden of the tax between buyers and sellers in a market.
B. tax revenues between government agencies.
C. tax revenues between the federal government and state governments.
D. population into different tax brackets.
Answer: A
Diff: 1

Figure 4-9

Figure 4-9 shows the market for cigarettes. The government plans to impose a unit tax in this market.

106. Refer to Figure 4-9. What is the size of the unit tax?
A. $8 B. $5
C. $3 D. cannot be determined from the figure
Answer: B
Diff: 1
107. Refer to Figure 4-9. How much of the tax is paid by buyers?
A. $8 B. $5 C. $4 D. $3
Answer: D
Diff: 2

108. Refer to Figure 4-9. The price buyers pay after the tax is
A. $12. B. $8. C. $5. D. $3.
Answer: B
Diff: 1

109. Refer to Figure 4-9. For each unit sold, the price sellers receive after the tax (net of tax) is
A. $12. B. $8. C. $4.40. D. $3.
Answer: D
Diff: 1

110. Refer to Figure 4-9. How much of the tax is paid by producers?
A. $45 B. $8 C. $3 D. $2
Answer: D
Diff: 2

111. Refer to Figure 4-9. As a result of the tax, is there a loss in producer surplus?
A. Yes, because producers are not selling as many units now.
B. No, because the consumer pays the tax.
C. No, because the market reaches a new equilibrium
D. No, because producers are able to raise the price to cover their tax burden.
Answer: A
Diff: 2

112. The government proposes a tax on halogen light bulbs. Sellers will bear the entire burden of the tax if the
A. supply curve of halogen bulbs is horizontal.
B. demand curve for halogen bulbs is vertical.
C. demand curve for halogen bulbs is horizontal.
D. demand curve is downward sloping and the supply curve is upward sloping.
Answer: C
Diff: 3

113. Buyers will bear the entire burden of a unit tax if the demand curve for a product is
A. horizontal. B. vertical.
C. downward sloping. D. upward sloping.
Answer: B
Diff: 2

114. Suppose the demand curve for a product is downward sloping and the supply curve is upward sloping. If a
unit tax is imposed in the market for this product,
A. sellers bear the entire burden of the tax.
B. the tax burden will be shared among the government, buyers and sellers.
 C. buyers bear the entire burden of the tax.
D. the tax burden will be shared by buyers and sellers.
Answer: D
Diff: 2

Figure 4-10

115. Refer to Figure 4-10. Suppose the market is initially in equilibrium at price P1 and now the government
imposes a tax on every unit sold. Which of the following statements best describes the impact of the tax? For
demand curve D1
A. the producer bears a smaller share of the tax burden if the supply curve is S2.
B. the producer bears a smaller share of the tax burden if the supply curve is S1.
C. the producer's share of the tax burden is the same whether the supply curve is S1 or S2.
D. the producer bears the entire burden of the tax if the supply curve is S2 and the consumer bears the
entire burden of the tax if the supply curve is S1.
Answer: B
Diff: 3

Figure 4-11

116. Refer to Figure 4-11. Suppose the market is initially in equilibrium at price P1 and then the government
imposes a tax on every unit sold. Which of the following statements best describes the impact of the tax?
A. The consumer will bear a greater share of the tax burden if the demand curve is D1.
B. The consumer's share of the tax burden is the same whether the demand curve is D1 or D2.
C. The consumer will bear a greater share of the tax burden if the demand curve is D2.
D. The consumer will bear the entire burden of the tax if the demand curve is D1 and the producer will bear
the entire burden of the tax if the demand curve is D2.
Answer: C
Diff: 2
117. Suppose an excise tax of $0.75 is imposed on every pack of cigarettes sold and sellers are responsible for
paying this tax. How would the imposition of the tax be illustrated in a graph?
A. The supply curve for cigarettes would shift to the left by $0.75.
B. The supply curve for cigarettes would shift to the left by less than $0.75.
C. The supply curve for cigarettes would shift to the left by more than $0.75.
D. The supply curve for cigarettes would shift to the right by $0.75.
Answer: A
Diff: 1

118. In Singapore the government places a $5,000 tax on the buyers of new automobiles. After the purchase of a
new car, a buyer must pay the government $5,000. How would the imposition of the tax on buyers be
illustrated in a graph?
A. The tax will shift the demand curve to the right by $5,000.
B. The tax will shift the demand curve to the left by $5,000.
C. The tax will shift both the demand and supply curve to the right by $5,000.
D. The tax will shift the supply curve to the left by $5,000.
Answer: B
Diff: 2

119. A tax is imposed on employers and workers that are used to fund Social Security and Medicare. This tax is
sometimes referred to as
A. the Income Security Tax. B. the federal income tax.
C. the ACIF. D. the payroll tax.
Answer: D
Diff: 2

120. FICA is a payroll tax imposed on employers and workers that is used to fund Social Security and Medicare.
Which of the following statements regarding the tax is true?
A. Employers are required to pay a greater share of the tax than workers but most economists believe the
burden of the tax is shared equally.
B. Congress wanted the burden of the tax to be greater for employers than for workers.
C. Most economists believe the burden of the tax falls almost entirely on workers.
D. Most economists believe the burden of the tax falls mostly on employers.
Answer: C
Diff: 1

121. "Taxes are what we pay for a civilized society." This statement was made by
A. Adam Smith. B. Oliver Wendell Holmes.
C. Herbert Hoover. D. Franklin Roosevelt.
Answer: B
Diff: 1

122. Economists have shown that the burden of a tax is

A. greater on the buyer when the tax is collected from the buyer.
B. greater on the seller when the tax is collected from the seller.
C. greater on the buyer when the tax is collected from the seller and greater on the seller when the tax is
collected from the buyer.
 D. the same whether the tax is collected from the buyer or the seller.
Answer: D
Diff: 1

123. An efficient tax is

A. a tax that imposes an equal tax burden on buyers and sellers.
B. a tax that raises a maximum amount of revenue.
C. a tax that imposes a small excess burden relative to the tax revenue that it raises.
D. a tax that is used to fund research and development of new technology.
Answer: C
Diff: 1

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
124. The division of the burden of a tax between buyers and sellers in a market is called tax incidence.
Answer: True False
Diff: 1

125. A tax is efficient if it imposes a small excess burden relative to the tax revenue it raises.
Answer: True False
Diff: 1

126. For most goods and services, the burden of a tax is on the sellers.
Answer: True False
Diff: 1

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
127. Employers withhold several taxes from employees ' paychecks, one of which is FICA. Congress requires
employers to pay half of the FICA tax and workers to pay the other half. Does this mean that the burden of the
FICA tax falls evenly on employers and employees? Briefly explain.
Answer: Most economists believe that even though employers and employees each pay half of the FICA tax, the
burden of the tax falls almost entirely on employees. The forces of demand and supply working in the
labor market determine the incidence of the tax, not Congress, so even though the tax is paid evenly by
employers and employees, this does not mean that the burden is shared equally.
Diff: 1

128. Is there a difference between the "true burden" of a tax and who is legally required to pay a tax? Briefly
explain.
Answer: There is a difference. The true burden of a tax refers to the tax incidence, or how much of a tax is
ultimately paid by the sellers and how much is paid by the buyers. The incidence of a tax does not
depend on whether the government collects a tax from the buyers of a good or from the sellers.
Diff: 1

Figure 4-12
 129. Refer to Figure 4-12. The figure above represents demand and supply in the market for cigarettes. Use the
diagram to answer the following questions.
a. How much is the government tax on each pack of cigarettes?
b. What portion of the unit tax is paid by consumers?
c. What portion of the unit tax is paid by producers?
d. What is the quantity sold after the imposition of the tax?
e. What is the after-tax revenue per pack received by producers?
f. What is the total tax revenue collected by the government?
g. What is the value of the excess burden of the tax?
h. Is this cigarette tax efficient?
Answer: a. $1.25
b. Consumer burden =$1.00
c. Producer burden = $0.25
d. Quantity traded = 18 billion
e. Net Price to seller = $1.25
f. Tax Revenue = $22.5 billion ($1.25 × 18 billion)
g. Excess burden (deadweight loss) = $1.25 billion (1/2 × $1.25 × 2 billion)
h. Yes, a tax is efficient if it imposes a small excess burden relative to the tax revenue it raises.
Diff: 2

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
130. The following equations represent the demand and supply for bird feeders.
QD = 35 - P
QS = -5 + 3P

What is the equilibrium price (P) and quantity (Q - in thousands) of bird feeders?
A. P = $10; Q = 25 thousand B. P = $35; Q = 20 thousand
C. P = $20; Q = 20 thousand D. P = $5; Q = 30 thousand
Answer: A
Diff: 3

131. If the price of garlic is represented by equation P = 25 - QD, then the corresponding quantity of garlic
demanded is represented by the equation
A. QD = P - 25. B. QD = P + 25. C. QD = 25 - P. D. QD = -25 + P.
Answer: C
Diff: 1

132. If the quantity of tacos demanded is represented by the equation QD = 20 - 0.5P then the corresponding price
of tacos is represented by the equation
 A. P = 0.5QD + 10. B. P = 40 - 2QD. C. P = 10 - 2QD. D. P = QD + 40.
Answer: B
Diff: 1

133. If the quantity of nail polish supplied is represented by the equation QS = -3 + 2P then the corresponding price
of nail polish is represented by the equation
A. P = 0.5QS + 1.5. B. P = 2QS + 6. C. P = 2QS - 6. D. P = 1.5 - 0.5QS.
Answer: A
Diff: 1

Table 4-5

Demand Supply
P = 50 - QD P = 10 + 1/3 QS
QD = 50 - P QS = 3P - 30
134. Refer to Table 4-5. The equations above describe the demand and supply for Aunt Maud's Premium Hand
Lotion. What are the equilibrium price and quantity (in thousands) for Aunt Maud's Lotion?
A. $20 and 30 thousand B. $30 and 20 thousand
C. $60 and 30 thousand D. $20 and 60 thousand
Answer: A
Diff: 3

135. Refer to Table 4-5. The equations above describe the demand and supply for Aunt Maud's Premium Hand
Lotion. The equilibrium price and quantity for Aunt Maud's lotion are $20 and 30 thousand units. What is
the value of consumer surplus?
A. $300 thousand B. $450 thousand C. $900 thousand D. $1,500 thousand
Answer: B
Diff: 3

136. Refer to Table 4-5. The equations above describe the demand and supply for Aunt Maud's Premium Hand
Lotion. The equilibrium price and quantity for Aunt Maud's lotion are $20 and 30 thousand units. What is
the value of producer surplus?
A. $600 thousand B. $300 thousand C. $150 thousand D. $30 thousand
Answer: C
Diff: 3

137. Refer to Table 4-5. The equations above describe the demand and supply for Aunt Maud's Premium Hand
Lotion. The equilibrium price and quantity for Aunt Maud's lotion are $20 and 30 thousand units. What is
the value of economic surplus in this market?
A. $600 thousand B. $1,050 thousand C. $1,500 thousand D. $2,100 thousand
Answer: A
Diff: 3

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
138. You are given the following market data for Venus automobiles in Saturnia.
Demand: P = 35,000 - 0.5Q
 Su = Price and Q = Quantity.
pply: P
= 8,000 + a. Calculate the equilibrium price and quantity.
0.25Q b. Calculate the consumer surplus in this market.
where P c. Calculate the producer surplus in this market.
Answer: a. Quantity = 36,000: {35,000 - 0.5Q = 8,000 + 0.25Q.; 27,000 = 0.75Q; Q = 36,000.}
Price = $17,000: {P = 35,000 - 0.5(36,000); P = 35,000 - 18,000; P = $17,000.}
b. Consumer surplus = (0.5)($35,000 - $17,000) × 36,000 = $324 million
c. Producer Surplus = (0.5)(17,000 - 8,000) × 36,000 = $162 million.
Diff: 3

139. The demand and supply equations for the peach market are:
Demand: P = 24 - 0.5Q
Supply: P = -6 + 2.5Q
where P = price per bushel, and Q = quantity (in thousands).

a. Calculate the equilibrium price and quantity.

b. Suppose the government guaranteed producers a price of $24 per bushel. What would be the effect on
quantity supplied? Provide a numerical value.
c. By how much would the $24 price change the quantity of peaches demanded? Provide
a numerical value.
d. Would there be a shortage or surplus of peaches?
e. What is the size of this shortage or surplus? Provide a numerical value.
Answer: a. Quantity = 10 thousand bushels: {24 - 0.5Q = -6 + 2.5Q; 30 = 3Q; Q = 10}
Price = $19: {P = 24 - 0.5(10); P = 24 - 5; P = $19}
b. Quantity supplied would increase to 12 thousand bushels: {24 = -6 + 2.5Q; 30 = 2.5Q; Q = 12}
c. Quantity demanded would fall to zero bushels: {24 = 24 - 0.5Q; 0 = -0.5Q; Q = 0}
d. There would be a surplus.
e. Surplus = 12,000 - 0 = 12 thousand bushels.
Diff: 2