Practice Questions #3

Topics covered :

1. Price ceilings / Price floors
2. Agricultural price support and subsidy program
3. Excise tax
4. Elasticity

1. If a tax is imposed on the production of oil yielded by walrus blubber, our model of demand and supply tells us

• the decrease in the price of walrus oil will be greater if the quantity demanded is less sensitive to price.
• the decrease in the price of walrus oil will be greater if the quantity demanded is more sensitive to price.
• the increase in the price of walrus oil will be greater if the quantity demanded is less sensitive to price.
• the increase in the price of walrus oil will be greater if the quantity demanded is more sensitive to price.
• you walrus hurt the one you love.

2. When the influenza vaccine first became available in the U.S., the government set the price below its equilibrium value. Output was insufficient to fill orders and the government regulated the distribution of the vaccine. Had the vaccine been sold privately without government intervention, excess demand would have been eliminated by

• price rising, demand decreasing, and quantity supplied increasing.
• price rising, quantity demanded decreasing, and supply increasing.
• price rising, quantity demanded decreasing, and quantity supplied increasing.
• price rising, demand decreasing, and supply increasing.
• price rising, demand increasing, and quantity supplied increasing.

3. The following table shows the demand schedule for movies in a small community

a. constant at all points on this demand curve.
b. relatively elastic at all points on this demand curve.
c. relatively inelastic at all points on this demand curve.
d. greater at lower prices than at higher prices.
e. greater at higher prices than at lower prices.

4. Suppose the government enacts a subsidy to producers to increase the producers' income. This strategy will cost the government less when the _____curve is _____, holding everything else constant.
a. demand ; elastic
b. demand ; inelastic
c. supply ; elastic
d. supply ; inelastic
e. demand ; unit-elastic

5. Suppose the cost of production for a good falls by $5, and as a result the market price falls by $5. We can assume that the price elasticity of demand is

• more than 1
• less than 1
• 1
• zero
• infinite

6. Suppose that the demand curve for a good is vertical. In this case we would expect:

• a tax placed on the seller to be borne entirely by the buyer.
• a tax placed on the seller to be borne entirely by the seller.
• Consumer tax incidence to be minimized.
• a and b
• b and c

7. A per-unit tax on the seller and a price support program have a similar effect on a market because

• both raise the amount of the good exchanged in the market
• both raise the price at which the good sells
• both leave excess supply that needs to be purchased by the government
• both result in the cost of production exceeding the value the consumer gets from the good
• both increase consumer's surplus and decrease producer's surplus

8. Assume that initially the market demand curve is Q^D = 1200 - 4P and market supply curve is Q^S = 2P. Then, suppose the government imposes a per-unit tax (an excise tax) of six dollars per unit produced on each firm in the industry.

(a) What is the equilibrium price and equilibrium quantity before the imposition of the tax?
(b) What is the consumer's surplus and producer's surplus at the initial equilibrium price?
(c) Suppose a government bureaucrat sets the price at $210. What is the loss of consumer's surplus at that price?
(d) What is the equilibrium price and equilibrium quantity after the imposition of the tax?
(e) What is the loss of consumer's surplus as a result of this tax imposition?
(f) What is the deadweight loss as a result of this tax imposition?

9. Assume that the market demand curve for wheat is Q^D = 30 - .5P and the market supply curve of wheat is Q^S =- 15+P.

(a) What is the equilibrium price and equilibrium quantity?

(b) Suppose the government decides to have a "price support program" with a price floor set at P_F = 40. What is the excess supply in this corn market? What is the cost of this program to the government?

(c) Suppose, instead, the government decides to have a "government subsidy program" with a guaranteed (or target) price of P_T = 35. What is the price to consumers? What is the subsidy per unit the government has to pay? What is the cost to the government for this program?