Question 1

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, it will collect tax revenue in the amount of:

Accepted Answer

A)  $0. 
B)  $1,200. 
C)  $1,600. 
D)  $2,000.

Question 2

If the demand curve is perfectly elastic, the burden of a tax on suppliers is borne:

Accepted Answer

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.

Question 3

Suppose there are 1,825 taxi medallions in Boston, each valued at about $250,000. Assume the price elasticity of demand for taxi rides is 1; the current price for a taxi ride is $4.75 per mile, and the cost of the ride is $3.00 per mile. How much would a person be willing to pay for a new medallion if the city increased the number of medallions to 2,000? (Hint: The price of the medallions is equal to the total profit from the average total number of miles each medallion will accumulate.)

Accepted Answer

A)  $160,000 
B)  $185,000 
C)  $250,000 
D)  $337,000

Question 4

Assuming a binding price floor, the more elastic the supply and demand curves are, the:

Accepted Answer

A)  smaller the shortage a price floor will create. 
B)  greater the shortage a price floor will create. 
C)  smaller the surplus a price floor will create. 
D)  greater the surplus a price floor will create.

Question 5

Refer to the graph shown. When market supply shifts from S0 to S1, total producer revenue:

Accepted Answer

A)  increases from $2,520 to $3,000. 
B)  increases from $1,260 to $1,500. 
C)  decreases from $3,000 to $2,520. 
D)  decreases from $1,500 to $1,260.

Question 6

Price ceilings create shortages, but taxes do not.

Accepted Answer

A) True 
 B)False

Question 7

Refer to the graph shown. When the market is in equilibrium, consumer surplus is area:

Accepted Answer

A)  A. 
B)  F. 
C)  A plus area F. 
D)  F plus area E.

Question 8

Refer to the graph shown. In the long run supply will become:

Accepted Answer

A)  more elastic, rotating from S0 to S1, creating a larger shortage with a price ceiling of P2. 
B)  less elastic, rotating from S0 to S1, creating a larger shortage with a price ceiling of P2. 
C)  more elastic, rotating from S0 to S1, creating a smaller shortage with a price ceiling of P2. 
D)  less elastic, rotating from S0 to S1, creating a smaller shortage with a price ceiling of P2.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Refer to the graph shown. An effective price ceiling at Pc causes consumer surplus to:

Accepted Answer

A)  change from areas C + D + F to areas B + C + D. 
B)  change from areas A + B + E to areas A + B + C. 
C)  fall from areas C + D + F to area D. 
D)  fall from areas A + B + E to area A.

Question 11

The distance between the supply curve and the price the producer receives for a product for a given quantity supplied is referred to as:

Accepted Answer

A)  market surplus. 
B)  market shortage. 
C)  consumer surplus. 
D)  producer surplus.

Question 12

Refer to the graph shown. If the price were somehow held at $8.15 per unit, consumer surplus would then equal:

Accepted Answer

A)  1,400. 
B)  600. 
C)  423.5. 
D)  1,171.5.

Question 13

When elasticities of supply and demand are both equal to 1, the burden of a tax will be:

Accepted Answer

A)  entirely on buyers. 
B)  entirely on sellers. 
C)  half on buyers and half on sellers. 
D)  mostly on buyers.

Question 14

Refer to the graph shown. After an increase in supply, the market is in equilibrium where the demand curve intersects S1. In this new equilibrium, producer surplus is equal to:

Accepted Answer

A)  900. 
B)  1,260. 
C)  2,520. 
D)  2,940.

Question 15

If sellers bear 1/3 of the tax burden and elasticity of demand is 2, what is the elasticity of supply?

Accepted Answer

A)  4 
B)  3 
C)  2 
D)  1

Question 16

Refer to the graph shown. An effective price ceiling at $3 causes consumer surplus to:

Accepted Answer

A)  increase from 80 to 120. 
B)  fall from 110 to 80. 
C)  increase from 120 to 130. 
D)  fall from 130 to 120.

Question 17

When government imposes a per-unit tax on a product, the net price producers actually receive for the product (after taxation) typically:

Accepted Answer

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.

Question 18

Refer to the graph shown. In equilibrium, producer surplus is equal to:

Accepted Answer

A)  600. 
B)  1,200. 
C)  1,400. 
D)  2,000.

Question 19

A general rule of political economy in a democracy is that when small groups are helped by a government action and large groups are hurt by that action by an equal and offsetting amount, policies tend to reflect:

Accepted Answer

A)  the large group's interest. 
B)  the small group's interest. 
C)  neither group's interest over the other. 
D)  the interest of a free market.

Question 20

Refer to the graph shown. 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:

Accepted Answer

A)  1,500. 
B)  2,500. 
C)  3,500. 
D)  5,000.

Exam 7: Taxation and Government Intervention