Professional Documents
Culture Documents
2) Buyers and sellers acting in their own best interest generate outcomes that are in society's best
interest when all of the following are true EXCEPT:
A) buyers and sellers are informed.
B) markets are efficient.
C) there are no external benefits.
D) there are no external costs.
Answer: B
Diff: 2
Topic: Market Efficiency and Government Intervention
Skill: Conceptual
AACSB: Reflective Thinking
3) Buyers and sellers acting in their own best interest generate outcomes that are in society's best
interest when:
A) there are informed buyers and sellers.
B) there is perfect competition.
C) there are no external costs.
D) all of the above
Answer: D
Diff: 2
Topic: Market Efficiency and Government Intervention
Skill: Conceptual
AACSB: Reflective Thinking
1
Copyright © 2012 Pearson Education, Inc.
4) If there are a large number of firms, each of which is so small it takes the market price as
given, then the market is characterized by:
A) informed buyers and sellers.
B) perfect competition.
C) no externalities.
D) efficiency.
Answer: B
Diff: 1
Topic: Market Efficiency and Government Intervention
Skill: Definition
5) Adam Smith taught that individual buyers and sellers who act in their own self interest
frequently promote society's interest. What assumption is needed for society's interest to be
promoted?
A) Buyers and sellers can make informed decisions.
B) Markets are perfectly competitive.
C) There are no external benefits or costs.
D) all of the above
Answer: D
Diff: 1
Topic: Market Efficiency and Government Intervention
Skill: Fact
6) The difference between the maximum amount that a consumer is willing to pay for a product
and the price that is paid for the product describes:
A) consumer surplus.
B) the cost of producing a unit of the product.
C) marginal utility.
D) producer surplus.
Answer: A
Diff: 1
Topic: The Demand Curve and Consumer Surplus
Skill: Definition
2
Copyright © 2012 Pearson Education, Inc.
8) Suppose the price of a liter of soda is $2. If Sara is willing to pay $3 for that liter of soda, her
consumer surplus is:
A) $0.
B) $1.
C) $2.
D) $3.
Answer: B
Diff: 2
Topic: The Demand Curve and Consumer Surplus
Skill: Analytical
AACSB: Analytic Skills
9) Assume that the price of a DVD player is $50. If Joshua is willing to pay $50 for that DVD
player, his consumer surplus is:
A) $0.
B) $1.
C) $10.
D) $50.
Answer: A
Diff: 2
Topic: The Demand Curve and Consumer Surplus
Skill: Analytical
AACSB: Analytic Skills
10) Suppose the price of a box of pop tarts is $3. If Michael is willing to pay $4 for that box of
pop tarts, his consumer surplus is:
A) $0.
B) $1.
C) $2.
D) $3.
Answer: B
Diff: 2
Topic: The Demand Curve and Consumer Surplus
Skill: Analytical
AACSB: Analytic Skills
11) Suppose the price of a scientific calculator is $80. If Juan is willing to pay $100 for that
scientific calculator, his consumer surplus is:
A) $0.
B) $10.
C) $20.
D) $30.
Answer: C
Diff: 1
Topic: The Demand Curve and Consumer Surplus
Skill: Analytical
AACSB: Analytic Skills
3
Copyright © 2012 Pearson Education, Inc.
12) Suppose that the price of a hamburger is $3. Victoria is willing to pay $5 for the first
hamburger, David is willing to pay $4 for the second hamburger, Kelly is willing to pay $3 for
the third hamburger, and Antony is willing to pay $2 for the fourth hamburger. In equilibrium,
what is the total consumer surplus from the consumption of hamburger?
A) $0
B) $2
C) $3
D) $9
Answer: C
Diff: 2
Topic: The Demand Curve and Consumer Surplus
Skill: Analytical
AACSB: Analytic Skills
13) Suppose that the price of a donut is $1 each. Lorena is willing to pay $2 for the first donut,
Ricky is willing to pay $1.80 for the second donut, Jennifer is willing to pay $1.50 for the third
donut, and Betty is willing to pay $1.20 for the fourth donut. In equilibrium, what is the total
consumer surplus from the consumption of donuts?
A) $2.40
B) $2.50
C) $3.50
D) $3.60
Answer: B
Diff: 2
Topic: The Demand Curve and Consumer Surplus
Skill: Analytical
AACSB: Analytic Skills
14) Suppose that the price of New York style slices of pizza is $4 each. Matthew is willing to pay
$6 for the first slice, James is willing to pay $5 for the second slice, Jessica is willing to pay $4
for the third slice, and Tammy is willing to pay $3 for the fourth slice. Which consumer will
NOT buy pizza slices?
A) Matthew
B) James
C) Jessica
D) Tammy
Answer: D
Diff: 2
Topic: The Demand Curve and Consumer Surplus
Skill: Analytical
AACSB: Analytic Skills
4
Copyright © 2012 Pearson Education, Inc.
15) In Figure 6.1, the price of the good is $20 and the shaded area represents:
A) producer surplus.
B) consumer surplus.
C) market equilibrium.
D) a price ceiling.
Answer: B
Diff: 1
Topic: The Demand Curve and Consumer Surplus, graphing
Skill: Analytical
AACSB: Analytic Skills
5
Copyright © 2012 Pearson Education, Inc.
17) If the good in Figure 6.1 were free:
A) consumer surplus would equal $450 and consumer expenditure would be $0.
B) consumer surplus and consumer expenditure would both be maximized.
C) consumer surplus and consumer expenditure would both be zero.
D) consumer surplus would be maximized but consumer expenditure would be impossible to
calculate.
Answer: A
Diff: 3
Topic: The Demand Curve and Consumer Surplus, graphing
Skill: Analytical
AACSB: Analytic Skills
19) As price falls along the elastic portion of a linear demand curve ________ decrease(s) while
________ increase(s).
A) only price; quantity demanded, consumer surplus, and consumer expenditures
B) consumer surplus and price; quantity demanded and consumer expenditures
C) quantity demanded and price; consumer surplus and consumer expenditures
D) consumer expenditures, quantity demanded, and price; consumer surplus
Answer: A
Diff: 3
Topic: The Demand Curve and Consumer Surplus
Skill: Conceptual
AACSB: Reflective Thinking
20) As price falls along the inelastic portion of a linear demand curve ________ decrease(s)
while ________ increase(s).
A) only price; quantity demanded, consumer surplus, and consumer expenditures
B) consumer surplus and price; quantity demanded and consumer expenditures
C) quantity demanded and price; consumer surplus and consumer expenditures
D) consumer expenditures and price; quantity demanded and consumer surplus
Answer: D
Diff: 3
Topic: The Demand Curve and Consumer Surplus
Skill: Conceptual
AACSB: Reflective Thinking
6
Copyright © 2012 Pearson Education, Inc.
21) Suppose that the price of a laptop computer drops from $700 to $550. Quantity demanded for
laptop computers will ________ and consumer surplus will ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: A
Diff: 2
Topic: The Demand Curve and Consumer Surplus
Skill: Analytical
AACSB: Analytic Skills
22) Suppose that the price of beer goes up due to a higher alcohol tax added. Quantity demanded
for beer will ________ and consumer surplus will ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: D
Diff: 2
Topic: The Demand Curve and Consumer Surplus
Skill: Conceptual
AACSB: Reflective Thinking
23) Suppose that the supply of gasoline increases. Price will ________ and consumer surplus
will ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: C
Diff: 3
Topic: The Demand Curve and Consumer Surplus
Skill: Conceptual
AACSB: Reflective Thinking
24) Suppose that the supply of gasoline decreases. Price will ________ and consumer surplus
will ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: B
Diff: 3
Topic: The Demand Curve and Consumer Surplus
Skill: Conceptual
AACSB: Reflective Thinking
7
Copyright © 2012 Pearson Education, Inc.
25) Suppose that Anne buys three pairs of designer shoes at $200 a pair. If the price equals the
amount Anne is willing to pay for the third pair, then:
A) she earned no consumer surplus.
B) she might have earned some consumer surplus on the first two pairs of shoes.
C) she would have earned consumer surplus if she bought one more pair of shoes.
D) she would have earned more consumer surplus if she bought one fewer pair of shoes.
Answer: B
Diff: 2
Topic: The Demand Curve and Consumer Surplus
Skill: Analytical
AACSB: Analytic Skills
26) Suppose that Tim is willing to pay $50 for a dozen of roses for Kim on Valentine's Day. If he
actually pays $2.50 per rose for the 12 roses, his total consumer surplus is:
A) $50.
B) $30.
C) $20.
D) $12.
Answer: C
Diff: 2
Topic: The Demand Curve and Consumer Surplus
Skill: Analytical
AACSB: Analytic Skills
28) The difference between the price a producer receives for a product and the minimum amount
a producer is willing to accept for that product is:
A) the market demand for a product.
B) consumer surplus.
C) perfect competition surplus.
D) producer surplus.
Answer: D
Diff: 1
Topic: The Supply Curve and Producer Surplus
Skill: Definition
8
Copyright © 2012 Pearson Education, Inc.
29) Suppose the market price for bagels is $1.50 each. If Fresh Bagels Bakery's marginal cost of
producing that bagel is $0.75, its producer surplus from that bagel is:
A) $0.
B) $0.25.
C) $0.75.
D) $1.25.
Answer: C
Diff: 2
Topic: The Supply Curve and Producer Surplus
Skill: Analytical
AACSB: Analytic Skills
30) Suppose the market price for a cup of coffee is $1.25. If Coffee Express' marginal cost of
making that cup of coffee is $0.75, its producer surplus from that cup of coffee is:
A) $0.50.
B) $0.75.
C) $1.25.
D) $1.50.
Answer: A
Diff: 2
Topic: The Supply Curve and Producer Surplus
Skill: Analytical
AACSB: Analytic Skills
31) Suppose the price of a package of guitar strings is $5. If Mark's marginal cost of producing
that package of guitar strings is $3, his producer surplus from that package of guitar strings is:
A) $0.
B) $1.
C) $2.
D) $3.
Answer: C
Diff: 2
Topic: The Supply Curve and Producer Surplus
Skill: Analytical
AACSB: Analytic Skills
32) Suppose the price of a package of guitar strings is $5. If Mark's marginal cost of producing
that package of guitar strings is $5, his producer surplus from that package of guitar strings is:
A) $0.
B) $1.
C) $2.
D) $3.
Answer: A
Diff: 2
Topic: The Supply Curve and Producer Surplus
Skill: Analytical
AACSB: Analytic Skills
9
Copyright © 2012 Pearson Education, Inc.
33) Suppose that the price of a coffee mug is $2. Lee's marginal cost of producing coffee mugs
$0.50 for the first mug, Tammy's marginal cost of producing coffee mugs is $1 for the second
mug, Stan's marginal cost of producing coffee mugs is $1.50 for the third mug, Joy's marginal
cost of producing coffee mugs is $2 for the fourth mug, and Jody's marginal cost of producing
coffee mugs is $3 for the fifth mug. In equilibrium, what is the producer surplus from producing
coffee mugs?
A) $0
B) $2
C) $3
D) $6
Answer: C
Diff: 2
Topic: The Supply Curve and Producer Surplus
Skill: Analytical
AACSB: Analytic Skills
34) Suppose that the price of a box of shotgun shells is $5. Morris' marginal cost of producing
boxes of shotgun shells is $3.50 for the first box, Tommy's marginal cost of producing boxes of
shotgun shells is $4 for the second box, Pat's marginal cost of producing boxes of shotgun shells
is $5.50 for the third box, and Al's marginal cost of producing boxes of shotgun shells is $6 for
the fourth box. In equilibrium, what is the producer surplus from producing boxes of shotgun
shells?
A) $1.50
B) $2.50
C) $3.50
D) $4.00
Answer: B
Diff: 2
Topic: The Supply Curve and Producer Surplus
Skill: Analytical
AACSB: Analytic Skills
35) Suppose that the price of a bottle of soda is $2. Vonda's marginal cost of production is $1.25
for the first bottle, Galiela's marginal cost of production is $1.50 for the second bottle, Gretchen's
marginal cost of production is $1.75 for the third bottle, and Matt's marginal cost of production is
$2 for the fourth bottle. Which producer gets no producer surplus?
A) Vonda
B) Galiela
C) Gretchen
D) Matt
Answer: D
Diff: 2
Topic: The Supply Curve and Producer Surplus
Skill: Analytical
AACSB: Analytic Skills
10
Copyright © 2012 Pearson Education, Inc.
36) Suppose that the price of macaroni drops. Quantity supplied will ________ and producer
surplus will ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: D
Diff: 2
Topic: The Supply Curve and Producer Surplus
Skill: Conceptual
AACSB: Reflective Thinking
37) Suppose that the price of macaroni rises. Quantity supplied will ________ and producer
surplus will ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: A
Diff: 2
Topic: The Supply Curve and Producer Surplus
Skill: Conceptual
AACSB: Reflective Thinking
38) If the demand for tennis shoes increases and a firm's supply curve is upward sloping, then:
A) producer surplus decreases.
B) producer surplus does not change.
C) producer surplus increases.
D) producer surplus may either increase or decrease.
Answer: C
Diff: 3
Topic: The Supply Curve and Producer Surplus
Skill: Conceptual
AACSB: Reflective Thinking
39) If the demand for tennis shoes decreases and a firm's supply curve is upward sloping, then:
A) producer surplus decreases.
B) producer surplus does not change.
C) producer surplus increases.
D) producer surplus may either increase or decrease.
Answer: A
Diff: 3
Topic: The Supply Curve and Producer Surplus
Skill: Conceptual
AACSB: Reflective Thinking
11
Copyright © 2012 Pearson Education, Inc.
40) In Figure 6.2 the price is $20 and the shaded area represents:
A) producer surplus.
B) consumer surplus.
C) market equilibrium.
D) a price ceiling.
Answer: A
Diff: 1
Topic: The Supply Curve and Producer Surplus, graphing
Skill: Analytical
AACSB: Analytic Skills
12
Copyright © 2012 Pearson Education, Inc.
42) If the good in Figure 6.2 were free:
A) producer surplus would not change but consumer expenditure would be minimized.
B) producer surplus and consumer expenditure would both be maximized.
C) producer surplus and consumer expenditure would both be zero.
D) producer surplus would be maximized but consumer expenditure would be minimized.
Answer: C
Diff: 2
Topic: The Supply Curve and Producer Surplus, graphing
Skill: Analytical
AACSB: Analytic Skills
44) As price falls along a supply curve, ________ increase(s) while ________ decrease(s).
A) nothing; quantity supplied, producer surplus, and revenues
B) producer surplus and price; quantity supplied and revenues
C) quantity supplied and price; producer surplus and revenues
D) revenues, quantity supplied, and price; producer surplus
Answer: A
Diff: 3
Topic: The Supply Curve and Producer Surplus
Skill: Conceptual
AACSB: Reflective Thinking
45) In order for a market to reach equilibrium producers must have enough information to make
informed decisions about purchasing the product.
Answer: FALSE
Diff: 1
Topic: Market Efficiency and Government Intervention
Skill: Conceptual
AACSB: Reflective Thinking
13
Copyright © 2012 Pearson Education, Inc.
47) If the market price of a DVD is $15 and a consumer was willing to pay $20 for it, that
consumers surplus on the DVD is $5.
Answer: TRUE
Diff: 2
Topic: The Demand Curve and Consumer Surplus
Skill: Analytical
AACSB: Analytic Skills
49) Producer surplus equals the market price less the producer's willingness to accept or marginal
cost.
Answer: TRUE
Diff: 1
Topic: The Supply Curve and Producer Surplus
Skill: Definition
51) If the marginal cost of a candy bar is $.10 and the producer sells it for $1.00, then the
producers surplus on that candy bar is $1.10.
Answer: FALSE
Diff: 2
Topic: The Supply Curve and Producer Surplus
Skill: Analytical
AACSB: Analytic Skills
52) People often complain about paying "outrageously high prices." Define an "outrageously
high price" in terms of consumer surplus.
Answer: Most of the time when you go to the store you pay much less for an item than you
would be willing to pay. This means that you earn considerable consumer surplus. An
"outrageously high price" is a price so close to the maximum that you are willing to pay for an
item that you get no or almost no consumer surplus.
Diff: 2
Topic: The Demand Curve and Consumer Surplus
Skill: Conceptual
AACSB: Reflective Thinking
14
Copyright © 2012 Pearson Education, Inc.
53) What is consumer surplus and how is it calculated?
Answer: Consumer surplus is the difference between consumers' willingness to pay and price or
what they must pay for a product. It is calculated by subtracting market price from willingness to
pay or the areas between the demand curve and the market price.
Diff: 2
Topic: The Demand Curve and Consumer Surplus
Skill: Conceptual
AACSB: Reflective Thinking
15
Copyright © 2012 Pearson Education, Inc.
2) Refer to Figure 6.3. On this graph, the total surplus of the market is maximized when the price
is at point:
A) A.
B) B.
C) O.
D) D.
Answer: C
Diff: 3
Topic: Market Equilibrium and Efficiency, graphing
Skill: Analytical
AACSB: Analytic Skills
16
Copyright © 2012 Pearson Education, Inc.
4) Prices below the free market equilibrium are inefficient because:
A) producer surplus is lower than in equilibrium.
B) consumer surplus is higher than in equilibrium.
C) total surplus is lower than in equilibrium.
D) total surplus is higher than in equilibrium.
Answer: C
Diff: 2
Topic: Total Surplus is Lower with a Price below the Equilibrium Price
Skill: Conceptual
AACSB: Reflective Thinking
5) Prices below the free market equilibrium are inefficient because the willingness to pay by
someone to consume an additional unit ________ the marginal cost to someone for producing
that unit.
A) exceeds
B) is less than
C) equals
D) None of the above; efficiency is defined in terms of natural resources, not market equilibrium.
Answer: A
Diff: 2
Topic: Total Surplus is Lower with a Price below the Equilibrium Price
Skill: Conceptual
AACSB: Reflective Thinking
6) Prices above the free market equilibrium are inefficient because the willingness to pay by
someone to consume an additional unit ________ the marginal cost to someone for producing
that unit.
A) exceeds
B) is less than
C) equals
D) None of the above; efficiency is defined in terms of natural resources, not market equilibrium.
Answer: B
Diff: 2
Topic: Total Surplus is Lower with a Price above the Equilibrium Price
Skill: Conceptual
AACSB: Reflective Thinking
9) Economists call the phenomenon that leads individual consumers and producers to the market
equilibrium:
A) the invisible foot.
B) the invisible head.
C) the invisible arm.
D) the invisible hand.
Answer: D
Diff: 1
Topic: Efficiency and the Invisible Hand
Skill: Definition
10) The famous economist who coined the metaphor "the invisible hand" is:
A) Mickey Kantor.
B) Alan Greenspan.
C) Milton Friedman.
D) Adam Smith.
Answer: D
Diff: 1
Topic: Efficiency and the Invisible Hand
Skill: Fact
18
Copyright © 2012 Pearson Education, Inc.
Table 6.1
11) Refer to Table 6.1. When quantity = 5, this market is ________ because ________.
A) inefficient; willingness to pay > marginal cost
B) inefficient; willingness to pay < marginal cost
C) efficient; willingness to pay = marginal cost
D) producing too much consumer surplus; willingness to pay > marginal cost
Answer: C
Diff: 2
Topic: Market Equilibrium and Efficiency
Skill: Analytical
AACSB: Analytic Skills
12) Refer to Table 6.1. When quantity = 7, this market is ________ because ________.
A) inefficient; willingness to pay > marginal cost
B) inefficient; willingness to pay < marginal cost
C) efficient; willingness to pay = marginal cost
D) producing too much consumer surplus; willingness to pay > marginal cost
Answer: B
Diff: 2
Topic: Market Equilibrium and Efficiency
Skill: Analytical
AACSB: Analytic Skills
13) Refer to Table 6.1. When quantity = 3, this market is ________ because ________.
A) inefficient; willingness to pay > marginal cost
B) inefficient; willingness to pay < marginal cost
C) efficient; willingness to pay = marginal cost
D) producing too much consumer surplus; willingness to pay > marginal cost
Answer: A
Diff: 3
Topic: Market Equilibrium and Efficiency
Skill: Analytical
AACSB: Analytic Skills
19
Copyright © 2012 Pearson Education, Inc.
14) Refer to Figure 6.3. On this graph, area ABC is:
A) consumer surplus.
B) producer surplus.
C) total surplus.
D) total producer net benefit.
Answer: A
Diff: 2
Topic: Market Equilibrium and Efficiency, graphing
Skill: Analytical
AACSB: Analytic Skills
20
Copyright © 2012 Pearson Education, Inc.
16) Refer to Figure 6.3. On this graph, area ACD is:
A) producer surplus.
B) total surplus.
C) consumer net benefit.
D) consumer surplus.
Answer: B
Diff: 2
Topic: Market Equilibrium and Efficiency, graphing
Skill: Analytical
AACSB: Analytic Skills
19) The maximum price reduces total surplus of the market because it prevents some mutually
beneficial transactions.
Answer: TRUE
Diff: 2
Topic: Total Surplus is Lower with a Price below the Equilibrium Price
Skill: Conceptual
AACSB: Reflective Thinking
21
Copyright © 2012 Pearson Education, Inc.
21) A price floor above the equilibrium price increases the total surplus of the market.
Answer: FALSE
Diff: 2
Topic: Total Surplus is Lower with a Price above the Equilibrium Price
Skill: Conceptual
AACSB: Reflective Thinking
22) Government intervention can be justified on efficiency grounds when at least one of the
efficiency conditions are not being met.
Answer: TRUE
Diff: 2
Topic: Government Intervention in Efficient Markets
Skill: Conceptual
AACSB: Reflective Thinking
24) What is a price ceiling and why must it be below equilibrium to be effective?
Answer: A price ceiling is a maximum price. It is only effective below equilibrium because the
market will remain at equilibrium if a maximum price is set above equilibrium.
Diff: 2
Topic: Total Surplus is Lower with a Price below the Equilibrium Price
Skill: Conceptual
AACSB: Reflective Thinking
22
Copyright © 2012 Pearson Education, Inc.
25) Draw a picture to illustrate why total surplus is highest at the competitive equilibrium price
and not at a price below equilibrium. Explain your diagram.
Answer:
At a price below equilibrium producers are willing to produce less of the good than they would
at equilibrium. This means that some mutually beneficial trades do not take place. Total surplus
is decreased by the amount illustrated by the shaded triangle.
Diff: 2
Topic: Total Surplus is Lower with a Price below the Equilibrium Price, graphing
Skill: Analytical
AACSB: Analytic Skills
26) What is a price floor and why must it be above equilibrium to be effective?
Answer: A price floor is a minimum price. It is only effective above equilibrium because the
market will remain at equilibrium if a minimum price is set below equilibrium.
Diff: 2
Topic: Total Surplus is Lower with a Price above the Equilibrium Price
Skill: Conceptual
AACSB: Reflective Thinking
27) Explain how the "invisible hand" makes sure that markets reach equilibrium more quickly
than they would if the government sets prices for goods.
Answer: The "invisible hand" is always adjusting the market price for goods. Suppose that
people's demand for heating oil goes up. Producers notice that they are running out of oil and
immediately increase their activities and raise price to compensate them for the extra work. If the
government set a price for heating oil, when demand rose the first thing the government would
have to do is appoint a panel of experts to study the problem. The free market would have "fixed
the problem" long before the panel of experts could be appointed.
Diff: 2
Topic: Efficiency and the Invisible Hand
Skill: Conceptual
AACSB: Reflective Thinking
23
Copyright © 2012 Pearson Education, Inc.
6.3 Controlling PricesMaximum and Minimum Prices
1) Refer to Figure 6.4. Suppose that the current price is set at A and Q1 units of a good are
traded. Which of the following statements is INCORRECT?
A) The quantity supplied exceeds the quantity demanded.
B) A buyer's willingness to pay is smaller than a seller's willingness to accept at Q1.
C) The consumer surplus would increase should the price fall.
D) Total surplus is not maximized.
Answer: B
Diff: 2
Topic: Controlling Prices--Maximum and Minimum Prices, graphing
Skill: Analytical
AACSB: Analytic Skills
2) Refer to Figure 6.4. Suppose that the current price is set at B and Q2 units of a good are
traded. Which of the following statements is INCORRECT?
A) The quantity demanded is equal to the quantity supplied.
B) Total surplus is not maximized.
C) A buyer's willingness to pay equals a seller's willingness to accept.
D) The trade of a good at the current price is efficient.
Answer: B
Diff: 2
Topic: Controlling Prices--Maximum and Minimum Prices, graphing
Skill: Analytical
AACSB: Analytic Skills
24
Copyright © 2012 Pearson Education, Inc.
3) Refer to Figure 6.4. Suppose that the current price is set at B and Q2 units of a good are
traded. Which of the following statements is INCORRECT?
A) The current market transaction is efficient.
B) Total surplus would decrease should the price fall.
C) Total surplus would increase should the price rise.
D) The quantity demanded equals the quantity supplied.
Answer: C
Diff: 2
Topic: Controlling Prices--Maximum and Minimum Prices, graphing
Skill: Analytical
AACSB: Analytic Skills
4) Refer to Figure 6.4. Suppose that the current price is set at C and Q1 units of a good are
traded. Which of the following statements is INCORRECT?
A) The quantity supplied is smaller than the quantity demanded.
B) A buyer's willingness to pay is greater than a seller's willingness to accept.
C) The producer surplus would increase should the price rise.
D) Total surplus would increase should the price fall.
Answer: D
Diff: 2
Topic: Controlling Prices--Maximum and Minimum Prices, graphing
Skill: Analytical
AACSB: Analytic Skills
5) If the government intervenes in the market, while the market meets the efficiency conditions.
Then the government:
A) promotes more efficiency.
B) causes inefficiency.
C) reduces the consumer surplus only.
D) reduces the producer surplus only.
Answer: B
Diff: 2
Topic: Controlling PricesMaximum and Minimum Prices
Skill: Conceptual
AACSB: Reflective Thinking
6) Suppose that the government sets a maximum price for milk at $5 a gallon and the equilibrium
price of a gallon is $3. How much quantity traded will this maximum price lead to?
A) the equilibrium quantity
B) below the equilibrium quantity
C) above the equilibrium quantity
D) There is not sufficient information.
Answer: A
Diff: 2
Topic: Setting Maximum Prices
Skill: Analytical
AACSB: Analytic Skills
25
Copyright © 2012 Pearson Education, Inc.
7) Suppose that the maximum price for rent in New York City is set above the equilibrium price.
Which of the following statements is incorrect?
A) It reduces the quantity supplied.
B) It increases the quantity demanded.
C) Consumers want to buy more than producers want to sell.
D) All of the above are incorrect.
Answer: D
Diff: 2
Topic: Setting Maximum Prices
Skill: Conceptual
AACSB: Reflective Thinking
8) If the government imposes a maximum price in a market that is below the equilibrium price:
A) total surplus in the market increases.
B) total surplus in the market decreases.
C) total surplus in the market does not change.
D) total surplus may increase or decrease, depending on whether costs are increasing or
decreasing in production.
Answer: B
Diff: 2
Topic: Setting Maximum Prices
Skill: Conceptual
AACSB: Reflective Thinking
9) Which of the following are examples of goods and services that have been subject to
maximum prices or may be subject to maximum prices in the near future?
A) gasoline
B) rental housing
C) medical goods and services
D) all of the above
Answer: D
Diff: 1
Topic: Setting Maximum Prices
Skill: Fact
26
Copyright © 2012 Pearson Education, Inc.
11) Rent control leads to quantity supplied being ________ quantity demanded.
A) equal to
B) greater than
C) less than
D) Either A or B is correct.
Answer: C
Diff: 2
Topic: Rent Control
Skill: Conceptual
AACSB: Reflective Thinking
12) If the government imposes a maximum price on rental apartments that is below the
equilibrium price, we can expect to see all of the following EXCEPT:
A) landlords doing less maintenance to their rental units.
B) new apartment units being built.
C) renters spending more time searching for apartments.
D) some building owners converting their apartments to condominiums.
Answer: B
Diff: 2
Topic: Rent Control
Skill: Conceptual
AACSB: Reflective Thinking
13) Suppose that the government imposes a maximum price on rental apartments and the market
price of apartments does not change. The most likely explanation is that:
A) the law is impossible to enforce.
B) apartment owners are withdrawing rental units from the market and forcing price up.
C) market forces are pushing rental rates up to avoid a shortage of apartments.
D) the maximum price set by the government was at or above the equilibrium price.
Answer: D
Diff: 2
Topic: Rent Control
Skill: Conceptual
AACSB: Reflective Thinking
14) All of the below are examples of negative effects of imposing rent control EXCEPT:
A) persons who get a place to live pay lower rent.
B) renters must pay non-refundable security deposits.
C) producer surplus decreases.
D) some people who would have rented apartments before rent control will not rent.
Answer: A
Diff: 2
Topic: Rent Control
Skill: Conceptual
AACSB: Reflective Thinking
27
Copyright © 2012 Pearson Education, Inc.
15) All of the below are examples of negative effects of imposing rent control EXCEPT:
A) renters spend less time searching for apartments.
B) persons who get a place to live pay higher rent.
C) producer surplus decreases.
D) some people who would have rented apartments before rent control will not rent.
Answer: A
Diff: 2
Topic: Rent Control
Skill: Conceptual
AACSB: Reflective Thinking
16) In the case of rent control, a maximum price will cause ________ and ________ the total
surplus of the market.
A) excess demand; reduce
B) excess demand; increase
C) excess supply; reduce
D) excess supply; increase
Answer: A
Diff: 2
Topic: Rent Control
Skill: Conceptual
AACSB: Reflective Thinking
18) Since rent control ________ the total surplus of the market, the policy generates a ________.
A) decreases; producer surplus
B) increases; producer surplus
C) decreases; deadweight loss.
D) increases; deadweight loss.
Answer: C
Diff: 2
Topic: Rent Control
Skill: Conceptual
AACSB: Reflective Thinking
28
Copyright © 2012 Pearson Education, Inc.
19) Since rent control outlaws transactions the would make both the consumer and supplier
better off, then rent control:
A) causes excess demand and increases total surplus.
B) causes inefficiency.
C) decreases total surplus.
D) B and C are correct.
Answer: D
Diff: 2
Topic: Rent Control
Skill: Conceptual
AACSB: Reflective Thinking
21) Suppose that the government sets a minimum price for soybeans at $5 a pound above the
equilibrium price. This leads to a quantity traded:
A) at the equilibrium quantity.
B) below the equilibrium quantity.
C) above the equilibrium quantity.
D) There is not sufficient information.
Answer: B
Diff: 2
Topic: Setting Minimum Prices
Skill: Analytical
AACSB: Analytic Skills
22) Assume the government sets a minimum price for a particular good below the equilibrium
price. How much quantity traded will this lead to?
A) the equilibrium quantity
B) below the equilibrium quantity
C) above the equilibrium quantity
D) There is not sufficient information.
Answer: A
Diff: 2
Topic: Setting Minimum Prices
Skill: Conceptual
AACSB: Reflective Thinking
29
Copyright © 2012 Pearson Education, Inc.
23) Refer to Figure 6.4. If consumers currently gain at the expense of producers, a maximum
price must have been set at:
A) A.
B) B.
C) C.
D) There is not sufficient information.
Answer: C
Diff: 2
Topic: Setting Maximum Prices, graphing
Skill: Analytical
AACSB: Analytic Skills
24) Refer to Figure 6.4. If producers currently gain at the expense of consumers, a minimum
price must have been set at:
A) A.
B) B.
C) C.
D) There is not sufficient information.
Answer: A
Diff: 2
Topic: Setting Minimum Prices, graphing
Skill: Analytical
AACSB: Analytic Skills
30
Copyright © 2012 Pearson Education, Inc.
25) Refer to Figure 6.4. If a market experiences excess demand and fails to maximize total
surplus, a maximum price must have been set at:
A) A.
B) B.
C) C.
D) There is not sufficient information.
Answer: C
Diff: 2
Topic: Setting Maximum Prices, graphing
Skill: Analytical
AACSB: Analytic Skills
26) Refer to Figure 6.4. If a market experiences excess supply and fails to maximize total
surplus, a minimum price must have been set at:
A) A.
B) B.
C) C.
D) There is not sufficient information.
Answer: A
Diff: 2
Topic: Setting Minimum Prices, graphing
Skill: Analytical
AACSB: Analytic Skills
27) Refer to Figure 6.4. If the current market transactions occur only over the output level where
a buyer's willingness to pay is greater than a seller's willingness to accept, the government could
have set:
A) a maximum price at A.
B) a minimum price at A.
C) a minimum price at C.
D) There is not sufficient information.
Answer: B
Diff: 2
Topic: Setting Minimum Prices, graphing
Skill: Analytical
AACSB: Analytic Skills
31
Copyright © 2012 Pearson Education, Inc.
28) Refer to Figure 6.4. If the current market transactions occur only over the output level where
a buyer's willingness to pay is greater than a seller's willingness to accept, the government could
have set:
A) a maximum price at A
B) a minimum price at C.
C) a maximum price at C.
D) There is not sufficient information.
Answer: C
Diff: 2
Topic: Setting Maximum Prices, graphing
Skill: Analytical
AACSB: Analytic Skills
29) A government policy that keeps the price of gasoline below its equilibrium level will increase
consumer surplus.
Answer: FALSE
Diff: 2
Topic: Setting Maximum Prices
Skill: Conceptual
AACSB: Reflective Thinking
30) Rent control makes consumers who can find a place to rent worse off.
Answer: FALSE
Diff: 2
Topic: Rent Control
Skill: Conceptual
AACSB: Reflective Thinking
31) A government policy that keeps the price of guitar strings above its equilibrium level will
increase total surplus.
Answer: FALSE
Diff: 2
Topic: Setting Minimum Prices
Skill: Conceptual
AACSB: Reflective Thinking
32) Deadweight loss is what the consumers lose when paying more for a good than what the
equilibrium price for that good is.
Answer: FALSE
Diff: 2
Topic: Setting Minimum Prices
Skill: Conceptual
AACSB: Reflective Thinking
32
Copyright © 2012 Pearson Education, Inc.
33) A price floor above the equilibrium price causes excess quantity demand.
Answer: FALSE
Diff: 2
Topic: Setting Minimum Prices
Skill: Conceptual
AACSB: Reflective Thinking
34) A policy that establishes a maximum price decreases the quantity supplied or leaves it
unchanged, while a policy that establishes a minimum price increases the quantity supplied or
leaves it unchanged.
Answer: TRUE
Diff: 2
Topic: Controlling PricesMaximum and Minimum Prices
Skill: Conceptual
AACSB: Reflective Thinking
36) Politicians are often heard saying that tuition at state universities should be kept low "to
make education equally accessible to all residents of the state, regardless of income." Assuming
that state funding for the universities is held constant, what condition will prevail if tuition is
held below equilibrium price? Will education really be "equally accessible" under these
conditions?
Answer: If tuition is held below equilibrium price there will be more people who want to attend
state universities than the university system can successfully educate. This will mean that the
universities will have to "ration" admission by raising admission standards so that some students
who did not have the best high school grades won't get college educations. It will also mean that
class sizes at the state universities will be larger, students will not be able to be admitted to some
of the classes they want to take, etc.
Diff: 2
Topic: Setting Maximum Prices
Skill: Conceptual
AACSB: Reflective Thinking
33
Copyright © 2012 Pearson Education, Inc.
37) Gasoline prices are rising because OPEC has cut the supply of oil they are willing to sell in
the world oil market. You hear someone in a restaurant say that the government should put a
ceiling on the price of gasoline to protect citizens from price gouging. Discuss the pros and cons
of a price ceiling on gasoline.
Answer: The pro is that the people who do get gasoline will pay lower prices for it. The con is
that with price ceilings there will be long lines and "sold out" signs at the gas station. So while
the price ceiling might save money on gasoline when you drive to Florida for spring break, the
shortages might mean that you can't find the gasoline you need to get back to school afterwards.
Diff: 2
Topic: Setting Maximum Prices
Skill: Analytical
AACSB: Analytic Skills
34
Copyright © 2012 Pearson Education, Inc.
3) Refer to Figure 6.6, which shows a market for taxi medallions. Without any limit to the
number of medallions (taxi licenses), the consumer surplus from consuming taxicab services is
represented by:
A) area ABF.
B) area ACI.
C) area DEH.
D) area CEI.
Answer: B
Diff: 3
Topic: Taxi Medallions, graphing
Skill: Analytical
AACSB: Analytic Skills
4) Refer to Figure 6.6, which shows a market for taxi medallions. Without any limit to the
number of medallions (taxi licenses), the producer surplus is represented by:
A) area ABF.
B) area ACI.
C) area DEH.
D) area CEI.
Answer: D
Diff: 3
Topic: Taxi Medallions, graphing
Skill: Analytical
AACSB: Analytic Skills
35
Copyright © 2012 Pearson Education, Inc.
5) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of taxi licenses
is reduced from Q2 to Q1, the consumer surplus from consuming taxicab services is represented
by:
A) area ABF.
B) area ACFG.
C) area DEH.
D) area BEFH.
Answer: A
Diff: 3
Topic: Taxi Medallions, graphing
Skill: Analytical
AACSB: Analytic Skills
6) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of medallions is
reduced from Q2 to Q1, the producer surplus is represented by:
A) area ABF.
B) area ACFG.
C) area DEH.
D) area BEFH.
Answer: D
Diff: 3
Topic: Taxi Medallions, graphing
Skill: Analytical
AACSB: Analytic Skills
7) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of taxi licenses
is reduced from Q2 to Q1, the consumer surplus:
A) decreases by area FGI.
B) decreases by (area BCFG + area FGI).
C) decreases by area GHI.
D) decreases by (area CDGH + area GHI).
Answer: B
Diff: 3
Topic: Taxi Medallions, graphing
Skill: Analytical
AACSB: Analytic Skills
36
Copyright © 2012 Pearson Education, Inc.
8) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of taxi licenses
is reduced from Q2 to Q1, the producer surplus:
A) increases by area BCFG.
B) increases by (area BCFG - area GHI).
C) decreases by area GHI.
D) decreases by (area CDGH + area GHI).
Answer: B
Diff: 3
Topic: Taxi Medallions, graphing
Skill: Analytical
AACSB: Analytic Skills
9) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of taxi licenses
is reduced from Q2 to Q1, the total surplus of the market is represented by:
A) area ABF.
B) area ABF + area BCFG.
C) area ABF + area BCFG + area CDGH.
D) area ABF + area BCFG + area CDGH + area DEH.
Answer: D
Diff: 3
Topic: Taxi Medallions, graphing
Skill: Analytical
AACSB: Analytic Skills
10) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of taxi licenses
is reduced from Q2 to Q1, the decrease in total surplus of the market is represented by:
A) area FGI.
B) area GHI.
C) area FHI.
D) area BDFH - area FHI.
Answer: C
Diff: 3
Topic: Taxi Medallions, graphing
Skill: Analytical
AACSB: Analytic Skills
11) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of taxi licenses
is reduced from Q2 to Q1:
A) the gain in consumer surplus equals the loss in producer surplus.
B) the gain in producer surplus equals the loss in consumer surplus.
C) the gain in consumer surplus is greater than the loss in producer surplus.
D) the gain in producer surplus is smaller than the loss in consumer surplus.
Answer: D
Diff: 3
Topic: Taxi Medallions, graphing
Skill: Analytical
AACSB: Analytic Skills
37
Copyright © 2012 Pearson Education, Inc.
12) In Figure 6.7 at equilibrium consumer surplus is area:
A) A.
B) A + B + C.
C) E + F + G.
D) G.
Answer: B
Diff: 3
Topic: Taxi Medallions, graphing
Skill: Analytical
AACSB: Analytic Skills
38
Copyright © 2012 Pearson Education, Inc.
14) In Figure 6.7 with a quantity constraint of Q1, consumer surplus is area:
A) A.
B) A + B + C.
C) E + F + G.
D) G.
Answer: A
Diff: 3
Topic: Taxi Medallions, graphing
Skill: Analytical
AACSB: Analytic Skills
15) In Figure 6.7 with a quantity constraint of Q1, producer surplus is area:
A) A.
B) A + B + C.
C) E + F + G.
D) G.
Answer: D
Diff: 3
Topic: Taxi Medallions, graphing
Skill: Analytical
AACSB: Analytic Skills
16) In Figure 6.7 with a quantity constraint of Q1, the dead weight loss is area:
A) A.
B) H + I + J.
C) C + F.
D) G.
Answer: C
Diff: 3
Topic: Taxi Medallions, graphing
Skill: Analytical
AACSB: Analytic Skills
17) A quantity restriction leads to a quantity traded ________ the equilibrium quantity.
A) at
B) above
C) below
D) Either A or C is correct.
Answer: D
Diff: 2
Topic: Licensing and Market Efficiency
Skill: Conceptual
AACSB: Reflective Thinking
39
Copyright © 2012 Pearson Education, Inc.
18) A quantity restriction leads to a price ________ the equilibrium price.
A) at
B) above
C) below
D) Either A or B is correct.
Answer: D
Diff: 2
Topic: Licensing and Market Efficiency
Skill: Conceptual
AACSB: Reflective Thinking
19) If the government imposes a quantity restriction on how many shoes can be imported into a
country, and the total quantity is below the market equilibrium quantity:
A) total surplus in the market increases.
B) total surplus in the market decreases.
C) total surplus in the market does not change.
D) total surplus may increase or decrease, depending on whether costs are increasing or
decreasing in production.
Answer: B
Diff: 2
Topic: Licensing and Market Efficiency
Skill: Conceptual
AACSB: Reflective Thinking
20) An electrician licensing program in the state of North Carolina requires each electrician to
obtain a license and renew it each year. Which of the following is a result of having the licensing
program in NC?
A) a decrease in total surplus
B) excess demand for electrical service
C) an increase in the quality of electrician
D) All of the above are a result of the licensing program.
Answer: D
Diff: 3
Topic: Licensing and Market Efficiency
Skill: Conceptual
AACSB: Reflective Thinking
21) An import restriction ________ the market price and ________ the total surplus of the
market.
A) increases; decreases
B) increases; increases
C) decreases; increases
D) decreases; decreases
Answer: A
Diff: 2
Topic: Import Restrictions
Skill: Conceptual
AACSB: Reflective Thinking
40
Copyright © 2012 Pearson Education, Inc.
22) Figure 6.5 illustrates the market for sugar. With free trade, the price of sugar would be at
point:
A) C.
B) D.
C) F.
D) G.
Answer: C
Diff: 2
Topic: Import Restrictions, graphing
Skill: Analytical
AACSB: Analytic Skills
23) Figure 6.5 illustrates the market for sugar. If imports of sugar were banned, the price of sugar
would be at point:
A) C.
B) D.
C) F.
D) G.
Answer: A
Diff: 2
Topic: Import Restrictions, graphing
Skill: Analytical
AACSB: Analytic Skills
41
Copyright © 2012 Pearson Education, Inc.
24) Figure 6.5 illustrates the market for sugar. With free trade, consumer surplus in the market
would be shown as area:
A) ABC.
B) AEF.
C) GEQ1.
D) ABQ20.
Answer: B
Diff: 2
Topic: Import Restrictions, graphing
Skill: Analytical
AACSB: Analytic Skills
25) Figure 6.5 illustrates the market for sugar. If sugar imports were banned, consumer surplus in
the market would be shown as area:
A) ABC.
B) AEF.
C) GEQ1.
D) ABQ20.
Answer: A
Diff: 2
Topic: Import Restrictions, graphing
Skill: Analytical
AACSB: Analytic Skills
26) Figure 6.5 illustrates the market for sugar. With free trade, producer surplus in the market
would be shown as area:
A) ABC.
B) AEF.
C) GEQ1.
D) FEG.
Answer: D
Diff: 2
Topic: Import Restrictions, graphing
Skill: Analytical
AACSB: Analytic Skills
27) Figure 6.5 illustrates the market for sugar. If sugar imports were banned, producer surplus in
the market would be shown as area:
A) ABC.
B) AEF.
C) CBD.
D) FEG.
Answer: C
Diff: 2
Topic: Import Restrictions, graphing
Skill: Analytical
AACSB: Analytic Skills
42
Copyright © 2012 Pearson Education, Inc.
28) Figure 6.5 illustrates the market for sugar. With free trade, total surplus in the market would
be shown as area:
A) ABC.
B) AEF.
C) AEG.
D) FEG.
Answer: C
Diff: 2
Topic: Import Restrictions, graphing
Skill: Analytical
AACSB: Analytic Skills
29) Figure 6.5 illustrates the market for sugar. If sugar imports were banned, total surplus in the
market would be shown as area:
A) ABC.
B) AEF.
C) CBD.
D) ABD.
Answer: D
Diff: 2
Topic: Import Restrictions, graphing
Skill: Analytical
AACSB: Analytic Skills
30) Figure 6.5 illustrates the market for sugar. If sugar imports were banned:
A) domestic producers gain at the expense of domestic consumers.
B) domestic consumers gain at the expense of domestic producers.
C) domestic consumers gain at the expense of foreign producers.
D) foreign producers gain at the expense of domestic consumers and producers.
Answer: A
Diff: 2
Topic: Import Restrictions, graphing
Skill: Analytical
AACSB: Analytic Skills
31) A ban on imports will ________ the price domestic consumers pay for the good, and
________ the amount of the good consumed by domestic consumers.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: B
Diff: 2
Topic: Import Restrictions
Skill: Analytical
AACSB: Analytic Skills
43
Copyright © 2012 Pearson Education, Inc.
32) A ban on imports will ________ domestic producer surplus, and ________ domestic
consumer surplus.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: B
Diff: 2
Topic: Import Restrictions
Skill: Analytical
AACSB: Analytic Skills
Recall the Application about the importation of used cars into Mexico to answer the
following question(s).
33) Recall the Application. The ban on all imported used cars into Mexico other than those
produced in 1998 will ________ Mexican consumer surplus and ________ Mexican producer
surplus.
A) increase; increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease
Answer: B
Diff: 2
Topic: Application 1, Used Cars to Mexico: 1998 Cars Only
Skill: Analytical
AACSB: Analytic Skills
34) Recall the Application. The ban on all imported used cars into Mexico other than those
produced in 1998 will ________ U.S. producer surplus and ________ the equilibrium price of
1998 model used cars.
A) decrease; increase
B) increase; increase
C) increase; decrease
D) decrease; decrease
Answer: A
Diff: 2
Topic: Application 1, Used Cars to Mexico: 1998 Cars Only
Skill: Analytical
AACSB: Analytic Skills
44
Copyright © 2012 Pearson Education, Inc.
Recall the Application about the shortage of human organs for transplant operations to
answer the following question(s).
35) Recall the Application. In a normal market, price will stabilize the market for human organs
and will eliminate the shortage. Why do thousand of Americans die waiting for an organ
transplant?
A) There is no pricing mechanism to close the gap between quantity demanded and quantity
supplied.
B) People are interested in donating organs but the medicine is not fully advanced.
C) People can only find human organs in the black market.
D) none of the above
Answer: A
Diff: 2
Topic: Application 2, Supply and Demand for Human Organs
Skill: Analytical
AACSB: Analytic Skills
36) Recall the Application. The U.S. government sets the domestic price of human organs for
transplanting at zero which leads to:
A) a surplus in human organs available for transplanting.
B) a shortage of human organs available for transplanting.
C) market equilibrium in organs available for transplanting.
D) no organs available for transplanting.
Answer: B
Diff: 2
Topic: Application 2, Supply and Demand for Human Organs
Skill: Analytical
AACSB: Analytic Skills
37) Recall the Application. In the U.S. there are fewer human organs available for transplants
than people who need transplants, this problem could be reduced by:
A) allowing people who need a transplant to purchase organs from donors.
B) having the government buy organs from donors and then allocating them to hospitals for those
who need transplants.
C) having a public appeal to convince more people to donate organs for transplanting.
D) all of the above
Answer: D
Diff: 2
Topic: Application 2, Supply and Demand for Human Organs
Skill: Analytical
AACSB: Analytic Skills
45
Copyright © 2012 Pearson Education, Inc.
Additional Application
Prior to 2001 Canada annually exported billions of board feet of lumber to the United States
tariff-free. The two countries had followed an agreement in which there would be no restrictions
on the lumber from Canadian companies. In March 2001 the agreement ended and in 2002 the
United States imposed tariffs and duties on imported Canadian lumber. What were the effects of
these changes and who gained and who lost?
The forestry workers of Canada were hurt. About 15,000 workers lost their jobs in British
Columbia and many Canadian towns suffered from the loss of income from lumber sales and
related industries. Exports to the United States fell from 14.7 billion board feet in 2000 to 20.9
million board feet in 2004. When the lumber prices rose in the United States, the costs of
production for home building firms increased.
The U.S. government has realized $3.5 billion from the tariffs and that is sitting in the Treasury
awaiting resolution of legal disputes. Lumber companies in the United States have seen their
prices rise with less competition.
James Thayer, “Soft Wood, Hard Dispute,” The Weekly Standard, November 18, 2005.
OnlineAdd
38) According to this application about the United States imposing tariffs on lumber from
Canada. After the tariffs were placed on Canadian lumber imports, we could expect the consumer
surplus in the United States to:
A) increase.
B) decrease.
C) remain unaffected.
D) none of these
Answer: B
Diff: 3
Topic: Additional Application
Skill: Analytical
AACSB: Analytic Skills
39) According to this application about the United States imposing tariffs on lumber from
Canada. The effects of the U.S. tariffs will ________ the price of lumber in the United States and
________ the quantity of imports from Canada.
A) increase, decrease
B) decrease, decrease
C) increase, increase
D) decrease, decrease
Answer: A
Diff: 2
Topic: Additional Application
Skill: Analytical
AACSB: Analytic Skills
46
Copyright © 2012 Pearson Education, Inc.
40) According to this application about the United States imposing tariffs on lumber from
Canada. If the cost of production for U.S. construction companies increased, then their ________
curve should shift ________.
A) demand, left
B) supply, right
C) demand, right
D) supply, left
Answer: D
Diff: 3
Topic: Additional Application
Skill: Analytical
AACSB: Analytic Skills
41) There are losers and winners from a taxi medallion policy. The losers are consumers and the
winners are the people who receive a medallion.
Answer: TRUE
Diff: 2
Topic: Taxi Medallions
Skill: Conceptual
AACSB: Reflective Thinking
42) An import ban on shrimp increases the price of shrimp, decreases the quantity of shrimp, and
therefore domestic producers will gain at the expense of domestic consumers.
Answer: TRUE
Diff: 2
Topic: Import Restrictions
Skill: Conceptual
AACSB: Reflective Thinking
43) A quantity restriction decreases the price of the product and the quantity produced.
Answer: FALSE
Diff: 2
Topic: Import Restrictions
Skill: Conceptual
AACSB: Reflective Thinking
44) With a quantity restriction , the total surplus of the market increases. On the contrary, with
the licensing restriction, the total surplus decreases.
Answer: FALSE
Diff: 2
Topic: Import Restrictions
Skill: Conceptual
AACSB: Reflective Thinking
47
Copyright © 2012 Pearson Education, Inc.
45) A quantity restriction greater than the equilibrium quantity has no effect on a market.
Answer: TRUE
Diff: 2
Topic: Import Restrictions
Skill: Conceptual
AACSB: Reflective Thinking
46) An import ban on sugar decreases the price of sugar, decreases the quantity of sugar, and
increases the output of the domestic sugar industry.
Answer: FALSE
Diff: 3
Topic: Import Restrictions
Skill: Analytical
AACSB: Analytic Skills
47) Suppose that televisions are produced both domestically and abroad. What would a ban on
imported televisions do to the price of televisions, the quantity of televisions, and the output of
the domestic television industry?
Answer: A ban on imported televisions would lead to a leftward shift in the total supply, so price
increases and quantity decreases. However, since supply is upward sloping, it is evident that
domestic production will increase in the case of an import ban.
Diff: 2
Topic: Import Restrictions
Skill: Analytical
AACSB: Analytic Skills
48
Copyright © 2012 Pearson Education, Inc.
48) Draw a graph to illustrate the effect on the market of an import restriction. Show how price
and quantity in the market are affected. What happens to consumer and producer surplus?
Answer:
As shown in the graph, total supply includes production by foreign and domestic suppliers, and
the market is in equilibrium at P1 and Q1. When an import restriction is imposed, the supply
decreases to only the production by domestic suppliers. As a result the price increases to P2 and
the quantity decreases to Q2. Consumer surplus is decreased, and the ban eliminates the producer
surplus of foreign suppliers. A producer surplus for domestic suppliers is generated, thus they
gain at the expense of domestic consumers.
Diff: 3
Topic: Import Restrictions, graphing
Skill: Analytical
AACSB: Analytic Skills
49
Copyright © 2012 Pearson Education, Inc.
49) Draw a graph showing the effect on the market of the imposition of a quantity restriction.
Show the effect on consumer and producer surplus.
Answer:
As shown in the graph, the market is originally in equilibrium at a price of P1 and a quantity of
Q1. The imposition of the quantity restriction at Q2, which is less than Q1, also has the effect of
causing the price to rise to P2. The triangle whose sides are the vertical line at Q2, the supply
curve, and the demand curve represents the combined loss in consumer and producer surplus that
results.
Diff: 3
Topic: Import Restrictions, graphing
Skill: Analytical
AACSB: Analytic Skills
50
Copyright © 2012 Pearson Education, Inc.
6.5 Who Really Pays Taxes?
1) Refer to Figure 6.8. If your city imposes a tax of $100 per apartment, new monthly rent
consumers pay is:
A) $460.
B) $500.
C) $560.
D) $600.
Answer: C
Diff: 2
Topic: Tax Shifting: Forward and Backward, graphing
Skill: Analytical
AACSB: Analytic Skills
2) Refer to Figure 6.8. If your city imposes a tax of $100 per apartment, new monthly rent
landlords receive after the tax is:
A) $460.
B) $500.
C) $560.
D) $600.
Answer: A
Diff: 2
Topic: Tax Shifting: Forward and Backward, graphing
Skill: Analytical
AACSB: Analytic Skills
51
Copyright © 2012 Pearson Education, Inc.
3) Refer to Figure 6.8. If your city imposes a tax of $100 per apartment:
A) consumers take the entire burden of the tax.
B) landlords take the entire burden of the tax.
C) consumers pay $60 and landlords pay $40 tax per apartment.
D) consumers pay $40 and landlords pay $60 tax per apartment.
Answer: C
Diff: 2
Topic: Tax Shifting: Forward and Backward, graphing
Skill: Analytical
AACSB: Analytic Skills
4) Refer to Figure 6.8. If your city imposes a tax of $100 per apartment, the tax would incur the
deadweight loss of:
A) $48,000.
B) $100,000.
C) $520,000.
D) $560,000.
Answer: B
Diff: 3
Topic: Tax Shifting: Forward and Backward, graphing
Skill: Analytical
AACSB: Analytic Skills
5) Refer to Figure 6.8. Suppose that your city imposes a tax of $100 per apartment and the
supply curve is a vertical line at Q=10,000. Then:
A) consumers pay the whole amount of the tax.
B) landlords pay the whole amount of the tax.
C) consumers and landlords split the tax.
D) There is not sufficient information.
Answer: B
Diff: 3
Topic: Tax Shifting: Forward and Backward, graphing
Skill: Analytical
AACSB: Analytic Skills
6) Given the slope of a supply curve, if a demand curve becomes more price elastic:
A) the share of a tax consumers take becomes smaller.
B) the share of a tax consumers take becomes greater.
C) consumers pay the entire amount of a tax.
D) There is not sufficient information.
Answer: A
Diff: 3
Topic: Tax Shifting and the Price Elasticity of Demand
Skill: Conceptual
AACSB: Reflective Thinking
52
Copyright © 2012 Pearson Education, Inc.
7) Ceteris paribus, if the demand for gasoline is relatively inelastic, and the government decides
to place a tax on it, there should be a relatively ________ price hike to eliminate the excess
________ caused by the tax.
A) large; supply
B) large; demand
C) small; supply
D) small; demand
Answer: B
Diff: 2
Topic: Tax Shifting and the Price Elasticity of Demand
Skill: Analytical
AACSB: Analytic Skills
8) If demand is elastic, and the government decides to raise the tax on new cars. Then the price
for cars will increase by a ________ amount and car buyers will bear a ________ share of the
tax.
A) large; large
B) large; small
C) small; large
D) small; small
Answer: D
Diff: 2
Topic: Tax Shifting and the Price Elasticity of Demand
Skill: Analytical
AACSB: Analytic Skills
9) If demand is inelastic, and the government decides to raise the tax on water. Then the price for
water will increase by a ________ amount and water consumers will bear a ________ share of
the tax.
A) large; large
B) large; small
C) small; large
D) small; small
Answer: A
Diff: 2
Topic: Tax Shifting and the Price Elasticity of Demand
Skill: Analytical
AACSB: Analytic Skills
53
Copyright © 2012 Pearson Education, Inc.
10) Other things being equal, if the demand for a taxed good is relatively elastic, that is, the
demand curve is relatively ________ consumers pay a ________ part of the tax.
A) steep; large
B) steep; small
C) flat; large
D) flat; small
Answer: D
Diff: 2
Topic: Tax Shifting and the Price Elasticity of Demand
Skill: Analytical
AACSB: Analytic Skills
11) Ceteris paribus, if the demand curve for milk is inelastic and the government decides to
impose a tax on it. There is going to be a relatively ________ price hike to eliminate the excess
________ caused by the tax.
A) large; supply
B) large; demand
C) small; supply
D) small; demand
Answer: B
Diff: 2
Topic: Tax Shifting and the Price Elasticity of Demand
Skill: Analytical
AACSB: Analytic Skills
54
Copyright © 2012 Pearson Education, Inc.
12) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. The consumer
surplus at the initial equilibrium is shown by:
A) Triangle A.
B) Triangle A + Rectangle B.
C) Triangle A +Rectangle B + Triangle C.
D) Triangle A + Rectangle B + Rectangle D.
Answer: C
Diff: 2
Topic: Tax Burden and Deadweight Loss, graphing
Skill: Analytical
AACSB: Analytic Skills
13) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. The consumer
surplus at the new equilibrium with $2 tax is shown by:
A) Triangle A.
B) Triangle A + Rectangle B.
C) Rectangle B + Triangle C.
D) Triangle C + Rectangle E.
Answer: A
Diff: 2
Topic: Tax Burden and Deadweight Loss, graphing
Skill: Analytical
AACSB: Analytic Skills
55
Copyright © 2012 Pearson Education, Inc.
14) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. Suppose the
government imposes a tax of $2 per pound of fish, and the tax is paid in legal terms by
producers. Which of the following shows the extra money consumers must pay for the 100,000
pounds of fish they purchase?
A) Triangle A
B) Rectangle B
C) Triangle A + Rectangle B
D) Rectangle B + Triangle C
Answer: B
Diff: 2
Topic: Tax Burden and Deadweight Loss, graphing
Skill: Analytical
AACSB: Analytic Skills
15) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. Suppose the
government imposes a tax of $2 per pound of fish, and the tax is paid in legal terms by
producers. Which of the following shows the loss of consumer surplus on the fish that are NOT
consumed because of the tax?
A) Triangle C
B) Rectangle B + Triangle C
C) Triangle C + Rectangle E
D) Rectangle B + Rectangle D
Answer: A
Diff: 2
Topic: Tax Burden and Deadweight Loss, graphing
Skill: Analytical
AACSB: Analytic Skills
16) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. Suppose the
government imposes a tax of $2 per pound of fish, and the tax is paid in legal terms by
producers. Which of the following shows the tax revenue raised by the government?
A) Triangle A
B) Rectangle B
C) Rectangle B + Triangle C
D) Rectangle B + Rectangle D
Answer: B
Diff: 2
Topic: Tax Burden and Deadweight Loss, graphing
Skill: Analytical
AACSB: Analytic Skills
56
Copyright © 2012 Pearson Education, Inc.
17) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. Suppose the
government imposes a tax of $2 per pound of fish, and the tax is paid in legal terms by
producers. Which of the following shows the difference between the total burden of the tax and
the amount of revenue collected by the government?
A) Triangle A
B) Rectangle B
C) Triangle C
D) Rectangle E
Answer: C
Diff: 2
Topic: Tax Burden and Deadweight Loss, graphing
Skill: Analytical
AACSB: Analytic Skills
18) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. Suppose the
government imposes a tax of $2 per pound of fish, and the tax is paid in legal terms by
producers. Which of the following statements is correct?
A) Producers bear the full cost of the tax.
B) Consumers bear the full cost of the tax.
C) Both producers and consumers equally share the tax.
D) Consumers bear a relatively large share of the tax, compared to producers.
Answer: B
Diff: 2
Topic: Tax Burden and Deadweight Loss, graphing
Skill: Conceptual
AACSB: Reflective Thinking
19) Figure 6.9 depicts a hypothetical fish market with a horizontal supply curve. Suppose the
government imposes a tax of $2 per pound of fish, and the tax is paid in legal terms by
producers. If the supply curve were positively sloped:
A) producers would bear the full cost of the tax.
B) consumers would bear the full cost of the tax.
C) both producers and consumers share the tax.
D) There is not sufficient information.
Answer: C
Diff: 2
Topic: Tax Burden and Deadweight Loss, graphing
Skill: Conceptual
AACSB: Reflective Thinking
57
Copyright © 2012 Pearson Education, Inc.
Recall the Application about the group of large restaurant owners in France requesting
that the government lower the VAT on restaurant meals to answer the following
question(s).
20) Recall the Application. What would happen if there is a VAT cut on restaurant meals?
A) Competitiveness will be decreased in the restaurant industry.
B) There will be a decrease in the sales of restaurant meals.
C) Restaurant owners will cut the prices of restaurant meals.
D) none of the above
Answer: C
Diff: 2
Topic: Application 3, Response to Lower Taxes in French Restaurants
Skill: Conceptual
AACSB: Analytic Skills
21) Recall the Application. If there is a tax cut on restaurant meals, there should be a decrease in
cost that will be translated into ________ prices for consumers and ________ quantity of meals
served.
A) higher; higher.
B) higher; lower
C) lower; lower.
D) lower; higher.
Answer: D
Diff: 2
Topic: Application 3, Response to Lower Taxes in French Restaurants
Skill: Conceptual
AACSB: Analytic Skills
Recall the Application about the taxes on mobile phones in many African countries to
answer the following question(s).
22) Recall the Application. A study of the mobile phone market suggests that f taxes are reduced
on mobile phone service in developing nations, tax revenue would ________ in the short run and
________ in the long run.
A) increase; increase even more
B) decrease; increase
C) increase; decrease
D) decrease; decrease even more
Answer: B
Diff: 2
Topic: Application 4, Taxing Mobile Phones in Africa
Skill: Conceptual
AACSB: Reflective Thinking
58
Copyright © 2012 Pearson Education, Inc.
23) Recall the Application. The high tax rates on mobile phone service in many African nations
________ the use of mobile phones and ________ economic development.
A) discourages; encourages
B) discourages; impedes
C) encourages; encourages
D) encourages; impedes
Answer: B
Diff: 2
Topic: Application 4, Taxing Mobile Phones in Africa
Skill: Conceptual
AACSB: Reflective Thinking
24) Given the slope of a supply curve, consumers take a relatively smaller share of a tax if their
demand becomes more price elastic.
Answer: TRUE
Diff: 3
Topic: Tax Shifting and the Price Elasticity of Demand
Skill: Conceptual
AACSB: Reflective Thinking
25) If the market for a good consists of a downward sloping demand curve and a vertical supply
curve, sellers will have to pay the whole amount of a newly imposed tax.
Answer: TRUE
Diff: 3
Topic: Tax Burden and Deadweight Loss
Skill: Conceptual
AACSB: Reflective Thinking
27) Consumers pay the part of a tax associated with a higher price for the product.
Answer: TRUE
Diff: 2
Topic: Tax Burden and Deadweight Loss
Skill: Conceptual
AACSB: Reflective Thinking
59
Copyright © 2012 Pearson Education, Inc.
28) If the market for a good consists of a downward sloping demand curve and a horizontal
supply curve, consumers will pay the whole amount of a newly imposed tax.
Answer: TRUE
Diff: 2
Topic: Tax Burden and Deadweight Loss
Skill: Conceptual
AACSB: Reflective Thinking
60
Copyright © 2012 Pearson Education, Inc.