Economics 101
Fall 2001
Practice Questions # 3
Topics covered : 1. Price ceilings / Price floors
2. Agricultural price support and subsidy program
3. Excise tax
4. Elasticity
- 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.
- 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.
- The following
table shows the demand schedule for movies in a small community
Price
|
Quantity demanded
(Thousands per
month)
|
$10
8
6
4
2
|
2
4
6
8
10
|
The
elasticity of demand is
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.
- 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
- 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
- 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
- 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
- Assume
that initially the market demand curve is QD = 1200 -
4P and market supply curve is QS = 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?
- Assume
that the market demand curve for wheat is QD = 30 -
.5P and the market supply curve of wheat is QS =-
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 PF = 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 PT = 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?