Ch.9 The Analysis of Competitive MarketsOct. 2004
Multiple Choice:
USE Figure 1 FOR QUESTIONS 1 & 2:
1.Compared to the situation at the equilibrium price and quantity of Po and Qo, what is the change in consumer surplus due to the policy of a price floor of Pf if producers produce Q2, but the government does not buy the surplus?
a. minus rectangle L plus triangles N and O
b. minus rectangle L
c.minus rectangle L minus triangle N
d.rectangle M plus triangle O
e.minus triangle R
2. In the above problem, what is the change in producer surplus due to the policy?
a. minus rectangle L plus triangles N and R
b.rectangle M plus triangle O
c.triangles N plus R
d.rectangle L minus triangle O minus shaded trapezoid T
e.rectangle L
3. When government intervenes in a competitive market by imposing an effective price ceiling, we would expect:
a.the quantity supplied to fall and the quantity demanded to rise
b.the quantity supplied and the quantity demanded to fall
c.the quantity supplied to rise and the quantity demanded to rise
d.the quantity supplied to rise and the quantity demanded to fall
4. In an unregulated, competitive market consumer surplus exists because:
a. some sellers are willing to take a lower price than the equilibrium price
b.some consumers are willing to pay more than the equilibrium price
c.some sellers will only sell at prices above equilibrium price (or actual price).
d.some consumers are willing to make purchases only if the price is below the actual price
5.When a below equilibrium price ceiling is imposed on a market,
a. producers clearly benefit
b. there is a transfer of surplus from producers to consumers, but consumers may end up worse off as a group
c. consumers who are still able to purchase as much as before gain more surplus than sellers lose
d. sellers who are still able to sell as much as before are not harmed
e.there is a net gain in welfare
6. In an unregulated, competitive market, producer surplus exists because:
a. some consumers are willing to pay more than the equilibrium price
b. some producers are willing to take more than the equilibrium price
c. some producers are willing to sell at less than the equilibrium price
d. some consumers are willing to purchase, but only at prices below equilibrium price.
7.Deadweight loss refers to:
a.high overhead costs
b.diseconomies of scale
c.net losses in total surplus
d.excess inventory
8. When a minimum wage is imposed on a competitive labor market and the minimum wage is above the equilibrium wage, the change in producer surplus (seller surplus) consisted of:
a. two parts and both are positive dollar values
b. two parts and both are negative dollar values
c.one part negative and always greater than the other part that is positive (both in dollars).
d.one part positive and one part negative. The positive part could be greater than the negative part (both parts in dollars).
9. Which of the following policies could lead to a deadweight loss?
a. price ceilings
b.price floors
c.policies prohibiting the sale of human organs
d.all of the above
e.a and b only
10. Which is most nearly correct concerning import tariffs and quotas (which are not auctioned off)?
a. there is no domestic deadweight loss with quotas
b. tariffs and quotas both result in domestic deadweight losses, but the total loss to the U.S. (including the deadweight loss) from quotas is less
c.tariffs and quotas both result in domestic deadweight losses, but the total loss to the U.S. (including the deadweight loss) from tariffs is less
d. there is no domestic deadweight loss from tariffs
e.tariffs impose a loss only if they are high enough to eliminate all trade
11.When a per-unit tax is levied on sellers,
a.sellers always bear the full burden
b.sellers always pass on the tax to buyers as increased prices
c.sellers bear the larger share if supply is highly elastic and demand is highly inelastic
d.buyers bear the larger share if supply is highly elastic and demand is highly inelastic
e.the ultimate burden of the tax is shared equally between buyers and sellers
12.The consensus among economists regarding airline deregulation is that:
a.deregulation created chaos
b.deregulation resulted in net welfare gains
c.deregulation caused a deadweight loss
d.industry profits fell considerably after deregulation
13.The most logical explanation for the use of price supports to raise farmers' income rather than relying upon direct cash payments is:
a.price supports are more efficient
b.price supports end up costing the government less than direct cash payments
c.price supports are politically more attractive
d.price supports result in a smaller deadweight loss
e.all of the above
14.Acreage limitation programs put on such agricultural programs as wheat can be made to work if the government gives farmers great enough incentives. When such a program is put in place,
a.the total change in welfare is negative
b.the total change in welfare is positive
c.the total change welfare would be negative, but only because of the additional payments for not producing
d.the total change in welfare would be positive, but only because of the additional payments for not producing
15.The burden of a tax per unit of output will fall heavily on consumers when:
a.demand is relatively inelastic and supply is relatively elastic
b.demand is relatively inelastic and supply is relatively inelastic
c.demand is relatively elastic and supply is relatively elastic
d.demand is relatively elastic and supply is relatively inelastic
Use Figure 2 for the next 5 questions:
16.If the government purchases enough alfalfa to raise the price from $50/ton to $75/ton, the cost (to the government) of the program will be:
a)$100 million
b)$225 million
c)$315 million
d)$675 million
e)none of the above
17.If the government purchases enough alfalfa to raise the price from $50/ton to $75/ton, the program will increase producer surplus by:
a)$450 million
b)$522.5 million
c)$562.5 million
d)$1,875 million
e)none of the above
18.If the government purchases enough alfalfa to raise the price from $50/ton to $75/ton, society is worse off by the amount of:
a)$450 million
b)$522.5 million
c)$562.5 million
d)$1,875 million
e)none of the above
19.If the government purchases enough alfalfa to raise the price from $50/ton to $75/ton, consumer surplus is reduced by:
a)$450 million
b)$522.5 million
c)$562.5 million
d)$1,875 million
e)none of the above
20.Suppose the government decides to support a price of $75/ton by paying producers not to produce the excess supply of alfalfa (which 25 - 16 = 9 million tons). The minimum cost (to the government) of this program will be:
a)$157.5 million
b)$202.5 million
c)$315.5 million
d)$1,875 million
e)none of the above
21.In Figure 3 graph, how much of consumer surplus is transferred to domestic producers after a tariff is imposed?
a. area PWPREAd. area FGC
b.area AEFGe. areas EAB plus FGC
c. area EFCB
22.In Figure 3, what is the deadweight loss after a tariff is imposed?
a. area PWPREAd. area FGC
b.area AEFGe. areas EAB plus FGC
c. area EFCB
23.In Figure 3, how much tariff revenue is collected by the treasury?
a. area PWPREAd. area FGC
b.area AEFGe. areas EAB plus FGC
c. area EFCB
24.In Figure 4, how much consumer surplus is lost due to the imposition of the tax?
a)$475b)$525c)$575d)$1,275e)none of the above
25.In Figure 4, what is the value of the deadweight loss due to the imposition of the tax?
a)$10b)$15c)$25d)$35e)none of the above
26.In Figure 4, what is the loss of producer surplus due to the imposition of the tax?
a)$190b)$215c)$250d)$310e)none of the above
27.In Figure 5, what is the value of consumer surplus after the rent ceiling is imposed?
a)$1,050
b)$1,250
c)$1,450
d)$1,650
e)none of the above
28.In Figure 5, what is the lost producer surplus after the rent ceiling is imposed?
a)$450
b)$600
c)$1,150
d)$1,250
e)none of the above
29.In Figure 5, what is the deadweight loss after the rent ceiling is imposed?
a)$500
b)$850
c)$1,150
d)$1,250
e)none of the above
30.In Figure 5, what is the producer surplus after the rent ceiling is imposed?
a)$75
b)$125
c)$175
d)$200
e)$250
Ch.9 The Analysis of Competitive Markets
Problems:
1.Suppose the government regulates the price of a good to be no lower than some minimum level. Can such a minimum price make producers as a whole worse off? Explain.
2.Explain diagrammatically and verbally how consumer surplus is transferred from U.S. consumers to other groups when a quota is imposed on foreign sugar.
3.Suppose the government wants to limit imports of a certain good. Is it preferable to use an import quota or a tariff? Why?
4.Some people have suggested raising the minimum wage, perhaps with a government subsidy to employers to help finance the higher wage. This exercise examines the economics of a minimum wage and wage subsidies. Suppose the supply of labor is given by Ls = 10 x w, where Ls is the quantity of labor (in millions of persons employed each year), and w is the wage rate (in dollars per hour). The demand for labor is given by LD = 60 - 10 x w.
a. What will the free market wage rate and employment level be? Suppose the government sets a minimum wage of $4 per hour. How many people would then be employed?
b. Suppose that instead of a minimum wage, the government offered a subsidy of $1 per hour for each employee. (The subsidy would be paid directly to the company.) What will the total level of employment be now? What will the equilibrium wage rate be?
5.Suppose the market for widgets can be described by the following equations:
Demand: P=10-Q Supply: P=Q-4
where P is the price in dollars per unit, and Q is the quantity in thousands of units. Then:
a. What is the equilibrium price and quantity?
b. Suppose the government imposes a tax of $1 per unit to reduce widget consumption and raise government revenues. What will the new equilibrium quantity be? What price will the buyer pay? What amount per unit will the seller receive?
c. Suppose the government has a change of heart about the importance of widgets to the happiness of the American public. The tax is removed, and a subsidy of $1 per unit is granted to widget producers. What will the equilibrium quantity be? What price will the buyer pay? What amount per unit (including the subsidy) will the seller receive? What will be the total cost to the government?
6.In example 9.1, we calculated the gains and losses from price controls on natural gas, and found that there was a deadweight loss of $1.4 billion. This calculation was based on a price of oil of $8 per barrel. If the price of oil had been $12 per barrel, what would the free market price of gas be? How large a deadweight loss would have resulted if the maximum allowable price had been $1.00 per mcf?
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