Exercise 4 - Solution PDF

Exercise 4 Solution
Chapter 4 Economic Efficiency, Government Price Setting, and Taxes

4.1 Consumer Surplus and Producer Surplus

1) The difference between the highest price a consumer is willing to pay for a good and
the price the consumer actually pays is called
A) producer surplus.
B) the substitution effect.
C) the income effect.
D) consumer surplus.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 98/98
Topic: Consumer Surplus
Objective: LO1: Distinguish between the concepts of consumer surplus and producer
surplus.
AACSB: Reflective Thinking
Special Feature: None

2) In a city with rent-controlled apartments, all of the following are true except
A) apartments usually rent for rates lower than the market rate.
B) apartments are often in shorter supply than they would be without rent control.
C) it usually takes more time to find an apartment than it would without rent control.
D) landlords have an incentive to rent more apartments than they would without rent
control.
Answer: D
Topic: Price Ceilings
surplus.
Special Feature: Economics in YOUR LIFE!: Does Rent Control Make It Easier to
Find an Affordable Apartment?

3) Lucinda buys a new GPS system for $250. She receives consumer surplus of $75
from the purchase. How much does Lucinda value her GPS system?
A) $75
B) $175
C) $250
D) $325
Answer: D
Comment: Recurring
surplus.
AACSB: Analytic Skills

4) Consumers are willing to purchase a product up to the point where
A) the marginal benefit of consuming the product is equal to the marginal cost of
consuming it.
B) the consumer surplus is equal to the producer surplus.
C) the marginal benefit of consuming the product equals the area below the supply
curve and above the market price.
D) the marginal benefit of consuming a product is equal to its price.
Answer: D
Comment: Recurring
surplus.

Table 4-1

Consumer Willingness to Pay
Tom $40
Dick 30
Harriet 25

5) Refer to Table 4-1. The table above lists the highest prices three consumers, Tom,
Dick and Harriet, are willing to pay for a short-sleeved polo shirt. If the price of one of
the shirts is $28 dollars
A) Tom will buy two shirts, Dick will buy one shirt and Harriet will buy no shirts.
B) Tom will receive $12 of consumer surplus from buying one shirt.
C) Tom and Dick receive a total of $70 of consumer surplus from buying one shirt each.
Harriet will buy no shirts.
D) Harriet will receive $25 of consumer surplus since she will buy no shirts.
Answer: B
Comment: Recurring
surplus.

6) Refer to Table 4-1. The table above lists the highest prices three consumers, Tom,
Dick and Harriet, are willing to pay for a short-sleeved polo shirt. If the price of the
shirts falls from $28 to $20
A) consumer surplus increases from $14 to $35.
B) Tom will buy two shirts; Dick and Harriet will each buy one shirt.
C) consumer surplus will increase from $70 to $95.
D) Harriet will receive more consumer surplus than Tom or Dick.
Answer: A
Comment: Recurring
surplus.

7) Marginal cost is
A) the total cost of producing one unit of a good or service.
B) the average cost of producing a good or service.
C) the difference between the lowest price a firm would have been willing to accept and
the price it actually receives.
D) the additional cost to a firm of producing one more unit of a good or service.
Answer: D
Comment: Recurring
surplus.

8) The total amount of producer surplus in a market is equal to
A) the difference between quantity supplied and quantity demanded.
B) the area above the market supply curve and below the market price.
C) the area above the market supply curve.
D) the area between the demand curve and the supply curve below the market price.
Answer: B
Comment: Recurring
Topic: Producer Surplus
surplus.

9) Which of the following statements is true?
A) Consumer surplus measures the total benefit from participating in a market.
B) When a market is in equilibrium consumer surplus equals producer surplus.
C) Consumer surplus measures the net benefit from participating in a market.
D) Producer surplus measures the total benefit received by producers from participating
in a market.
Answer: C
Comment: Recurring
surplus.

Figure 4-2

10) Refer to Figure 4-2. What area represents producer surplus at a price of P
2
?
A) A + B
B) B + D
C) A + B + C
D) A + B + C + D + E
Answer: C
Comment: Recurring
Skill: Graphing
surplus.

11) Refer to Figure 4-2. What area represents the increase in producer surplus when
the market price rises from P
1
to P
2
?
A) B + D
B) A + C + E
C) C + E
D) A + B
Answer: D
Comment: Recurring
Skill: Graphing
surplus.

4.2 The Efficiency of Competitive Markets

1) In a competitive market equilibrium
A) total consumer surplus equals total producer surplus.
B) marginal benefit and marginal cost are maximized.
C) consumers and producers benefit equally.
D) the marginal benefit equals the marginal cost of the last unit sold.
Answer: D
Comment: Recurring
Topic: Competitive Equilibrium
Objective: LO2: Understand the concept of economic efficiency.

Figure 4-3

Figure 4-3 shows the market for tiger shrimp. The market is initially in equilibrium at a
price of $15 and a quantity of 80. Now suppose producers decide to cut output to 40

in
order to raise the price to $18.

2) Refer to Figure 4-3. What is the value of consumer surplus at a price of $18??
A) $60
B) $120
C) $180
D) $240
Answer: A
Comment: Recurring
Topic: Economic Surplus
Skill: Graphing
3) Refer to Figure 4-3. What is the value of producer surplus at a price of $18??
A) $240
B) $300
C) $340
D) $720
Answer: A
Comment: Recurring
Skill: Graphing

4) Refer to Figure 4-3. What is the value of the deadweight loss at a price of $18??
A) $100
B) $180
C) $660
D) $1,040
Answer: A
Comment: Recurring
Topic: Deadweight Loss
Skill: Graphing

5) Refer to Figure 4-3. At a price of $18 consumers are willing to buy 40 pounds of
tiger shrimp. Is this an economically efficient quantity?
A) No, the marginal benefit of the 40th unit exceeds the marginal cost of that 80th unit.
B) Yes, otherwise consumers would not buy 40 units.
C) Yes, because $18 shows what consumers are willing to pay for the product.
D) No, the marginal cost of the 40th unit exceeds the marginal benefit of the 40th unit.
Answer: A
Comment: Recurring
Topic: Economic Efficiency
Skill: Graphing

6) ________ refers to the reduction in economic surplus resulting from not being in
competitive equilibrium.
A) Marginal cost
B) Producer atrophy
C) Deadweight loss
D) Economic shortage
Answer: C
Comment: Recurring
Topic: Deadweight Loss

7) ________ is maximized in a competitive market when marginal benefit equals
marginal cost.
A) Deadweight loss
B) Marginal profit
C) Economic surplus
D) Selling price
Answer: C
Comment: Recurring

8) If there is a market outcome in which the marginal benefit to consumers of the last
unit produced is equal to its marginal cost of production and consumer surplus plus
producer surplus is maximized, then
A) maximum deadweight loss occurs.
B) economic efficiency is achieved.
C) profits are maximized.
D) costs are minimized.
Answer: B
Comment: Recurring
Topic: Economic Efficiency

4.3 Government Intervention in the Market: Price Floors and Price Ceilings

1) When a competitive equilibrium is achieved in a market
A) all individuals are better off than they would be if a price ceiling or price floor was
imposed by government.
B) the total net benefit to society is maximized.
C) the total benefits to consumers are equal to the total benefits to producers.
D) economic surplus equals the deadweight loss.
Answer: B
Comment: Recurring
Topic: Competitive Equilibrium
Objective: LO3: Explain the economic effect of government-imposed price ceilings
and price floors.

2) Which of the following is not a consequence of minimum wage laws?
A) Low skilled workers are hurt because minimum wage reduces the number of jobs
providing low skilled
workers with training.
B) Employers will be reluctant to offer low-skill workers jobs with training.
C) Producers have an incentive to offer workers non-wage benefits such as health care
benefits and convenient working hours rather than a higher wage.
D) Some workers benefit when the minimum wage is increased.
Answer: C
Comment: Recurring
Topic: Price Floors
and price floors.

3) To affect the market outcome, a price ceiling
A) must be set below the black market price.
B) must be set below the legal price.
C) must be set below the price floor.
D) must be set below the equilibrium price.
Answer: D
Comment: Recurring
Topic: Price Ceilings
and price floors.

4) Economists refer a to a market where buying and selling take place at prices that
violate government price regulations as
A) a black market.
B) an outlaw market.
C) a noncompetitive market.
D) a restricted market.
Answer: A
Comment: Recurring
Topic: Black Markets
and price floors.

5) Which term refers to a legally established minimum price that firms may charge?
A) a price ceiling
B) a subsidy
C) a price floor
D) a tariff
Answer: C
Comment: Recurring
Topic: Price Floors
and price floors.

6) A minimum wage law dictates
A) the minimum quantity of labor that a firm must employ.
B) the lowest wage that firms may pay for labor.
C) the highest wage that firms must pay for labor.
D) the minimum qualifications for labor.
Answer: B
Comment: Recurring
Topic: Price Floors
and price floors.

7) Which of the following is not a result of government price controls?
A) Some people win and some people lose.
B) Price controls benefit poor consumers but harm producers and wealthy consumers.
C) Price controls decrease economic efficiency.
D) A deadweight loss will occur.
Answer: B
Comment: Recurring
Topic: Price Controls
and price floors.

4.4 The Economic Impact of Taxes

1) The actual division of the burden of a tax between buyers and sellers in a market is
called
A) tax incidence.
B) tax liability.
C) tax bearer.
D) tax parity.
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 112-113/112-113
Topic: Tax Incidence
Objective: LO4: Analyze the economic impact of taxes.

2) Suppose the demand curve for a product is vertical and the supply curve is upward
sloping. If a unit tax is imposed in the market for this product,
A) sellers bear the entire burden of the tax.
B) buyers bear the entire burden of the tax.
C) the tax burden will be shared equally between buyers and sellers.
D) buyers share the burden of the tax with government.
Answer: B
Comment: Recurring

3) Suppose an excise tax of $1 is imposed on every case of beer sold and sellers are
responsible for paying this tax. How would the imposition of the tax be illustrated in a
graph?
A) The supply curve for cases of beer would shift to the right by $1.
B) The supply curve for cases of beer would shift to the left by more than $1.
C) The supply curve for cases of beer would shift to the left by less than $1.
D) The supply curve for cases of beer would shift to the left by $1.
Answer: D
Comment: Recurring
Topic: The Economic Impact of Taxes

4) When Congress passed a law that imposed a tax designed to fund its Social Security
and Medicare programs it wanted employers and workers to share the burden of the tax
equally. Most economists who have studied the incidence of the tax have concluded
A) the tax is not high enough to cover the future costs of Social Security and Medicare.
B) the tax on employers is too high because it reduces the employment of low-skilled
workers.
C) the burden of the tax falls almost entirely on workers.
D) the tax rate should be greater for high income workers than for low income workers.
Answer: C
Diff: 2 Page Ref: 115-116/115-116
Special Feature: Making the Connection: Is the Burden of the Social Security Tax
Really Shared Equally between Workers and Firms?

5) When the government taxes a good or service, it
A) affects the market equilibrium for that good or service.
B) eliminates the deadweight loss associated with the good or service.
C) increases consumer surplus for the good or service.
D) increases producer surplus for the good or service.
Answer: A
Comment: Recurring

6) A tax that imposes a small excess burden relative to the tax revenue that it raises is
A) a payroll tax.
B) a sin tax.
C) an efficient tax.
D) a FICA tax.
Answer: C
Comment: Recurring

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Exercise 4 Solution

Chapter 4 Economic Efficiency, Government Price Setting, and Taxes

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