CH 10

Package: Test Bank
Title: Microeconomics: Theory and Application, 12e

Chapter Number: 10
Question Type: Multiple Choice
1. What is meant by consumer surplus?
a. It is the total quantity of a good bought by a consumer divided by the price paid.
b. It is a measure of an individual consumer’s utility from the consumption of a good.
c. It is the difference between a consumer’s maximum willingness to pay and the price.
d. It is a measure of the total benefit to consumers from the purchase of a good.
Answer: C
Difficulty Level: Easy

Section Reference: The Evaluation of Gains and Losses
Learning Objective: Show how changes in market conditions or government policies affect the
welfare of consumers, producers, and market participants as a whole.
2. What is meant by producer surplus?
a. It is the total quantity of a good produced by the seller.

b. It is the difference between the producer’s marginal cost and the price.
c. It is the difference between a producer’s minimum selling price and the actual price.
d. It is a measure of the total benefit to producers resulting from the purchase of an input.
Answer: C

3. Producer surplus is calculated as _____.
a. the area between the price line and the supply curve up to the equilibrium level of output
b. the area between the supply curve and the X-axis up to the equilibrium level of output
c. the area between the price line and the demand curve up to the equilibrium level of output
d. the area between the demand curve and the supply curve up to the equilibrium level of output
Answer: A
4. Suppose the demand for raspberry frozen yogurt can be represented by the equation QD = 5 – 2P,
and the supply is given by the equation QS = 3P. Which of the following is the best estimate of the
consumer surplus in this market?
a. $2
b. $1.25
c. $2.25
d. $3.75
Answer: C
Difficulty Level: Hard

Section: The Evaluation of Gains and Losses
5. Suppose the demand for ice cream sundaes can be represented by the equation QD = 10 – P, and
the supply is given by the equation QS = P. Which of the following is the best estimate of the
producer surplus in this market?
a. $5
b. $10
c. $12.5
d. $22.5
Answer: C

6. The long-run supply curve in a constant-cost competitive industry is a(n) _____ line.
a. horizontal
b. vertical
c. downward sloping
d. upward sloping
Answer: A

7. In the long run, aggregate producer surplus is zero in:
a. industries with positive accounting profits.

b. industries with a positive economic profit.
c. decreasing-cost industries.
d. constant-cost competitive industries.
Answer: D
Difficulty Level: Medium

8. The total surplus gained by all the participants in a competitive market is the area between the
_____ up to the equilibrium level of output.
a. demand curve and the equilibrium price line

b. demand curve and the supply curve
c. demand curve and the horizontal axis
d. equilibrium price line and the horizontal axis
Answer: B

9. The area under the supply curve represents _____.
a. the variable cost of producing the good or service

b. the fixed cost of producing the good or service
c. the marginal value to the firm from producing the good or service
d. the total revenue earned by the firm from selling the good or service
Answer: A

10. The following figure shows the effect of a price ceiling in the market for yams. The market was
initially in equilibrium at price P2 and quantity B.
Refer to Figure 10-1. The total surplus at the initial point of equilibrium, F, is given by _____.
a. LFP2
b. LFGP1
c. LFM
d. LFIP1
Answer: C

11. The following figure shows the intersection of demand and supply at the price P2 and quantity
Q2 in a competitive market.
Refer to Figure 10-2. What is the consumer surplus at the equilibrium level of output?
a. a + b + f + g + h
b. a + b + c + d
c. a + b + c + f + g
d. a + b + c
Answer: D

Refer to Figure 10-2. What is the producer surplus at the equilibrium level of output?
a. f + g + j
b. f + g + h + i + j
c. f + g
d. i + h + g + f
Answer: A

13. What is meant by a deadweight loss?
a. It is the aggregate loss in total surplus in an inefficient market.

b. It is the total loss in producer surplus due to output being at an inefficient level.
c. It is the sum of the consumer and producer surpluses in an inefficient market.
d. It is the loss in consumer surplus due to a price ceiling or floor in the market.
Answer: A

14. The level of output produced by a firm is efficient if _____ at that level of output.
a. marginal benefit equals marginal cost

b. total cost equals total revenue
c. fixed cost equals price
d. average variable cost equals average revenue
Answer: A

15. When the efficient rate of output is produced in the short run:
a. marginal cost is greater than marginal benefit.

b. the producer surplus is as large as possible.
c. the total surplus is as large as possible.
d. marginal benefit is greater than marginal cost.
Answer: C

16. The equilibrium of a competitive industry is:
a. equitable but not necessarily efficient.

b. efficient.
c. not always efficient.
d. neither efficient nor equitable.
Answer: B

17. When a price ceiling is imposed in a competitive market at a level below the equilibrium price:
a. the gain to producers outweighs the loss to consumers.
b. the output level becomes inefficient.

c. the total surplus in the market is not affected.
d. the producer surplus is increased.
Answer: B

Refer to Figure 10-2. What is the deadweight loss if a price ceiling is imposed at the price level P3
in this market?
a. b + f + c + g
b. b + c + d + e
c. c + g
d. d + e
Answer: C

In Figure 10-1, the deadweight loss due to a price ceiling set at P1 is area _____.
a. GFH
b. EFI
c. EFK
d. EFHI
Answer: B

20. When a price ceiling is imposed in a competitive market at a level below the equilibrium price:
a. the total surplus is reduced.

b. there is no welfare cost associated with it.
c. the consumer surplus increases more than producer surplus.
d. the producer surplus increases more than consumer surplus.
Answer: A

Refer to Figure 10-1. The aggregate consumer surplus at the initial point of equilibrium, F, is
_____.
a. EFJ
b. LEJP2
c. LEP3
d. LFP2
Answer: D

In Figure 10-1, the aggregate consumer surplus after a price ceiling is set at P1 is _____.
a. LFP2
b. LEP3
c. LEJP2
d. LEIP1
Answer: D
In Figure 10-1, what is the quantity of output produced after the imposition of the price ceiling at
P1?
a. OA
b. OB
c. OC
d. ON
Answer: A

In Figure 10-1, the net change in total surplus due to a price ceiling set at P3 is _____.
a. EKF
b. P3KFP2
c. 0
d. EFJ
Answer: C

25. When a price ceiling is imposed on a competitive market at a level above the equilibrium price:
a. the consumer surplus is reduced.

b. producers lose some or all of the producer surplus.
c. the total surplus is not changed by the price ceiling.
d. both the producers and consumers lose surplus.
Answer: C

26. When a price ceiling is imposed on a competitive market at a level equal to the equilibrium
price:
a. consumer surplus is increased.

b. producer surplus is increased.
c. both producer and consumer surplus is reduced.
d. total surplus remains unchanged.
Answer: D

27. Suppose an increasing-cost competitive industry is in equilibrium at a price of $100 and an

output of 1,000 units. When a price ceiling of $80 is imposed the quantity traded in the market
reduces to 800 units. Which of the following is true?
a. Consumer surplus will increase and producer surplus will fall, but total surplus stays the same.
b. Consumer surplus will fall and producer surplus will increase, keeping total surplus unchanged.
c. Consumer surplus may or may not fall but producer surplus will fall.
d. Consumer surplus will remain unchanged, but producer surplus and total surplus will fall.
Answer: C

Refer to Figure 10-1. The change in aggregate consumer surplus due to a price ceiling set at P1 is
area _____.
a. –EFJ
b. EFJ + P2JIP1
c. EFJ – P3EJP2
d. P2JIP1 – EFJ
Answer: D

Refer to Figure 10-1. The change in aggregate producer surplus due to a price ceiling set at P1 is
area _____.
a. –EFI
b. EFJ – P2JIP1
c. –P2FIP1
d. P1IM
Answer: C

In Figure 10-1, the aggregate producer surplus after a price ceiling is set at P1 is area _____.
a. MFP2
b. MIEP3
c. MIJP2
d. MIP1
Answer: D

In Figure 10-1, the aggregate producer surplus at the initial point of equilibrium, F, is area _____.
a. P2FIP1
b. FP2M
c. MIP1
d. LP2F
Answer: B

32. Presently, the United States produces as well as imports crude oil. Suppose the government
imposes a $10 per barrel excise tax on imported oil. What will happen?
a. The price of oil will rise by $10; less oil will be consumed but sales of foreign producers will rise
at the expense of domestic producers.
b. The price of oil will rise; less oil will be consumed but sales of domestic producers will rise at
the expense of the foreign oil producers.
c. The price of oil will decline and more U.S.-produced oil will be sold in place of the heavily taxed
foreign oil.
d. The price of oil will decline and more oil will be consumed but the relative shares of the oil
market between the U.S. and foreign oil producers will be unchanged.
Answer: B

Section Reference: Excise Taxation
Learning Objective: Analyze the effects of an excise tax on a specific good on the welfare of
consumers, producers, and market participants as a whole.
33. In the short run, an excise tax placed on all firms in an increasing-cost competitive industry
will result in:
a. a fall in price and an increase in output.

b. an increase in output and a fall in price.
c. a fall in both price and output.
d. an increase in price and a fall in output.
Answer: D

34. A per-unit excise tax on a single competitive firm causes:
a. all cost curves, except the total fixed cost curve to increase by the amount of the tax.
b. all per-unit cost curves to increase by less than the amount of the tax.
c. all per-unit cost curves, except the marginal cost curve, to decrease by the amount of the tax.
d. all per-unit cost curves and the marginal cost curve to increase by the amount of the tax.
Answer: D

35. An excise tax levied on firms in a constant-cost competitive industry will:
a. increase output more in the short run than in the long run.
b. reduce output more in the long run than in the short run.
c. benefit consumers in the short run but harm them in the long run.
d. increase the product price more in the short run than in the long run.
Answer: B

36. If a good is produced by an increasing-cost competitive industry and the demand for its product
is elastic, the imposition of a per-unit tax on producers will cause price to _____ in the short run.
a. rise by the amount of the tax

b. fall by the amount of the tax
c. rise by less than the amount of the tax
d. fall by more than the amount of the tax
Answer: C

37. In the long run, the imposition of an excise tax in a constant-cost competitive industry will
cause price to:
a. rise by the amount of the tax.

b. fall by the amount of the tax.
c. rise by less than the amount of the tax.
d. fall by more than the amount of the tax.
Answer: A

38. A given per-unit excise tax will increase the short run product price by the highest amount
when:
a. demand is elastic and supply is inelastic.
b. supply is inelastic and demand is elastic.
c. demand is inelastic and supply is elastic.
d. supply is perfectly inelastic and demand is elastic.
Answer: C

39. Consider two increasing-cost competitive industries (A and b. having identical supply curves.
However, the demand curve faced by industry A is more inelastic than the demand curve of
industry B. Which of the following is true if a per-unit excise tax is levied on the output of both the
industries?
a. The consumers of industry A’s product will bear a greater burden of the tax than the producers.
b. The consumers of industry A’s product will bear a smaller burden of the tax than the producers.
c. The consumers of industry B’s product will bear a larger burden of the tax than the consumers of
industry A.
d. The consumers of industry B’s product will bear the entire burden of the tax imposed on that
product.
Answer: A

Section: Excise Taxation
40. Consider two increasing cost competitive industries (A and b. having identical demand curves.
However, the supply curve faced by industry A is more inelastic than the supply curve of industry
B. Which of the following is true if a per-unit excise tax is levied on the output of both the
industries?
a. The consumers of industry A’s product will bear a greater burden of the tax than the producers.
b. The consumers of industry A’s product will bear a smaller burden of the tax than the producers.
c. The consumers of industry B’s product will bear a smaller burden of the tax than the consumers
of industry A.
d. The consumers of industry B’s product will bear the entire burden of the tax imposed on that
product.
Answer: B
41. If a commodity has a(n) _____, a greater share of the burden of an excise tax levied on the
commodity would be borne by the producers.
a. relatively elastic supply curve and a perfectly inelastic demand curve

b. perfectly elastic supply curve
c. relatively inelastic demand curve and a relatively elastic supply curve
d. perfectly elastic demand curve
Answer: D

42. If a commodity has a(n) _____, a greater share of the burden of an excise tax levied on the
commodity would be borne by the consumers.
a. perfectly elastic demand curve and an elastic supply curve

b. perfectly elastic demand curve and perfectly inelastic supply curve
c. relatively inelastic supply curve
d. perfectly inelastic demand curve
Answer: D

43. An excise tax imposed on junk food reduces consumer surplus by $50, producer surplus by
$80, and results in tax revenue of $40 for the government. What is the welfare effect of this tax?
a. A net loss of $10

b. A net gain of $40
c. A net loss of $90
d. A net loss of $130
Answer: C

44. For an excise tax which causes output in a market to fall to zero:
a. the tax revenue and deadweight loss are both zero.

b. the tax revenue is positive but there is no deadweight loss.
c. the deadweight loss is equal to the total surplus before the tax.
d. the deadweight loss is equal to the producer’s surplus.
Answer: C

45. A rent control has been imposed on the market for rental housing in a country. If the long run
supply curve in this competitive market is more price elastic than the short run supply curve, it
implies that:
a. the deadweight loss of the rent control is higher in the long run compared to the short run.
b. the deadweight loss of the rent control is higher in the short run compared to the long run.
c. the deadweight loss of the rent control is zero in the long run.
d. the deadweight loss of the rent control is zero in the short run.
Answer: A

46. Rent controls in the rental housing market:
a. will lead to the deterioration of the quality of rental housing.

b. will not significantly affect supply in the long run.
c. does not have any adverse effects in the short run.
d. benefits tenants but not landlords.
Answer: A

47. How do price ceilings in the rental housing market affect tenants?
a. Since price ceilings keep rents from rising above a certain level, the net gain to tenants is
positive.
b. Tenants are worse off from price ceilings since the supply of rental housing falls in the long run.
c. Tenants benefit from price ceilings since landlords have incentives to improve the quality of
existing rental housing
d. Since the supply of rental housing is inelastic in the short run, tenants are not affected by a price
ceiling.
Answer: B

48. One of the reasons for the low profitability of U.S. airlines during the era of regulation by the
Civil Aeronautics Board (CAB) was _____.
a. the absence of organized labor unions

b. low airline safety
c. the scheduling of airline flights to sparsely populated areas
d. the price ceiling imposed by the CAB
Answer: C

Section Reference: Airline Regulation and Deregulation
Learning Objective: Detail how regulation of the U.S. airline industry affected fares, airline
company profits, and service quality.
49. The U.S. airline industry, prior to deregulation, was characterized by _____.
a. excessive profits
b. a high level of efficiency
c. excess demand
d. nonprice competition
Answer: D

50. The Civil Aeronautics Board (CAB). allowed airlines to charge prices above the equilibrium
price. Even then the airlines were not profitable because:
a. their economic profits were zero.

b. nonprice competition between the airlines raised costs and eroded profits.
c. the demand was too low to make profit.
d. they were subject to heavy taxes by the government which drove down profits.
Answer: B

51. Although U.S. airline fares fell significantly after deregulation, profits did not fall. This was
because:
a. the airline industry is a decreasing cost industry.

b. the airlines reduced costs by lowering wages to workers.
c. the demand for air travel did not increase by a significant percentage.
d. the airlines received subsidies from the federal government.
Answer: B

52. When the U.S. airline industry was regulated by the Civil Aeronautics Board (CAB)., airline
workers’ unions:
a. did not benefit since the airlines were unprofitable and could not pay high wages.
b. negotiated higher-than-competitive fares from the airlines.
c. received lesser pay than what they received after deregulation.
d. were not organized and so did not have any bargaining power.
Answer: B

53. Deregulation of the airline industry has resulted in:
a. a reduction in the number of airline passengers.

b. a reduction in the wages and salaries in the airline industry.
c. an increase in airfares.
d. a rapid expansion of airport capacity.
Answer: B

54. A contestable market is one in which:
a. a small number of firms operate, keeping price above marginal cost.

b. the market price is independent of the number of firms.
c. the price in the market depends upon the number of firms because entry is free.
d. the lack of barriers to entry causes price to remain low.
Answer: B

55. Which of the following strengthens the possibility that the airline market is a contestable
market?
a. Since other airlines can enter the market at no cost and charge lower fares, the fare charged by a
single airline is always equal to the marginal cost.
b. The barriers to entry in the airline market lead to nonprice competition between the airlines
operating in the market.
c. The fares that are charged for routes with more than one airline are significantly higher than the
fares charged for a route with only one airline.
d. Airlines regularly charge fares that are above the competitive levels irrespective of the number of
airlines plying a particular route.
Answer: A

56. Which of the following is true of deregulation and airline safety in the U.S.?
a. Airline safety has deteriorated since the deregulation of the airline industry because safety
standards are determined by the airlines themselves.
b. Airline safety has deteriorated since airline deregulation because increased competition does not
give airlines any incentive to reduce the number of accidents.
c. Since airline safety standards are set by a government agency, deregulation of routes and fares is
not directly linked to airline safety.
d. Airline safety has increased post-deregulation because airlines are now not required to insure
their aircrafts against accidents.
Answer: C

57. Restrictions on entry in the taxicab market tends to benefit _____ the most.
a. the government
b. original recipients of medallions
c. current taxicab drivers
d. taxicab passengers
Answer: B

Section Reference: City Taxicab Markets
Learning Objective: Explain how the entry restrictions imposed by most major U.S. cities on taxis
affect fares and the profits earned by licensed taxi owners.
58. Issuing a fixed number of licenses to operate a taxicab in a city would mean that the number
of:
a. cabs and fares are both above the efficient level.

b. cabs is less than the efficient quantity and fares are above free-market levels.
c. cabs is above the efficient level and fares are depressed below the free-market level.
d. cabs and fares are both below the efficient level.
Answer: B

59. Suppose a city limits the number of cabs that can provide taxi service by issuing medallions.
If the medallions can be bought and sold and they command a positive price, you can conclude that:
a. fares are above the competitive levels.

b. no illegal cabs will operate in the city.
c. the demand for cabs is lesser than the supply of cabs.
d. the supply curve for taxicabs is horizontal.
Answer: A

60. Suppose the government limits the number of cabs that can operate in the city by issuing a
limited number of medallions. Later, if the government decides to regulate fares instead and sets
them below current levels:
a. surpluses will result in the taxicab market.

b. the resale value of the medallion will fall.
c. the demand for taxicabs will decline.
d. congestion during peak traffic hours will decrease.
Answer: B

61. Deregulation of the taxicab industry is most likely to result in:
a. an increase in the operation of illegal cabs.

b. reduced safety of passengers.
c. a shift of taxicab services from poor neighborhoods to the city.
d. a large financial loss for those who own medallions.
Answer: D

62. Suppose there is a city which licenses cabs, but cab owners find they cannot get anyone to buy
their medallions at any price. You can conclude that:
a. selling medallions is illegal.

b. cab owners are making a normal profit.
c. cab fares are higher than the efficient level.
d. the number of licenses issued are limited.
Answer: B

63. The following figure shows the demand and supply for a commodity in the domestic U.S.
market as well as the global market. The commodity is imported from the rest of the world to the
U.S. market.
Refer to Figure 10-3. In the absence of trade, the equilibrium price in the U.S. market is _____.
a. P3
b. P2
c. P1
d. P0
Answer: A

Section Reference: Consumer and Producer Surplus, and the Net Gains from Trade
Learning Objective: Understand the effects of international trade on consumer and producer surplus
and why a net gain results to a country from either imports or exports.
64. The following figure shows the intersection of the demand and supply curves for a commodity
in the domestic market at price P2 and quantity Q2, in the absence of trade. With trade, the supply
curve shifts to Supplytrade.
Refer to Figure 10-4. The quantity of imports into the domestic market is given by _____.
a. Q2 – Q1
b. Q3 – Q2
c. Q3 – Q1
d. Q3
Answer: C

U.S. market.
Refer to Figure 10-3. The total consumer surplus prior to trade was _____.
a. P4EP3
b. P4KP2
c. P4ELP2
d. P3EP0
Answer: A

U.S. market.
Refer to Figure 10-3. The total producer surplus prior to trade was _____.
a. P3EP0
b. P2LP0
c. P1MP0
d. P3EMP1
Answer: A

U.S. market.
In Figure 10-3, trade increases consumer surplus in the U.S. by _____.
a. P3EKP2
b. P3EP0
c. EKL
d. P2LMP1
Answer: A

U.S. market.
In Figure 10-3, the total producer surplus after trade is _____.
a. P3ELP2
b. ELK
c. P2LP0
d. P2LMP1
Answer: C

U.S. market.
In Figure 10-3, the net gain to the U.S. from trade is _____.
a. P3EP0
b. P3ELP2
c. P4EP0
d. ELK
Answer: D

Refer to Figure 10-4. In the absence of trade, the total consumer surplus is given by _____.
a. a + b + c + g + f
b. a + b + c + d
c. d + b + c
d. a + b + c
Answer: D

Refer to Figure 10-4. In the absence of trade, the total producer surplus is given by _____.
a. f + g + j
b. f + g + h + j
c. f + g + h + i
d. f + g + h + i + j
Answer: A

Refer to Figure 10-4. When foreign suppliers enter the domestic market the total consumer surplus
becomes _____.
a. a + b + c + d
b. a + b + c + f + g + h
c. a + b + c + f + g + j
d. a + b + c + f + g + h + i
Answer: D

Refer to Figure 10-4. The net gain to domestic residents when they trade with foreign suppliers is
represented by _____.
a. d + e
b. h + i
c. k + l + m
d. f + g + j
Answer: B

U.S. market.
In Figure 10-3, for the rest of the world:
a. the gain in producer surplus equals the gain in consumer surplus.

b. producer surplus increases while consumer surplus is unchanged.
c. the gain in consumer surplus is greater than the gain in producer surplus.
d. there are no changes in consumer or producer surplus after trade.
Answer: B

75. Which of the following is true of international trade?
a. Free international trade benefits foreign producers at the cost of domestic industry.
b. The net gain to a country from free international trade is positive.
c. The proportion of international trade in the world is on the decline.
d. Free trade is a zero-sum game; one nation gains at another’s expense.
Answer: B

76. The Candlemakers' petition was a satire of protectionism written and published in 1845. In the
petition, candlemakers advocated that all businesses should shut their blinds and curtains and block
all sunlight from entering their buildings. Although satirical, which of the following would be
expected to take place if this policy were implemented?
a. The net effect on employment would be negative since the demand for candles would decrease
the number of jobs associated with the candlemaking industry.
b. Since consumers would have to spend a larger proportion of their income on candles than before,
the net effect of this policy would be to reduce spending on other domestic goods.
c. Domestic citizens would be better off because it would increase consumer surplus.
d. Although sunlight is a free alternative to candlelight during the daytime, a policy to block
sunlight would productively allocate resources to domestic industries.
Answer: B

77. In 2002, the U.S. imposed higher tariffs on steel imports to save American jobs. How did these
tariffs reduce U.S exports?
a. The dollars that foreigners could have earned on U.S. imports decreased, thus reducing U.S.
exports.
b. The tariffs led to lower imports of steel, a depreciation of the dollar, and consequently lower U.S.
exports.
c. The country’s trading partners have always imposed high tariffs on their own imports.
d. The tariffs increased domestic inflation leading to a depreciation of the dollar and consequently,
lower U.S. exports.
Answer: A

78. In 2002, the U.S. imposed higher tariffs on steel imports to save American jobs. However, the
30 percent increase in tariffs on steel imports imposed a net job loss on the U.S. in part because:
a. the substitution effect of the tax led consumers to buy more of other domestic goods.
b. the tariff led to the depreciation of the dollar and an increase in exports.
c. consumers spent less on other goods as a result of higher steel prices.
d. the tariff was not high enough to sustain employment in the American steel industry.
Answer: C

79. In which of the following cases is it likely that the entire U.S. domestic demand for corn is met
through imports?
a. The price of corn in the rest of the world is equal to the domestic price of corn in the U.S.
b. The uniform world price of corn is less than the minimum price at which the U.S. producers are
willing to supply.
c. The price of corn in the rest of the world exceeds the domestic U.S. price of corn.
d. The uniform world price of corn exceeds the cost of U.S. production of corn.
Answer: B

Section Reference: Government Intervention in Markets: Quantity Controls
Learning Objective: Explore how government-specified maximum quantities, or quotas, on sugar
imports affect consumers, domestic producers, and the net welfare of the United States as well as
other countries that produce sugar.
80. The following figure shows the domestic U.S. market for bananas and the global market for
bananas. The domestic supply curve is given by SUPPLYUS. With free trade, the equilibrium output
in the U.S. market is Q. The import quota imposed by the government is equal to 0A.
Refer to Figure 10-5. Which of the following should necessarily be true?
a. FG = BC
b. 0D = EH
c. EH = 0C + CQ
d. BC = EF
Answer: A

Refer to Figure 10-5. Which of the following should necessarily be true in the absence of a quota?
a. EH = 0C + CQ
b. EH = 0Q
c. 0Q = 0Q'
d. 0A + BC = FG
Answer: B

Refer to Figure 10-5. The price of bananas in the global market prior to the imposition of an import
quota is _____.
a. P3
b. P1
c. P4
d. P2
Answer: A

Refer to Figure 10-5. After the import quota has been imposed, the equilibrium price in the
domestic market changes to _____.
a. P1
b. P2
c. P3
d. P4
Answer: A

Refer to Figure 10-5. Given that trade in bananas is free from any restrictions, which of the
following would be true if P5 was lesser than P3?
a. The domestic demand for bananas would be fully satisfied through imports.
b. The U.S. would not import bananas; domestic demand would be satisfied by domestic
production.
c. Domestic producers would be worse off and foreign producers would be better off.
d. Domestic consumers would lose surplus as they would have to pay a higher domestic price.
Answer: B

Which of the following correctly identifies the effect of an import quota on a good?
a. Domestic producers do not gain from an import quota.

b. The gain to domestic producers is higher than the loss to domestic consumers.
c. Prices in the global market will fall due to the imposition of an import quota.
d. Domestic consumers bear the burden of an import quota in terms of higher domestic prices.
Answer: D

86. Given that quotas benefit producers, who are few in number, at a greater expense to consumers,
who are more in number, which of the following correctly explains why quotas are still in effect?
a. Domestic consumers are better organized than domestic producers.

b. Quotas reduce prices in domestic markets.
c. The benefits of quotas are concentrated and visible while the costs are dispersed.
d. When a quota is imposed by the importing country, it lowers prices in the global market.
Answer: C

Section: Government Intervention in Markets: Quantity Controls
87. Which of the following is true of a quota in a competitive market?
a. A quota increases total surplus as the quantity produced and consumed in the domestic market
increases.
b. A quota is a trade policy used to promote greater efficiency in production within world markets.
c. A quota reduces the welfare of domestic consumers more than it increases the welfare of
producers.
d. A quota is imposed in a competitive market to increase total world output of goods and services.
Answer: C

Section: Government Intervention in Markets: Quantity Controls
Question Type: Essay
88. Suppose the following supply and demand curves govern the market for lungs: QS = 4,000 + P
and QD = 10,000 –2P.
a) Assume that individuals are allowed to sell their lungs. Graph the supply and demand curves and
calculate the equilibrium price and quantity. Identify graphically and calculate total surplus.
b) What is the numerical change in consumer surplus in going from a situation in which the sale of
lungs is permitted to one in which it is prohibited? Is there a gain or loss in consumer surplus?
c) What is the numerical change in producer surplus in going from a situation in which the sale of
lungs is permitted to one in which it is prohibited? Is there a gain or loss in producer surplus?
d) What is the numerical deadweight loss created by prohibiting the sale of lungs?
Answer:
a)
X
Error: Reference
source not found
4000 + P = 10,000 - 2P ® 3P = 6,000 ® P* = $2,000 per lung ® Q* = 4000 + 2000 = 6,000 lungs
Total surplus is area “abg0” equal to $19,000,000. Area “abc” + area “chg0” + area “hbg” =
½ (6,000-0)(5,000 – 2,000) + (2,000)(4,000) + ½ (2,000)(6,000-4,000) = 9,000,000 + 8,000,000 +
2,000,000 = 19,000,000.
b) CS when lung sales are permitted (free-market, price can go above $0) = triangle "abc"
CS when lung sales are prohibited (price ceiling = $0) = trapezoid "aeg0"
Thus, the change is area "chg0" minus "ebh". Those who obtain kidneys gain area "chg0" because
they do not have to pay the $20,000 price. Those who no longer get a kidney lose area "ebh".
Thus, the change is area "chg0" minus "ebh" = (2,000)(4,000) - (½)(3,000-2,000)(6,000-4,000) =
$1,000,000 which is an increase in consumer surplus.
c) PS when lung sales are permitted = trapezoid "cbg0"

PS when lung sales are prohibited = none
Thus, the loss in PS is area "chg0", which those who would've donated their lungs for free lose,
plus area "hbg", which people who would've supplied their lung for a positive price lose.
Thus, the loss in PS is area "chg0" plus "hbg" = + (2,000)(4,000) + ½ (2,000)(6,000-4,000) =
$10,000,000.
d) The deadweight loss is area "ebg" = (½)(3,000-0)(6,000-4,000) = $3,000,000.

89. Suppose the demand and supply for apples is given by the following supply and demand
curves: QS = (1/3)P – (4/3) and QD = 12 – P.
a) Graph and calculate the equilibrium price [P*] and quantity [Q*].
b) Show that the effect of a per-unit tax of $1 levied on suppliers is the same as when levied on
buyers.
c) What percent of the $1 per-unit tax is borne by sellers? What percent is borne by buyers?
Answer:
a) (1/3)P – (4/3) = 12 – P ® (4/3)P = 40/3 ® P* = 10 and Q* = 2
In the graph given above, the intersection of the “Demand” and “Supply” curves gives equilibrium
price 10 and equilibrium quantity 2.
Equating the demand and supply equations we get: (1/3)P – (4/3) = 12 – P ® (4/3)P = 40/3 ® P* =
10 and Q* = 2
b) The supply curve with the tax is given by P = 3Q + 4 + 1. This leads to a new equilibrium price
and quantity.
3Q + 4 + 1 = 12 – Q ® 4Q = 7 ® Q* = 7/4 and P* = 12 – (7/4) = 41/4 = $10.25. Notice that the
two supply curves in the graph are always $1 apart vertically. Thus, buyers pay $10.25 and sellers
take home $10.25 - $1 = $9.25.
If the tax were levied on buyers, this would shift the demand curve vertically downward by $1 and
lead to a new equilibrium price and quantity. 3Q + 4 = 12 – Q – 1 ® 4Q = 7 ® Q* = 7/4 and P* =
12 – (7/4) – 1 = 37/4 = $9.25.
In this case, buyers pay $9.25 to the seller and $1 to the government, equal to the same $10.25 they
paid (all to the seller) when the tax was levied explicitly on sellers. The seller takes home the $9.25
from the buyer, the same amount they took home when they were explicitly taxed.
c) Sellers bear 75% of the tax because they are paying $0.75 of each $1 collected by the
government. They receive $9.25 after the tax compared to $10 before the tax. Buyers bear the
remaining 25% of the tax. Buyers pay $10.25 out of their pocket (regardless of who is explicitly
taxed) compared to $10 before. Sellers bear a greater burden than buyers in this case because the
supply curve is relatively inelastic compared to the demand curve. With a more elastic demand
curve, the post-tax price increase to buyers is smaller.

Section Reference 01: The Evaluation of Gains and Losses
Section Reference 02: Excise Taxation
Learning Objective 01: Show how changes in market conditions or government policies affect the
Learning Objective 02: Analyze the effects of an excise tax on a specific good on the welfare of
90. Explain how entry restrictions imposed on taxis by a city affects fares and profits of licensed
taxi owners as demand increases over time.
Answer: Entry restrictions can be imposed by a city if it requires a medallion to operate a taxi.
With a fixed number of medallions, the supply curve for passenger-miles is vertical. As demand
increases, this leads to higher prices for taxi riders. Licensing taxicabs will benefit those who
receive the medallion first: the original owners. Future owners of medallions, or persons who buy a
medallion from a previous owner, will likely only receive competitive returns because the original
medallion owner would not sell for anything less than their expected profit from keeping the
medallion and driving their taxi.

91. Suppose the demand for some good can be estimated using the equation QD = a – bP, and the
supply can be estimated using the equation QS = c + dP, where a is the intercept and b is the slope
of the demand curve, and c is the intercept and d is the slope of the supply curve. P is the
equilibrium price in the market.
(a) If a per-unit excise tax of size T were imposed on each unit of this good sold in the market,
d
show that the percentage of the tax born by the consumer is (b  d) , and the percentage of the tax
b
born by the supplier is (b  d) .
 pays (i.e., Pd. minus the price received by the
[Hint: The tax (T) is equal to the price the consumer
supplier (PS). Therefore, T = PD – PS. Rearrange and substitute into one of the equations above.]

Answer: (a) Setting the demand and supply curves equal to each other and solving for PD.
a – bPD = c + d(PD – T)
a – bPD = c + dPD – dT
a – c + dT = bPD + dPD
a – c + dT = PD(b + d)
a  c  dT
 PD
(b  d) and
PD d

T (b  d)

Setting the demand and supply curves equal to each other and solving for PS:
a – b(PS + T) = c + dPS
a – bPS – bT = c + dPS
a – c – bT = bPS + dPS
a – c – bT = PS(b + d)
a  c  bT
 PS
(b  d )
PS b

and T (b  d)


92. Is the outcome of a competitive market efficient? Explain with the help of a graph.
Answer: The equilibrium level of output in a competitive market is also the most efficient outcome.
Efficiency in output is the condition in which output is expanded to the point where marginal
benefit equals marginal cost. In the following graph, demand is equal to supply in a competitive
market at quantity Q. The area under the demand curve represents the marginal benefit from
producing each unit and the area under the supply curve represents the marginal cost of producing
each unit. This output level Q is efficient because total surplus AEB is maximized at Q. If output is
reduced to 2 units, marginal benefit from producing 2 units is greater than marginal cost.
Expanding output beyond Q will increase total surplus. If output produced is 4 units, the marginal
cost of producing 4 units is greater than marginal benefit. Total surplus can be increased by
increasing the number of units produced. Thus the output produced in a competitive market,
provides the largest total surplus that is possible.
P
Supply
B
Demand
A
0 2 Q 4 Q

93. A government study concludes that excessive alcohol consumption is due to the low price of
alcohol in the market. In order to reduce the consumption of alcohol, the government wishes to set
a price floor above the equilibrium price of alcohol. Explain whether this policy would have its
intended effect. What is the net loss or gain from the price floor?
Answer: A price floor is a minimum price below which alcohol cannot be sold. In the graph given
below, demand and supply intersect at the equilibrium price P and quantity Q. The price floor, set
above price P, is P1.
As a result of the price floor, the price in the market rises to P1. At price P1, the quantity supplied is
Q1, which is lesser than Q. Consumers and producers lose surplus equal to b + c. The area a of
consumer surplus gets transferred to producers. At price P1, more suppliers are induced to enter the
market and supply a quantity of Q2. However since demand has not increased, the area c is the
surplus that is produced in the market. The deadweight loss from this price floor is therefore b + c +
d. Although consumption of alcohol falls, the net effect on market participants is negative.
The above graph assumes that demand for alcohol is elastic. This is true for social drinkers. The
demand for alcohol can also be inelastic among addicts or regular drinkers.
This graph shows the demand for alcohol to be inelastic. With a price floor P1, the transfer of
consumer surplus to producers is a. The loss of total surplus is “c + d + the shaded triangle”. When
the demand for alcohol is inelastic, consumers lose a larger share of their surplus. So consumption
of alcohol falls and the net effect on consumer surplus is negative.

94. What would be the welfare effect of a per-unit tax in the following markets?
a) The market for cigarettes

b) The market for cashmere scarves
Answer:
a) The demand for cigarettes is usually considered to be inelastic, though not perfectly so. The levy
of an excise tax in the cigarette market will shift the supply curve inward as shown below:
Price increases from P to P’ and quantity decreases from Q to Q’. Consumers and producers lose
surplus to the extent of b and c respectively. The rectangular areas “a” and “d” as shown in the
figure represent the transfer of consumers and producers surplus to the government in the form of
tax revenue. Therefore the deadweight loss is represented by “b + c”.
b) Cashmere scarves are a luxury good that have elastic demand.

A tax on cashmere scarves will shift the supply curve upward. Price rises from P to P’ and from Q
to Q’. Total surplus reduces by “c + d”. The rectangular area shown by “a” and “b” are transferred
from the consumers and producers to the government in the form of tax revenue. The deadweight
loss is given by “c +d”.
As can be seen from the above graphs, the deadweight loss from an excise tax is larger when the
demand curve is elastic than when it is inelastic.

95. Given that sale of crack cocaine for a positive price is completely banned in certain parts of the
world, why is it that there is a thriving black market for this illegal drug? Explain with the help of
demand and supply curves.
Answer: Banning the sale of a good for a positive price is the same as setting a price ceiling of zero
for the good. The demand for crack cocaine, which is a highly addictive substance, is inelastic. The
supply of crack cocaine, just like for any other commodity, will increase as its price increases..
Demand
P
Supply
0 Q Q
At a price of 0, quantity demanded is greater than the quantity supplied. In a competitive market,
this would push up prices till the quantity demanded and supplied are the same. Since the price
cannot increase, the shortage in the market persists. A shortage in a market due to a price restriction
usually leads to the formation of black markets for the commodity. Since the demand in the market
is not satisfied, buyers and sellers form black markets where the commodity is usually sold at
prices that are higher than free-market prices.

96. The city planning authority in a city decides that street food vendors should be issued licenses
in the interests of reducing inconvenience to pedestrians on the streets. They decide to issue a fixed
number of transferable permits, say Q. Over time, how would this licensing system affect the price
and quantity of street food?
Answer: Since the number of vendor permits are fixed at Q, the supply curve is vertical at Q.
Demand and supply intersect at price P and quantity Q. Issuing a fixed number of licenses has no
initial effect on price and output when demand is unchanged. As the city grows and the population
increases, the demand for food increases from D to D’. However, since the number of licenses
issued is fixed, supply cannot increase, leading to an increase in prices at the same level of output.
Therefore, as a result of the licensing system, prices increase without an increase in output.
Since the street vendor market is otherwise perfectly competitive, supply in the absence of licenses,
is perfectly elastic (as shown by S’). An increase in demand would have led to an increase in output
at the same price.
P Supply = S
Demand = D'
P1
P Supply = S'
Demand = D
0 Q Q2 Quantity


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Package: Test Bank

Title: Microeconomics: Theory and Application, 12e

Question Type: Multiple Choice

1. What is meant by consumer surplus?

Difficulty Level: Easy

2. What is meant by producer surplus?

a. It is the total quantity of a good produced by the seller.

Difficulty Level: Easy

3. Producer surplus is calculated as _____.

Difficulty Level: Hard

Difficulty Level: Hard

Difficulty Level: Easy

7. In the long run, aggregate producer surplus is zero in:

a. industries with positive accounting profits.

Difficulty Level: Medium

a. demand curve and the equilibrium price line

Difficulty Level: Easy

9. The area under the supply curve represents _____.

a. the variable cost of producing the good or service

Difficulty Level: Medium

Difficulty Level: Medium

Difficulty Level: Easy

Difficulty Level: Easy

13. What is meant by a deadweight loss?

a. It is the aggregate loss in total surplus in an inefficient market.

Difficulty Level: Easy

a. marginal benefit equals marginal cost

Difficulty Level: Easy

a. marginal cost is greater than marginal benefit.

Difficulty Level: Easy

16. The equilibrium of a competitive industry is:

a. equitable but not necessarily efficient.

Difficulty Level: Easy

b. the output level becomes inefficient.

Difficulty Level: Medium

Difficulty Level: Easy

Difficulty Level: Medium

a. the total surplus is reduced.

Difficulty Level: Easy

Difficulty Level: Medium

Difficulty Level: Medium

Difficulty Level: Hard

a. the consumer surplus is reduced.

Difficulty Level: Medium

a. consumer surplus is increased.

Difficulty Level: Medium

27. Suppose an increasing-cost competitive industry is in equilibrium at a price of $100 and an

Difficulty Level: Medium

Difficulty Level: Medium

Difficulty Level: Medium

Difficulty Level: Medium

Difficulty Level: Easy

Difficulty Level: Medium

a. a fall in price and an increase in output.

Difficulty Level: Easy

34. A per-unit excise tax on a single competitive firm causes:

Difficulty Level: Medium

35. An excise tax levied on firms in a constant-cost competitive industry will:

Difficulty Level: Medium

a. rise by the amount of the tax

Difficulty Level: Medium

a. rise by the amount of the tax.

Difficulty Level: Medium