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Microeconomics: Prin., Apps, & Tools, 8e (O'Sullivan) TB1

Chapter 6 Market Efficiency and Government Intervention
6.1 Consumer Surplus and Producer Surplus
1) A market equilibrium will generate the largest possible surplus when:

A) there are no external benefits and external costs.
B) there is perfect competition.
C) perfect information is available.
D) all of the above.
Answer: D
Diff: 1
Topic: Market Efficiency and Government Intervention
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-7
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
Skill: Conceptual
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.
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Copyright © 2014 Pearson Education, Inc.
D) all of the above.
Answer: D
Diff: 2
Skill: Conceptual
2
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
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
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
3
7) If a consumer buys a good we know that her willingness to pay:
A) is greater than its price.
B) is less than its price.
C) is equal to its price.
D) is either greater than or equal to its price.
Answer: D
Diff: 1
Skill: Conceptual
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
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
Skill: Analytical
4
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
Skill: Analytical
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
Skill: Analytical
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
Skill: Analytical
5
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
Skill: Analytical
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
Skill: Analytical
6
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
16) In Figure 6.1, the consumer surplus is equal to:

A) $400.
B) $300.
C) $200.
D) $100.
Answer: D
Diff: 2
Skill: Analytical
7
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
Skill: Analytical
18) As price falls along a particular demand curve, consumer surplus:

A) decreases rapidly.
B) decreases by a very small amount.
C) remains constant.
D) increases.
Answer: D
Diff: 2
Skill: Conceptual
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
Skill: Conceptual
8
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
Skill: Conceptual
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
Skill: Analytical
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 ________.
Answer: D
Diff: 2
Skill: Conceptual
9
23) Suppose that the supply of gasoline increases. Price will ________ and consumer surplus
will ________.
Answer: C
Diff: 3
Skill: Conceptual
24) Suppose that the supply of gasoline decreases. Price will ________ and consumer surplus
will ________.
Answer: B
Diff: 3
Skill: Conceptual
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
Skill: Analytical
10
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
Skill: Analytical
27) Producer surplus is:

A) the difference between the highest market price consumers are willing to pay for a product
and the minimum amount producers are willing to accept for that product.
B) the difference between the market price consumers are willing to pay for a product and the
actual price they pay.
C) the price a producer receives for a product minus the marginal cost of production.
D) the economic profit earned from the sale of a good, minus its marginal cost of production.
Answer: C
Diff: 1
Topic: The Supply Curve and Producer Surplus
Skill: Definition
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.
C) perfect competition surplus.
D) producer surplus.
Answer: D
Diff: 1
Skill: Definition
11
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
Skill: Analytical
30) Suppose the market price for a cup of coffee is $1.25. If Coffee Express's 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
Skill: Analytical
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
Skill: Analytical
12
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
Skill: Analytical
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
Skill: Analytical
34) Suppose that the price of a box of shotgun shells is $5. Morris's 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
Skill: Analytical
13
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
Skill: Analytical
36) Suppose that the price of macaroni drops. Quantity supplied will ________ and producer
surplus will ________.
Answer: D
Diff: 2
Skill: Conceptual
37) Suppose that the price of macaroni rises. Quantity supplied will ________ and producer
surplus will ________.
Answer: A
Diff: 2
Skill: Conceptual
14
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
Skill: Conceptual
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
Skill: Conceptual
15
40) In Figure 6.2 the price is $20 and the shaded area represents:
C) market equilibrium.
D) a price ceiling.
Answer: A
Diff: 1
Topic: The Supply Curve and Producer Surplus, graphing
Skill: Analytical
41) In Figure 6.2, the producer surplus is:

A) $400.
B) $300.
C) $200.
D) $100.
Answer: C
Diff: 2
Skill: Analytical
16
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
Skill: Analytical
43) As price falls along a particular supply curve, producer surplus:

A) decreases.
B) remains constant.
C) increases rapidly.
D) increases a very small bit.
Answer: A
Diff: 1
Skill: Conceptual
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
Skill: Conceptual
17
Recall the Application about Japanese and American consumers' willingness to pay for
Internet service to answer the following question(s). In the United States, the average
willingness to pay for Internet service is $85 per month, and the average monthly price of
Internet service is $40 per month.
45) According to the Application, the average consumer surplus in the United States from
Internet service is about ________ percent of the price.
A) 47
B) 89
C) 113
D) 212
Answer: C
Diff: 2
Topic: Application 1, Consumer Surplus of Internet Service
Skill: Analytical
46) According to the Application, as a percentage of the price, consumer surplus from Internet
service is:
A) higher in Japan than in the Unites States.
B) higher in the United States than in Japan.
C) about the same in both the United States and Japan.
D) negative in Japan and positive in the United States.
Answer: B
Diff: 1
Topic: Application 1, Consumer Surplus of Internet Service
Skill: Fact
47) 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
Skill: Conceptual
48) Consumer surplus increases as the price of a good decreases.

Answer: TRUE
Diff: 1
Skill: Conceptual
18
49) 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
Skill: Analytical
50) Consumer surplus is price less willingness to sell.

Answer: FALSE
Diff: 1
Skill: Definition
51) Producer surplus equals the market price less the producer's willingness to accept or
marginal cost.
Answer: TRUE
Diff: 1
Skill: Definition
52) Producer surplus increases as the price of a good decreases.

Answer: FALSE
Diff: 1
Skill: Conceptual
53) 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
Skill: Analytical
19
54) 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
Skill: Conceptual
55) 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
Skill: Conceptual
56) What is willingness to accept?

Answer: the minimum price that a producer is willing to accept as payment for a product
Diff: 2
Skill: Definition
57) What is producer surplus?

Answer: the difference between price and willingness to accept or the area between the market
price and the supply curve
Diff: 1
Skill: Definition
20
6.2 Market Equilibrium and Efficiency
1) What is the total surplus of a market?

A) the sum of consumer surplus and producer deficit
B) the sum of consumer surplus and producer surplus
C) the difference between the consumer surplus and producer surplus
D) the difference between the highest price that a consumer is willing to pay and the lowest price
that a producer is willing to sell
Answer: B
Diff: 1
Topic: Market Equilibrium and Efficiency
Skill: Definition
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
21
3) Prices below the free market equilibrium price are inefficient because:
A) they prevent mutually beneficial transactions.
B) no one can be made better off without hurting someone by participating in another
transaction.
C) all mutually beneficial transactions happen.
D) more goods could be produced using society's resources.
Answer: A
Diff: 2
Topic: Total Surplus is Lower with a Price below the Equilibrium Price
Skill: Conceptual
4) Prices below the free market equilibrium price 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
Skill: Conceptual
5) Prices below the free market equilibrium price 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
Skill: Conceptual
22
6) Prices above the free market equilibrium price are inefficient because the willingness to pay
that unit.
A) exceeds
B) is less than
C) equals
Answer: B
Diff: 2
Topic: Total Surplus is Lower with a Price above the Equilibrium Price
Skill: Conceptual
7) Prices above the free market equilibrium price are inefficient because:
A) no one can be made better off without hurting someone by participating in another
transaction.
B) they prevent mutually beneficial transactions.
C) all mutually beneficial transactions happen.
D) more goods could be produced using society's resources.
Answer: B
Diff: 2
Skill: Conceptual
8) A price equal to the free market equilibrium price is efficient because the willingness to pay
that unit.
A) exceeds
B) is less than
C) equals
Answer: C
Diff: 2
Topic: Efficiency and the Invisible Hand
Skill: Conceptual
23
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
Skill: Definition
10) The famous economist who coined the metaphor "the invisible hand" is:
A) Mickey Kantor.
B) Ben Bernanke.
C) Milton Friedman.
D) Adam Smith.
Answer: D
Diff: 1
Skill: Fact
24
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
Skill: Analytical
Answer: B
Diff: 2
Skill: Analytical
Answer: A
Diff: 3
Skill: Analytical
25
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
Skill: Analytical
15) Refer to Figure 6.3. On this graph, area BCD is:

B) total surplus.
C) consumer net benefit.
D) consumer surplus.
Answer: A
Diff: 2
Skill: Analytical
26
16) Refer to Figure 6.3. On this graph, area ACD is:
B) total surplus.
C) consumer net benefit.
D) consumer surplus.
Answer: B
Diff: 2
Skill: Analytical
17) Refer to Figure 6.3. On this graph, area BCEO represents:

B) total surplus.
C) firm profits.
D) total revenues.
Answer: D
Diff: 2
Skill: Analytical
18) Refer to Figure 6.3. On this graph, area BCEO represents:

B) total surplus.
C) consumer expenditures.
D) firm profits.
Answer: C
Diff: 2
Skill: Analytical
27
Recall the Application about the mismatch of rent-controlled apartments and their tenants
to answer the following question(s).
19) Recall the Application. Rent control ________ the quantity of apartments supplied and
________ the total value of the apartment market.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: D
Diff: 2
Topic: Application 2, Rent Control and Mismatches
Skill: Conceptual
20) Recall the Application. According to a recent study, about ________ percent of rent-
controlled apartments in New York City are mismatched.
A) 20
B) 40
C) 60
D) 80
Answer: A
Diff: 1
Topic: Application 2, Rent Control and Mismatches
Skill: Fact
21) The maximum price reduces total surplus of the market because it prevents some mutually
beneficial transactions.
Answer: TRUE
Diff: 2
Skill: Conceptual
22) To be effective a price ceiling must be above the equilibrium price.

Answer: FALSE
Diff: 2
Skill: Conceptual
28
23) A price floor above the equilibrium price increases the total surplus of the market.
Answer: FALSE
Diff: 2
Skill: Conceptual
24) 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
25) The market maximizes total surplus under what conditions?

Answer: no external costs or benefits, perfect information and perfect competition
Diff: 2
Skill: Conceptual
26) What is a price ceiling and why must it be below the equilibrium price to be effective?
Answer: A price ceiling is a maximum price. It is only effective below the equilibrium price
because the market will remain at equilibrium if a maximum price is set above the equilibrium
price.
Diff: 2
Skill: Conceptual
29
27) 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
28) What is a price floor and why must it be above the equilibrium price to be effective?
Answer: A price floor is a minimum price. It is only effective above the equilibrium price
because the market will remain at equilibrium if a minimum price is set below the equilibrium
price.
Diff: 2
Skill: Conceptual
29) 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
Skill: Conceptual
30
6.3 Controlling Prices—Maximum and Minimum Prices
1) Refer to Figure 6.4. Suppose that the current price is set at A and 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 .
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
2) Refer to Figure 6.4. Suppose that the current price is set at B and units of a good are traded.
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
Skill: Analytical
31
3) Refer to Figure 6.4. Suppose that the current price is set at B and units of a good are traded.
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
Skill: Analytical
4) Refer to Figure 6.4. Suppose that the current price is set at C and units of a good are traded.
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
Skill: Analytical
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 Prices—Maximum and Minimum Prices
Skill: Conceptual
32
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
7) Suppose that the maximum price for rent in New York City is set above the equilibrium price.
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
Skill: Conceptual
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
Skill: Conceptual
33
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
Skill: Fact
10) A maximum price set below the equilibrium price will:

A) cause excess demand and increase total surplus.
B) cause excess demand and decrease total surplus.
C) cause excess supply and increase total surplus.
D) cause excess supply and decrease total surplus.
Answer: B
Diff: 2
Skill: Conceptual
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
34
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
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
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
35
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
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
17) Which of the following statements about rent control is FALSE?

A) Rent control is an effective way to help the poor.
B) Many wealthy and famous people benefit from rent control.
C) A person does not have to be poor to qualify for a rent-controlled apartment.
D) All of the above are false statements.
Answer: A
Diff: 1
Topic: Rent Control
Skill: Fact
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
36
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
20) If government sets a minimum price above the equilibrium price:

A) some consumers gain at the expense of producers and the total surplus decreases.
B) some consumers gain at the expense of producers and the total surplus increases.
C) some producers gain at the expense of consumers and the total surplus decreases.
D) some producers gain at the expense of consumers and the total surplus increases.
Answer: C
Diff: 2
Topic: Setting Minimum Prices
Skill: Conceptual
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.
Answer: B
Diff: 2
Skill: Analytical
37
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
Answer: A
Diff: 2
Skill: Conceptual
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.
Answer: C
Diff: 2
Topic: Setting Maximum Prices, graphing
Skill: Analytical
38
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.
Answer: A
Diff: 2
Topic: Setting Minimum Prices, graphing
Skill: Analytical
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.
Answer: C
Diff: 2
Skill: Analytical
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.
Answer: A
Diff: 2
Skill: Analytical
39
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.
Answer: B
Diff: 2
Skill: Analytical
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.
Answer: C
Diff: 2
Skill: Analytical
Recall the Application about price controls on candy bars during World War II to answer
the following question(s).
29) Recall the Application. In a comparison of weights of candy bars in 1943 and 1939, a
Consumer Reports study found that in a vast majority of cases, the size of candy bars had
________ and their price per ounce had ________.
A) increased; increased
B) increased; decreased
C) decreased; increased
D) decreased; decreased
Answer: C
Diff: 1
Topic: Application 3, Price Controls and the Shrinking Candy Bar
Skill: Fact
40
30) Recall the Application. In a comparison of weights of candy bars in 1943 and 1939, a
Consumer Reports study stated that the change in size of candy bars is an example of:
A) "hidden price increases."
B) "an illegal price ceiling."
C) "deadweight loss."
D) "negative producer surplus."
Answer: A
Diff: 1
Topic: Application 3, Price Controls and the Shrinking Candy Bar
Skill: Fact
31) A government policy that keeps the price of gasoline below its equilibrium level will
increase consumer surplus.
Answer: FALSE
Diff: 2
Skill: Conceptual
32) Rent control makes consumers who can find a place to rent worse off.
Answer: FALSE
Diff: 2
Topic: Rent Control
Skill: Conceptual
33) A government policy that keeps the price of guitar strings above its equilibrium level will
increase total surplus.
Answer: FALSE
Diff: 2
Skill: Conceptual
34) 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
Skill: Conceptual
41
35) A price floor above the equilibrium price causes excess quantity demand.
Answer: FALSE
Diff: 2
Skill: Conceptual
36) 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 Prices—Maximum and Minimum Prices
Skill: Conceptual
37) Will a price ceiling always result in a reduction in efficiency?

Answer: Not always. A price ceiling only results in inefficiency if it is effective—if it causes the
market price to fall below the equilibrium price. If the price ceiling's maximum price is above the
equilibrium price, the price ceiling is ineffective and does nothing to the market outcome.
Diff: 2
Skill: Conceptual
38) 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
Skill: Conceptual
42
39) 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
Skill: Analytical
6.4 Controlling Quantities—Licensing and Import Restrictions
1) Which of the following is a way of controlling the quantity of a particular product?

A) rent control
B) price floor
C) business licenses
Answer: C
Diff: 1
Topic: Controlling Quantities - Licensing and Import Restrictions
Skill: Conceptual
2) Why does the medallion policy cause inefficiency?

A) It decreases the total surplus of the taxi market.
B) It prevents riders and drivers from doing mutually beneficial transactions.
C) It always decreases producer surplus only.
D) A and B are correct.
Answer: D
Diff: 3
Topic: Taxi Medallions
Skill: Conceptual
43
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
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
Skill: Analytical
44
5) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of taxi licenses
is reduced from to , 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
Skill: Analytical
6) Refer to Figure 6.6, which shows a market for taxi medallions. If the number of medallions is
reduced from to , the producer surplus is represented by:
A) area ABF.
B) area ACFG.
C) area DEH.
D) area BEFH.
Answer: D
Diff: 3
Skill: Analytical
is reduced from to , 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
Skill: Analytical
45
is reduced from to , 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
Skill: Analytical
is reduced from to , 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
Skill: Analytical
is reduced from to , 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
Skill: Analytical
46
is reduced from to :
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
Skill: Analytical
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
Skill: Analytical
47
13) In Figure 6.7 at equilibrium, producer surplus is area:
A) A.
B) A + B + C.
C) E + F + G.
D) G.
Answer: C
Diff: 3
Skill: Analytical
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
Skill: Analytical
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
Skill: Analytical
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
Skill: Analytical
48
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
18) A quantity restriction leads to a price ________ the equilibrium price.

A) at
B) above
C) below
Answer: D
Diff: 2
Skill: Conceptual
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
Skill: Conceptual
49
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
Skill: Conceptual
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
50
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
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
Skill: Analytical
51
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
Skill: Analytical
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
Skill: Analytical
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
Skill: Analytical
52
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
Skill: Analytical
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
Skill: Analytical
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
Skill: Analytical
53
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
Skill: Analytical
31) A ban on imports will ________ the price domestic consumers pay for the good, and
________ the amount of the good consumed by domestic consumers.
Answer: B
Diff: 2
Skill: Analytical
32) A ban on imports will ________ domestic producer surplus, and ________ domestic
consumer surplus.
Answer: B
Diff: 2
Skill: Analytical
54
Recall the Application about the cost of using import restrictions to protect jobs in the
luggage industry to answer the following question(s). According to a report from the
Federal Reserve Bank of Dallas, import restrictions in the luggage industry protect about
226 jobs and reduce consumer surplus by $290 million.
33) Recall the Application. Import restrictions in the luggage industry in the United States have
________ the supply of luggage and ________ the price of luggage in the United States.
A) increased; increased
B) increased; decreased
C) decreased; increased
D) decreased; decreased
Answer: C
Diff: 2
Topic: Application 4, The Cost of Protecting a Luggage Job
Skill: Conceptual
34) Recall the Application. According to the report from the Federal Reserve Bank of Dallas,
another protected industry in the United States is one that produces ball bearings, with 146 jobs
saved at an annual cost of $603,368 per job. This indicates that annual consumer surplus in this
industry is reduced by about:
A) $4,130.
B) $872,000.
C) $88 million.
D) $275 million.
Answer: C
Diff: 2
Topic: Application 4, The Cost of Protecting a Luggage Job
Skill: Analytical
35) 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
55
36) 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
Skill: Conceptual
37) A quantity restriction decreases the price of the product and the quantity produced.
Answer: FALSE
Diff: 2
Skill: Conceptual
38) 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
Skill: Conceptual
39) A quantity restriction greater than the equilibrium quantity has no effect on a market.
Answer: TRUE
Diff: 2
Skill: Conceptual
40) 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
Skill: Analytical
56
41) 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
Skill: Analytical
42) 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
Skill: Analytical
57
43) 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
Skill: Analytical
58
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
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
Skill: Analytical
59
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
Skill: Analytical
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
Skill: Analytical
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.
Answer: B
Diff: 3
Skill: Analytical
60
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.
Answer: A
Diff: 3
Topic: Tax Shifting and the Price Elasticity of Demand
Skill: Conceptual
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
Skill: Analytical
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
Skill: Analytical
61
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
Skill: Analytical
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
Skill: Analytical
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
Skill: Analytical
62
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
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
Skill: Analytical
63
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
Skill: Analytical
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
Skill: Analytical
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
Skill: Analytical
64
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
Skill: Analytical
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
Skill: Conceptual
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.
Answer: C
Diff: 2
Skill: Conceptual
65
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 5, Response to Lower Taxes in French Restaurants
Skill: Conceptual
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 5, Response to Lower Taxes in French Restaurants
Skill: Conceptual
22) 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
Skill: Conceptual
23) 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
66
24) The excess burden of a tax is the amount paid by consumers.
Answer: FALSE
Diff: 2
Skill: Conceptual
25) Consumers pay the part of a tax associated with a higher price for the product.
Answer: TRUE
Diff: 2
Skill: Conceptual
26) 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
Skill: Conceptual
27) When do consumers bear the larger share of a tax?

Answer: when demand is inelastic
Diff: 2
Skill: Conceptual
28) What is a deadweight loss or tax burden associated with a tax?

Answer: the difference between the total burden of the tax and the amount of revenue the
government receives
Diff: 2
Skill: Conceptual
67

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Test Bank for Microeconomics Principles

Applications and Tools 8th Edition OSulliva Sheffrin

Microeconomics: Prin., Apps, & Tools, 8e (O'Sullivan) TB1

6.1 Consumer Surplus and Producer Surplus

1) A market equilibrium will generate the largest possible surplus when:

16) In Figure 6.1, the consumer surplus is equal to:

18) As price falls along a particular demand curve, consumer surplus:

27) Producer surplus is:

41) In Figure 6.2, the producer surplus is:

43) As price falls along a particular supply curve, producer surplus:

48) Consumer surplus increases as the price of a good decreases.

50) Consumer surplus is price less willingness to sell.

52) Producer surplus increases as the price of a good decreases.

55) What is consumer surplus and how is it calculated?

56) What is willingness to accept?

57) What is producer surplus?

1) What is the total surplus of a market?

15) Refer to Figure 6.3. On this graph, area BCD is:

17) Refer to Figure 6.3. On this graph, area BCEO represents:

18) Refer to Figure 6.3. On this graph, area BCEO represents:

22) To be effective a price ceiling must be above the equilibrium price.

25) The market maximizes total surplus under what conditions?

10) A maximum price set below the equilibrium price will:

17) Which of the following statements about rent control is FALSE?

20) If government sets a minimum price above the equilibrium price:

37) Will a price ceiling always result in a reduction in efficiency?

6.4 Controlling Quantities—Licensing and Import Restrictions

1) Which of the following is a way of controlling the quantity of a particular product?

2) Why does the medallion policy cause inefficiency?

12) In Figure 6.7 at equilibrium consumer surplus is area:

18) A quantity restriction leads to a price ________ the equilibrium price.

27) When do consumers bear the larger share of a tax?

28) What is a deadweight loss or tax burden associated with a tax?

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