ECO10004_Economics Principles

Tutorial 3

1. The price elasticity of supply is equal to:

a. the value of the slope of the supply curve.
b. the change in quantity supplied divided by the change in price.
c. the percentage change in price divided by the percentage change in quantity
supplied.
d. the percentage change in quantity supplied divided by the percentage change
in price.

2. Suppose that the price of a money clip increases from $0.75 to $0.90 and quantity
supplied rises from 8000 units to 10000 units. Use the midpoint formula to calculate
the price elasticity of supply.
a. 1.22
b. 1.0
c. 0.82
d. 0.07

3. If firms do not increase their quantity supplied when price changes, then supply is:
a. perfectly elastic.
b. perfectly inelastic.
c. relatively inelastic.
d. elastic.

4. Suppose the demand curve for a product is represented by a typical downward-sloping

curve. Now suppose the demand for this product increases. Which of the following
statements accurately predicts the resulting increase in price?
a. The more elastic the supply curve, the greater the price increase.
b. The more elastic the supply curve, the smaller the price increase.
c. The increase in price is not affected by the elasticity of the supply curve.
d. There will be no increase in price if the supply curve is perfectly inelastic.

5. Paul goes to Sportsmart to buy a new tennis racquet. He is willing to pay $200 for a
new racquet, but buys one on sale for $125. Paul's consumer surplus from the
purchase is
a. $325.
b. $200.
c. $125.
d. $75.

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Table A
Consumer Willingness to Pay
Tom $40
Dick 30
Harriet 25

6. Refer to A. The table above lists the highest prices three consumers, Tom, Dick and
Harriet, are willing to pay for a short-sleeved polo shirt. If the price of one of the
shirts is $28 dollars,
a. Tom will buy two shirts, Dick will buy one shirt and Harriet will buy no shirts.
b. Tom will receive $12 of consumer surplus from buying one shirt.
c. Tom and Dick receive a total of $70 of consumer surplus from buying one
shirt each. Harriet will buy no shirts.
d. Harriet will receive $25 of consumer surplus since she will buy no shirts.

7. Refer to Table A. The table above lists the highest prices three consumers, Tom, Dick
and Harriet, are willing to pay for a short-sleeved polo shirt. If the price of the shirts
falls from $28 to $20,
a. consumer surplus increases from $14 to $35.
b. Tom will buy two shirts; Dick and Harriet will each buy one shirt.
c. consumer surplus will increase from $70 to $95.
d. Harriet will receive more consumer surplus than Tom or Dick.

Figure 5-2

8. Refer to Figure 5-2. What area represents producer surplus at a price of P2?
a. A + B
b. B + D
c. A + B + C
d. A + B + C + D + E

9. Refer to Figure 5-2. What area represents the increase in producer surplus when the
market price rises from P1 to P2?
a. B + D
b. A + C + E
c. C + E
d. A + B
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 10. Which of the following is an example of a price floor?
a. Rent control
b. Minimum wage
c. Subsidised pharmaceutical drugs
d. Medicare

11. Rent control is an example of:

a. a subsidy for low-skilled workers.
b. a price floor.
c. a price ceiling.
d. a black market.

Table 5-4
Quantity of Quantity of
Hourly Wage
labour labour
(dollars)
Supplied Demanded
$7.50 530 000 650 000
8.50 550 000 630 000
9.50 570 000 610 000
10.50 590 000 590 000
11.50 610 000 570 000
12.50 630 000 550 000

Table 5-4 shows the demand and supply schedules for labour market in the city of Pixley.

12. Refer to Table 5-4. What is the equilibrium hourly wage (W*) and the equilibrium
quantity of labour (Q*)?
a. W* = $10.50; Q* = 590 000
b. W* = $11.50; Q* = 570 000
c. W* = $9.50; Q* = 570 000
d. W* = $10.50; Q* = 1 200 000

13. Refer to Table 5-4. If a minimum wage of $11.50 is mandated, there will be a
a. shortage of 20 000 units of labour.
b. surplus of 20 000 units of labour.
c. shortage of 40 000 units of labour.
d. surplus of 40 000 units of labour.

14. Refer to Table 5-4. If a minimum wage of $12.50 is mandated, there will be a
a. shortage of 40 000 units of labour.
b. surplus of 40 000 units of labour.
c. shortage of 80 000 units of labour.
d. surplus of 80 000 units of labour.

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 15. The actual division of the burden of a tax between buyers and sellers in a market is
called
a. tax incidence.
b. tax liability.
c. tax bearer.
d. tax parity.

Figure 5-8

16. Refer to Figure 5-8. Suppose the market is initially in equilibrium at price P1 and
now the government imposes a tax on every unit sold. Which of the following
statements best describes the impact of the tax? For demand curve D1
a. the producer bears a greater share of the tax burden if the supply curve is S2.
b. the producer bears a greater share of the tax burden if the supply curve is S1.
c. the producer's share of the tax burden is the same whether the supply curve is
S1 or S2.
d. the producer bears the entire burden of the tax if the supply curve is S1, and
the consumer bears the entire burden of the tax if the supply curve is S2.

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Review Questions

Figure 5-10

1. Refer to Figure 5-10. The figure above illustrates the markets for two goods, Good X
and Good Y. Suppose an identical dollar tax is imposed in each market.
a. Compare the consumer burden and producer burden in each market. Illustrate your
answer graphically.
b. If the goal of the government is to raise revenue with minimum impact to quantity
consumed, in which market should the tax be imposed?
c. If the goal of the government is to discourage consumption, in which market
should the tax be imposed?

2. The graph below represents the market for lychee nuts. The equilibrium price is $7.00
per bushel, but the market price is $5.00 per bushel. Identify the areas representing
consumer surplus, producer surplus, and deadweight loss at the equilibrium price of
$7.00 and at the market price of $5.00.

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Table 5-5
Price per Quantity Quantity
Bushel Demanded Supplied
(dollars) (bushels) (bushels)
$2 40 000 0
4 34 000 4000
6 28 000 8000
8 24 000 16 000
10 20 000 20 000
12 18 000 28 000
14 12 000 36 000
16 6000 40 000

Table 5-5 above contains information about the corn market. Answer the following questions
based on this table.

3. Refer to Table 5-5. An agricultural price floor is a price that the government
guarantees farmers will receive for a particular crop. Suppose the federal government
sets a price floor for corn at $12 per bushel.

a. What is the amount of shortage or surplus in the corn market as result of the price
floor?
b. If the government agrees to purchase any surplus output at $12, how much will it
cost the government?
c. If the government buys all of the farmers' output at the floor price, how many
bushels of corn will it have to purchase and how much will it cost the
government?
d. Suppose the government buys up all of the farmers' output at the floor price and
then sells the output to consumers at whatever price it can get. Under this scheme,
what is the price at which the government will be able to sell off all of the output
it had purchased from farmers? What is the revenue received from the
government's sale?
e. In this problem we have considered two government schemes: (1) a price floor is
established and the government purchases any excess output and (2) the
government buys all the farmers' output at the floor price and resells at whatever
price it can get. Which scheme will taxpayers prefer?
f. Consider again the two schemes. Which scheme will the farmers prefer?
g. Consider again the two schemes. Which scheme will corn buyers prefer?