Economics 10th Edition Colander Test Bank Download

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File: Chapter 07 Taxation and Government Intervention
True/False
[QUESTION]
1. When the market is in equilibrium, total surplus is maximized.
Ans: True
AACSB: Reflective Thinking
Bloom’s: Understand
Difficulty: 02 Medium
Learning Objective: 07-01
Topic: Producer and Consumer Surplus
Feedback: Equilibrium makes the combination of consumer surplus and producer surplus as
large as it can be.
[QUESTION]
2. The total cost of taxation to consumers and producers generally exceeds the amount of tax
revenue collected by government.
Ans: True
Feedback: The total cost also includes the deadweight loss.
[QUESTION]
3. An excise tax on alcohol causes the supply of alcohol to decrease and the price of alcohol to
decrease.
Ans: False
Topic: Burden of Taxation
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Feedback: When supply shifts to the left, the equilibrium price rises.
[QUESTION]
4. If a tax is legally required to be paid by sellers, sellers typically bear the full burden of the tax.
Ans: False
Feedback: A portion of the burden of the tax usually can be shifted to consumers through higher
prices.
[QUESTION]
5. If the demand for insulin is highly inelastic, the burden of a tax on insulin will be borne
almost entirely by sellers.
Ans: False
Feedback: When demand is inelastic, buyers bear most of the burden.
[QUESTION]
6. If the government's goal is to alter people's behavior through taxation, taxing goods with
relatively elastic demand and supply would be most effective.
Ans: True
Feedback: When demand is elastic, people respond more to the price change caused by the tax.
[QUESTION]
7. A price ceiling is in essence an implicit tax on producers and an implicit subsidy to
consumers.
Ans: True
Bloom’s: Remember
Difficulty: 01 Easy
Topic: Government Intervention as Implicit Taxation
Feedback: A price ceiling transfers surplus from producers to consumers by lowering the price.
[QUESTION]
8. Unlike excise taxes, price ceilings create no deadweight loss.
Ans: False
Bloom’s: Remember
Difficulty: 01 Easy
Feedback: Price ceilings also create deadweight loss because the quantity bought and sold is
below the optimal level.
[QUESTION]
9. Price ceilings create shortages, but taxes do not.
Ans: True
Feedback: Taxes create a wedge between the price consumers pay and the price suppliers
receive, but quantity demanded and quantity supplied are still equal.
[QUESTION]
10. The military draft can be seen as an implicit tax on potential recruits and a subsidy to those
who demand defense services.
Ans: True
Feedback: The draft reduces the surplus of recruits because they receive lower pay than what the
market would generate; those who demand defense services are subsidized because their costs
are reduced.
[QUESTION]
11. The more inelastic the demand for agricultural output, the stronger the incentive for farmers
to engage in rent-seeking activities.
Ans: True
Topic: Rent Seeking, Politics, and Elasticities
Feedback: The more inelastic the demand, the greater the loss of revenue resulting from an
increase in supply. The incentive for rent seeking is to avoid this loss of revenue.
Multiple Choice
[QUESTION]
12. If the minimum that the Smith family would be willing to sell their house for is $185,000,
but they in fact sell it for $210,000, they will receive:
A. producer surplus in the amount of $210,000.
B. producer surplus in the amount of $25,000.
C. consumer surplus in the amount of $210,000.
D. consumer surplus in the amount of $25,000.
Ans: B
Feedback: Producer surplus is the difference between what the seller will accept and the actual
price he or she receives: $210,000 – $185,000 = $25,000.
[QUESTION]
13. The distance between the demand curve and the price the consumer has to pay for a product
(given quantity demanded) is referred to as:
A. market surplus.
B. market shortage.
C. consumer surplus.
D. producer surplus.
Ans: C
Bloom’s: Remember
Difficulty: 01 Easy
Feedback: The demand curve shows how much an individual would be willing to pay. If the
consumer pays less than that, it represents a net gain. Economists call this gain consumer surplus.
[QUESTION]
14. The distance between the supply curve and the price the producer receives for a product for
a given quantity supplied is referred to as:
A. market surplus.
B. market shortage.
C. consumer surplus.
D. producer surplus.
Ans: D
Bloom’s: Remember
Difficulty: 01 Easy
Feedback: The supply curve shows how much a producer would be willing to accept. If the
producer receives more than that, it represents a net gain. Economists call this gain producer
surplus.
[QUESTION]
15. Total consumer surplus is measured as the area:
A. between the demand curve and the supply curve.
B. above the demand curve.
C. between the vertical axis, the demand curve, and a horizontal line through the market price.
D. between the demand curve and the horizontal axis.
Ans: C
Bloom’s: Remember
Difficulty: 01 Easy
Feedback: Given quantity demanded, consumer surplus is the distance between the demand
curve and the price consumers must pay.
[QUESTION]
16. Total producer surplus is measured as the area:
A. between the demand curve and the supply curve.
B. above the supply curve.
C. between the supply curve and the horizontal axis.
D. between the vertical axis, the supply curve, and a horizontal line through the market price.
Ans: D
Bloom’s: Remember
Difficulty: 01 Easy
Feedback: Producer surplus is the distance between the supply curve and the price producers
receive.
[QUESTION]
17. Refer to the graph shown. The market represented here is in equilibrium when the price is:
A. $5.00 per unit and 220 units are bought and sold.
B. $8.15 per unit and 220 units are bought and sold.
C. $5.00 per unit and 400 units are bought and sold.
D. $3.65 per unit and 400 units are bought and sold.
Ans: C
Feedback: The market is in equilibrium where supply and demand intersect.
[QUESTION]
18. Refer to the graph shown. In equilibrium, consumer surplus is equal to:
A. 600.
B. 1,200.
C. 1,400.
D. 2,000.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Consumer surplus is the area between the demand curve and the price of $5.00 per
unit. This area is equal to (12 – 5) × (400) × (1/2).
[QUESTION]
19. Refer to the graph shown. In equilibrium, producer surplus is equal to:
A. 600.
B. 1,200.
C. 1,400.
D. 2,000.
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Producer surplus is the area between the supply curve and the price of $5.00 per unit.
This area is equal to (5 – 2) × (400) × (1/2).
[QUESTION]
20. Refer to the graph shown. In equilibrium, total surplus is equal to:
A. 600.
B. 1,200.
C. 1,400.
D. 2,000.
Ans: D
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Consumer surplus is equal to (12 – 5) × (400) × (1/2) = 1,400, and producer surplus is
equal to (5 – 2) × (400) × (1/2) = 600. The sum of these is 2,000, or (12 – 2) × 400 × (1/2).
[QUESTION]
21. Refer to the graph shown. If the price were somehow held at $8.15 per unit, consumer
surplus would then equal:
A. 1,400.
B. 600.
C. 423.5.
D. 1,171.5.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: At the price of $8.15, consumer surplus is equal to (12 – 8.15) × (220) × (1/2).
[QUESTION]
22. Refer to the graph shown. If the price were somehow held at $8.15 per unit, producer surplus
would then equal:
A. 1,400.
B. 600.
C. 423.5.
D. 1,171.5.
Ans: D
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: At the price of $8.15, producer surplus is equal to [(8.15 – 3.65) × (220)] + [(3.65 –
2) × (220) × (1/2)].
[QUESTION]
23. Refer to the graph shown. The difference between total surplus in equilibrium and total
surplus when price is $8.15 and quantity is 220 is:
A. 405.
B. 423.5.
C. 600.
D. 800.
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The difference is (8.15 – 3.65) × (400 – 220) × (1/2). Total surplus in equilibrium is
2,000, and total surplus at the price of $8.15 is 1,595.
[QUESTION]
24. Refer to the graph shown. When the market is in equilibrium, consumer surplus is area:
A. A.
B. F.
C. A plus area F.
D. F plus area E.
Ans: A
Bloom’s: Remember
Difficulty: 01 Easy
Feedback: Consumer surplus is the area between the vertical axis, the demand curve, and the
horizontal line through the equilibrium price.
[QUESTION]
25. Refer to the graph shown. When the market is in equilibrium, producer surplus is area:
A. A.
B. F.
C. C plus area D plus area E.
D. A plus area F.
Ans: B
Bloom’s: Remember
Difficulty: 01 Easy
Feedback: Producer surplus is the area between the vertical axis, the supply curve, and the
horizontal line through the equilibrium price.
[QUESTION]
26. Refer to the graph shown. When the market is in equilibrium, total surplus is area:
A. A plus area B.
B. E plus area F.
C. A plus area F.
D. A plus area C plus area F.
Ans: C
Bloom’s: Remember
Difficulty: 01 Easy
Feedback: Total surplus is the sum of consumer surplus and producer surplus. Consumer surplus
is the area between the vertical axis, the demand curve, and the horizontal line through
equilibrium price, and producer surplus is the area between the vertical axis, the supply curve,
and the horizontal line through the equilibrium price.
[QUESTION]
27. Refer to the graph shown. Total surplus is maximized when:
A. the market is in equilibrium at price P1 and quantity Q1.
B. producers are able to charge a price above P1.
C. consumers are able to pay a price below P1.
D. excess demand is maximized.
Ans: A
Feedback: The text demonstrates that there will be lost surplus when price is above or below
equilibrium. Excess demand is maximized at a price of zero, where the quantity supplied would
be zero and there would be no surplus.
[QUESTION]
28. If price is increased by law from a market equilibrium value of $5 to a higher value of $6:
A. both producer surplus and consumer surplus will increase.
B. consumer surplus will decrease and there will be some lost surplus.
C. producer surplus will decrease and there will be some lost surplus.
D. there will be lost surplus, as both producer surplus and consumer surplus decrease.
Ans: B
Feedback: Consumer surplus falls as a result of the higher price. The lost surplus is the result of
fewer units bought and sold.
[QUESTION]
29. If price is lowered by law from the market equilibrium value of $5 to a lower value of $4:
A. both producer surplus and consumer surplus will increase.
B. consumer surplus will decrease and there will be some lost total surplus.
C. producer surplus will decrease and there will be some lost total surplus.
D. there will be lost surplus, as both producer surplus and consumer surplus decrease.
Ans: C
Feedback: Producer surplus falls as a result of the lower price. The lost surplus is the result of
fewer units bought and sold.
[QUESTION]
30. Refer to the graph shown. If price is increased from $3 to $4, consumer surplus will fall by:
A. 25.
B. 50.
C. 100.
D. 125.
Ans: D
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Consumer surplus falls by [$4 – $3] × 100 + [$4 – $3] × 50 × (1/2).
[QUESTION]
31. Refer to the graph shown. If price is increased from $3 to $4, total surplus will fall by:
A. 50.
B. 100.
C. 150.
D. 200.
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Lost surplus is [$4 – $3] × 50 × 1/2 + [$3 – $2] × 50 × 1/2. Some surplus is
transferred from consumers to producers.
[QUESTION]
32. Refer to the graph shown. When the market is in equilibrium, consumer surplus is equal to:
A. 500.
B. 1,000.
C. 1,500.
D. 2,000.
Ans: B
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Consumer surplus is [10 – 5] × 400 × (1/2).
[QUESTION]
33. Refer to the graph shown. When the market is in equilibrium, producer surplus is equal to:
A. 500.
B. 1,000.
C. 1,500.
D. 2,000.
Ans: B
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Producer surplus is [5 – 0] × 400 × (1/2).
[QUESTION]
34. Refer to the graph shown. If consumers had to pay $7.50 per unit for this product instead of
$5.00 per unit (because of a price floor or a shift in supply), consumer surplus would fall from:
A. 2,000 to 500.
B. 1,000 to 500.
C. 1,000 to 250.
D. 500 to 250.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: At $5, consumer surplus is 1,000. At $7.50, consumer surplus is [10 – 7.5] × 200 ×
(1/2).
[QUESTION]
35. Refer to the graph shown. If the price of this product fell from $5.00 to $2.50 (because of a
price ceiling or a shift in demand), producer surplus would fall from:
A. 2,000 to 500.
B. 1,000 to 500.
C. 1,000 to 250.
D. 500 to 250.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: At $5, producer surplus is 1,000. At $2.50, producer surplus is [2.5 – 0] × 200 ×
(1/2).
[QUESTION]
36. Refer to the graph shown. When the market is in equilibrium, consumer surplus is equal to:
A. 1,125.
B. 1,500.
C. 2,250.
D. 2,500.
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Consumer surplus is [17.5 – 10] × 300 × (1/2).
[QUESTION]
37. Refer to the graph shown. When the market is in equilibrium, producer surplus is equal to:
A. 250.
B. 500.
C. 750.
D. 1,000.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
[QUESTION]
38. Refer to the graph shown. If consumers had to pay $13 per unit for this product instead of
$10 per unit, consumer surplus would fall from:
A. 2,250 to 1,125.
B. 1,125 to 810.
C. 1,500 to 810.
D. 1,125 to 405.
Ans: D
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: At $10, consumer surplus is 1,125. At $13, consumer surplus is [17.5 – 13] × 180 ×
(1/2).
[QUESTION]
39. Refer to the graph shown. If the price of this product fell from $10 to $8, producer surplus
would fall from:
A. 250 to 180.
B. 750 to 220.
C. 750 to 270.
D. 1,000 to 540.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: At $10, producer surplus is 750. At $8, producer surplus is [8 – 5] × 180 × (1/2).
[QUESTION]
40. There would be no deadweight loss if:
A. demand was perfectly inelastic.
B. demand was perfectly elastic.
C. taxes collected were used for societal good.
D. demand was to shift by the amount of the tax.
Ans: A
AAACSB: Reflective Thinking
Feedback: Deadweight loss is caused by changes in behavior. If demand is perfectly inelastic,
quantity demanded doesn't change and there is no deadweight loss.
[QUESTION]
41. A per-unit tax on coffee paid by the seller causes the:
A. supply of coffee curve to shift upward by the amount of the per-unit tax.
B. supply of coffee curve to shift downward by the amount of the per-unit tax.
C. demand for coffee curve to shift upward by the amount of the per-unit tax.
D. demand for coffee curve to shift downward by the amount of the per-unit tax.
Ans: A
Feedback: Sellers will attempt to raise prices as a result of the tax, and so the supply curve shifts
upward. The demand curve would shift if the tax were paid by the consumer.
[QUESTION]
42. Graphically, deadweight loss is shown by the:
A. welfare loss rectangle.
B. welfare loss triangle.
C. tax revenue rectangle.
D. consumer surplus loss triangle.
Ans: B
Bloom’s: Remember
Difficulty: 01 Easy
Feedback: This is the textbook definition of the welfare loss triangle.
[QUESTION]
43. Refer to the graph shown. Assume that the market is initially in equilibrium at a price of $6
and a quantity of 40 units. If the government imposes a $2 per-unit tax on this product, the
equilibrium price will change to:
A. $4.
B. $5.
C. $7.
D. $8.
Ans: C
Feedback: After the tax, equilibrium is where the demand curve intersects S1.
[QUESTION]
and a quantity of 40 units. If the government imposes a $2 per-unit tax on this product,
equilibrium quantity will change to:
A. 30.
B. 50.
C. 60.
D. 100.
Ans: A
[QUESTION]
and a quantity of 40 units. In equilibrium, consumer surplus is equal to:
A. 40.
B. 80.
C. 120.
D. 160.
Ans: B
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
[QUESTION]
and a quantity of 40 units. In equilibrium, producer surplus is equal to:
A. 40.
B. 80.
C. 120.
D. 160.
Ans: B
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
[QUESTION]
and a quantity of 40 units. If the government imposes a $2 per-unit tax on this product, it will
collect tax revenue in the amount of:
A. $60.
B. $80.
C. $100.
D. $120.
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Tax revenue is $2 × 30, since the tax causes equilibrium quantity to fall from 40 to
30.
[QUESTION]
and a quantity of 40 units. If the government imposes a $2 per-unit tax on this product, consumer
surplus will fall from:
A. 80 to 45.
B. 160 to 90.
C. 90 to 45.
D. 160 to 80.
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: In equilibrium, consumer surplus is 80. After the tax, consumer surplus is [10 – 7] ×
30 × (1/2).
[QUESTION]
and a quantity of 40 units. If the government imposes a $2 per-unit tax on this product, producer
surplus will fall from:
A. 80 to 45.
B. 160 to 90.
C. 90 to 45.
D. 160 to 80.
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: In equilibrium, producer surplus is 80. After the tax, producer surplus is [5 – 2] × 30
× (1/2).
[QUESTION]
deadweight loss from the tax will be:
A. 10.
B. 60.
C. 70.
D. 80.
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Total lost surplus is 70, but 60 of this becomes tax revenue. We assume that the tax
revenue produces enough welfare to replace the 60 units of lost surplus. The area of the welfare
loss triangle is 10.
[QUESTION]
51. When government imposes a per-unit tax on a product, the net price producers actually
receive for the product (after all taxes) typically:
A. increases by the amount of the per-unit tax.
B. increases by less than the amount of the per-unit tax.
C. decreases by the amount of the per-unit tax.
D. decreases by less than the amount of the per-unit tax.
Ans: D
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: As long as demand is downward-sloping and supply is upward-sloping, the price
producers keep after paying the tax decreases by less than the amount of the per-unit tax. As long
as demand is not perfectly inelastic, consumers will bear part of the per unit tax.
[QUESTION]
52. A per-unit tax will result in a deadweight loss unless the tax causes no change in:
A. the price consumers pay.
B. the price producers receive after paying it.
C. equilibrium quantity sold.
D. either equilibrium price or equilibrium quantity.
Ans: C
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: It is the fact that most taxes cause quantity bought and sold to fall that results in
deadweight loss. As explained in the text, the loss of welfare represents a loss for those
consumers and producers who would have traded without the tax but do not with the tax.
[QUESTION]
53. Refer to the graph shown. Assume the market is initially in equilibrium at point b in the
graph but the imposition of a per-unit tax on this product shifts the supply curve up from S0 to S1.
The effect of the tax is to raise equilibrium price from:
A. P1 to P1 + t.
B. P1 to P2.
C. P2 – t to P2.
D. P2 – t to P1 + t.
Ans: B
Feedback: The initial equilibrium is at point b. After the tax, equilibrium is at point c.
[QUESTION]
The amount of revenue government will collect from this tax is equal to the:
A. amount of the per-unit tax multiplied by Q1.

B. amount of the per-unit tax multiplied by Q2.
C. area of the triangle abc.
D. area of the triangle bcd.
Ans: B
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The tax reduces quantity to Q2.
[QUESTION]
The welfare loss triangle from this tax is represented by area:
A. cfg.
B. beg.
C. abc.
D. bcd.
Ans: C
Feedback: Area abc is the welfare loss triangle, as defined in the text.
[QUESTION]
The lost consumer surplus of this tax is equal to the area:
A. P1(P2 – t)ab.
B. P2P1bc.
C. cab.
D. cdb.
Ans: B
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: After the tax, equilibrium is at point c, resulting in this lost consumer surplus.
[QUESTION]
The lost producer surplus of this tax is equal to the area:
A. P1(P2 – t)ab.
B. P1P2cb.
C. abc.
D. bcd.
Ans: A
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: After the tax, sellers will actually keep P2 – t per unit, so from the sellers’
perspective, it is as if equilibrium changed from point b to point a.
[QUESTION]
equilibrium price will change to:
A. $4.
B. $8.
C. $12.
D. $14.
Ans: C
[QUESTION]
equilibrium quantity will change to:
A. 300.
B. 400.
C. 500.
D. 1,000.
Ans: B
[QUESTION]
and a quantity of 500 units. In equilibrium, consumer surplus is equal to:
A. 1,500.
B. 2,500.
C. 3,500.
D. 5,000.
Ans: B
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
[QUESTION]
and a quantity of 500 units. In equilibrium, producer surplus is equal to:
A. 1,500.
B. 2,500.
C. 3,500.
D. 5,000.
Ans: B
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
[QUESTION]
and a quantity of 500 units. If the government imposes a $4 per-unit tax on this product, it will
collect tax revenue in the amount of:
A. $0.
B. $1,200.
C. $1,600.
D. $2,000.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Tax revenue is $4 × 400, since the tax causes equilibrium quantity to fall from 500 to
400.
[QUESTION]
consumer surplus will fall from:
A. 2,500 to 1,600.
B. 5,000 to 3,200.
C. 2,500 to 1,200.
D. 5,000 to 2,500.
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: In equilibrium, consumer surplus is 2,500. After the tax, consumer surplus is [20 –
12] × 400 × (1/2).
[QUESTION]
producer surplus will fall from:
A. 2,500 to 1,600.
B. 5,000 to 3,200.
C. 3,200 to 1,600.
D. 5,000 to 2,500.
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: In equilibrium, producer surplus is 2,500. After the tax, producer surplus is [12 – 4] ×
400 × (1/2).
[QUESTION]
deadweight loss from the tax will be:
A. 200.
B. 1,600.
C. 1,800.
D. 2,000.
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Total lost surplus is 1,800, but 1,600 of this becomes tax revenue. The area of the
welfare loss triangle is 200.
[QUESTION]
66. Refer to the graph shown. Assume the market is initially in equilibrium at point j in the
The effect of the tax is to raise equilibrium price from:
A. d to b.
B. d to c.
C. c to b.
D. e to c.
Ans: B
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: The initial equilibrium is at point j. After the tax, equilibrium is at point h.
[QUESTION]
The amount of revenue the government will collect from this tax is equal to the area of:
A. rectangle chie.
B. triangle ach.
C. triangle egi.
D. rectangle bkjd.
Ans: A
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: The tax reduces quantity from m to l, and the amount of the tax is given by the
distance ce or hi.
[QUESTION]
The welfare loss triangle from this tax is represented by area:
A. cdj.
B. dei.
C. hji.
D. khj.
Ans: C
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: Area hji is the welfare loss triangle, as defined in the text.
[QUESTION]
The lost consumer surplus of this tax is equal to the area:
A. cdjh.
B. deij.
C. hji.
D. khj.
Ans: A
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: After the tax, equilibrium is at point h, resulting in this lost consumer surplus.
[QUESTION]
The lost producer surplus of this tax is equal to the area:
A. cdjh.
B. deij.
C. hji.
D. khj.
Ans: B
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: After the tax, sellers actually will keep “e” per unit, and so from the sellers’
perspective, it is as if equilibrium changed from point j to point i.
[QUESTION]
71. Refer to the graph shown. Initially, the market is in equilibrium with price equal to $3 and
quantity equal to 100. Government imposes a tax on suppliers of $1 per unit. The effect of the
tax is to:
A. raise the price consumers pay from $3 to $4.

B. lower the price consumers pay from $3 to $2.
C. raise the price sellers keep after paying the tax.
D. lower the price sellers keep after paying the tax.
Ans: A
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: Since demand is perfectly inelastic, the price consumers pay increases by the amount
of the tax, but sellers keep the same amount after paying the tax.
[QUESTION]
quantity equal to 100. Government imposes a tax on suppliers of $1 per unit. The effect of the
tax is to:
A. give government tax revenues of $100.
B. give government tax revenues of $400.
C. reduce producer surplus by $100.
D. reduce producer surplus by $400.
Ans: A
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: Since the equilibrium quantity does not change, there is no deadweight loss and, in
this case, no loss of producer surplus. Since 100 units are sold and the amount of the per-unit tax
is $1, government collects $100 in revenue.
[QUESTION]
quantity equal to 100. As a result of a per-unit tax imposed by the government, the supply curve
shifts from S0 to S1. The effect of the tax is to:

C. raise the price sellers keep after paying the tax from $25 to $30.
D. lower the price sellers keep after paying the tax from $25 to $20.
Ans: D
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: In this case, the price consumers pay remains the same, but sellers keep only $20 per
unit after paying the tax.
[QUESTION]

C. reduce producer surplus by $375.
D. reduce producer surplus by $400.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Lost producer surplus equals [(25 – 20) × 50] + [(25 – 20) × 50 × (1/2).
[QUESTION]
C. raise the price sellers keep after paying the tax from $12 to $14.
D. lower the price sellers keep after paying the tax from $14 to $12.
Ans: A
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: In this case, the price consumers pay goes up by the amount of the tax.
[QUESTION]

C. reduce consumer surplus by $240.
D. reduce consumer surplus by $200.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Tax revenue is $200. Lost consumer surplus equals [(14 – 12) × 100] + [(14 – 12) ×
40 × (1/2).
[QUESTION]
77. Refer to the graph shown. Initial market equilibrium is at the intersection of the demand
curve and S0. When government imposes a per-unit tax, supply shifts from S0 to S1. The
deadweight loss associated with this tax is represented by area:
A. GHI.
B. HJI.
C. CDGH.
D. ABIJ.
Ans: A
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: Area HJI is the welfare loss triangle.
[QUESTION]
78. Suppose people freely choose to spend 40 percent of their income on health care, but then
the government decides to tax 40 of a person's income to provide the same level of coverage as
before. What can be said about deadweight loss in each case?
A. Taxing income results in deadweight loss, and purchasing health care on one's own doesn't
result in deadweight loss.
B. Taxing income results in less deadweight loss because government knows better what health
care coverage is good for society.
C. There is no difference because the goods are purchased in the market in either case.
D. There is no difference because the total spending remains the same and the health care
purchased remains the same.
Ans: A
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: Taxation results in deadweight loss because it reduces the incentive to work. The
important relationship is between effort and income. When people spend their own money, they
are choosing how to spend it. Government cannot know ahead of time what the individual will
buy.
[QUESTION]
79. If the supply curve is perfectly inelastic, the burden of a tax on suppliers is borne:
A. entirely by the suppliers.
B. entirely by the consumers.
C. mostly by the suppliers and partly by the consumers if the demand curve is inelastic.
D. partly by the suppliers and mostly by the consumers if the demand curve is elastic.
Ans: A
Feedback: When the supply curve is perfectly inelastic, the entire burden of the tax falls on the
suppliers.
[QUESTION]
80. If the supply curve is perfectly elastic, the burden of a tax on suppliers is borne:
Ans: B
Feedback: When the supply curve is perfectly elastic, price rises by the amount of the tax and
the entire burden of the tax falls on the consumers.
[QUESTION]
81. If demand is perfectly inelastic, the burden of a tax on suppliers is borne:
Ans: B
Feedback: When the demand curve is perfectly inelastic, suppliers can shift the entire burden of
a tax onto the consumers.
[QUESTION]
82. If the demand curve is perfectly elastic, the burden of a tax on suppliers is borne:
C. mostly by the suppliers and partly by the consumers if the supply curve is inelastic.
D. partly by the suppliers and mostly by the consumers if the supply curve is elastic.
Ans: A
Feedback: When the demand curve is perfectly elastic, the entire burden of the tax falls on the
suppliers.
[QUESTION]
83. Refer to the graphs shown. The burden of the tax is borne entirely by consumers in graphs:
A. A and D.
B. B and C.
C. C and D.
D. B and D.
Ans: B
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: Price rises by the full amount of the tax when demand is perfectly inelastic and when
supply is perfectly elastic.
[QUESTION]
84. Refer to the graph shown. The burden of the tax is borne entirely by sellers in graphs:
A. A and D.
B. B and C.
C. C and D.
D. B and D.
Ans: A
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: Price is unchanged by the tax when demand is perfectly elastic and when supply is
perfectly inelastic.
[QUESTION]
85. Refer to the graphs shown. The most tax revenue collected by a given per-unit tax on
producers is shown by graphs:
A. A and D.
B. B and C.
C. C and D.
D. B and D.
Ans: D
Feedback: Since quantity sold doesn't change in graphs B and D, tax revenue is the greatest
there.
[QUESTION]
86. Refer to the graphs shown. Deadweight loss is the least with the imposition of a given per-
unit tax on producers in graphs:
A. A and D.
B. B and C.
C. C and D.
D. B and D.
Ans: D
Feedback: Since quantity sold doesn't change when supply or demand is inelastic, there is no
deadweight loss.
[QUESTION]
87. Refer to the graphs shown. In which graph is there no producer surplus either with or
without a per-unit tax?
A. A.
B. B.
C. C.
D. D.
Ans: C
Feedback: There is no producer surplus when supply is perfectly elastic.
[QUESTION]
88. Refer to the graphs shown. In which graph is there no consumer surplus either with or
without a per-unit tax?
A. A.
B. B.
C. C.
D. D.
Ans: A
Feedback: There is no consumer surplus when the demand curve is perfectly elastic.
[QUESTION]
89. Refer to the following graph.
Given a tax of t on suppliers, revenue collected is:
A. A, B, C. Suppliers pay A and B. Consumers pay C.
B. A, B, C. Suppliers pay B and C. Consumers pay A.
C. A and B. Suppliers pay A. Consumers pay B.
D. A and B. Suppliers pay B. Consumers pay A.
Ans: D
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Given tax t, equilibrium price becomes P2. Suppliers net P1. Thus, the tax borne by
consumers is (P2 – P0) ×Q1, and the tax borne by suppliers is (P0 – P1) ×Q1.
[QUESTION]
90. If elasticity of demand is 0.2, elasticity of supply is 0.5, and a 10 percent excise tax is levied
on the good:
A. the tax burden on suppliers will be greater.
B. the tax burden on consumers will be greater.
C. the tax burden will be the same for both.
D. one cannot say who will bear the greater burden without knowing the tax.
Ans: B
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: The more inelastic the supply or demand, the greater the burden of the tax placed on
that party.
[QUESTION]
on the good:
Ans: A
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: The more inelastic the supply or demand, the greater the burden of the tax placed on
that party.
[QUESTION]
on the good:
Ans: C
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: Elasticity is the same for both, so the producer and consumer equally share the
burden.
[QUESTION]
93. Suppose the equilibrium price of CDs is $10 a CD. At that price, quantity of CDs demanded
and supplied is 100,000. If a $6 tax per CD paid by suppliers increases the equilibrium price to
$14 per CD and reduces the equilibrium quantity sold to 90,000:
A. suppliers pay a greater portion of the tax because they are more price elastic.
B. consumers pay a greater portion of the tax because they are less price elastic.
C. suppliers pay a greater portion of the tax because the tax is levied on them.
D. suppliers pay a greater portion of the tax because they are less price elastic.
Ans: B
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: Suppliers receive a price (net of the tax) of $8 while consumers pay $14. Thus,
elasticity of demand is approximately .3 and elasticity of supply is approximately .5. The party
who is more price inelastic bears the larger burden of the tax.
[QUESTION]
94. Suppose the equilibrium price of textbooks is $40 a textbook. At that price, the quantity of
textbooks demanded and supplied is 20,000. If a $5 tax per textbook paid by consumers
increases the price paid by consumers to $42 a textbook and reduces the equilibrium quantity
sold to 18,000, elasticity of:
A. demand is 1.4 and elasticity of supply is 2.16. Consumers pay a larger portion of the tax.
B. demand is 0.7 and elasticity of supply is 46. Consumers pay a smaller portion of the tax.
C. supply is 1.4 and elasticity of demand is 2.16. Suppliers pay a larger portion of the tax.
D. supply is 0.7 and elasticity of demand is 46. Suppliers pay a smaller portion of the tax.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Suppliers receive a price (net of the tax) of $37, and consumers pay $42. Thus,
elasticity of demand is 2.16 and elasticity of supply is 1.35. The party who is more price inelastic
bears the larger burden of the tax.
[QUESTION]
95. Given the same price elasticity of supply, sellers would be able to pass along the largest
portion of a 10 percent tax on which item?
A. Beef with a price elasticity of demand of 0.62
B. Pork with a price elasticity of demand of 0.73
C. Chicken with a price elasticity of demand of 0.32
D. Fish with a price elasticity of demand of 0.12
Ans: D
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: The more inelastic the demand, the greater the burden of the tax placed on
consumers.
[QUESTION]
96. Given the same price elasticity of supply, sellers would be able to pass along the smallest
portion of a 10 percent tax on which item?
A. Beef with a price elasticity of demand of 0.62
B. Pork with a price elasticity of demand of 0.73
C. Chicken with a price elasticity of demand of 0.32
D. Fish with a price elasticity of demand of 0.12
Ans: B
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The more elastic the demand, the smaller the burden of the tax placed on consumers.
[QUESTION]
97. Those with more inelastic demands will bear a larger burden of a tax because they:
A. have more buying power.
B. have more income.
C. will switch to other products with a tax.
D. have fewer substitutes for that good.
Ans: D
Feedback: Those with inelastic demands have fewer substitutes. Thus, they will accept more of
the burden of a tax.
[QUESTION]
A $4 tax is levied on suppliers (represented by S0 without the tax). From the graph and tax
structure you know that the:
A. elasticities of supply and demand are about the same.
B. elasticity of supply is less than the elasticity of demand.
C. elasticity of demand is less than the elasticity of supply.
D. elasticities cannot be calculated.
Ans: A
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: Since the tax incidence is identical, so are the elasticities.
[QUESTION]
99. A local government is considering a 10 percent tax on items A, B, and C. They want to tax
only those goods for which the burden of the tax is lowest on suppliers. They know that the
elasticity of supply of all the suppliers in question is about equal and have observed that when
the price of A , B, and C rose 10 percent, total sales receipts for A and B rose 2 percent but
declined 2 percent for C. From this information, they should:
A. tax A and B but not C.
B. tax A, B, and C equally.
C. tax C but not A and B.
D. You need to know the volume of sales to determine the answer.
Ans: A
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: For A and B, revenue rose when price increased. Therefore, demand must be
inelastic for those goods. Thus, the tax burden would be greatest for consumers (lowest for
suppliers) for A and B.
[QUESTION]
100. Refer to the graph shown. Given the same supply elasticity, the burden of a 10 percent tax
would be borne the most by the consumer in segment:
A. AB.
B. BC.
C. CD.
D. DE.
Ans: D
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: From A to E, elasticity declines. The tax borne the most by consumers is along the
segment with the lowest elasticity, DE.
[QUESTION]
101. Refer to the graph shown. If the elasticity of supply is 1, the burden of the tax will be
shared equally by consumers and suppliers at which point?
A. A
B. C
C. E
D. It depends on who pays the tax.
Ans: B
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: Suppliers and consumers will share the tax burden equally only if their elasticities are
the same. Price elasticity of demand is 1 only at point C.
[QUESTION]
102. Given the same supply elasticity, the burden of a 10 percent tax on suppliers would be
greatest on consumers within what price range?
A. $2 and $4.
B. $4 and $6
C. $6 and $8
D. $8 and $10
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Elasticity rises as price rises along a straight-line demand curve. Thus, the lowest
range is the most likely candidate. Doing the calculations, we find that elasticity between $2 and
$4 is [(26 – 22)/24]/[(4 – 2)/3] = (4/24)/(2/3) = (1/6)/(2/3) = 3/12 = .25 and is lower than in all
the other ranges.
[QUESTION]
103. An excise tax is imposed on smartphones. If the elasticity of demand is 2 and the elasticity
of supply is 1, we can predict that:
A. consumers will bear the full tax burden.
B. sellers will bear the full tax burden.
C. consumers will bear 2/3 of the tax burden.
D. sellers will bear 2/3 of the tax burden.
Ans: D
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The consumers' share of the tax burden is ES/(ES + ED), and the sellers' share is
ED/(ES + ED).
[QUESTION]
104. When elasticities of supply and demand are both equal to 1, the burden of a tax will be:
A. entirely on buyers.
B. entirely on sellers.
C. half on buyers and half on sellers.
D. mostly on buyers.
Ans: C
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: The consumer's share of the tax burden is ES/(ED + ES), and the seller's share is
ED/(ED + ES).
[QUESTION]
105. Suppose that 75 percent of a cigarette tax is borne by consumers. If the supply elasticity is
1, the demand elasticity is equal to:
A. 1.
B. 1/2.
C. 1/3.
D. 1/4.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Set the consumer's share of the tax burden, ES/(ED + ES) equal to 3/4, substitute ES =
1, and solve for ED.
[QUESTION]
106. If elasticity of demand is 0.2, elasticity of supply is 0.6, and a 10 percent excise tax is
levied on the good:
A. consumers pay 25 percent of the tax.
B. sellers pay 25 percent of the tax.
C. consumers pay 20 percent of the tax.
D. sellers pay 60 percent of the tax.
Ans: B
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The consumers' share is ES/(ED + ES) = 75 percent. The sellers' share is therefore 25
percent.
[QUESTION]
107. If elasticity of demand is 1.8, elasticity of supply is 0.2, and a 20 percent excise tax is
levied on the good:
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Topic: TBurden of Taxation
percent.
[QUESTION]
on the good:
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
percent.
[QUESTION]
109. If sellers bear 1/3 of the tax burden and elasticity of demand is 2, what is the elasticity of
supply?
A. 4
B. 3
C. 2
D. 1
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The sellers' share is ED/(ED + ES) = 1/3. Substituting 2 for ED and solving for ES, we
get 4.
[QUESTION]
110. If elasticity of demand is 1 and elasticity of supply is 0, what percentage of a 10 percent tax
will be borne by consumers?
A. 100 percent.
B. 50 percent.
C. 10 percent.
D. 0 percent.
Ans: D
Feedback: Because supply is perfectly inelastic, suppliers will bear the entire burden of the tax.
[QUESTION]
111. Suppose elasticity of demand is 0.2, elasticity of supply is 0.7, and a 10 percent excise tax
is levied on producers. Which of the following changes will reduce the share of the tax paid by
consumers?
A. Elasticity of supply falls to 0.3.
B. Elasticity of demand falls to 0.1.
C. The tax will be increased to 20 percent.
D. Nothing will change the burden of the tax.
Ans: A
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: The less elastic the supply, the smaller the burden borne by consumers.
[QUESTION]
112. Suppose elasticity of demand is 1, elasticity of supply is 2, and a 5 percent excise tax is
levied on consumers. Which of the following changes will reduce the burden of the tax on
consumers?
A. Elasticity of demand falls to 0.
B. Elasticity of demand rises to 2.
C. Taxing authorities levy the tax on suppliers.
D. Nothing will change the burden of the tax.
Ans: B
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: The more elastic the demand, the smaller the burden borne by consumers.
[QUESTION]
113. The more elastic the supply and the demand curves are, the:
A. smaller the shortage a price ceiling will create.
B. greater the shortage a price ceiling will create.
C. smaller the surplus a price ceiling will create.
D. greater the surplus a price ceiling will create.
Ans: B
Feedback: Price ceilings create shortages, and more elastic supply and demand curves will
worsen the problem because quantity demanded and quantity supplied will be much more
influenced by small price changes.
[QUESTION]
114. Assuming a binding price floor, the more elastic the supply and demand curves are, the:
A. smaller the shortage a price floor will create.
B. greater the shortage a price floor will create.
C. smaller the surplus a price floor will create.
D. greater the surplus a price floor will create.
Ans: D
Feedback: Price floors create surpluses, and more elastic supply and demand curves will worsen
the problem because quantity demanded and quantity supplied will be much more influenced by
small price changes.
[QUESTION]
115. Assuming a binding price floor, the more inelastic the supply and the demand curves are,
the:
A. smaller the shortage a price floor will create.
B. greater the shortage a price floor will create.
C. smaller the surplus a price floor will create.
D. greater the surplus a price floor will create.
Ans: C
Feedback: Price floors create surpluses, and more inelastic supply and demand curves will
create less of a problem because quantity demanded and quantity supplied will not be affected as
much by the price change.
[QUESTION]
116. Refer to the graph shown. If the government imposed a price ceiling of $4, producers’
revenue would:
A. rise.
B. decline.
C. remain unchanged.
D. It cannot be determined.
Ans: B
Feedback: Elasticity of demand is 1 at $6; below $6, demand is inelastic. A decline in price in
the range below $6 will reduce revenue.
[QUESTION]
117. Refer to the graph shown. If the government imposed a price ceiling of $4, the quantity
purchased by consumers in this market would:
A. decline from 6 to 4.
B. decline from 4 to 2.
C. increase from 2 to 4.
D. increase from 4 to 6.
Ans: B
Feedback: Although quantity demanded at $4 is 6, consumers can buy only what producers are
willing and able to sell.
[QUESTION]
118. Refer to the graph shown. If the government imposed a price ceiling of $4, producer
surplus would:
A. increase from 2 to 4.
B. increase from 4 to 8.
C. fall from 8 to 2.
D. fall from 16 to 4.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Producer surplus in equilibrium is [6 – 2] × 4 × (1/2) = 8. Producer surplus when the
price is kept at $4 is [4 – 2] × 2 × (1/2) = 2.
[QUESTION]
119. Refer to the graph shown. If the government imposed a price ceiling of $4, consumer
surplus would:
A. fall from 12 to 4.
B. fall from 12 to 8.
C. rise from 12 to 13.
D. be unchanged at 12.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Consumer surplus in equilibrium is [12 – 6] × 4 × (1/2). Consumer surplus when the
price is kept at $4 is [(12 – 9) × 2 × (1/2) + (9 – 4) × 2].
[QUESTION]
120. Refer to the graph shown. If the price were at the market equilibrium price, the total surplus
would be the combination of the areas:
A. A through F.
B. A through D.
C. E and F.
D. A, B, and E.
Ans: A
Feedback: Areas A through F reflect both consumer surplus and producer surplus.
[QUESTION]
121. Refer to the graph shown. With an effective price ceiling at Pc, the quantity supplied:
A. falls from Q3 to Q2.
B. falls from Q1 to Q2.
C. increases from Q2 to Q1.
D. increases from Q1 to Q3.
Ans: B
Feedback: Q1 is equilibrium quantity; when price falls to Pc, quantity supplied falls to Q2.
[QUESTION]
122. Refer to the graph shown. With an effective price ceiling at Pc, total surplus is reduced by:
A. rectangles B and C.
B. rectangles A and D.
C. triangles E and F.
D. rectangle B and triangle E.
Ans: C
Feedback: These triangles are the deadweight loss from the price ceiling.
[QUESTION]
123. Refer to the graph shown. An effective price ceiling at Pc imposes a deadweight loss shown
by:
Ans: C
Feedback: These triangles are the deadweight loss from the price ceiling.
[QUESTION]
124. Refer to the graph shown. An effective price ceiling at Pc causes consumer surplus to:
A. change from areas C + D + F to areas B + C + D.

B. change from areas A + B + E to areas A + B + C.
C. fall from areas C + D + F to area D.
D. fall from areas A + B + E to area A.
Ans: B
Feedback: The price ceiling reduces quantity and transfers area C from producers to consumers.
[QUESTION]
125. Refer to the graph shown. An effective price ceiling at Pc causes producer surplus to:

Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The price ceiling reduces quantity and transfers area C from producers to consumers.
[QUESTION]
126. Refer to the graph shown. With an effective price ceiling at Pc, the effect is an implicit tax
on:
A. suppliers of area C and a subsidy to consumers of that area.

B. suppliers of area D and a subsidy to consumers of that area.
C. consumers of area C and a subsidy to suppliers of that area.
D. consumers of area D and a subsidy to suppliers of that area.
Ans: A
Feedback: Area C was part of producer surplus in equilibrium; with the price ceiling, this area
becomes part of consumer surplus.
[QUESTION]
127. Refer to the graph shown. With an effective price floor at Pf, total surplus is reduced by:
Ans: C
Feedback: These triangles are the deadweight loss from the price floor.
[QUESTION]
128. Refer to the graph shown. An effective price floor at Pf imposes a deadweight loss shown
by:
Ans: C
Feedback: These triangles are the deadweight loss from the price floor.
[QUESTION]
129. Refer to the graph shown. An effective price floor at Pf causes consumer surplus to:

Ans: D
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The price floor reduces quantity and transfers area B from consumers to producers.
[QUESTION]
130. Refer to the graph shown. An effective price floor at Pf causes producer surplus to:

Ans: A
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: The price floor reduces quantity and transfers area B from consumers to producers.
[QUESTION]
131. Refer to the graph shown. With an effective price floor at Pf, the effect is an implicit tax on:
A. suppliers shown by area C and a subsidy to consumers of that area.

B. suppliers shown by area B and a subsidy to consumers of that area.
C. consumers shown by area C and a subsidy to suppliers of that area.
D. consumers shown by area B and a subsidy to suppliers of that area.
Ans: D
Feedback: Area B was part of consumer surplus in equilibrium; with the price floor, this area
becomes part of producer surplus.
[QUESTION]
132. Refer to the graph shown. If the price were at the market equilibrium price, the total surplus
would be equal to:
A. 80.
B. 120.
C. 200.
D. 400.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: In equilibrium, consumer surplus is [10 – 6] × 40 × (1/2) and producer surplus is [6 –
0] × 40 × (1/2).
[QUESTION]
133. Refer to the graph shown. With an effective price ceiling at $3, the quantity supplied:
A. falls from 70 to 40.
B. falls from 40 to 20.
C. increases from 40 to 70.
D. increases from 20 to 40.
Ans: B
Feedback: 40 is the equilibrium quantity supplied; when price falls to $3, quantity supplied falls
to 20.
[QUESTION]
134. Refer to the graph shown. With an effective price ceiling at $3, total surplus is reduced by:
A. 20.
B. 30.
C. 50.
D. 100.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The deadweight loss triangles have area equal to [8 – 6] × 20 × (1/2) and [6 – 3] × 20
× (1/2).
[QUESTION]
135. Refer to the graph shown. An effective price ceiling at $3 imposes a deadweight loss of:
A. 20.
B. 30.
C. 50.
D. 100.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
× (1/2).
[QUESTION]
136. Refer to the graph shown. An effective price ceiling at $3 causes consumer surplus to:
B. fall from 110 to 80.
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The price ceiling reduces quantity and transfers some surplus from producers to
consumers. With the price ceiling, consumer surplus is [(10 – 8) × 20 × (1/2) + [(8 – 3) × 20].
[QUESTION]
137. Refer to the graph shown. An effective price ceiling at $3 causes producer surplus to:

B. increase from 80 to 110.
C. fall from 120 to 30.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The price ceiling reduces quantity and transfers some surplus from producers to
consumers. With the price ceiling, producer surplus is [3 – 0] × 20 × (1/2).
[QUESTION]
138. Suppose there are 1,825 taxi medallions in Boston, each valued at about $250,000. Assume
the price elasticity of demand for taxi rides is 1; the current price for a taxi ride is $4.75 per mile,
and the cost of the ride is $3.00 per mile. How much would a person be willing to pay for a new
medallion if the city increased the number of medallions to 2,000? (Hint: The price of the
medallions is equal to the total profit from the average total number of miles each medallion will
accumulate.)
A. $160,000
B. $185,000
C. $250,000
D. $337,000
Ans: B
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The quantity of taxis supplied increases by 9.15 percent. That means quantity
demanded also will increase by 9.15 percent. For this to happen, price has to fall by 9.15 percent
to $4.30. Profit per ride will be $1.30, a 26 percent decline. The price of medallions similarly
will decline by 26 percent to $185,000.
[QUESTION]
139. The price of gasoline is generally higher in Hawaii than in the continental United States.
Therefore, the Hawaiian legislature passed a law forbidding gas stations from charging a price
higher than the average price of gas on the West Coast of the United States. This is an example
of:
A. a price floor.
B. a price ceiling.
C. a quota.
D. a tax.
Ans: B
Bloom’s: Remember
Difficulty: 01 Easy
Feedback: Limiting how high a price can be charged is a price ceiling.
[QUESTION]
With an effective price ceiling at $3, the effect is an implicit tax on:
A. suppliers equal to $60.
B. suppliers equal to $80.
C. consumers equal to $60.
D. consumers equal to $80.
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The area [6 – 3] × 20 was part of producer surplus in equilibrium; with the price
ceiling, this area becomes part of consumer surplus.
[QUESTION]
141. Refer to the graph shown. With an effective price floor at $8, total surplus is reduced by:
A. 25.
B. 45.
C. 90.
D. 100.
Ans: B
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
× (1/2).
[QUESTION]
142. Refer to the graph shown. An effective price floor at $8 imposes a deadweight loss of:
A. 25.
B. 45.
C. 90.
D. 100.
Ans: B
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
× (1/2).
[QUESTION]
143. Refer to the graph shown. An effective price floor at $8 causes consumer surplus to:
A. increase from 10 to 62.50.
B. fall from 62.50 to 10.
Ans: B
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The price floor reduces quantity and transfers some surplus from consumers to
producers. Without the price floor, consumer surplus is [10 – 5] × 25 × (1/2). With the price
floor, it is [10 – 8] × 10 × (1/2).
[QUESTION]
144. Refer to the graph shown. An effective price floor at $8 causes producer surplus to:

B. fall from 62.5 to 10.
C. increase from 62.5 to 70.
D. fall from 70 to 62.5.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The price floor reduces quantity and transfers some surplus from consumers to
producers. With the price floor, producer surplus is [(2 – 0) × 10 × (1/2) + [(8 – 2) × 10].
Without the price floor, it is [5-0] × 25 × (1/2).
[QUESTION]
145. Refer to the graph shown. With an effective price floor at $8, the effect is an implicit tax
on:
A. suppliers equal to $50.

B. suppliers equal to $30.
C. consumers equal to $50.
D. consumers equal to $30.
Ans: D
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: The area [8 – 5] × 10 was part of consumer surplus in equilibrium; with the price
floor, this area becomes part of producer surplus.
[QUESTION]
146. Taxes:
A. cause market shortages.
B. cause the equilibrium quantity to increase.
C. create a wedge between the price consumers pay and the price suppliers receive.
D. cause the price consumers pay to equal the price suppliers receive.
Ans: C
Feedback: This is related to the difference between price ceilings and taxes. Neither causes
quantity to rise (both cause quantity to fall); only price ceilings cause market shortages because
with a price ceiling, the price consumers pay equals the price suppliers receive.
[QUESTION]
147. Government is lobbied to institute price controls because:
A. they tend to increase total producer surplus and consumer surplus.
B. people care more about their own surplus than they do about total surplus.
C. people care more about total surplus than they do about their own surplus.
D. they reduce producer surplus, but they raise consumer surplus more than enough to
compensate.
Ans: B
Feedback: Price controls reduce total producer surplus and consumer surplus.
[QUESTION]
148. Rent-seeking activities:
A. require resources, and the net result is to reduce total welfare to society.
B. require resources, but the net result is to increase total welfare to society.
C. do not require resources.
D. have no effect on society's welfare.
Ans: A
Bloom’s: Remember
Difficulty: 01 Easy
Feedback: Lobbying the government requires resources. Since the net result is a transfer of
surplus from one group to another, these activities are unproductive in the sense that they do not
improve social surplus and therefore reduce total welfare to the society.
[QUESTION]
149. As a result of advances in productivity, farmers can produce more at a lower cost. The
effect of these changes has been to:
A. increase the demand for farm output.
B. reduce total revenue for farmers as a group.
C. increase total revenue for farmers as a group.
D. increase profits for farmers as a group.
Ans: B
Bloom’s: Remember
Difficulty: 01 Easy
Feedback: Because the demand for food is highly inelastic, the rightward shift of supply has
resulted in lower total revenue.
[QUESTION]
150. When demand is highly inelastic and supply shifts to the right, price:
A. falls, quantity sold increases, and total revenue increases.
B. falls, quantity sold increases, and total revenue decreases.
C. increases, quantity sold decreases, and total revenue increases.
D. increases, quantity sold decreases, and total revenue decreases.
Ans: B
Feedback: Because demand is highly inelastic, the decrease in price is proportionately larger
than the increase in quantity, and so total revenue falls.
[QUESTION]
151. Refer to the graph shown. Initially, the market is in equilibrium where the demand curve
intersects S0. In the initial equilibrium, consumer surplus is equal to:
A. 750.
B. 1,500.
C. 2,250.
D. 3,000.
Ans: B
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
[QUESTION]
152. Refer to the graph shown. Initially, the market is in equilibrium where the demand curve
intersects S0. In the initial equilibrium, producer surplus is equal to:
A. 900.
B. 1,800.
C. 4,500.
D. 6,000.
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: When price is 5 and quantity is 600, producer surplus is [5 – 2] × 600 × (1/2).
[QUESTION]
153. Refer to the graph shown. After an increase in supply, the market is in equilibrium where
the demand curve intersects S1. In this new equilibrium, consumer surplus is equal to:
A. 806.4.
B. 1,881.6.
C. 1,260.
D. 2,940.
Ans: D
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: When price is 3 and quantity is 840, consumer surplus is [10 – 3] × 840 × (1/2).
[QUESTION]
154. Refer to the graph shown. After an increase in supply, the market is in equilibrium where
the demand curve intersects S1. In this new equilibrium, producer surplus is equal to:
A. 806.4.
B. 1,881.6.
C. 1,260.
D. 2,940.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: When price is 3 and quantity is 840, producer surplus is [3 – 0] × 840 × (1/2).
[QUESTION]
155. Refer to the graph shown. When market supply shifts from S0 to S1, total producer revenue:
A. increases from $2,520 to $2,956.8.
B. increases from $1,260 to $1,478.4.
C. decreases from $3,000 to $2,520.
D. decreases from $1,478.4 to $1,260.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Total revenue is price times quantity ($5 × 600 = $3,000 initially and $3 × 840 =
$2,520 after the shift).
[QUESTION]
156. Refer to the graph shown. When market supply shifts from S0 to S1, the revenue gain to
suppliers resulting from increased quantity demanded is shown by area:
A. A.
B. B.
C. C.
D. D.
Ans: C
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Area C shows the increased revenue resulting from the greater quantity sold.
[QUESTION]
157. Refer to the graph shown. When market supply shifts from S0 to S1, the revenue loss to
suppliers resulting from the lower price is shown by area:
A. A.
B. B.
C. C.
D. D.
Ans: A
AACSB: Analytic
Bloom’s: Apply
Difficulty: 03 Hard
Feedback: Area A shows the lost revenue caused by the lower price.
[QUESTION]
158. Refer to the graph shown. The segment of the demand curve between the initial equilibrium
price of $5.00 and the new equilibrium price of $3.00 is:
A. elastic.
B. inelastic.
C. perfectly elastic.
D. perfectly inelastic.
Ans: B
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: Since total revenue fell when price fell (area A is larger than area C), we know that
demand is inelastic for this segment.
[QUESTION]
159. The more inelastic demand is, the:
A. more sellers have to gain by restricting supply to raise price and total revenue.
B. less sellers have to gain by restricting supply to raise price and total revenue.
C. more sellers have to gain by raising supply to lower price and raise total revenue.
D. smaller will be the effect on total revenue of a change in price.
Ans: A
Feedback: When demand is inelastic, reducing supply results in a higher equilibrium price and
an increase in total revenue. The more inelastic demand is, the greater is the benefit of doing so.
[QUESTION]
160. Which of the following statements is true?
A. Supply and demand tend to be much more elastic in the long run than in the short run.
B. Supply and demand tend to be much more inelastic in the long run than in the short run.
C. Supply is elastic in the short run, whereas demand is elastic only in the long run.
D. Supply is inelastic in the short run, whereas demand is inelastic only in the long run.
Ans: A
Feedback: In the long run, consumers and producers are better able to adjust to a price change,
and so the quantity response tends to be larger.
[QUESTION]
161. When supply and demand are both elastic, a price floor will cause a:
A. larger surplus than when supply and demand are inelastic.
B. smaller surplus than when supply and demand are inelastic.
C. larger shortage than when supply and demand are inelastic.
D. smaller shortage than when supply and demand are inelastic.
Ans: A
Feedback: When supply and demand are elastic, a given increase in price caused by a price floor
results in a larger change in quantity demanded and quantity supplied.
[QUESTION]
162. A price floor will create the largest surplus when:
A. both supply and demand are inelastic.
B. both supply and demand are elastic.
C. supply is elastic and demand is inelastic.
D. supply is inelastic and demand is elastic.
Ans: B
Feedback: When supply and demand are elastic, a given increase in price caused by a price floor
results in a larger change in quantity demanded and quantity supplied.
[QUESTION]
163. Refer to the graph shown. Which statement best characterizes the difference between the
effect of a price ceiling in the short run and the long run?
A. A price ceiling of P0 will create a shortage of (Q4 – Q0) in the short run and the long run.
B. A price ceiling of P2 will create a shortage of (Q3 – Q0) in the short run and a smaller shortage
of (Q3 – Q1) in the long run.
C. A price ceiling of P2 will create a shortage of (Q3 – Q1) in the short run, but a greater shortage
of (Q3 – Q0) in the long run.
D. A price ceiling of P0 will create a shortage of (Q3 – Q0) in the short run and the long run.
Ans: C
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: In the long run, supply becomes more elastic (shown here rotating from S0 to S1) so
that a price ceiling P2 creates a larger shortage in the long run.
[QUESTION]
164. Refer to the graph shown. In the long run supply will become:
A. more elastic, rotating from S0 to S1, creating a larger shortage with a price ceiling of P2.
B. less elastic, rotating from S0 to S1, creating a larger shortage with a price ceiling of P2.
C. more elastic, rotating from S0 to S1, creating a smaller shortage with a price ceiling of P2.
D. less elastic, rotating from S0 to S1, creating a smaller shortage with a price ceiling of P2.
Ans: A
AACSB: Analytic
Bloom’s: Analyze
Difficulty: 03 Hard
Feedback: In the long run, supply becomes more elastic (shown here rotating from S0 to S1) so
that a price ceiling P2 creates a larger shortage in the long run.
[QUESTION]
165. The problems created by price controls become greatest as time goes by when:
A. supply becomes more inelastic and demand becomes more elastic.
B. demand becomes more in elastic and supply becomes more elastic.
C. demand and supply become more elastic.
D. demand and supply become more inelastic.
Ans: C
Feedback: Because in the long run demand and supply become more elastic, price ceilings will
create greater shortages and price floors will create greater surpluses as time progresses.
[QUESTION]
166. Consumers have the greatest incentive to lobby for price controls in the short run when
supply is:
A. inelastic and demand increases
B. inelastic and demand decreases.
C. elastic and demand increases.
D. elastic and demand decreases.
Ans: A
Feedback: Price will rise the most when supply is inelastic and demand increases. Consumers
have the greatest incentive to keep prices down in this case.
[QUESTION]
167. "When small groups are helped by a government action and large groups are hurt by that
same action, the small group tends to lobby far more effectively than the large group; thus,
policies tend to reflect the small group's interest, not the interest of the large group." This
statement is:
A. evidence of the futility of lobbying.
B. the law of effective lobbying.
C. the large/small rule.
D. the general rule of political economy.
Ans: D
Bloom’s: Remember
Difficulty: 01 Easy
Feedback: See the definition of a general rule of political economy.
[QUESTION]
168. A general rule of political economy in a democracy is that when small groups are helped by
a government action and large groups are hurt by that action by an equal and offsetting amount,
policies tend to reflect:
A. the large group's interest.
B. the small group's interest.
C. neither group's interest over the other.
D. the interest of a free market.
Ans: B
Bloom’s: Remember
Difficulty: 01 Easy
Feedback: Because each person in the smaller group benefits more, each person in that smaller
group has an incentive to lobby harder.
[QUESTION]
169. When the United States imposed a tariff on imported shrimp, a Vietnamese official said: "If
the tariffs are imposed, that will mean fewer shrimp for the U.S. market and higher prices for
consumers. So the U.S. government position hurts its own people. That's irrational." The
imposition of tariffs by the United States in this case illustrates:
A. that the U.S. government, like all governments, is sometimes irrational.
B. what the text calls the general rule of political economy, which states that often small interest
groups lobby better than large groups.
C. that U.S. consumers are either irrational or altruistic because they are willing to pay higher
prices to help the U.S. shrimp industry.
D. the good/bad paradox that what is good economics is always bad politics and vice versa.
Ans: B
Feedback: Small interest groups often beat diffuse large groups even when the total benefit to
the small group is a small fraction of the cost to the large group. See the text for the definition of
the general rule of political economy.

Economics 10th Edition Colander Test Bank Download

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File: Chapter 07 Taxation and Government Intervention

A. amount of the per-unit tax multiplied by Q1.

A. raise the price consumers pay from $3 to $4.

A. raise the price consumers pay from $25 to $30.

A. give government tax revenues of $100.

A. give government tax revenues of $100.

A. change from areas C + D + F to areas B + C + D.

A. change from areas C + D + F to areas B + C + D.

A. suppliers of area C and a subsidy to consumers of that area.

A. change from areas C + D + F to areas B + C + D.

A. change from areas C + D + F to areas B + C + D.

A. suppliers shown by area C and a subsidy to consumers of that area.

A. increase from 30 to 120.

A. increase from 10 to 80.

A. suppliers equal to $50.

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