Chapter 6

Microeconomics: Prin.
, Apps, & Tools, 8e (O'Sullivan) TB2

Chapter 6 Market Efficiency and Government Intervention
6.1 Consumer Surplus and Producer Surplus
1) The difference between the maximum amount a person is willing to pay for a good and its
current market price is known as:
A) the paradox of value.
B) profits.
C) revealed preferences.
D) consumer surplus.
Answer: D
Diff: 1
Topic: The Demand Curve and Consumer Surplus
Skill: Definition
AACSB: Reflective Thinking Skills
Learning Outcome: Micro-7
2) Tom would be willing to pay a maximum of $2,500 to attend the Super Bowl this year, and he
can buy a ticket for $2,050. His consumer surplus is:
A) $25.
B) $50.
C) $275.
D) $450.
Answer: D
Diff: 1
Skill: Analytical
AACSB: Analytic Skills
3) You would be willing to pay a maximum of $1000 for an airplane ticket to London, UK during
the summer, and you can buy an airplane ticket for $890. Your consumer surplus is:
A) $90.
B) $190.
C) $110.
D) $100.
Answer: C
Diff: 1
Skill: Analytical
1
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4) Assume that Crystal's demand for hand bags remains constant, but the price of hand bags
increases. Crystal's consumer surplus:
A) decreases.
B) increases.
C) remains constant.
D) may increase or decrease depending on the amount of the price decrease.
Answer: A
Diff: 2
Skill: Analytical
5) Suppose you receive a consumer surplus of $50. The $50 represents:

A) a monetary payment from the store.
B) a monetary payment from the government.
C) a reduction in the original price of the good.
D) the fact that you paid $50 less than you were willing to pay for the good.
Answer: D
Diff: 2
Skill: Conceptual
2
6) Refer to Figure 6.1. If the price of a donut is $1.25, consumer surplus is:
A) $1.75.
B) $1.25.
C) $ .75.
D) $ .50.
Answer: D
Diff: 2
Topic: The Demand Curve and Consumer Surplus, graphing
Skill: Analytical
7) Refer to Figure 6.1. If the price of a donut is $ .75, consumer surplus is:
A) $1.75.
B) $1.50.
C) $ .75.
D) $ .50.
Answer: B
Diff: 2
Skill: Analytical
3
8) Refer to Figure 6.1. If the price of a donut is $ .25, consumer surplus is:
A) $3.50.
B) $3.00.
C) $1.50.
D) $ .00.
Answer: B
Diff: 2
Skill: Analytical
9) Refer to Figure 6.2. If the price of a DVD rental is $2.00, consumer surplus will be $
________ each week.
A) 6.00
B) 4.00
C) 2.00
D) 12.00
Answer: D
Diff: 2
Skill: Analytical
4
________ each week.
A) 6.00
B) 4.00
C) 2.00
D) 12.00
Answer: A
Diff: 2
Skill: Analytical
________ each week.
A) 6.00
B) 4.00
C) 2.00
D) 12.00
Answer: C
Diff: 2
Skill: Analytical
12) Consumer surplus is equal to:

A) the area under the demand curve.
B) the area under the demand curve above the good's price.
C) the area under the demand curve below the good's price.
D) the good's price times the quantity purchased.
Answer: B
Diff: 1
Skill: Conceptual
5
13) Consumer surplus can be defined as the:
A) value a consumer receives from a good minus the price paid for that good.
B) maximum amount the consumer would pay for a good.
C) actual amount paid for a good minus the benefit of using that good.
D) marginal utility of a good divided by its price.
Answer: A
Diff: 1
Skill: Definition
14) Producer surplus is equal to:

A) the area under the supply curve.
B) the area above the supply curve below the good's price.
C) the area under the supply curve below the good's price.
D) the good's price times the quantity purchased.
Answer: B
Diff: 1
Topic: The Supply Curve and Producer Surplus
Skill: Conceptual
15) Mary has an old house built in 1950 that she would be willing to sell for $100,000. If
someone offers to buy her house for $110,000, Mary's producer surplus would be equal to:
A) $5,000.
B) $10,000.
C) $55,000.
D) $100,000.
Answer: B
Diff: 1
Skill: Analytical
6
16) Laura makes hand-made jewelry and she would be willing to sell pairs of earrings for $50. If
Laura sells each pair of earrings for $65, her producer surplus per pair of earrings sold would be
equal to:
A) $115.
B) $65.
C) $15.
D) $50.
Answer: C
Diff: 2
Skill: Analytical
17) Jody's bakery makes cakes and would be willing to sell each cake for $12.50. If Jody's
bakery sells 10 cakes for $13 each, the total producer surplus for Jody's bakery would be equal
to:
A) $5.00.
B) $12.50.
C) $125.
D) $130.
Answer: A
Diff: 2
Skill: Analytical
7
18) Refer to Figure 6.3. If the price of one hour of tutoring is $20, then producer surplus is:
A) $40.
B) $30.
C) $20.
D) $10.
Answer: D
Diff: 2
Topic: The Supply Curve and Producer Surplus, graphing
Skill: Analytical
19) Refer to Figure 6.3. If the price of one hour of tutoring is $30, then producer surplus is:
A) $40.
B) $30.
C) $20.
D) $10.
Answer: B
Diff: 2
Skill: Analytical
8
20) Refer to Figure 6.3. If the price of one hour of tutoring falls from $30 to $20, then producer
surplus will:
A) increase.
B) decrease.
C) not change.
D) cease to exist.
Answer: B
Diff: 2
Skill: Analytical
21) Assume that the supply of smartphones remains constant, but the price of smartphones
increases. Producer surplus:
A) will decrease.
B) will increase.
C) will remain constant.
D) may increase or decrease depending on the amount of the price increase.
Answer: B
Diff: 2
Skill: Analytical
22) Assume that linen pants are a normal good and consumer income rises. If the supply of linen
pants remains constant, producer surplus:
A) will decrease.
B) will increase.
C) will remain constant.
D) may increase or decrease depending on the amount of the price increase.
Answer: B
Diff: 3
Skill: Analytical
9
23) Assume that production costs rise and demand remains constant. The equilibrium price will
________ and the producer surplus will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer: B
Diff: 2
Skill: Conceptual
24) Suppose that you are willing to pay $25 for a new shirt and the market price is $35. In this
case:
A) you will not buy the good.
B) you will buy the good and receive a consumer surplus of $5.
C) you will buy the good and receive a consumer surplus of -$10.
D) you will buy the good and receive a consumer surplus of -$35.
Answer: A
Diff: 2
Skill: Conceptual
25) A supply curve reflects buyers' willingness to pay.

Answer: FALSE
Diff: 1
Skill: Conceptual
26) Consumer surplus is the difference between the price that a buyer pays and the price a seller
requires.
Answer: FALSE
Diff: 1
Skill: Definition
10
27) If Jaime is willing to pay $8 for a movie ticket and the theater charges her only $4 for 2
movie tickets, her consumer surplus for each movie ticket is equal to $4.
Answer: FALSE
Diff: 1
Skill: Analytical
28) Assuming that the demand for a product is stable, a increase in price will lead to an increase
in consumer surplus.
Answer: FALSE
Diff: 2
Skill: Analytical
29) A seller's willingness to accept is the minimum amount he or she is willing to accept as
payment for a product, and is equal to the marginal cost of production.
Answer: TRUE
Diff: 1
Skill: Conceptual
30) Assuming that the supply for a product is stable, an increase in price will lead to an increase
in producer surplus.
Answer: TRUE
Diff: 2
Skill: Analytical
AACSB: Ethical Understanding and Reasoning Abilities
31) Jerry has a guitar that he is willing to sell for $150. If someone offers him $175, his producer
surplus is $25.
Answer: TRUE
Diff: 1
Skill: Analytical
11
32) What is consumer surplus?
Answer: Consumer surplus is the difference between the maximum amount a buyer is willing to
pay for a product and the price he or she pays for the product.
Diff: 1
Skill: Definition
33) Martha was willing to pay $200 for a new winter coat, but the current market price of coats is
$150. Calculate Martha's consumer surplus. What happens to consumer surplus if the price of a
coat rises to $175?
Answer: The consumer surplus Martha receives from purchasing the coat is $50 ($200 - $150).
If the price of a coat rises to $175, her consumer surplus will fall to $25 ($200 - $175).
Diff: 1
Skill: Analytical
12
34) Figure 6.4 shows the market for new cars. Show the area of consumer surplus at the market
equilibrium.
Answer: The shaded in area represents consumer surplus.
Diff: 1
Skill: Conceptual
13
35) Figure 6.5 shows the market for bananas. Shade in the area of consumer surplus. Use the
information provided to calculate consumer surplus.
Answer: Consumer surplus is equal to (0.5)($0.5)(4,000) = $1,000.
Diff: 1
Skill: Analytical
36) What is consumer surplus?

Answer: Consumer surplus is the amount a consumer is willing to pay for a product minus the
price the consumer actually pays.
Diff: 1
Skill: Definition
14
37) Marty has a collection of Beanie Babies that he is willing to sell for $850. Someone offers
him $1,000 for his collection. Calculate Marty's producer surplus. What happens to Marty's
producer surplus if someone offers him $1,200 instead?
Answer: The producer surplus Marty receives from selling his Beanie Baby collection is $150
($1,000 - $850). If the price rises to $1,200, his producer surplus will rise to $350 ($1,200 -
$850).
Diff: 1
Skill: Analytical
6.2 Market Equilibrium and Efficiency
1) At the free market equilibrium, the efficient level of output is produced because:
A) government regulates the output level that must be produced.
B) firms are maximizing profit.
C) willingness to pay is the same for all consumers.
D) total surplus is maximized.
Answer: D
Diff: 1
Topic: Market Equilibrium and Efficiency
Skill: Conceptual
2) At the market equilibrium, resources are allocated efficiently because:

A) the marginal cost of producing another unit is equal to zero.
B) the price buyers pay accurately reflects the marginal cost of the resources used to produce the
good.
C) the price buyers pay is greater than sellers' willingness to sell.
D) all of the above
Answer: B
Diff: 2
Skill: Conceptual
15
3) The conclusion that the level of output is efficient at the market equilibrium rests on all of the
following assumptions EXCEPT that:
A) buyers and sellers are well-informed.
B) there are no external costs or benefits.
C) the government regulates price and output.
D) the market is perfectly competitive.
Answer: C
Diff: 1
Skill: Conceptual
4) If the government imposes a maximum price for milk that is above the equilibrium price:
A) this maximum price for milk will have no economic impact.
B) quantity demanded of milk will be less than quantity supplied.
C) demand for milk will be greater than supply.
D) the available milk supply will have to be rationed.
Answer: A
Diff: 2
Topic: Total Surplus is Lower with a Price Above the Equilibrium Price
Skill: Conceptual
5) If the equilibrium price of gasoline is $2.75 per gallon and the government will not allow oil
companies to charge more than $2.00 per gallon of gasoline, which of the following will happen?
A) Demand must eventually decrease so that the market will come into equilibrium at a price of
$2.00.
B) Supply must eventually increase so that the market will come into equilibrium at a price of
$2.00.
C) Total surplus in the market will be lower than it would be if the price was $2.75 per gallon.
D) The market will be in equilibrium at a price of $2.00.
Answer: C
Diff: 1
Topic: Total Surplus is Lower with a Price Below the Equilibrium Price
Skill: Conceptual
16
6) If the market price of salmon is $8.99 per pound but the government will not allow salmon
farmers to charge more than $4.99 per pound of salmon, which of the following will happen?
A) The supply curve for salmon will shift to the left.
B) There will be an excess demand for salmon.
C) There will be an excess supply of salmon.
D) The market will be in equilibrium at a price of $4.99.
Answer: B
Diff: 3
Skill: Conceptual
7) Recall the application on rent control and mismatches. Under rent control, the government sets
a maximum price for housing, decreasing the quantity supplied and the total value of the market.
Rent control and other maximum prices cause ________ possibly ________.
A) inefficiency; mismatches.
B) efficiency: mismatches
C) mismatches: equilibrium
D) none of the above
Answer: A
Diff: 1
Skill: Conceptual
8) Market equilibrium maximizes the total surplus in a market and therefore it is efficient.
Answer: TRUE
Diff: 1
Skill: Conceptual
9) Market equilibrium guarantees that all mutually beneficial transactions take place.
Answer: TRUE
Diff: 1
Skill: Conceptual
17
10) A maximum price below the market equilibrium price will lower the total surplus of the
market.
Answer: TRUE
Diff: 1
Skill: Conceptual
11) In an efficient market where buyers and sellers act in their own self-interest, Adam Smith's
invisible hand is in action
Answer: TRUE
Diff: 1
Skill: Conceptual
12) Why is the market equilibrium efficient?

Answer: The market equilibrium is efficient because it maximizes the total surplus of the
market. All mutually beneficial trades that are possible occur when the market is at equilibrium.
Diff: 1
Skill: Conceptual
13) Comment on the following statement: "Individual consumers and producers acting in their
own self-interest will lead a perfectly competitive market to the efficient level of output."
Answer: The statement is true. When individuals act in their own self-interest, a perfectly
competitive market will achieve market equilibrium. At this level of output, all mutually
beneficial trades have taken place and total surplus is maximized.
Diff: 1
Skill: Conceptual
18
6.3 Controlling Prices—Maximum and Minimum Prices
1) Refer to Figure 6.6. If the government will not allow landlords to charge more than $400 for
an apartment, which of the following will happen?
A) Demand must eventually decrease so that the market will come into equilibrium at a price of
$400.
B) Supply must eventually increase so that the market will come into equilibrium at a price of
$400.
C) There will be an excess demand for apartments.
D) The market will be in equilibrium at a price of $400.
Answer: C
Diff: 1
Topic: Rent Control, graphing
Skill: Analytical
2) Refer to Figure 6.6. If the government will not allow landlords to charge more than $400 for
an apartment, the deadweight loss will be equal to:
A) $2000.
B) $2500.
C) $5000.
D) $7500.
Answer: C
Diff: 1
Skill: Analytical
19
3) Refer to Figure 6.6. Suppose that the equilibrium quantity is 100. Consumer surplus is equal
to:
A) $20,000.
B) $10,000.
C) $200.
D) $30,000.
Answer: B
Diff: 2
Skill: Conceptual
4) Refer to Figure 6.6. Suppose that landlords could not charge the market equilibrium price of
$500, but instead could charge no more than $400. As a result, the quantity of apartments rented
will fall from 100 to 50. In this case consumer surplus will:
A) decrease.
B) increase.
C) stay the same.
D) It is impossible to say.
Answer: B
Diff: 2
Skill: Analytical
5) Suppose that the market equilibrium price of TVs is $250 but manufacturers are not allowed
to charge more than $200 due to a government regulation. Which of the following would be a
definite result of imposing a maximum price?
A) Consumer surplus will increase.
B) Producer surplus will decrease.
C) Government revenue will increase.
D) all of the above
Answer: B
Diff: 2
Topic: Setting Maximum Prices
Skill: Analytical
20
6) Suppose that the government sets a maximum price for insulin below the equilibrium price:
A) there will be an efficient level of insulin produced.
B) there will be excess supply of insulin.
C) total surplus will be lower than it would be at the market equilibrium price.
D) total surplus will be greater than it would be at the market equilibrium price.
Answer: C
Diff: 2
Skill: Conceptual
7) If the government sets a maximum price for gasoline above the equilibrium price:
A) quantity demanded of gasoline will be equal to quantity supplied of gasoline.
B) there will be excess demand for gasoline.
C) there will be excess supply for gasoline.
D) demand for gasoline will be less than supply for gasoline.
Answer: A
Diff: 2
Skill: Conceptual
8) In the market equilibrium, with a price of $500 there are 2000 apartments. If the government
decides to enact a rent control policy, with a maximum price of $400, it reduces the quantity to
1500 apartments. Due to the rent control decreasing the total surplus of the market, the policy
generates a(n) ________.
A) excess supply.
B) equilibrium.
C) higher price.
D) deadweight loss.
Answer: D
Diff: 1
Skill: Conceptual
21
9) Figure 6.7 shows the supply and demand curves for human kidneys. Because the government
does not allow a person to sell a kidney:
A) 50 kidneys are donated.
B) 30 kidneys are donated.
C) 20 kidneys are donated.
D) 0 kidneys are donated.
Answer: C
Diff: 2
Topic: Setting Maximum Prices, graphing
Skill: Analytical
10) Figure 6.7 shows the supply and demand curves for human kidneys. If the government
allowed the market to seek equilibrium, then:
A) 50 kidneys are donated.
B) 30 kidneys are donated.
C) 20 kidneys are donated.
D) 0 kidneys are donated.
Answer: B
Diff: 2
Skill: Analytical
22
11) Figure 6.7 shows the supply and demand curves for human kidneys. If the government set
the price of a kidney at $5,000, then:
A) 50 kidneys would be purchased.
B) 300 kidneys would be purchased.
C) 5000 kidneys would be purchased.
D) 0 kidneys would be purchased.
Answer: D
Diff: 2
Skill: Analytical
12) If the government sets a minimum price above the equilibrium price for soybeans. which of
the following statements will be correct?
A) There will be an efficient level of output produced.
B) There will be excess supply.
C) There will be excess demand.
D) all of the above
Answer: B
Diff: 2
Topic: Setting Minimum Prices
Skill: Conceptual
13) Assume that there is rent control in Chicago. Which of the following is true?
A) All consumers in the rental market will benefit because the rent will be lower.
B) The total surplus will fall because there will be a shortage of apartments.
C) The total surplus will rise because consumer surplus will increase.
D) Consumer surplus will increase and as a result all consumers in the rental market will benefit.
Answer: B
Diff: 2
Topic: Rent Control
Skill: Analytical
23
14) Recall the application about price controls and the candy bars. During World War II, the U.S.
government imposed price controls to set maximum prices on all different products, including
candy bars. How did the candy bar producers respond it to maximum prices?
A) Producers increase the supply of candy bars.
B) Producers shrank the weight of the candy bars.
C) A lot of the producers dropped out of candy bar market.
Answer: B
Diff: 1
Topic: Rent Control
Skill: Fact
15) A maximum price below the market equilibrium price will raise the total surplus of the
market.
Answer: FALSE
Diff: 1
Skill: Conceptual
16) Rent control reduces market efficiency if the maximum rents allowable are below the market
equilibrium price.
Answer: TRUE
Diff: 1
Skill: Conceptual
17) If the government sets a minimum price below the market equilibrium price. This will have
no economic impact on the market.
Answer: TRUE
Diff: 2
Skill: Conceptual
24
18) Rent controls are always efficient in helping the poor and negatively impacting the wealthy.
Answer: FALSE
Diff: 2
Topic: Rent Control
Skill: Conceptual
19) A minimum price set below the market equilibrium will lead to excess supply and to a drop
in the total surplus of the market.
Answer: FALSE
Diff: 2
Skill: Conceptual
20) Suppose that the equilibrium rent for a two-bedroom apartment in downtown Chicago is
$900 per month. The city council decides to place a maximum price on apartment rents and will
not allow landlords to charge more than $700 per month. Draw this situation using a graph.
Make sure that you show the original equilibrium and the effect of the maximum price on the
market. What will happen in this market? What will happen to total surplus?
Answer: There will be excess demand of apartments because quantity demanded (QD) is greater
than quantity supplied (QS). Total surplus will fall because some mutually beneficial trades
cannot take place due to the maximum price.
Diff: 2
Skill: Analytical
25
21) Suppose that the equilibrium price of a gallon of gas is $1.20 per gallon. The government
decides to place a maximum price on gasoline and will not allow sellers to charge more than
$1.40 per gallon. Draw this situation using a graph. Make sure that you show the original
equilibrium and the effect of the maximum price on the market. What will happen in this market?
What will happen to total surplus?
Answer: There will be no effect of this price ceiling on the market. If sellers try to charge a price
of $1.40 per gallon, quantity demanded (QD) would be lower than quantity supplied (QS). This
means that there would be excess supply. Because the government has created a maximum price,
it does not prevent the price from falling as it would in this case. Therefore, the price of gasoline
will remain $1.20 per gallon. Since the market is at equilibrium, total surplus is maximized and
all mutually beneficial trades take place.
Diff: 2
Skill: Analytical
26
22) Suppose that the equilibrium price of a bushel of corn is $0.75 per gallon. The government
decides to place a minimum price on corn and will not allow sellers to charge less than $0.90 per
bushel. Draw this situation using a graph. Make sure that you show the original equilibrium and
the effect of the minimum price on the market. What will happen in this market? What will
happen to total surplus?
Answer: The minimum price will lead to excess supply of corn because quantity demanded
(QD) exceeds quantity supplied (QS). Total surplus in the market will be lower because some
mutually beneficial trades will not take place.
Diff: 1
Topic: Setting Minimum Prices, graphing
Skill: Analytical
27
6.4 Controlling Quantities—Licensing and Import Restrictions
Table 6.1
1) Table 6.1 indicates the demand and supply schedules for oil in the United States. Suppose also
that the world price of oil is $75 per barrel and that the United States can buy all the oil it wants
at that price. Which of the following statements is TRUE about the impact of a law banning all
oil imports?
A) Consumers would pay a lower price for oil than they would under free trade.
B) Domestic producers benefit from the law because they can charge a higher price and sell
more.
C) Total surplus in the oil market rises.
D) Consumer surplus increases.
Answer: B
Diff: 2
Topic: Import Restrictions
Skill: Analytical
28
2) Figure 6.8 shows the market for taxicab services in a small town. If there is no government
intervention and the supply of taxicab services reflects the law of supply, the price per mile
traveled will be:
A) $1.00.
B) $1.50.
C) $2.00.
D) It is impossible to determine.
Answer: B
Diff: 2
Topic: Taxi Medallions, graphing
Skill: Analytical
3) Figure 6.8 shows the market for taxicab services in a small town. If the government limits
taxicab services to 20 per day, the price per mile traveled will be:
A) $1.00.
B) $1.50.
C) $2.00.
D) It is impossible to determine.
Answer: C
Diff: 2
Skill: Analytical
29
taxicab services to 20 per day, then the deadweight loss is equal to:
A) $15.
B) $7.50.
C) $3.75.
D) $20.
Answer: B
Diff: 2
Skill: Analytical
taxicab services to 20 per day, then producer surplus will:
A) increase by $10.
B) increase by $6.25.
C) decrease by $3.75.
D) increase by $20.
Answer: A
Diff: 2
Skill: Analytical
6) Figure 6.8 shows the market for taxicab services in a small town. If the government creates a
new law limiting taxicab services to 20 per day:
A) consumer surplus will rise.
B) producer surplus will be unaffected.
C) total surplus will fall.
D) total surplus will be unaffected.
Answer: C
Diff: 2
Skill: Analytical
30
7) Which of the following would result from a quota imposed on the quantity of cars that can be
imported into the U.S.?
A) an increase in the total surplus
B) an increase in producer surplus
C) Consumers will pay higher prices.
D) an increase in consumer surplus
Answer: C
Diff: 2
Skill: Conceptual
8) A ban on imported avocados would result in:

A) an increase in total surplus because domestic production will increase.
B) no change in total surplus because the reduction in consumer surplus will offset the increase
in producer surplus.
C) a reduction in total surplus because a deadweight loss is created.
D) it is impossible to say what will happen to total surplus.
Answer: C
Diff: 2
Skill: Analytical
31
Additional Application
Prior to 2001 Canada annually exported billions of board feet of lumber to the U.S. tariff-free.
The two countries had followed an agreement in which there would be no restrictions on the
lumber from Canadian companies. In March 2001 the agreement ended and in 2002 the U.S.
imposed tariffs and duties on imported Canadian lumber. What were the effects of these changes
and who gained and who lost?
The forestry workers of Canada were hurt. About 15,000 workers lost their jobs in British
Columbia and many Canadian towns suffered from the loss of income from lumber sales and
related industries. Exports to the U.S. fell from 14.7 billion board feet in 2000 to 20.9 million
board feet in 2004. When the lumber prices rose in the U.S., the costs of production for home
building firms increased.
The U.S. government has realized $3.5 billion from the tariffs and that is sitting in the Treasury
awaiting resolution of legal disputes. Lumber companies in the U.S. have seen their prices rise
with less competition.
James Thayer, "Soft Wood, Hard Dispute," The Weekly Standard, November 18, 2005. Online
9) According to this application about the U.S. imposing tariffs on lumber from Canada, after the
tariffs were placed on Canadian lumber imports, we could expect the consumer surplus in the
U.S. to:
A) increase.
B) decrease.
C) remain unaffected.
D) none of these
Answer: B
Diff: 3
Topic: Additional Application
Skill: Analytical
10) According to this application about the U.S. imposing tariffs on lumber from Canada, the
effects of the U.S. tariffs will ________ the price of lumber in the U.S. and ________ the
quantity of imports from Canada.
A) increase; decrease
B) decrease; decrease
C) increase; increase
D) decrease; increase
Answer: A
Diff: 2
Skill: Analytical
32
11) Recall the application about the cost of protecting a luggage job, luggage and handbags are
subject to import quotas and tariffs that decrease the supply of luggage and increase the price to
consumers by 13 percent. These policies protect 226 jobs in the industry, which of the following
statements is true about the impact of protecting these jobs?
A) Consumer surplus increases.
B) Consumer surplus decreases.
C) Producer surplus decreases.
Answer: B
Diff: 2
Topic: Application 4, The Cost of Protecting a Luggage Job
Skill: Conceptual
33
Additional Application
Prior to 2001 Canada annually exported billions of board feet of lumber to the U.S. tariff-free.
The two countries had followed an agreement in which there would be no restrictions on the
lumber from Canadian companies. In March 2001 the agreement ended and in 2002 the U.S.
imposed tariffs and duties on imported Canadian lumber. What were the effects of these changes
and who gained and who lost?
The forestry workers of Canada were hurt. About 15,000 workers lost their jobs in British
Columbia and many Canadian towns suffered from the loss of income from lumber sales and
related industries. Exports to the U.S. fell from 14.7 billion board feet in 2000 to 20.9 million
board feet in 2004. When the lumber prices rose in the U.S., the costs of production for home
building firms increased.
The U.S. government has realized $3.5 billion from the tariffs and that is sitting in the Treasury
awaiting resolution of legal disputes. Lumber companies in the U.S. have seen their prices rise
with less competition.
James Thayer, "Soft Wood, Hard Dispute," The Weekly Standard, November 18, 2005. Online
12) According to this application about the U.S. imposing tariffs on lumber from Canada, if the
cost of production for U.S. construction companies increased, then their ________ curve should
shift ________.
A) demand; left
B) supply; right
C) demand; right
D) supply; left
Answer: D
Diff: 3
Skill: Analytical
13) An import restriction on automobiles would lead to an increase in the price of automobiles
and a decrease in consumer surplus.
Answer: FALSE
Diff: 2
Skill: Conceptual
34
14) The licensing of taxis through the use of medallions decreases the price of taxi service.
Answer: FALSE
Diff: 2
Topic: Taxi Medallions
Skill: Conceptual
15) There are winners and losers from licensing programs such as a taxi medallion policy. The
losers are producers, who receive lower prices for taxi rides.
Answer: FALSE
Diff: 2
Topic: Taxi Medallions
Skill: Conceptual
16) Figure 6.9 shows the market for tobacco. If the government has no restrictions on imported
tobacco, what will be the price of tobacco and the level of tobacco produced? If the government
passes a law banning tobacco imports, what happens to the price of tobacco and the quantity of
tobacco sold?
Answer: If there are no laws limiting tobacco imports, the price of tobacco will be and the
quantity of tobacco sold will be . If the government passes a law banning tobacco imports, the
price of tobacco will rise to and the quantity sold will fall to .
Diff: 2
Skill: Analytical
35
17) Figure 6.9 shows the market for tobacco. If the government passes a law banning tobacco
imports, what happens to the total surplus of the market? Who wins and who loses as a result of
this policy?
Answer: If the government passes a law banning tobacco imports, total surplus will fall in the
market because some mutually beneficial transactions do not occur. The winners of this policy
would be the domestic producers who can now charge a higher price for their tobacco. The losers
of this policy are the consumers who must pay a higher price for tobacco and therefore buy a
smaller quantity. Foreign producers are also negatively impacted by this ban.
Diff: 2
Skill: Analytical
6.5 Who Really Pays Taxes?
1) Suppose a good is produced in a constant cost industry. The market price is $4 and the
equilibrium quantity is 20. After a tax is imposed on the good, the price rises to $5 and the
equilibrium quantity falls to 18. The amount of the tax is:
A) $1 per unit sold.
B) less than $1 per unit sold.
C) more than $1 per unit sold.
D) $0.50 per unit sold.
Answer: C
Diff: 2
Topic: Tax Shifting and the Price Elasticity of Demand
Skill: Analytical
2) A $2000 tax levied on the maker of MRIs will cause:

A) an upward movement along the supply curve as the price of MRIs rises.
B) a downward movement along the supply curve as the after tax price received by the seller
falls.
C) a leftward shift of the supply curve.
D) a rightward shift of the supply curve.
Answer: C
Diff: 2
Skill: Conceptual
36
3) Consider a market with a downward sloping demand curve and an upward sloping supply
curve. A $50 tax levied on the producer of the good will cause the market price to:
A) increase by $50.
B) decrease by $50.
C) increase by less than $50.
D) increase by more than $50.
Answer: C
Diff: 2
Skill: Conceptual
4) Suppose a tax is imposed on energy drinks that have a price elasticity of demand equal to 2,
and a price elasticity of supply equal to 1. We would expect that:
A) the producers of energy drinks containing sugar would pay a larger portion of the tax.
B) the consumer would pay a larger portion of the tax.
C) the consumer would pay the entire tax.
D) the producers of energy drinks containing sugar would pay the entire tax.
Answer: A
Diff: 2
Topic: Tax Burden and Deadweight Loss
Skill: Analytical
5) The deadweight loss from a taxation is:

A) the difference between total burden of tax and the amount of revenue collected by the
government.
B) affected by the size of the tax imposed by the government.
C) extra money consumers must pay for the tax imposed by the government.
D) B and C are correct
Answer: A
Diff: 2
Skill: Conceptual
37
6) When a tax is levied on a good or service, the following will happen:
A) the quantity of the good sold will not change.
B) neither the price nor the quantity of the good sold will change.
C) the price of the good sold will not change.
D) the price and the quantity of the good sold will change.
Answer: D
Diff: 1
Topic: Who Really Pays Taxes?
Skill: Conceptual
7) Refer to Figure 6.10. If a tax is imposed on the market in Figure 6.10, ________ will bear a
larger share of the tax.
A) the consumers
B) the producers
C) the government
D) no one
Answer: B
Diff: 1
Topic: Tax Shifting: Forward and Backward, graphing
Skill: Conceptual
38
8) Refer to Figure 6.11. If a tax is imposed on the market in Figure 6.11, ________ will bear a
smaller share of the tax.
A) the consumers
B) the producers
C) the government
D) no one
Answer: B
Diff: 1
Topic: Tax Shifting: Forward and Backward, graphing
Skill: Conceptual
9) A tax on a good or service ________ the price that buyers pay and ________ the price that
sellers receive.
A) raises; lowers
B) raises; raises
C) lowers; lowers
D) lowers; raises
Answer: A
Diff: 1
Skill: Conceptual
39
10) A tax imposed on the supplier of Blu Ray players shifts:
A) the demand curve for Blu Ray players to the left.
B) the supply curve for Blu Ray players to the left.
C) the demand curve for Blu Ray players to the right.
D) the supply curve for Blu Ray players to the right.
Answer: B
Diff: 1
Skill: Conceptual
11) When a tax is levied on a good or service:

A) buyers are worse off, but sellers are unaffected.
B) both buyers and sellers are worse off.
C) both buyers and sellers are unaffected.
D) sellers are worse off, but buyers are better off.
Answer: B
Diff: 2
Skill: Conceptual
12) When a tax is levied on a good or service:

A) buyers and sellers generally share the burden of the tax.
B) buyers always bear the burden of the tax.
C) sellers always bear the burden of the tax.
D) sellers bear some of the burden of the tax only if supply is perfectly elastic.
Answer: A
Diff: 2
Skill: Conceptual
13) The proportion of the tax burden that falls on consumers depends on:
A) the price elasticity of demand.
B) the size of the tax.
C) the price elasticity of supply.
D) both A and C
Answer: D
Diff: 2
Skill: Conceptual
40
14) If the supply of a good is relatively elastic, changing the price causes:
A) a relatively large change in the amount that consumers want to buy.
B) a relatively large change in the amount that sellers want to sell.
C) a relatively small change in the amount that sellers want to sell.
D) a relatively small change in the amount that buyers want to buy.
Answer: B
Diff: 1
Skill: Conceptual
15) All else equal, if supply is relatively elastic and demand is relatively inelastic, a tax on a
product will cause:
A) buyers to bear a larger portion of the tax burden.
B) sellers to bear a larger portion of the tax burden.
C) buyers and sellers to share the tax burden equally.
D) It is impossible to tell from this information who will bear the greater tax burden.
Answer: A
Diff: 2
Skill: Conceptual
16) All else equal, if demand is relatively elastic and supply is relatively inelastic, a tax on a
product will cause:
A) buyers to bear a larger portion of the tax burden.
B) sellers to bear a larger portion of the tax burden.
C) buyers and sellers to share the tax burden equally.
D) It is impossible to tell from this information who will bear the greater tax burden.
Answer: B
Diff: 2
Skill: Conceptual
41
17) If the supply of land were perfectly inelastic, a tax on land would be paid:
A) partly by sellers and partly by buyers.
B) entirely by sellers.
C) entirely by buyers.
D) It is impossible to determine given this information.
Answer: B
Diff: 2
Skill: Conceptual
18) Deadweight loss is NOT:

A) the reduction in surplus that results from a tax.
B) an excess burden of a tax.
C) a loss of economic efficiency.
D) the excess supply that occurs when a tax is imposed on a product.
Answer: D
Diff: 1
Skill: Definition
19) Taxes may cause deadweight losses because:

A) they transfer purchasing power from buyers to the government.
B) they lower the surplus in the market.
C) they increase consumer surplus at the expense of producer surplus.
D) they transfer purchasing power from sellers to the government.
Answer: B
Diff: 2
Skill: Analytical
20) Assume that the demand for insulin is relatively more inelastic than the demand for aspirin.
All else equal, a tax on aspirin:
A) will lead to a larger deadweight loss than a tax on insulin.
B) will have the same deadweight loss as a tax on insulin.
C) will lead to a smaller change in quantity demanded than a tax on insulin.
D) both A and C
Answer: A
Diff: 2
Skill: Conceptual
42
21) Recall the application about the response to lower taxes in French restaurants. If the quantity
of meals sold will increase due to the lower prices, a tax cut will:
A) have a positive effect on consumers and restaurant owners.
B) be paid exclusively by the restaurant owners.
C) decrease the competitiveness in the restaurant industry.
D) be paid exclusively by the customers.
Answer: A
Diff: 2
Topic: Application 5, Response to Lower Taxes in French Restaurants
Skill: Conceptual
22) Recall the application about the response to lower taxes in French restaurants. If the demand
for restaurant meals is elastic, we could predict the tax cut will:
A) decrease the sales of restaurant meals.
B) increase the sales of restaurant meals.
C) benefit only sellers.
Answer: B
Diff: 2
Topic: Application 5, Response to Lower Taxes in French Restaurants
Skill: Analytical
23) A burden of a tax on a good will not always be borne entirely by the seller.
Answer: TRUE
Diff: 2
Skill: Conceptual
24) The amount of a tax shifted forward depends on the price elasticities of supply and demand.
Answer: TRUE
Diff: 2
Skill: Conceptual
43
25) All else equal, the more elastic the demand for a good, the larger the burden of a tax borne by
consumers.
Answer: FALSE
Diff: 2
Skill: Conceptual
26) A tax on a good or service generally creates a deadweight loss.

Answer: TRUE
Diff: 1
Skill: Conceptual
27) Comment on the following statement: "If a tax is placed on sellers, sellers will bear the entire
burden of the tax."
Answer: The statement is false. The seller's costs will rise, causing a fall in supply. This will
lead to an increase in the price of the product as long as the demand is not perfectly elastic or the
supply is not perfectly inelastic. This means that the buyers and sellers will share the burden of
the tax.
Diff: 2
Skill: Conceptual
28) Explain the difference between forward and backward shifting of a tax.
Answer: Forward shifting occurs when the price of a product rises as a result of a tax and buyers
end up bearing the burden of the tax. Backward shifting occurs because less output is produced
and thus input suppliers receive less.
Diff: 2
Topic: Tax Shifting: Forward and Backward
Skill: Definition
29) What is the deadweight loss of a tax?

Answer: The deadweight loss of a tax is the amount by which the burden of a tax exceeds the
total revenue collected. The deadweight loss of a tax is also known as the excess burden of a tax.
Diff: 1
Skill: Definition
44
30) What determines the size of the deadweight loss of a tax?
Answer: The larger the distortion that a tax causes in behavior, the larger the deadweight loss. If
the tax is a tax on a product, the more elastic the demand, the larger the deadweight loss.
Diff: 2
Skill: Analytical
31) Comment on the following statement: "The more inelastic the demand, the greater is the
deadweight loss caused by any given tax rate."
Answer: The statement is false. In fact, it is backwards. When demand is elastic, the change in
quantity demanded caused by a tax is greater than the change in quantity demanded if demand
was inelastic. Thus, for a given tax rate, the deadweight loss is greater when demand is elastic.
Diff: 2
Skill: Conceptual
45

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Microeconomics: Prin.

, Apps, & Tools, 8e (O'Sullivan) TB2

6.1 Consumer Surplus and Producer Surplus

5) Suppose you receive a consumer surplus of $50. The $50 represents:

12) Consumer surplus is equal to:

14) Producer surplus is equal to:

25) A supply curve reflects buyers' willingness to pay.

36) What is consumer surplus?

6.2 Market Equilibrium and Efficiency

2) At the market equilibrium, resources are allocated efficiently because:

12) Why is the market equilibrium efficient?

8) A ban on imported avocados would result in:

6.5 Who Really Pays Taxes?

2) A $2000 tax levied on the maker of MRIs will cause:

5) The deadweight loss from a taxation is:

11) When a tax is levied on a good or service:

12) When a tax is levied on a good or service:

18) Deadweight loss is NOT:

19) Taxes may cause deadweight losses because:

26) A tax on a good or service generally creates a deadweight loss.

29) What is the deadweight loss of a tax?

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