Download Microeconomics, 4e (Perloff)

Microeconomics, 4e (Perloff)
Chapter 9 Applying the Competitive Model
9.1 Consumer Welfare
1) Mister Jones was selling his house. The asking price was $220,000, and Jones decided he would take no
less than $200,000. After some negotiation, Mister Smith purchased the house for $205,000. Smith's
consumer surplus is
A) $5,000.
B) $15,000.
C) $20,000.
D) not able to be calculated from the information given.
Answer: D
Topic: Consumer Welfare
2) You enter a store and buy a bottle of soda. Do you usually receive consumer surplus?
A) Yes, because you wouldn't buy the soda if your willingness to pay would be less than the price.
B) Yes, because the you are thirsty.
C) No, because you value other drinks more.
D) No, because you have less money after the transaction.
Answer: A
Topic: Consumer Welfare
3) Mary purchased a stuffed animal toy for $5. After a few weeks, someone offered her $100 for the toy.
Mary refused. One can conclude that Mary's consumer surplus from the toy is
A) less than $5.
B) at least $95.
C) at least $100.
D) $105.
Answer: B
Topic: Consumer Welfare
4) Joe's demand for spring water can be represented as p = 10 - Q (where p is measured in $/gallon and Q
is measured in gallons). He recently discovered a spring where water can be obtained free of charge. His
consumer surplus from this water is
A) $0.
B) $50.
C) $100.
D) unknown based upon the information provided.
Answer: B
Topic: Consumer Welfare
5) Assume a consumer has a horizontal demand curve for a product. His consumer surplus from buying the
product
A) is maximized.
B) can't be calculated.
C) equals zero.
D) Need more information.
Answer: C
Topic: Consumer Welfare
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6) The above figure shows the market demand curve for telecommunication while driving one's car (time
spent on the car phone). The current price is $0.35 per minute. If the price were to increase by ten cents per
minute,consumer surplus would
A) fall to $820.
B) fall by $84.
C) fall by $58.
D) fall to $369.
Answer: B
Topic: Consumer Welfare
7) The above figure shows the market demand curve for telecommunication while driving one's car (time
spent on the car phone). At the current price of $0.35 per minute, consumer surplus equals
A) $301.00.
B) $924.50.
C) $1,225.50.
D) $1,250.00.
Answer: B
Topic: Consumer Welfare
8) As the price of a good increases, the loss in consumer surplus is larger,
A) the more elastic demand is.
B) the more money previously spent on the good.
C) the less money previously spent on the good.
D) the smaller the price increase.
Answer: B
Topic: Consumer Welfare
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9) If lower-income households spend a greater share of their income on cigarettes than do higher-income
households, then a tax that raises the price of cigarettes will
A) cause lower-income households to incur a greater loss of consumer surplus than that incurred by higherincome households.
B) cause higher-income households to incur a greater loss of consumer surplus than that incurred by lowerincome households.
C) raise consumer surplus among higher-income households.
D) cause consumer surplus to decline among smokers, but the relative impact cannot be determined from
the given information.
Answer: D
Topic: Consumer Welfare
10) Suppose consumers of cigarettes can be classified into two groups: heavy users and light users. Heavy
users purchase more cigarettes and are less sensitive to price changes relative to light users. To determine
whether a heavy user suffers a greater loss of consumer surplus than a light user does when the price of
cigarettes increases, one would need to know
A) each group's average income.
B) the actual quantities purchased by each.
C) each individual's price elasticity of demand.
D) no additional information.
Answer: D
Topic: Consumer Welfare
11) Sarah's demand curve for whiskey has the same slope as Pete's; however, it lies to the right of Pete's.
An increase in the price of whiskey will cause
A) Sarah to incur a greater loss of consumer surplus than Pete will.
B) Pete to incur a greater loss of consumer surplus than Sarah will.
C) Sarah and Pete to incur the same loss of consumer surplus.
D) Sarah's demand curve to shift closer to Pete's.
Answer: A
Topic: Consumer Welfare
12) Sarah and David both have linear demand curves for lemonade. Sarah's demand curve for lemonade
intersects David's demand curve at a price of 50 cents per glass. Sarah's demand curve is more inelastic
than David's. A change in the price of lemonade from 50 cents to 25 cents per glass will
A) decrease Sarah's consumer surplus more than David's.
B) decrease David's consumer surplus more than Sarah's.
C) increase Sarah's consumer surplus more than David's.
D) increase David's consumer surplus more than Sarah's.
Answer: D
Topic: Consumer Welfare
For the following, please answer "True" or "False" and explain why.
13) Consumer surplus from a given purchase is the difference between what one was willing to pay for that
purchase and what was actually paid.
Answer: True. This is the definition of consumer surplus.
Topic: Consumer Welfare
14) Consumers who are more sensitive to changes in price suffer a greater loss of consumer surplus from
any given price increase.
Answer: False. Consumers who are more sensitive to the price increase will reduce their purchase of the
good by a greater extent than those who are not price sensitive. As a result, they incur a smaller loss of
consumer surplus.
Topic: Consumer Welfare
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15) The change in total welfare from a 10% increase in price will depend only on the elasticity of demand.
Answer: False. The effect of a price change also depends on revenue changes.
Topic: Consumer Welfare
16) Ann and Bill each spend $30 per month on cigarettes when the price is $1 per pack. Draw a graph to
illustrate that the consumer with the less elastic demand will suffer the greater loss of consumer surplus
when the price of cigarettes increases. Explain and label the figure.
Answer:
See the above figure. The curve labeled LE is the less elastic demand curve, and the curve labeled ME is

the more elastic demand curve. When price increases from $1 to  , the person with demand curve ME
suffers a loss of a + c + e. The person with demand curve LE suffers a loss of a + b + c + d + e. Thus, the
person with the less elastic demand suffers the greater loss of consumer surplus.
Topic: Consumer Welfare
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17) Figure 9.6 shows an individual's demand curve for time per month spent telecommunicating while
driving (talking on the car phone.) A car phone is useless except for talking with somebody who is not in
the car. If calls are priced at ten cents per minute, what is the consumer surplus derived from talking? What
is the most this person would pay for the car phone? Explain.
Answer: The consumer surplus from talking on the car phone is ($2.90 * 20)/2 = $29. This person would
pay up to $29 per month to have the phone. Having the phone is worth $29 per month to this person
because that is the value this person places on calls from the car phone over and above what is paid just for
the calls. The phone has no other value to the person except to make the calls. If the phone cost more than
$29 per month this person would feel better off without the phone.
Topic: Consumer Welfare
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9.2 Producer Welfare
1) Producer surplus is equal to
A) the area under the supply curve.
B) the difference between price and average cost for all units sold.
C) the difference between price and marginal cost for all units sold.
D) the firm's profit when fixed costs exist.
Answer: C
Topic: Producer Welfare
2) Producer surplus equals
A) total revenue minus total variable cost.
B) total revenue minus the sum of all marginal cost.
C) profit plus fixed cost.
D) All of the above.
Answer: D
Topic: Producer Welfare
3) Mister Jones was selling his house. The asking price was $220,000, and Jones decided he would take no
less than $200,000. After some negotiation, Mister Smith purchased the house for $205,000. Jones'
producer surplus is
A) $5,000.
B) $15,000.
C) $20,000.
D) not able to be calculated from the information given.
Answer: A
Topic: Producer Welfare
4) Suppose the market supply curve is p = 5 + Q. At a price of 10, producer surplus equals
A) 50.
B) 25.
C) 12.50.
D) 10.
Answer: C
Topic: Producer Welfare
5) Suppose the market supply curve is p = 5Q. At a price of 10, producer surplus equals
A) 50.
B) 25.
C) 12.50.
D) 10.
Answer: D
Topic: Producer Welfare
6) The difference between producer surplus and profit is always the associated
A) opportunity costs.
B) total costs.
C) variable costs.
D) fixed costs.
Answer: D
Topic: Producer Welfare
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7) In the short run, if a firm operates, it earns a profit of $500. The fixed costs of the firm are $100. This
firm has a producer surplus of
A) $500.
B) $100.
C) $400.
D) $600.
Answer: D
Topic: Producer Surplus
For the following, please answer "True" or "False" and explain why.
8) Producer surplus is the sum of the profits earned by all firms in a market.
Answer: False. This definition ignores fixed costs. Producer surplus minus fixed costs equals profits.
Topic: Producer Welfare
9) Producer surplus equals total revenue minus the sum of all marginal cost.
Answer: True. The sum of all marginal cost equals total variable cost. Total revenue minus total variable
cost equals producer surplus.
Topic: Producer Welfare
10) When is the profit a firm earns equal to the producer surplus? Explain.
Answer: Profit equals producer surplus when the firm has no fixed costs. Producer surplus can be thought
of as the gains from trade. In the short run, if the firm produces any output, it earns profit equal to revenue
minus variable costs minus fixed costs. If the firm shuts down, it loses the fixed costs. The producer surplus
equals the profit from trading minus the profit or loss from not trading, revenue minus variable costs. If no
fixed costs exist, then profit will equal the producer surplus.
Topic: Producer Welfare
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11) Suppose the market supply curve for wheat is shown in the above figure. Calculate the producer
surplus when price is $2 per bushel. If legislation mandates that the price be $1 per bushel, what is the
resulting loss in producer surplus?
Answer: At a price of $2, producer surplus equals ($1.50 * 1200)/2 = $900. At a price of $1, producer
surplus equals ($0.50 * 500)/2 = $125. The $1 decrease in prices results in a $775 decrease in producer
surplus.
Topic: Producer Welfare
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9.3 Competition Maximizes Welfare
1) Economists claim that measuring society's welfare as CS + PS
A) is inappropriate since ultimately everyone is a consumer.
B) is valid only when the same person could be either a consumer or a producer.
C) treats the gains to consumers and producers equally.
D) is not commonly accepted.
Answer: C
Topic: Competition Maximizes Welfare
2) Advocates of steel tariffs to protect U.S. steel firms realize that when imposing such tariffs the gains of
firms are outweighed by the losses to consumers.. This implies that
A) such advocates value producer surplus more than consumer surplus.
B) want to help consumers.
C) such advocates value consumer surplus more than producer surplus.
D) such advocates value producer surplus and consumer surplus equally.
Answer: A
Topic: Competition Maximizes Welfare
3) If a market produces a level of output below the competitive equilibrium, then
A) social welfare is not maximized.
B) consumer surplus might still be maximized.
C) the actual price will be below the equilibrium price.
D) social welfare might still be enhanced if a price ceiling keeps price below the competitive price.
Answer: A
Topic: Competition Maximizes Welfare
4) If in a market the last unit of output was sold at a price higher than marginal cost
A) producer are better off producing more.
B) consumers are better off if less of the product is sold.
C) social welfare is not maximized.
D) the unit increased total profit.
Answer: C
Topic: Competition Maximizes Welfare
5) A competitive market maximizes social welfare because in a competitive market
A) profits are zero.
B) price equals marginal cost of the last unit produced.
C) price equals average cost of the last unit produced.
D) there is free entry and exit.
Answer: B
Topic: Competition Maximizes Welfare
6) If a market produces a level of output that exceeds the competitive equilibrium output, then
A) social welfare will be higher.
B) producer surplus will be higher.
C) marginal cost will exceed price.
D) All of the above.
Answer: C
Topic: Competition Maximizes Welfare
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7) If an economist states that not enough of a good is being produced, she usually means that
A) not everyone can afford the good.
B) price exceeds marginal cost.
C) consumer surplus equals zero.
D) at equilibrium, some people who still wish to sell the good cannot find a buyer.
Answer: B
Topic: Competition Maximizes Welfare
8) Deadweight loss occurs when
A) producer surplus is greater than consumer surplus.
B) the maximum level of total welfare is not achieved.
C) consumer surplus is reduced.
D) an inferior good is consumed.
Answer: B
Topic: Competition Maximizes Welfare
9) Giving presents of Christmas does NOT generate a deadweight loss if
A) all gift are money.
B) everybody gets exactly want she wants.
C) nobody can be made better off by returning the gift and purchasing a different one.
D) All of the above.
Answer: D
Topic: Competition Maximizes Welfare
10) The deadweight loss associated with output less than the competitive level can be determined by
A) subtracting the competitive level producer surplus from the producer surplus associated with less output.
B) subtracting the consumer surplus from the producer surplus associated with less output.
C) summing the consumer and producer surplus associated with less output.
D) summing the change in the total consumer and producer surplus from moving from the competitive
level of output to less output.
Answer: D
Topic: Competition Maximizes Welfare
For the following, please answer "True" or "False" and explain why.
11) As the quantity produced of a good increases, the social welfare generated by that good increases.
Answer: False. This only takes consumer surplus into account. Beyond the competitive equilibrium,
additional units of output have less value than the cost to make them. Thus, beyond the competitive
equilibrium, social welfare declines as the quantity of a good increases.
Topic: Competition Maximizes Welfare
12) While producing less then the competitive output decreases social welfare, the same cannot be said
about producing more than the competitive output.
Answer: False. When more than the competitive output is produced each unit sold cost more than it is
valued at. This reduces social welfare compared to the competitive output.
Topic: Competition Maximizes Welfare
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13) Explain why the competitive output maximizes welfare.
Answer: If less output is produced, then the last unit that is consumed will be valued by consumers more
than the cost of producing it. If output is increased to the competitive level, consumers will value those
additional goods more than the cost of producing them, and welfare will increase. If output is greater than
the competitive output level, then the cost of producing the units beyond the competitive level is greater
than the value. At output levels greater than the competitive level, welfare is decreased. Thus, the
competitive output level maximizes welfare, because consumers value the last unit of output at exactly the
amount that it costs to produce it.
Topic: Competition Maximizes Welfare
14) Suppose a consumer advocacy group has convinced legislators that vitamin pills should be free to
consumers. Such a policy would enhance the health of the citizenry, they argue. Assuming a downwardsloping linear demand curve and a horizontal long-run supply curve, determine the resulting output and
social welfare from such a policy. Compare this result to the competitive equilibrium.
Answer: Consumer surplus is maximized when price equals zero. Output will be the quantity where the
demand curve hits the quantity axis. The social welfare is less than the competitive result because for
quantities beyond the competitive equilibrium, producers incur a cost for which they are not reimbursed.
Some of this loss represents a transfer to consumers (the area under the demand curve to the right of the
equilibrium quantity). The area above the demand curve and below the supply curve for quantities beyond
the equilibrium quantity represents the deadweight loss.
Topic: Competition Maximizes Welfare
15) Suppose an industry trade group has convinced legislators that a price floor should be used so that
producer surplus is maximized in the market for milk. The group argues that such a policy would save the
"family farm." Assuming a downward-sloping linear demand curve and a horizontal long-run supply curve,
determine the resulting price, output and social welfare from such a policy. Compare this result to the
competitive equilibrium.
Answer: Producer surplus is maximized at a price that is midway between the supply curve and the demand
curve intercept. Compared to the competitive equilibrium, a lower quantity is sold at a higher price. The
area from this new quantity to the competitive quantity in between the demand and supply curves
represents the loss of consumer surplus that is not gained by anyone-the deadweight loss.
Topic: Competition Maximizes Welfare
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9.4 Policies that Supply Curves
1) The services of real estate brokers are provided in a competitive market. If the state Board of Realtors
enacts several requirements that limit the number of real estate brokers, which of the following is most
likely to occur?
A) The supply curve of real estate brokers will shift to the left.
B) The supply curve of real estate brokers will shift to the right.
C) Social welfare will remain unchanged.
D) The supply curve will remain unchanged.
Answer: A
Topic: Policies that Shift Supply Curves
2) Which of the following best describes the market reaction if a city restricts the number of firms that are
allowed to operate in a market?
A) The market supply curve shifts to the left.
B) The market demand curve shifts to the left.
C) Quantity supplied increases because price increases.
D) Price decreases.
Answer: A
Topic: Policies that Shift Supply Curves
3) The services of real estate brokers are provided in a competitive market. If the state Board of Realtors
enacts several requirements that limit the number of real estate brokers, which of the following is most
likely to occur?
A) Consumer surplus will increase.
B) Producer surplus will increase.
C) Entry of new brokers will increase.
D) Social welfare will increase.
Answer: B
Topic: Policies that Shift Supply Curves
4) The services of real estate brokers are provided in a competitive market. If the state Board of Realtors
enacts several requirements that limit the number of real estate brokers, then consumer surplus will most
likely
A) increase.
B) decrease.
C) remain unchanged.
D) There is not enough information to answer.
Answer: B
Topic: Policies that Shift Supply Curves
5) The services of real estate brokers are provided in a competitive market. If the state Board of Realtors
enacts several requirements that limit the number of real estate brokers, then social welfare will most likely
A) not change but there will be a transfer from consumer to producer.
B) not change but there will be a transfer from producer to consumer.
C) decrease although producers are made better off.
D) decrease although consumers are made better off.
Answer: C
Topic: Policies that Shift Supply Curves
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6) A new law applied to a competitive market that requires that laid off workers be paid a large severance
payment will
A) not generate a deadweight loss.
B) increase total welfare.
C) increase consumer surplus in the market.
D) decrease consumer surplus in the market.
Answer: D
Topic: Policies that Shift Supply Curves
7) If a city decides to restrict the number of pizza parlors
A) the price of pizza will increase.
B) pizza parlors will make higher profits.
C) total welfare will decrease.
D) All of the above.
Answer: D
Topic: Policies that Shift Supply Curves
For the following, please answer "True" or "False" and explain why.
8) Policies that restrict supply could generate an increase in social welfare because the increase in producer
surplus could exceed the decrease in consumer surplus.
Answer: False. One impact of a supply restriction is an exchange from consumers to producers. The net
effect on social welfare is zero. Additionally, there is a deadweight loss. This is the additional surplus that
could be generated if supply were not restricted. This effect is always negative. As a result, social welfare
always declines in response to a supply restriction.
Topic: Policies that Shift Supply Curves
9) If a city decides to lift restrictions of how many taxi cabs can operate social welfare will increase.
Answer: True. Even though turning producer surplus into consumer surplus doesn't increase total welfare,
the elimination of the deadweight loss that resulted from the limit does.
Topic: Policies that Shift Supply Curves
10) Suppose anyone with a driver's license is capable of supplying one trip from the airport to the
downtown business center on any given day. The long-run supply curve of such trips is horizontal at p =
$50, which is the average cost of such trips. Suppose daily demand is Q = 1000 - 10p. Calculate the change
in consumer surplus, producer surplus and social welfare if the city government requires those people
supplying such trips to possess a special license, and the government will issue only 300 licenses.
Answer: The competitive equilibrium is Q = 1000 - (10 * 50) = 500. With the supply restriction of 300,
price becomes $70. The loss in social welfare is [(70 - 50) * (500 - 300)]/2 = $2,000. Producers gain (70 50) * 300 = $6,000. Consumers lose $6,000 + $2,000 = $8,000.
Topic: Policies that Shift Supply Curves
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11) The above figure shows the demand and supply curves in the market for milk. If the government
imposes a quota at 500 gallons, calculate the deadweight loss.
Answer: DWL = .5(4 - 2)(1000 - 500) = 500
Topic: Policies that Shift Supply Curves
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9.5 Policies that Create A Wedge Between Supply and Demand
1) The total welfare associated with a market that includes a government sales tax equals
A) consumer surplus plus producer surplus.
B) consumer surplus plus producer surplus minus government tax revenue.
C) consumer surplus plus producer surplus plus government tax revenue.
D) the government tax revenue.
Answer: C
Topic: Policies that Create a Wedge
2) If a city government enact a maximum price on rent
A) quantity supplied will decrease.
B) quantity demanded will increase.
C) allocational problems develop.
D) All of the above.
Answer: D
Topic: Policies that Create a Wedge
3) The above figure shows supply and demand curves for apartment units in a large city. If the city
government passes a law that establishes $350 per month as the legal maximum rent, the loss in social
welfare equals
A) b + c.
B) f.
C) a.
D) f + g.
Answer: D
Topic: Policies that Create a Wedge
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4) The above figure shows supply and demand curves for apartment units in a large city. If the city
government passes a law that establishes $350 per month as the legal maximum rent, deadweight loss
occurs because
A) consumers place a greater value on the last apartment unit than the cost to supply it.
B) the supplier of the last apartment unit receives a rental price that is less than the marginal cost of
supplying it.
C) the quantity of apartments supplied has decreased.
D) All of the above.
Answer: A
Topic: Policies that Create a Wedge
5) The above figure shows supply and demand curves for apartment units in a large city. If the city
government passes a law that establishes $350 per month as the legal maximum rent, the consumer's net
gain in surplus equals
A) c - f.
B) b - f.
C) d - f.
D) The answer cannot be determined from the information given.
Answer: A
Topic: Policies that Create a Wedge
6) The above figure shows supply and demand curves for apartment units in a large city. If the city
government passes a law that establishes $350 per month as the legal maximum rent, producer surplus
A) increases.
B) decreases.
C) stays the same.
D) changes in a direction that cannot be determined from the information given.
Answer: B
Topic: Policies that Create a Wedge
7) The above figure shows supply and demand curves for apartment units in a large city. If the city
government passes a law that establishes $350 per month as the legal maximum rent, producer surplus
decreases by
A) d.
B) b + f.
C) c + g.
D) i.
Answer: C
Topic: Policies that Create a Wedge
8) The above figure shows supply and demand curves for apartment units in a large city. If the city
government passes a law that establishes $350 per month as the legal maximum rent, producer surplus will
be
A) d.
B) d + e.
C) d + g.
D) d + c + g.
Answer: A
Topic: Policies that Create a Wedge
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9) The above figure shows supply and demand curves for apartment units in a large city. At the
unregulated equilibrium, producer surplus will be
A) d.
B) d + e.
C) d + g.
D) d + c + g.
Answer: D
Topic: Policies that Create a Wedge
10) The above figure shows supply and demand curves for apartment units in a large city. The area "e"
represents
A) the loss in producer surplus if a rent ceiling of $350 is imposed.
B) the total variable cost of supplying Q1 units.
C) the marginal cost of supplying Q1 units.
D) the total revenue received by supplying Q1 units.
Answer: B
Topic: Policies that Create a Wedge
11) The above figure shows supply and demand curves for apartment units in a large city. The area "c"
represents
A) the loss in consumer surplus if a rent ceiling of $350 is imposed.
B) a transfer from producers to consumers if a rent ceiling of $350 is imposed.
C) a transfer from consumers to producers if a rent ceiling of $350 is imposed.
D) the total revenue received by supplying Q1 units.
Answer: B
Topic: Policies that Create a Wedge
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12) The above figure shows supply and demand curves for milk. In an effort to help farmers, the
government passes a law that establishes a $3 per gallon price support. To maintain the price support,
government expenditures must equal
A) k + i.
B) f + g + h + i + j.
C) f + g + h + i + j + k.
D) f + g + h + i + j + k + e.
Answer: C
Topic: Policies that Create a Wedge
13) The above figure shows supply and demand curves for milk. If amount Q2 is produced in the market
A) producer surplus is maximized.
B) consumer surplus is minimized.
C) a deadweight loss is generated.
D) All of the above.
Answer: C
Topic: Policies that Create a Wedge
14) The above figure shows supply and demand curves for milk. In an effort to help farmers, the
government passes a law that establishes a $3 per gallon price support. To maintain the price support,
government must purchase
A) Q1 gallons.
B) Q2 gallons.
C) Q1 - Q2 gallons.
D) Q2 - Q1 gallons.
Answer: D
Topic: Policies that Create a Wedge
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15) The above figure shows supply and demand curves for milk. In an effort to help farmers, the
government passes a law that establishes a $3 per gallon price support. As a result, consumer surplus falls
by
A) a.
B) b + f.
C) f + g.
D) b + f - c.
Answer: B
Topic: Policies that Create a Wedge
16) The above figure shows supply and demand curves for milk. In an effort to help farmers, the
government passes a law that establishes a $3 per gallon price support. The loss in social welfare resulting
from this price support equals
A) k + i.
B) j.
C) [$3 * (Q2 – Q1)] - h.
D) $3 * k.
Answer: C
Topic: Policies that Create a Wedge
17) The above figure shows supply and demand curves for milk. If the government passes a $2 per gallon
specific tax, the loss in social welfare will equal
A) b + c + f + g.
B) f + g.
C) b + f.
D) c + g.
Answer: B
Topic: Policies that Create a Wedge
18) The above figure shows supply and demand curves for milk. If the government passes a $2 per gallon
specific tax, the loss in consumer surplus will equal
A) b + c + f + g.
B) f + g.
C) b + f.
D) c + g.
Answer: C
Topic: Policies that Create a Wedge
19) The above figure shows supply and demand curves for milk. If the government passes a $2 per gallon
specific tax, the loss in producer surplus will equal
A) b + c + f + g.
B) f + g.
C) b + f.
D) c + g.
Answer: D
Topic: Policies that Create a Wedge
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20) The above figure shows supply and demand curves for milk. If the government passes a $2 per gallon
specific tax, the tax revenue is
A) $2 * Q1.
B) $2 * Q2.
C) $2 * (Q2 - Q2).
D) $2.
Answer: A
Topic: Policies that Create a Wedge
For the following, please answer "True" or "False" and explain why.
21) A per unit subsidy increases both consumer and producer surplus, but results in a deadweight loss.
Answer: True. The government expenditure more than offset the gains to consumer and producer surplus
resulting in a deadweight loss.
Topic: Policies that Create a Wedge
22) The tax revenue that is generated by a government tax is counted towards total welfare.
Answer: True. The tax will benefit either producers or consumers or both. Therefore it does not represent a
loss in welfare.
Topic: Policies that Create a Wedge
23) The above figure shows the demand and supply curves in the market for milk. Currently the market is
in equilibrium. If the government imposes a $2 per gallon tax to be collected from sellers, estimate the
change in p, Q, and social welfare.
Answer: The supply curve shifts vertically by $2. The price changes from $3 per gallon to $4 per gallon.
Quantity falls from 1,000 gallons to 500 gallons. For the 500 gallons no longer produced, consumer surplus
was $250 and producer surplus was $250. Producers and consumers also pay $1,000, but that represents a
transfer to the government.
Topic: Policies that Create a Wedge
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24) The above figure shows the demand and supply curves in the market for milk. Currently, the market is
in equilibrium. If the government imposes a $2 per gallon tax to be collected from sellers, calculate the
dead weight loss associated with the tax, and explain why the dead weight loss occurs.
Answer: The deadweight loss equals .5 * 2 * 500 * $500. The deadweight loss occurs because the tax
lowers the output from the competitive level. At the output level that occurs with the tax, consumers value
the last unit of output by more than it costs to produce that unit.
Topic: Policies that Create a Wedge
25) The above figure shows the demand and supply curves in the market for milk. Currently the market is
in equilibrium. If the government establishes a $4 per gallon price support, estimate the change in p, Q, and
social welfare.
Answer: Price rises to $4 per gallon. Consumers purchase only 500 gallons of milk. The government
purchases 1,000 gallons of milk to support the price at $4. Thus, a total of 1,500 gallons is produced. The
loss in social welfare equals 1,000 gallons of milk at $4/gallon (equals $4,000) less the producer surplus
above the old demand curve up to a price of $4 (which is $500). The loss in social welfare is $3,500.
Topic: Policies that Create a Wedge
26) The above figure shows the demand and supply curves in the market for milk. Currently the market is
in equilibrium. If the government establishes a $2 per gallon price ceiling to ensure that children are
nourished, estimate the change in p, Q, and social welfare.
Answer: At a price of $2, only 500 gallons are produced. The deadweight loss equals
[(1000 - 500) * (4 - 2)]/2 = $500.
Topic: Policies that Create a Wedge
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9.6 Comparing Both Types of Policies: Imports
1) The larger the U.S. imposed per unit import tariff on a good imported and produced in the U.S.
A) the smaller the U..S consumer surplus.
B) the larger the U.S. producer surplus.
C) the larger the government revenue.
D) All of the above.
Answer: D
Topic: Comparing both Types of Policies
2) A ban on imports, a tariff, or a quota raise the price to domestic consumers. This means that consumers
will buy less of the product at a higher price. The loss associated with this is called
A) production associated loss.
B) productive consumption loss.
C) consumption distortion loss.
D) consumer misperception loss.
Answer: C
Topic: Comparing both Types of Policies
3) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1
represents the world supply curve. If imported rice is banned, the loss in social welfare is
A) a + b + c + d + e.
B) a.
C) c + e.
D) a + c + d + e.
Answer: D
Topic: Comparing both Types of Policies
22
4) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1
represents the world supply curve. Currently 10 units are imported. The Consumption distortion loss is
equal to
A) c+e
B) c.
C) e.
D) a + c + d + e.
Answer: C
Topic: Comparing both Types of Policies
5) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1
represents the world supply curve. Currently 10 units are imported. The loss from shifting production from
foreign to domestic producers equals
A) c + e
B) c.
C) e.
D) a + c + d + e.
Answer: B
Topic: Comparing both Types of Policies
6) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1
represents the world supply curve. If a $1 tariff is imposed on imported rice, the loss in social welfare is
A) b + c + d + e.
B) a.
C) c + e.
D) a + c + d + e.
Answer: C
Topic: Comparing both Types of Policies
7) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1
represents the world supply curve. Suppose a free market exists. If a $1 per unit tariff is imposed on
imported rice, the quantity of imported rice will decrease by
A) 10 units.
B) 20 units.
C) 30 units.
D) 40 units.
Answer: B
Topic: Comparing both Types of Policies
8) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1
represents the world supply curve. Suppose a free market exists. An import quota of 30 units would
A) cause consumer surplus to fall by "e."
B) cause social welfare to fall by $30.
C) increase producer surplus by "d."
D) have no effect.
Answer: D
Topic: Comparing both Types of Policies
23
9) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1
represents the world supply curve. Suppose a free market exists. The smallest tariff necessary to completely
eliminate imported rice is
A) $1 per unit.
B) $2 per unit.
C) $3 per unit.
D) $4 per unit.
Answer: B
Topic: Comparing both Types of Policies
10) The above figure shows the market for rice in Japan. S2 represents the domestic supply curve, and S1
represents the world supply curve. A $1 per unit tariff has the same effect on producer and consumer
surplus as a quota of
A) 10 units.
B) 20 units.
C) 30 units.
D) 40 units.
Answer: A
Topic: Comparing both Types of Policies
11) Tariffs and quotas create a loss in social welfare because
A) producer surplus declines.
B) revenues from tariffs are misspent.
C) consumer surplus declines.
D) All of the above.
Answer: C
Topic: Comparing both Types of Policies
12) The welfare loss from an import quota is greater than that of an equivalent tariff because
A) tariff revenues can be used to society's benefit.
B) the loss in consumer surplus is not as large.
C) domestic producers gain more from a quota than from a tariff.
D) tariff revenues represent an additional deadweight loss.
Answer: A
Topic: Comparing both Types of Policies
13) The cost of lobbying for an import quota in a perfectly competitive market
A) increases the welfare loss of the quota.
B) decreases the deadweight loss of the quota.
C) shifts the supply curve of the good to the left.
D) increases the consumer surplus.
Answer: A
Topic: Comparing both Types of Policies
14) Rent seeking in the form of lobbying for an increase in import tariffs by domestic producers
A) increases consumer surplus.
B) increases total welfare.
C) increases the deadweight loss.
D) None of the above.
Answer: C
Topic: Comparing both Types of Policies
24
For the following, please answer "True" or "False" and explain why.
15) The welfare loss of a tariff equals that of a import quota that leads to the same level of imports.
Answer: False. In the case of a tariff the government receives revenue which does not reduce welfare. With
a quota this amount is often lost to foreign importers.
Topic: Comparing both Types of Policies
16) "Supporters of import restrictions and protectionist policies place greater weight on producer welfare
than on consumer welfare." Comment.
Answer: Import restrictions increase the producer surplus of domestic producers. Consumer surplus,
however, decreases by more than producers gain. Thus, the statement seems to be correct.
Topic: Comparing both Types of Policies
17) The domestic demand curve, domestic supply curve, and world supply curves for a good are given in
the above figure. All the curves are linear. Initially, the country allows imports. Then imports are banned.
Calculate how consumer and producer surplus change because of the ban. Is the country better off with the
ban on imports? Why?
Answer: Consumer surplus before the ban equals .5 * 75 * 75 = $2812.5. Producer surplus before the ban
equals .5 * 25 * 25 = $312.5. Total social welfare equals $3125. The consumer surplus after the ban equals
.5 * 50 * 50 = $1250. Producer surplus equals .5 * 50 * 50 = $1250 after the ban. Total social welfare
equals $2500. Consumer surplus has decreased by $1562.5 and producer surplus has increased by $937.5
because of the ban. Total social welfare has decreased by $635. The country is worse off because the total
social welfare has decreased.
Topic: Comparing both Types of Policies
25
18) Explain why a government would impose an import tariff when domestic consumers suffer more than
producers gain?
Answer: The tariff may be a product of producer rent seeking. Each producer will gain a relatively large
amount compared to the loss of each consumer. The producers may be able to coordinate their rent seeking
activities. Each consumer will only lose a relatively small amount so it is unlikely that consumers will
coordinate a protest to the tariff.
Topic: Comparing both Types of Policies
26