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Problem Set 4
Econ 202 (03, 04, and 05) Spring 2003
(Dr. Tin-Chun Lin)
1.
In the graph shown, which of the demand curve is most elastic at point A?
P
A
D1
D2
D3
Q
2.
(A) D1.
(B) D2.
(C) D3.
(D) All of the demand curves shown are equally elastic at point A.
(Answer: (A))
In the graph shown above, a given increase in price would result in the largest increase in total revenue
on which demand curve?
(A) D1.
(B) D2.
(C) D3.
(D) It is impossible to answer the question with the information given.
(Answer: (C))
3.
(True or False) When the price elasticity of demand is less than 1, a decrease in price will increase total
revenue.
(Answer: False)
4.
(True or False) A linear demand curve becomes more elastic as price falls.
(Answer: False)
5. (True or False) If the price of a normal good increases, consumers’ total expense must increase.
(Answer: False)
6. (True or False) Both price ceilings and price floors are normally accompanied by shortages.
(Answer: False)
7.
8.
(True or False) The elasticity of demand will be constant at all points along a down-ward sloping
straight-line demand curve.
(Answer: False)
When policymakers use price ceilings or price floors,
(A) They are able to make everyone in the market better off.
(B) They obscure the signals that normally guide the allocation of society’s resources.
(C) They improve the efficiency of resource allocation in society.
(D) All of the above.
(E) None of the above.
(Answer: (B))
9. Which of the following is the most correct statement about price controls?
(A) Price controls never help those they are designed to help.
(B) Price controls always help those they are designed to help.
(C) Price controls always hurt those they are designed to help.
(D) Price controls often hurt those they are designed to help.
(Answer: (D))
10 Workers with high skills and much experience are not affected by the minimum wage because,
(A) They belong to unions.
(B) They are not legally guaranteed the minimum wage.
(C) They generally earn wages less than the minimum wage.
(D) Their equilibrium wages are well above the minimum wage.
11. Which of the following is not a result of an increase in the minimum wage?
(A) An increase in production.
(B) An increase in the number of teenagers unemployed.
(C) An increase in the number of teenagers who chose to look for jobs.
(D) An increase in the dropout rate from school.
(Answer: (D))
(Answer: (A))
12. (True or False) Other factors held constant, if there are few close substitutes for a good, demand is
more elastic for it.
(Answer: False)
13. The following are the demand and supply schedules for chocolate brownies:
Price
Quantity demanded
Quantity supplied
(cents per brownie)
(millions per day)
(millions per day)
90
1
7
80
2
6
70
3
5
60
4
4
50
5
3
40
6
2
a. If there is no tax on brownies, what is their price and how many are produced and consumed?
(Answer: the equilibrium price is 60 cents per brownie, and the equilibrium quantity is 4 million.)
b. If a tax of 20 cents per brownie is introduced, what happens to the price of a brownie and the
number produced and consumed? (Answer: the tax raises the equilibrium price of brownies to 70
cents per brownie and lowers the quantity to 3 million.)
c. How much tax does the government collect and who pays it? (Answer: the government collects
$600,000 in tax revenue; consumers pay $300,000 of the tax in total; producers pay $300,000 of
the tax in total.)
14. Suppose that a 5 percent sales tax is levied on all goods and services.
a. Will this cause total spending on every good and service to increase? (Answer: only the demand is
inelastic (i.e. elasticity is less than 1 but larger than zero))
b. Will all prices rise by 5 percent as a result of tax? (Answer: when the demand is perfectly inelastic
(i.e. elasticity is equal to zero) or the supply is perfectly is perfectly elastic (i.e. elasticity equals
infinity.)
c. Is it possible that the burden of the tax be shared equally by all buyers and all sellers of every good
and services? (Answer: yes.)
15. The government has decided that the free-market price of cheese is too low.
a. Suppose the government imposes a binding price floor in the cheese market. Use a supply-anddemand diagram to show the effect of this policy on the price of cheese and the quantity of cheese
sold. Is there a shortage or surplus of cheese? (Answer: you can do it by yourself).
b. Farmers complain that the price floor has reduced their total revenue. Is this possible? Explain.
(Answer: The farmers’ complaint that their total revenue has declined is correct if demand is
elastic. With elastic demand, the percentage decline in quantity would exceed the percentage rise
in price, so total revenue would decline.)
c. In response to farmer’ complaints, the government agrees to purchase all of the surplus cheese at
the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?
(Answer: producers benefit; taxpayers lose. Taxpayers lose because they would be financing the
purchase of the surplus cheese.)
16. If the government places a $500 tax on luxury cars, will the price paid by consumers rise by more than
$500, less than $500, or exactly $500? Explain. (Answer: If the government imposes a $500 tax on
luxury cars, the price paid by consumers will rise less than $500, in general. The burden of any tax is
shared by both producers and consumers—the price paid by consumers rises and the price received by
producers falls, with the difference between the two equal to the amount of the tax. The only
exception would be if the supply curve were perfectly elastic, in which case consumers would bear the
full burden of the tax and the price paid by consumers would rise by exactly $500.