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Taxing consumables

1. A result of welfare economics is that the equilibrium price of a product is considered to be the best price because it
a. maximizes total revenue for firms and maximizes the quantity supplied of the product.
b. maximizes the combined welfare of buyers and sellers.
c. minimizes costs and maximizes profits of sellers.
d. minimizes the level of welfare payments to those who no longer live below the poverty line.

2. When a buyer's willingness to pay for a good is equal to the price of the good,
a. the buyer's consumer surplus for that good is maximized.
b. the buyer will buy as much of the good as the buyer's budget allows.
c. the price of the good exceeds the value that the buyer places on the good.
d. the buyer is indifferent between buying the good and not buying it.

3. Cost is a measure of the
a. seller's willingness to sell.
b. seller's producer surplus.
c. producer shortage.
d. seller's willingness to buy.

4. Market power refers to the
a. side effects that may occur in a market.
b. government regulations imposed on the sellers in a market.
c. ability of market participants to influence price.
d. forces of supply and demand in determining equilibrium price.

5. When cigarettes are taxed and sellers of cigarettes are required to pay the tax to the government,
a. the size of the cigarette market is reduced.
b. the price paid by buyers of cigarettes decreases.
c. the demand for cigarettes decreases.
d. there is a movement downward and to the right along the demand curve for cigarettes.

6. Suppose a tax is levied on the buyers of a good;
a. then the supply curve shifts upward by the amount of the tax.
b. then the quantity supplied decreases for all conceivable prices of the good.
c. this means that the buyers of the good will send tax payments to the government.
d. this means that the buyers of the good will pay a higher effective price for the good, not that they will send tax payments to the government.

7. When a tax is levied on buyers of a good,
a. government collects too little revenue to justify the tax if the equilibrium quantity of the good decreases as a result of the tax.
b. there is an increase in the quantity of the good supplied.
c. a wedge is placed between the price buyers pay and the price sellers effectively receive.
d. the effective price to buyers decreases because the demand curve shifts leftward.

8. A deadweight loss is a consequence of a tax on a good because the tax
a. induces the government to increase its expenditures.
b. induces buyers to consume less, and sellers to produce less, of the good.
c. causes a disequilibrium in the market.
d. imposes a loss on buyers that is greater than the loss to sellers.

9. The supply curve and the demand curve for a good are straight lines. When the good is taxed, the area on the relevant supply-and-demand graph that represents
a. government's tax revenue is a rectangle.
b. the deadweight loss of the tax is a triangle.
c. the loss of consumer surplus caused by the tax is neither a rectangle nor a triangle.
d. All of the above are correct.

Figure 8-6

See attached

10. Refer to Figure 8-6. As a result of the tax,
a. consumer surplus decreases by $65; producer surplus decreases by $85; tax revenue of $120 is generated; and the deadweight loss of the tax is $30.
b. consumer surplus decreases by $75; producer surplus decreases by $75; tax revenue of $120 is generated; and the deadweight loss of the tax is $30.
c. consumer surplus decreases by $80; producer surplus decreases by $80; tax revenue of $120 is generated; and the deadweight loss of the tax is $40.
d. consumer surplus decreases by $120; producer surplus decreases by $120; tax revenue of $200 is generated; and the deadweight loss of the tax is $40.

11. The amount of deadweight loss from a tax depends upon
a. the price elasticity of demand.
b. the price elasticity of supply.
c. the amount of the tax per unit.
d. All of the above are correct.

12. When a country allows trade and becomes an importer of steel,
a. the losses of the domestic producers of steel exceed the gains of the domestic consumers of steel.
b. the losses of the domestic consumers of steel exceed the gains of the domestic producers of steel.
c. the gains of the domestic producers of steel exceed the losses of the domestic consumers of steel.
d. the gains of the domestic consumers of steel exceed the losses of the domestic producers of steel.

Figure 9-5

See attached

13. Refer to Figure 9-5. The size of the tariff on carnations is
a. $8 per dozen.
b. $6 per dozen.
c. $4 per dozen.
d. $2 per dozen.

____ 14. Turkey is an importer of goose-down pillows. The world price of these pillows is $50. Turkey imposes a $7 tariff on pillows. Turkey is a price-taker in the pillow market. As a result of the tariff,
a. Turkish consumers of pillows become worse off and Turkish producers of pillows become worse off.
b. Turkish consumers of pillows become worse off and Turkish producers of pillows become better off.
c. Turkish consumers of pillows become better off and Turkish producers of pillows become worse off.
d. Turkish consumers of pillows become better off and Turkish producers of pillows become better off.

____ 15. The North American Free Trade Agreement
a. increased trade restrictions among Canada, Mexico and the United States.
b. eliminated tariffs on imports to North America from the rest of the world.
c. reduced trade restrictions among Canada, Mexico and the United States.
d. None of the above is correct.

____ 16. Disposable personal income is the income that
a. households have left after paying taxes and non-tax payments to the government.
b. businesses have left after paying taxes and non-tax payments to the government.
c. households and noncorporate businesses have left after paying taxes and non-tax payments to the government.
d. households and businesses have left after paying taxes and non-tax payments to the government.

____ 17. A recession is always associated with
a. declining real GDP.
b. slow but positive growth of real GDP.
c. rising inflation.
d. the end of a war.

____ 18. When the overall level of prices in the economy is increasing, we say that the economy is experiencing
a. economic growth.
b. stagflation.
c. inflation.
d. deflation.

____ 19. Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because
a. new goods and services are always of higher quality than existing goods and services.
b. new goods and services cost less than existing goods and services.
c. new goods and services cost more than existing goods and services.
d. when a new good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living.

____ 20. The real interest rate tells you
a. how fast the number of dollars in your bank account rises over time.
b. how fast the purchasing power of your bank account rises over time.
c. the number of dollars in your bank account today.
d. the purchasing power of your bank account today.

____ 21. A nation's standard of living is measured by its
a. real GDP.
b. real GDP per person.
c. nominal GDP.
d. nominal GDP per person.

____ 22. Over time people have become more conscientious about recycling paper. At the same time corporations have found new ways to use this scrap paper. From these two things
a. we can be sure that scrap paper is now less scarce.
b. we can be sure that scrap paper is now more scarce.
c. we know that the scarcity of scrap paper has not changed.
d. we cannot tell if the scarcity of scrap paper has changed.

____ 23. Proprietary technology is knowledge that is
a. known but no longer used much.
b. known, but only recently discovered.
c. known mostly by only those in a certain profession.
d. known only by the company that discovered it.

____ 24. The traditional view of the production process is that capital is subject to
a. constant returns.
b. increasing returns.
c. diminishing returns.
d. diminishing returns for low levels of capital, and increasing returns for high levels of capital.

____ 25. Drug companies can usually obtain patents on new drugs. This turns new ideas into
a. private goods, and increase the incentive to engage in research.
b. private goods, but decrease the incentive to engage in research.
c. public goods, and increase the incentive to engage in research.
d. public goods, and decrease the incentive to engage in research.

True/False
Indicate whether the sentence or statement is true or false.

____ 26. Consumer surplus is the amount a buyer actually has to pay for a good minus the amount the buyer is willing to pay for it.

____ 27. Efficiency is related to the size of the economic pie, whereas equity is related to how the pie gets sliced and distributed.

____ 28. Economists generally believe that, although there may be advantages to society from ticket-scalping, the costs to society of this activity outweigh the benefits.

____ 29. Unless markets are perfectly competitive, they mail fail to maximize the total benefits to buyers and sellers.

____ 30. A tax on insulin is likely to cause a tremendous deadweight loss to society.

____ 31. If the world price of a good is greater than the domestic price in a country that can engage in international trade, then that country becomes an importer of that good.

____ 32. When a government imposes a tariff on a product, the domestic price will equal the world price.

____ 33. Import quotas and tariffs both cause the quantity of imports to fall.

____ 34. If the nominal interest rate is 5 percent and the inflation rate is 2 percent, then the real interest rate is 3 percent.

____ 35. If a country made it easier for people to establish and prove the ownership of their property, real GDP per person would likely rise.

Short Answer

36. Answer each of the following questions about supply and producer surplus.
a. What is producer surplus?
b. What is the relationship between the cost to sellers and the supply curve?
.

37. Using the graph shown, determine the value of each of the following:
a. equilibrium price before the tax
b. consumer surplus before the tax
c. producer surplus before the tax
d. total surplus before the tax
e. consumer surplus after the tax
f. producer surplus after the tax
g. total tax revenue to the government
h. total surplus (consumer surplus + producer surplus + tax revenue) after the tax
i. deadweight loss

See attached

38. Using the graph below, answer the following questions about hammers.

See attached

a. What is the equilibrium price of hammers before trade?
b. What is the equilibrium quantity of hammers before trade?
c. What is the price of hammers after trade is allowed?
d. What is the quantity of hammers imported after trade is allowed?
e. What is the amount of consumer surplus before trade?
f. What is the amount of consumer surplus after trade?
g. What is the amount of producer surplus before trade?
h. What is the amount of producer surplus after trade?
i. What is the amount of total surplus before trade?
j. What is the amount of total surplus after trade?
k. What is the change in total surplus because of trade?

39. Using the graph, assume that the government imposes a $1 tariff on hammers. Answer the following questions given this information.

See attached

a. What is the domestic price and quantity demanded of hammers after the tariff is imposed?
b. What is the quantity of hammers imported before the tariff?
c. What is the quantity of hammers imported after the tariff?
d. What would be the amount of consumer surplus before the tariff?
e. What would be the amount of consumer surplus after the tariff?
f. What would be the amount of producer surplus before the tariff?
g. What would be the amount of producer surplus after the tariff?
h. What would be the amount of government revenue because of the tariff?
i. What would be the total amount of deadweight loss due to the tariff?

40. List the three major problems in using the CPI as a measure of the cost of living.

41. Use the data on U.S. real GDP below to compute real GDP per person for each year. Then use these numbers to compute the percentage increase in real GDP per person from 1987 to 2005.

Year Real GDP (2000 prices) population
1987 $6,435,000 million 243 million
2005 $11,092,000 million 296.6 million

42. Why is productivity related to the standard of living? In your answer be sure to explain what productivity and standard of living mean. Make a list of things that determine labor productivity.

43. Why does a nation's standard of living depend on property rights?

44. How do outward-oriented policies affect a nation's productivity?

45. Compare and contrast the population theories of Malthus and Kremer

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Solution Summary

A series of questions looking at welfare economics, willingness to pay, and the basic definitions of cost.

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