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Suppose consumers consider gasoline to be a necessity and are not very responsive to gasoline
price changes. If the government decides to help out struggling gasoline suppliers by placing a
binding price floor on the gasoline market, we can predict that (assume the gasoline market is not
initially in market failure):
Answer
Question 2
What are the only two differences we observe in a market when a government chooses to tax a
buyer versus when it chooses to tax a seller? Assume no initial market failure.
Answer
Question 3
Suppose the labor market is in a socially optimal free market equilibrium with Pe=$8 per hour
and Qe=8 million hours of employment demanded and supplied. Suppose now that the
government decides to make workers pay a $4 per hour tax when they supply their labor to the
market and we observe an increase in the buyer's price to Pb=$9 per hour and resource
misallocation of 2 million hours too few bought and sold. Based on this information we know that
the seller's price will be ____ and that tax effectiveness rate will be equal to _____.
Answer
1. Ps=$13; 133%.
2. Ps=$8; 133%.
3. Ps=$9; 25%.
4. Ps=$5; 75%.
5. None of the above.
Question 4
Suppose buyers in a market have received a $1000 per unit subsidy from the government and that
as a result of this subsidy the market equilibrium price rose by $500. Based on this information,
which of the following could possibly be the values of Ed and Es?
Answer
1. -0.5; 0.5.
2. -2; 2.
3. -1/4; 1/4.
4. All of the above.
5. None of the above.
Question 5
Suppose the government decides to place a $3 per pack tax on cigarette buyers. If cigarette
producers are perfectly price inelastic, then we can predict that this tax will result in ____ and
will have a tax effectiveness rate equal to ____.
Answer
Question 6
Suppose the following table contains summary data for a market both before and after the
government has placed a tax on it. Based on this data, we can estimate that the tax was in
the amount of _____ and was placed on _____.
Qd Qs Pb Ps
Before
100 100 $10 $10
Taxation
After
80 80 $11 $9
Taxation
Answer
Question 7
Suppose a well-functioning market exists with no initial market failure where Pe=$10 and
Qe=500 units. Now suppose the government offers buyers a subsidy of $3 whenever they buy a
unit of this product and we observe a change to new Pe=$12 and new Qe=520 units. Based on
this information, we can predict that the subsidy resulted in RM=_____ and DWL=_____.
Answer
Question 8
Suppose the market for a product has an equilibrium price of $6 and an equilibrium quantity
being bought and sold equal to 100,000 units. If the government decides to offer a $3 per unit
subsidy to the buyers of this product and we observe that the equilibrium price rises to $7, then
we know that:
Answer
1. Ps has risen to $7, Pb has fallen to $4 and Es>|Ed|.
2. Ps has risen to $7, Pb has fallen to $4 and |Ed|>Es.
3. Pb has risen to $7, Ps has fallen to $4 and Es>|Ed|.
4. Pb has risen to $7, Ps has fallen to $4 and |Ed|>Es.
5. None of the above.
Question 9
Suppose that buyers of health care are perfectly price inelastic while suppliers are responsive to
price changes. If we make health care suppliers pay a tax on the health care they provide, then we
can predict that health care buyers will pay _____ and that this tax will ____ the amount of health
care bought and sold in this country.
Answer
Question 10
Suppose the City of Columbia want to help low-income workers in the construction trade. Which
policy would be more beneficial to the workers: a $2 per hour subsidy given directly to workers
or a $2 per hour subsidy given to employers who hire these workers?
Answer
1. It is always best to provide the subsidy directly to the worker to ensure the worker gets
the full benefit of the subsidy.
2. It is always best to provide the subsidy directly to the employer to ensure that the taxes
get paid on the extra income earned.
3. It doesn’t matter whether the subsidy goes directly to the worker or the employer. The
subsidy will always be shared equally by the two groups.
4. It doesn’t matter whether the subsidy goes directly to the worker or the employer. The
subsidy will be shared according to how responsive each is to price of labor changes.
5. None of the above.
Question 11
Suppose a market exists with Pe=$10 and Qe=10 million units. If the government decides to
make suppliers pay a $3 per unit tax and as a result we observe a change in price to new Pe=$12
and a change in quantity to new Qe=5 million units, then we can calculate the tax effectiveness
rate as _____.
Answer
1. 200%.
2. 120%.
3. 100%.
4. 50%.
5. none of the above.
Question 12
If universities and students are responsive to price changes, then federal subsidies to
higher education have the effect of:
Answer
1. Raising tuition (Pe) if the subsidy is offered to students in the form of grants and
scholarships but lowering tuition (Pe) if the subsidy is offered to the university.
2. Lowering the out-of-pocket cost of education (Pb) paid by students.
3. Raising the amount of money the university gets to pocket per student enrolled
(Ps).
4. Causing resource misallocation and deadweight loss, assuming there was no
initial market failure in the market for education.
5. All of the above.
Question 13
If buyers and sellers are responsive to price changes, then taxes and subsidies (assuming
they are not Pigovian) create:
Answer
Question 14
Which of the following is likely to happen if a tax is placed on buyers in a market where
buyers and sellers are price responsive? Assume no initial market failure.
Answer
Question 15
Answer
Question 16
Suppose a market has a downward sloping demand curve but a flat or horizontal supply
curve. If a $2 per unit tax is placed on buyers in this market we can predict that:
Answer
Question 17
Which of the following would likely occur if workers are offered a subsidy?
Answer
Question 18
The difference between the buyer's price and the seller's price when a tax is imposed on a
market is called:
Answer
1. Reservation price.
2. Tax wedge.
3. Tax incidence.
4. Resource misallocation.
5. None of the above.
Question 19
Suppose the government places a tax of $10 per book on sellers of textbooks and as a
result we observe an $8 increase in textbook prices. Based on this information we can
predict that:
Answer
Question 20
If the government offers a subsidy to a market, the subsidy will be shared between buyers
and sellers according to:
Answer
Question 21
If workers and employers are equally responsive to changes in the price of labor, then if
the government places a tax on suppliers of labor, we can predict that the buyer's price
(Pb) will _____, the seller's price (Ps) will ______ and the tax burden will be ______.
Answer
Question 22
Answer
1. Pigovian subsidies are used to fix market failures.
2. Subsidies are shared by buyers and the sellers according to how responsive each is
to price changes.
3. Subsidies always lead to a more efficient allocation of scarce resources.
4. Pigovian subsidies increase economic surplus but non-Pigovian subsidies reduce
economic surplus.
5. Non-Pigovian subsidies encourage too much market activity.
Question 23
A $10,000 federal subsidy offered to each college student would provide a benefit of:
Answer
Question 24
Answer
Question 25
Which of the following states the rule for how the benefit of a subsidy gets distributed
between buyers and sellers of a product?
Answer
Question 26
Answer
Question 27
Answer
Question 28
Which of the following could be a reason for the government to offer buyers or sellers in
a market a subsidy?
Answer
Question 29
If we place a tax on supplier of a product and the supply curve is flatter than the demand
curve then we can predict that:
Answer
Question 30
If we place a tax on a product, who will bear more of the burden of the tax?
Answer
Question 31
Suppose the government needs to raise additional tax revenue and it is considering
placing a $1 per unit tax on market A, which has a current Pe=$10 and Qe=100 units or
market B, which also has a current Pe=$10 and Qe=100 units. Based on this information,
which market should it tax if it wants to raise the most tax revenue?
Answer
1. It can tax either market since it will earn $100 in revenue from either.
2. It should tax whichever market has the least price responsive buyers and sellers.
3. It should tax whichever market has the most price responsive buyers and sellers.
4. It should split the tax between the two markets, placing a $0.50 cent per unit tax
on each.
5. None of the above
Question 32
Which of the following statements is true regarding subsidies offered to buyers and/or
sellers of a product?
Answer
Question 33
Answer
Suppose we decide to offer a $1 per gallon subsidy to buyers of milk. Which of the
following predictions could we make regarding the impact of this subsidy on the market
for milk?
Answer
1. If milk consumers are more responsive than milk suppliers to price changes, then
milk consumers will get more of the subsidy.
2. If milk suppliers are less responsive than milk consumers to price changes, then
milk suppliers will get more of the subsidy.
3. The subsidy will have the same impact on milk price that a $1 per gallon tax
would have on milk price.
4. The subsidy will encourage market activity and increase economic surplus.
5. None of the above
Question 35
Answer
Question 36
Answer
Question 37
Suppose a market is not initially in market failure so that the free market outcome is the
socially optimal outcome. If we impose either a tax or a subsidy on this market then we
can predict that the market will:
Answer
1. Suffer resource misallocation and deadweight loss as a result of the tax because it
discourages market activity but not as the result of the subsidy since it encourages
market activity.
2. Suffer resource misallocation (RM) and deadweight loss (DWL), with the
amounts of these two harms being larger the less responsive buyers and sellers are
to price changes.
3. End up in a disequilibrium with Qd no longer equal to Qs. The market will
experience either an excess demand or an excess supply at the new final outcome.
4. All of the above
5. None of the above.
Question 38
Answer
1. It is certain that suppliers will bear the entire burden of the tax.
2. It is certain that suppliers and demanders will equally share the burden of the tax.
3. It is possible (but not certain) that suppliers will bear the entire burden of the tax.
4. The tax will be shared between suppliers and demanders according to how
responsive each is to price changes.
5. Both 3 and 4 are possible predictions
Question 39
Suppose producers are price responsive but buyers are not at all price responsive (buyers
are perfectly price inelastic). What would happen if producers were offered a $3 subsidy
for producing and selling their product to these consumers?
Answer
1. The supply curve would shift to the left and the subsidy would be shared equally
between buyers and sellers.
2. The market equilibrium price would fall, but it would fall by less than $3.
3. The supply curve would shift to the right and the subsidy would be shared
between suppliers and consumers with $1 going to suppliers and $2 going to
consumers.
4. This would result in resource misallocation and deadweight loss.
5. None of the above
Question 40
Answer
Question 41
Answer
1. It is the difference between the tax rate paid by the rich and the rate paid by the
poor.
2. It is the area between the old demand curve and new demand curve after it has
been shifted by a tax.
3. It is the difference between the total amount of tax paid by sellers and the total
amount of tax paid by buyers.
4. It is the difference between the price that sellers receive (and pocket) and the price
that buyers pay (out of pocket) after a tax has been imposed on a market.
5. It is the deadweight loss that occurs as a result of a tax.
Question 42
Which of the following statements about subsidies (that are not Pigovian) is false?
Answer
Question 43
Answer
Question 44
Answer
Question 45
If the government offers buyers a subsidy, the demand curve shifts _____ and if it offers
a subsidy to sellers, the supply curve shifts _____.
Answer
Question 46
Answer
Question 47
According to the article, “Device Makers Add Fee to Cover Health Tax,” Tampa General
Hospital bought about $114 million worth of medical devices this year. Based on this
current sales figure, the congressional budget forecasters estimate that the tax of 2.3% of
sales will raise approximately $29 billion in tax revenue for the government by the year
2022. For this projected revenue number to be accurate the forecasters must:
Answer
Have realized that this tax on device producers will cause them to increase price
which will decrease demand and shift the demand curve to the left causing a
reduction in device sales and revenues.
Have realized that device producers may absorb some of the tax by lowering wages
of workers, resulting in more of the device tax making its way to government tax
revenues.
Have factored in the likelihood that device buyers are responsive to price changes
and will likely reduce their quantity of devices demanded so that actual revenue
raised is less than this expected revenue raised.
Both 1 and 3
All of the above
Question 48
According to the article “Obama Tax Hikes,” which of the following statements describe
the results of the Obama tax plan?
Answer
Question 49
According to the article “The Rock and the Hard Place on the Deficit,” which of the
following statements are true about the study done by Christina and David Romer?
Answer
Question 50
According to the article, “Device Makers Add Fee to Cover Health Tax,”the new health
care law makes medical device makers (producers) pay a tax of 2.3% to help finance the
health care system and as a result we know that:
Answer
These device producers are passing at least some of this new tax on to their device
customers.
Hospital executives (device customers) say they are also footing the bill for this tax
as they sign new contracts to buy medical devices with higher prices.
Some medical device producers are explicitly passing this tax onto their customers
as a “medical device adjustment” surcharge and some are quietly “baking it into the
contract.”
All of the above
None of the above
Question 51
According to the article “The Rock and the Hard Place on the Deficit,”
Answer
Question 52
According to the article, “Device Makers Add Fee to Cover Health Tax,” the last
paragraph of the article says that “companies seen baking in the cost of the tax would feel
‘a very swift and vocal objection in the market-place’.” This quote means that:
Answer
Device producers will have a difficult time passing the entire tax onto device
consumers because device consumers are responsive to price changes and will
likely cut back on purchases if price rises.
Device producers will not be allowed to pass the tax onto device consumers because
special interest groups will lobby Congress for help against this unfair price
increase.
Device producers will lose all their product sales if they try to make device
consumers share the cost of the tax.
Device producers will be able to pass the tax entirely on to device consumers but
those consumers will be very unhappy about this.
None of the above
Question 53
According to the article “The Rock and the Hard Place on the Deficit,” why does
conventional analysis underestimate the effects of tax changes on the economy?
Answer
Question 54
According to the article “The Rock and the Hard Place on the Deficit,” conventional
analysis ____________ the effect of tax changes on the economy _________.
Answer
1. underestimates; slightly
2. underestimates; substantially
3. overestimates; slightly
4. overestimates; substantially
5. estimates; precisely
Question 55
According to the article “Obama Tax Hikes,” the Obama tax plan would result in:
Answer
Question 56
According to the article “Obama Tax Hikes,” how do tax increases affect the cost of
productive factors?
Answer
Question 57
Answer
1. The fundamental tax policy of the U.S. has been to increase tax burdens.
2. In Congress, there is bipartisan understanding that higher tax rates support
stronger economic growth.
3. Bush-era tax policies likely weakened the macro economy.
4. No Congress has voted to raise significant sums of new tax revenues since 1996.
5. All of the above
Question 58
According to the article “The Rock and the Hard Place on the Deficit,”
Answer
1. Poorer households typically pay more of a tax increase out of their savings than
wealthier households do.
2. Wealthier households typically pay more of a tax increase out of their savings
than poorer households do.
3. Tax increases typically cause wealthier households to reduce spending more than
they cause ordinary households to reduce spending.
4. Tax increases on wealthier households likely have a larger impact on the economy
than they have when placed on ordinary households.
5. None of the above.
Question 59
According to the article “The Rock and the Hard Place on the Deficit,” which of the
following statements are true about the study done by Christina and David Romer?
Answer