Exam 2

Question 1

With a tax on producers, supply

Answer 1

Decreases

Question 2

The price paid by buyers minus the price paid by sellers equals

Answer 2

the tax whether it is imposed on buyers or on sellers.

Question 3

When demand is more elastic than supply,

Answer 3

producers bear the majority of the tax burden.

Question 4

Assume that cigarettes sell for $7 per pack in New Jersey and $3 per pack in South Carolina, and New Jersey taxes cigarettes at $3.00 per pack and South Carolina taxes cigarettes at $0.10 per pack. How might cigarette sellers respond to the after-tax price differential between the two states?

Answer 4

Cigarette sellers will increase the supply of cigarettes to New Jersey and decrease the supply of cigarettes to South Carolina.

Question 5

If a $2 tax on cigarettes decreases both consumer and producer surplus,

Answer 5

tax revenues will be less than the amount of the lost consumer and producer surplus.

Question 6

The U.S. Congress first instituted the minimum wage in:

Answer 6

1938.

Question 7

Stating that TR = TC is equivalent to stating that:

Answer 7

P = AC.

Question 8

The Centers for Disease Control and Prevention (CDC) wants at least 90 percent of the population vaccinated against preventable diseases, since the chance of a disease outbreak decreases as vaccine coverage increases. We can conclude that:

Answer 8

the external benefits of vaccination likely decrease as more and more people are vaccinated.

Question 9

An external cost:

Answer 9

is a cost paid by people other than the producer or consumer trading in the market.

Question 10

An external benefit in a market will cause the market to produce:

Answer 10

less than is socially desirable.

Question 11

Why do many consumers and politicians advocate for price controls?

Answer 11

Price controls appear to be a straightforward response to the problem of price increases.

Question 12

Markets are advantageous over central planning as methods of resource allocation because:

Answer 12

resources travel to their highest value uses.

Question 13

When the minimum price that can be legally charged is above the market price, we say there is a price:

Answer 13

floor.

Question 14

Which of the following encompasses all the relevant information about the uses of a particular good?

Answer 14

the price of the good

Question 15

The long-run supply curve for rent-controlled apartments is generally more inelastic than the short-run supply curve.

Answer 15

False

Question 16

Which of the following is TRUE?

Price times quantity equals profit.

Profit equals marginal revenue minus marginal cost.

Profit equals total revenue minus average cost.

Profit equals (price minus average cost) times quantity.

Answer 16

Profit equals (price minus average cost) times quantity.

Question 17

To maximize profit firms should keep producing as long as marginal revenue is:

Answer 17

greater than marginal cost.

Question 18

If price controls are so harmful, why would a country ever impose them?

Answer 18

Politicians have strong incentives to respond to the public when prices increase sharply.

Question 19

Average total cost is equal to total cost divided by profit.

Answer 19

False

Question 20

It is Valentine’s Day in the United States, and you give your lover one dozen roses that were freshly picked 72 hours ago from the fields of Kenya. What made this gift possible?

Answer 20

economic markets

Question 21

If a tax is imposed on a market with inelastic demand and elastic supply:

Answer 21

buyers will bear most of the burden of the tax.

Question 22

Rent controls are:

Answer 22

an inefficient way to help the poor in raising their standard of living.

Question 23

The best way to help the poor afford housing is by:

Answer 23

issuing housing vouchers.

Question 24

Futures markets in coal can signal which of the following kinds of information?

Answer 24

when the coal seams may run out
changes in the industrial demand for coal
the effect of the projected arrival of coal substitutes
All of the answers are correct.

Question 25

With fluctuating prices in an industry, firms are likely to:

Answer 25

consider lifetime profits of entering or exiting the industry.

Question 26

Which of the following statements is NOT true for a case in which the demand for labor is more elastic than the supply of labor?

Answer 26

Firms cannot escape the cost of health insurance for labor by employing fewer workers.

Question 27

Which of the following is the correct answer to the question: Why do smokers pay almost all the taxes assessed on cigarettes?
I. Because they are addictive, the demand for cigarettes is relatively elastic when compared to the supply curve of cigarettes.
II. Because they are addictive, the demand for cigarettes is relatively inelastic when compared to the supply of cigarettes.
III. Cigarette manufacturers can very easily escape a state tax by selling in a different state.

Answer 27

II and III only

Question 28

Which of the following statements is TRUE?

Entry and exit from an industry depend on the firm’s market share.

Fixed costs fall as firms produce more output, the so-called “spreading of the costs.”

High profits in an industry give entrepreneurs an incentive to enter that industry.

A firm should enter an industry if average costs are less than producer surplus.

Answer 28

High profits in an industry give entrepreneurs an incentive to enter that industry.

Question 29

John and Tom enter into a futures contract where John agrees to deliver 500 crates of coffee to Tom one year from now. Tom agrees to pay a price of $200 per crate. A year from now, John and Tom find that the market price of coffee is $210 per crate. How might they make a cash settlement on the contract?

Answer 29

John will offer $5,000 to Tom and not deliver any crates of coffee.

Question 30

If a price floor is above the equilibrium price it will have no effect in the market.

Answer 30

False

Question 31

A subsidy is:

Answer 31

• similar to a reverse tax.
• calculated as the price received by sellers minus the price paid by buyers.
• paid for by taxpayers.
• answer choices are correct.

Question 32

If the demand and supply curves have equal slopes in absolute value, the burden of a commodity tax will be split equally regardless of on whom the tax is placed.

Answer 32

True

Question 33

Firms should enter the industry if marginal revenue is greater than the total costs.

Answer 33

False

Question 34

When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.

Answer 34

too high; too low

Question 35

The major factor determining the price of orange juice futures is the:

Answer 35

weather

Question 36

If a seller facing excess demand is unable to raise the price of the good due to a price ceiling, a likely result will be:

Answer 36

a decrease in the quality of the product.

Question 37

Markets are linked in unpredictable and creative ways by

Answer 37

entrepreneurs who look for methods of cutting costs.