Week 9 Quiz Key

Question 1

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

There will be only a small reduction in gasoline market activity.

There will be only a small amount of resource misallocation.

There will be only a small amount of deadweight loss.

Gasoline suppliers will likely experience higher sales revenues.

All of the above.

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

1. Whether Pb rises or falls; whether Ps rises or falls.

2. Whether RM is too many or too few units bought and sold; whether DWL is positive or

negative.

3. Whether Pe rises or falls; whether Qe rises or falls.

4. Whether Pe rises or falls; whether demand shifts or supply shifts.

5. None of the above.

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%.


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.


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

1. No resource misallocation; 100%.

2. No resource misallocation; 0%.

3. A large amount of resource misallocation; impossible to determine with information

given.

4. A small but positive amount of resource misallocation; impossible to determine with

information given.


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

Taxation 100 100 $10 $10

After

Taxation 80 80 $11 $9

Answer

1. $2 per unit; impossible to determine with the information given.

2. $1 per unit; sellers.

3. $1 per unit; buyers.

4. $2 per unit; both buyers and sellers at the same time.


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

1. 20 units too few bought and sold ; $60.

2. 0, since this improved market activity ; $0, since this improved market activity.

3. 520 units too many bought and sold ; $1560.

4. 30 units too few bought and sold ; $30.

5. 20 units too many bought and sold ; $30.

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.


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

1. None of the tax; not change.

2. Most of the tax; reduce.

3. All of the tax; not change.

4. Part of the tax; reduce.


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 doesnt 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 doesnt 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.


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.


Question 13

If buyers and sellers are responsive to price changes, then taxes and subsidies (assuming

they are not Pigovian) create:

Answer

1. Extra revenue for the government.

2. Increased producer surplus.

3. Increased economic surplus.

4. Deadweight loss.


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

1. There will be a reduction of market activity.

2. There will be a reduction in economic surplus.

3. Resources will be misallocated.

4. Both buyers and sellers will share the tax burden.


Question 15

What is a "tax wedge"?

Answer

1. The difference between Democratic and Republican desired tax policy.

2. The difference between the highest and lowest marginal tax rate used in the

United States.

3. The amount of resource misallocation that is caused by tax policy.

4. The difference between the buyer's price and seller's price that arises as a result of

taxing a market.

5. The difference between consumer surplus and producer surplus that arises as a

result of taxing a market.

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

1. Ps will stay the same but Pb will rise by $2.

2. Neither Ps nor Pb will change.

3. Ps will fall by $1 and Pb will rise by $1.

4. Ps will fall by $2 but Ps won?t change.

5. None of the above

Question 17

Which of the following would likely occur if workers are offered a subsidy?

Answer

1. The equilibrium quantity of labor will decrease.

2. The equilibrium price of labor will increase.

3. The subsidy will be shared by workers and employers.

4. all of the above

5. none of the above

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.


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

1. |Ed|1

2. |Ed|>Es

3. |Ed|0 and Es

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

1. Exactly $10,000 to each student.

2. Exactly $10,000 to each college enrolling a student.

3. $10,000 to students and colleges but the benefit would likely be shared by them.

4. Exactly $10,000 to each student and also $10,000 to each college enrolling a

student.

5. $0, since subsidies have no net impact on well-functioning markets.

Question 24

If we offer a subsidy to buyers of a product, we can be sure that:

Answer

1. Buyers will get the entire benefit of the subsidy.

2. Buyers may or may not get benefit of the subsidy, depending on how responsive

they are to price changes relative to how responsive sellers are to price changes.

3. Buyers will get exactly half of the benefit of the subsidy.

4. Economic surplus will increase.

5. Both 2 and 4.

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

1. Whoever is more responsive to price changes gets more of the subsidy.

2. Whoever is less responsive to price changes gets less of the subsidy.

3. Whoever is more responsive to price changes gets less of the subsidy.

4. Regardless of price responsiveness, the subsidy will be shared evenly.

5. Whoever officially is offered the subsidy by the government gets all of the

subsidy benefit.

Question 26

In order to figure out how a tax burden is shared, we need to know:

Answer

1. Price elasticity of demand and price elasticity of supply.

2. Size of the imposed tax.

3. Number of buyers and sellers in the market.

4. Monopolistic position of the seller in the market.

5. Detailed information on government tax policy

Question 27

If we impose a tax on workers:

Answer

the entire tax burden will be borne by workers

the labor supply curve will shift to the right.

there will be no deadweight loss.

the equilibrium price of labor will probably increase.

none of the above

Question 28

Which of the following could be a reason for the government to offer buyers or sellers in

a market a subsidy?

Answer

1. To encourage market activity

2. To fix a market failure

3. To reduce a Deadweight loss

4. Above all

5. None of all

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

1. Suppliers will bear less of the tax burden.

2. Suppliers will bear more of the tax burden.

3. Suppliers will bear all of the tax burden.

4. Suppliers will bear none of the tax burden.

5. Suppliers and demanders will equally share the tax burden.

Question 30

If we place a tax on a product, who will bear more of the burden of the tax?

Answer

1. The demanders of a good always pay more of the tax burden.

2. The suppliers of a good always pay more of the tax burden.

3. Whoever is more responsive to price changes pays more of the tax burden.

4. Whoever is less responsive to price changes pays more of the tax burden.

5. The demanders of a good and the suppliers of a good always split the tax burden

equally.

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.


Question 32

Which of the following statements is true regarding subsidies offered to buyers and/or

sellers of a product?

Answer

1. Subsidies tend to reduce market activity.

2. Buyers get more of the subsidy if demand is more price elastic than supply.

3. Subsidies do not change the amount of consumer surplus or producer surplus

earned.

4. Subsidies encourage market activities, leading to a more efficient use of scarce

resources.


Question 33

Which of the following is true regarding subsidies?

Answer

1. Whoever is more responsive to price changes gets less of the subsidy

2. Whoever is less responsive to price changes gets more of the subsidy.

3. Subsidies tend to encourage market activity because they lower the cost of

participating in the market.

4. Sometimes subsidies occur in response to perceived positive externalities.

5. All of the Above

Question 34

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.


Question 35

A tax on employers of labor will:

Answer

1. Shift the labor demand curve to the right.

2. Shift the labor supply curve to the left.

3. Shift the labor supply curve vertically down.

4. Shift the labor demand curve to the left.


Question 36

What happens if producers of a product are offered a subsidy?

Answer

1. Both supply and demand shift to the right.

2. Both supply and demand shift to the left.

3. Supply shifts to the right.

4. Demand shifts to the right.

5. Supply shifts to the left.

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


Question 38

If we impose a tax on the suppliers of a product, we could predict that:

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.


Question 40

A properly established Pigovian subsidy:

Answer

1. Is always shared equally between buyers and sellers.

2. Neither encourages nor discourages market activity.

3. Does not cause resource misallocation or deadweight loss.

4. All of the above


Question 41

Which of the following best describes a "tax wedge"?

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

1. Subsidies encourage market activity.

2. Subsidies result in more economic efficiency and do not result in deadweight

losses.

3. Subsidies can be offered to either demanders or suppliers in a market.

4. Subsidies to suppliers shift the supply curve to the right.

5. Subsidies can result in a misallocation of resources.

Question 43

Which of the following may result in a deadweight loss to the economy?

Answer

1. A tax placed on the demanders of a product.

2. A subsidy offered to the demanders of a product.

3. A tax placed on the suppliers of a product.

4. A subsidy offered to the suppliers of a product.


Question 44

Who receives the benefit of a subsidy offered to consumers of a product?

Answer

1. The subsidy is helpful to buyers since this is a subsidy to consumers.

2. The subsidy is helpful to sellers since the buyers are purchasing more.

3. The subsidy is helpful to buyers and sellers, with the more responsive party

receiving less of the subsidy.

4. The subsidy is not helpful to buyers nor sellers because the government is creating

a deadweight loss.

5. The subsidy is helpful to buyers and sellers, with the more responsive party

receiving more of the subsidy.

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

1. to the right; to the right

2. to the right; to the left

3. to the left; to the right

4. to the left; to the left

5. vertically up; vertically up

Question 46

What is a Pigovian subsidy?

Answer

1. It is a subsidy to help the poor.

2. It is a subsidy to fix a market failure caused by the existence of a positive

externality.

3. It is a subsidy to protect the rich.

4. It is subsidy that comes from a government welfare program.


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

1. Slower economic growth

2. Fewer jobs

3. More unemployed Americans

4. All of the above


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

1. Prominent Reagan-era supply-side economists hypothesized that a tax increase

would lead to a reduction in tax revenues.

2. A large number of academic studies have found that the impact of higher tax rates

on economic growth are relatively small.

3. Higher tax rates reduce the rewards of work and investing.



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

1. Spending cuts will slow economic recovery in the near term.

2. Tax increases will slow economic recovery in the near term.

3. Spending cuts will likely slow economic recovery in the near term less than tax

increases will slow economic recovery.

4. All of the above


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

1. Because conventional analysis uses wrong models.

2. Because conventional analysis links the tax changes to what is happening in the

economy.

3. Because conventional analysis is done by the non-economists.

4. Because conventional analysis uses wrong data.


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

1. Faster economic growth.

2. More jobs.

3. More unemployed Americans.

4. Increased business investment.

5. All of the above

Question 56

According to the article Obama Tax Hikes, how do tax increases affect the cost of productive factors?

Answer

1. Tax increases increase factor costs.

2. Tax increases decrease factor costs.

3. Tax increases do not affect factor costs.

4. Tax increases affect factor costs ambiguously.


Question 57

According to the article Obama Tax Hikes,

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.


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

1. The study examined only federal tax policy.

2. The study examined both federal and state tax policies.

3. The study addresses the key problem of the conventional analysis of the effect of

tax changes.


5. Both 1 and 3.

Week 9 Quiz Key

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