Deck 8: Welfare Economics and the Gains From Trade

Question 1

Social or welfare care is consumer surplus minus producer surplus.

Answer 1

False

Question 2

A normative criteria is a way of balancing benefits against costs.

Answer 2

True

Question 3

The efficiency criterion is normative in nature.

Answer 3

True

Question 4

A $5 per unit sales tax is bad for consumers because it implies that the total amount (price plus tax)that they must pay increases by $5.

Question 5

The value of a good is ultimately determined by the amount of labor needed to produce the good.

Question 6

One effect of a tax is that output in the market which is taxed falls.

Question 7

When the Pareto criterion is used to choose between different policies,any recommendation requires unanimous agreement.

Question 8

Even if total surplus is maximized,there is still a chance that there will be a deadweight loss.

Question 9

Consumer's surplus equals the total value that the consumer places on his purchases minus the amount he actually paid.

Question 10

A consumer's demand curve for pizza is identical to his total value curve for pizza.

Question 11

The Pareto criterion is a criterion under which any proposal that can be unanimously defeated should be rejected.

Question 12

To be effective,a price ceiling needs only to be enforced.

Question 13

Although a sales tax hurts both producers and consumers,their losses are fully offset by the benefits created by the tax revenues.

Question 14

A given level of output is efficient if no more social gain can be obtained from changing the output level.

Question 15

Consumers will benefit from a tariff,because it helps domestic firms and generates revenue for the government.

Question 16

According to the efficiency criterion,when a policy creates both winners and losers,it will be preferred to the status quo as long as the winners' gains outweigh the losers' losses.

Question 17

If a tax and a price control have the same effect on the price paid by consumers,then the two policies will create the same deadweight loss.

Question 18

If the potential Pareto criterion rejects a policy change,then the efficiency criterion will reject it as well.

Question 19

Market demand always represents marginal value.

Question 20

Producer's surplus is equal to total revenue minus consumer's surplus.

Question 21

Sales Tax

The following questions refer to the accompanying diagram shows the effects of a sales tax imposed on consumers. The initial price and quantity are P0 and Q0, respectively. After the tax is imposed, the equilibrium quantity is Q1, firms receive the price Ps, and consumers pay the price Pd.


-Refer to Sales Tax.After the tax is imposed,social gain is equal to

A) area A + D + E + G + H + J.
B) area B + C + F + I - J.
C) area A + B + C + D + E + F + G + H + I.
D) area A + B + C + D + F + G + I.

Question 22

In an Edgeworth box,all Pareto-optimal allocations lie within the region of mutual advantage.

Question 23

Sales Tax

The following questions refer to the accompanying diagram shows the effects of a sales tax imposed on consumers. The initial price and quantity are P0 and Q0, respectively. After the tax is imposed, the equilibrium quantity is Q1, firms receive the price Ps, and consumers pay the price Pd.


-Refer to Sales Tax.After the tax is imposed,consumers' surplus is equal to

A) area A + B.
B) area B.
C) area B + C.
D) area A + B + C + D + E.

Question 24

The marginal value that a consumer places on the last unit can be read off of the

A) demand curve.
B) supply curve.
C) contract curve.
D) production possibility curve.

Question 25

The Invisible Hand Theorem shows that competitive markets create the maximum possible social gain,even when all interactions among the markets are taken into account.

Question 26

The area beneath a consumer's demand curve out to the quantity purchased represents

A) consumer's surplus.
B) the region of mutual advantage.
C) the total value of the consumer's purchases.
D) the marginal value placed on the last unit consumed.

Question 27

Sales Tax

The following questions refer to the accompanying diagram shows the effects of a sales tax imposed on consumers. The initial price and quantity are P0 and Q0, respectively. After the tax is imposed, the equilibrium quantity is Q1, firms receive the price Ps, and consumers pay the price Pd.


-Refer to Sales Tax.The portion of the tax revenue ultimately paid by consumers is

A) area A + B + C + D.
B) area C + D.
C) area C + D + E.
D) area A + B + C + D + E.

Question 28

When a policy creates the most social gain possible,it is considered "best" by the

A) efficiency criterion.
B) Pareto criterion.
C) Edgeworth criterion.
D) maximin criterion.

Question 29

Large countries have more to gain from international trade than small countries do.

Question 30

Sales Tax

The following questions refer to the accompanying diagram shows the effects of a sales tax imposed on consumers. The initial price and quantity are P0 and Q0, respectively. After the tax is imposed, the equilibrium quantity is Q1, firms receive the price Ps, and consumers pay the price Pd.


-Refer to Sales Tax.Area C + D + F + G

A) the total value that consumers receive from their purchases.
B) the tax revenue collected by the government.
C) the fall in producers' surplus.
D) the deadweight loss due to the tax.

Question 31

If the marginal value of a third soda is $1.50 to Jackie,then

A) Jackie would be willing to pay no more than $4.50 for three sodas.
B) Jackie places a total value of less than $4.50 on three sodas.
C) Jackie would pay no more than $1.50 for an additional soda when she has already consumed 2 sodas.
D) Jackie would pay no more than $1.50 for any soda.

Question 32

The gains from international trade are greatest when a country's autarkic relative prices are similar to the world relative prices.

Question 33

Sales Tax

The following questions refer to the accompanying diagram shows the effects of a sales tax imposed on consumers. The initial price and quantity are P0 and Q0, respectively. After the tax is imposed, the equilibrium quantity is Q1, firms receive the price Ps, and consumers pay the price Pd.


-Refer to Sales Tax.Prior to the sales tax,which of the following was false?

A) Consumer surplus was A+B+C+D+E.
B) Producer surplus was F+G+H+I+J.
C) Government tax revenue was zero.
D) Dead-weight loss was zero.

Question 34

Policy B will be judged to be better than another by the Pareto criterion when

A) Policy B is preferred unanimously.
B) Policy B would win a majority of votes.
C) there is no deadweight loss associated with Policy B.
D) any fair minded person would recognize that Policy B is fair and equitable.

Question 35

The price of a good accurately reflects the total value it creates for society.

Question 36

A country will gain from international trade whenever the world relative price differs from the autarkic relative price.

Question 37

Which of the following normative criteria rejects a policy whenever there exists an alternative policy that could unanimously defeat it?

A) Majority rule.
B) The efficiency criterion.
C) The Pareto criterion.
D) The potential Pareto criterion.

Question 38

A result of selling concert tickets cheaply,that is below the equilibrium price,will be that

A) only those with nothing else to do will wait in line to buy a ticket.
B) ticket buyers' benefits increase,at the expense of the performers.
C) the costs associated with competition among buyers for the limited number of tickets will create deadweight losses.
D) more tickets will be sold than if the price were at the market equilibrium.

Question 39

Sales Tax

The following questions refer to the accompanying diagram shows the effects of a sales tax imposed on consumers. The initial price and quantity are P0 and Q0, respectively. After the tax is imposed, the equilibrium quantity is Q1, firms receive the price Ps, and consumers pay the price Pd.


-Refer to Sales Tax.After the tax is imposed,the deadweight loss is equal to

A) area A + D + G.
B) area F + G + H.
C) area E + H.
D) area E + H + J.

Question 40

In an Edgeworth box economy,a competitive equilibrium must lie on the contract curve within the region of mutual advantage.

Question 41

Refer to Edgeworth Box Economy.In an Edgeworth box,points within the region of mutual advantage represent allocations that

A) can be achieved by a competitive market.
B) both consumers prefer to the initial endowment.
C) exhaust the potential gains from trade.
D) are Pareto optimal.

Question 42

Which of the following would not be an example of a nonproductive activity creating social losses?

A) Accountants seeking methods of tax avoidance for their clients.
B) Lawyers engaged in litigation that would transfer money from one group to another.
C) Lawyers hired to assist two parties in writing a contract.
D) Lobbyists seeking laws that would transfer public lands to private parties without any payment.

Question 43

An explanation for how the price of water can be less than the price of diamonds,even though water is more valuable,is that

A) price is a poor guide to value.
B) markets for water and diamonds are not competitive.
C) price reflects marginal value,not total value.
D) diamond production requires more labor,and value is based on labor.

Question 44

The following questions refer to the accompanying diagram shows the effects of an excise subsidy given to firms. The initial price and quantity are P0 and Q0, respectively. After the subsidy is granted, the equilibrium quantity is Q1, firms receive the price Ps, and consumers pay the price Pd.


-Refer to Excise Subsidy.After the subsidy is granted,producers' surplus equals

A) area A + B + E + H.
B) area E + H + F + I.
C) area B + C + E + H.
D) area H.

Question 45

The following questions refer to the accompanying diagram shows the effects of an excise subsidy given to firms. The initial price and quantity are P0 and Q0, respectively. After the subsidy is granted, the equilibrium quantity is Q1, firms receive the price Ps, and consumers pay the price Pd.


-Refer to Excise Subsidy.The deadweight loss created by the subsidy is represented by

A) area F + G.
B) area D + G + J.
C) area C.
D) area D.

Question 46

Refer to Edgeworth Box Economy.The initial holdings of an individual in an Edgeworth box is referred to as

A) the contract point.
B) the endowment point.
C) the Pareto preferred point.
D) the competitive equilibrium point.

Question 47

The following questions refer to the accompanying diagram shows the effects of an excise subsidy given to firms. The initial price and quantity are P0 and Q0, respectively. After the subsidy is granted, the equilibrium quantity is Q1, firms receive the price Ps, and consumers pay the price Pd.


-Refer to Excise Subsidy.Which areas count as part of the measure for both consumer's surplus and producer's surplus?

A) areas A,B,E and H.
B) areas B,E and F.
C) areas B and E.
D) no areas can count as part of the measure for both.

Question 48

Refer to Edgeworth Box Economy.Analysis of an Edgeworth box economy shows that a competitive equilibrium

A) must be Pareto optimal.
B) can be located anywhere along the contract curve.
C) may lie anywhere within the region of mutual advantage.
D) must lie to the southeast of the endowment point.

Question 49

Price Ceiling

The following questions refer to the accompanying diagram shows the effects of a price ceiling. The initial price and quantity are P0 and Q0, respectively, and the price ceiling is imposed at the price P1. Assume that none of the potential deadweight loss can be avoided.

-Refer to Price Ceiling.The price ceiling creates a deadweight loss equal to

A) area A + H.
B) area B + C + D + E.
C) area B + D.
D) area C + E.

Question 50

According to the Invisible Hand Theorem,when competitive markets are used to allocate resources

A) no further gains from trade can be created.
B) selfish behavior will cause socially undesirable outcomes.
C) the resulting distribution of income will be fair and equitable.
D) each good's price will equal the value of the labor used in its production.

Question 51

Price Ceiling

The following questions refer to the accompanying diagram shows the effects of a price ceiling. The initial price and quantity are P0 and Q0, respectively, and the price ceiling is imposed at the price P1. Assume that none of the potential deadweight loss can be avoided.

-Refer to Price Ceiling.After the price ceiling is imposed,consumers' surplus is equal to

A) area A.
B) area A + B.
C) area A + B + D.
D) area A + B + C + D + E + F + G.

Question 52

Which of the following best summarizes the essence of the Invisible Hand Theorem?

A) Competitive markets guarantee that any shortages or surpluses existing in an economy will be quickly eliminated.
B) Of all the possible economic systems,competitive markets are the most philosophically compatible with democracy and freedom.
C) Within competitive markets,people who selfishly pursue their own interests end up achieving a socially desirable outcome.
D) The social gain created by competitive markets is second only to what a hypothetical benevolent dictator could achieve.

Question 53

Price Ceiling

The following questions refer to the accompanying diagram shows the effects of a price ceiling. The initial price and quantity are P0 and Q0, respectively, and the price ceiling is imposed at the price P1. Assume that none of the potential deadweight loss can be avoided.

-Relative to before the price ceiling,how much surplus do producers lose because of the ceiling?

A) Area D + E + H
B) Area D + E
C) Area D + E + F
D) Area H.

Question 54

The following questions refer to the accompanying diagram shows the effects of an excise subsidy given to firms. The initial price and quantity are P0 and Q0, respectively. After the subsidy is granted, the equilibrium quantity is Q1, firms receive the price Ps, and consumers pay the price Pd.


-Refer to Excise Subsidy.The amount of the subsidy paid to firms is given by

A) area A + B + E + H.
B) area B + C + D + E + F + G.
C) area D.
D) area F + G + I + J.

Question 55

To fully analyze the effects of a tariff on imports of tomatoes,an economist needs

A) only to know the supply and demand curves in the market for tomatoes.
B) only to know about supply and demand in the market for tomatoes and in markets for other products tomato farmers grow.
C) to use general equilibrium analysis.
D) to use a production possibilities curve.

Question 56

Refer to Edgeworth Box Economy.In an Edgeworth box,a point where two indifference curves are tangent represents

A) the initial endowment point.
B) an allocation that both consumers prefer to the initial endowment.
C) a competitive equilibrium.
D) a Pareto-optimal allocation of goods.

Question 57

Refer to Edgeworth Box Economy.Based on the situation shown in the diagram,we can conclude that

A) Augie and Bev have reached a competitive equilibrium.
B) the relative price of food must rise to clear the market.
C) both point X and point Y must lie on the contract curve.
D) there is a shortage of clothing and a surplus of food.

Question 58

Price Ceiling

The following questions refer to the accompanying diagram shows the effects of a price ceiling. The initial price and quantity are P0 and Q0, respectively, and the price ceiling is imposed at the price P1. Assume that none of the potential deadweight loss can be avoided.

-Refer to Price Ceiling.Area B + D represents

A) the deadweight loss due to the price ceiling.
B) the fall in consumers' surplus caused by the imposition of the price ceiling.
C) the value of the time and resources spent by consumers to acquire the limited supply.
D) the post-ceiling profits earned by the producers of the good.

Question 59

When the supply curve is flat,a tariff on imported goods

A) always increases the welfare of Americans.
B) always decreases the welfare of American..
C) has no effect on the welfare of Americans.
D) only affects the welfare of Americans if the goods are also made domestically .

Question 60

Suppose that the average football player earns $1 million per year and that there are 500 players.The average school teacher earns $25,000 per year and there are 1 million teachers.From this we can say that

A) football players are paid too much.
B) teachers are paid too little.
C) the group of football players must be more valuable than teachers as a group.
D) teachers as a group are more valuable than the group of football players.

Question 61

Consider the following:
How does the tariff affect consumers' surplus and producers' surplus? How much tariff revenue is collected by the government? Does imposing the tariff cause the country's social gain to rise or fall?
How does the tariff affect consumers' surplus and producers' surplus in this situation? How much tariff revenue is collected by the government? When a "large country" imposes a tariff,will its social gain rise or fall?

Question 62

If demand is downward sloping and there is tax on the good,Consumer surplus equals

A) The area between the demand curve and the price,up to the equilibrium quantity.
B) Total surplus minus producer surplus.
C) Total surplus minus producer surplus and government tax revenue.
D) Total surplus minus producer surplus,government tax revenue,and dead-weight loss.

Question 63

Consider points A,B,C,and D shown in the accompanying Edgeworth box diagram.

Question 64

Demand in a perfectly competitive market is Q = 100 - P.Supply in that market is Q = P - 10.What is the market equilibrium price and quantity? Given that price and quantity,how much consumer surplus,producer surplus,and deadweight loss is there? If the government imposes a $10 per unit sales tax,what is the new equilibrium price and quantity? Once the government imposes the tax,how consumer surplus,producer surplus,and dead-weight loss is there?

Question 65

Why is a small country more likely to gain from international trade than a large country?

A) Because autarkic relative prices in a small country are likely to be quite different from the world relative prices.
B) Because a small country,unlike a large country,does not have the resources it needs to be self-sufficient.
C) Because small countries tend to be specialized in their production,while large countries tend to be diversified.
D) Because a small country is less likely to encounter decreasing returns to scale than is a large country.

Question 66

If the autarkic and world relative prices are equal,then

A) consumers are better off with trade than without trade.
B) the country has the option of supplying either good in the world market.
C) no gains from trade are possible.
D) the world markets are not in equilibrium.

Question 67

Refer to Tax Problem.In the absence of any government intervention (e.g.taxes or price controls),the market equilibrium is

A) P = 45,Q = 45
B) P = 55,Q = 45
C) P = 45,Q = 55
D) P = 55,Q = 55

Question 68

Consider the following:

Question 69

Demand in a perfectly competitive market is Q = 100 - P.Supply in that market is Q = P - 10.What is the market equilibrium price and quantity? Given that price and quantity,how much consumer surplus,producer surplus,and deadweight loss is there? If the government imposes a $40 price ceiling,what quantity will be produced and sold? Assuming that those who value the good the most actually get after the ceiling is imposed,how much consumer surplus,producer surplus,and dead-weight loss is there?

Question 70

In an open economy in which only two goods are produced and possibly traded,we would find that

A) production occurs where the production possibility curve is tangent to a line with the slope equal to the ratio of the world relative prices.
B) production occurs where an indifference curve is tangent to the production possibilities curve.
C) consumption occurs where an indifference curve is tangent to the production possibilities curve.
D) consumption occurs where the production possibilities curve is tangent to a line with a slope equal to the ratio of the world relative prices.

Question 71

d. 1600.

Question 72

The diagram below shows Spencer's annual demand for videos.Spencer currently rents videos from Blockpopper's,which charges $2.50 per rental.

Question 73

All of the following statements about the free market equilibrium output are equivalent except:

A) Total surplus is maximized.
B) There is zero dead-weight loss.
C) There are no allocations that a Pareto preferred.
D) There is positive dead-weight loss.

Question 74

Suppose there are two goods: guns and roses.Also suppose Australia is initially closed to trade.When international trade is opened,Australia chooses to sell guns and buy roses in the world markets.

Question 75

Refer to Tax Problem.If the government imposes a $10 per unit consumption tax,then the market will produce

A) 20 units
B) 40 units
C) 45 units
D) 90 units

Question 76

Define the term deadweight loss.Will there be a deadweight loss if a good's marginal cost exceeds its marginal value? Explain.

Question 77

Refer to Tax Problem.The deadweight loss due to a $10 per unit consumption tax is

A) zero.
B) $10.
C) $25.
D) $50.