Question 1

When a price floor is above the equilibrium price,

Accepted Answer

A)  quantity demanded will exceed quantity supplied, so there will be a shortage. 
B)  quantity supplied will exceed quantity demanded, so there will be a surplus. 
C)  the market will be in equilibrium. 
D)  This is a trick question because price floors are generally set below the equilibrium price.

Question 2

The Laffer curve indicates that

Accepted Answer

A)  when tax rates are low, a decrease in tax rates is likely to increase tax revenues. 
B)  when tax rates are high, an increase in tax rates is likely to a decrease in tax revenues. 
C)  tax revenue will always increase when tax rates are increased. 
D)  tax revenue will always decrease when tax rates are lowered.

Question 3

Other things constant, as the price of a resource increases,

Accepted Answer

A)  the quantity of the resource demanded falls. 
B)  the quantity of the resource supplied falls. 
C)  the price of the product the resource helps to produce falls. 
D)  there is less of an incentive for users of the resource to find substitute resources.

Question 4

Figure 4-22 
Refer to Figure 4-22. From this tax the government will collect a total of

Accepted Answer

A)  $125.00. 
B)  $175.00. 
C)  $200.00. 
D)  $250.00.

Question 5

During the imposition of price controls in the 1970s, long gasoline lines were common. In the absence of price controls, markets would have eliminated such excess demand by

Accepted Answer

A)  allowing the price to rise, so gas was rationed to those willing to pay the most for it. 
B)  increasing the gap between supply and demand. 
C)  allowing price to decline, so the poor could afford to buy more gas. 
D)  mandating a 50-mile-per-hour speed limit to reduce consumption.

Question 6

Which of the following will most likely occur when government price controls fix the price of a good above market equilibrium?

Accepted Answer

A)  Waiting lines to buy the good will develop. 
B)  The quality of the good will deteriorate. 
C)  Consumers will buy more than they would at the market equilibrium price. 
D)  A surplus of the good will develop.

Question 7

Rent controls tend to cause persistent imbalances in the market for housing because

Accepted Answer

A)  Quantity demanded exceeds quantity supplied but price cannot rise to remove the shortage. 
B)  Quantity demanded exceeds quantity supplied but price cannot fall to remove the surplus. 
C)  Quantity supplied exceeds quantity demanded but price cannot rise to remove the shortage. 
D)  Quantity supplied exceeds quantity demanded but price cannot fall to remove the surplus.

Question 8

In a market economy, which of the following would most likely cause a prolonged grain surplus?

Accepted Answer

A)  a decrease in the demand for grain 
B)  an increase in the supply of grain 
C)  imposition of a price floor above the equilibrium price of grain 
D)  imposition of a price ceiling below the equilibrium price of grain

Question 9

A tax imposed on the sellers of a good will

Accepted Answer

A)  raise the price paid by buyers and lower the equilibrium quantity. 
B)  raise the price paid by buyers and raise the equilibrium quantity. 
C)  raise the net price received by sellers and raise the equilibrium quantity. 
D)  raise the net price received by sellers and lower the equilibrium quantity.

Question 10

Use the table below to choose the correct answer.

For the income range illustrated, the tax shown here is

Accepted Answer

A)  regressive. 
B)  proportional. 
C)  progressive. 
D)  progressive up to $30,000 but regressive beyond that.

Question 11

Rent control applies to about two-thirds of the private rental housing in New York City. Economic theory suggests that the below-equilibrium prices established by rent controls would

Accepted Answer

A)  create a surplus of rental housing. 
B)  promote a rapid increase in the future supply of housing. 
C)  result in poor service and quality deterioration of many rental units. 
D)  lead to a reduction in housing discrimination against minorities.

Question 12

A substantial revision of the income tax code that made business and personal tax returns much easier to complete would tend to cause which of the following changes in the labor market for accountants?

Accepted Answer

A)  an increase in the demand for accountants 
B)  an increase in the employment of accountants 
C)  a decrease in the wage rate of accountants 
D)  an increase in the number of students choosing to major in accounting

Question 13

Suppose the demand curve for a good is highly elastic and the supply curve is highly inelastic. If the government taxes this good,

Accepted Answer

A)  buyers and sellers will each share 50 percent of the burden, regardless of the elasticities of the demand and supply curves. 
B)  sellers will bear a larger share of the tax burden. 
C)  the distribution of the burden will depend upon whether the buyers or the sellers are required to send the tax to the government. 
D)  buyers will bear a larger share of the tax burden.

Question 14

Which of the following examples illustrates a proportional income tax?

Accepted Answer

A)  I earn $5,000 and pay $500 in taxes; you earn $10,000 and pay $1,000 in taxes. 
B)  I earn $5,000 and pay $500 in taxes; you earn $10,000 and pay $500 in taxes. 
C)  I earn $5,000 and pay $500 in taxes; you earn $10,000 and pay $800 in taxes. 
D)  I earn $5,000 and pay $500 in taxes; you earn $10,000 and pay $1,200 in taxes.

Question 15

In 2010 the federal government reduced the Social Security tax withholding rate from 12.4 percent (6.2 percent on both the employer and employee) to 8.4 percent (4.2 percent on both the employer and employee) on the wages of all workers. If the supply of labor is relatively inelastic when compared to the elasticity of the demand for labor, the burden of this tax will

Accepted Answer

A)  continue to fall primarily on employees. 
B)  continue to fall primarily on employers. 
C)  be divided equally between employees and employers. 
D)  change from primarily falling on employees to employers.

Question 16

Use the figure below to answer the following question(s).
Figure 4-7

Refer to Figure 4-7. The supply curve S 1 and the demand curve D indicate initial conditions in the market for gasoline. A $.60-per-gallon excise tax on gasoline is levied. How much revenue does the $.60-per-gallon tax generate for the government?

Accepted Answer

A)  $40 billion 
B)  $48 billion 
C)  $50 billion 
D)  $60 billion

Question 17

If the Federal government enacts a new excise tax of $1.50 per six-pack of beer. Which of the following is most likely to occur?

Accepted Answer

A)  Consumers of beer will pay a higher price and buy a larger quantity. 
B)  Consumers of beer will pay a higher price, which will increase the profits of beer companies, inducing them to sell a larger quantity. 
C)  Consumers of beer will pay a higher price and buy a smaller quantity. 
D)  Consumers of beer will buy less wine from France.

Question 18

Figure 4-20 
Refer to Figure 4-20. The equilibrium price in the market before the tax is imposed is

Accepted Answer

A)  $8. 
B)  $6. 
C)  $5. 
D)  $3.

Question 19

Because of price controls in the former Soviet Union, people often waited in long lines for food and other necessities. Modern economic theory would indicate that, relative to price rationing, waiting in line is

Accepted Answer

A)  just as efficient. 
B)  less efficient because the time spent waiting in line imposes an opportunity cost on the buyer that does not generate revenue for the seller. 
C)  more efficient since waiting in line reduces the transaction costs of purchasing goods. 
D)  more efficient since waiting in line reduces the cost of the goods to the consumer.

Question 20

Figure 4-25 
Refer to Figure 4-25. The tax causes a reduction in consumer surplus that is represented by area

Accepted Answer

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

Exam 4: Supply and Demand: Applications and Extensions