Deck 4: Supply and Demand: Applications and Extensions

Question 1

A $25 government subsidy paid directly to buyers of jeans will result in

A) a downward shift in the demand curve for jeans by $25.
B) an upward shift in the demand curve for jeans by $25.
C) a downward shift in the supply curve for jeans by $25.
D) an upward shift in the supply curve for jeans by $25.

Answer 1

an upward shift in the demand curve for jeans by $25.

Question 2

A subsidy is defined as

A) a payment that must be made to the government whenever a good or service is sold.
B) the number of trades that are eliminated from a market when a tax is imposed.
C) the difference between total revenue and total cost for a business firm.
D) a payment to either the buyer or seller of a good or service, usually on a per-unit basis, when a good or service is purchased.

Answer 2

a payment to either the buyer or seller of a good or service, usually on a per-unit basis, when a good or service is purchased.

Question 3

When a government subsidy is granted to the sellers of a product, buyers can end up capturing some of the benefit because

A) the market price of the product will fall in response to the subsidy.
B) the market price of the product will rise in response to the subsidy.
C) the market price of the product will not change in response to the subsidy.
D) producers will reduce the supply of the product.

Answer 3

the market price of the product will fall in response to the subsidy.

Question 4

Black markets that operate outside the legal system are often characterized by

A) low profits for suppliers.
B) lower opportunity costs for suppliers and buyers.
C) decreased prices.
D) the use of violence as a means of settling disputes.

Question 5

A payment the government makes to either the buyer or seller, usually on a per-unit basis, when a good or service is purchased or sold is called a

A) black market.
B) interest rate.
C) subsidy.
D) tax.

Question 6

A market that operates outside the legal system, either by selling illegal goods or by selling goods at illegal prices is referred to in economics as a

A) gray market.
B) resource market.
C) black market.
D) criminal market.

Question 7

In the supply and demand model, a subsidy granted to sellers is illustrated by

A) a downward shift in the demand curve, by the per unit amount of the subsidy.
B) an upward shift in the demand curve, by the per unit amount of the subsidy.
C) a downward shift in the supply curve, by the per unit amount of the subsidy.
D) an upward shift in the supply curve, by the per unit amount of the subsidy.

Question 8

When a government subsidy is granted to the buyers of a product, sellers can end up capturing some of the benefit because

A) the market price of the product will fall in response to the subsidy.
B) the market price of the product will rise in response to the subsidy.
C) the market price of the product will not change in response to the subsidy.
D) buyers will reduce their demand for the product.

Question 9

A legal system that provides secure private property rights and unbiased enforcement of contracts

A) is unnecessary for the smooth operation of markets.
B) reduces the efficiency of markets.
C) enhances the efficiency of markets.
D) makes it easier for sellers to cheat or defraud consumers.

Question 10

In the supply and demand model, a subsidy granted to buyers is illustrated by

A) a downward shift in the demand curve, by the per unit amount of the subsidy.
B) an upward shift in the demand curve, by the per unit amount of the subsidy.
C) a downward shift in the supply curve, by the per unit amount of the subsidy.
D) an upward shift in the supply curve, by the per unit amount of the subsidy.

Question 11

A black market is

A) a market that operates outside the legal system, either by selling illegal goods or by selling goods at illegal prices.
B) a market where goods and services can be obtained at lower prices.
C) a government-mandated market where controls are placed on prices.
D) a market where exchanges are made using bartering.

Question 12

The large amount of violence associated with the current drug trade is mostly caused by

A) the fact that drug markets must operate outside the normal legal system.
B) buyers and sellers often being under the influence of drugs at the time of the transaction.
C) buyers and sellers who are often unfamiliar with conducting normal transactions within the legal system.
D) the lack of quantity supplied and quantity demand being in balance in black markets because there is no equilibrium price in these markets.

Question 13

The benefit of a subsidy will go primarily to sellers when the

A) demand for the product is highly inelastic and supply is relatively elastic.
B) demand for the product is highly elastic and the supply is relatively inelastic.
C) subsidy is legally (statutorily) granted to the seller of the product.
D) subsidy is legally (statutorily) granted to the buyer of the product.

Question 14

After the ban on the production and sale of alcohol ended in 1933,

A) the quality of alcohol sold declined.
B) the murder rate declined.
C) the profit rate for bootleg sellers of alcohol increased.
D) all of the above occurred.

Question 15

Which of the following statements regarding black markets is true?

A) The reliability of products sold in black markets is generally higher than the reliability of products sold in legal markets.
B) The prices of goods in black markets are generally lower than the prices of similar products in legal markets.
C) The laws of supply and demand do not affect the prices of goods exchanged in black markets.
D) The rate of violence is higher in black markets than in legal markets.

Question 16

A $10 per unit government subsidy paid directly to sellers of heaters will result in

A) a downward shift in the demand curve for heaters by $10.
B) an upward shift in the demand curve for heaters by $10.
C) a downward shift in the supply curve for heaters by $10.
D) an upward shift in the supply curve for heaters by $10.

Question 17

Which of the following statements is true?

A) In both black markets and legal markets, supply and demand determine price.
B) The quality of products sold in black markets and legal markets are similar.
C) The price of products in black markets tends to be the same as those in legal markets for otherwise identical products.
D) The rate of violence is similar in black markets and legal markets.

Question 18

If drugs such as marijuana and cocaine were legalized, it would be likely that

A) their prices would decrease.
B) there would be a reduction in tainted or poor quality drugs.
C) there would be less violence occurring in drug transactions.
D) all of the above.

Question 19

Suppose the U.S. government banned the sale and production of cigarettes. Which of the following would be most likely to occur?

A) No one would smoke anymore.
B) The amount of violence involved in the buying and selling of cigarettes would increase.
C) The price of cigarettes would decrease.
D) The supply for cigarettes would become elastic.

Question 20

Which of the following statements is true?

A) The quality of products sold in black markets tends to be less reliable than the quality of products in legal markets.
B) For otherwise identical products, the price of products in black markets tends to be higher than in legal markets.
C) The rate of violence is higher in black markets than in legal markets.
D) All of the above are true.

Question 21

Suppose that a tax is placed on a particular good. If the buyers end up bearing most of the tax burden, this indicates that the

A) demand is more inelastic than the supply.
B) supply is more inelastic than the demand.
C) government has required that buyers remit the tax payments.

Question 22

Taxes adversely affect the allocation of resources because

A) they do not always fall more heavily on the rich than on the poor.
B) the taxes collected are not enough to finance government spending.
C) not everyone pays taxes.
D) they distort prices and thus distort the decisions of households and firms.

Question 23

Which of the following generalizations about the benefit of a subsidy is correct?

A) The more inelastic the supply of a product, the larger the portion of the benefit will be to buyers.
B) The more inelastic the demand for a product, the larger the portion of the benefit will be to buyers.
C) The more elastic the supply of a product, the smaller the portion of the benefit will be to buyers.
D) The distribution of the benefit of a subsidy is not affected by the elasticity of the supply and demand for the product for which the subsidy is granted.

Question 24

The more elastic the supply of a product, the more likely that the actual benefit of a subsidy granted of the product will

A) go to sellers.
B) go to buyers.
C) go equally to both buyers and sellers.
D) do none of the above.

Question 25

Suppose that a tax is placed on a particular good. If the sellers end up bearing most of the tax burden, this indicates that the

A) demand is more inelastic than supply.
B) supply is more inelastic than demand.
C) government has required that buyers remit the tax payments.
D) government has required that sellers remit the tax payments.

Question 26

If the federal government began granting a subsidy of 10 cents per apple to apple growers and as a result the price of apples to consumers falls by 8 cents,

A) the actual benefit of this subsidy goes mostly to consumers.
B) the actual benefit of this subsidy goes mostly to producers.
C) the actual benefit of this subsidy would be shared equally by producers and consumers.
D) nobody would benefit from the subsidy.

Question 27

A tax imposed on the sellers of a good will

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 28

A subsidy on a product will generate more actual benefit for consumers (and less for producers) when

A) the supply of the product is relatively inelastic.
B) the supply of the product is relatively elastic.
C) the demand for the product is relatively elastic.
D) either a or c is true.

Question 29

When a government subsidy is granted to the buyers of a product, sellers can end up capturing some of the benefit because

A) the market price of the product will fall in response to the subsidy.
B) the market price of the product will rise in response to the subsidy.
C) the market price of the product will not change in response to the subsidy.
D) producers will reduce the supply of the product.

Question 30

The actual burden of a tax

A) falls most heavily on the side of the market that is more elastic.
B) falls most heavily on the side of the market that is more inelastic.
C) falls most heavily on the side of the market that is closest to unitary elasticity.
D) is distributed independently of relative elasticities of supply and demand.

Question 31

A tax on the buyers of coffee will

A) increase the price of coffee paid by buyers, increase the net price of coffee received by sellers, and increase the equilibrium quantity of coffee.
B) decrease the price of coffee paid by buyers, increase the net price of coffee received by sellers, and decrease the equilibrium quantity of coffee.
C) increase the price of coffee paid by buyers, decrease the net price of coffee received by sellers, and decrease the equilibrium quantity of coffee.
D) increase the price of coffee paid by buyers, decrease the net price of coffee received by sellers, and increase the equilibrium quantity of coffee.

Question 32

The benefit of a subsidy will go primarily to buyers when the

A) demand for the product is highly inelastic and supply is relatively elastic.
B) demand for the product is highly elastic and the supply is relatively inelastic.
C) subsidy is legally (statutorily) granted to the seller of the product.
D) subsidy is legally (statutorily) granted to the buyer of the product.

Question 33

The actual benefit of a government subsidy is determined primarily by

A) the elasticities of demand and supply.
B) the legal (or statutory) assignment of the subsidy
C) the number of exchanges that are made possible as a result of the subsidy.
D) whether the subsidy is paid by cash or check.

Question 34

The more inelastic the demand for a product, the more likely that the actual benefit of a subsidy granted on the product will

A) go to sellers.
B) go to buyers.
C) go equally to both buyers and sellers.
D) do none of the above.

Question 35

If the supply of health care services is highly inelastic, programs that subsidize the cost of purchasing medical services will

A) lead to higher prices for medical services.
B) lead to lower prices for medical services.
C) not affect the price of medical services.
D) help the buyers of medical services more than the sellers of those services.

Question 36

Suppose that the federal government grants a 50 cent per gallon subsidy to buyers of gasoline and that the demand for gasoline is highly inelastic while the supply is highly elastic. Under these circumstances, the benefit of the subsidy

A) will go primarily to producers.
B) will go primarily to consumers.
C) will be split equally between consumers and producers.
D) cannot be determined because the actual benefit of a subsidy is not influenced by the elasticities of supply and demand.

Question 37

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

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 38

If a $50 subsidy is legally (statutorily) granted to the sellers of weed eaters and as a result the price of weed eaters to consumers falls by $30, the actual benefit of the subsidy

A) goes completely to buyers of weed eaters.
B) goes completely to sellers of weed eaters.
C) is $30 to buyers and $20 to sellers.
D) is $20 to buyers and $30 to sellers.

Question 39

When government gives a subsidy to buyers of good X, the benefits of the subsidy flow to

A) the buyers of good X only.
B) the sellers of good X only.
C) the buyers and sellers of good x equally.
D) both the buyers and sellers of good x, and the distribution of the benefits will be dependent on the elasticity of demand and the elasticity of supply.

Question 40

A subsidy on a product will generate more actual benefit for producers (and less for consumers) when

A) the supply of the product is relatively inelastic.
B) the supply of the product is relatively elastic.
C) the demand for the product is relatively inelastic.
D) either b or c is true

Question 41

Taxes create deadweight losses because they

A) reduce profits of firms.
B) distort incentives.
C) cause prices to rise.
D) create revenue for the government.

Question 42

Suppose that the federal government levies a 50 cent excise tax on gasoline and that the demand for gasoline is highly inelastic while the supply is highly elastic. Under these circumstances, the burden of the tax

A) will fall primarily on producers.
B) will fall primarily on consumers.
C) will be split equally between consumers and producers.
D) cannot be determined because the burden of a tax is not influenced by the elasticities of supply and demand.

Question 43

The statutory incidence (or burden) of a tax refers to

A) the governmental agency responsible for collecting the tax.
B) who actually bears the burden of a tax once changes in market prices are taken into account.
C) the degree of progressiveness in the rate structure of the tax.
D) who the tax is legally or statutorily imposed on.

Question 44

An excise tax levied on a product will impose a smaller relative burden on consumers (and a larger relative burden on sellers) when

A) the supply of the product is relatively inelastic.
B) the supply of the product is relatively elastic.
C) the demand for the product is relatively elastic.
D) either a or c is true.

Question 45

If a $500 tax is placed legally (statutorily) on the sellers of new violins and as a result the price of violins to consumers rises by $400, then the actual burden of the tax

A) falls completely on violin buyers.
B) falls completely on violin sellers.
C) is $400 on violin buyers and $100 on sellers.
D) is $100 on violin buyers and $400 on sellers.

Question 46

Deadweight losses are associated with

A) taxes that distort the incentives that people face.
B) taxes that target expenditures on survivor's benefits for Social Security.
C) taxes that have no efficiency losses.
D) lump-sum taxes.

Question 47

The burden of a tax will fall primarily on sellers when the

A) demand for the product is highly inelastic and the supply is relatively elastic.
B) demand for the product is highly elastic and the supply is relatively inelastic.
C) tax is legally (statutorily) imposed on the seller of the product.
D) tax is legally (statutorily) imposed on the buyer of the product.

Question 48

Which of the following generalizations about the burden of an excise tax is correct?

A) The more inelastic the supply of a product, the larger the portion of an excise tax will be paid by buyers.
B) The more inelastic the demand for a product, the larger the portion of an excise tax will be paid by buyers.
C) The more elastic the supply of a product, the smaller the portion of an excise tax will be paid by buyers.
D) The burden of an excise tax on a product is independent of the elasticity of the supply and demand for the product on which the tax is levied.

Question 49

If a $500 tax is placed legally (statutorily) on the buyers of new couches and as a result the price of couches at stores rises by $200, the actual burden of the tax

A) falls completely on couch buyers.
B) falls completely on couch sellers.
C) is $200 on couch buyers and $300 on sellers.
D) is $300 on couch buyers and $200 on sellers.

Question 50

If the government wants to generate large revenues from placing a tax on the consumption of a particular good, it should choose a good for which

A) the demand is price elastic
B) the demand is unitary elastic
C) the demand is price inelastic
D) there are many good substitutes available for the good

Question 51

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

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 52

An excise tax levied on a product will impose a larger relative burden on consumers (and a smaller relative burden on sellers) when

A) the supply of the product is relatively inelastic.
B) the supply of the product is relatively elastic.
C) the demand for the product is relatively inelastic.
D) either b or c is true

Question 53

The actual incidence (or burden) of a tax refers to

A) the governmental agency responsible for collecting the tax.
B) who actually bears the burden of a tax once changes in market prices are taken into account.
C) the degree of progressiveness in the rate structure of the tax.
D) who the tax is legally or statutorily imposed on.

Question 54

If the government wants to raise tax revenue and shift most of the tax burden to the consumers, it would impose a tax on a good with a

A) flat (elastic) demand curve and a steep (inelastic) supply curve.
B) steep (inelastic) demand curve and a flat (elastic) supply curve.
C) steep (inelastic) demand curve and steep (inelastic) demand curve.
D) flat (elastic) demand curve and a flat (elastic) supply curve.

Question 55

The actual burden of a tax is determined primarily by

A) the elasticities of demand and supply.
B) the legal (or statutory) assignment of the tax.
C) the number of exchanges that are eliminated from the market as a result of the tax.
D) none of the above.

Question 56

If the government wants to raise tax revenue and shift most of the tax burden to the sellers it would impose a tax on a good with a

A) flat (elastic) demand curve and a steep (inelastic) supply curve.
B) steep (inelastic) demand curve and a flat (elastic) supply curve.
C) steep (inelastic) demand curve and steep (inelastic) supply curve.
D) flat (elastic) demand curve and a flat (elastic) supply curve.

Question 57

If the federal government placed a 50 cent per pack excise tax on cigarette manufacturers, and if as a result, the price to consumers of a pack of cigarettes went up by 40 cents, the

A) actual burden of this tax falls mostly on consumers.
B) actual burden of this tax falls mostly on manufacturers.
C) actual burden of the tax would be shared equally by producers and consumers.
D) tax would clearly be a progressive tax.

Question 58

A deadweight loss results from the imposition of a tax on a good because the tax

A) induces the government to increase its expenditures.
B) reduces the quantity of exchanges between buyers and sellers.
C) causes a disequilibrium in the market.
D) imposes a loss on buyers that is greater than the loss to sellers.

Question 59

If the demand for a good is very price elastic, the imposition of a tax on that good

A) places the largest portion of the burden on the sellers of that product
B) places the burden of the tax equally on buyers and sellers
C) places the largest portion of the tax on consumers
D) will make demand more elastic than it was before the tax
E) will make demand more inelastic than it was before the tax

Question 60

The burden of a tax will fall primarily on buyers when the

A) demand for the product is highly inelastic and the supply is relatively elastic.
B) demand for the product is highly elastic and the supply is relatively inelastic.
C) tax is legally (statutorily) imposed on the seller of the product.
D) tax is legally (statutorily) imposed on the buyer of the product.

Question 61

If Jayla's tax liability increases from $10,000 to $16,000 when her income increases from $30,000 to $40,000, her marginal tax rate is

A) 33 percent.
B) 35 percent.
C) 50 percent.
D) 60 percent.

Question 62

Emma works full time during the day as an economist and faces a 90 percent marginal tax rate. If Emma were to get an offer to work a second job in the evenings doing consulting work for a local business for $10,000 per year, how much of this additional income would she be able to keep as net pay after taxes?

A) $1,000
B) $4,000
C) $6,000
D) $10,000

Question 63

If a household has $40,000 in taxable income and its tax liability is $20,000, the household's average tax rate is

A) 10 percent.
B) 25 percent.
C) 40 percent.
D) 50 percent

Question 64

The average tax rate is defined as

A) the average number of times a circulating dollar is taxed during a year.
B) the change in the tax rate as income increases.
C) the change in the tax rate as income decreases.
D) tax liability divided by taxable income.

Question 65

The excess burden or deadweight loss of a tax refers to the

A) increase in product price as a result of the tax.
B) growth in government funded programs as a result of the revenue generated by the tax.
C) loss of disposable income consumers suffer from the tax.
D) reduction in gains from mutually beneficial exchanges that are eliminated as a result of the tax.

Question 66

If a $2 tax per bottle of wine is imposed on wine producers, which of the following will occur?

A) The price of wine will increase, fewer bottles will be purchased, and there will be a deadweight loss from this tax.
B) The price of wine will increase, more bottles will be purchased, and consumers will gain as the result of this tax.
C) The price of wine will decrease, more bottles will be purchased, and there will be a deadweight loss from this tax.
D) The price of wine and quantity sold will be unchanged.

Question 67

Use the table below to choose the correct answer. The marginal tax rate on income in the $20,000 to $25,000 range is

A) 10 percent.
B) 12 percent.
C) 20 percent.
D) 30 percent.

Question 68

The term "deadweight loss" or "excess burden" is used to describe the

A) expenditures on exercise and weight-reducing programs by individuals who are overweight.
B) loss from the elimination of mutually beneficial exchanges that results from the imposition of a tax in a market.
C) difference between the value consumers place on a good and the price they have to pay for it.
D) reduction in consumer welfare that occurs when the firms in a market make a profit.

Question 69

The deadweight loss (or excess burden) resulting from levying a tax on an economic activity is the

A) tax revenue raised by the government as the result of the tax.
B) loss of potential gains from trade from activities forgone because of the tax.
C) increase in the price of an activity as the result of the tax levied on it.
D) marginal benefits derived from the expansion in government activities made possible by the increase in tax revenues.

Question 70

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 tax were redefined such that the entire 12.4 percent was statutorily levied on employers, economic analysis suggests that the actual burden of the tax would

A) remain unchanged.
B) shift more heavily toward employers.
C) shift more heavily toward employees.
D) be different than if the entire 12.4 percent was statutorily imposed on employees.

Question 71

The marginal tax rate is defined as

A) tax liability divided by taxable income.
B) tax liability multiplied by taxable income.
C) the change in tax liability divided by the change in taxable income.
D) the change in tax liability minus the change in taxable income.

Question 72

If Sophia's tax liability increases from $10,000 to $15,000 when her income increases from $30,000 to $40,000, her marginal tax rate is

A) 33 percent.
B) 35 percent.
C) 50 percent.
D) 60 percent.

Question 73

The more elastic the supply of a product, the more likely it is that the burden of a tax will

A) fall on sellers.
B) fall on buyers.
C) fall equally on both buyers and sellers.
D) be borne by the public sector, and not by market participants.

Question 74

If Aisha were to get a $3,000 bonus from her employer, which of the following tax rates would most accurately reflect the percent of this additional income that she would owe in taxes?

A) her marginal tax rate
B) her average tax rate
C) her progressive tax coefficient
D) the rate of excess burden

Question 75

An income tax is defined as regressive if

A) the tax liability of those with higher incomes exceeds the tax liability of those with low incomes.
B) the tax liability of those with higher incomes is less than the tax liability of those with low incomes.
C) those with higher incomes pay a higher percentage of their incomes in taxes than those with low incomes.
D) those with higher incomes pay a lower percentage of their incomes in taxes than those with low incomes.

Question 76

The "incidence of a tax" is the term used to indicate

A) the responsibility for collecting the tax.
B) who actually bears the tax burden.
C) who the tax is initially levied on.
D) the regressive rate structure of the tax.

Question 77

Which tax rate measures the percent of your income paid in taxes?

A) the marginal tax rate
B) the average tax rate
C) progressive tax coefficient
D) the excise tax rate

Question 78

Suppose an excise tax is imposed on two products X and Y, both of which have identical supply elasticities. The demand for good X is highly elastic, while the demand for good Y is highly inelastic. The deadweight loss (or excess burden) will be

A) equal in both cases.
B) larger for good X than good Y.
C) larger for good Y than good X.
D) zero in both cases.

Question 79

Use the table below to choose the correct answer. The marginal tax rate on income in the $25,000 to $30,000 range is

A) 10 percent.
B) 20 percent.
C) 50 percent.
D) 70 percent.

Question 80

If a household has $40,000 in taxable income and its tax liability is $4,000, the household's average tax rate is

A) 10 percent.
B) 25 percent.
C) 40 percent.
D) 50 percent