Homework 2

1.The following table contains some production possibilities for an economy for a given month.

Sweaters / Gloves
4 / 300
6 / X
8 / 100

If the production possibilities frontier is bowed outward, then “X” could be

a. / 100.
b. / 150.
c. / 200.
d. / 250.

2.A certain production possibilities frontier shows production possibilities for two goods: wheat and shirts. Which of the following concepts cannot be illustrated by this model?

a. / the flow of dollars between sellers of wheat and shirts and buyers of wheat and shirts
b. / the tradeoff between production of wheat and production of shirts
c. / the opportunity cost of shirts in terms of wheat
d. / the effect of economic growth on production possibilities involving wheat and shirts

3.

According to the graph, which of the following is true for Cliff and Paul?

a. Paul has a comparative advantage in both wheat and corn.

b. Paul has a comparative advantage in wheat and Cliff has a comparative advantage in corn.

c. Cliff has a comparative advantage in wheat and Paul has a comparative advantage in corn.

d. Cliff has a comparative advantage in both wheat and corn.

4.Belarus has a comparative advantage in the production of linen, but Russia has an absolute advantage in the production of linen. If these two countries decide to trade,

a. / Belarus should export linen to Russia.
b. / Russia should export linen to Belarus.
c. / trading linen would provide no net advantage to either country.
d. / Without additional information about opportunity costs, this question cannot be answered.

5.Two goods are substitutes if a decrease in the price of one good

a. increases the demand for the other good.

b. reduces the demand for the other good.

c. reduces the quantity demanded of the other good.

d. increases the quantity demanded of the other good.

6.Which of the following cause and effect events is in order for a seller?

a. Technology improves, profit falls, the supply curve shifts left.

b. An input price falls, profit increases, the supply curve shifts right.

c. An input price rises, profit falls, the supply curve shifts right.

d. An input price rises, profit rises, the supply curve shifts left.

7. A decrease in resource costs to firms in a market will result in

a. a decrease in equilibrium price and an increase in equilibrium quantity.

b. a decrease in equilibrium price and a decrease in equilibrium quantity.

c. an increase in equilibrium price and no change in equilibrium quantity.

d. an increase in equilibrium price and an increase in equilibrium quantity.

8.Which chain of events occurs in the correct order?

a. Quantity supplied increases, price increases, demand increases.

b. Price increases, demand increases, quantity supplied increases.

c. Demand increases, price increases, quantity supplied increases.

d. Any of the above could be correct.

9. Which of the following would definitely result in a higher price in the market for Snickers?

a. demand increases and supply decreases

b. demand and supply both decrease

c. demand decreases and supply increases

d. demand and supply both increase

10.What would happen to the equilibrium price and quantity of coffee if the wages of coffee-bean pickers fell and the price of tea fell?

a. Price will fall and the effect on quantity is ambiguous.

b. Price will rise and the effect on quantity is ambiguous.

c. Quantity will fall and the effect on price is ambiguous.

d. Quantity will rise and the effect on price is ambiguous.

11.Which of the following would shift the demand curve for gasoline to the right?

a. / a decrease in the price of gasoline
b. / an increase in consumer income, assuming gasoline is a normal good
c. / an increase in the price of cars, a complement for gasoline
d. / a decrease in the expected future price of gasoline

12.What will happen to the equilibrium price and quantity of new cars if the price of gasoline rises, the price of steel rises, public transportation becomes cheaper and more comfortable, and auto-workers negotiate higher wages?

a. / Price will fall and the effect on quantity is ambiguous.
b. / Price will rise and the effect on quantity is ambiguous.
c. / Quantity will fall and the effect on price is ambiguous.
d. / Quantity will rise and the effect on price is ambiguous.

13.A good will have a more inelastic demand,

a. / the greater the availability of close substitutes.
b. / the broader the definition of the market.
c. / the longer the period of time.
d. / the more it is regarded as a luxury.

14.Elasticity of demand is closely related to the slope of the demand curve. The less responsive buyers are to a change in price, the

a. / steeper the demand curve will be.
b. / flatter the demand curve will be.
c. / further to the right the demand curve will sit.
d. / closer to the vertical axis the demand curve will sit.

15.When we move upward and to the left along a linear, downward-sloping demand curve, price elasticity of demand

a. / first becomes smaller, then larger.
b. / always becomes larger.
c. / always becomes smaller.
d. / first becomes larger, then smaller.

16.When the price of bubble gum is $0.50, the quantity demanded is 400 packs per day. When the price falls to $0.40, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for bubble gum is

a. / inelastic.
b. / elastic.
c. / unit elastic.
d. / perfectly inelastic.

17.The discovery of a new hybrid wheat would increase the supply of wheat. As a result, wheat farmers would realize an increase in total revenue if

a. / the supply of wheat is elastic.
b. / the supply of wheat is inelastic.
c. / the demand for wheat is inelastic.
d. / the demand for wheat is elastic.

18.If the government removes a binding price ceiling from a market, then the price paid by buyers will

a. / increase and the quantity sold in the market will increase.
b. / increase and the quantity sold in the market will decrease.
c. / decrease and the quantity sold in the market will increase.
d. / decrease and the quantity sold in the market will decrease.

19.A binding price floor will reduce a firm's total revenue

a. / always.
b. / when demand is elastic.
c. / when demand is inelastic.
d. / never.

20.When a tax is levied on sellers of tea,

a. / the well-being of both sellers and buyers of tea is unaffected.
b. / sellers of tea are made worse off and the well-being of buyers is unaffected.
c. / sellers of tea are made worse off and buyers of tea are made better off.
d. / sellers and buyers of tea both are made worse off.

21.Which of the following is not correct?

a. / Taxes levied on sellers and taxes levied on buyers are not equivalent.
b. / A tax places a wedge between the price that buyers pay and the price that sellers receive.
c. / The wedge between the buyers’ price and the sellers’ price is the same, regardless of whether the tax is levied on buyers or sellers.
d. / In the new after-tax equilibrium, buyers and sellers share the burden of the tax.

22.If a tax is imposed on a market with inelastic demand and elastic supply, then

a. / buyers will bear most of the burden of the tax.
b. / sellers will bear most of the burden of the tax.
c. / the burden of the tax will be shared equally between buyers and sellers.
d. / it is impossible to determine how the burden of the tax will be shared.

23.Suppose Lauren, Leslie and Lydia all purchase bulletin boards for their rooms for $15 each. Lauren's willingness to pay was $35, Leslie's willingness to pay was $25, and Lydia's willingness to pay was $30. Total consumer surplus for these three would be

a. / $15.
b. / $30.
c. / $45.
d. / $90.

24.Suppose your own demand curve for tomatoes slopes downward. Suppose also that, for the last tomato you bought this week, you paid a price exactly equal to your willingness to pay. Then

a. / you should buy more tomatoes before the end of the week.
b. / you already have bought too many tomatoes this week.
c. / your consumer surplus on the last tomato you bought is zero.
d. / your consumer surplus on all of the tomatoes you have bought this week is zero.

25.Which of the following will cause an increase in consumer surplus?

a. / an increase in the production cost of the good
b. / a technological improvement in the production of the good
c. / a decrease in the number of sellers of the good
d. / the imposition of a binding price floor in the market

26.Which of the following will cause an increase in producer surplus?

a. / the imposition of a binding price ceiling in the market
b. / buyers expect the price of the good to be lower next month
c. / the price of a substitute increases
d. / income increases and buyers consider the good to be inferior

27.Total surplus in a market will increase when the government

a. / imposes a tax on that market.
b. / imposes a binding price floor on that market.
c. / removes a binding price ceiling from that market.
d. / None of the above is correct.

28.Coffee and tea are substitutes. Bad weather that sharply reduces the coffee bean harvest would

a. / increase consumer surplus in the market for coffee and decrease producer surplus in the market for tea.
b. / increase consumer surplus in the market for coffee and increase producer surplus in the market for tea.
c. / decrease consumer surplus in the market for coffee and increase producer surplus in the market for tea.
d. / decrease consumer surplus in the market for coffee and decrease producer surplus in the market for tea.

The vertical distance between points A and B represents a tax in the market.

29.The imposition of the tax causes the price paid by buyers to

a. / decrease by $2.
b. / increase by $3.
c. / decrease by $4.
d. / increase by $5.

30.The amount of the tax on each unit of the good is

a. / $1.
b. / $4.
c. / $5.
d. / $9.

31.The amount of tax revenue received by the government is

a. / $2.50.
b. / $4.
c. / $5.
d. / $9.

32.The amount of deadweight loss as a result of the tax is

a. / $2.50.
b. / $5.
c. / $7.50.
d. / $10.

33.The deadweight loss from a $1 tax will be smallest in a market with

a. / inelastic supply and elastic demand.
b. / inelastic supply and inelastic demand.
c. / elastic supply and elastic demand.
d. / elastic supply and inelastic demand.

34.Which of the following scenarios is not consistent with the Laffer curve?

a. / The tax rate is very low, and tax revenue is very low.
b. / The tax rate is very high, and tax revenue is very low.
c. / The tax rate is very high, and tax revenue is very high.
d. / The tax rate is moderate (between very high and very low), and tax revenue is relatively high.

35.If a country allows trade and, for a certain good, the domestic price without trade is higher than the world price,

a. / the country will be an exporter of the good.
b. / the country will be an importer of the good.
c. / the country will be neither an exporter nor an importer of the good.
d. / Additional information is needed about demand to determine whether the country will be an exporter of the good, an importer of the good, or neither.

36.When a country allows trade and becomes an importer of a good,

a. / consumer surplus and producer surplus both increase.
b. / consumer surplus and producer surplus both decrease.
c. / consumer surplus increases and producer surplus decreases.
d. / consumer surplus decreases and producer surplus increases.

37.A tariff on a product makes

a. / domestic sellers better off and domestic buyers worse off.
b. / domestic sellers worse off and domestic buyers worse off.
c. / domestic sellers better off and domestic buyers better off.
d. / domestic sellers worse off and domestic buyers better off.

38.If the United States imposes a tariff on automobiles, then

a. / total surplus in the American automobile market decreases.
b. / producer surplus in the American automobile market increases.
c. / U.S. imports of foreign automobiles decrease.
d. / All of the above are correct.

39.When a country that imports a particular good imposes an import quota on that good,

a. / consumer surplus increases and total surplus increases in the market for that good.
b. / consumer surplus increases and total surplus decreases in the market for that good.
c. / consumer surplus decreases and total surplus increases in the market for that good.
d. / consumer surplus decreases and total surplus decreases in the market for that good.

40.A major difference between tariffs and import quotas is that

a. / tariffs create deadweight losses, but import quotas do not.
b. / tariffs help domestic consumers, and import quotas help domestic producers.
c. / tariffs raise revenue for the government, but import quotas create surplus for those who get the licenses to import.
d. / All of the above are correct.

41.Import quotas and tariffs produce similar results. Which of the following is not one of those results?

a. / The domestic price of the good increases.
b. / Consumer surplus of domestic consumers increases.
c. / Producer surplus of domestic producers increases.
d. / A deadweight loss is experienced by the domestic country.