Econ 201 - Practice Exam 2 - ANSWER KEY

Multiple Choice

1. Which of the following statements accurately describes the relationship between the demand curve and
consumers' willingness to pay (WTP)?

a. The demand curve shows the maximum price consumers are willing to pay for each
additional unit of the good.
b. The demand curve indicates that consumers are only willing to pay the same price for all units.
c. The demand curve represents the costs incurred by producers for each unit sold.
d. The demand curve does not reflect consumer preferences and behaviors in the market.

2 . Which statement accurately describes a tariff?

a. A tariff is a restriction on the quantity of imports allowed into a country.

b. A tariff is a tax on imported goods that can impact consumer prices.
c. Tariffs are implemented to subsidize domestic industries and lower their production costs.
d. Tariffs are taxes imposed on exports to enhance international trade.

3. Refer to the graph. What is the tax revenue based on the information shown in the graph?

a. 80
b. 10
c. 15
d. 5

4. The maximum price a consumer is willing to pay for a laptop is $1000, but the market price is $875.
The cost incurred by the seller is $500. Given this information we know that the
a. producer surplus is $125.
b. consumer surplus is $375.
c. producer surplus is $500.
d. consumer surplus is $125.

5. Buyers of a product will bear the smaller part of the tax burden, and seller will bear a larger part of the
tax burden, when
a. the supply of the product is more elastic than the demand of the product.
b. the demand of the product is more elastic than the supply of the product.
c. both the supply and demand of the product are equally elastic.
d. the supply of the product is more inelastic than the demand of the product.
6. Which of the following statements best contrasts negative and positive externalities?
a. A negative externality occurs when someone benefits from an activity without paying for it, while
a positive externality occurs when someone bears a cost they did not agree to.

b. A negative externality causes an external cost, leading to overproduction, while a positive

externality creates external benefits, resulting in underproduction of a beneficial good.

c. A negative externality happens when a business gains excessive profit at the expense of others,
while a positive externality is when businesses pass on cost savings to consumers.

d. A negative externality arises from the underuse of natural resources, while a positive externality
happens when people benefit from those resources without paying for them.

7. A consumer is willing to pay a maximum of $50 for a pair of shoes, while the market price is set at
$40. The seller's cost to produce the shoes is $20. Based on this information, what are the consumer
surplus and producer surplus?

a. Consumer Surplus is $10; Producer Surplus is $20.

b. Consumer Surplus is $30; Producer Surplus is $10.
c. Consumer Surplus is $20; Producer Surplus is $10.
d. Consumer Surplus is $10; Producer Surplus is $30.

8. In a market for concert tickets, consumers have different maximum prices they are willing to pay based
on their preferences. If a consumer is willing to pay $150 for a front-row ticket but the market price is
$100, what does this indicate about the consumer's benefit from purchasing the ticket?

a. The consumer will not buy the ticket because they do not like the concert.
b. The consumer experiences a benefit of $50 from buying the ticket.
c. The consumer believes the ticket price is too high and will wait for a discount.
d. The consumer is indifferent to the purchase since they are paying their maximum price.

9. When there is a discovery of a new, healthier alternative to red meat, the demand for beef is expected to

a. increase, and producer surplus increases.

b. increase, and producer surplus decreases.
c. decrease, and producer surplus decreases.
d. decrease, and consumer surplus increases.
10. If there is a breakthrough in farming technology that affects the production of strawberries, the
consumer surplus for strawberries will

a. decrease, as the increased supply drives prices up.

b. increase, as the lower prices allow more consumers to purchase strawberries.
c. remain unchanged, since consumer preferences are not affected by supply changes.
d. decrease, resulting in a reduction in the quantity purchased.

11. Refer to the graph. What is the quantity exported?

a. 310
a. 18
b. 110
c. 160

12. Refer to the graph from question 11. What is the amount of producer surplus after trade?

a. 2480
b. 1000
c. 1200
d. 450

13. Which of the following statements accurately describes the area representing consumer surplus (CS)
in a graph?

a. Consumer surplus is the area below the equilibrium price and above the supply curve.
b. Consumer surplus is the area above the demand curve and below the equilibrium price.
c. Consumer surplus is the area below the demand curve and above the equilibrium price.
d. Consumer surplus is the area between the equilibrium price and the quantity supplied.

14. Which of the following statements best defines deadweight loss?

a. Deadweight loss is the loss of revenue experienced by the supplier when it cannot sell its goods at
the market price.
b. Deadweight loss is the economic inefficiency that occurs when the equilibrium outcome in a
market is not achieved, leading to a loss of total welfare.
c. Deadweight loss is the decrease in consumer surplus that occurs when the price of a good rises.
d. Deadweight loss is the reduction in producer surplus resulting from market distortions such as a
tax imposed by the government
15. Which statement accurately describes the relationship between elasticity and deadweight loss?

a. The more elastic the supply and demand curves, the larger the deadweight loss.
b. The more inelastic the supply and demand curves, the larger the deadweight loss.
c. The more inelastic the supply and elastic the demand curves, the larger the deadweight loss.
d. The relationship between elasticity and deadweight loss cannot be determined without knowing
specific market conditions.

16. When a country allows trade and acts as an exporter, what impact does this have on domestic
producers and consumers?

a. Both domestic consumers and producers benefit equally from the increase in total surplus.
b. Domestic producers are better off due to the increase in producer surplus.
c. Domestic consumers are better off given the increase in consumer surplus.
d. Both domestic consumers and producers are equally worse off due to a decline in consumer
surplus.

17. The fish in the ocean are accessible for everyone, but overfishing reduces the amount of fish available
for others, this means that fish in the ocean are non-excludable and rivalrous, what type of good does this
represent?

a. Natural Monopoly
b. Public good
c. Common Good
d. Private Good

18. Refer to the graph. What is the quantity imported?

a. 45
b. 25
c. 15
d. 20

19. Refer to the graph from question 19. What is the amount of consumer surplus after trade?

a. 135
b. 60
c. 90
d. 40
20. When a country allows trade and acts as an importer, what impact does this have on domestic
producers and consumers?

a. The effect on the domestic consumer and producer cannot be determined from the given
information.
b. Domestic consumers are worse off due to the decrease in consumer surplus.
c. Domestic producers are worse off due to the decrease in producer surplus.
d. Both domestic consumers and producers are equally better off due to the increase in total surplus.

21. What are the effects of imposing a tariff or quota when going from free trade to trade with
restrictions?

a. Tariffs and quotas lead to lower prices for consumers and increase imports, benefiting domestic
consumers.
b. Tariffs raise prices and reduce imports, this benefits domestic producers while harming
consumers and creating inefficiencies.
c. Tariffs and quotas have no impact on the market as consumers can easily switch to domestic
alternatives without price changes.
d. Tariffs decrease the cost of imported goods, this encourages imports and increases overall market
efficiency.

22. Which of the following statements best describes the differences between excludability and rivalry?
a. A good is excludable if people cannot be prevented from using it, while a good is a rival if
multiple people can consume it at the same time without diminishing other people’s use.
b. A good is excludable if a person can be prevented from using it, while a good is a rival if one
person’s use of it diminishes other people’s use.
c. A good is non-excludable if it benefits everyone equally, while a good is a rival if only a limited
number of people can use it.
d. A good is excludable if one person’s use of it diminishes other people’s use, while a good is rival
if a person can be prevented from using it.

23. Private education is non-rival but excludable, given this information, private education is a

a. Public good
b. Common Good
c. Private Good
d. Natural Monopoly

24. According to the Coase Theorem, private solutions to externalities are possible when:

a. The government sets a price for resolving externalities.

b. One party has significantly more bargaining power than the other.
c. Externalities are taxed or regulated by the government.
d. Bargaining costs are low.
Short Answer

1. Answer questions a-k based on the graph? SHOW YOUR WORK

a. How much is the tax indicated by the graph? 10-5=5

b. What is the consumer surplus before the tax? ½ (2000-0)(13-7) = 6,000

c. What is the producer surplus before the tax? ½ (2000-0)(7-3) = 4,000

d. What is the total surplus before the tax? CS + PS = 12,000 + 8,000 = 10,000

e. What is the consumer surplus after the tax? ½ (1000-0)(13-10) = 1500

f. What is the producer surplus after the tax? ½ (1000–0)(5-3) = 1000

g. What is the tax revenue? (1000-0)(5) = 5000

h. What is the total surplus after the tax? CS + PS + Tax Revenue = 1500 + 1000 + 5000 = 7,500

i. What is the change in consumer surplus? 1500-6000= - 4500

j. What is the change in producer surplus? 1000 - 4000 = - 3000

k. What is the change in total surplus? 7,500 - 10,000 = - 2,500

2. Answer questions a-j based on the graph? SHOW YOUR WORK

a. What is the domestic price after the tariff? p=7

b. What is the domestic quantity demanded after the tariff? 400

c. What is the quantity imported before the tariff? 500 -100 = 400

d. What is the quantity imported after the tariff? 400-200 = 200

e. What is the consumer surplus before the tariff? ½ (500-0)(15-5) = 2500

f. What is the producer surplus before the tariff? ½ (100-0)(5-3) = 100

g. What is the consumer surplus after the tariff? ½ (400-0)(15-7) = 1600

h. What is the producer surplus after the tariff? ½ (200-0)(7-3) = 400

i. What is the revenue from the tariff? (400-200)(7-5)= 400

j. What is the change in total surplus? 2400-2600= -200

3. Using a supply and demand diagram, demonstrate how a positive externality leads to market

inefficiency. SHOW ALL LABELS.

4. Answer the following questions based on the graph? SHOW YOUR WORK

a. What is the consumer surplus at equilibrium (p=$22)? 224

b. What is the producer surplus at equilibrium (p=$22)? 176

c. What is the total surplus at equilibrium (p=$22)? 400

d. What price are consumers willing to pay for 12 units? 30

e. At what price are suppliers willing to sell 12 units? 10

f. At a quantity of 12, what price are consumers willing to pay? $30

g. At a quantity of 12, what price are suppliers willing to receive? $10